Annual Report and Accounts 2012 - Royal London Group and... · 1 2011 results include £97m (£91m...

A mutualunderstandingAnnual Report and Accounts 2012

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Royal London is a mutual company.Being a mutual is our key differentiator and it allows us to put our members and customers first. Everything we do is done with their long-term interests in mind. We always aim to provide award-winning customer service and products that are great value for money.


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Royal London Group – Annual Report and Accounts 2012

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Key Performance Indicators

Contents

Royal London at a glance 04Chairman’s statement 06Group Chief Executive’s statement 09Group Finance Director’s review 13Business overview 24Basis of preparation 36Our corporate responsibility 37

Board of Directors 40Directors’ report 42Corporate Governance statement 44Directors’ remuneration report 56Auditors’ report 68

Business review Financial statements

Consolidated statement of comprehensive income 73Balance sheets 74Statements of cash flows 75Notes to the financial statements 76European Embedded Value (EEV) – supplementary information 156

Notice of Annual General Meeting and resolutions 168

Glossary 171 2013 financial calendar 177Contact offices 177

Governance Additional information

Returns to with-profit policyholders

Mutual dividend allocated 88 88Bonuses added to with-profit policies 282 231Investment performance of assets backing Royal London Open Fund 8.6% 6.0%

Profitability

EEV profit before tax and mutual dividend 336 232�IFRS profit before tax and mutual dividend 321 152�

Operating performance

EEV operating profit 246 334�Operating profit (IFRS basis) 189 298�New business profits² 108 96Present value of new insurance business premiums 3,524 3,291Group funds under management 49,799 46,222

Capital strength

Regulatory (Insurance Group Directive) capital surplus 2,374 1,906

1 2011 results include £97m (£91m after tax) one-off gain arising on the acquisition of Royal Liver2 Grossed up for tax at 23% (2011 26%)

2012 £m

2011 £m

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Scottish LifeScottish Life is the award-winning pensions specialist of the Royal London Group. It provides products and services to both individual customers and to employers with pension schemes and their scheme members, distributed through financial advisers in the UK.

Bright Grey and Scottish ProvidentRoyal London operates two distinct brands in the UK individual protection market. Bright Grey is a modern, forward-thinking protection specialist, set up by Royal London in 2003. Scottish Provident was established in 1837 and has grown to become one of the UK’s leading providers of protection cover.

Caledonian LifeCaledonian Life is one of the Republic of Ireland’s leading providers of protection plans and became part of the Group in 2011.

Royal London 360ºRoyal London 360° develops investment, savings and protection products and provides bespoke trust solutions. It also offers ‘white labelled’ products, working with major distributors both in the UK and internationally.

Royal London PlusRoyal London Plus connects the Group to our roots as a ‘Home Service’ insurance company dating back to the mid 19th Century. Still at the heart of our business, it provides a dedicated service to the Group’s consumer businesses.

Royal London Asset Management (RLAM)RLAM is the specialist fund management company within the Royal London Group. It investson behalf of the Group, as well as for a wide range of institutional and wholesale clients.

AscentricAscentric provides a web-based service which helps financial advisers to manage their clients’ long-term savings. This service is provided to financial advisers through the Ascentric Wrap service and to large distributors and product providers through the Investment Funds Direct Limited white label solution.

MoneyVista MoneyVista is an online service that was created and launched by Royal London in 2011. It helps customers create and maintain their own financial plan.

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At a glance

Protection

Pensions

Policy administration

Investments

Wrap platform

Financial planning

International

®

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Chairman’s statement

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“The anticipated recovery in the UK economy has proved elusive and economic forecasters seea period of low growth ahead for the UK market. In tough trading conditions, Royal London has continued to perform well.”Tim Melville-Ross, Chairman

The anticipated recovery in the UK economy has proved elusive and economic forecasters see a period of low growth ahead. In tough economic conditions Royal London has continued to perform well, with strong new business performance, increased underlying profits and an improved capital position. These results are covered more fully in the Group Chief Executive’s statement and the Group Finance Director’s review.

Strategy reviewDuring 2012 we undertook a fundamental review of the strategy of Royal London, looking at prospects for the markets where we operate and identifying areas which offer opportunities for growth as the market for financial services develops. It is clear from this work that one of our key differentiating factors is our mutual status and this will be core to our strategy as we move forward. We want to make mutuality something that singles us out from the competition and underpins quality in the products and service that we offer. This feels entirely appropriate as there is evidence that internationally the mutual insurance model is becoming more popular, driven by concerns that have emerged since the economic crisis of 2008. Our Chief Executive, Phil Loney, provides an overview of our new strategy inhis statement.

It is most encouraging that at the end of 2012 the FSA publisheda Consultation paper entitled “Mutuality and With-Profits funds:a way forward”. This paper points to the resolution of a long-standing debate that we have been having with the Regulator over the ownership of with-profits assets. It is clear that there is a much more pragmatic stance being adopted; a stance which could create an environment in which mutuals thrive. However, the FSA also makes it clear that if mutuals are to thrive they must make the benefits of mutuality tangible to members. Indeed that is in line with our own thinking and strategic direction.

Of course one of the main ways we currently make the benefits of mutuality tangible is through the mutual dividend. It is with pleasure that I can confirm that we will be allocating a mutual dividend once again this year of £88m.

The Co-operative transactionIt is pleasing to note that on 18 March 2013 we signed the Saleand Purchase Agreement (SPA) for the acquisition of Co-operative Insurance Society Limited and The Co-operative Asset Management Limited. We are now looking to obtain formal approval from the FSA for the proposed change in control. In addition, we shall be seeking the approval of our members to proceed with this transaction by way of a vote at an Extraordinary General Meeting, which isto be held on the same day as our Annual General Meeting (AGM) on 4 June 2013. We will be circulating to all our members areport on the proposed deal and voting packs as part of our AGM communications. I would like to thank the acquisition team fortheir hard work and look forward to seeing the developmentsin the coming months.

Regulatory developments As ever, regulation dominated the G20 agenda as the tide of regulation both in the UK and increasingly from Europe continued unabated. The passing of the Financial Services Act formally laid the foundations for the dissolution of the Financial Services Authority and the creation of two new regulatory bodies: the Prudential Regulation Authority and the Financial Conduct Authority. We look forward to working with the new regulatory authorities. Two of the major themes of the last few years, pension reform and the Retail Distribution Review (RDR), are inextricably entwined and will come to the fore during 2013. All companies are now required to offer a workplace pension and to automatically enrol their workforce into the scheme. While the largest UK employers are already doing this, small and medium-sized enterprises (SMEs) will typically haveto start the auto-enrolment process during 2013 or 2014. All the experience of our specialist pension business, Scottish Life, strongly suggests that SMEs will require substantial advice and assistance in meeting their new legal obligations. The problem is that the sweeping reforms introduced by the RDR are likely to reduce the numbersof advisers available to advise firms and their employees. If auto-enrolment is to be an effective policy intervention, the Government and regulators need to provide some clear ground rules for employers and their advisers and to ensure the market for adviceis established on a commercially viable basis.

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For some time we have been working towards implementing new capital requirements for EU insurers: the project known as ‘Solvency II’. During 2012 progress towards the final rules was slow and implementation day was pushed back again. Helpfully the UK regulator has shown willing to adopt an interim approach to insurance and solvency, taking the existing regime and overlaying some of the provisions from Solvency II. This is a proportionate approach and even if Solvency II progresses no further theUK industry is in a better state than before work commenced.

In another development the EU Commission has been lookingto extend some of the safeguards contained in Solvency II across to workplace pensions. This is an entirely ill-conceived initiative.If progressed it would impose enormous costs on all industry sectors with well-developed workplace pensions, diverting capital from the business at a sensitive point in the economic cycle to provide unneeded support to pension schemes. We are strongly opposed to this initiative both as an investor in industry and as a provider of pensions to our own employees. Helpfully the UK Government has also voiced very strong opposition to the EU Commission’s proposals.

Late 2012 also saw the arrival of the EU-wide ban on the use of gender as a factor in the pricing of insurance risks. This changehas had significant impacts on our protection business in both the UK and the Republic of Ireland. Gender has traditionally been a major factor used to price protection products, so a re-pricing to meet the new legal requirements will have far-reaching and unpredictable consequences for the market.

Board changesThis will be my last statement as Chairman of Royal Londonas I will stand down at the AGM in June. At this point Rupert Pennant-Rea will take over as Chairman. Rupert joined the Board in December, bringing a wealth of experience at the most senior levels in the financial sector. I have immensely enjoyedmy time at Royal London, however I am happy to stand down at this point knowing that the business rests in safe hands.David Williams, who has been a non-executive director since 2006 and latterly Chairman of the Remuneration Committee, will also be standing down at this year’s AGM. On behalf ofthe Board I would like to thank David for his contribution asa non-executive director and for his advice and support tothe Board over the last seven years.

In December, Group Finance Director, Stephen Shone, announced his intention to step down after 14 years in the role. We are all extremely grateful to Stephen for his commitment to the success of Royal London. During his time at Royal London he has developed and delivered strategies which have led the business through significant change and transformation, and which have resulted in the successful position that the Group enjoys today. Stephen has successfully managed The Co-operative transaction to the point of signing the sale and purchase agreement and will step down at this year’s AGM.

Earlier in the year John Deane stepped down from the Board. John was with Royal London for just over 5 years, duringwhich time he made a tremendous contribution to the success of our intermediary businesses. Latterly he oversaw the development of the MoneyVista financial planning tool from concept to full launch.

In June, Kerr Luscombe, Group Strategy Director joined the Board as an Executive Director. In December we confirmed that Kerr would combine his existing responsibilities with thatof Group Finance Director. In December Jon Macdonald,who joined the Group in November as Group Risk Director, also joined the Board. Jon has held a number of senior riskand capital management roles at a number of major financial services companies. Both Kerr and Jon are fellows of the Institute and Faculty of Actuaries.

There have been further changes to the Board with the appointment of three new non-executive directors, which were confirmed by the regulator in July. Jane Platt, Kathryn Matthews and David Weymouth all bring a diverse range of skills and experience to the Board. Jane Platt will be stepping down at the forthcoming AGM as she has been appointed to the Board of the Financial Conduct Authority. Detailed biographies of all four can be found on pages 40 and 41. As I step downfrom the Board I am satisfied with its balance and breadthof experience.

Annual General MeetingAs a modern mutual organisation, Royal London is keen to keep in touch with its members. There are a number of ways that members can make their views known. The main event of our year is the Annual General Meeting. This year’s AGM will beheld at 11.30 a.m. (or immediately following the EGM, which commences at 11.00 a.m., if later) on 4 June 2013.

This year we are inviting members who cannot attend the meeting in person to watch a live webcast of the event. Members have been sent full details in the voting pack. They can also vote by using the proxy voting form either online or in paper form. Members can also use the proxy voting form to ask questions of the Board. We are keen that members vote online wherever possible as this is the method which keeps cost to the minimum.

Looking ahead The progress towards economic recovery in the UK has continued to disappoint. Nevertheless Royal London has a robust set of propositions that have continued to deliver real customer benefit in a variety of economic conditions. The future strategy will firmly focus on developing and delivering further benefitsto customers and enhancing our position in the market. AlthoughI am stepping down from my responsibilities as Chairman of Royal London, I firmly believe that the business is on the right track for future success.

Tim Melville-RossChairman

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It feels thatthe company is working for your best interests.”Scottish Life customer

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2012 was my first full year as Group Chief Executive of Royal London and one that saw significant change for the Group.

The economic downturn which began in 2008 continued to impact the markets in which we operate. Weak economic conditions mean modest growth in our investments and minimal market growth for insurance services. Customer budgets have come under severe pressure and many have focused on short-term savings or reducing debt. Realistically many of the key UK life assurance product markets face weak growth prospects for the foreseeable future. If Royal London is to continueto organically grow the profits that it makes and distributes to members, then that growth must be won at the expense of competitors or achieved by improving our franchises in newer product categories and channels with better growth prospects. The key exception to this picture is in the area of group pension business, where the prospects for growth are significant as all employers will be required to offer a pension schemeand auto-enrol their workforce. However, long payback periods make this challenging for all insurers.

In the light of the current economic situation and the likely future prospects your Board and the executive team undertook a strategic review during 2012. The review considered a number of key questions facing our business:• How will we strategically differentiate Royal London in the future?• How can Royal London grow in a flat market?• How can a company such as Royal London remain competitive in a consolidating sector?

In developing our response to these questions, we analysed the key strengths of our businesses, the potential of the markets in which we operate and our position relative to competitors. The process was rigorous and took full account of external analysis and viewpoints. I am pleased to report that we came to some very clear conclusions.

Group ChiefExecutive’s statement

“There was a lot to be proudof in 2012. Royal London produced healthy profits and good investment returns.Our products and service gained further recognition in highly competitive markets.”Phil Loney, Group Chief Executive

Standing out from the crowdRoyal London is the UK’s largest mutual life and pensions provider. Being a mutual means we are owned by our members, whoare also customers of the Group. So all our resources and efforts should and can be focused on serving our customers and members, with no shareholders to reward. Our goal is to make the benefits of this continual customer focus real and tangibleand so underpin our growth through:• Offering great value for money in our products – superior

products already mean that Royal London Group companies are growing market share in all our major markets and the Group’s life and pension sales increased by 7% (on a PVNPB basis) despite tough market conditions. Our UK protection brands, Bright Grey and Scottish Provident, both have the maximum 5-Star ratings from the independent product research company Defaqto for their critical illness range. Scottish Life has been awarded the ‘Ultimate Default Fund’ voted on by financial advisers for four years in succession.

• Excellent service – good service is hard to find these days so we continually aim to improve our service for our customers and the financial advisers who act on their behalf. In 2012 we again won the coveted Financial Adviser 5-Star service award for Scottish Life and Royal London Asset Management also achieved this accolade. • Strong investment performance – in the current economy it is hard to find a good return for your long-term savings.

This makes good investment performance, delivered for modest fees, very valuable. I am pleased to report another strong year of performance from Royal London Asset Management. Investment returns were ahead of benchmarks in the Royal London With-Profits Fund and across the main Scottish Life pension funds. The quality and consistency of performance achieved by our fund managers continues to

be recognised by independent analysts.• We share our profits with our members through our

discretionary mutual dividend – I am pleased to report that in 2012 we allocated £88m to qualifying members. The mutual dividends allocated over the last 5 years provide a further boost to the value of the investments held by members who receive this benefit.

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• Weaimtoofferourcustomersandmembersmorethan ourshareholder-ownedrivals–ourinvestmentinMoneyVista hasprovidedahighqualityfinancialeducationandplanning

websitewhichisprovidedfreeforanyonewhowishesto beacustomerofRoyalLondon.Thisinnovativeservicehasseen

rapidgrowthintakeupbycustomersin2012andisfastdevelopingareputationforthequalityofitstips,toolsandguidestohelppeoplemanagetheirmoneymoreeffectively.

Ourvisionistobethemostcustomer-focusedinsuranceproviderintheUK,ownedbycustomers,andrunsolelyfortheirbenefit.Wearedevelopingapipelineofnewproduct,serviceandfinancialeducationofferingswhichwebelievewillofferexcellenttangiblevaluetocustomersandsodifferentiateRoyalLondonfromitscompetitors.

Expanding for the futureRoyalLondoncontinuestoinveststronglyinitsmainpensionandlifeassurancebusinessesintheUKandIreland.Wearealsoincreasingourinvestmenttofurtherenhanceourpropositionsinthosemarketswherewehaveagoodandgrowingfootholdandweseestrongfuturegrowthprospects.Forexample,wewillseektotakeadvantageoftheopportunitiespresentedtousthroughAscentric,ourleadingwrapplatform,throughfurtherinvestmentinsystemsandprocessestoenableAscentric’srapidandconsistentgrowth.WeareseeinggoodgrowthinnewinstitutionalfundinflowsintoRoyalLondonAssetManagementasweinvestinsalesandmarketingcapabilityandexpandtheproductrange.

Maintaining and improving our efficiencyRoyalLondonhasgrownsignificantlyinsizeoverthelastfewyearsandnowhas£50bnoffundsundermanagement.WhilstourfocusremainsmainlyontheUKandtheRepublicofIreland,wemustensurethatweremainfullycompetitivewithlarger,oftenmultinationalinsurers.

During2012weexaminedarangeofoptionstoachievethisgoal.Weplantoreduceourexpensesthroughoperationalimprovements,aprocesswhichwehavealreadystartedandwillbecontinuingin2013.WewillcreateaconsolidatedsetofITandcustomerserviceplatformsandconcentrateourexpenditureonasmallerrangeofsuppliers.Wewillseektocontinuallyimproveourprocesses,andincreaseourinvestmentindigitalcapability.Thisfocusonsustainablecostreductionwillhelptofundourgrowthplansgoingforwards.Inaddition,wewillassessselectedpotentialacquisitionstoaddfurtherscaletoourorganisation,inordertoachieveenhancedeconomiesofscaleandwidendistribution.OurworkonTheCo-operativetransactionisanexcellentexampleofthisapproach.

2012 resultsAgainstthebackgroundofaflateconomyandaconsolidatingmarketforlong-termbusinesswehavedeliveredagoodoperatingperformance,strongfinancialreturnsandasubstantialincreaseincapitalsurplus.OurEEVprofitbeforetaxandmutualdividendwas£336m,a45%increasecomparedwith2011.UnderlyingEEVoperatingprofit(beforetaxandbeforetheimpactofeconomicvolatility)was£246m.Thisisanincreaseof4%onlastyear,afteradjustingfortheoneoffimpactofRoyalLiverinour2011numbers.Thisisagoodoperatingprofitinthecontextofdifficulteconomicconditions.

AmoredetailedanalysisofthefinancialperformanceofRoyalLondonisgivenintheGroupFinanceDirector’sreview,butIamverypleasedtoreportthatwecontinuetodeliverstrongreturnstoourmembersandpolicyholders.Weadded£282mofbonuses(2011£231m)towith-profitspolicies.Wealsoallocatedafurther£88masamutualdividendforrelevantwith-profitspolicies(2011£88m).

In2012notonlywasthestateoftheeconomyachallenge,buttherewerealsoanumberoflegislativeandregulatorychangesthatbroughttheirownchallenges.AstheChairmanhasalreadypointedout,theyearsawtheremovalofgender-basedpricingofproductsandtheintroductionofthelonganticipatedRetailDistributionReview.Thesechangesrequiredagreatdealofpeople’scommitmentandtime.IampleasedtoreportthateventhoughRoyalLondonGroupbusinesseshavefacedsometrulyfundamentalchallengestotheirmarketsin2012,ineverycaseourpeoplerosetothechallengeanddelivered.

Changes in with-profitsPreviousannualreportshavementionedtheongoingdebatewiththeFSAovertheownershipofwith-profitscapitalinamutual.AstheleadingUKmutuallifeassurancecompany,asuccessfulresolutiontothatdebateisfundamentaltoourfuturestrategy.Iamthereforeverypleasedtoreportthatinlate2012theFSAissuedanewconsultationpaperentitled“MutualityandWith-Profitsfunds:awayforward”,inwhichtheFSAmadeitclearthattheywerenowseekingtoworkwiththemutualsectortoidentifyasolutiontothediscussionsovercapitalinamutualwhichwillenablemutualinsurerstothriveaspartofadiversefinancialservicesindustryintheUK.WeviewtherecentconsultationpaperasaverypositivestepandlookforwardtoengagingwiththeFSAanditssuccessor,theFCA,todeliverthebenefitsofastrongmutualinsurancesectorin2013andbeyond.

The Co-operative transactionAsmentionedintheChairman’sstatementwehavemadepositivestepsinourproposedacquisitionofthelifeinsuranceandassetmanagementbusinessesfromTheCo-operativeBankingGroup,withtherecentsigningoftheSaleandPurchaseAgreement.Ourfuturestrategyencompassesorganicgrowthandgrowthbyacquisition,inordertoincreaseourscale,efficiencyandcompetitiveness.Thecompletionofthisacquisitionwillrepresentasubstantialcomponentofthatstrategy.

SummaryThestateoftheeconomymeanttradingconditionsweredifficult,yetweproducedagoodsetofresults,addedtomembervalueanddeclaredamutualdividend.Regulatorychangesinkeymarketsabsorbedconsiderabletimeandresourcebutthechangesweresuccessfullyimplemented.Finally,during2012weputinplaceastrategytodriveRoyalLondonforward,takingadvantageoftheopportunitieswhichareavailableinthemarketandaddressingthecost,growthanddifferentiationchallengesweface.Wehavealreadycommencedanumberofstrategicinitiativesacrossthebusiness.Thesenewinitiativesarethefirststepsonajourneyandwillcontinuetobedevelopedthroughtimeinlinewithourevolvingbusinessstrategy.WeareconfidentthatourstrategywillallowRoyalLondontofaceabrightandconfidentfuturedeliveringvalueforourcustomersandmembers.

Phil LoneyGroupChiefExecutive

Group Chief Executive’s statement (continued)

Phil LoneyPhil LoneyGroupGroup ChiefChief

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Royal London is the UK’s largest mutual life and pensions provider. We are owned by our members – a key differentiating factor for the business.

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I am the focus of the company and profitsare re-distributed to menot shareholders.”Royal London Group customer

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I am pleased to present these results in my first review as Group Finance Director since being appointed to the role on 1 January 2013.

As a mutual, our financial priorities are to deliver good financial returns to our members and policyholders, atthe same time as maintaining a strong and stable capital position for the ongoing security of our members and policyholders. In 2012 we have continued to deliver well against these objectives.

Returns to with-profits policyholdersIn 2012 we added £282m of bonuses (2011 £231m) to with-profits policies. We also shared our profits withour qualifying with-profits policyholders by allocating £88m(after tax) as a discretionary mutual dividend to relevant with-profits policies (2011 £88m).

Capital strengthOur capital surplus has increased substantially in 2012, as a result of our good operating performance and improved financial markets. Our closed sub-funds remained self-sufficient and required no support from the Royal London Open Fund.

Key development activities We have made significant progress and signed binding contracts for the proposed acquisition of the life, pensions and asset management businesses of The Co-operative Banking Group.

We fully integrated Royal Liver, which we acquired in July 2011, and we have started to realise profits from this business in excess of that anticipated last year end, mainly due to our expense base now being lower than we expected last year.

We have also continued to invest in developing our systems and processes to ensure we can meet the evolving regulatory requirements, at the same time as working to improve our operational effectiveness and efficiency.

Group FinanceDirector’s review

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“We have delivered good financial returns to our members and policyholders and our capital strengthhas continued to improve.”Kerr Luscombe, Group Finance Director

Financial overviewOur European Embedded Value (EEV) basis profit after tax, including the impact of economic variances, was £225m. Thisis a substantial increase on last year’s result (2011 £122m), particularly since the 2011 result included a £91m after-tax one-off gain from the acquisition of Royal Liver.

Our EEV operating profit (excluding the impact of economic variances and before tax) was £246m (2011 £334m). This represents a 4% increase on our operating profit in 2011, before the recognition of the £97m (before tax) Royal Liver gain. This is a good performance in continued difficulttrading conditions.

EEV operating profit

We provide definitions of the key terms used in these accounts in the Glossary on pages 171 to 175.

201020092008 2011 2012

£213m £171m £243m £334m £246m

Includes £97mfrom the acquisitionof Royal Liver

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2009

12.2% 10.6%

2010

13.1% 11.9%

2011

6.0% 6.7%

2012

8.6% 7.8%

Returning value to our members and policyholders

We have returned good value to our with-profits policyholders in 2012, through:• investment returns applied to policies – which this year were 0.8% ahead of benchmark;• bonuses added in the year and on maturity of policies – which have continued to represent a good return, particularly when compared to other key players in our industry; and• mutual dividends, as our way of sharing our profits with our qualifying with-profits policyholders.

Investment returnsOur investments are managed by our in-house team at Royal London Asset Management (RLAM). We achieved good investment returns in 2012 on the assets invested on behalf of our customers and members.

During the course of 2012 the financial markets continued to be volatile, led by the continued uncertainty in the Eurozone. However, the FTSE 100 ended 2012 at 5,898 which was 6% above its valueof 5,572 at the end of 2011.

Royal London with-profits performanceWe measure our investment return against benchmarks that we have constructed from market indices weighted to reflect the asset mix of each sub-fund. In 2012 the investments backing the asset shares of the Royal London Open Fund achieved a return of 8.6%, which is 0.8% above its benchmark. In particular, we achievedstrong returns across equities and corporate bonds.

The chart below shows the investment return, before tax and charges, earned by the investments backing the asset shares of the Royal London Open Fund, compared to benchmark.

Actual Benchmark

Royal London with-profits performance by asset classThe chart below shows the performance in 2012 of the investments backing the asset shares of the Royal London Open Fund for each of our asset classes.

Actual Benchmark

Group Finance Director’s review (continued)

As at 31 December 2012 the investments backing the asset shares of the Royal London Open Fund were composed 56% (2011 55%) of its assets in equities and property, 30% (2011 28%) in UK Government bonds and 14% (2011 14%) in corporate bonds.

With-profits policyholder bonusesThe bonuses paid to our with-profits policyholders in 2012 areas follows:

2012 2011 £m £mAnnual 46 46Interim 13 9Final 223 176Total 282 231

We manage our with-profits funds and set bonus rates with the aim of being fair to all policyholders invested in the funds. When we decide bonus rates we need to consider the policyholders who will remain in the fund as well as those whose policies mature or become claims. We also need to maintain the strength of the funds and protect the long-term interests of current and future policyholders and members.

Annual bonusesAnnual bonus rates for 2012 remained unchanged at 0.5% forRoyal London conventional with-profits life policies and have been increased for most Royal London accumulating with-profits pension policies to 1.0%. The annual bonus rates for Royal London unitised with-profits policies remained unchanged, with the exception of the Regular Savings Plan (which was increased from 0.5% to 1.5%),the With- Profits Bond (which was decreased from 2.5% to 2.0%) and Royal London 360° Unitised With-Profits bond (which was decreased from 2.0% to 1.0%).

Final bonuses and maturity payoutsWe have narrowed the gap between maturity payouts and asset shares over recent years and they are now fairly well aligned, as shown in the graphs on the opposite page.

OutlookWe review final bonuses annually and we expect to continue todo this in the future, unless market volatility means that we needto review them more frequently.

Although longer term regular premium life policies are now aligned with asset share, we expect to continue to reduce maturity payouts because the asset shares of policies maturing in the future arelikely to be lower than those of policies maturing now. This is because future investment returns are expected to be lower than those experienced in the early years of those policies.

Policies maturing in 2013 are expected to continue to provide good and fair long-term real returns, although payouts on many longer term policies are likely to be lower than on similar policies maturing in 2012.

UKequities

Overseasequities

Property Governmentbonds

UK corporate bonds

12.7% 12.3% 13.0% 13.1%2.2%3.6% 3.1% 2.8%

15.8% 13.1%

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Comparison of our payouts with other providersThe chart below illustrates our typical payout for 15 year Royal London Open Fund policies, this being our policy duration with the greatest volume of maturities in 2012. This shows that in 2012, we paid out higher returns than the industry average and than a number of other major shareholder-owned UK insurers.

Illustrative payout on 2012 maturity of a £50a month 15 year with-profits policy

Source: ‘Money Management’ April 2012

Mutual dividendIn addition to with-profits bonuses, over recent years we have allocated a discretionary ‘mutual dividend’ to relevant policyholders as a way of sharing the results of the Group’s successful performance.

The good investment returns and healthy operating profitsfor the year, together with the increased strength of the Royal London Open Fund have enabled us to allocate a discretionary mutual dividend of £88m for 2012 (2011 £88m).

We have again applied this by enhancing the asset sharesof relevant policies. This represents an enhancement to the relevant policies’ asset shares of approximately 1.8%.

Since first launching the mutual dividend in 2007, we have allocated a total of £325m in mutual dividends. This represents a significant benefit of mutuality for our relevant with-profits members.

Payments to protection policyholdersIn addition to the returns allocated to our with-profits policies, we have also delivered substantial claims payments to our protection policyholders. For example, during 2012 we paid out over £164m to our UK protection policyholders in claims on their life and critical illness policies (2011 £165m).

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Management of with-profits business

We continue to manage our with-profits business in line withthe Principles and Practices of Financial Management (PPFM). We published new versions of the existing PPFM on 1 July 2012 on the Group’s website following some minor changes to our Practices and the establishment of a With-Profits Committee. Further details of the With-Profits Committee are given in the Corporate Governance section on page 48 and also publishedin the Terms of Reference for the With-Profits Committee document on the Group’s website.

We also publish a series of guides to our with-profits business which set out a summary of the key points from the PPFMin simpler terms. We aim to add value for our members and to continue to ensure that Royal London’s with-profits policyholders receive fair and competitive returns on their savings with us.Our objective is to pay benefits at maturity broadly in line with a with-profits policy’s underlying value, or asset share, after allowing for smoothing. We use asset shares as the means by which we

Illustration of with-profits policies maturity payoutsThe charts below compare maturity payouts with asset shares for typical Royal London Open Fund 15 year and 25 year monthly premium endowment policies. Both charts show that we narrowed the gap between maturity payout and assetshare over the period from 2005.

Example 25 Year Endowment Policy

(premium of £50 per month)

Maturity payout Asset share

Example 15 Year Endowment Policy

(premium of £50 per month)

Maturity payout Asset share

2005 2006 2007 2008 2009 2010 2011 2012 2013

Maturity year

£70,000

£60,000

£50,000

£40,000

£30,000

£20,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Maturity year

£15,000

£14,000

£13,000

£12,000

£11,000

£10,000

seek to ensure we are treating all classes and generations of policyholder fairly when determining payouts.

We calculate the asset shares for specimen with-profits policiesby accumulating the premiums paid at the rate of return earned on the assets backing the policies, after deducting amounts to cover expenses, mortality charges and tax (where applicable).The asset share also includes any enhancements we have made.

The investment returns we credit to the asset share of a policy from January 2010 vary according to the fund it is in and, for some funds, the period remaining until it reaches its maturity or pension date.

The amount of smoothing we apply follows the approach laid out in the PPFM and depends on the strength of the fund and also the extent to which actual payouts are above or below asset shares.

Royal London

Industry Average

Standard Life

Scottish Widows

£12,074 £11,655

Norwich Union

£10,493

Prudential

£11,903 £10,432 £10,020

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Financial overview We have delivered a good financial performance in 2012. This is vital to making sure we can continue to provide good, sustainable returns to our policyholders.

We have maintained a healthy level of underlying operating profits, despite the challenging economic climate, with new business levels ahead of last year.

New business

We wrote 7% more new life and pensions business in 2012 compared to 2011 (on the Present Value of New Business Premiums basis). This is largely a reflection of the quality of the products we offer and is a great result in the current challenging market conditions. Our new business results are as follows:

2012 2011 2012 2011 2012 2011 £m £m £m £m % %

Scottish Life 30.4 26.1 2,438 2,251 1.2 1.2 Protection 41.0 23.0 482 393 8.5 5.9Royal London Retail - 16.6 - 69 - 24.0Royal London 360° 8.8 8.2 364 398 2.4 2.1Caledonian 3.2 (0.8) 32 7 10.0 (11.4)Royal London Plus 12.9 15.3 208 173 6.2 8.8

Total life and pensions business 96.3 88.4 3,524 3,291 2.7 2.7

RLAM 11.5 7.7 2,264 1,363 0.5 0.6

Total 107.8 96.1 5,788 4,654 1.9 2.11New business contribution in the table above has been grossed up for tax at 23% (2011 26%). We have done this to help compare our results with the results of shareholder-owned life insurance companies, which typically pay tax at 23% (2011 26%).

Present value of new life and pensions business premiums (PVNBP)

Total life and pensions business PVNBP

The growth in new business and the value this brings demonstrates the market’s view of our products and intermediaries’ willingness to recommend them to clients. In turn, some of this added value is distributed to relevant with-profits policyholders through the mutual dividend.

+7%

2008

£2,237m £2,461m £3,108m

2009 2010 2011 2012

£3,291m £3,524m

Life and pensions new business marginThe margin on new life and pensions business was 2.7%, which was unchanged on last year.

The internal rates of return (IRR) and payback periods for our business units writing new long-term business are as follows:

2012 2011 2012 2011 % % Years YearsScottish Life 8.6 8.5 10 10Protection 11.4 11.4 5 5Royal London 360° 11.3 12.9 7 7

Our IRRs and payback periods have remained fairly consistent with the prior year. We had a marginal reduction in IRR for Royal London 360° due to changes in mix of business sold. We provide further details on our EEV new business results by business unit on page 163.

Internal rate of return Payback period

After including the impact of economic variances, our financial results improved on last year. We achieved good investment returns, as a result of improving investment markets and our own investment performance being better than benchmark. However, our results were impacted by a marked reduction in the value of our Group pension scheme surplus.

Overall, our EEV profit after tax was £225m, a substantial improvement on last year (2011 £122m).

New business marginPVNBPNew businesscontribution1


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Impact of economic variancesOur 2012 results benefited from £127m of favourable economic experience variances, due to improved investment returns in the year compared to our expectations at the start of the year. This was despite a £82m adverse impact from an increase in the value of our subordinated debt liability, reflecting the increased value placed on our corporate debt by the end of 2012. In addition, we reflected £83m of favourable economic assumption changes as a result of improved assumptions of future economic performance compared to those assumed at the start of the year. Movement in Group pension scheme surplusThe £95m reduction in the surplus of the Royal London Group Pension Scheme (RLGPS) in 2012 has had a significant impact on our reported result for the year. The surplus recognised in our accounts as at 31 December 2012 was £62m (2011 £157m). The decrease in the year is mainly due to a reduction in the rate used to discount the scheme liabilities, which reflects a reduction in corporate bond yields, following their strong performance in 2012.

We also operate two schemes for ex Royal Liver employees. The surpluses of these schemes are included as part of the valuation of the closed Royal Liver Sub-Fund and therefore do not count towards the surplus position of the Royal London Open Fund. The combined Royal Liver scheme surplus as at 31 December 2012 was £56m (2011 £90m). As with RLGPS, this also decreased in the year due to a reduction in the liability discount rate. There are fur ther details on the scheme valuations in note 35 on page 131.

Mutual dividendAs a result of our good operating profits and continued strong capital position, we have been able to allocate a mutual dividend of £93m for the year, which equates to £88m after tax (2011 £88m).

EEV profit after taxOur EEV profit after tax and mutual dividends was £225m in 2012, a substantial improvement on our result of £122m in 2011 (which included the Royal Liver £91m after tax gain), largely because of economic factors.

Presentation of our results

As a mutual business, our Group financial results presented in this Annual Report and Accounts represent the full movement in the year in the value of the Royal London Open Fund. Our reported profit does not include the profits of closed sub-funds, since we retain the surpluses of closed funds for the with-profits policyholders who are invested in those funds.

This differs from the way that shareholder-owned life insurance companies present their results. In these, the profit or loss for the year is only that attributable to the company’s shareholders and is generally restricted to 10% of the distributable surplus in the with-profits fund and all the surplus from the non-profit business. Amounts attributable to policyholders are retained separately and are not included in reported profit.

European Embedded Value resultsThe main financial basis we use to assess our performance is the European Embedded Value (EEV) basis. Our results are summarised here. You can read the detailed results on pages 156 to 167.

EEV income statement

2012 2011 £m £m

Contribution from new business 89 77Profit from existing business - Expected return 64 84- Experience variances 34 31- Operating assumption changes 61 15Expected return on opening net worth 29 31Profit on uncovered business 8 9Other items (39) (10)

Operating profit before business combinations 246 237Gain arising on business combinations - 97

Operating profit before tax 246 334Economic experience variances 127 116Economic assumption changes 83 (162)Movement in RLGPS pension scheme surplus (95) (31)Financing costs (25) (25)

EEV profit before tax and mutual dividend 336 232Mutual dividend (93) (94)

EEV profit before tax 243 138Attributed tax charge (18) (16)

EEV profit after tax 225 122

EEV operating profitThe Group achieved an EEV operating profit in 2012 of £246m. This compares to £237m in 2011, before recognising the one-off gain of £97m from acquiring Royal Liver, shown as ‘gain arising on business combinations’ in the table above.

Our EEV operating profit includes:• £89m profits from new business written in the year, a 16% increase on last year. • £34m operating experience variances. • £61m operating assumption changes, mainly reduced future

expense projections, as a result of improved operating efficiencies and costs being spread over a larger in-force book of business than last year (in part due to the acquisition of Royal Liver).

Operating profit also includes the expected return on our assets. This year’s operating result has been adversely impacted by lower expected returns on our opening assets compared to last year. This meant our operating profit was around £30m lower thanit would have been had we applied the same rate of expected return in 2012 as we did in 2011. However, our actual investment returns were better than we expected at the start of the year and the benefit of this is shown below the operating profit line, within economic experience variances.

Other items mainly comprise corporate and development costs. This compares to costs of £30m in 2011, which were partially offset by a £20m positive impact from making changes toour actuarial modelling. This year’s corporate costs include expenditure on developing our Group strategy and investment to further strengthen our internal governance as a responseto the evolving regulatory environment.

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Definition of operating profit

Operating profit is the profit on the IFRS basis resulting from our business operations. Our primary business operations are:• providing life assurance and pensions;• managing and administering investments, and• acquiring and administering closed long-term insurance funds.

In order to present a better understanding of the underlying operating performance of the Group, operating profit excludes certain items which are outside management control.In particular, it excludes the impact of investment fluctuations, economic assumption changes and movements in the pension scheme surplus. It also excludes methodology changeswhich are a direct response to investment market movements,although these are under control of management.

Operating profit is stated before finance costs and taxes.It is also stated before the mutual dividend, as this is a return to relevant policyholders, similar to an equity dividend in a shareholder-owned company.

In 2011, operating profit included the one-off gain recognised from acquiring Royal Liver, since this activity was within management control and represented the value we expected to earn as part of our primary business operations.

IFRS resultsOur International Financial Reporting Standards (IFRS) resultsare summarised here. You can read the detailed results on pages73 to 155.

IFRS consolidated statement of comprehensive income

2012 2011 £m £m

RevenuesGross earned premiums 1,087 1,076Amounts paid to reinsurers (405) (344)

Net earned premiums 682 732Investment return 3,058 1,314Gain arising on business combinations - 91Other revenues 211 204

Total revenues 3,951 2,341

ExpensesPolicyholder benefits and claims 2,701 1,600Operating expenses 987 647Finance costs 30 30Tax credit (27) (24)

Total expenditure 3,691 2,253

Transfer to the UDS 260 88

The IFRS result for 2012 was a profit after tax of £260m (after deducting the mutual dividend of £88m). This is a significant improvement on the £88m profit after tax in 2011, primarily dueto the more favourable economic variances experienced in 2012 compared to last year. It should also be noted that, as withthe EEV income statement, the 2011 result also included the£91m (after tax) one-off gain from the acquisition of Royal Liver.

The increase in investment return reflects our improved investment performance in 2012.

Other revenues mainly represent fee income from fund management, which has increased as a result of increased levelsof assets under management.

Reserves for policyholder benefits and claims increased inthe year, reflecting the increased investment return allocatedto policyholder liabilities.

Operating expenses comprise:• Core operating expenses of £476m (2011 £442m), which

increased due to reflecting a full year of Royal Liver expenses in 2012, compared to 6 months in 2011 (as it was acquired in July 2011).

• Investment management expenses of £91m (2011 £87m), which have increased as a result of the rising investment markets.• Investment returns allocated/paid to external unit holders of

unit trusts of £186m (2011 £15m) which have increased due to rising investment markets, plus a greater proportion of our unit trusts are now held by external holders.

• Amortisation and impairment of £105m (2011 £103m).• The decrease in the Group pension scheme surpluses of £129m

(being £95m on RLGPS and £34m on Royal Liver schemes). Last year these schemes increased in value by £9m overall, which was presented within ‘other revenues’.

Operating profit (IFRS basis)Whilst we mainly focus on the EEV basis for assessing our operating performance, we have also calculated our operating profit on the IFRS basis, in order to indicate the amount of our IFRS result that relates to our core operating activities. This is broadly similar to our EEV operating profit, the main differences being the amortisationof certain intangible assets, which are recognised on the IFRS basis but not in EEV, and embedded value profits of our asset management subsidiary, which are not recognised in our IFRS results.

Our operating profit for 2012 was £189m (2011 £201m, before the Royal Liver gain).

Reconciliation of operating profit to IFRS profit after tax

2012 2011 £m £mOperating profit before business combinations 189 201Gain arising on business combinations - 97

Operating profit (IFRS basis) 189 298

Adjusting for the following items: Investment return variances and economic assumption changes 291 (125)(Decrease) / increase in the Group pension schemes surplus (129) 9Finance costs (30) (30)Mutual dividend (88) (88)

IFRS profit before tax 233 64Tax credit 27 24

IFRS profit after tax 260 88


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IFRS balance sheet

2012 2011 £m £m

Assets Property, plant and equipment 42 45Investment property 2,319 2,259Intangible assets including acquired VIF 1,083 1,109Reinsurers’ share of insurancecontract liabilities 1,159 1,043Pension scheme asset 118 247Other assets 32,127 31,543Cash and cash equivalents 2,901 2, 512

Total assets 39,749 38,758

LiabilitiesUnallocated divisable surplus (UDS) 2,648 2,388Insurance and investment contract liabilities 34,270 33,008Subordinated liabilities 398 398Other liabilities 2,433 2,964

Total liabilities 39,749 38,758

Our IFRS unallocated divisible surplus has increased to reflect the transfer of £260m profits in the year. Our balancesheet remains robust, and we experienced no significant asset impairments in the year.

Our total investment portfolio (reported on the balance sheet above within other assets) is £31,719m, an increase on 2011 of 2%. Our asset portfolio remains high quality, with the majorityof our investments in higher graded assets, rated A or above. 48% (2011 50%) of our asset portfolio is in fixed income investments and cash. The Group’s exposure to sovereign debt from Portugal, Italy, Ireland, Greece and Spain amounted to 0.4% (2011 1.0%) of the total assets on the balance sheet, thereby limiting our direct exposure to adverse effects fromthe ongoing Eurozone market crisis. We analyse our sovereign debt holdings on page 106.

Our insurance and investment contract liabilities have increased in 2012, reflecting increased new business and increasedasset share valuations, offset by business run-off in the year.

Reconciliation of the IFRS unallocated divisible surplus to the European Embedded Value

2012 2011 £m £m

IFRS unallocated divisible surplus 2,648 2,388Valuation difference between IFRS and EEV- Goodwill and intangible assets (excluding VIF) (296) (308)- Deferred tax valuation differences (99) (74)- Subordinated debt at market value 47 134- Capital requirements of subsidiaries and other valuation differences (68) (94)

Add items only included on an embedded value basis- Valuation of asset management and service subsidaries 133 119

Other valuation differences 50 25

European Embedded Value 2,415 2,190

There are details of the basis on which we have prepared the EEV results, and the differences to the IFRS basis, in the notes to the EEV results on page 160.

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As a mutual insurance company, our security is reflected inour capital strength. The stronger and more stable our capital position is, the more security our members and policyholders have. In addition, our capital strength gives us more flexibilityto manage our investment strategy in order to generate higher investment returns. It also allows us to distribute an increased amount of our profits to our qualifying members, throughmutual dividends.

We regularly monitor our capital levels and have in place acapital management plan in order to manage the sensitivityof our capital to fluctuations in investment markets and operational factors.

Structure of the Royal London With-Profits FundThe Royal London With-Profits Fund comprises the Royal London Open Fund and a number of closed sub-funds arising from businesses that we have acquired in the past. All new business is written into the Royal London Open Fund.

Surpluses in the closed sub-funds are ultimately for the benefit of the with-profits policyholders in those funds and do not belongto the Royal London Open Fund. Therefore we do not count the value of the surplus in the closed sub-funds towards the published surplus of the Royal London Open Fund. However, this acts as an additional and potentially significant buffer against the risk of the Royal London Open Fund having to support the closed sub-fundsin stressed conditions.

Self-sufficiency of the closed fundsThe Royal London Open Fund is committed to provide capital support to the closed sub-funds in the event that a closed fund moves into deficit. Similarly, should the Royal London OpenFund move into deficit, the Scottish Life and Royal Liver closed sub-funds are committed to support it if they can.

One of our key objectives is to manage the capital position ofthe closed sub-funds so that they are all self-supporting andthe surplus in each remains at least sufficient to meet its owncapital requirements without unfairly holding back surplus from policyholders who exit. We measure this self-sufficiency onthe realistic capital basis.

Throughout 2012 our closed sub-funds have continued to becapital self-sufficient, with no support required from the Royal London Open Fund.

Capital management planOur capital management plan sets out a target range for our surplus capital levels, together with an agreed set of management actionsto be taken in the event of surplus capital falling outside our target range. This means we can respond promptly to variations in capital levels, should the need arise.

Over the last few years we have put in place management actions to reduce the sensitivity of our capital levels to fluctuations in investment markets. These actions include changes to investment strategy, changes to equity backing ratios and the introductionof lifestyling.

Investment strategyWe aim to manage the Group’s exposure to asset volatilitythrough asset matching and hedging strategies, in order to match the performance of our assets closely to the underlying liabilities.

Equity backing ratiosThe equity backing ratio (EBR) is the proportion of equities and property assets backing with-profits asset shares. These assets aremore risk-seeking and generally exhibit greater volatility. We setthe EBR for each sub-fund depending on the risk profile and strength of the sub-fund. The table below shows the average EBRfor each sub-fund at 31 December 2012.

Sub-fund EBR %

Royal London Open Fund Open 56%United Friendly OB Closed 30%United Friendly IB Closed 57%Refuge Assurance IB Closed 38%Scottish Life Closed 25%Phoenix Life Assurance Limited Closed 34%Royal Liver Closed 38%

Impact of lifestylingWe use lifestyling in the Royal London Open Fund, the United Friendly OB Sub-fund, the United Friendly IB Sub-fund and the Refuge Assurance IB Sub-fund.

By lifestyling we mean that we reduce the proportion of a policy’s investments in equity and property and increase the proportionin fixed-interest investments, each year during the 10 years beforethe policy’s maturity or pension date. This reduces the risk exposurefor those policies closer to their maturity or pension dates because investment returns from equity and property, although potentially higher, are generally less stable than from fixed interest investments.

As a result of lifestyling, the investment return that we add to the asset shares of policies depends on the number of years untilthe policy’s maturity or pension date. The table below shows some example investment proportions and investment returns for 2012 for investments backing the asset shares of policies investedin the Royal London Open Fund. The equity backing ratios are approximate and may change in the future.

15 72% 9.1% 10 67% 8.9% 5 42% 8.2% 1 24% 7.6%

Number of years to maturity or pension date

Investment return before tax and

charges

Approximate equity backing

ratio

Capital management


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Realistic capital

2012 2011 £m £m

Total realistic participating net assets,including upper tier 2 capital 16,102 15,906Total realistic participating liabilities (12,522) (12,864)

Realistic working capital (beforeclosed fund transfer commitments) 3,580 3,042Closed fund transfer commitments* (1,045) (895)

Total working capital 2,535 2,147Risk capital margin (39) (50)

Excess realistic capital 2,496 2,097

* Closed fund transfer commitments represent the realistic working capital of the closed sub-funds, which is retained forthe benefit of policyholders in those funds.

We added substantial value to our realistic capital in the year, through the value from new business written in the year, favourable operating experience and investment returns in excess of those expected at the start of the year.

We analyse the realistic working capital by open and closed funds on page 152. Also, the capital statement onpage 153 provides a reconciliation of our working capital tothe unallocated divisible surplus in the IFRS balance sheet.

One of our key financial priorities is to manage our capital levels effectively in order to provide security and good financial returns for our policyholders and members.Improved equity markets contributed significantly to the increase in our capital strength in 2012.

We report the Group’s capital on the two FSA Pillar I bases:1. The regulatory (Insurance Group Directive) basis, and2. The FSA realistic balance sheet (realistic) basis. The realistic capital basis underpins our IFRS and EEV valuations.

We also monitor our capital on the FSA’s Pillar II Internal Capital Assessment (ICA) basis. The Group’s excess capital improved under all measures in 2012.

Regulatory capital

2012 2011 £m £m

Admissible assets includingupper tier 2 capital 30,315 29,250Mathematical reserves and other liabilities (24,899) (24,547)

Total available regulatory capital 5,416 4,703Capital resource requirements - EU solvency requirements (713) (741)- Additional with-profits requirements* (2,301) (2,026)- Subsidiaries (28) (30)

Total regulatory capital required (3,042) (2,797)

Excess regulatory capital 2,374 1,906

* The additional with-profits requirements represent the regulatory surpluses in the closed sub-funds. These are heldfor the benefit of the policyholders invested in them and therefore do not count towards the Royal London Open Fund excess regulatory capital.

At 31 December 2012, our excess regulatory capital was £2,374m (2011 £1,906m). The Group has maintained strong regulatory capital cover of 178% (2011 168%).

Our excess regulatory capital increased by 25% in 2012, primarily as a result of increased investment returns in theyear, compared to the prudent returns expected in the regulatory valuations.

Capital strength

The charts below show we have substantially strengthened our excess capital levels over recent years:

Excess regulatory capital

Excess realistic capital

+19%

20092008 2010 2011 2012

£1,182m £1,863m £2,087m £2,097m £2,496m

20092008 2010 2011 2012

+25%

£773m £1,026m £1,597m £1,906m £2,374m

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We delivered a good financial performance in 2012 and we have seena substantial increase in our capital strength.

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Regulatory developmentsDuring 2012 we have continued to develop our governance framework and processes to ensure we can meet the evolving regulatory requirements. These included implementing the changes needed to allow us to successfully meet the requirements of the Retail Distribution Review.

Preparing for the Solvency II regulatory regimeSolvency II is a major European Union Directive which will transform how we manage and report risk and capital.

The regulations and guidance in respect of Solvency II have not yet been finalised so we do not yet have a clear viewof all its impacts. At this stage, however, we expect the new regulations will result in a new requirement to includea risk margin, which is an explicit addition to best estimate liabilities to allow for risk. There may also be potentially reduced profit margins recognised on our unit-linked savings business due to changes to the rules affecting the recognition of future premiums.

Under the new regime, firms can apply to use an ‘internal model’ to calculate the Solvency Capital Requirement (SCR) if they do not consider the standard formula specified inthe Directive to be appropriate to their risk profile. In 2012 we completed most of our original development plansand have shown that our SCR is broadly similar according to both internal model and standard formula. It is also not dissimilar to our current Internal Capital Assessment (ICA).

A significant milestone in 2012 was the completion of our first Own Risk Solvency Assessment (ORSA). From 2013 the ORSA will be integrated into our business planning cycle and is a powerful new facility which demonstates howwell we understand the risks we manage within our businesses. We have also invested significantly in 2012 in transforming our risk management systems and risk information infrastructure.

Well publicised legislative delays within the EU mean that implementation of Solvency II is not now expected tobe before January 2016. However, by 2014 the European Insurance and Occupational Pensions Authority (EIOPA) expects firms to have a working governance system, an approach to the ORSA and a clear view of why the risk management approach is proportionate for their business as set out under the Solvency II Directive. We continueto work with the regulator to ensure that they aresatisfied that we will have these elements in place by 2014.

Our current project priorities are to complete thework needed to report in accordance with the new reporting templates and continue to develop ourtechnical documentation and validation processes.

Taxation developmentsOur Group’s taxation basis changed with effect from1 January 2013, as a result of a change in the tax regime for UK life insurers. Under the new regime, tax is now basedon the statutory accounts results and commercial allocations rather than being driven by the FSA regulatory returns. In addition, a new basis of tax for protection business has been introduced, taxing it in the same way as pension business.

We are also progressing well with the implementation of Real Time Information (RTI) reporting of PAYE data to HMRC, which takes effect for the Group during 2013, and preparingfor the introduction of new US reporting legislation knownas the Foreign Account Taxes Compliance Act (FATCA), which we expect to implement in 2014.

Ratings agenciesWe continued to engage with ratings agencies to provide a financial strength rating for the Group. In 2012 Standard & Poor’s and Moody’s reaffirmed our strong ratings of ‘A- positive outlook’ and ‘A2 Good Financial Security’. This is an external and independent endorsement of our financial strength and stability.

The Co-operative transactionOn 18 March 2013 Royal London signed the agreement to acquire Co-operative Insurance Society Limited along with its subsidiaries and The Co-operative Asset Management Limited,by way of a share purchase. We expect that the transaction will complete later in 2013, having met all the necessary completion requirements, including a successful vote by our membersand approval of change in control from the FSA. Should this bethe case, we will be reflecting the impact of the transaction in our 2013 Group results. Once completed, this transaction is expected to increase Royal London’s funds under management from £50bn to approximately £70bn and our customer basewill increase from 4 million to 6 million.

SummaryThroughout 2012 we have delivered good financial returns to our members and policyholders and we have seen a substantial increase in our capital strength.

Looking forward, our financial priorities continue to be to grow our profitable business lines, further improve our operational effectiveness and continue our strong capital management. These actions will allow us to continue to provide good financial returns and continued security for our policyholders and members.

Kerr LuscombeGroup Finance Director


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Scottish Life is the award-winning pensions specialist of the Royal London Group. It provides products and services to both individual customers and to employers with pension schemes and their scheme members, distributed through financial advisers in the UK.

Scottish Life delivers benefits and not complex features to customers, with the cornerstoneof the offering being its excellent customer service.

In 2012, the external market recognised the strengths of its customer-focused propositions through the awards Scottish Life won. This external recognition validates its strategy and provides an excellent platform for success in 2013.

As discussed in the Chairman and Chief Executive’s statements, 2012 saw almost unprecedented regulatory and market activity in the pensions arena, ahead of long-expected, fundamental change in 2013;• from 31 December 2012 the FSA’s RDR replaced initial commission with a fee-based

structure for investment business. RDR will bring considerable change to the adviser landscape. Some advisers will move from independent to restricted-advice models. Others may leave the industry, due to the RDR obligations. Banks are expected to withdraw their retail advice services or restrict them to customers with large investments;

• auto-enrolment is scheduled to run from 2013 to 2017 – as the Government encourages individuals to save for their retirement. The forecast is for 5-10 million new entrants to join group pension schemes; and• the ‘At Retirement’ market is changing – with people living longer and phasing their transition into retirement. This will continue to increase demand for more flexible retirement income.

Throughout the year, Scottish Life has supported advisers in their preparations for these regulatory changes.

Progress through recessionAll this is happening while the UK economy remains in recession. The most optimistic predictions suggest very subdued growth in the near future. However, Scottish Lifeis proud of the progress it made and the success delivered in 2012. It improved the award-winning Governed Investment proposition at a time when economic concerns and volatile markets are high in customers’ minds.

The pensions market overall remained flat in 2012, but Scottish Life enjoyed further success.It wrote new business of £2,438m on a PVNBP basis, up 8% from 2011. Using the well-established Financial Adviser’s Fee (FAF), it wrote new business on profitable terms, muchin line with the approaches advocated by RDR.

Scottish Life saw strong sales of both its core Governed Investment proposition and highly regarded Income Release product, with both maintaining impressive market shares.This success was built around class-leading service and a simple proposition, allowing Scottish Life to maintain margin while competitors reduced charges and offeredmore complex propositions.

Increasing group businessPrior to 2013 and the RDR’s removal of commission, Scottish Life viewed the group market as less attractive and focusedinstead on building its highest ever market share in individual pensions. However, it is now writing increased levels of group pension business reflectingthe growing workplace savings marketand building on this through a strong auto-enrolment proposition, focusingon the customer.

Last year’s review stated that Scottish Life intended to uphold its well-regarded individual proposition and strengthen its group offering against a backdrop of major regulatory challenge. Scottish Life believes the 2012 results reflect strong delivery against those plans.

Looking aheadScottish Life believes RDR will create a level playing field in the group market, as initial commission is banned. It anticipates that, fuelled by auto-enrolment, the overall pensions market will expand significantly.

Scottish Life is well placed to benefit from both. Its simple packaged-product approach offers value for money to customers andand award-winning service saves financial adviser’s time.

The increasing demand for investment governance will play well to its acclaimed Governed Investment Portfolio proposition. Scottish Life will work to help employers through the complexity of their new workplace savings duties.

And, of course, it will always deliver an excellent customer experience thatmakes financial sense to customers andtheir advisers.

Business overview

Pensions

Every question I asked was answered clearly, in plain English.”Scottish Life customer

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8%The pensions market overall remained flat in 2012, but Scottish Life enjoyed

further success. It wrote newbusiness of £2,438m on a PVNBP

basis, up 8% from 2011.

Scottish Life won theFinancial Adviser

5-Star Award for the fourth year running and

Best for Service for thethird year.

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Ascentric provides a web-based service which helps financial advisers to manage their clients’ long-term savings. This service is provided to financial advisers through the Ascentric Wrap service andto large distributors and product providers through the Investment Funds Direct Limited white-label solution.

Ascentric’s products include a taxed account (General Investment Account), ISA, SIPP, Onshore Bond and Offshore Bond.

Customers have the opportunity to invest in a wide variety of funds, stocks and shares, bonds, structured products and cash.

The Wrap account helps customers manage their finances through online access to their investments with a clear charging structure. Customers can view their portfolio at a single glance, putting themin control of their investments throughtheir financial adviser.

The impact of the Retail Distribution Review The Retail Distribution Review (RDR) will extend the concept of ‘adviser charging’ and encourage the whole industry to demonstrably provide unbiased advice.

RDR now requires the whole industry to provide a transparent service to advisers and clients. Ascentric has always done so, as a central feature of its offer. So, the impact of thesechanges on its service is relatively limited, allowing Ascentric to focus on strengthening theIT infrastructure, improving its service levels and broadening the range of products on offer.

In 2012, Ascentric was awarded ‘Best Platform for Adviser Service’ and ‘Best Open Architecture Platform’ at the UK Platform Awards 2012, as well as a 5-Star Platform rating from independent financial research company Defaqto. However, growth in the platform market was affected by general economic conditions. Although this led to net new business falling on 2011 levels, performance exceeded that of the wider platform market.

Promisingly, Ascentric enjoyed a record year for new adviser firm sign-ups, suggesting thatonce adviser firms have completed their RDR preparations, new business levels should startto improve in 2013.

Looking aheadAscentric is investing significantly in a major redesign of its IT infrastructure and architecture. This two-year project will see it redesigning the user interface screens and improving the way the platform functions.

This activity will allow Ascentric to capitalise on the opportunities presented by RDR while continuing to deliver innovative technology solutions to customers in 2013 and beyond.

Business overview (continued)

Award-winning Ascentric

UK Platform Awards 2012: Best Platform for Adviser

Service and Best OpenArchitecture Platform.

Total assets under administration up 41% to £5,147m41%

Wrap platform

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Royal London Plus connects the Group to its roots as a Home Service insurance company. It no longer collects premiums or sells policies door to door but remainsat the heart of the Group’s business.

Royal London Plus specialises in administering the policies of insurance companies that are no longer selling new business, known as ‘closed books’. It is now the third largest business in the UK doing this kind of work, administering around 5 million policies for over 2 million customers. This includes former customers of Refuge Assurance, United Friendly, Phoenix Life Assurance Limited and Royal Liver.

The 2011 Navigant Life & Pensions Benchmarking Survey recognised Royal London Plus as achieving the lowest cost base amongst administrators of closed books while maintaining a high quality service to customers.

In 2012, Royal London Plus finished transferring all Royal Liver operations from Liverpool to Wilmslow. It is now generating significant cost savings and service benefits by integrating them into the Royal London Plus operating model. This enables every one of the 140 customer services consultants to see on a single screen all the policies a customer has with Royal London Plus. Investment in such systems helps them to deal with over 85% of enquiries at the first point of contact, something that customers say they value.

The Sales Contact Centre helps customers interested in taking out a new plan. Royal London Plus doesn’t provide financial advice; instead it gives customers the information they need to make up their own minds. It’s clearly a service customers appreciate: a regular survey among those contacting the Sales Contact Centre found that 97% would recommend it to their friends and family. As a result, in 2013 Royal London Plus intends to expand this team and the plans it offers.

Occasionally service can fall short of the high standards aimed for. Royal London Plus values complaints because it uses them to help make changes and improve services. For example, in 2012 it received 13% fewer complaints about servicing policies than in 2011 and now resolves more than half such complaints within 24 hours.

Sales Contact Centre

97%would recommend ourSales Contact Centre totheir friends and family.

During October and November 2012, Royal London Plus asked customers how easy they thought it was to deal with. Nearly nine out of ten callers were satisfied or very satisfied with the service they received. Royal London Plus wantsit to be ten out of ten and will continue to look for ways to improve during 2013.

I found the operator very helpful, obliging and clear – she really put me at ease.”Royal London customer



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®

Royal London Asset Management (RLAM) is the specialist fund management company within the Royal London Group. It invests on behalf of the Group, as well as for a wide range of institutional and wholesale clients.

Alongside RLAM, there are two cash management businesses: Royal London Cash Management (RLCM) and Royal London Asset Management Channel Islands (RLAM CI). They provide specialist cash management services for a wide range of both onshore and offshore clients.

RLAM manages £47.6bn of assets, invested in equities, bonds, property and cash. It offers pooled products, such as OEICs, offshore funds and pooled pension funds, as well as segregated accounts.

RLAM has continued to make a direct contribution to the Group’s profitability despite the challenging investment environment. It also continues to enjoy strong support from the institutional and wholesale markets. During 2012, it attracted new assets of £2.3bn.

RLAM enhanced its product range during 2012 with the launch of two new funds. The Royal London European Corporate Bond Fund enables clients to gain exposure to investment grade corporate bonds issued in Euros. The Royal London Duration Hedged Credit Fund, an investment grade fund, aims to achieve a positive total return in all market conditions, while using derivatives to reduce interest rate risk by taking duration close to zero.

New business in 2012RLAM’s strong reputation in fixed interest helped it to win new business totalling £2.0bn in gross new assets. It also attracted £201m of new equity assets across its range of active and passive funds and £100m in property and other assets.

Total funds under RLAM management increased to £47.6bn at the end of 2012, up from £44.0bn in 2011. Revenue from external business rose from £23.7m in 2011 to £30.0m in 2012, representing 54% of RLAM’s total revenue.

RLCM and RLAM CI remain focused on capital preservation. The approach acknowledges that clients with cash on deposit value security first and foremost. A range of investors continue to appreciate this approach.

Despite the low interest rate environment, client demand remained robust with inflows during the year totalling £583m, resulting in total cash under management rising to £6.6bnby the end of the year.

Investment performance in 2012• 45% of RLAM’s equity and fixed interest unit trust/OEIC funds outperformed their peer

group averages during 2012. Consistent performance over the longer term means that this proportion rises to 63% and 82% over the three and five year periods to the end of 2012, respectively;

• six RLAM fund managers hold a prestigious Citywire Fund Manager Rating;• Corporate Bond and Sterling Credit funds outperformed their peer group average by 0.74% and 0.99%, respectively;• The UK Equity Income Fund was 5.26% ahead of its peer group average over the year

and is the only fund in the IMA UK Equity Income sector to have outperformed in each of the last seven calendar years;• three of RLAM’s four property funds outperformed their benchmarks in 2012; and• the assets backing the Royal London Open Fund returned 8.6% in 2012, ahead of

benchmark, and it continues to deliver performance ahead of benchmark over the longer term.

Looking aheadThe global economic environment continues to be challenging. RLAM expects the Eurozone to survive, although the transition to greater fiscal and political unity is likely to be volatile.

The fragile UK economy is in an extended period of consolidation and low growth. High levels of Government and consumer debt and the unwillingness of companies to increase capital spending are providing a headwind to economic recovery. Interest rates and inflation look set to remain atlow levels for the foreseeable future and significant wage pressures are not expected to develop.

RLAM will maintain its focus on providing high quality investment management forthe Royal London Group, as well as growing external funds under management. It will continue to broaden its investor base and develop new product offerings in response to client demand and the prevailing investment environment.

RLAM anticipates continued growth of fixed income business and will look to further expand its share of equity and property business, capitalising on the strong long-term performance of its offerings in these areas. It will also look to win new mandates in areas where it can see increasing client demand, including multi-asset buy and maintain credit. It aims to take advantage of its long-term investment focus and stock selection capabilities within the corporate bond market.

RLAM acknowledges that the institutional pensions market is declining as defined benefit schemes close to new and existing members and move into run-off. As aresult, it will increase its focus on other partsof the institutional market. It is already starting to see increasing interest from non-pension sectors and will proactively source more new business from them in 2013.

RLCM and RLAM CI will continue to be leading providers of cash management services to a wide range of listed companies, charities and educational establishments, maintaining their focus on security, liquidity and performance.

Investments


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Royal London Asset Management Awards in 2012:

In 2012 RLAM won four awards, for both its investmentperformance and the quality of its service.

High Yield Bonds category IPD/IPF UK Property Investment Awards 2012 High Yield Bond Funds (Royal London Sterling Extra Yield Fund)

FT Adviser Online Service Awards 2012: 5-Star Service Award

FT Financial Adviser Online Service Awards 2012: 5-Star Award– Investment category.

WinnerFT Pension &

Investment ProviderAwards 2012

WinnerIPD/IPF UK

Property Investment Awards 2012

5-StarService

FT AdviserOnline ServiceAwards 2012

5-StarService

FT Financial AdviserOnline ServiceAwards 2012

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Bright Grey: it may be business, but it’s always personal.Bright Grey is a modern, forward-thinking protection specialist, set up by Royal Londonin 2003. It is totally committed to giving financial advisers the solutions and support they need to give their clients protection advice that makes sound financial sense.

Its Personal and Business Protection Menu plans include life cover, critical illness cover andboth income cover and payment cover for sickness. A key part of its offering is the Helping Hand service which gives customers much-needed practical support when they need it most.

Its level and decreasing term products have been awarded Defaqto 5-Star ratings.

Progress in 2012Bright Grey has concentrated on maintaining its competitiveness and making improvements to its proposition – introducing more market-leading definitions to its critical illness product. It also regularly reviewed prices and provided support to help advisers grow their business. It developed a new contact centre system, specifically designed with the future in mind. This flexible, up-to-date contact system is helping Bright Grey to work more effectively and offer an even better service to customers. During the year Bright Grey paid 93% of the critical illness claims it received.

Royal London has two UK-based protection brands, each with its own distinctive positioning and market appeal.

Together, Bright Grey and Scottish Provident wrote £482m of new business in 2012, compared with £393m in 2011.

23%Our protection businesses

saw a 23% increasein new business.

Protection

I went straight through to a customer service adviser without having to go through lots of other departments. I was dealt with quickly, efficiently and politely.” Bright Grey customer


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Scottish Provident: the choice of experience.Scottish Provident has become one of the UK’s leading providers of protection cover. To step up its ambitions in the protection market Royal London acquired Scottish Provident in 2008.

Scottish Provident offers a wide range of protection plans for either set term or whole of life cover. It protects both people and businesses. As the pioneer of the menuof benefits approach to protection, Scottish Provident has a wealth of experienceand expertise and a flexible product range to suit everyone. The high quality of theterm range of plans is demonstrated by the maximum 5-Star rating from independent research company, Defaqto, in each of the last 9 years.

Progress in 2012In light of the changing regulatory environment following the Retail Distribution Review,Scottish Provident replaced its unit-linked Pegasus product range. The new simplified whole-of-life plan offers life assurance with terminal illness cover, including a choice of guaranteed and reviewable premiums. This plan opens the door to new markets for Scottish Provident.

Scottish Provident also made further improvements to its proposition, including adding more market-leading definitions to its critical illness product. And it improved its systems and processes – for example, introducing call recording and enhancing email security.

Looking ahead Scottish Provident expects conditionsin the protection market to remain challenging. Even while the distribution landscape is shifting and regulationis increasing, it believes there are opportunities to grow the businesswith good, strong propositions.

Understanding the changing marketand the developing needs of customers will be key. It will continue to develop products and services, improve howit targets different customer segmentsand achieve success through peopleand systems.

Through the Bright Grey and Scottish Provident brands, we aim to grow our share of existing markets and use insight and expertise to gain accessto new markets.

Prompt service. A very helpful and polite member of staff who dealt with me. A very good quote, thank you.”Scottish Provident customer

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2012 marked Caledonian Life’s first fullyear as part of the Royal London Group.

Royal London’s entry into the Irish market in July 2011 was viewed very positively by brokers (IFAs). With the backing of a strong and supportive new parent and following an initial revamp of its product range, Caledonian Life had a massive increase in new business sales and supporting brokers in the closing months of 2011.

The challenge for Caledonian Life during 2012 was to build and expand uponthis initial success. It did just that, with new business sales increasing significantly, expanding market share substantially and also generating strong profit margins.

Caledonian’s share of the Irish protection market has grown from 2.5% in 2011 toa near 6% share in 2012. The share of the broker protection market (which excludes bancassurance and direct sales) has also shown tremendous growth, to just under 10%, a likely top 5 position, which is up from 4.1% in 2011.

The overall protection market in Ireland was flat in 2012, which makes this performance all the more remarkable. Success was achieved firstly throughthe efforts, broker business relationships and market knowledge of the entire Caledonian team. Secondly, Caledonian Life understood and reacted to a changed market. Like much of Europe, the Republic of Ireland is in an economically challenged place. This has impacted on consumersand in turn, the life market.

In reaction to this changed environment, Caledonian Life substantially adapted its offering over the duration of 2012, through a variety of planned initiatives: by matching the cheapest price available from competitors, with an additional 2.5% discount available where it wasnot already the cheapest; revamping product features to match, if not exceed, the best in the market; and very importantly, introducing some attractive new commission models to brokers on sales of its products, while ensuring service turnarounds were maintained. It also substantially reduced costs and improved process efficiencies.

Besides business successes, this approach also generated independent plaudits in industry service awards, as well as wider reaching marketing competitions. Namely:

Professional Insurance Brokers Association (PIBA)Service Awards

First place: • Competitive value for your customers (Protection).• Friendly staff. • Speed and accuracy of documents. • Committed and supportive of broker market.

Marketing awards• Finalist All Ireland Marketing Awards, Direct Marketing category. • Bronze prize winner An Post Irish Direct Marketing awards. • Bronze prize winner Association of Promotional Marketing Consultants awards.

Looking aheadAs the Irish economy shows some encouraging signs of growth, Caledonian Life iswell positioned to benefit. In 2013 it will focus on continually improving the productsand services it provides to brokers and clients.

new businesssales in 2012£32m


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IrishProtection

6%Caledonian’s share of the Irish Protection market has grownfrom 2.5% in 2011 to almost

6% in 2012.

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£114mregular premium new business

on a PVNBP basis

34

Royal London 360° has built a strong international reputation founded ontrust and personal service.

Royal London 360° develops investment, savings and protection products and provides bespoke trust solutions. It also offers ‘white labelled’ products, workingwith major distributors both in the UKand internationally.

Based in the offshore financial centre on the Isle of Man, it does business in the Far East, Africa, the Middle East and the UK. It has offices in Hong Kong, Lebanon and Dubai.

Royal London 360°’s performance was strong again in 2012. New business PVNBP was £364m, made up of £114m forregular premium business and £250m for single premiums.

Highlights of 20122012 saw the ongoing shift in focus to more profitable regular premium business. This enhanced the proposition behind its new regular premium product, Quantum.

The market has responded positively and Royal London 360° sold 52% more regular premium new business in 2012 than in 2011. It also continued to develop its investment dealing infrastructure. Towards the end of the year, it applied the final phase of new back office investment management technology, delivering increased functionality and capability.

Royal London 360°’s websites have been rebuilt, as well as its online servicing functionality, enabling customers to switch their investments online. However, this is only the first step in its plans. To make sure it keeps ahead of the competition, it will continue to develop and deliver new functionality.

Looking aheadRoyal London 360°’s strategy in the UK will be to continue to build its Wrap alliances.In late 2012, it launched two more partnerships. A further two are ready to go live in thefirst quarter of 2013. It is increasingly recognised as the offshore bond provider of choicein this arena.

With this focus, Royal London 360° has chosen not to promote its own branded product in the IFA market place post-RDR. It will focus mainly on modifications to its existing product range. It will also review the positioning of its international portfolio bond, PIMS, to investigate competitiveness.

Longer term, it expects to be regulated in more places. This means increasing its local front line support and branch office administration capabilities.

Royal London 360°’s strategy remains clear and it will continue to identify opportunities at geographic, product and distributor level to diversify sensibly into profitable market segments and channels.

International


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At the end of 2011, Royal London launched MoneyVista, an online service designed to help UK consumers take controlof their finances.

Users can create and maintain their own long-term financial plan. Free to use, the service builds a plan that shows customers their current financial position and lets them plan for the financial future they and their family want.

The service is designed for the many consumers in the UKwho do not use professional advisers and for those who use an adviser, but take an active interest in their finances themselves. Currently, these consumers tend to find information and make decisions themselves using the media, internet, friends andfamilies to help them.

As financial planning can be daunting, the MoneyVista service comes with lots of calculators, videos and guides, as well as access to a panel of experts to answer any questions.

The MoneyVista service has been reviewed positively in the media and has had 1.25 million visitors.

MoneyVista’s plans for 2013 include the further developmentof the service, ensuring that users have information and guidesto help them feel confident with their plans for the future.

MoneyVista provides customers with a robust online DIY service. Users enter information on income, expenditure, savings, investments, pensions, property and protection to create their own plan.

From here, customers can get answers to their big financial questions:• Can I afford to retire when I want to?• How much should I set aside for a rainy day?• Am I getting the best return on my savings?

Getting answers

Financial planning

By using the service, customers can:• become more confident with their finances;• understand their financial priorities; and• become better placed to speak to their financial services provider or adviser.

Taking control

For me it was being able to see exactly what my financial situation will be when I give up work. I would have to say it was an alarming wake-up call to see that plunging line!”MoneyVista customer

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Basis of preparation

The Business Review has been prepared in accordance with the Directors’ Report Business Review requirements of the Companies Act 2006.

It incorporates much of the guidance set out in the Accounting Standards Board’s Reporting Statement: ‘Operating and Financial Review’. It is addressed to and written for the members of Royal London with the intention of giving a fair review of its business development, performance and position at the present time.

This business review contains 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 the 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 out in Royal London’s forward-looking statements. Royal London undertakes no obligation to update the forward-looking statements contained in this document or any other forward-looking statement it may make.

Accounting basis of preparationThe results and financial position are presented on an IFRS basis as adopted by the EU.

In addition to reporting results under the IFRS basis, they are also reported on an EEV basis as supplementary information. In the directors’ opinion, EEV provides a more transparent view of the performance of the life and related operations year on yearthan the results presented under IFRS. Supplementary information on EEV reporting is included on pages 156 to 167.

The EEV methodology adopted is in accordance with EEV principles introduced by the Chief Financial Officers’ Forum in May 2004and updated in October 2005 (so far as they can be adopted fora mutual company). Under EEV methodology, the total profit recognised over the full lifetime of a policy is the same as under IFRS reporting.

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Our corporate responsibility

In 2012 we were proud to be awarded a Silver rating in the Business in the Community (BITC) CR Index and remain committed to using the BITC framework to support our CR programme. We continue to use the BITC framework to develop our CR programme and activities across four pillars:

Looking after our environment We continually look at innovative ways to minimise our impact on the environment, investing in technology and new ways of working in a bid to reduce our carbon footprint.

Investing in our skills and our peopleWe value our people and make sure they have the help and support they need to stay healthy and safe, develop new skills and be fairly rewarded for their contribution to our business. We want everybody who works at Royal London to feel pride and a sense of belonging to the Company.

Adding value in the communityWe remain loyal to our local communities and create opportunities for our people to provide practical and financial support and help with regeneration activities.

Supporting our marketplaceWe put our customers first and make sure we continueto improve our products and services to meet theirneeds. We use our investment strength to promote positivecorporate behaviour to the benefit of our clients andthe wider community.

Workplace

“We are committed to ensuring that responsible behaviour is fully integrated in the way we do business in Royal London.”Andrew Carter,Executive Director and Board Sponsor of CR Programme

We make sure our people have the help and support they need to stay healthy and safe. We want them to be rewarded for their contribution to our success. We want everybodywho works at Royal London to feel pride and a sense of belonging to the Company.

Our workplace initiatives include a free, independent and confidential employee support helpline, available to all employees 24 hours a day, 365 days a year. We offer a competitive remuneration package and bonus scheme. Benefits include holidays, pension schemes and private medical insurance, as well as discounts on various products and services.

Our range of family-friendly initiatives includes childcare vouchers and flexible working. We have helped 486 people to alter their working pattern to improve their work life balance.

We make sure Royal London is a safe place to work. We work with expert partners to deliver health initiatives, including freeeye and hearing tests, first aid support and free seasonal flu jabs for employees.

Learning and developmentIn 2012, Royal London established a Leadership Academy, offering a wide range of resources to anyone who aspires to be a good leader.

Employee engagementWe talk to our people and listen to what they have to say. We ask for their views and ideas and update them regularlyon our performance. 86% of people responded to our annual employee engagement survey in 2012.

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Energy managementWe have reduced our greenhouse gas emissions by 1.8% since 2008. Across the Group this equates to a reduction of 550 tonnes of CO2. We continue to seek reductions in energy use and, where possible, invest in energy efficient equipment. Various programmes under way saw energy reductions in 2012, including: • new air conditioning equipment; • a new building management system in our Wilmslow office; • the replacement of old boilers in our Edinburgh office with

more efficient, modern units; and• the conversion of lighting systems to LED units – a key energy reduction parameter.

Royal London Asset Management (RLAM) was awarded Carbon Saver Gold Standard status for reducing its carbon emissions over a three year period. RLAM’s award is evidence of the progress it is making in reducing consumption and promoting the efficient use of energy across its property portfolio.

By the end of December 2012 we had generated 84 tonnes more travel related CO

2 than in 2011. We have recently investedin new video conferencing equipment which will help to reduce our carbon footprint from travel in 2013. We also continuedour partnership with the Bike Station, funded by the Scottish Government’s Climate Challenge Fund.

By the end of December 2012 we had reduced our electricity emissions by 148 tonnes but our gas emissions had increasedby 69.6 tonnes of CO2 compared to 2011. The increase in gas consumption was as a direct result of weather conditions which resulted in boilers being online for much longer.

Waste managementWe work with our employees and suppliers to maximise recycling and reduce waste. Wilmslow recycled 91% of all waste and Edinburgh 88%. In 2013 we will be working towards our goalof achieving zero waste to landfill. The recycling of Wilmslowand Edinburgh’s food waste has equated to a saving of 3.8 tonnes of CO2 . In 2012 we produced 21,739 kg more waste than in 2011. This increase is due to a programme to reduce the sizeof our archives in Royal London House in Wilmslow.

Water managementOur water consumption increased by 14.4% in 2012. This canbe partly explained by mechanical failures of the cooling towersat Wilmslow. In the fourth quarter of 2012 two of the three Wilmslow cooling towers were decommissioned and we expect this will lead to a significant reduction in both water and electricity usage in 2013.

Environment

Our corporate responsibility (continued)

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Royal London develops products and services that help people take responsibility for planning and providing for their own financial affairs. We regularly monitor these products to ensure they offer good value. We take care to invest responsibly and manage our risks effectively.

Responsible shareholdingRLAM has a strategic objective of building business success based on delivering good investment performance and strong client relationships. Our Board recognises that, in addition to its responsibilities to clients, it also has a responsibility to employees, suppliers, the environment, the companies in which it invests and the wider community in which the Company operates.

As sustainable investment is a key part of our overall product offering, we proactively promote best practice in all companies in which we invest. When fund managers manage each fund or portfolio, they know that environmental and social governance are integral to their responsibilities.

RLAM supports and intends to comply with the Stewardship Code. We will report annually on our activities relating to the Code’s principles. In this reporting period, we have continued to bring pressure on companies through an active approach to corporate governance, publishing our voting track record every six months.

We are a signatory to the United Nations Principles of Responsible Investment, a framework for global best practicein responsible investment supported by over 800 institutionsin 45 countries. We are also a signatory to the Carbon Disclosure Project, which encourages the largest global businesses to report on and reduce their carbon footprint.

Financial planningWe launched our MoneyVista service at the end of 2011. MoneyVista offers a service that will help consumers to make sense of their finances and to put in place realistic plans tohelp them achieve their financial goals. The service is aimed at consumers who manage their own finances, informed by friends, family, the media and the internet. By using MoneyVista, consumers will feel more knowledgeable about their finances and more willing to engage with financial professionals when appropriate.

Customer serviceRoyal London has withdrawn from the Life & Savings Benchmarking Survey (formerly the ABI Customer Impact Survey). Instead, we’ve partnered with an external agency, ServiceTick, which specialises in customer satisfaction metrics to deliver an 8-week pilot study which began in October 2012. We will use thepilot exercise to create a relevant and robust measurement of customer satisfaction for the business.

We have produced a separate corporate responsibility report which gives more information about our CR programme andis available on our website, www.royallondongroup.co.uk.

Andrew CarterExecutive Director

The Royal London Volunteering Awards recognise the commitment, time and energy that our people give to the community. In 2012, 27 of our people won an award and we donated £6,750 to the organisations they support.

356people took part in

various projects

We encourage our employees to get involved in volunteering and charitable fundraising activities.

Charitable givingWe have worked with Alzheimer’s Research UK (ARUK)since 2011. ARUK is the UK’s leading dementia research charity, specialising in finding preventions, treatments and a curefor dementia.

During 2012, people across the Group raised £49,051 through a huge range of activities, from marathons and bike rides, to car boot sales and team pub quizzes.

As part of encouraging fundraising activity for other charities, we offer an added incentive by matching funds raised by up to £1,000. We also promote Give As You Earn, so employees can donate to charities of their choice in a tax-efficient way.

April 2012 marked the first anniversary of the launch of The Royal London Foundation. Between 1 April and 31 December 2012, the Foundation had awarded grants worth over £94,000 to charities and projects in three core areas: education, health and the elderly.

VolunteeringOur employee volunteering programme, ‘Stepforward’, encourages our people to take up to two days eachyear of company time to volunteer in their communities. In 2012, 356 people took part in various projects.

The Royal London Volunteering Awards recognise the commitment, time and energy that our people give to the community. In 2012, 27 of our people won an award andwe donated £6,750 to the organisations they support.

Community Marketplace

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Governance

Board of DirectorsTim Melville-Ross CBE ChairmanTim Melville-Ross was appointed to the Board on 1 June 1999 and became Non-Executive Deputy Chairman and Senior Independent Director in June 2002. Tim became Chairman on 1 January 2006 and is Chairman of the Nomination Committee. He was chief executive of the Nationwide Building Society from 1985 to 1994 and director-general of the Institute of Directors from 1994 to 1999. Tim is chairman of the Higher Education Funding Council for England.

Stephen Shone BSc (Econ), FCA Executive Director (Group Finance Director until 31 December 2012)

Stephen Shone was appointed to the Board on 1 January 1999 when he joined Royal London as Group FinanceDirector. He has led the major acquisitions made by the Group during the last fourteen years, including Royal Liver and the life insurance and asset management business from The Co-operative Banking Group. He has 25 years’ experience in the financial management of life companies. He has previously held senior positions at Prolific Group and Irish Life plc.

Andrew Carter MA C.DIR Executive DirectorAndrew Carter was appointed to the Board on 2 January 2007. He joined Royal London Asset Management in September 2001 as Chief Investment Officer and was promoted to Chief Executive Officer in September 2003.In 2012 he was made Chief Executive Officer of Royal London Wealth. Andrew has extensive asset management experience of the major asset classes, beginning his career in investment management in 1983 with Provident Life. Prior to joining Royal London he held a number of investment management positions at Gartmore from 1987 to 2001.

Phil Loney Group Chief ExecutivePhil Loney was appointed to the Board on 1 October 2011, coinciding with his appointment as Group Chief Executive of Royal London Group. He previously spent eight years at Lloyds Banking Group, most recently as managing director, Life, Pensions and Investments. Prior to joining Lloyds, Phil held senior management positions with AXA, Norwich Union, CGU and Lloyds Abbey Life amongst others. He is a director of the Association of British Insurers, and deputy chairman of the Association of Financial Mutuals (AFM).

Jon Macdonald FIA Group Risk DirectorJon Macdonald was appointed to the Board on 14 December 2012 having joined the Group in November 2012as Group Risk Director. He was previously group chief risk officer for RSA. He has held a number of senior riskand capital management roles at Prudential, PwC, Aviva, Fox-Pitt Kelton, Swiss Re and Zurich and is a fellowof the Institute of Actuaries. He is a member of the Institute of Actuaries’ risk management executive committee.

Kerr Luscombe BSc FFA Group Finance DirectorKerr joined the group in October 2011 and was appointed to the Board on 23 July 2012 as Group Strategy Director prior to taking up the role of Group Finance Director on 1 January 2013. Before joining Royal London he was finance director in a number of organisations, including most recently in the Life, Pensions and Investment business of Lloyds Banking Group. Prior to that he was finance director for the life companies within Santander which became part of the Resolution Group and subsequently the Phoenix Group. He had previously held a number of senior management roles in Abbey National and Santander. Kerr is an actuary and was admitted as a Fellow of the Institute of Actuaries in 1991.

Duncan Ferguson MA FIA Dip Ag Sci Senior Independent Director Duncan Ferguson was appointed to the Board on 1 April 2010. He is the Senior Independent Director and is Chairman of both the Board Risk Committee and the With-Profits Committee. He has some 40 years’ experience in senior management of insurance companies and as a consulting actuary. He was senior partner of Bacon & Woodrow then B&W Deloitte from 1994 to 2003. Duncan was also a non-executive director of Halifax from 1994 until it merged with Bank of Scotland in 2001 and then of HBOS Financial Services until 2007. He is currently a non-executive director of Henderson Group plc and is chairman of the Guardian With-Profits Committee. He was President of the Institute of Actuaries from 1996 to 1998.

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Tracey Graham Non-Executive DirectorTracey Graham was appointed to the Board on 10 March 2013. She was chief executive of Talaris Limited, an international cash management business, from 2005 to 2010 and led the management buyout of that business from De La Rue. Prior to that, she was president of Sequoia Voting Systems, customer services director at AXA Insurance plc and held a number of senior positions at HSBC. Tracey is currently non-executive director at RPS Group plc, Dialight plc, and Albemarle and Bond plc, where she chairs their respective remuneration committees.

Rupert Pennant-Rea BA (Econ), MA Chairman (designate)Rupert Pennant-Rea was appointed to the Board on 13 December 2012 and he will become Chairman afterthe AGM this year. Rupert has extensive financial services industry experience. He is currently chairman ofHenderson Group plc and will be stepping down at their AGM in May 2013. He was deputy governor of the Bank of England from 1993 to 1995, prior to which he spent 16 years with The Economist, where he was editor from 1986 to 1993. He was appointed non-executive chairman of the Economist Group in July 2009. His other directorships include Go-Ahead Group plc, Gold Fields Limited (South Africa) and Hochschild Mining.

Jane Platt Chartered FCSI Non-Executive DirectorJane Platt was appointed to the Board on 5 July 2012 and sits on the Audit, Board Risk and Nomination Committees. She is currently chief executive for National Savings & Investments. Prior to this she was chief operating officer, customer segments at Reuters, president of services for asset managers at Reuters and chief executive of Barclays Stockbrokers and Barclays Bank Trust Company. She has previously held non-executive positions at Witan Investment Trust and the Edinburgh UK Tracker Trust and acted as a pension fund trustee.

Kathryn Matthews Non-Executive DirectorKathryn Matthews was appointed to the Board on 26 June 2012 and chairs the Investment Committee and sits on the Nomination and Remuneration Committees. She was previously chief investment officer for Asia Pacific (excluding Japan) for Fidelity International. Prior to this she held positions at William M Mercer, AXA Investment Managers, Santander Global Advisors and Baring Asset Management. She is also a non-executive director of JPMorgan Chinese Investment Trust, APERAM SA, Conversus Capital, Montanaro UK Smaller Companies Investment Trust, Rathbone Brothers, Fidelity Asian Values plc and Hermes Fund Managers. In addition, Kathryn has also previously held a non-executive role at Religare Enterprises.

David Weymouth BA Hons, MBA, FCIB Non-Executive DirectorDavid Weymouth was appointed to the Board on 1 July 2012 and sits on the Board Risk, Investment and Nomination Committees. David is currently group chief risk officer at RSA, having been group operations and risk director since he joined RSA in 2007. Prior to this he consulted to a number of major firmsand government departments and enjoyed a successful 27 year career at Barclays including the role of group chief information officer. He is a non-executive director of the Financial Services Authority’s Financial Compensation Scheme. He has previously held a number of non-executive roles at the Department of Trade and Industry (Operating Committee), Chordiant Software and the Charities Aid Foundation.

David Williams MSc Non-Executive DirectorDavid Williams was appointed to the Board on 1 March 2006. He is Chairman of the Remuneration Committee. He is currently chair of the operating partners with Duke Street LLP and chairman of Natures Way Foods Ltd, Wagamama Ltd and The Original Factory Shop Ltd. Additionally, he is a non-executive director and chairman of the Remuneration Committee of Mothercare plc. He also held a number of senior appointments with Diageo plc, PepsiCo Inc and Whitbread plc. He holds an MSc from the London Graduate School of Business Studies.

Andrew Palmer FCA Non-Executive DirectorAndrew Palmer was appointed to the Board on 1 April 2011. Andrew is Chairman of the Audit Committee. He was group finance director of Legal & General Group plc where he also held a number of financialand operational roles in the asset management, insurance and international businesses. He is currently seniorindependent director at SEGRO but will be stepping down at their AGM on 23 April 2013. He is a non-executive director of Direct Line Insurance Group and a member of the Financial Reporting Review Panelof the Financial Reporting Council.

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Directors’ report for the year ended 31 December 2012

The business review includes information about the Group’s business, its financial performance during the year and likely developments. The corporate governance statement includes information about any principal risks and uncertaintiesassociated with the business.

Principal activitiesRoyal London Group (the Group) comprises The Royal London Mutual Insurance Society Limited (the Company) and its subsidiaries. The Group is structured into a number of businesses as set outin the Business review. The principal activity of the Company isthe transaction of long-term insurance business covering life and pensions. The principal activities of the subsidiary undertakings are set out in note 20 to the financial statements.

Going concernAfter making enquiries, the directors are satisfied that the Company and the Group have adequate resources to continue to operate as a going concern for the foreseeable future and have prepared the financial statements on that basis.

Annual General MeetingThe Annual General Meeting (AGM) of the Company will be held at 11.30 a.m. (or immediately following the EGM, which commences at 11.00 a.m., if later) on 4 June 2013 at Dexter House (etc.venues),No. 2 Royal Mint Court, Tower Hill, London, EC3N 4QN. The Notice convening the meeting together with guidance on the AGM is being sent to all members.

DirectorsDetails of the current directors are set out on pages 40 and 41. All of the directors have held office throughout the period under review except for the following changes:

Appointments Date Tracey Graham 10 March 2013 Kerr Luscombe 23 July 2012Jon Macdonald 14 December 2012Kathryn Matthews 26 June 2012Rupert Pennant-Rea 13 December 2012Jane Platt 5 July 2012David Weymouth 1 July 2012

Resignations DateJohn Deane 29 June 2012Robert Jeens 22 May 2012

There are 4 Directors stepping down at this year’s AGM.

David Williams is stepping down after 7 years on the Board.

After 14 years as a director, including 7 years as Chairman, Tim Melville-Ross will step down from the Board at the forthcoming AGM. Following Tim’s resignation Rupert Pennant-Rea willbe appointed Chairman.

After seeing the Co-operative transaction through to signing of the sale and purchase agreement, Stephen Shone will step down from the Board at the AGM. Jane Platt will also step down from the Board at the AGM as she has been appointed to the Board of the Financial Conduct Authority.

In accordance with the UK Corporate Governance Code 2010: An Annotated Version for Mutual Insurers all continuing directors retire and offer themselves for reappointment each year. The details of the executive directors’ service contracts are set out in the Directors’ remuneration report on pages 56 to 67. None of the directors has or previously had an interest in the shares of any Group undertaking.

The directors present their report for the year ended 31 December 2012. The directors’ report should be read together with the business review and the corporate governance statement, which are incorporated in this directors’ report by reference.

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Directors’ indemnitiesThe directors have the benefit of a qualifying third-party indemnity provision (as defined in section 234 of the Companies Act 2006). The Company also maintains directors’ and officers’ liability insurance in respect of itself and its directors.

Directors’ conflictsUnder the Articles of Association the Board is authorised to approve conflicts or potential conflicts of directors’ interest. The Board has reviewed the interests of the directors andtheir connected persons and has authorised any interests which conflicted or potentially conflicted with the interests of the Company. On an ongoing basis the Board periodically reviews conflict authorisations to determine whether the authorisation given should continue, be added to, or be revoked by the Board.

Financial instrumentsThe Group makes extensive use of financial instruments inthe ordinary course of its business. Details of the risk management objectives and policies of the Group in relationto its financial instruments and information on the risk exposures arising from those instruments are set out in note40 to the financial statements.

EmployeesDetails of the Group’s employment policies are shown on page 37.

Risk managementThe Group has procedures in place to identify, monitor and evaluate the significant risks it faces. The Group’s risk management objectives and policies are set out on pages 50 to 55 and in note 40 on pages 139 to 151 of the financial statements.

Corporate responsibilityThe Board recognises that the Group has a responsibility to act ethically in relation to the physical and social environment in which it operates. A summary of the Group’s approach is set out on pages 37 to 39. Additionally, that section sets out the Group’s policy on charitable and community activity.

Political donationsNo political donations were made in the year ended31 December 2012 (2011 nil).

Supplier payment policyThe Group does not follow any code or standard with its suppliers, but it is the policy of the Group to agree terms of payment when orders for goods and services are placedand to pay in accordance with those terms. The ratio of the amount owed to trade creditors at the end of the year tothe amounts invoiced by suppliers during the year equatesto a 28-day average payment period (2011 28-day).

AuditorsA resolution for the reappointment of PricewaterhouseCoopers LLP as auditors of the Company will be proposed at the AGM. The directors who held office at the date of approval of this directors’ report confirm that:• so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware; and• each director has taken all steps that ought to have been taken as a director to be aware of any relevant audit information and to establish that the Group’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

By order of the Board.

Simon MitchleyFor and on behalf of Royal London Management Services LimitedCompany Secretary27 March 2013

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In this report, the term ‘period under review’ means the period from 1 January 2012 to the date of this report.

The UK Corporate Governance CodeThe Board considers that throughout the period under review ithas applied the relevant principles and complied with the relevant provisions of the UK Corporate Governance Code 2010: An Annotated Version for Mutual Insurers, published in October 2010 (the Code).

The BoardOne of the main roles of the Board is to focus on the strategic objectives of the Royal London Group, to ensure that it is appropriately managed and that it achieves these objectives.

Role The Board meets regularly to determine the Group’s strategy, to review the Group’s operating and financial performance, to set the Group’s risk appetite and to provide oversight that the Group is adequately resourced and effectively controlled. The Board determines the Group’s: • values, standards and ethics;• strategy and objectives and approves an annual business

plan and budget and monitors the Group’s performance in achieving them;• risk appetite;• organisational structure; and• remuneration (including pension) policies.

The Board:• reviews the most significant risks affecting the Group and the

action being taken to manage or mitigate them;• appoints directors and makes and approves certain of the senior

appointments including the Group Chief Executive, the executives who report directly to him, the senior actuarial appointments, the Group Risk Director and the Company Secretary;

• determines the responsibilities of the Group Chief Executive and approves any delegation of his responsibilities to executive directors, heads of business units or support functions;

• declares annual and final bonuses (and the basis for payment of benefits on early termination, including market value adjustment factors) on with-profits policies issued by any Group company;

• approves the Annual Report and Accounts and the significant regulatory returns;

• approves the Principles and Practices of Financial Management for the with-profits funds; and

• reserves to itself certain decisions.

These reserved decisions include:• those relating to the acquisition or disposal of any business or

major asset;• setting up of a new business or joint venture or the merging

of any part of the Group’s business with a third party;• making or guaranteeing a significant loan; and • significant investments and transactions not at arm’s length.

Those matters that are not specifically reserved for the Board are delegated to the Group Chief Executive, who has in place clear and appropriate apportionment of responsibilities amongst executive directors and senior managers in order that the business of the Group can be effectively managed and reported on.

The roles of the Chairman and Group Chief Executive are separate and there is a clear division of responsibilities between the two roles. The Chairman is primarily responsible for leading the Board, ensuring its effectiveness and setting its agenda. The Group Chief Executive is responsible for the day-to-day management of the Group’s business. All directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures are complied with. In addition, all directors have access to independent professional advice at the Company’s expense where they consider it necessary in the discharge of their duties.

Composition and balanceThe Board currently comprises the Chairman, eight independent non-executive and five executive directors. One of the non-executive directors, Duncan Ferguson, is the Senior Independent Director. The biographies of all the directors appear on pages 40 and 41, together with summaries of their experience and qualifications and a note of their other significant commitments. Membership of the Board’s committees is set out in this statement.

The Board, after a recommendation of the Nomination Committee, has considered the cross-directorships held by Duncan Ferguson and Rupert Pennant-Rea in relation to the principles and provisions of the Code. The Board concluded that notwithstanding the existence of a cross-directorship, Duncan and Rupert were independent in character and judgement and that their business relationship was not material in their ability to act in the best interests of the Group. The board therefore consider both of these directors to be independent.

The Board’s policy is to appoint and retain non-executive directors, who can apply their wider knowledge and experience to their understanding of the Royal London Group, and to review and refresh regularly the skills and experience the Board requires. The Nomination Committee continued succession planning for the Board during the year to ensure that an appropriate balance of skills and experience is maintained and that there is progressive refreshing of the Board. As part of the process for the appointment of new directors, the Nomination Committee, on behalf of the Board, considers the diversity of the Board, including gender. The aim is that the Board as a whole should have an appropriate balance of skills, experience, independence and knowledge to enable each director and the Board as a whole to discharge their duties and responsibilities effectively. Each director must be able to devote sufficient time to the role in order to discharge his or her responsibilities effectively. The process for appointing new directors is conducted by the Nomination Committee and a description of its duties is set out in its report.

Corporate Governance statement

The Board is committed to high standards of corporate governance which it believes are critical to business integrity, performance and maintaining member confidence.

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Board effectivenessThe Board conducts a formal and rigorous evaluation ofits performance, the performance of its directors and the performance of the committees of the Board. The processis led by the Chairman and supported by the Company Secretary. The Board considers that an external review should be held periodically. The last external review was held in 2009 facilitated by consultants Egon Zehnder. During 2012 the Board made a number of new appointments as part of its succession planning. As such the Board believesit is appropriate to carry out an externally facilitated evaluation in respect of 2013.

In 2012, each director was formally asked to give comments on a range of subjects relating to the performance of the Board and each committee of which he was a member.The comments were collated and discussed by the Board and the relevant committee.

The Chairman evaluated the performance of the non-executive directors and the Group Chief Executive. The non-executive directors, led by the Senior Independent Director (Duncan Ferguson), evaluated the performanceof the Chairman, taking into account the views of the executive directors. The Group Chief Executive evaluated the performance of the other executive directors.

The matters resulting from the evaluation included:• refining how the Board operates;• improving the contact between non-executive directors

and management below the Group Executive; and• refining the Board appraisal process.

All matters arising from the evaluation have been assigned an action plan and are regularly reviewed by the Board.

The Board considers that each non-executive director displayed the commitment required to discharge the role properly and was independent. The Chairman meetsfrom time to time with the non-executive directors in the absence of the executive directors.

By way of a Board development plan, the directors have continued to update their skills and knowledge, both within the Group and outside. Presentations have been givenon key issues and developments within the industry. The directors are kept informed of relevant regulatory and corporate governance developments as they arise through senior managers and external advisors.

On appointment to the Board each director receives an induction tailored to their experience.

SuccessionIt is the responsibility of the Board to ensure that plansare in place for appointments to the Board that will maintain an appropriate balance of skills and experience. The Nomination Committee provides advice to the Boardon succession planning. During the year much of the current succession planning was put into effect.

The Board is committed to ensuring a diverse pool of candidates is considered for any vacancies that may arise and that they are filled by the most qualified candidates based on merit having regard to the benefits of diversity.

Board Committees The Board has established Audit, Board Risk, Nomination and Remuneration Committees. During 2012 the Board reviewed the governance structure and, in addition, introduced an Investment Committee and a With-Profits Committee.

Audit Committee On behalf of the Audit Committee I am pleased to present the Committee’s report for 2012.

The members of the Audit Committee currently comprise Andrew Palmer (Chairman), Duncan Ferguson, Rupert Pennant-Rea, Jane Platt and David Williams. Tim Melville-Ross attends,but is not a member of the Committee. The qualifications of each member of the Committee are included in the biographiesof the directors on pages 40 and 41. The responsibilities of the Audit Committee include:• monitoring the integrity of the financial statements and

formal announcements relating to financial performance;• reporting to the Board on proposed financial reporting;• monitoring and reviewing the effectiveness of the Group’s

internal controls; • reviewing the external auditors’ management letters and

management’s response to them;• reviewing policies and actuarial liabilities;• reviewing accounting matters requiring the exercise

of judgement;• reviewing, on an ongoing basis, reports from the Internal

Audit function;• reviewing the effectiveness of the Internal Audit function

and approving the annual Internal Audit plan;• making recommendations to the Board in relation to the

appointment of the external auditors, to be put to the members for their approval in general meetings. Approving the remuneration and terms of engagement of the external auditors;

• reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process;

• monitoring the engagement of the external auditors to supply non-audit services;

• determining the Group’s policy for employing former employees of the external auditors; and

• reviewing arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting, financial control or otherwise.

The Audit Committee reports to the Board on all theseissues, identifying any matters which it considers require action or improvement and makes recommendations to the Board.

The executive directors and some members of senior management including the Group Risk Director, the Group Head of Regulatory Risk and Compliance, the Head of Internal Audit and the external auditors submit reports to, and attend meetings of, the Audit Committee.

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Corporate Governance statement (continued)

4. Internal AuditThe Committee oversaw the activities of the Internal Audit function. It received summary reports on the results of all audits performed and monitored management’s responses to issues identifiedand the timeliness of their resolution. The Committee reviewed and provided input into the risk-based internal audit plans for 2013, with a focus on obtaining assurance that an appropriate level of internal audit resources has been planned for the year. The Committee also held a number of meetings with the Head of Internal Audit without the executive present.

5. External auditThe Committee monitored the operation of the Group’s external audit, including: approving the audit fee and receiving reports from the external auditors on their audit plan, the key audit risks, their progress during the year and significant findings arising from their audit.

The Committee reviewed and approved policies on auditor independence and on the employment of former external audit staff. Any significant non-audit services were subject to authorisation by the Chairman of the Audit Committee and the Committee received regular updates on the level of all non-audit work performed. The Committee is satisfied as to the continued independence and objectivity of the auditors, PricewaterhouseCoopers. The Committee reviewed an evaluation of the effectiveness of the external auditors, which was prepared by Internal Audit using input from across the Group, and which concluded the external auditors were effective.In addition, the Committee conducted a private meeting with the external auditors to discuss and review key issues. The Committee recommended the re-appointment of PricewaterhouseCoopers as auditors of the Company.

Andrew PalmerChairman of the Audit Committee

Report of the Nomination Committee

The Code states that the Board should satisfy itself that at leastone member of the Audit Committee has recent and relevant financial experience. The Board takes the view that rather thanan individual or individuals, the Audit Committee as a wholeshould be considered for this test and has concluded that the Audit Committee does have the relevant skills and financial experience.

During the year the Audit Committee particularly focused on the following areas:

1. Financial reporting mattersThe Committee reviewed the Group’s annual and half year IFRS and EEV reporting. In doing so, the Committee considered the accounting policies adopted by the Group, the impact of any emerging technical accounting issues and the significant reporting and valuation judgments made by management. This included assessing the valuation of investments valued by the directors, the key actuarial assumptions underpinning the insurance liabilities and any material contingent assets and liabilities. The Committee discussed and reviewed the results, and the presentation of them, in the annual report, accounts, press releases and going concern statement.

2. Regulatory and compliance mattersThe Committee received regular reports from Group Compliance setting out all significant compliance matters arising, including FSA communications. The most significant activity was a programme to review the effectiveness of the Group’s governance arrangements. This programme identified some enhancements to the existing governance structure that have now been implemented.

3. Control environmentThe Committee reviewed the effectiveness of the control environment across the Group throughout 2012. This included reviewing reports from management on major control issues being managed in the year. The Committee concluded that the control environment of the Group was generally effective throughout the year and that any matters arising had been appropriately dealt with.

On behalf of the Nomination Committee I am pleased to present the Committee’s report for 2012.

The current members of the Nomination Committee compriseTim Melville-Ross (Chairman), Duncan Ferguson, Tracey Graham, Kathryn Matthews, Andrew Palmer, Rupert Pennant-Rea, Jane Platt, David Weymouth, David Williams and Phil Loney.

The responsibilities of the Nomination Committee include:• reviewing the structure, size and composition (including the

skills, knowledge and experience) of the Board and making recommendations to the Board with regard to any changes;

• nominating for Board approval candidates to fill vacancies on the Board and its committees;

• succession planning, taking into account, in particular, the challenges and opportunities facing the Group and the skills and expertise needed on the Board in the future; and

• keeping under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring

the continued ability of the organisation to compete effectively in the marketplace.

During the year the Committee focused on the appointment of a new Chairman and new directors and the reappointment of the existing non-executive directors. When recommending the additional appointments the Committee considered the expertise and skillsof the Board, our Group strategy, potential acquisitions and diversity.

Tim Melville-RossChairman of the Nomination Committee

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Report of the Investment Committee

On behalf of the Investment Committee I am pleased to present the Committee’s report for 2012.

The Investment Committee was established in 2012 andits membership comprises both executive and non-executive directors. Current members of the Investment Committee comprise of Kathryn Matthews (chair) and other members are Andrew Palmer, David Weymouth, Kerr Luscombe, Jon Macdonald and Hugh McKee. In addition, Andrew Carter (CEO, Wealth), Robert Talbut (Chief Investment Officer, RLAM), Stephen Wilson, the With-Profits Actuary, and Colin Pountney, the Actuarial Function Holder, attend Committee meetings.

The responsibilities of the Investment Committee include:• reviewing and recommending appropriate investment

strategy to the Board;• reviewing recommendations and approving the

appointment and removal of key external fund managers;• reviewing investment performance and reacting

appropriately to both positive and negative performance;• assessing the effectiveness of risk oversight within RLAM;• reviewing on a periodic basis the appropriateness of

investment mandates;• determining the suitability of new investment classes or

types of investment;• ensuring alignment of investment policies with any

mutual or ethical brand proposition statements;• receiving summary activity and escalation points from its

subcommittees and any other relevant committees; and• agreeing action on any escalated material operational

or financial issues affecting investment operations and performance.

During the year, as part of its normal duties, the Committee focused on:• reviewing investment performance of key funds;• market and economic review;• oversight of RLAM’s investment business and regulatory matters;• review of high yield investments;• review of RLAM’s capability in the UK fixed income

market;• review of the property investment philosophy and

process; • review of reports from its subcommittees; • oversight of RLAM’s product developments;• review of RLAM’s top risks; and• review of the implementation of a new derivatives

management system.

Kathryn MatthewsChairman of the Investment Committee

Report of the Board Risk Committee

On behalf of the Board Risk Committee I am pleased to present the Committee’s report for 2012.

The members of the Board Risk Committee compriseDuncan Ferguson (Chairman), Andrew Palmer, Jane Platt, David Weymouth and David Williams. In accordance with best practice, Tim Melville-Ross attends, but is not a member of the Committee.

The responsibilities of the Board Risk Committee include:• reviewing and recommending to the Group Board the

assignment of risk management responsibilities, including the interaction between the Board and the boards of

operating subsidiaries;• reviewing and challenging risk information received, including

whether key risks are managed to an acceptable level and cost;• providing oversight and advice to the Board on the current

risk exposures of the Group by reviewing and recommending to the Board actions on significant risk issues, trends, practices, litigation and loss events that have implications for the Group;

• monitoring the effectiveness of the Group’s overall risk and capital management frameworks through ongoing review and independent assurance, including approving significant changes to the ‘Internal Model’;

• reviewing and challenging the stresses and scenarios undertaken, including reverse stress tests;

• reviewing and recommending to the Board the Group’s risk appetite and ensuring it is aligned with the future strategy of the Group;

• reviewing and approving the Group’s policies in relation to strategic, financial and operational risks, including the process for identifying and assessing business and environmental risks and the management of these risks by the Group;

• ensuring that the Group conducts appropriate review and due diligence of acquisition propositions; and

• annual review of results to ensure profits are aligned with risk appetite for remuneration purposes.

The Committee reports to the Board on all of the issues detailed above, identifying any matters in respect of which it considers that action or improvement is needed and makes recommendations to the Board.

The Group Risk Director attends meetings of the Board Risk Committee. The executive directors and certain members of senior management, such as the Group Head of Regulatory Risk and Compliance and the Head of Internal Audit, attend meetings regularly by invitation.

During the year the Committee particularly focused on the following areas: • the Solvency II programme;• risk management framework;• risk appetite;• assessing the risks associated with the proposed acquisition

of Co-operative Insurance Society Limited and The Co-operative Asset Management Limited; and• the integration of Royal Liver into the Group.

Duncan FergusonChairman of the Board Risk Committee

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The terms of reference of all Board committees are published on the Group’s website in the corporate governance section.

Institutional shareholderThe Group, through Royal London Asset Management (RLAM), firmly believes in the use of best practices by the companies in which it invests and its approach is set out in the corporate responsibility statement on pages 37 to 39.

The Group uses the AGM to communicate directly with members. In order to facilitate this the 2013 AGM will be webcast.

Directors’ responsibilitiesThe directors are responsible for preparing the Annual Report and Accounts, the Directors’ remuneration report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors haveelected to prepare the Company and Group financial statements in accordance with IFRS as adopted by the European Union (EU). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group andof the profit or loss of the Group for that period. In preparingthose financial statements, the directors are required to:• select suitable accounting policies and then apply them

consistently;• make judgements and accounting estimates that are reasonable

and prudent;• state whether applicable IFRS as adopted by the EU have been followed, subject to any material departures disclosed and

explained in the financial statements; and• prepare the financial statements on the going concern basis

unless it is inappropriate to presume that the Company will continue in business.

On behalf of the With-Profits Committee I am pleased to present the Committee’s report for 2012.

The With-Profits Committee was established during the year and comprises two Company appointed members and three independent members. The Company appointed members are Duncan Ferguson and Kerr Luscombe. Stephen Shone resigned as a member of the Committee on 31 December 2012. The independent members are Julius Pursail, Jim Gallagher and Paul Coulthard. Paul was the Independent Person before he was appointed a member of the Committee. The With-Profits Actuary and the Actuarial Function Holder attend Committee meetings. This Committee replaces the independent person structure that was previously in place to provide independent oversight of the Group’s with-profits policies.

The Committee’s role is to carry out a pro-active review of the regulatory role as specified in FSA rules and provide independent opinion and oversight on material matters that affect with-profits policyholders. In particular, the FSA’s Principles for Business such as treating customers fairly, effective management and control, communicating with customers and managing conflicts of interest.

The Committee’s role is to assess, report on and provide clear advice on:• the way each with-profits fund is managed;• compliance with each with-profits fund’s PPFM;• whether the interests of with-profits policyholders, and the

respective interests of groups of with-profits policyholders, are fairly reflected in the management of the long-term fund. This will include considering the treatment of any conflicts of interest that may arise between different groups of with-profits policyholders, between with-profits policyholders and the Company and between with-profits policyholders and the members of the Company; and

• any other matter in which it might reasonably be expected that the Committee should have an involvement.

During the year the Committee focused on:• the mutual dividend and bonus rates;• the FSA’s PS 12/04 – Protecting with-profits policyholders

and other changes to its Conduct of Business Rules;• run-off plans for the closed funds;• the effectiveness of the With-Profits Actuary;• complaints by policyholders;• the potential acquisition of the Co-operative Insurance

Society Limited and The Co-operative Asset Management Limited; and

• strategic investments.

Duncan FergusonChairman of the With-Profits Committee

The Remuneration Committee comprises non-executive directors and is chaired by David Williams. The other members are Rupert Pennant-Rea, Tracey Graham, Kathryn Matthews, Tim Melville-Ross and Andrew Palmer. Further details of the members of the Remuneration Committee during the year and the work of the Committee are set out in the Directors’ remuneration report on pages 56 to 67.

David WilliamsChairman of the Remuneration Committee


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The directors are 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 Company and the Group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006. It should be noted that legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors are responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. They are also responsible for the maintenance and integrity of the Group’s website.

Attendance of Board and Board Committee meetings (the table below shows the meetings each director attended and the maximum amount of meetings they could have attended).

Total number of meetings in 2012 12 5 10 5 11 3 5

Attendance

Andrew Carter 12 /12 - - - - - -

Andrew Palmer 12 /12 5/5 10 /10 5/5 11/11 3/3 -

David Williams 12 /12 5/5 10 /10 5/5 11/11 - -

David Weymouth 4/5 - 3/4 2/2 - 2/2 - (appointed 1 July 2012)

Duncan Ferguson 11/12 5/5 10 /10 4/5 5/5 - 5/5

Jane Platt 4/5 2/2 4/4 2/2 - - - (appointed 5 July 2012)

John Deane 7/7 - - - - 1/1 - (resigned 29 June 2012)

Jon MacDonald 1/1 - - - - - - (appointed 14 December 2012)

Kathryn Matthews 6/6 - - 3/3 5/5 2/2 - (appointed 26 June 2012)

Kerr Luscombe 4/5 - - - - 2/2 - (appointed 23 July 2012)

Phil Loney 12 /12 - - 5/5 - - -

Robert Jeens 6/6 2/2 4/4 2/2 4/4 - - (retired 22 May 2012)

Rupert Pennant-Rea 1/1 1/1 - 1/1 - - - (appointed 13 December 2012)

Stephen Shone 12 /12 - - - - 3/3 5/5

Tim Melville-Ross 12 /12 - - 5/5 11/11 - -

Tracey Graham was appointed on 10 March 2013 and so did not attend any meetings in 2012.

BoardAudit

CommitteeBoard Risk

CommitteeNomination Committee

Remuneration Committee

Investment Committee

With-Profits Committee

Each of the directors, whose names and functions are shown on pages 40 and 41 confirm that, to the best of their knowledge:• the Group financial statements, which have been prepared

in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

• the Business review on pages 3 to 39 includes a fair review of the development and performance of the business and the position of the Group; and

• a description of the principal risks and uncertainties that the Group faces together with details of the Group’s risk governance structure are provided on pages 50 to 55.

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Risk management and internal control The Board is responsible for the Group’s system of risk management and internal control, as well as for reviewing its effectiveness. The system is designed to manage rather than eliminate the risks of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The system has been in place throughout the period under review and accords with the Code. The Board is very conscious of the importance of the Group’s internal controls and attaches high priority to developing them in line with best practice.

The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The management of each business unit and support function is responsible for identifying, evaluating, rating (in terms of probability of occurrence and likely impact), assigning responsibility for, reporting, managing and mitigating all risks relevant to its area of business, including the design and operation of suitable internal controls.

The Group’s system of risk management and internal control comprises its system of governance, risk appetite, risk policies, internal control and monitoring activities and the internal environment including its philosophy, culture and behaviours.

Taken together these elements are designed to: • facilitate the effective and efficient operation of the Group by enabling it to respond appropriately to significant business,

operational, financial, regulatory and other risks that could impact upon the delivery of its objectives;

• promote a clear understanding of the risks faced to allow the Group to balance risk, capital and return effectively, enhancing the Group’s decision making capacity;

• promote the preparation of reliable published financial statements and selected financial data; and

• facilitate compliance with applicable laws, regulations and internal policies.

The Group has a formal governance structure of committees to manage risk, reporting to the Board. Risk management is an integral part of the Group’s corporate agenda and employees at all levels have risk management responsibilities.

The Group’s primary objective in undertaking risk management is to ensure that the achievement of the Group’s performance and objectives is not undermined by unexpected events and that sufficient capital is maintained. The framework described below, in conjunction with the Individual Capital Assessment (ICA) and the Group risk register, is used to help quantify the capital impact of significant risks.

Insurance CommitteeThe role of the Committee is to provide oversight of the Group’s long-term insurance management, ensuring that insurance policies and procedures are in place and operating effectively and that the control, co-ordination and monitoring of insurance and reinsurance is adequate and within the Group’s risk appetite.

Operational and RegulatoryRisk CommitteeThe role of the Committee is to oversee the control and management of operational and regulatory risks across the Group. The Committee monitors the operational and regulatory risk management processes, activities and responsibilities within the Group and reports on significant operational and regulatory risks that may arise.

Capital Management CommitteeThe role of the Committee is to advise and support Senior Management and the Board regarding the Group’s capital position, balance sheet, asset allocation benchmarks and investment performance objectives and benchmarks. The Committee’s role is also to ensure that the Group has in place the necessary processes to identify, manage and report on market, credit and liquidity risks in accordance with the Group’s risk appetite and the parameters set by the Board.

Calculation Engine Control CommitteeThe role of the Committee is to provide detailed governance of the Calculation Engine by review and challenge of the design, testing and validation of changes, and the quality of documentation and the performance of the Calculation Engine.

BoardThe Board’s role is to provide entrepreneurial leadership of the Group within a framework of prudent and effective controls, which enable risk to be assessed and managed.

Board Risk CommitteeThe role of the Committee is to advise the Board and provide oversight of the risks faced by the Group and all aspects of the risk management framework.

Executive Risk CommitteeThe role of the Committee is to monitor the risk management processes, to develop the overall risk strategy and to ensure that appropriate action is taken to manage risk.

Risk Governance structure


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This approach enables the early identification of risks and, through an assessment of likelihood and impact, the Group seeks to understand fully the dimensions of the exposures it faces. In response to unacceptable exposures, targeted action plans are put in place. Regular reporting on risks and mitigating actions is made by individual business units through the Executive Risk Committee to the Board. During 2012 the Board continued to strengthen the Group’s risk management framework and had independent reviews of this undertakenas the Group progressed its Solvency II programme.

The Board has conducted a review of the effectiveness of the Group’s system of internal control during the year ended31 December 2012 taking into account matters arising up to the date of approval of this Annual Report and Accounts. The review covered all material, controls including business, operational, financial, compliance and risk management processes. It was conducted on an ongoing basis, via reports submitted to the Board, the Board Risk Committee and the Audit Committeeand also by reports prepared as part of the year-end process.

Solvency II is driving enhanced risk management and capital management practices and the Board continues to seek independent advice and to take steps to enhance its approach to risk and capital management to minimise any weaknesses in systems and controls. In the event of any significant weaknesses being identified, the Board will ensure that necessary actionsare taken to address them.

Three lines of defence The Group’s governance structures for risk management are based on the ‘three lines of defence’ model. Primary responsibility for risk management lies with the business units and specialist operational process functions. A second line of defence is provided by specialist functions that undertake monitoring, challenge and policy setting, such as the Group’s independentRisk and Compliance function. The third line of defence is provided by Internal Audit, which provides process assurance, supported by external audit.

In practice, executive management has been delegated the day-to-day responsibility for establishing and implementing appropriate systems and controls and for managing the risks which impact upon their respective areas of responsibility. Business unit managers identify, assess and record material risks, including information on their likelihood and severity and the mitigating controls or actions planned. This framework allows the Group to assess its overall risk exposure and to create a mapof major risk exposures along with associated actions. This map is continually monitored and refreshed and evidence of control effectiveness is regularly reported. These processes are supported by the Group Risk and Compliance function that is independent of the business and reports to the Group Chief Executive viathe Group Risk Director. It provides specialist knowledge, review, challenge and quality assurance, as well as the co-ordination of reporting to appropriate committees and the Board.

Group risk policies The Group’s risk policies are the high level standards and requirements that determine the way in which risks are to be managed and controlled. The Board ensures that policies are regularly reviewed to reflect the changing commercial and regulatory environment as well as the Group’s organisational structure. The Group’s risk policies have been reviewed and aligned to meet the requirements of Solvency II.

Solvency II The prudential regulations which govern the insurance industry are currently being reviewed and updated on an EU-wide basis (known as Solvency II). When these regulations are finalisedand implemented, the Group will be able to opt either to use a standard formula for determining its regulatory capital requirements, or to use its own Internal Model, which will require approval from the regulator. During 2012 the Group worked towards a submission being made for regulatory approval during 2013, in line with the anticipated implementation date for Solvency II of 1 January 2014. However, following EU delays to Solvency II implementation (not now expected before 2016), and in line with FSA recommendations to Internal Model firms, the Group is replanning its work on the Internal Model over a longer time-frame while awaiting clarification of the final, detailed requirements.

The Internal Model is central to the business and it will enable the Group to make more effective decisions by fully integrating risk and capital management. The Solvency II Internal Model is, to a large extent, a formalisation of the processes that already take placeand the models and systems for calculating capital requirements(the Calculation Engine) that are already in use within the Group.

Group risk appetiteThe Group’s Risk Appetite Statement sets out explicitly the amount of risk that the Group is currently willing to accept, which aligns with its capacity to bear risk. The Board has responsibility for setting the risk appetite for the Group as a whole. It is applied by the use of principles and by the settingof tolerances, limits and authority levels. In 2012 the Board approved the Group’s risk preferences, which define risks that the Group views as being desirable, neutral, or undesirable. The Board also approved risk appetite statements for five categories of risk as follows:

Capital The Group will ensure it has sufficient capital in excess of its regulatory requirements to be broadly consistent with an AA credit rating. The closed funds will target capital to minimise the probability of requiring support from the Open Fund whilst distributing surplus to with-profits policyholders in a fair manner. Both available and required capital will be managed as part of this appetite.

Performance The Group aims to manage its earnings volatility such that profits are within a defined percentage of plan. It will also target optimisation of longer-term value and returns including targeting a minimum internal rate of return on capital on both new business and transactions.

Reputational The Group is averse to risk exposures that could impact the Group’s reputation or brand.

Operational The Group acknowledges that a certain level of operational risk needs to be taken. We have a low appetite for losses due to operational risk exposure but, the impacts of operational risk controls should be commensurate with the scale and the nature of the risks mitigated.

Liquidity The Group will ensure there is sufficient liquidity to meet our expected short-term cash outflows in extreme but plausible scenarios.

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The economy and Royal London’s key markets

Principal risk and uncertainty

The economic environment continues to be uncertain.The future of the Eurozone continues to be uncertain and should it break up the effects are likely to be extremely serious and could lead to a long-term Europe wide recession. Should this occur there are likely to be extreme fluctuations in exchange rates and the value of investments. Resultant possible losses from our exposure to banking, insurance and reassurance counterparties could have an adverse affect on the Group’s capital position and operations.

A change in economic conditions can affect the Group’s performance. Volatility in the economy and investment markets and the continuing prospects for low growth rates in the UK can affect consumers’ disposable incomes and appetite for the Group’s products and services.

Changing socio-economic trends (customers wanting to deal direct, transactions through mobile applications, data security, etc.) present opportunities and challenges to our business model.

Royal London monitors its product range and market position regularly through analysis of policyholder experience and business volumes. This helps the Groupto re-price its products dynamically and develop newones in response to changes in demand.

Royal London regularly undertakes reviews to ensurewe are developing strategies and operational capabilitiesto take account of current and future changes in marketsand consumer behaviours.

Royal London has reviewed its position and has no significant direct exposure to the Eurozone, although there is unavoidable indirect exposure. A breakup scenario has been considered by the Group’s executive governance committees and particularly within the Capital Management Committee because of the impact on our capital position. Royal London continues to manage carefully its limited direct exposure within investment funds and its reliance on third parties (e.g. a prudent risk appetite toward the credit rating of counterparties). Royal London will continue to closely monitor the situation and to manage developments.

Risk mitigation and management

Principal risks and uncertaintiesManaging risk is fundamental to the Group’s activities in order to generate returns for policyholders. The Group has processes in place to identify and manage risks, which include assessing scenarios and reverse stress tests. The Group’s approach to risk management is set out earlier in this statement. The Board believes the principal risks and uncertainties facing the Group are as set out on the following pages with the actions taken to manage and mitigate.


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Changing regulation and taxation

Solvency II is the new proposed European framework for insurance supervision. It proposes a fundamental change to the way in which insurers calculate their prudential capital requirement. While the high level regulation is understood, much of the low level detail and exact timescales are still undecided.

The Retail Distribution Review (RDR) affects firms throughout the UK retail market ranging from product manufacturers such as insurers and asset managers, to distributors such as banks, wealth managers and IFAs.

Central to the RDR reform is the removal of commission on retail investments and the introduction of a new model where advisers are paid by feesagreed with their customers.

The changes required as a result of the RDR are likely to have wide reaching impacts across financial services organisations. Strategic responses will vary significantly in the degree of change involved, but all require significant changes to business and technology operations.

RDR impacts some of our business units albeit to significantly varying extents. Across the Groupprojects have delivered the necessary changes toallow Royal London to facilitate the deductionof adviser and consultancy charges from relevant products and provide the required disclosure underthe regulations. We continue to evaluate how our markets are evolving and to develop our systemsand processes to meet the needs of policyholdersand distributors in the post RDR environment.

The change in the UK regulatory regime arising from the split of the FSA into the PRA and FCA, combined with a more intensive supervisory approach, maylead to an increase in the Group’s regulatory costs and disruption of its existing regulatory relationships.

As our business has grown we have increased thesize and capability of our compliance function and we continue to engage actively with our regulators.

Royal London is represented on several industrybodies including ABI senior committees, the Association of Financial Mutuals and HMRC and Treasuryworking parties.

The FSA issued a further consultation paper to respond to the concerns of the mutual with-profits sector.Faced with a decline in new with-profits business, firms faced potential uncertainty over their future directionas with-profits funds run off. Royal London welcomes this paper as a significant step forward for the mutual insurance sector.

As the largest mutual insurer in the UK, Royal London views this issue as being of critical importance for a positive resolution. The Group will continue to maintain a proactive dialogue with the FSA, and in due course the FCA, following this latest consultation, to support the delivery of the benefits identified from a strong mutual insurance sector.

During the year, Royal London has worked towardsa submission being made for regulatory approvalduring 2013, in line with the expected implementation date for Solvency II of 1 January 2014. However,following EU delays to Solvency II implementation (not now expected before 2016), and in line with FSA recommendations, the Group is replanning its work on the Internal Model over a longer time-frame while awaiting clarification of the final, detailed requirements.


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The Group is exposed to the risk of failure or default of one or more of its counterparties. As part of its business, the Group invests in debt securities and other assets in order to meet its obligations to policyholders. As a resultof this activity exposures can arise to issuers of debt and other financial instruments. The Group’s day-to-day activities also mean that it has exposures to banking, insurance and reassurance counterparties as well as third party providers of IT and administration services.

The Group seeks to manage its exposure to any one counterparty or third party. It actively monitors and reports against limits in respect of its investments. Contracts with third parties and suppliers are governed by strict service level agreements which are monitored and discussed at regular account management meetings.

If the Group’s assumptions are subsequently proved to be wrong then adjustments may impact on its financial position. The Group’s business involves the underwriting of risks where the ultimate liability is dependent on long-term trends in factors such as mortality, lapse rates, interest rates and counterparty defaults. Royal London takes a prudent approach when calculating capital requirements. However, extreme movements can take place. Such events couldarise from for example, medical science advances and movements in financial markets or in the broader economic environment. The Group may need to review assumptionsif this did happen, potentially impacting its financial position.

In the event that actual claims experience is less favourable than envisaged, the Group’s reassurance arrangements will provide significant mitigation. Additionally, Royal London uses its experience to assess and set its prices for known risks and to make sure that reserves are appropriate.The calculation of reserves is underpinned by stress and scenario testing, which assesses the appropriateness of key assumptions to a combination of extreme events, including financial and economic conditions, investment performance and product-specific matters.

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Maintaining our financial strength

An increase in the Group’s funding commitments for its defined benefit pension schemes may impact on its financial position. The Group’s main risks in managing its defined benefit pension schemes arise from inflation, interest rates and longevity and from risks associated with the schemes’ investment strategies. Any adverse movements in these factors could increase future funding costs and could impact our financial position. An additional risk factor is a possible Solvency II approach to regulation being imposed.

Overall the schemes are reasonably well funded, however the Board recognises this position could change and continues to closely monitor funding levels and assesses opportunities to reduce volatility and the risk to the Group.

Royal London has representation on the Pensions Regulator Expert Group and ABI's working party regarding the potential legislative changes to defined benefit pension scheme funding arrangements.



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Organisational delivery

There has been successful growth of the Group in recent years, together with internal change programsto continually improve our capabilities and the experience of our customers. There is a remote riskthat the Group’s continued growth plans, combinedwith the significant amount of external change in markets, regulation and legislation, results in possible future inefficient or ineffective organisational delivery, with consequential operational loss and/orreputational damage.

Royal London’s strategic and operational plans are regularly reviewed by the Board. These take accountof the Group’s resources and the scale and diversityof change currently underway and planned for the future. The Board oversees Royal London’s change portfolio to make sure all changes are phased in line with the business’s ability to manage them.



Material outsourcers and supplier relationships

In line with other large financial services organisations, Royal London has a number of material relationships with outsourcers and service providers. Whilst processing or specialist work is undertaken by these organisations, the Group remains fully responsible for the oversight, management and performance of the outsourced activity. There is a risk that we would be unable to meet our regulatory obligations following the failure of or a significant degradation in service received from a service provider.

Royal London has a framework for the governanceand oversight of material outsource and supplier arrangements. It includes the requirement for executive approval prior to commencing such arrangements together with policies and processes for the oversight and escalation of risks and issues to the attention ofthe appropriate risk committees. The business closely manages outsourcer and supplier relationships on an ongoing basis.



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2012 Directors’remuneration report

Introduction from the Remuneration Committee Chairman

On behalf of the Remuneration Committee, I am pleased to present the Directors’ remuneration report.

The Committee ensures that Royal London’s remuneration arrangements are appropriately aligned with the interests of our members, the performance of the Group and its strategic direction, as well as with good corporate governance practice. In particular, it is important that Royal London’s approach to remuneration enables it to attract, retain and motivate individuals with the talent it requires to deliver its strategy and to compete with the other top 12 UK life insurers who are our direct competitors.

As set out in the Group Finance Director’s review on pages 13 to 23, the Group delivereda strong performance in 2012, despite continued difficult trading conditions. Our EEV profit after tax increased to £225m (2011 £122m) after allocating a mutual dividend of £88m (2011 £88m).

For 2012, the short-term incentive plan rewarded performance against a balanced scorecard of measures aligned to the interests of our members and customers across five key areasof performance: financial, risk management and compliance, customers and members, people, and building the future. The Committee believes this has enhanced line-of-sight for participants as to which areas of performance are important to support delivery of the strategy.

Also during 2012, the Committee carried out a review of Royal London Asset Management (RLAM) short- and long-term incentives and the incentive arrangements for employees in our sales functions to ensure these continue to be in line with the Remuneration Policy and comply with the latest regulations and guidance.

As Royal London continues to develop and implement its strategy during 2013, and as best practice and regulatory thinking continues to evolve, the Committee will remain focused on ensuring Royal London’s remuneration is fit for purpose.

The Department for Business Innovation & Skills (BIS) issued proposed regulations in2012 on the reporting of Directors’ pay. Although the proposed regulations were not finalised at the time this report went to print, the Committee has chosen to incorporate many of the proposed BIS regulations in order to provide members with increased transparency and clarity on the remuneration policy at Royal London. The mainstructural change made to the report has been to divide it into two sections, a Policy Report and an Implementation Report.

This report will be presented to members for approval at the Annual GeneralMeeting on 4 June 2013. The tables at the end of this report have been auditedby the Company’s auditors, PricewaterhouseCoopers LLP.

David WilliamsChairman of the Remuneration Committee

This report has been prepared inaccordance with the relevantprovisions of the Companies Act 2006 and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 and has been approved bythe Board.

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Committee Membersin 2012• David Williams (Chairman)• Duncan Ferguson (stepped down 24 May 2012)• Robert Jeens (retired 22 May 2012)• Kathryn Matthews (appointed 31 July 2012)• Tim Melville-Ross • Andrew Palmer• Rupert Pennant-Rea (appointed 13 December 2012)

Remuneration CommitteeThe Committee’s key annual activities by month are as follows:• January: approve targets for the short-term incentive plan.• March: review salaries and short-term incentive outcomes for the prior year, as well as prepare the remuneration report for the prior year.• June: review and approve long-term incentive outcomes, as well as calibrate targets for the next award.

In addition, the Committee:• seeks annual confirmation from Risk and Compliance that the Group’s: – performance has not been achieved as a result of any actions taken outside of the Risk Appetite. – remuneration arrangements do not promote excessive risk taking and are appropriately aligned to the Group’s risk appetite.• ensures that contractual terms on termination and any payments made are fair to the individual and members, that failure is not rewarded and that a duty to mitigate loss is fully recognised.• reviews any major changes in employee benefit structures throughout the Group.• selects, appoints and determines terms of reference for independent remuneration consultants to advise the Committee.

During the year, the Committee met eleven times and all members were present at each meeting that they were due to attend. In addition, the Committee invited the Group Chief Executive, the Group Director, People and Corporate Affairs, the Group Head of Reward, the Group Finance Director and the Group Head of Tax to provide information and advice to the Committee. No persons are ever present when their own remuneration is being considered.

The full terms of reference of the Committee can be found on theRoyal London Group website at: www.royallondongroup.co.uk

Policy report

Key Principles of Remuneration Policy

The Key Principles of the Remuneration Policy are summarised below:

Align with interests of membersand other customers

Align with delivering Group strategyand good governance

Align with relevant market practice

• Performance-related incentive arrangements are designed to align the interests of executives with those of members and other customers.• The Committee has absolute discretion to amend any incentive amounts prior to payment to ensure they are appropriate, i.e. fair to both members and employees, and in line with the overall performance of the Group.

• Taking full account of the remuneration principles set by the Financial Services Authority (FSA) and other regulatory requirements, as well as good corporate governance practice.• Ensure that risk taking outside of the Group’s risk appetite is not rewarded.

• Ensure total remuneration is appropriately competitive to support the recruitment, retention and motivation of talented people allowing us to compete effectively against the other top 12 UK life insurers who are our direct competitors.

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Policy table – Executive Directors

Base salary

Benefits

Pension

Short-termIncentive Plan,STIP*

Long-termIncentive Scheme,LTIS*

* To be eligible to receive any payment, participants must be in employment and not be under notice prior to the date payment is due in accordance with the Plan Rules.** In exceptional circumstances, the Committee may make higher awards if it considers this to be in the best interests of members.

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2012 Directors’ remuneration report (continued)

Policy table – Non-Executive Directors

Annual feeOperationFees are reviewed annually and all directors abstain on determination of their own remuneration.The remuneration of the Group Chairman is determined by the Committee and that of the Non-Executive directors by the Board. The Chairman and Non-Executive directors are not eligible to participate in the incentive schemes and their service is not pensionable.

Purpose and link to strategy Sufficient to attract and retain directorsof the necessary calibre and reflect the responsibilities and time involved inRoyal London matters.

The table below sets out the policy for non-executive director remuneration at Royal London for 2013 onwards.

The Remuneration policy for executive directors is determined based on the Key Principles. The table below sets out the policy as it applies to each element of executive director remuneration for 2013 onwards.

Purpose and link to strategy

Support the recruitment, retention and motivation of talented people.

Focus participants on the in-year results that need to be achieved to meet Royal London’s annual financial and non-financial objectives in the context of the agreed Group strategy.

Provide strong alignment of participants with the long-term interests of members and other customers.

OperationSalaries are reviewed by considering the individual’s responsibilities, performance, and the current market positioning against appropriate roles in the top 12 UK life insurers with whom we compete directly. The salary review for the broader Royal London employee population is also taken into account.

Benefits are reviewed annually and include private medical insurance, medical screening and, for some, either a company car or a cash allowance in lieu of a car. Executive Directors may participate in the Group flexible benefits scheme.

Defined Contribution Scheme: applies to newly appointed executive directors. They may opt to receive a salary supplement in lieu of participation in the pension scheme.

Defined Benefit Scheme: the main terms applying to their final salary pensions accrued since 30 November 2001 are:• payable from age 60;• spouse’s pension payable on death of 55% of the director’s pension;• pensions increase in payment in line with inflation, up to a maximum of 7.5% each year; and• maximum increase in accrual 2.5% per annum. This scheme is closed to new employees.

Vesting outcomes are subject to a discretionary override basedon the Committee’s assessment of underlying performance. Payment of one-third of any amount earned under the STIP is deferred for three years and is adjusted for the change in the value of Royal London to its members over the period.Unvested deferred STIP awards are also subject to clawback.

Vesting of awards is based on performance over three years against five measures. To align further with members’ long-term interests, release of any award is further deferred as follows:• 50% vests after three years;• 25% vests after four years; and • 25% after five years from the date of grant.Vesting outcomes are subject to a discretionary override basedon the Committee’s assessment of underlying performance.Deferred payments are also subject to clawback.Further, the value of an award is adjusted for the change in the value of Royal London to its members. The vesting calculationis independently reviewed.

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Policy table – Executive Directors

Base salary

Benefits

Pension

Short-termIncentive Plan,STIP*

Long-termIncentive Scheme,LTIS*

* To be eligible to receive any payment, participants must be in employment and not be under notice prior to the date payment is due in accordance with the Plan Rules.** In exceptional circumstances, the Committee may make higher awards if it considers this to be in the best interests of members.

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Annual feeFees paid in respect of anygiven year for each Non-Executivedirector are disclosed in theimplementation report.

Change in yearNone.

Performance measuresSubject to annual review of individual contribution and Group performance.

Based on role.

Performance is assessed against a balanced business scorecard combining both financial andnon-financial measures.

Key long-term performance measures.Specific performance measures for any given plan will be described in the implementation report in the year of grant and again in the year the award vests.

Opportunity

Any changes will be applied in line with the annual review.

Varies by individualand level.

Up to 25%of salary.

Up to 1/30th of final salary for each year worked.

Maximum opportunity of up to 150% of salary, Target opportunity of up to 75% of salary**.

Maximum opportunity of up to 150% of salary per annum**.

Changein year

None.

Balanced business scorecard introduced.

None.

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Pay scenario chartsThe charts below illustrate potential total pay each Executive Director could earn per annum based on three scenarios as set out in thefollowing table:

Fixed elements of pay, i.e. salary, pension and benefits, are positioned to be appropriately competitive for the individual and role. The short- and long-term incentives are designed to ensure total remuneration is appropriately competitive for the performance delivered for the members of Royal London.

In terms of expected total pay, 50% of Group Chief Executive remuneration is fixed (salary, pension and other benefits) and 50% isvariable (short- and long-term incentive). Actual variable pay outcomes can vary between 0% and 100% of maximum depending on actual performance delivered, resulting in a higher or lower split between fixed and variable pay. This is illustrated in the charts below.

Fixed Annual incentive LTIS

Ownership guidelinesThe Group Chief Executive and other executive directors are required to hold shadow shares earned under the short- and long-term incentives, built up over time. Shadow shares are a proxy for the value of Royal London to its members. This means that the value ofa participant’s award changes over time in line with the value of Royal London to its members. The Committee believes that ownership guidelines help underpin the Group’s Remuneration Policy and further align the interests of executives with those of members. Periodically, the Committee reviews individual ownership guidelines to ensure they continue to be in line with market practice.

ScenarioFixed

On Plan Performance (achieves targets)

Maximum Performance (significantly exceeds targets)

LTIS outcome (% of maximum opportunity)0%

10%(c.34% for RLAM LTIS)

100%

Cash and Deferred STIP outcome (% of maximum opportunity)0%

50%

100%

Salary, pension and benefits

Received in line withcontractual entitlement


Kerr Luscombe

Fixed On Plan Maximum

Phil Loney

Jon Macdonald

Fixed On Plan Maximum Fixed On Plan Maximum

Andrew Carter

Fixed On Plan Maximum

£876k

£1,464k

£2,992k

£405k£672k

£1,450k

£493k

£958k

£1,886k

£342k£549k

£1,041k

The charts above exclude Stephen Shone who is stepping down from the Board at the forthcoming AGM.

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Mutual dividend

2011 2012

£88m £88m

Distribution statementThe illustrations below show the increase in EEV profit before tax and mutual dividend, EEV operating profit, mutual dividend and total employee pay expenditure in 2012. Note, the 2011 figures shown for EEV profit and EEV operating profit exclude the one-off gain of £97m (before tax) from the acquisition of Royal Liver Assurance.

Total employee pay expenditure

2011 2012

£156m £161m

+3%

EEV Profit before tax and mutual dividend EEV Operating profit

Service contractsThe main terms of executive director service contracts are provided in the table below.

Duration

Notice Period

Pay in lieu of notice

Other benefits

*Jon Macdonald is required to give 12 months’ notice to the Company.

CEO termsContinuous term to retirement age.

12 months by the Company.12 months by the CEO.

Pay in lieu of notice (salary and contractual benefits) if employment is terminated by the Group for reasons other than misconduct.

Company reimburses reasonable travel and overnight expenses in connection with work-related travel to and from home to place of work.

Other executive director termsContinuous term to retirement age.

12 months by the Company.6 months by the Executive Director*.

Pay in lieu of notice (salary and contractual benefits) if employment is terminated by the Group for reasons other than misconduct.

Not applicable.

Exit payment policyThe Company’s approach when considering payments in the event of termination is to take account of the individual circumstances including the reason for termination, any contractual obligations and applicable incentive plan and pension scheme rules. Executive Directors’ contracts do not include compensation for severance as a result of a change of control. In the event an executive leaves for reasons of death, injury, disability, change of control of the Company, or any other reason which the Committee in its absolute discretion permits, any outstanding awards under applicable short- and long-term incentive plans will be prorated for time and performance. For all other leavers, outstanding short- and long-term incentive awards will lapse. The Committee retains discretion to alter these provisions as permitted by the relevant Plan Rules on a case-by-case basis following a review of circumstances and to ensure fairness for both members and participants.

Consideration of members’ viewsIn determining remuneration, the Committee endeavours to take into account views expressed by members at the AGM, following the Remuneration Committee Chairman’s presentation. Members of the Committee are also availableto speak with members on an individual basis at the AGM. The voting outcome on the Directors’ remuneration report at the 2012 and 2011 AGMs is shown in the below table. No adverse views on executive remuneration were expressed by members at either the 2012 or 2011 AGM.

% approved

2012 AGM

90.9%

2011 AGM

93.3%

+4%+149%

2011 2012

£135m £336m

2011 2012

£237m £246m

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Directors’ remuneration for 2012 – audited

For 2012, the table below sets out the total emoluments for each director together with a single figure for total remuneration earned.

£000 £000 £000 £000 £000 £000 £000 £000 £000

Chairman

Tim Melville-Ross 200 - - - - 200 - - 200

Executive Directors

Andrew Carter 341 - 15 223 - 579 546 120 1,245

John Deane 229 46 - 164 195 634 253 - 887

Phil Loney 609 152 74 778 - 1,613 117 - 1,730

Kerr Luscombe 126 19 7 115 - 267 - - 267

Jon Macdonald 14 2 1 * 77 94 - - 94

Stephen Shone 406 - 27 323 - 756 314 180 1,250

Non-Executive Directors

Duncan Ferguson 81 - - - - 81 - - 81

Robert Jeens 26 - - - - 26 - - 26

Kathryn Matthews 38 - - - - 38 - - 38

Andrew Palmer 61 - - - - 61 - - 61

Rupert Pennant-Rea 3 - - - - 3 - - 3

Jane Platt 27 - - - - 27 - - 27

David Weymouth 27 - - - - 27 - - 27

David Williams 64 - - - - 64 - - 64

* Eligible for 2012 STIP, subject to performance up to 1 May 2013.Note, figures are prorated to reflect date of joining the Board.

STIPSalary

or fees

Pensionsupple-

mentTaxable benefits Other

Total emolu-ments

Long-term incentives

vesting in 2012

Totalremune-

ration

Definedbenefit

pension

Pension supplementJohn Deane, Phil Loney, Kerr Luscombe and Jon Macdonald received cash supplements in lieu of pension of 20%, 25%, 15% and 15% of salary respectively.

Taxable benefitsBenefits include private medical insurance, medical screening, company car (or cash allowance in lieu of a car).

Other – recruitment awardsJon Macdonald joined the Board on 14 December 2012 andas compensation for forfeited awards from his previous employer received a conditional award of £77,000 in shadow shares, 40.5% of which will vest in September 2013, 20.5% in June 2014 and 39% in June 2015, subject to continued employment. A separate 2011 LTIS award of £39,100 was also made, which will vest subject to performance and continued employment. The actual amount received will be reportedin the Directors’ remuneration report for the year in whichthe award vests.

These awards were determined in accordance with the Remuneration Policy.

Other – payment to leaversDetails of payments in respect of Mike Yardley, Stephen Shoneand John Deane are provided on page 66.

Non-Executive Directors’ remunerationJane Platt’s fee is paid directly to National Savings & Investments.The annual base fee for Non-Executive Directors is £54,000. Additional fees are payable for Committee Chairmanship as follows: • Board Risk, Remuneration, and Investment Committees: £10,000; • Audit Committee: £12,000 ; and • With Profits Committee: £20,000.The annual fee for the Group Chairman is: £200,000.

SalarySalary shown for Executive Directors is prior to participationin any benefit related salary sacrifice arrangement.

Defined benefit pensionCalculated as 20 times the increase in accrued pension in 2012,net of inflation.

Implementation report


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STIP in 2012

The maximum STIP opportunity levels and outcomes for the executive directors in respect of 2012 are shown in the table below.

Max award (% salary) Outcome (as % of salary) Commentary

Andrew Carter 150 65

John Deane 120 72

Phil Loney 150 127

Kerr Luscombe 120 91

Jon Macdonald 120 -

Stephen Shone 120 79

In determining the awards, the Committeeduly considered alignment with theKey Principles of the Remuneration Policy,including the application of discretion tovary awards.

NoteAndrew Carter’s STIP is based on Royal London Group’s performance (up to 40% of salary) and delivery against objectives specificto Royal London Asset Management’s agreed strategy (up to 110% of salary).Phil Loney will donate 25% of his award to charity.Jon Macdonald’s STIP in 2012 is subject to his performance up to May 2013. John Deane’s STIP in 2012 is prorated to his leaving date.

Deferred STIP in 2012 – audited

Amounts relating to the deferred STIP previously awarded are detailed in the table below. Amounts awarded under the 2012 STIP are excluded from this table and are included in the Directors’ remuneration for 2012 audited table.

Andrew Carter 322 - 152 131 605

John Deane 420 (124) 144 123 563

Phil Loney - - 70 22 92

Kerr Luscombe - - 17 6 23

Stephen Shone 444 (138) 149 126 581

Mike Yardley 824 (276) 500 141 1,189

Interest in deferred STIP

Provision at 31.12.11£000

Deferred in2012£000

Change in value of non-exercisable awards

during 2012 £000

As at 31.12.12 £000

Long-term incentives vesting in 2012

Relates to two long-term incentive awards granted in 2010,i.e. a “Growth” award and an “Outperformance” award. Eachrewards Group shadow share performance over the relevantperiod (2010 to 2012).

The Growth award rewards participants with a share in Groupshadow share value growth over the period, provided it is atleast 15%. Growth over the period was 64%, accordingly thisaward vested in full.

The Outperformance award rewards participants with a sharein Royal London’s outperformance of a comparator group ofUK life insurers.

Note: Outperformance award values are expected to havenil value based on an estimate of outperformance achieved of0%. The assessment of outperformance will be finalised and independently verified in June 2013.

All long-term incentive award outcomes are independently verified.

The amounts reported within the total remuneration tables for long-term incentives vesting represent the value of awards in the year they were issued. Any subsequent changes in value are reflected in the table on page 65 showing the movement in outstanding long-term incentive awards.

Paid in 2012£000

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Executive Director salaries

Salaries for executive directors were reviewed in accordance with the Remuneration Policy. The following table sets out the annual salaries payable to each director from 1 April 2013. 2013 2012 Increase £000 £000 %

Andrew Carter 349 343 1.7

Phil Loney 627 612 2.5

Kerr Luscombe* 340 285 19.0

Jon Macdonald 285 285 -

Stephen Shone 416 408 2.0

* With effect from 1 January 2013. Increase applied following appointment to Group Finance Director.

Long-term incentive awards

During 2012, executive directors were granted LTIS awards which will vest at the end of 2014 if performance conditions are metand subject to the Plan Rules. The actual amounts vesting to the executive will be disclosed in the 2014 single-figure disclosure of total remuneration. Further detail of these awards is provided in the table below.

Andrew Carter 231 251.0 23.5 31 Dec 2014

Phil Loney 150 187.5 10.0 31 Dec 2014

Kerr Luscombe 150 187.5 10.0 31 Dec 2014

Jon Macdonald 100 125.0 10.0 31 Dec 2014

Stephen Shone 150 187.5 10.0 31 Dec 2014

Note: Andrew Carter’s long-term incentive is based on Royal London Group’s performance (up to 100% of salary) and delivery against objectives specific to Royal London Asset Management’s agreed strategy (up to 151% of salary).

Face value(% salary)

Max value at vest (% salary)

Threshold vesting (% face value)

End ofperformance

period

Performance Measures and

Weighting

TSR Outperformance 50%Investment Outperformance 20%

Absolute EEV 15%Absolute VNB growth 15%

Overall vesting subject to a +/- 25% adjustment based on cumulative

mutual dividend

Directors’ remuneration for 2011 – audited

For 2011, the table below sets out the total emoluments for each director together with a single figure for total remuneration earned.

£000 £000 £000 £000 £000 £000 £000 £000 £000

Chairman

Tim Melville-Ross 198 - - - - 198 - - 198

Executive Directors

Andrew Carter 331 - 15 456 - 802 857 160 1,819

John Deane 383 77 - 431 - 891 940 - 1,831

Phil Loney 150 38 20 210 985 1,403 - - 1,403

Stephen Shone 398 - 27 448 - 873 961 240 2,074

Mike Yardley 446 - 18 576 1,237 2,277 1,689 300 4,266

Non-Executive Directors

Duncan Ferguson 65 - - - - 65 - - 65

Robert Jeens 66 - - - - 66 - - 66

Andrew Palmer 41 - - - - 41 - - 41

David Williams 64 - - - - 64 - - 64

* The 2011 STIP figures have been restated to exclude the variance in prior year deferred STIP awards so as to be consistent with the current year treatment, in accordance with the proposed BIS regulations.

Salary or fees

Pensionsupple-

mentTaxable benefits

RestatedSTIP

Recruitment/loss of office

Total emolu-ments

Long-term incentives

vesting in 2011

Totalremune-

ration

Definedbenefit

pension


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Pension entitlements – audited

Age £000pa £000pa £000pa £000 £000 £000

Stephen Shone 55 170 17 9 3,663 3,093 570

Andrew Carter 52 82 10 6 1,430 1,089 341

¹ The accrued pensions are the amounts which the directors would be entitled to from normal retirement age if they left service atthedateshown.Nodirectoriseligibletoreceiveanyadditionalbenefitintheeventofearlyretirement.² The transfer values have been calculated in accordance with the relevant legislation and guidance and are based on the cash equivalent basis applicable to the Royal London Group Pension Scheme (the “Scheme”) at the date shown.³ Mike Yardley accrued pension rights until 31 March 2012, in line with the amount as estimated and disclosed in the 2011 Directors’ remuneration report. �TheCompanypaidthefollowingcontributionsonbehalfoftheDirectorsviasalarysacrifice.Theseamountshavenotbeen deducted from the amounts shown in the table above.5 There was a change in the Trustees transfer value basis during the year, which led to an increase in the transfer values at 31 December 2012. 2012 2011 £000 £000

Stephen Shone 30 29

Andrew Carter 25 24

Accrued pension at

31.12.12¹

Increasein accrued

pension during the year

Increasein accrued

pension during the year

(net of inflation)

Transfer value of accrued pension at

31.12.112

Transfer value of accrued pension at

31.12.122

Increase intransfer

value over the year, net of director’s

contri- butions2,�,5

Outstanding long-term incentive awards – audited

Exercisable long-term incentive awards are detailed in the table below:

Andrew Carter 834 404 324 (734) 828

John Deane 808 192 193 (940) 253

Phil Loney - 117 - (117) -

Stephen Shone 937 200 246 (1,069) 314

Mike Yardley 1,532 335 17 (1,884) -

Exercisable awards at 31.12.12 include estimated payouts.

In addition to the previously noted exercisable awards, the following provisions have been made in respect of plans which have not reached their third anniversary or date of exercise:

Andrew Carter 522 - (404) 427 545

John Deane 243 - (192) 67 118

Phil Loney 295 - (117) 471 649

Kerr Luscombe 9 - - 96 105

Jon Macdonald - 77 - 80 157

Stephen Shone 253 - (200) 239 292

Mike Yardley 335 - (335) - -

Increase in exercisable awards during 2012

Exercisable at 31.12.11

£000

Transfer fromprovisions

£000

Change in value during 2012

£000Paid in 2012

£000

Exercisable at 31.12.12

£000

Provision at 31.12.11

£000

Transfer to exercisable

awards£000

Granted onjoining

£000

Change in value of non-exercisable awards

during 2012£000

Provision at31.12.12

£000

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Loss of office payments – audited

Mike YardleyPayments were made to Mike Yardley in accordance with the terms disclosed in the 2011 Directors’ remuneration report.

Stephen ShoneStephen Shone stepped down as Group Finance Director on 31 December 2012 and will step down from the Board at the forthcoming AGM. In accordance with the Remuneration Policy, the following provisions have been made in relation to Stephen Shone leaving the Group:

Item

Salary and benefits

Loss of office payment

2012 and 2013 STIP

Project-related Incentive

Deferred STIP 2010 to 2011

Long-term Incentive awards 2010 to 2012

2013 LTIS

John DeaneJohn Deane stepped down as Chief Executive, Intermediary, on 29 June 2012 and left the Group on 1 August 2012. In accordance with theRemuneration Policy, the following provisions were made in relation to John Deane leaving the Group:

Item

Salary and benefits

2012 STIP

Deferred STIP 2009 to 2012

Long-term Incentive awards 2010 to 2011

2012 LTIS

In addition, payments are subject to mitigation.

Provision

Eligible to receive salary and benefits to 31 December 2013, the end of his notice period. In addition, payments are subject to mitigation.

Eligible to receive loss of office payment of £30,000.

Eligible to participate, subject to performance and determined in accordance with the Plan Rules, subjectto deferral of 1/3rd of STIP into shadow shares for 3 years and clawback during the deferral period.

Eligible to participate in an additional incentive of up to 120% of salary in respect of delivery against key project-based targets in 2013, subject to 1/3rd deferral into shadow shares for one year from31 December 2013 and subject to clawback during this period. At the discretion of the Committee,a further 25% of salary may be payable depending on the project completion date.

Eligible for awards, in accordance with the Plan Rules. Amounts as previously disclosed.

Eligible for awards, amounts as previously disclosed, any payment determined in accordance with the Plan Rules, i.e. based on 3-year performance, prorated for time to end of notice period and subject to normal deferral mechanism, if appropriate, including clawback during the deferral period. Any payments will be disclosed in the Directors’ remuneration report corresponding to the year in which the performance period ends, in line with our normal disclosure practice.

Not eligible to participate.

Provision

Eligible to receive payment equivalent in value to salary and benefits to 31 December 2012, the end of hisnotice period.

Eligible to participate, considered a good leaver with payment prorated to 1 August 2012.

Eligible for awards, in accordance with the Plan Rules. Amounts as previously disclosed.

Eligible for awards, amounts as previously disclosed, any payment determined in accordance with the Plan Rules, i.e. based on 3-year performance, prorated for time to end of notice period and subject to normal deferral mechanism, if appropriate, including clawback during the deferral period. Any payments will be disclosed in the Directors’ remuneration report corresponding to the year in which the performance period ends, in line with our normal disclosure practice.

Not eligible to participate.


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Remuneration Committee support

The table below provides details of the external advisors to the Committee, including whether they provided additional advice or support to the Royal London Group, and the respective fees paid to them in 2012. Feesare charged based on the scope and requirements of the work as agreed with the Remuneration Committeeor Royal London Group.

Kepler Associates

PricewaterhouseCoopers

Pinsent Masons

Towers Watson**

* refer to note 9 in the financial statements. **additionally provided administration and actuarial services to the Royal London Group Pension Scheme Trustees. Fees in respect of these services totalled £1,620,000 in 2012.

By order of the Board

David WilliamsChairman of the Remuneration Committee27 March 2013

Nature of advice provided to the Remuneration Committee

Independent advice on all aspects of remunerationof the executive directorsand senior executives.Provides support on other aspects of Group remuneration for the Committee.

Audit-related services only.

Legal support with regard to the operation of the Group’s incentive plans and matters pertaining to the terms of appointment of directors.

Specialist advice on the operation of the Royal London Group Pension Scheme.

Nature of advice provided to theRoyal London Group

None.

Audit, tax andnon-audit services.

General legal advice.

Administration and secretarial support to the Group Pension Scheme.

Total Fees £000

176

11

100

20

Total Fees £000

0

3,035*

275

140

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Auditors’ report

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error.

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Independent auditors’ report tothe members of The Royal London Mutual Insurance Society Limited We have audited the Group and Parent Company financial statements (the 'financial statements') of The Royal London Mutual Insurance Society Limited for the year ended31 December 2012, which comprise the Group and Parent company balance sheets, the Group statement of comprehensive income, the Group and Parent company statements of cash flows, the Accounting policies and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditorsAs explained more fully in the Directors’ responsibilities statement set out on page 48 and 49, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standardsrequire us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state

of the Group’s and of the Parent Company’s affairs as at 31 December 2012 and of the Group’s result and Group’s and Parent Company’s cash flows for the year then ended;• the Group financial statements have been properly prepared

in accordance with IFRSs as adopted by the European Union; • the Parent Company financial statements have been properly

prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matter prescribedby the Companies Act 2006In our opinion, the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to reportby exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if,in our opinion:• adequate accounting records have not been kept by the

Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or• the Parent Company financial statements are not in

agreement with the accounting records and returns; or• certain disclosures of directors’ remuneration specified by law are not made; or• we have not received all the information and explanations we require for our audit.

Corporate governance statement The directors have requested that we review the parts ofthe Corporate governance statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review by the Listing Rules of the Financial Services Authority (because the company applies Listing Rules 9.8.6R 5 and 6 as if it were a listed company) and with the eight provisions of the Annotated UK Corporate Governance Code specified by the Association of Financial Mutuals, and that we review the directors’ statement, set outon page 42, in relation to going concern (because the company applies Listing Rule 9.8.6R 3). We have nothing to report in respect of these reviews.

Directors’ remuneration reportAt the request of the directors, we have also audited the partof the Directors’ remuneration report that is described ashaving been audited. In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

Gavin PhillipsSenior Statutory Auditorfor and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory Auditors,

London27 March 2013

Notes:(a) The maintenance and integrity of the Royal London Group website is the

responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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Consolidated statement of comprehensive income 73

Balance sheets 74

Statements of cash flows 75

Notes to the financial statements 76

European Embedded Value (EEV) supplementary information 156

Contents

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2012 2011

Notes £m £m

RevenuesGross earned premiums 3 (a) 1,087 1,076Amounts paid to reinsurers (405) (344)

Net earned premiums 682 732Fee income from investment and fund management contracts 4 180 165Investment return 5 3,058 1,314Gain arising on business combinations 21 (a) – 91Other operating income 6 31 39

Total revenues 3,951 2,341

Policyholder benefits and claimsClaims paid, before reinsurance 7 (a) 1,944 1,880Reinsurance recoveries 7 (a) (247) (208)

Claims paid, after reinsurance 1,697 1,672

Decrease in insurance contract liabilities, before reinsurance (521) (63)Reinsurance ceded (116) (153)

Decrease in insurance contract liabilities, after reinsurance (637) (216)(Increase)/decrease in non-participating value of in-force business (167) 9Increase in investment contract liabilities 1,808 135

Total policyholder benefits and claims 2,701 1,600

Operating expensesAdministrative expenses 8,9 452 409Investment management expenses 11 156 133Amortisation charges and impairment losses on acquired PVIF and other intangible assets 18 105 103Investment return attributable to external unit holders 33 (a) 121 (31)Other operating expenses 12 153 33

Total operating expenses 987 647

Finance costs 13 30 30

Result before tax 233 64

Tax credit 14 (a) (27) (24)

Transfer to the unallocated divisible surplus 28 260 88

Profit for the year – –

Other comprehensive income for the year, net of tax – –

Total comprehensive income for the year – –

As a mutual company, all earnings are retained for the benefit of participating policyholders and are carried forward within the unallocated divisible surplus. Accordingly, there is no profit for the year shown in the statement of comprehensive income.

Consolidated statement of comprehensive incomefor the year ended 31 December 2012

73

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Balance sheetsas at 31 December 2012

Group Parent company

2012 2011 2012 2011

ASSETS Notes £m £m £m £m

Property, plant and equipment 16 42 45 – –

Investment property 17 2,319 2,259 2,234 2,191

Intangible assetsGoodwill 254 254 232 232Acquired PVIF on investment contracts 56 97 56 91Acquired PVIF on insurance contracts 137 178 127 160Deferred acquisition costs on investment contracts 554 476 478 427Other intangible assets 82 104 64 75

Total intangible assets 18 1,083 1,109 957 985

Reinsurers’ share of insurance contract liabilities 24 1,159 1,043 1,159 1,042

Pension scheme asset 35 (a) 118 247 118 247

Deferred tax asset 34 (a) 121 85 108 76

Current tax asset 10 9 7 7

Financial assetsFinancial investments 19 31,719 31,096 18,962 17,534Investments in Group entities 20 – – 7,965 8,418Loans and receivables, including insurance receivables 22 277 353 174 177Cash and cash equivalents 23 2,901 2,512 2,091 1,696

Total financial assets 34,897 33,961 29,192 27,825

Total assets 39,749 38,758 33,775 32,373

LIABILITIES Notes £m £m £m £m

Participating insurance contract liabilities 24 11,717 11,981 11,717 11,981Participating investment contract liabilities 26 1,946 1,922 1,946 1,922Unallocated divisible surplus 28 2,648 2,388 2,648 2,388Non-participating value of in-force business 25 (963) (796) (906) (771)

15,348 15,495 15,405 15,520

Non-participating insurance contract liabilities 24 4,069 4,326 3,797 3,893Non-participating investment contract liabilities 26 17,501 15,575 13,397 11,526

21,570 19,901 17,194 15,419

Subordinated liabilities 29 398 398 398 398Payables and other financial liabilities 30 460 826 293 607Provisions 31 238 201 228 191Other liabilities 32 322 280 257 238Liability to external unit holders 33 (b) 1,413 1,657 – –

Total liabilities 39,749 38,758 33,775 32,373

The financial statements on pages 73 to 155 were approved by the Board of Directors and signed on its behalf on 27 March 2013.

Kerr Luscombe Group Finance Director

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2012 2011 2012 2011

Notes £m £m £m £m

Cash flows from operating activitiesTransfer to the unallocated divisible surplus 260 88 260 88Adjustments for non-cash items 39 (a) (591) 807 (124) 351Adjustments for non-operating items 39 (b) 30 30 6 23Acquisition of investment property (171) (130) (171) (130)Net proceeds from sale/(acquisition) of financial investments 1,342 (1,350) 691 (885)Proceeds from disposal of investment property 57 71 57 71Changes in operating receivables 76 24 3 52Changes in operating payables (313) 267 (290) 255Change in liability to external unit holders (244) 133 – –

Net cash flows from operating activities before tax 446 (60) 432 (175)Tax paid (10) (22) (2) (10)

Net cash flows from operating activities 436 (82) 430 (185)

Cash flows from investing activitiesAcquisition of property, plant and equipment (6) (4) – –Acquisition of Group entities 39 (d) – 137 (7) 130Proceeds from disposal of Group entities 39 (d) – – 1 3Dividends received from Group entities – – 1 3

Net cash flows from investing activities (6) 133 (5) 136

Cash flows from financing activitiesRepayment of other debt and finance lease liabilities (1) – – –Interest paid (30) (30) (25) (25)

Net cash flows from financing activities (31) (30) (25) (25)

Net increase/(decrease) in cash and cash equivalents 399 21 400 (74)Cash and cash equivalents at 1 January 23 2,495 2,474 1,684 1,758

Cash and cash equivalents at 31 December 23 2,894 2,495 2,084 1,684

An integral part of the operations of the Group is the management of a portfolio of investment assets. Cash flows relating to the purchase and sale of these assets have been treated as operating cash flows for the purposes of the statements of cash flows. In the Parent company, Open Ended Investment Companies (OEICs) and other investment funds that are classified for financial reporting purposes as subsidiaries are also part of this operating portfolio of investment assets and hence cash flows in relation to these assets are also classified as operating cash flows for the Parent company statement of cash flows.

Statements of cash flowsfor the year ended 31 December 2012

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Notes to the financial statementsfor the year ended 31 December 2012

1. Accounting policies(a) Basis of preparationThe 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 (IFRIC) 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 set out below are reviewed for appropriateness each year. These policies have been applied consistently to all periods presented in these financial statements, unless otherwise stated.

All amounts in the financial statements are shown in pounds sterling, which is the presentational currency of the Group and the Parent company. Unless otherwise stated, amounts are shown in millions of pounds, rounded to the nearest million.

Restatement of comparatives The Group has elected to early adopt the Amendment to IAS 12, ‘Income taxes’ – deferred tax: recovery of underlying assets. The effect of this change is to increase by £13m both the deferred tax asset recognised at 31 December 2012 and the tax credit for the year to that date. The change in policy had no net effect on the deferred tax position in either 2011 or 2010 and consequently neither the Group statement of comprehensive income nor the Group or Parent company balance sheets have required restatement. However there is a change to the constituent elements of the deferred tax position in those years and the comparative disclosures given in note 34 have been restated accordingly.

New and amended standards adopted by the GroupOther than as set out above, there are no new or amended standards and interpretations that are applicable for the first time in these financial statements that have had a material impact.

New and amended standards not yet effectiveThe following new and amended standards, which have been issued but are not yet effective, have not been applied in these financial statements:

– IFRS 9, ‘Financial Instruments’, issued November 2009 and October 2010. This new standard is being issued in several phases with the intention that when complete, it will replace IAS 39, ‘Financial Instruments: Recognition and Measurement’. This first phase includes the chapters on classification and measurement. The Group has not yet completed its assessment of the impact of this standard, which is largely dependent on the outcome of the IFRS insurance accounting project;

– Amendments to IAS 19, ‘Employee Benefits’. The amendments eliminate the corridor approach, replace the interest cost and expected return on plan assets by a net interest amount calculated by applying the discount rate to the net defined benefit asset/liability and remove future scheme administration costs from the calculation of the pension scheme obligation. The main impact on the Group will be that actuarial gains and losses and the restriction on scheme surplus will be recognised in Other Comprehensive Income rather than being included in the result before tax;

– IFRS 10, ‘Consolidated Financial Statements’ builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the Parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Group is yet to assess IFRS 10’s full impact;

– IFRS 11, ‘Joint Arrangements’ eliminates the option to use proportional consolidation for joint ventures, which will change the accounting for the Group’s joint ventures to the equity method;

– IFRS 12, ‘Disclosures of Interests in Other Entities’ is expected to increase the disclosures in the Group accounts relating to investments in Group entities;

– Amendment to IFRSs 10, 11 and 12 on transition guidance limits the requirement to provide comparative information to only the preceding comparative period;

– IFRS 13, ‘Fair Value Measurement’ does not introduce additional requirements for fair value accounting, but defines fair value and provides a single source of fair value measurements and disclosure requirements. It will increase the fair value disclosures required in the Group accounts and will extend the fair value hierarchy to non-financial assets and non-financial liabilities measured at fair value in the balance sheet.

There are no other standards or interpretations that are not yet effective and that would be expected to have a material impact on the financial statements.

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The Group financial statements incorporate the assets, liabilities and results of the Parent company and its subsidiaries.

Subsidiaries are those entities (including OEICs and other investment funds) over which the Group directly or indirectly has the power to govern the operating and financial policies in order to gain benefits. Profits or losses of subsidiaries sold or acquired during the period are included in the consolidated results up to the date that control ceases or from the date of gaining control.

The Group applies the purchase method in accounting for business combinations. The cost of business combinations comprises the fair value of the consideration paid and of the liabilities incurred or assumed. For acquisitions completed prior to 2010, the cost of business combinations also included any directly related expenses. For subsequent acquisitions, all acquisition costs are expensed as incurred.

The excess of the cost of a business combination over the fair value of the identifiable net assets acquired is recorded as goodwill. If the cost of the business combination is less than the fair value of identifiable net assets acquired, the difference is recognised immediately in the statement of comprehensive income.

The financial statements produced by subsidiaries for inclusion in the Group financial statements are prepared using accounting policies consistent with those adopted by the Group. Intra-group transactions, balances and unrealised gains and losses on intra-group transactions are eliminated.

Associates are entities over which the Group has significant influence but not control, generally accompanying an ownership interest of between 20% and 50%. The Group’s investments in associates are all investment funds and have been accounted for as financial assets held at fair value through profit or loss as permitted by IAS 28, ‘Investments in Associates’.

(c) Classification of contractsThe Group classifies its products for accounting purposes as insurance, investment or investment with discretionary participation features. Insurance contracts are those contracts that transfer significant insurance risk. Contracts that do not transfer significant insurance risk are investment contracts.

A discretionary participation feature is a contractual right held by a policyholder to receive additional payments as a supplement to guaranteed benefits:• that are likely to be a significant proportion of the total contractual payments; and• whose amount or timing is contractually at the discretion of the issuer and that are contractually based on: – the performance of a specified pool of contracts, or a specified type of contract, or – realised and/or unrealised investment returns on a specified pool of assets held by the issuer, or – the profit or loss of the company that issues the contracts.

Such contracts are more commonly known as ‘with-profits’ or as ‘participating’ contracts.

Hybrid contracts are those where the policyholder can invest in and switch between both unit-linked (non-participating) and unitisedwith-profits (participating) investment mediums at the same time. Certain hybrid contract types are treated as if they were whollynon-participating investment contracts when accounting for premiums, claims and other revenue.

(d) Revenue(i) Premiums Premiums received and reinsurance premiums paid relate to insurance and non-hybrid participating investment contracts. They are accounted for when due for payment except for recurring single premiums and premiums in respect of unit-linked business, which are accounted for when the related liabilities are created.

(ii) Fee income from investment and fund management contractsManagement fees arising from investment and fund management contracts are recorded in the statement of comprehensive income in the period in which the services are provided. Initial fees, which relate to the future provision of services are deferred and recognised in the statement of comprehensive income over the anticipated period in which the services will be provided. Such deferred fee income is shown as a liability in the balance sheet.

1. Accounting policies (continued)(b) Basis of consolidation

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(iii) Investment returnInvestment return comprises the investment income and fair value gains and losses derived from assets held at fair value through profit or loss, rental income and fair value gains and losses derived from investment property and interest income derived from cash and cash equivalents.

Investment income derived from assets held at fair value through profit or loss includes dividends and interest income. Dividends are recorded on the date on which the shares are declared ex-dividend. UK dividends are recorded net of the associated tax credits; overseas dividends are recorded gross, with the related withholding tax included within the tax expense as foreign tax. Interest income is recognised on an accruals basis. Rental income from investment property, net of any lease incentives received or paid, is recognised on a straight-line basis over the term of the lease.

(iv) Commission incomeThe Group acts as an introducer for certain third-party insurers. Commission income and profit commission received on the underwriting results of those insurers is recognised in the statement of comprehensive income as the related services are provided.

(e) ClaimsClaims paid and reinsurance recoveries relate to insurance and non-hybrid participating investment contracts. For non-linked policies, maturity claims and annuities are accounted for when due for payment. Surrenders are accounted for when paid or, if earlier, on the date when the policy ceases to be included within the calculation of the related contract liabilities. Death claims and all other non-linked claims are accounted for when notified. For linked policies, claims are accounted for on cancellation of the associated units.

Claims payable include related claims handling costs. Reinsurance recoveries are accounted for in the same period as the related claim.

(f ) Tax expense Tax expense comprises current and deferred tax and is recognised in profit or loss except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised directly in other comprehensive income. Both current and deferred tax are calculated using tax rates enacted or substantively enacted at the balance sheet date.

(i) Current taxCurrent tax is the expected tax payable on the taxable income for the year and any adjustment to tax payable in respect of previous years.

(ii) Deferred taxDeferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. The following temporary differences are not provided for: • the initial recognition of goodwill not deductible for tax purposes;• temporary differences arising on investments in subsidiaries where the Group controls the timing of the reversal of the temporary

difference and it is probable that the temporary difference will not reverse in the foreseeable future.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

(g) Property, plant and equipmentOwner-occupied land and buildings are carried at fair value in the balance sheet. Fair value is determined annually by independent professional valuers, who are members of the Royal Institution of Chartered Surveyors, and is based on current prices in an active market for similar properties in the same location and condition. An increase in fair value is recognised in other comprehensive income, except to the extent that it is the reversal of a previous revaluation decrease which was recognised in profit or loss. A decrease in fair value is recognised immediately in profit or loss, except to the extent that it reverses a previous revaluation surplus recognised in other comprehensive income.

Other plant and equipment consisting of computer equipment, office equipment and vehicles are stated at cost less accumulated depreciation and impairment losses. Cost comprises the fair value of the consideration paid to acquire the asset and includes directly related expenditure.

Subsequent costs are included in an asset’s carrying value only to the extent that it is probable that there will be future economic benefits associated with the item and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the statement of comprehensive income during the period in which they are incurred.

1. Accounting policies (continued)(d) Revenue (continued)


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Land is not depreciated. No depreciation is provided on owner-occupied buildings as such depreciation would be immaterial. Depreciation on other items of property, plant and equipment is charged to the statement of comprehensive income and is calculated so as to reduce the value of the assets to their estimated residual values on a straight-line basis over the estimated useful lives of the assets concerned, which range from 3 to 8 years.

The residual values and estimated useful lives are reviewed annually. Where an asset’s carrying amount exceeds its recoverable amount the carrying amount is written down immediately to the recoverable amount.

Gains and losses on disposals are included in the statement of comprehensive income and are determined by comparing proceeds with carrying amounts.

(h) Intangible assets(i) GoodwillGoodwill is tested annually for impairment and is stated at cost less accumulated impairment losses. Any gain or loss on subsequent disposal of a subsidiary will include any attributable goodwill remaining.

(ii) Acquired PVIFThe present value of acquired in-force business (PVIF) arises on the acquisition of portfolios of investment and insurance contracts, either directly or through the acquisition of a subsidiary. It represents the net present value of the expected pre-tax cash flows of the contracts which existed at the date of acquisition and is amortised over the remaining lifetime of those contracts. The amortisation is recognised in the statement of comprehensive income and is calculated on a systematic basis to reflect the pattern of emergence of profits from the acquired contracts. Amortisation is stated net of any unwind of the discount rate.

The estimated lifetime of the acquired contracts ranges from 5 to 35 years for life business and 17 to 40 years for pensions business.

The value of the acquired PVIF is assessed annually for impairment and any impairment is recognised in full in the statement of comprehensive income in the year it is identified.

(iii) Deferred acquisition costsDeferrable acquisition costs for non-participating and hybrid participating investment contracts are capitalised as an intangible asset. Deferrable costs are restricted to directly related and incremental costs incurred for the acquisition of new contracts. This consists of commission only, including the value of future commission payable to third parties. All other acquisition costs are expensed as incurred. The deferred acquisition cost asset is amortised over the anticipated lifetime of the related contracts in the same pattern as the related services are provided.

All acquisition costs on insurance and non-hybrid participating investment contracts are recognised as an expense in the statement of comprehensive income when incurred.

(iv) Other intangible assetsOther intangible assets consist of investment management rights, administration servicing rights and distribution agreements acquired as part of a business combination and software licences. They are carried at cost less accumulated amortisation and impairment losses. The initial cost is determined as the fair value of the intangible asset at the date of acquisition. Where that fair value is not readily observable it is determined using a valuation technique such as discounted cash flow analysis.

Other intangible assets are amortised on a straight-line basis over their useful lives, which range from 3 to 10 years. The useful lives are determined by considering relevant factors such as the remaining term of agreements, the normal lives of related products and the competitive position.

(i) ReinsuranceThe Group seeks to reduce its exposure to potential losses by reinsuring certain levels of risk with reinsurance companies. Reinsurance contracts that meet the classification requirements for insurance contracts set out above, are classified as reinsurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets.

Reinsurance assets represent short-term payments due from reinsurers and longer-term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. They are measured on a consistent basis to the reinsured insurance contracts. Reinsurance liabilities represent premiums payable for reinsurance.

1. Accounting policies (continued)(g) Property, plant and equipment (continued)

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(j) Investments(i) Investment property Investment property is property held for rental, capital growth or both, excluding those occupied by the Group or the Parent company. Investment property includes freehold and leasehold land and buildings.

Investment property is initially measured at cost. For freehold property, cost comprises the fair value of the consideration paid plus the associated transaction costs. For leasehold property, the cost is the lower of the fair value of the property and the present value of the minimum lease payments at the inception of the lease.

All investment property is subsequently carried at fair value in the balance sheet. Fair value is determined annually by independent professional valuers based on market evidence. Any gain or loss arising from a change in fair value is recognised in the statement of comprehensive income.

(ii) Financial investmentsAll investment transactions are recognised at trade date.

All financial investments are classified upon initial recognition as held at fair value through profit or loss (FVTPL). The Group does not classify any financial investments as ‘available for sale’ or as ‘held to maturity’. The FVTPL category has two subcategories: financial assets held for trading and those designated as FVTPL. All derivative instruments are classified as held for trading as required by IAS 39, ‘Financial Instruments: Recognition and Measurement’. All other financial investments are classified as designated as FVTPL.

Financial assets that are designated as FVTPL are:• financial assets held in the internal linked funds of the Group backing unit-linked insurance and investment contract liabilities. The

designation of these assets at FVTPL eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or

• financial assets managed and whose performance is evaluated on a fair value basis.

Financial assets classified as FVTPL, including derivatives classified as held for trading, are initially recognised at the fair value of the consideration paid. They are subsequently measured at fair value with any resultant gain or loss recognised in the statement of comprehensive income.

Fair value for quoted investments in an active market is the bid price: for investments in unit trusts, OEICs and other pooled funds (including those classified as investments in Group entities) it is the bid price quoted on the last day of the accounting period on which investments in such funds could be redeemed. If the market for a quoted financial investment is not active or the investment is unquoted, the fair value is determined by using valuation techniques. For these investments, the fair value is established by using quotations from independent third parties, such as brokers or pricing services or by using internally developed pricing models. Priority is given to publicly available prices from independent sources, when available, but overall, the source of pricing and/or valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. Valuation techniques include the use of recent arm’s length transactions, reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis and option pricing models making maximum use of market inputs from independent sources and relying as little as possible on entity specific inputs.

(iii) Investments in Group entitiesInvestments in Group entities within the Parent company financial statements are designated as FVTPL. Fair value for those entities which are not unit trusts, OEICs and other pooled funds is determined using the same valuation techniques as are used for unquoted investments, as described above.

1. Accounting policies (continued)


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(k) Loans and receivablesLoans and receivables are initially recognised at the fair value of the consideration paid. Subsequently they are measured at amortised cost.

(l) Finance leases(i) Group acting as lessorLeases under which substantially all the risks and rewards of ownership are transferred by the lessor are classified as finance leases.

The Group leases certain freehold buildings to third parties by way of finance lease. No amount is recognised for these buildings within investment property. Instead an asset is recognised within loans and receivables that represents the Group’s net receivable from finance leases. This asset is initially stated at an amount equal to the present value of the minimum lease rentals receivable at the inception of the lease. As lease rentals are received, these are split between an interest element, calculated on an effective interest basis, which is credited to the statement of comprehensive income and a capital element, which reduces the finance lease receivable.

(ii) Group acting as lesseeLeases under which substantially all the risks and rewards of ownership are assumed by the lessee are classified as finance leases.

Leasehold investment property is accounted for as a finance lease. At the commencement of the lease an asset is recognised within investment property at an amount equal to the lower of the fair value of the property and the present value of the minimum lease payments. An equal liability is established to represent the financing element of the lease contract. As lease payments are made, these are split between an interest element, calculated on an effective interest basis, which is charged to the statement of comprehensive income and a capital element, which reduces the finance lease liability.

(m) Operating lease payments Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Payments under operating leases, net of lease incentives received, are recognised in the statement of comprehensive income on a straight-line basis over the term of the lease.

(n) ImpairmentGoodwill is tested for impairment annually. The carrying amounts of other intangible assets, property, plant and equipment and financial assets (other than those at FVTPL) are reviewed at each balance sheet date for any indication of impairment or whenever events or circumstances indicate that their carrying amount may not be recoverable.

For non-financial assets, an impairment loss is recognised whenever the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use.

For financial assets (other than those at FVTPL) an impairment loss is recognised if the present value of the estimated future cash flows arising from the asset is lower than the asset’s carrying value.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Impairment losses are recognised in the statement of comprehensive income.

An impairment loss in respect of goodwill is never reversed. In respect of other non-financial assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. For financial assets (other than those at FVTPL) an impairment loss is reversed if there is a decrease in the impairment that can be related objectively to an event occurring after the impairment was recognised. An impairment loss is reversed only to the extent that after the reversal, the asset’s carrying amount is no greater than the amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(o) Derecognition and offset of financial assets and financial liabilitiesA financial asset is derecognised when the contractual rights to receive the cash flows from the asset have expired or where they have been transferred and the Group has also transferred substantially all of the risks and rewards of ownership.

A financial liability is derecognised when the obligation specified in the contract is discharged or cancelled or expires.

Financial assets and liabilities are offset and the net amount presented in the balance sheet if, and only if, there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and liability simultaneously.


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(p) Cash and cash equivalentsCash and cash equivalents in the balance sheet comprise cash balances, deposits held on call with banks and other short-term highly liquid investments with three months or less to maturity from the date of acquisition. Cash and cash equivalents in the statement of cash flows are stated net of bank overdrafts.

(q) Insurance contracts and participating investment contracts Under IFRS 4, ‘Insurance Contracts’, insurance and participating investment contract liabilities are valued using accounting policies consistent with those adopted prior to the transition to IFRS.

The insurance and participating investment contract liabilities are determined annually in accordance with regulatory requirements. For participating contracts the liabilities are determined on a realistic basis in accordance with FRS 27 ‘Life Assurance’, except that the participating liabilities within the closed funds are adjusted to ensure that any difference between the surplus in those funds as measured on an IFRS basis and the surplus as measured on a realistic basis is included within participating liabilities. The surpluses in the closed funds are included within the participating contract liabilities because they are not available for distribution to other policyholders or for other business purposes. The closed funds are the Refuge industrial branch fund, the United Friendly funds, the Scottish Life fund, the PLAL with-profits fund and the Royal Liver fund.

The participating liabilities include an assessment of any future options and guarantees included in this business on a market-consistent basis. The calculations also take into account bonus decisions, which are consistent with the Parent company’s Principles and Practices of Financial Management. In determining the realistic value of the participating liabilities the value of non-profit business written in the participating fund is accounted for as part of the calculation. The present value of future profits on this business is separately calculated and this value is deducted from the participating liabilities.

For linked insurance contracts, the calculation of the liability is based upon the fund value at the valuation date plus a reserve, where on a prudent basis, it is estimated that future cash outflows cannot be covered by future cash inflows.

A liability adequacy test is then carried out on insurance liabilities to ensure that the carrying amount of the liabilities (less related intangible assets) is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all contractual cash flows are discounted and compared against the carrying value of the liability. Where a shortfall is identified it is charged immediately to the statement of comprehensive income.

The estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the statement of comprehensive income as they occur.

(r) Embedded derivativesThe Group does not separately measure embedded derivatives that meet the definition of an insurance contract or embedded options to surrender insurance contracts for a fixed amount (or a fixed amount and an interest rate). All other embedded derivatives are separated and carried at fair value if they are not closely related to the host contract and they meet the definition of a derivative.

(s) Unallocated divisible surplusThe nature of benefits for participating contracts is such that the allocation of surpluses between participating policyholders is uncertain. The amount not allocated at the balance sheet date is classified within liabilities as the unallocated divisible surplus.

(t) Non-participating investment contracts All the non-participating investment contracts issued by the Group are unit-linked. The financial liabilities for these contracts are designated at inception as at fair value through profit or loss. This classification has been used because it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

The fair value of a unit-linked financial liability is determined using the current unit values that reflect the fair values of the financial assets contained within the Group’s unitised investment funds linked to the financial liability, multiplied by the number of units attributed to the contract holder at the balance sheet date.

If the investment contract is subject to a surrender option, the fair value of the financial liability is never less than the amount payable on surrender, discounted for the required notice period, where applicable.



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(u) Premiums received and claims paid on investment contractsFor non-participating investment and hybrid participating investment contracts the amounts received as premiums are not included in the statement of comprehensive income but are accounted for as deposits received and are added to the value of investment contract liabilities in the balance sheet.

Amounts repaid as claims on non-participating investment and hybrid participating investment contracts are not included in the statement of comprehensive income but are accounted for as a deduction from investment contract liabilities.

(v) BorrowingsFinancial instruments that contain an obligation to make interest payments or repayments of principal are classified as borrowings.

Liabilities for borrowings are recognised initially at the fair value of the proceeds received, net of any discount and less attributable transaction costs. Subsequent to initial recognition, borrowings 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. The amortisation charge is included in the statement of comprehensive income within finance costs. An equivalent amount is added to the carrying value of the liability such that at the redemption date the value of the liability equals the redemption value. All borrowing costs are expensed as they are incurred.

(w) ProvisionsA provision is recognised in the balance sheet when there is a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. No provision is established where a reliable estimate of the obligation cannot be made.

A provision for onerous contracts is recognised when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.

(x) Pension costs The Group operates three defined benefit schemes and three defined contribution arrangements.

(i) Defined benefit schemesThe defined benefit schemes provide benefits based on final pensionable pay. The assets of the schemes are held in separate trustee administered funds. The funding position of each scheme is assessed annually by an independent qualified actuary using the projected unit credit method.

The pension scheme asset recognised in the balance sheet is the excess that is recoverable of the fair value of each scheme’s assets over the present value of that scheme’s liabilities. Deficits in the value of a scheme’s assets over its liabilities are recognised in the balance sheet as a pension liability. The net movement in the pension scheme asset or liability, including all actuarial gains and losses, is included within other operating expenses or other operating income as appropriate.

When the benefits of the plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the statement of comprehensive income on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the statement of comprehensive income.

(ii) Defined contribution arrangementsThe Group operates a number of defined contribution arrangements for employees who are not active members of a group defined benefit scheme. The Group pays contractual contributions in respect of these arrangements and such contributions are recognised as an expense as the related employee services are provided.

(y) Foreign currency translationThe primary economic environment in which the Group and the Parent company operate is the United Kingdom. Hence the functional currency of the Group and the Parent company is pounds sterling. Assets and liabilities denominated in foreign currencies are expressed in sterling at the exchange rate ruling on the balance sheet date. Revenue transactions for foreign operations are translated at average rates of exchange for the year. For all other operations, revenue transactions and those relating to the acquisition and realisation of investments have been translated into sterling at the rates of exchange ruling at the time of the respective transactions. Exchange differences arising from the translation of foreign operations are included within the statement of comprehensive income within other operating income or other operating expenses as appropriate. Any other exchange differences are dealt with in the statement of comprehensive income under the same heading as the underlying transactions are reported.


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(z) Segmental reportingOperating segments are reported in a manner consistent with the internal reporting provided 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 Group Board of Directors.

(aa) Use of judgements, estimates and assumptionsThe preparation of financial statements requires management to make judgements in the process of applying the Group’s accounting policies. In selecting accounting policies where IFRS permits a choice of policy, the Directors have applied judgement in determining the most appropriate policy as follows:

• Measurement model for certain assets. IFRS allows a choice of measurement model for financial assets, investment property, property, plant and equipment and, in the Parent company balance sheet, investments in Group entities. This is typically a choice between a cost and a fair value model. The Group and Parent company have applied a fair value model to all these assets, with the exception of loans and receivables and computers, office equipment and vehicles. The fair value model has been used in order to match asset valuations to the valuation of the related policyholder liabilities.

• Measurement model for non-participating investment contracts. As set out in note 1 (t) these liabilities have been valued at fair value in order to match their valuation to the related assets.

• Valuation of financial assets in illiquid markets. The Group closely monitors the valuation of assets in markets that have become less liquid. Determining whether a market is active requires the exercise of judgement and is determined based upon the facts and circumstances of the market for the instrument being measured. Where it is determined that there is no active market, fair value is established using a valuation technique as described in note 1 (j) (ii).

The preparation of financial statements also requires the use of estimates and assumptions that affect the amounts reported in the balance sheet and statement of comprehensive income and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management’s best knowledge of current circumstances and expectations of future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant to the following:

Item Note • Deferred tax 1 (f ) (ii), 34• Intangible assets 1 (h), 18• Fair values of investment property and financial investments 1 (j) (i), (ii), 17, 19• Impairment 1 (n)• Insurance contracts and participating investment contract liabilities 1 (q), 24 to 27• Pension costs 1 (x), 35

2. Segmental informationThe segmental disclosures required under IFRS are based on operating segments that 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.

The activities of each operating segment are described below.

Scottish LifeThe principal activity of Scottish Life is the provision of pensions and other retirement products to individuals and to employer pension schemes in the UK.

Bright Grey/Scottish ProvidentBright Grey/Scottish Provident provides protection products to individuals in the UK.

Royal London RetailRoyal London Retail provided life and protection products through Santander’s UK branch networks. The distribution contract with Santander ceased at the end of June 2011.

Royal London 360°Royal London 360° is the international business of the Group, providing investment, savings and protection products.

Royal London PlusThe principal activity of Royal London Plus is the administration of the Group’s direct-to-customer business.



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Royal London Asset ManagementRoyal London Asset Management is the fund management operation of the Group. It 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.

Central items and otherThis segment comprises Ascentric, MoneyVista, Caledonian Life and centrally held items, such as group functions.

a) Segment profitThe profit measure used by the Group Board of Directors to monitor performance is European Embedded Value (EEV) operating profit before tax. Further detail on the EEV results is given within the EEV section on pages 156 to 167. The EEV operating profit by operating segment is shown in the following table, together with a reconciliation of the total EEV operating profit to the IFRS result before tax.

Group

2012 2011

£m £m

Scottish Life 80 68

Bright Grey/Scottish Provident 42 84

Royal London Retail 3 (5)

Royal London 360° 11 10

Royal London Plus 100 53

Royal London Asset Management 18 34

Central items:

– Gain arising on business combinations – 97

– Other (8) (7)

Total EEV operating profit before tax 246 334

Amortisation of intangibles (12) (15)

Valuation differences between EEV and IFRS (12) (60)

Investment return variances 175 76

Economic assumption changes 83 (162)

Movement in pension scheme surpluses (129) 9

Financing costs (30) (30)

Mutual dividend (88) (88)

IFRS result before tax 233 64

The main reasons for the variances in business unit operating profit from 2011 to 2012 are operating experience and assumption changes. Most notably, Bright Grey/Scottish Provident had £37m favourable operating assumption changes in 2011 which were not repeated in 2012, and Royal London Plus had a total of £36m favourable operating experience and assumption changes in 2012 compared to £(10)m total adverse variances in 2011.

2. Segmental information (continued)

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Group – 2012

UK International Total

£m £m £m

RevenuesNet earned premiums 641 41 682

Fee income from investment and fund management contracts 178 2 180

Investment return 2,974 84 3,058

Other operating income 28 3 31

Total revenues 3,821 130 3,951

Group – 2011

UK International Total

£m £m £m

RevenuesNet earned premiums 665 67 732

Fee income from investment and fund management contracts 152 13 165

Investment return 1,434 (120) 1,314

Gain arising on business combinations 91 – 91

Other operating income 27 12 39

Total revenues 2,369 (28) 2,341

(c) Major customersThe directors consider the Group and Parent company’s external customers to be the individual policyholders. As such, the Group and Parent company are not reliant on any individual customer.

3. Premiums(a) Gross earned premiums

Group

2012 2011

£m £m

Regular premiums– Insurance contracts 799 799– Participating investment contracts 21 25

820 824Single premiums– Insurance contracts 257 242– Participating investment contracts 10 10

267 252

1,087 1,076

2. Segmental information (continued)(b) Geographical analysis


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(b) Premiums received on investment contractsAs set out in note 1(u) the Group does not account for the amounts received as premiums in relation to non-participating and hybrid participating investment contracts as premium income in the statement of comprehensive income. These amounts are accounted for as deposits received and are added to the value of investment contract liabilities in the balance sheet. The amounts received by the Group during the year were £2,390m (2011 £2,405m) in respect of non-participating contracts and £17m (2011 £20m) in respect of hybrid participating contracts.

4. Fee income from investment and fund management contracts

Group

2012 2011

£m £m

Investment contract fees receivable– Annual management charges applied to linked funds 128 95– Policy administration fees 57 62– Bid/offer spread and other charges 6 6– Surrender penalties 4 3

195 166Fund management fees receivable 29 23

224 189Change in deferred fee income (44) (24)

180 165

5. Investment return

Group

2012 2011 £m £m

Investment income from financial investments held at fair value through profit or loss 1,093 1,090Fair value gains from financial investments held at fair value through profit or loss 1,867 36Rental income from investment property 158 125Fair value (losses)/gains from investment property (59) 50Interest income from cash and cash equivalents 17 19Net foreign exchange loss (18) (6)

3,058 1,314

The fair value gains from financial investments held at fair value through profit or loss (FVTPL) and the fair value (losses)/gains from investment property include both the net fair value gain and loss on the revaluation of assets held at the balance sheet date and the gains and losses realised on assets disposed of during the year.

Included within fair value gains from financial investments held at FVTPL are fair value losses of £97m (2011 £79m) arising on assets held for trading.

6. Other operating income

Group

2012 2011 £m £m

Commission income 15 16Increase in defined benefit pension scheme asset (note 35 (d)) – 9Other 16 14

31 39

3. Premiums (continued)

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7. Claims(a) Claims paid

Group

2012 2011 £m £m

Claims paid, before reinsurance– Insurance contracts 1,626 1,597– Participating investment contracts 318 283

1,944 1,880

Reinsurance recoveries– Insurance contracts (247) (208)

Claims paid, after reinsurance– Insurance contracts 1,379 1,389– Participating investment contracts 318 283

1,697 1,672

(b) Claims on investment contractsAs set out in note 1(u) the Group does not account for the amounts paid out as claims in relation to non-participating and hybrid participating investment contracts as a claim expense in the statement of comprehensive income. These amounts are accounted for as deposits repaid and are deducted from the value of investment contract liabilities in the balance sheet. The amounts repaid by the Group during the year totalled £2,017m (2011 £1,226m) in respect of non-participating investment contracts and £55m (2011 £55m) in respect of hybrid participating investment contracts.

8. Administrative expenses by type

Group

2012 2011 £m £m

Acquisition costs– Expenses 126 114– Commission 170 159Movement in deferred acquisition costs on investment contracts (note 18)– Additions (131) (116)– Amortisation and impairment charges 53 54

218 211

Maintenance costs – Operational expenses 101 88– Renewal commission 40 38– Restructuring expenses 11 2– Movement in provision for future commission 47 32

199 160

Other administrative expenses, including long-term incentive plans 35 38

452 409


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9. Administrative expenses by nature

Group2012 2011

£m £m

Staff costs (note 10 (a)) 161 156Movement in deferred acquisition costs on investment contracts (note 18) (78) (62)Acquisition commission 170 159Renewal commission 40 38Depreciation of property, plant and equipment (note 16) 2 3Information systems maintenance and rent 17 15Property costs 12 10Regulatory, professional and administration fees 59 44Movement in provision for future commission 47 32Other expenses 22 14

452 409

Auditors’ remuneration, net of VAT Group

2012 2011 £000 £000

Fees payable to PwC for the audit of the Society and consolidated financial statements 1,221 1,313Fees payable to PwC for other services– Audit of the company’s subsidiaries 577 611– Audit related assurance services 247 229– Tax compliance services 8 4– Tax advisory services 205 132– Other assurance services 571 167– Other non-audit services 206 116

Total 3,035 2,572

The appointment of auditors to the Group’s pension schemes and the fees paid in respect of those audits are agreed by the trustee of each scheme, which act independently from the management of the Group.

Fees in respect of the Royal London Group Pension Scheme – Audit 38 38Fees in respect of the Royal Liver Assurance Superannuation Fund (UK) – Audit 17 13Fees in respect of the Royal Liver Assurance Limited Superannuation Fund (ROl) – Audit 17 13Fees in respect of the Royal Liver Assurance Superannuation Fund (UK) – S179 accounts – 10

Total 72 74

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10. Staff costs(a) Analysis of staff costs

Group

2012

£m

2011Restated

£m

Wages and salaries 125 126Social security contributions 13 12Other pension costs – defined contribution arrangement 4 4Other pension costs – defined benefit scheme (note 35 (d)) 13 8Termination benefits 6 6

161 156

Number Number

The average number of persons (including executive directors) employed by the Group during the year was:Sales and sales support 436 538Administration 2,351 2,154

2,787 2,692

The 2011 comparative figures have been restated to reclassify £3m from wages and salaries to other pension costs – defined contribution arrangement.

(b) Directors’ emoluments

Group

2012 2011£m £m

Total emoluments 4 7Long-term incentives vesting in the year 1 4

Full details of the directors’ emoluments are included in the Directors’ remuneration report on pages 56 to 67. The information included therein, together with the table above, encompasses that required by the Companies Act 2006.

(c) Key management compensation payable Compensation payable to key management, including executive directors, is shown in the table below. The number of key management for the year, including executive and non-executive directors, was 26 for the Group and 22 for the Parent company (2011 26 for the Group and 22 for the Parent company).


2012 2011 2012 2011£m £m £m £m

Salaries, short-term incentive plans and other benefits 8 9 5 7Post employment benefits – defined contribution arrangements – 1 – 1Post employment benefits – defined benefit schemes 1 1 1 1Change in amounts payable under long-term incentive plans 6 7 4 5

15 18 10 14

The ‘Post employment benefits – defined benefit schemes’ comprises the current service cost calculated in accordance with IAS 19, ‘Employee Benefits’. This represents the increase in the present value of the defined benefit obligation in respect of key management arising from their service during the year.

The Group’s policy for determining key management remuneration, including executive directors, is for total remuneration to be at the median of the UK financial services market. Bonus plans are designed to encourage and reward increases in the value of the business for the benefit of members. The total amount receivable by key management, including executive directors, under long-term incentive plans was £4m as at31 December 2012 (2011 £4m). The amount of long-term incentive plans exercised by key management during the year was £9m (2011 £1m).


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11. Investment management expenses

Group

2012 2011

£m £m

Property expenses 19 14Other transaction costs 17 21Costs of in-house investment management operations 34 31Distributions to external unit holders from consolidated funds 65 46Other 21 21

156 133

12. Other operating expenses

Group

2012 2011

£m £m

Operating interest payable 3 3Provisions 6 3Foreign currency translation 4 11Decrease in defined benefit pension scheme asset (note 35(d)) 127 –Impairment on property, plant and equipment (note 16) 2 –Other 11 16

153 33

13. Finance costs

Group

2012 2011

£m £m

Finance costs comprise interest payable arising from:– Subordinated liabilities 25 25– Other interest payable 5 5

30 30

14. Tax credit(a) Tax credit in the statement of comprehensive income

Group

2012 2011

£m £m

Tax has been provided as follows:UK corporation tax charge– Current year (1) –– Adjustments in respect of prior periods (2) –

(3) –

Foreign tax partially relieved against UK corporation tax 12 10Deferred tax (note 34 (a)) (36) (34)

(27) (24)

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14. Tax credit (continued)(b) Reconciliation of the effective tax rateTax on the Group’s result before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to the profits of the consolidated companies as follows:

Group

2012 2011

£m £m

Result before tax 233 64

Tax calculated at the standard rate of corporate tax in the UK 47 13

Due to a different basis of tax applying to UK Mutual life assurance business (72) (37)Due to adjustments in respect of prior periods (2) –

Tax credit for the year (27) (24)

UK corporation tax in the statement of comprehensive income has been calculated at a rate of 20% (2011 20%) on the taxable profits in respect of insurance business of the long-term fund, 24.5% (2011 26.5%) on the taxable profits in respect of Permanent Health Insurance business of the long-term fund and the subsidiaries of the long-term fund.

The Finance Act 2012 reduced the rate of corporation tax from 24% to 23% effective from 1 April 2013. The impact of this reduction in tax rate, which is applicable to the calculation of deferred tax assets and liabilities at the reporting date, is reflected in the deferred tax credit above. Future reductions in the tax rate which have been announced but have not yet been substantively enacted have not been reflected in the calculation of deferred tax.

15. Parent company statement of comprehensive incomeThe Parent company has taken advantage of the exemption under Section 408 of the Companies Act 2006 not to include a parent company statement of comprehensive income. The Parent company is a mutual company and consequently the profit for the year is reported as £nil after a transfer to or from the unallocated divisible surplus.


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16. Property, plant and equipment

Group – 2012

Owner-occupied land and buildings

Computers, office equipment and

vehicles Total

£m £m £m

Cost or valuation

At 1 January 55 78 133

Additions – 6 6

Transfers to investment property (5) – (5)At 31 December 50 84 134

Accumulated depreciation and impairment losses

At 1 January (17) (71) (88)

Depreciation charge – (2) (2)

Impairment losses (2) – (2)At 31 December (19) (73) (92)

Net book valueAt 1 January 38 7 45

At 31 December 31 11 42

Group – 2011

Owner-occupied land and buildings

Computers, office equipment and vehicles Total

£m £m £m

Cost or valuation


Acquired through business combinations 10 1 11

Other additions – 4 4

Transfers to investment property (6) – (6)


Accumulated depreciation and impairment losses

At 1 January (17) (68) (85)

Depreciation charge – (3) (3)

At 31 December (17) (71) (88)

Net book value



For the purposes of the disclosure required by IAS 1, ‘Presentation of Financial Statements’, all property, plant and equipment held by the Group is classified as being held for more than 12 months from the balance sheet date. The Parent company did not hold any property, plant and equipment at the balance sheet date or at the previous balance sheet date.

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Owner-occupied land and buildings shown above are held on a freehold basis. If the owner-occupied land and buildings were stated on a historical cost basis, the amounts would be as follows:

Group

2012 2011

£m £m

Cost 40 47

Accumulated depreciation and impairment losses (17) (17)

Net book value 23 30

17. Investment property


2012 2011 2012 2011

£m £m £m £m

Fair value

At 1 January 2,259 1,877 2,191 1,812

Additions

– Capitalised expenditure on existing properties 26 18 26 18

– Acquisition of new properties 145 112 145 112

Disposals (57) (71) (57) (71)

Net (loss)/gain from fair value adjustments (59) 44 (71) 37

Transfers from property, plant and equipment 5 6 – –

Acquired through business combinations – 273 – 283

At 31 December 2,319 2,259 2,234 2,191

Rental income from investment property 158 125 165 120

Direct operating expenses arising from investment property 19 14 19 13

Included in the Group value at 31 December 2012 is £106m in respect of the property held by the Group’s Southpoint joint venture (see note 20 (c)). During the year, as part of the ongoing management of the Group’s portfolio, the decision was made to dispose of the property. Contracts were exchanged for the sale on 12 December 2012 and the sale completed on 9 January 2013.

For the purposes of the disclosure required by IAS 1, the amount of investment property at the balance sheet date that is classified as being held for more than 12 months is £2,124m for the Group (2011 £2,248m) and £ 2,145m for the Parent company (2011 £2,181m).

The fair value of investment property above includes £443m (2011 £436m) for the Group and £336m (2011 £341m) for the Parent company held under finance leases.

The direct operating expenses shown above all related to properties that generated income. There were no direct operating expenses in either the current or the prior year in respect of properties that did not generate income.

Investment property is revalued to fair value annually with an effective date of 31 December. The fair values are determined by a registered independent valuer having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. The principal valuers used were CB Richard Ellis, BNP Paribas Real Estate and Knight Frank LLP. Fair value is based on current prices in an active market for similar properties in the same location and condition. Where there is no such market, estimated future cash flows are taken into consideration. Current lease arrangements, which were entered into on an arm’s length basis and which are comparable to those for similar properties in the same location, are taken into account in the valuation. The net (losses)/gains from fair value adjustments shown above represents the net fair value (losses)/gains on the revaluation of properties held at the balance sheet date. It does not include gains or losses realised on properties disposed of during the year.

Investment properties are leased to third parties under operating leases. Under the terms of certain leases, the company is required to repair and maintain the related properties. At the balance sheet date the future minimum lease payments receivable under non-cancellable leases are shown in the following table. For the purposes of this table, the minimum lease period has been taken as the period to the first possible date that the lease can be terminated by the lessee.


16. Property, plant and equipment (continued)

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17. Investment property (continued)These total future minimum lease payments receivable can be analysed as follows:


2012 2011 2012 2011

£m £m £m £m

Not later than one year 116 126 116 120

Later than one year and not later than five years 368 419 368 395

Later than five years 377 460 377 407

861 1,005 861 922


2012 2011 2012 2011

£m £m £m £m

Freehold 725 756 725 756

Leasehold 136 249 136 166

861 1,005 861 922

18. Intangible assetsThe following tables show the movements in the intangible assets of the Group and the Parent company.

Group – 2012

Goodwill

Acquired PVIF on

investment contracts

Acquired PVIF on

insurance contracts

Deferred acquisition

costs on investment

contracts

Other intangible

assets Total

£m £m £m £m £m £m

CostAt 1 January 254 429 921 756 204 2,564Additions – – – 131 1 132

At 31 December 254 429 921 887 205 2,696

Accumulated amortisation and impairment lossesAt 1 January – (332) (743) (280) (100) (1,455)Amortisation charge – (41) (34) (53) (23) (151)Impairment losses – – (7) – – (7)

At 31 December – (373) (784) (333) (123) (1,613)

Net book valueAt 1 January 254 97 178 476 104 1,109

At 31 December 254 56 137 554 82 1,083

The net book value of intangible assets at 31 December 2012 can be analysed between amounts expected to be amortised:

Within 12 months – 24 24 59 22 129In more than 12 months 254 32 113 495 60 954

254 56 137 554 82 1,083

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Group – 2011

Goodwill

Acquired PVIF on


Acquired PVIF on

insurance contracts

Deferred acquisition costs

on investment contracts

Other intangible

assets Total£m £m £m £m £m £m

CostAt 1 January 254 412 899 640 204 2,409Acquired through business combinations – 17 22 – – 39Other additions – – – 116 – 116

At 31 December 254 429 921 756 204 2,564

Accumulated amortisation and impairment lossesAt 1 January – (298) (700) (226) (74) (1,298)Amortisation charge – (25) (38) (52) (25) (140)Impairment losses – (9) (5) (2) (1) (17)

At 31 December – (332) (743) (280) (100) (1,455)

Net book valueAt 1 January 254 114 199 414 130 1,111

At 31 December 254 97 178 476 104 1,109



254 97 178 476 104 1,109

18. Intangible assets (continued)


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Parent company – 2012

Goodwill

Acquired PVIF on


Acquired PVIF on

insurance contracts

Deferred acquisition

costs on investment

contracts

Other intangible

assets Total

£m £m £m £m £m £m

CostAt 1 January 232 410 891 673 138 2,344Additions – – – 106 – 106

At 31 December 232 410 891 779 138 2,450

Accumulated amortisation and impairment lossesAt 1 January – (319) (731) (246) (63) (1,359)Amortisation charge – (35) (33) (55) (11) (134)

At 31 December – (354) (764) (301) (74) (1,493)

Net book valueAt 1 January 232 91 160 427 75 985

At 31 December 232 56 127 478 64 957



232 56 127 478 64 957


Goodwill

Acquired PVIF on


Acquired PVIF on

insurance contracts



Other intangible

assets Total

£m £m £m £m £m £m

Cost

At 1 January 232 393 869 575 138 2,207Acquired through business combinations – 17 22 – – 39Other additions – – – 98 – 98

At 31 December 232 410 891 673 138 2,344

Accumulated amortisation and impairment losses

At 1 January – (287) (690) (200) (48) (1,225)Amortisation charge – (23) (36) (46) (15) (120)Impairment losses – (9) (5) – – (14)

At 31 December – (319) (731) (246) (63) (1,359)

Net book valueAt 1 January 232 106 179 375 90 982

At 31 December 232 91 160 427 75 985


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Goodwill

Acquired PVIF on


Acquired PVIF on

insurance contracts



Other intangible

assets Total

£m £m £m £m £m £mWithin 12 months – 18 33 48 11 110In more than 12 months 232 73 127 379 64 875

232 91 160 427 75 985

(a) Goodwill Goodwill is the only intangible asset that has an indefinite useful life. The carrying value of £254m comprises £123m recognised on the acquisition of the former Resolution businesses and assets in 2008 (2011 £123m), £110m (2011 £110m) in respect of the acquisition of Scottish Life in 2001, £3m (2011 £3m) in relation to a cash management business and £18m (2011 £18m) relating to the acquisition of Investment Funds Direct Group Limited and Investment Sciences Limited.

Goodwill is tested for impairment annually. The impairment test involves comparing the carrying value of the goodwill to its recoverable amount on a cash-generating unit basis. The recoverable amount of the goodwill has been determined using a value-in-use calculation. This is determined as the present value of the expected profits arising from the future new business written by the relevant business unit. The key assumptions used for the value-in-use calculations are as follows:

• Expected profits from future new business are based on the medium-term plan approved by the Board of Directors, which covers a five-year period, and as such reflect the best estimate of future profits based on both historical experience and expected growth rates. Some of the assumptions that underlie the budgeted expected profits include customer numbers, premium rate and fee income changes, claims inflation and commission rates.

• Growth rates – Cash flows beyond that period have been assumed to grow at a steady rate of between 2.5% and 3.0% per annum (2011 2.5% to 3.0%).

• Discount rates – The cash flows have been discounted using a risk-adjusted discount rate of 6.1% (2011 7.8%).

The recoverable amount significantly exceeds the carrying amount of the goodwill and a reasonably possible change in a key assumption will not cause the carrying value of the goodwill to exceed its recoverable amount.

(b) Other intangible assetsOther intangible assets consist of distribution channel relationships, investment management contracts, policy administration rights acquired as part of the acquisition of the former Resolution businesses and assets in 2008 and software licences. They are being amortised over their expected useful lives of between three and ten years.

19. Financial investments


2012 2011 2012 2011

£m £m £m £m

Financial investments held at fair value through profit or loss (FVTPL) – Classified as held for trading 100 525 96 498 – Designated as FVTPL 31,619 30,571 18,866 17,036

31,719 31,096 18,962 17,534



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19. Financial investments (continued)For the purposes of the disclosure required by IAS 1, it has been assumed that financial investments will be realised in order to settle the claims expected to arise during the 12 months following the balance sheet date. On this basis, the amount of financial investments at the balance sheet date that are classified as being held for more than 12 months is £28,191m for the Group (2011 £28,479m) and £14,544m for the Parent company (2011 £15,404m).

The Parent company includes within its investment portfolio a significant holding in OEICs and other investment funds managed by subsidiary companies. Those funds in which the Parent company holds 50% or more are classified as subsidiaries (‘consolidated funds’). The Parent company’s investment in these consolidated funds is shown in note 20 and is not included in the Parent company figures below. On consolidation, the underlying investments of the consolidated funds are included within the appropriate investment line in the balance sheet and are therefore included in the Group figures shown below.

(a) Financial investments classified as held for trading


2012 2011 2012 2011 £m £m £m £m

Derivatives (note 19 (d))

– Unquoted 100 525 96 498

100 525 96 498

(b) Financial investments designated as FVTPL


2012 2011 2012 2011

£m £m £m £m

Equity securities– Quoted 11,520 12,445 3,726 4,661– Unquoted 312 299 303 290

11,832 12,744 4,029 4,951

Debt and fixed-income securities– Government bonds 8,386 8,788 7,219 7,032– Other quoted 6,027 5,983 3,549 3,227– Loans secured by policies 12 14 12 14– Deposits with credit institutions 564 492 501 464– Other unquoted 170 155 144 126

15,159 15,432 11,425 10,863

Other investments– Unit trusts and other pooled investments 4,628 2,395 3,412 1,222

Total financial investments designated as FVTPL 31,619 30,571 18,866 17,036

Included in the figures for Government bonds above are corporate bonds, issued by companies and guaranteed by their respective governments, of £40m for the Group (2011 £56m) and £33m for the Parent company (2011 £43m).

(c) Derivative financial instrumentsThe Group and Parent company utilise derivative instruments to hedge market risk (see note 40), for efficient portfolio management and for the matching of liabilities to policyholders. Derivatives are either ‘exchange-traded’ (regulated by an exchange), which have a quoted market price, or ‘over-the-counter’ (individually negotiated between the parties to the contract), which are unquoted.

The Group is exposed to credit risk on the carrying value of derivatives in the same way as it is exposed to credit risk on other financial investments. To mitigate this risk, a portion of the fair value of the derivatives held by the Group at any point in time is matched by collateral and cash margin received from the counterparty to the transaction. Cash margin is collateral in the form of cash. Initial cash margin is exchanged at the outset of the contract. Variation margin is exchanged during the life of the contract in response to changes in the value of the derivative. Further details are given in note 19 (e). The remaining credit risk is managed within the Group’s risk management framework, which is discussed further in note 40.

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(c) Derivative financial instruments (continued) The Group and Parent company utilise the following derivatives:

Options and warrantsOptions are contracts under which the seller grants the buyer the right, but not the obligation, to buy or to sell a specific amount of a financial instrument at a predetermined price, at or by a set date, or during a set period. The Group uses equity options to manage its exposure to fluctuations in equity markets and to back certain products which include a guaranteed investment return based on equity values. Warrants give the holder the right to purchase a particular equity at a specified price.

FuturesA futures contract is an agreement to buy or sell a given quantity of a financial instrument, at a specified future date at a pre-determined price. The Group uses futures to manage its exposure to fluctuations in equity markets.

Inf lation swapsAn inflation swap is a contract under which inflation-indexed payments are exchanged for fixed interest payments based on an agreed principal amount. Only the net interest payments are exchanged. No exchange of principal takes place. The Group uses inflation swaps to manage the inflation exposure of its inflation-indexed bonds.

Interest rate swapsAn interest rate swap is a contract under which interest payments at a fixed interest rate are exchanged for interest payments at a variable interest rate (or vice versa) based on an agreed principal amount. Only the net interest payments are exchanged. No exchange of principal takes place.

SwaptionsSwaptions are options to enter into an interest rate swap at a future date, and are used to limit exposure to fluctuations in interest rates over the long term.

Swaptions and interest rate swaps are used to mitigate the interest rate risk inherent in guaranteed annuity rates granted by the Group. The derivatives give the Group the right to swap floating rate cash receipts for fixed rate receipts in the future, enabling the Group to hedge its obligation to make future annuity payments at a fixed rate.

Credit default swapsA credit default swap is a contract under which the purchaser pays a periodic premium in exchange for a contingent payment in the event of a credit default occurring in an agreed underlying asset. The Group uses credit default swaps to manage the credit exposure of its fixed rate financial assets.

Currency forwardsA currency forward is a contract to exchange an agreed amount of currency at a specified exchange rate and on a specified date. The Group uses currency forwards to reduce exposure to movements in exchange rates.

(d) Fair value of derivative instruments held

Group

2012 2011

Contract/ notional amount

Fair values Contract/ notional amount

Fair values

Assets Liabilities Assets Liabilities

£m £m £m £m £m £m

Equity options and warrants 295 39 – 418 129 –Inflation swaps – – – 25 – (21)Interest rate swaps 921 45 (75) 3,168 372 (191)Interest rate swaptions 1,179 15 – 1,409 22 –Credit default swaps 15 – – 67 1 –Currency forwards 409 1 (1) 744 1 (3)

Total derivative assets/(liabilities) 100 (76) 525 (215)

19. Financial investments (continued)


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19. Financial investments (continued) (d) Fair value of derivative instruments held (continued)

Parent company

2012 2011

Contract/ notional amount

Fair values Contract/ notional amount

Fair values

Assets Liabilities Assets Liabilities

£m £m £m £m £m £m

Equity options and warrants 201 36 – 326 125 –Inflation swaps – – – 25 – (20)Interest rate swaps 823 44 (45) 2,916 349 (147)Interest rate swaptions 1,179 15 – 1,409 23 –Credit default swaps 15 – – 67 1 –Currency forwards 366 1 (1) 697 – (3)

Total derivative assets/(liabilities) 96 (46) 498 (170)

In addition to the above, the Group and Parent company make use of futures contracts. At 31 December 2012, the Group and Parent company had entered into equity futures trades giving exposure to equities with a notional value of Group £152m (2011 £157m) and Parent company £1m (2011 £1m). The equity futures had no market value at that date because all variation margin on these contracts is settled on a daily basis.

The Group paid initial cash margin of £8m (2011 £11m) and Parent company £nil (2011 £nil) in respect of these trades, which is included within ‘loans and receivables’. The net variation margin payable by the Group and the Parent company at 31 December 2012 was £1m (2011 £1m), being the amount due for the movement on the last business day of 2012, which was settled on the first business day in 2013. Variation margin receivable is included within ‘loans and receivables’ and variation margin payable is included within ‘payables and other financial liabilities’.

(e) Collateral and other arrangements(i) Stock loan agreementsThe Group and Parent company have entered into a number of stock lending transactions that transfer legal title to third parties, but not the exposure to the income and market value movements arising from those assets. As a result, the Group and Parent company retain the risks and rewards of ownership and the assets continue to be recognised in full on the Group and Parent company balance sheets. There are no restrictions arising from the transfers.

The assets transferred under these agreements are secured by the receipt of collateral. The level of collateral held is monitored regularly and adjusted as necessary to manage exposure to credit risk.

The collateral received was in the form of UK, US, Japanese and European government bonds and quoted equities. It may be sold or re-pledged in the absence of default. No collateral was sold or re-pledged in the year (2011 £nil) and there were no defaults in the year (2011 none).

The following table shows the assets within the Group and Parent company balance sheets that have been transferred under stock loan agreements and the related collateral received.


2012 2011 2012 2011

£m £m £m £m

Stock loan agreements– Listed equities 850 539 237 74– Corporate bonds 53 133 46 93– Government bonds 1,105 1,583 1,030 1,318

2,008 2,255 1,313 1,485

Collateral received 2,101 2,363 1,368 1,550

(ii) Other collateral receivedCollateral was also received in respect of derivatives. Non-cash collateral was £3m (2011 £108m) for the Group and £1m (2011 £97m) for the Parent company. The collateral received was in the form of UK, US, Japanese and European government bonds and quoted equities. It may be sold or re-pledged in the absence of default. No collateral was sold or re-pledged in the year (2011 £nil) and there were no defaults in the year (2011 none).

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(ii) Other collateral received (continued)Cash margin was £50m (2011 £249m) for both the Group and the Parent company. Cash margin received is included within ‘cash and cash equivalents’, with an offsetting liability included within ‘payables and other financial liabilities’.

The market value of derivatives in respect of which collateral and cash margin was received was £47m for the Group (2011 £350m) and £46m for the Parent company (2011 £342m).

(iii) Assets pledged as collateralThe Group pledged £nil (2011 £24m) and the Parent company £nil (2011 £23m) assets as collateral in respect of derivative contracts. In 2011, the assets pledged were in the form of UK government bonds. The corresponding derivative liability is included within ‘payables and other financial liabilities’, and amounted to £1m (2011 £24m) for the Group and £1m (2011 £24m) for the Parent company.

In addition, the Group and Parent company paid £1m (2011 £3m) of initial and variation cash margin in respect of derivatives.

(f ) Fair value methodology

Financial investments held at fair value have been classified using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The position assigned to the asset or liability in the fair value hierarchy has to be determined by the lowest level of any input to its valuation that is considered to be significant to the valuation of the asset or liability in its entirety. The hierarchy only reflects the methodology used to derive the asset’s or liability’s fair value. It does not directly reflect the investment quality of the instrument. The three levels of the hierarchy are as follows:

Level 1 – Quoted prices in active markets Inputs to level 1 fair values are quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is one in which transactions occur with sufficient frequency and at sufficient volumes to provide pricing information on an ongoing basis.

Level 2 – Inputs other than quoted prices included within level 1 that are observableInputs to level 2 fair values are those other than quoted prices included within level 1, that are observable for the asset or liability, either directly as prices or indirectly, i.e. derived from prices. Level 2 inputs include:• Quoted prices for identical assets in markets that are not active;• Quoted prices for similar assets in active markets;• Inputs to valuation models that are observable for the asset. For example interest rates and yield curves observable at commonly quoted

intervals, volatilities, prepayment spreads, loss severities, credit risks and default rates.

Level 3 – Inputs not based on observable dataInputs to level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs are typically used where observable inputs are not available.

The Group and Parent company’s financial investments and derivative liabilities classified into the three levels of the fair value hierarchy are shown in the following tables.

19. Financial investments (continued) (e) Collateral and other arrangements (continued)


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19. Financial investments (continued)(f ) Fair value methodology (continued)

Group – 2012

Level 1 Level 2 Level 3 Total

£m £m £m £m

Derivative assets – – 100 100Equity securities– Quoted 11,487 33 – 11,520– Unquoted – – 312 312Debt and fixed-income securities– Government bonds 7,270 1,116 – 8,386– Other quoted – 5,842 185 6,027– Loans secured by policies – – 12 12– Other unquoted – 41 129 170Other investments– Unit trusts and other pooled investments 4,240 381 7 4,628

22,997 7,413 745 31,155

– Deposits with credit institutions – – – 564

Total financial investments 22,997 7,413 745 31,719

74% 24% 2% 100%Derivative liabilities (note 30) – – (76) (76)

Group – 2011


£m £m £m £m


22,294 7,147 1,163 30,604

Deposits with credit institutions – – – 492

Total financial investments 22,294 7,147 1,163 31,096

73% 23% 4% 100%Derivative liabilities (note 30) – (3) (212) (215)

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£m £m £m £m


12,914 4,887 660 18,461


Total financial investments 12,914 4,887 660 18,962

70% 26% 4% 100%Derivative liabilities (note 30) – – (46) (46)



£m £m £m £m


11,710 4,321 1,039 17,070


Total financial investments 11,710 4,321 1,039 17,534

69% 25% 6% 100%

Derivative liabilities (note 30) – (3) (167) (170)

Level 1 financial instruments are mainly equity securities listed on a recognised exchange, UK government bonds and quoted unit trusts in active markets.

Level 2 financial instruments are mainly listed corporate bonds and overseas government bonds. Corporate bonds have generally been classified as level 2 as the prices provided by third-party pricing sources do not meet the definition of level 1 as they include inputs which are not based on actual transaction prices.

Level 3 financial instruments include interests in private equity funds, listed corporate bonds for which prices are not available or for which the available prices are considered to be stale and unquoted bonds valued using a single broker quote or internal models that incorporate unobservable inputs. The derivative instruments included in level 3 are unquoted instruments, valued using internal models.

19. Financial investments (continued) (f ) Fair value methodology (continued)


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19. Financial investments (continued)(f ) Fair value methodology (continued) The movements during the year in the level 3 instruments are shown in the table below:

2012


Financial investments

Derivative liabilities



£m £m £m £m

At 1 January 1,163 (212) 1,039 (167)Purchases 144 (8) 99 (8)Sales (368) – (341) –Net gains and (losses) recognised in profit or loss (194) 144 (137) 129

At 31 December 745 (76) 660 (46)

‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date 53 (8) 51 (8)

2011






£m £m £m £m

At 1 January 1,002 (95) 953 (67)Acquired through business combinations 171 – 171 –Purchases 145 (1) 65 –Sales (505) – (477) –Net gains and (losses) recognised in profit or loss 350 (116) 327 (100)

At 31 December 1,163 (212) 1,039 (167)

‘Net gains and (losses) recognised in profit or loss’ that relate to assets still held at the balance sheet date 184 (116) 160 (100)

The ‘Net gains and (losses) recognised in profit and loss’ shown above are included within the statement of comprehensive income within ‘Investment return’.

Transfers from level 2 to level 1 of £3m for the Group and £1m for the Parent company were made in the year (2011 £nil).

Only a small proportion of the Group and Parent company’s assets are valued at a fair value derived using unobservable, level 3 inputs. The derivative assets are valued using a combination of internal models and external counterparty valuations. A sensitivity analysis is not provided as the overall impact on the UDS or result for the year from changes to key assumptions would not be material.

The majority of the remaining assets are valued using valuations obtained from external parties which are reviewed internally to ensure that they are appropriate. The Group has limited access to the key assumptions and data underlying these valuations, however management have performed an assessment to conclude that changing one or more of the assumptions used in the valuation would not have a material effect on the financial statements and therefore no sensitivity analysis has been presented.

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(g) Sovereign debt exposures

Included within the Group and Parent company’s government bonds are the following exposures to sovereign debt shown by country:


2012 2011 2012 2011

£m £m £m £m

UK 7,270 7,581 6,187 5,939

Germany 310 235 297 231

France 193 173 192 172

Ireland 3 1 1 1

Italy 20 72 19 72

Portugal – 2 – 2

Spain 12 7 12 7

Slovenia 24 38 23 37

Belgium 32 42 32 42

Austria 39 59 39 59

Finland 2 21 2 21

Holland 78 50 77 50

Other Europe 26 19 12 13

USA 109 72 100 67

Canada 22 12 15 11

Japan 83 70 79 66

Rest of world 12 10 12 10

Total 8,235 8,464 7,099 6,800

The Group’s exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain represents less than 1% (2011 less than 1%) of the total investment portfolio.

20. Investments in Group entitiesThe Parent company’s investments in Group entities comprise:

Parent company

2012 2011

£m £m

Shares 308 282Loans 45 47OEICs and other investment funds 7,612 8,089

7,965 8,418

Investments in Group entities are carried in the balance sheet at fair value. For the purposes of the disclosure required by IAS 1, all of the investments in Group entities held at the balance sheet date are classified as being held for more than 12 months.

The OEICs and other investment funds represent the Parent company’s investment in funds in which it holds 50% or more and which are managed by subsidiaries of the Group.

19. Financial investments (continued)


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20. Investments in Group entities (continued)(a) Significant subsidiaries The Parent company has the following significant subsidiaries, all of which are incorporated in England and Wales or Scotland with the exception of Royal London 360° Insurance Company Limited, which is incorporated on the Isle of Man:

% Holding

Name 2012 2011 Nature of business

Royal London Asset Management Limited 100.0 100.0 Investment management

Royal London Unit Trust Managers Limited 100.0 100.0 Unit trust management

Royal London Savings Limited 100.0 100.0 ISA management

Royal London 360° Insurance Company Limited 100.0 100.0 Life assurance

Royal London Pooled Pensions Company Limited 100.0 100.0 Pension fund management

RL Finance Bonds plc 100.0 100.0 Finance company

Wrap IFA Services Limited 90.1 90.1 Wrap platform management

Unit Trusts and OEICs reported as subsidiaries under IFRS:

– The Royal London Sterling Credit Fund 61.1 69.1 OEIC

– The Royal London UK Mid Cap Growth Fund 65.0 63.0 OEIC

– The Royal London UK Opportunities Fund 94.1 95.4 OEIC

– The Royal London European Income Fund 99.8 99.9 OEIC

– The Royal London Japan Growth Fund 98.6 98.7 OEIC

– The Royal London FTSE 350 Fund 81.1 81.5 OEIC

– The Royal London US Index Tracker Fund 80.7 74.8 OEIC

– The Royal London UK All Share Tracker Fund 95.9 97.0 OEIC

– The Royal London UK Government Bond Fund1 n/a 59.8 OEIC

– The Royal London Index Linked Fund 72.3 65.2 OEIC

– The Royal London Corporate Bond Fund1 n/a 60.1 OEIC

– The Royal London UK Growth Fund 76.3 72.9 OEIC

– The Royal London European Growth Fund 90.6 91.8 OEIC

– The Royal London Equity Income Fund1 n/a 56.9 OEIC

– The Royal London UK Equity Fund 88.9 88.1 OEIC

– The Royal London Far East Fund 99.2 99.2 OEIC

– The Royal London UK Smaller Companies Fund 99.9 100.0 OEIC

– The Royal London Cash Plus Fund 61.1 100.0 OEIC

– The Corporate Bond Fund2 n/a 100.0 OEIC

– The Global Equity Fund2 n/a 100.0 OEIC

– Growth Portfolio Fund2 n/a 86.0 OEIC

– UK Fixed Interest Fund2 n/a 77.3 OEIC

– UK Equity Growth Trust2 n/a 100.0 Unit trust

1 The Parent company’s holding in these OEICs has fallen below 50% and therefore they have not been accounted for as subsidiaries as at 31 December 2012.

2 These OEICs and the unit trust were treated as subsidiary undertakings following the acquisition of Royal Liver Assurance Limited on 1 July 2011. They were wound up during 2012 with the underlying investments transferred to the Parent company.

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(b) Fair value methodologyThe investments in Group entities have been classified into the fair value hierarchy (see note 19 (f )) as shown in the table below.


Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Shares – – 308 308Loans – – 45 45OEICs and other investment funds 7,612 – – 7,612

7,612 – 353 7,965


Level 1 £m

Level 2 £m

Level 3 £m

Total £m

Shares – – 282 282Loans – – 47 47OEICs and other investment funds 8,089 – – 8,089

8,089 – 329 8,418

The movement in the level 3 assets during the year is shown in the table below:


Shares Loans

£m £m

At 1 January 282 47Additions – 7Repayment of loans – (1)Net gains or (losses) recognised in profit or loss 26 (8)

At 31 December 308 45


Shares Loans

£m £m

At 1 January 260 58Acquired through business combinations 8 –Other additions 7 –Repayment of loans – (3)Net gains or (losses) recognised in profit or loss 7 (8)

At 31 December 282 47

The ‘Net gains or (losses) recognised in profit or loss’ shown above are included in the statement of comprehensive income within ‘Investment return’. The amount of those ‘Net gains or (losses) recognised in profit or loss’ that relates to assets still held at the balance sheet date is a gain of £18m (2011 loss of £1m).

Changing one or more of the inputs to the level 3 valuation to reasonably possible alternatives would not result in a material change to the valuation of those assets.

20. Investments in Group entities (continued)


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(c) Interests in joint ventures The Group has the following interests in joint ventures, which have been accounted for by the Group using proportional consolidation.

Group and Parent company

% Holding

Name 2012 2011 Nature of business

Southpoint General Partner Limited 50 50 Property developmentRLW Estates Limited 50 50 Property development

The following table shows the total assets, liabilities, income and expenses relating to the Group’s interests in joint ventures.

Group

2012 2011

£m £m

Current assets 108 17Long-term assets – 95

108 112

Current liabilities (108) (107)Long-term liabilities (2) (2)

(110) (109)

Income 6 4

Expenses (8) (19)

21. Acquisitions and corporate transactions(a) Prior year acquisition of Royal Liver Assurance LimitedOn 1 July 2011, the Group acquired the entire long-term business and all the assets and liabilities of Royal Liver Assurance Limited (Royal Liver) by way of a transfer undertaken in accordance with Section 86 of, and Schedule 15 to, the Friendly Societies Act 1992.

There was no cash consideration payable in respect of this transfer. However, the Royal London Open Fund is obliged to provide capital support to the Royal Liver Sub-Fund if in deficit, which is therefore contingent consideration. The fair value of this contingent consideration was deemed to be £nil, as the possibility of capital support being needed to support the Royal Liver closed fund in the long term, having taken any appropriate and available management actions, was considered to be remote.

The Royal Liver business is closed to new business, with the exception of protection contracts written in the Republic of Ireland under the ‘Caledonian’ brand. As part of the transfer, a new sub-fund of the Royal London fund was formed for the benefit of Royal Liver policyholders with policies in-force on the date of transfer. All Caledonian business written after the transfer date is being written into the Royal London Open Fund. Under the terms of the transfer the Royal Liver sub-fund is maintained in accordance with a fixed charging structure for administration and asset management services for an agreed period.

This transaction gave rise to a gain of £91m (net of tax), being the excess of the fair value of net assets acquired over the consideration.

(b) Corporate transactionsOn 18 March 2013, Royal London signed a binding Sale and Purchase Agreement (SPA) to acquire Co-operative Insurance Society Limited along with its subsidiaries and The Co-operative Asset Management Limited by way of a share purchase. Should all the conditions precedent set out in the SPA be met, including a successful member vote on the acquisition and the granting of Change in Control by the FSA, the acquisition will complete upon the transfer of shares from The Co-operative Banking Group to The Royal London Mutual Insurance Society Limited, at which point Royal London will take control of these entities. Once completed, this transaction is expected to increase Royal London’s funds under management from £50bn to circa £70bn and our customer base will increase from 4 million to 6 million. As the transaction had not completed by the date of approval of these financial statements the disclosures required by paragraph 59 (b) of IFRS 3, ‘Business Combinations’ have not been given.

20. Investments in Group entities (continued)

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Group Parent company2012 2011 2012 2011

£m £m £m £m

Amounts due from customers 18 25 16 18Receivables arising under reinsurance contracts 18 19 16 19Investment income receivable 58 66 40 26Amounts due from brokers 63 110 29 32Finance lease receivables 12 14 12 14Amounts due from other Group entities – – 3 5Prepayments and accrued income 42 48 7 8Other receivables 66 71 51 55

277 353 174 177

Expected to be recovered within 12 months 266 336 163 160Expected to be recovered in more than 12 months 11 17 11 17

277 353 174 177

Loans and receivables are carried in the balance sheet at amortised cost. Their fair values are not materially different from the values shown above.

Finance lease receivables The Group and the Parent company have leased to third parties a number of properties under long-term leases, which are classified as finance leases. The terms of the finance leases entered into range from 150 to 240 years.


2012 2011 £m £mReceivables under finance leases – minimum lease receipts:Not later than one year 1 1Later than one year and not later than five years 5 5Later than five years 24 30

30 36Less: future charges (18) (22)

Present value of receivables under finance leases 12 14

Present value of receivables under finance leases:Not later than one year 1 1Later than one year and not later than five years 4 4Later than five years 7 9

12 14

23. Cash and cash equivalents


2012 2011 2012 2011

£m £m £m £m

Bank balances 812 515 530 183Short-term bank deposits 2,086 1,952 1,561 1,475Short-dated debt 3 45 – 38

2,901 2,512 2,091 1,696

All cash balances are due within one year. There are no restrictions on the transferability of these balances except to the extent that some of the deposits are for fixed terms of up to 3 months. The effective interest rate on the short-term bank deposits was 0.8% (2011 1.21%) for the Group and 0.45% (2011 0.70%) for the Parent company. The average maturity of the short-term bank deposits was 26 days (2011 26 days) for the Group and 8 days (2011 19 days) for the Parent company.

22. Loans and receivables


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23. Cash and cash equivalents (continued)The cash and cash equivalents for the purposes of the statements of cash flows are as follows:


2012 2011 2012 2011

£m £m £m £m

Cash and cash equivalents 2,901 2,512 2,091 1,696Bank overdrafts (7) (17) (7) (12)

Cash and cash equivalents in the statements of cash flows 2,894 2,495 2,084 1,684

24. Insurance contract liabilities and reinsurance assetsThe movement in insurance contract liabilities and reinsurance assets in the year is shown in the following tables.

Group – 2012

Insurance contract liabilities, gross of reinsurance

Reinsurers’ share of insurance liabilities

Insurance contract liabilities, net of reinsurance

ParticipatingNon-

participating ParticipatingNon-


participating

£m £m £m £m £m £m

At 1 January 11,981 4,326 – (1,043) 11,981 3,283

Expected changes during the year (820) (202) – (31) (820) (233)

Expected closing position 11,161 4,124 – (1,074) 11,161 3,050

New business 120 88 – (150) 120 (62)

Experience variationsDemographic 60 46 – 16 60 62Economic 483 76 – 12 483 88

543 122 – 28 543 150

Changes in assumptionsDemographic 2 (45) – 26 2 (19)Expense 9 (31) – – 9 (31)Economic (112) 13 – (7) (112) 6Management actions 44 – – – 44 –Methodology 13 (24) – 18 13 (6)

(44) (87) – 37 (44) (50)

Other movementsClaims outstanding – 2 – – – 2Other (63) (180) – – (63) (180)

(63) (178) – – (63) (178)

At 31 December 11,717 4,069 – (1,159) 11,717 2,910

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Group – 2011




ParticipatingNon-



participating

£m £m £m £m £m £m

At 1 January 10,113 3,885 (1) (712) 10,112 3,173

Expected changes during the year (363) (338) – 2 (363) (336)

Expected closing position 9,750 3,547 (1) (710) 9,749 2,837

New business 119 50 – (116) 119 (66)

Experience variationsDemographic 41 24 – 13 41 37Economic 253 (163) – (4) 253 (167)

294 (139) – 9 294 (130)

Changes in assumptionsDemographic 24 (101) – 88 24 (13)Expense 4 (3) – – 4 (3)Economic 217 239 – (102) 217 137Management actions 61 – – – 61 –Methodology (23) 18 – (11) (23) 7

283 153 – (25) 283 128

Other movementsAcquired through business combinations 1,555 642 – (174) 1,555 468Claims outstanding – 56 – (23) – 33Other (20) 17 1 (4) (19) 13

1,535 715 1 (201) 1,536 514

At 31 December 11,981 4,326 – (1,043) 11,981 3,283

24. Insurance contract liabilities and reinsurance assets (continued)


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ParticipatingNon-



participating

£m £m £m £m £m £m

At 1 January 11,981 3,893 – (1,042) 11,981 2,851

Expected changes during the year (820) (179) – (31) (820) (210)

Expected closing position 11,161 3,714 – (1,073) 11,161 2,641

New business 120 88 – (150) 120 (62)

Experience variationsDemographic 60 38 – 16 60 54Economic 483 67 – 12 483 79

543 105 – 28 543 133

Changes in assumptionsDemographic 2 (45) – 26 2 (19)Expense 9 (31) – – 9 (31)Economic (112) 13 – (7) (112) 6Management actions 44 – – – 44 –Methodology 13 (24) – 18 13 (6)

(44) (87) – 37 (44) (50)

Other movementsClaims outstanding – 2 – (1) – 1Other (63) (25) – – (63) (25)

(63) (23) – (1) (63) (24)

At 31 December 11,717 3,797 – (1,159) 11,717 2,638

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ParticipatingNon-



participating

£m £m £m £m £m £m

At 1 January 10,113 3,376 (1) (712) 10,112 2,664

Expected changes during the year (363) (287) – 2 (363) (285)

Expected closing position 9,750 3,089 (1) (710) 9,749 2,379

New business 119 50 – (116) 119 (66)

Experience variationsDemographic 41 – – 13 41 13Economic 253 (111) – (5) 253 (116)

294 (111) – 8 294 (103)

Changes in assumptionsDemographic 24 (101) – 88 24 (13)Expense 4 (3) – – 4 (3)Economic 217 239 – (102) 217 137Management actions 61 – – – 61 –Methodology (23) 18 – (11) (23) 7

283 153 – (25) 283 128

Other movements

Acquired through business combinations 1,555 637 – (174) 1,555 463Claims outstanding – 56 – (23) – 33Other (20) 19 1 (2) (19) 17

1,535 712 1 (199) 1,536 513

At 31 December 11,981 3,893 – (1,042) 11,981 2,851

For the purposes of the disclosure required by IAS 1, the amount of insurance contract liabilities classified as due to be settled in more than 12 months from the balance sheet date is £13,977m for the Group (2011 £13,786m) and £13,740m for the Parent company (2011 £13,409m).

The amount of the reinsurers’ share of insurance liabilities classified as due to be recovered in more than 12 months from the balance sheet date is £945m (2011 £948m) for both the Group and the Parent company.

The ‘Other’ figure for the Group in 2012 includes a reclassification of £171m from non-participating insurance contracts to non-participating investment contracts.

The amounts presented above represent the liabilities of the open and closed sub-funds.



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25. Non-participating value of in-force businessThe movement in the non-participating value of in-force business in the year is shown in the table below.


2012 2011 2012 2011

£m £m £m £m

At 1 January Non-participating value of in-force business included within participating contract liabilities 796 770 771 750Non-participating value of in-force business included within the fair value of insurance subsidiaries – – 49 47Acquired PVIF 275 313 251 285Adjusted deferred acquisition costs arising on investment contracts 335 306 289 269Deferred fee income on investment contracts (214) (189) (209) (183)

Total value of in-force business at 1 January 1,192 1,200 1,151 1,168

Expected changes during the year (159) (140) (159) (140)

Expected closing position 1,033 1,060 992 1,028

New business 136 119 136 119

Acquired through business combinations – 81 – 81

Experience variationsDemographic 9 16 9 16Economic 63 (17) 63 (17)

72 (1) 72 (1)

Changes in assumptionsDemographic 13 21 13 21Expense 18 – 18 –Economic 7 (65) 7 (65)Management actions – 5 – 5Methodology (2) (11) (2) (11)

36 (50) 36 (50)

Other movements (3) (17) (6) (26)

1,274 1,192 1,230 1,151

At 31 DecemberNon-participating value of in-force business included within participating contract liabilities 963 796 906 771Non-participating value of in-force business included within the fair value of insurance subsidiaries – – 67 49Acquired PVIF 193 275 183 251Adjusted deferred acquisition costs arising on investment contracts 376 335 305 289Deferred fee income on investment contracts (258) (214) (231) (209)

Total value of in-force business at 31 December 1,274 1,192 1,230 1,151

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The adjusted deferred acquisition costs arising on investment contracts shown above are equal to the deferred acquisition costs arising on investment contracts shown in note 18 less the element of those deferred acquisition costs that relates to future commission.

The deferred fee income on investment contracts shown on the previous page is equal to the deferred fee income shown in note 32. For the Group only, this is adjusted to remove deferred fee income in relation to fund management contracts of £1m at 31 December 2012 (2011 £1m).

For the purposes of the disclosure required by IAS 1, the amount of the balance of £963m (2011 £796m) of non-participating value of in-force business classified as due to be recovered in more than 12 months from the balance sheet date is £779m (2011 £688m) for the Group and the Parent company.

26. Investment contract liabilities(a) Movement in investment contract liabilitiesThe movement in investment contract liabilities in the year is shown in the tables below.

Group

2012 2011

ParticipatingNon-


participating

£m £m £m £m

At 1 January 1,922 15,575 1,578 14,349

Expected changes during the year (110) (720) 76 (360)

Expected closing position 1,812 14,855 1,654 13,989

New business 15 1,784 8 1,735

Experience variationsDemographic 21 (249) 19 218Economic 66 931 13 (441)

87 682 32 (223)

Changes in assumptionsDemographic 6 – (7) (3)Expense (2) (1) – –Economic (14) 8 (87) (7)Management actions (1) – 1 –Methodology 6 3 (1) –

(5) 10 (94) (10)

Other movementsAcquired through business combinations – – 313 133Other 37 170 9 (49)

37 170 322 84

At 31 December 1,946 17,501 1,922 15,575

25. Non-participating value of in-force business (continued)


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26. Investment contract liabilities (continued)(a) Movement in investment contract liabilities (continued)

Parent company

2012 2011

ParticipatingNon-


participating

£m £m £m £m

At 1 January 1,922 11,526 1,578 10,855

Expected changes during the year (110) (392) 76 (289)

Expected closing position 1,812 11,134 1,654 10,566

New business 15 1,402 8 1,264

Experience variationsDemographic 21 60 19 147Economic 66 796 13 (508)

87 856 32 (361)

Changes in assumptionsDemographic 6 – (7) (3)Expense (2) (1) – –Economic (14) 8 (87) (7)Management actions (1) – 1 –Methodology 6 3 (1) –

(5) 10 (94) (10)

Other movementsAcquired through business combinations – – 313 133Other 37 (5) 9 (66)

37 (5) 322 67

At 31 December 1,946 13,397 1,922 11,526

The participating investment contract liabilities include a discretionary element, determined by management from time to time, with regard to the returns earned on investments in the with-profits funds. These liabilities have been calculated on a basis consistent with the valuation of insurance contracts. It is not considered practicable to provide a fair value for these liabilities.

For the purposes of the disclosure required by IAS 1, the amount of investment contract liabilities classified as due to be settled in more than 12 months from the balance sheet date is £17,620m (2011 £16,358m) for the Group and £14,019m (2011 £12,741m) for the Parent company.

The ‘Other’ figure for the Group in 2012 includes a reclassification of £171m from non-participating insurance contracts to non-participating investment contracts.

The amounts presented above represent the liabilities of the open and closed sub-funds. More details on the Group’s fund structure are set out on page 20.

(b) Non-participating investment contract liabilities – fair value methodologyAll of the non-participating investment contract liabilities arise from unit-linked contracts, which are valued at fair value. These liabilities have been classified into the fair value hierarchy (see note 19 (f )) as set out below.

The position assigned to the liability in the fair value hierarchy has to be determined by the lowest level of any input to its valuation that is considered to be significant. The fair value of the non-participating liabilities is determined using the fair values of the net assets of the Group’s unitised investment funds. These net assets are predominantly investments for which the fair values are derived from observable market inputs. For some funds, adjustments are made to the investment funds’ net asset value for tax or accrued income and expenses. The basis of these adjustments is not observable, however they are not significant to the valuation of the fund as a whole. Therefore, all of the Group and Parent company’s investment contract liabilities have been classified as level 2.

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27. Insurance and investment contract liabilities and reinsurance assets – valuation assumptions (a) AssumptionsThe assumptions used to determine insurance and investment contract liabilities are set by the Board of Directors based on advice given by the Actuarial Function Holder. These assumptions are updated at least at each reporting date to reflect latest estimates. The assumptions used can be summarised as follows:

(i) Demographic Mortality and morbidityMortality and morbidity bases are reviewed periodically to ensure that assumptions remain appropriate, taking into account recent company and industry experience for each class of business. In the case of term assurances, including those that offer critical illness benefits, an increase in mortality experience leads to increased claim levels and hence an increase in liabilities. For annuity contracts the risk is that policyholders live longer than expected. Protection business and part of the annuity book are subject to reinsurance that mitigates these risks.

Valuation bases have been set in line with recent company experience, where it is available in sufficient volume to provide reliable results. Where company experience is not considered sufficient, bases have been set by reference to either industry experience or the terms on which the business is reinsured. A margin is included to provide against potential adverse variations in experience. In particular, a margin has been included to allow for expected future improvements in longevity.

The principal mortality rates used by the Group and the Parent company to calculate non-participating liabilities are shown in the table below. The rates shown include a margin of prudence, typically 5%. For participating liabilities and the calculation of the value of in-force business, the rates are similar but incorporate a lower margin, generally 2.5%.

Class of business 2012 mortality 2011 mortality

Ordinary long-term assurancesRoyal London Mutual and Ex-United Assurance Group non-linked 76.65% AM92 and 110.25% AF92 87% AM92 and 111% AF92Ex-Scottish Life 55.65% AM92 and 89.25% AF92 72% AM92 and 86% AF92Ex-Royal Liver 87.15% AM92 and 95.55% AF92 95% AM92 and 108% AF92RL Retail non-linked term assurances– male non-smokers 89.25% TMN00 sel 98.5% TMN00 sel– male smokers 96.6% TMS00 sel 96.5% TMS00 sel– female non-smokers 92.4% TFN00 sel 94.5% TFN00 sel– female smokers 80.85%TFS00 sel 87.0% TFS00 sel

Self Assurance term assurances– male non-smokers 75.6% TMN00 sel 80.0% TMN00 sel– male smokers 95.55% TMS00 sel 88.0% TMS00 sel– female non-smokers 72.45% TFN00 sel 89.5% TFN00 sel– female smokers 80.85% TFS00 sel 86.0% TFS00 sel

Pensions – deferred annuities in deferment

Ex-Refuge Assurance OB non-linked 106.875% AM92 and 118.75% AF92 106% AM92 and 118% AF92Ex-Scottish Life – individual 64.6% AM92 and 62.7% AF92 74% AM92 and 71% AF92Ex-Scottish Life – group 63.65% AM92 and 54.15% AF92 71% AM92 and 67% AF92

Pensions – immediate annuities and deferred annuities in payment

100% PCMA00 adj (1) and PCFA00 adj (2) 100% PCMA00 adj (3) and PCFA00 adj (4)

Industrial assuranceRoyal London Mutual 79.8% ELT16 (males) 66% ELT15 (males)Ex-United Assurance Group 79.8% ELT16 (males) 66% ELT15 (males)Ex-Royal Liver 70.875% ELT15 (males) 71% ELT15 (males)

(1) improvements from 2001 in line with the ‘core’ CMI_2011 projection model with a 2% long-term rate of mortality improvement, increased by 0.75 + 0.01 x (year of birth – 1944)(2) improvements from 2001 in line with the ‘core’ CMI_2011 projection model with a 2% long-term rate of mortality improvement, increased by 0.70 - 0.033 x (year of birth – 1944)(3) improvements from 2001 in line with the ‘core’ CMI_2010 projection model with a 2% long-term rate of mortality improvement, increased by 0.581 + 0.019 x (year of birth – 1944)(4) improvements from 2001 in line with the ‘core’ CMI_2010 projection model with a 2% long-term rate of mortality improvement, increased by 0.836 - 0.036 x (year of birth – 1944)


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27. Insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued)(a) Assumptions (continued)(i) Demographic (continued)PersistencyPersistency is the extent to which policies remain in force and are not for any reason lapsed, made paid-up, surrendered or transferred prior to maturity or expiry.

The rates of persistency used in the calculation of the liabilities for the major lines of non-participating protection business, participating business and the non-participating value of in-force business are based on actual experience plus a margin to provide for potential adverse variations. The rates vary by product line, sales channel, duration in force and for some products by fund size.

(ii) ExpensesFor the main classes of business, maintenance expenses are set in accordance with management service agreements and for business transferred to the Parent company, in accordance with the appropriate scheme of transfer. Expenses for those classes of business not covered by either a management service agreement or a scheme of transfer are based on the actual expenses incurred.

Expenses are assumed to inflate in line with the change in the Retail Price Index plus 1%.

Indicative renewal expense assumptions used by the Group and the Parent company are shown in the following table.

2012 2011

Per policy

Per claim Premium Reserve

Per policy

Perclaim Premium Reserve

Class of business £ £ % % £ £ % %

Ordinary long-term RL OB WP life & pensions 8.83 – 5.00 0.0900 9.13 – 5.00 0.0870Ex-RA OB WP pre 1998 life & pensions 15.14 – 4.00 0.0710 14.92 – 4.00 0.0730Ex-UF OB WP DWP pensions 0.00 – – 0.1720 0.00 – – 0.1720Scottish Provident business 15.12 – – 0.0600 14.64 – – 0.0600Bright Grey 16.79 – – 0.0600 17.20 – – 0.0600RL Retail protection business 20.09 – – 0.0600 18.40 – – 0.0600

Pensions – deferred annuitiesEx-Scottish Life – Individual RP 36.49 – – 0.074 39.87 – – 0.081Ex-Scottish Life – Group RP 38.04 – – 0.074 39.22 – – 0.081

Industrial assuranceRoyal London Mutual 6.67 – 5.00 0.0900 7.16 – 5.00 0.0870Ex-Refuge Assurance 4.60 – 2.50 0.0750 4.53 – 2.50 0.0710Ex-Royal Liver 6.62 – 0.00 0.0570 8.74 – 0.00 0.0600Ex-United Friendly 6.04 – 2.50 0.0790 5.96 – 2.50 0.0720

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(iii) Economic• Non-participating liabilities The valuation interest rate for any given product group is set by reference to the market value of, and yields on, assets chosen to support

that product group. The valuation interest rates used reflect the allocation of assets to the various lines of business and margins consistent with the statutory solvency basis of valuation. A reduction in interest rates increases the liabilities.

• Participating liabilities For participating business, the majority of the liability is calculated as the aggregate asset share for the business in force. This is a

retrospective calculation based on actual experience. The values of financial options (including premium rate guarantees and guaranteed annuity options) and future deductions from asset shares are calculated using market-consistent techniques. Market consistency is achieved by running a large number of economically credible scenarios through a stochastic valuation model. Each scenario is discounted at a rate consistent with the individual simulation. The economic scenarios achieve market consistency by:

– Deriving the underlying risk-free rate from the forward gilt curve, with a margin of 10 basis points to reflect empirical evidence that gilt yields may understate the true risk-free rate;

– Calibrating equity and interest rate volatility to observed market data by duration and price, subject to interpolation/extrapolation where traded security prices do not exist.

• Non-participating value of in-force business The non-participating value of in-force business has been calculated on a market-consistent basis. Future investment returns and discount

rates are set by reference to risk-free yields. Risk has been allowed for through margins in the demographic and expense assumptions. The value of in-force business is calculated initially on the assumption that future income and gains will be subject to taxation at the appropriate rates, it is then adjusted to take account of brought forward tax losses and reliefs not recognised elsewhere in the financial statements. A total of £nil (2011: £15m) of deferred tax attributes have been recognised in the Group and Parent company’s value of in-force business.

The valuation interest rates used by the Group and Parent company for non-participating liabilities are shown in the following table.

Class of business2012 interest % per annum

2011 interest % per annum

Ordinary long-term non-linked life assurancesRoyal London fund business 4.300 4.000Ex-Royal Liver fund business 3.000 3.500Ex-Scottish Life fund business 2.500 2.900

Pensions – deferred annuitiesRoyal London fund – in deferment 4.625 4.500Royal London fund – in payment (1) (1)Ex-Royal Liver fund – in deferment 3.000 3.500Ex-Royal Liver fund – in payment 3.250 4.125Ex-Scottish Life fund – in deferment 3.000 3.375Ex-Scottish Life fund – in payment (1) (1)

Pensions – individual – in paymentRoyal London fund business 4.125 4.125Ex-Royal Liver fund business 3.250 4.125

Industrial assuranceRoyal London fund business 4.300 4.000Ex-Refuge Assurance fund business 4.100 4.000Ex-Royal Liver fund business 3.000 3.500Ex-United Friendly fund business 5.000 4.700

(1) Valuation interest rates determined using the forward gilt curve.

27. Insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued)(a) Assumptions (continued)


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27. Insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued)(b) Changes in assumptionsThe following tables show the impact of changes in the assumptions used to calculate insurance contract liabilities and reinsurance assets during the year. The tables demonstrate this effect by showing the 2012 year end liabilities as if they had been calculated using the 2011 year end assumptions.

Group – 2012

Impact of change in variable

Liability using 2011

assumptions Demographic Expenses Economic Other


assumptions

£m £m £m £m £m £m

Insurance contract liabilities, grossParticipating insurance contracts 11,761 2 9 (112) 57 11,717

Non-participating insurance contracts– Unit-linked 2,095 (1) – (5) (2) 2,087– Non-profit, other than annuities 665 (44) (26) 8 (20) 583– Non-profit annuities 1,199 – (5) 10 (2) 1,202– Claims outstanding 197 – – – – 197

4,156 (45) (31) 13 (24) 4,069

15,917 (43) (22) (99) 33 15,786

Reinsurers’ share of insurance liabilitiesNon-participating insurance contracts– Non-profit, other than annuities (327) 26 – (7) 18 (290)– Non-profit annuities (834) – – – – (834)– Claims outstanding (35) – – – – (35)

(1,196) 26 – (7) 18 (1,159)

(1,196) 26 – (7) 18 (1,159)

Insurance contract liabilities, net Participating insurance contracts 11,761 2 9 (112) 57 11,717

Non-participating insurance contracts– Unit-linked 2,095 (1) – (5) (2) 2,087– Non-profit, other than annuities 338 (18) (26) 1 (2) 293– Non-profit annuities 365 – (5) 10 (2) 368– Claims outstanding 162 – – – – 162

2,960 (19) (31) 6 (6) 2,910

14,721 (17) (22) (106) 51 14,627

Non-participating value of in-force business (927) (13) (18) (7) 2 (963)

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Group – 2011





assumptions

£m £m £m £m £m £m

Insurance contract liabilities, grossParticipating insurance contracts 11,698 24 4 217 38 11,981

Non-participating insurance contracts– Unit-linked 2,176 5 (1) 45 – 2,225– Non-profit, other than annuities 812 (117) – 100 17 812– Non-profit annuities 990 11 (2) 94 1 1,094– Claims outstanding 195 – – – – 195

4,173 (101) (3) 239 18 4,326

15,871 (77) 1 456 56 16,307

Reinsurers’ share of insurance liabilitiesNon-participating insurance contracts– Non-profit, other than annuities (326) 95 (1) (26) (12) (270)– Non-profit annuities (656) (7) 1 (76) – (738)– Claims outstanding (35) – – – – (35)

(1,017) 88 – (102) (12) (1,043)

(1,017) 88 – (102) (12) (1,043)

Insurance contract liabilities, net Participating insurance contracts 11,698 24 4 217 38 11,981

Non-participating insurance contracts– Unit-linked 2,176 5 (1) 45 – 2,225– Non-profit, other than annuities 486 (22) (1) 74 5 542– Non-profit annuities 334 4 (1) 18 1 356– Claims outstanding 160 – – – – 160

3,156 (13) (3) 137 6 3,283

14,854 11 1 354 44 15,264

Non-participating value of in-force business (846) (21) – 65 6 (796)

27. Insurance and investment contract liabilities and reinsurance assets – valuation assumptions (continued)(b) Changes in assumptions (continued)


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assumptions

£m £m £m £m £m £m

Insurance contract liabilities, grossParticipating insurance contracts 11,761 2 9 (112) 57 11,717

Non-participating insurance contracts– Unit-linked 1,827 (1) – (5) (2) 1,819– Non-profit, other than annuities 662 (44) (26) 8 (20) 580– Non-profit annuities 1,199 – (5) 10 (2) 1,202– Claims outstanding 196 – – – – 196

3,884 (45) (31) 13 (24) 3,797

15,645 (43) (22) (99) 33 15,514

Reinsurers’ share of insurance liabilitiesNon-participating insurance contracts– Non-profit, other than annuities (327) 26 – (7) 18 (290)– Non-profit annuities (834) – – – – (834)– Claims outstanding (35) – – – – (35)

(1,196) 26 – (7) 18 (1,159)

(1,196) 26 – (7) 18 (1,159)

Insurance contract liabilities, net Participating insurance contracts 11,761 2 9 (112) 57 11,717

Non-participating insurance contracts– Unit-linked 1,827 (1) – (5) (2) 1,819– Non-profit, other than annuities 335 (18) (26) 1 (2) 290– Non-profit annuities 365 – (5) 10 (2) 368– Claims outstanding 161 – – – – 161

2,688 (19) (31) 6 (6) 2,638

14,449 (17) (22) (106) 51 14,355

Non-participating value of in-force business (870) (13) (18) (7) 2 (906)


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assumptions

£m £m £m £m £m £m

Insurance contract liabilities, grossParticipating insurance contracts 11,698 24 4 217 38 11,981

Non-participating insurance contracts– Unit-linked 1,749 5 (1) 45 – 1,798– Non-profit, other than annuities 807 (117) – 100 17 807– Non-profit annuities 990 11 (2) 94 1 1,094– Claims outstanding 194 – – – – 194

3,740 (101) (3) 239 18 3,893

15,438 (77) 1 456 56 15,874

Reinsurers’ share of insurance liabilitiesNon-participating insurance contracts– Non-profit, other than annuities (326) 95 (1) (26) (12) (270)– Non-profit annuities (656) (7) 1 (76) – (738)– Claims outstanding (34) – – – – (34)

(1,016) 88 – (102) (12) (1,042)

(1,016) 88 – (102) (12) (1,042)

Insurance contract liabilities, net Participating insurance contracts 11,698 24 4 217 38 11,981

Non-participating insurance contracts– Unit-linked 1,749 5 (1) 45 – 1,798– Non-profit, other than annuities 481 (22) (1) 74 5 537– Non-profit annuities 334 4 (1) 18 1 356– Claims outstanding 160 – – – – 160

2,724 (13) (3) 137 6 2,851

14,422 11 1 354 44 14,832

Non-participating value of in-force business (821) (21) – 65 6 (771)


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The movement in the unallocated divisible surplus (UDS) during the year is shown in the table below.


2012 2011 2012 2011

£m £m £m £m

At 1 January 2,388 2,300 2,388 2,300Transfer from the income statement 260 88 260 88

At 31 December 2,648 2,388 2,648 2,388

The UDS represents a surplus for which the allocation between participating policyholders has yet to be determined. Therefore, for the purposes of the disclosure required by IAS 1, the whole of the UDS at the balance sheet date has been classified as a balance that will be settled after more than 12 months.

The closing balance on the UDS for both the Group and Parent company includes amounts attributable to the Royal London Open Fund only. The surpluses in the closed funds are included within the participating contract liabilities because they are not available for distribution to other policyholders or for other business purposes. The closed funds are the Refuge Assurance industrial branch fund, the United Friendly funds, the Scottish Life fund, the PLAL with-profits fund and the Royal Liver fund.

29. Subordinated liabilities


Effective

interest rate

2012 2011 2012 2011

£m £m % %

Perpetual Cumulative Step-up Subordinated Guaranteed Notes 398 398 6.28 6.28

All of the balance shown above is expected to be settled more than 12 months after the balance sheet date.

Subordinated liabilities are carried in the balance sheet at amortised cost. Their fair value at 31 December 2012 was £354m (2011 £264m).

On 14 December 2005, RL Finance Bonds plc, a wholly owned subsidiary of the Parent company, issued the Perpetual Cumulative Step-up Subordinated Guaranteed Notes. The issue price of the Notes was 99.676% of the principal amount of £400m. The discount of £1m and the directly related costs incurred to issue the Notes of £4m have been capitalised as part of the carrying value and are being amortised on an effective interest basis over the period to the first possible redemption date.

The Notes are guaranteed by the Parent company. The proceeds of the issue were loaned to the Parent company on the same interest, repayment and subordination terms as those applicable to the Notes.

The Notes have no maturity date but the issuer has the option to redeem all of the Notes at their principal amount on 15 December 2015 and at three-monthly intervals thereafter. Interest is payable on the Notes at a fixed rate of 6.125% per annum for the period to15 December 2015, payable annually in arrears on 15 December each year. If the Notes are not redeemed on 15 December 2015 the interest rate will be reset on that date and at three-monthly intervals thereafter, at a rate equal to the offered three-month sterling deposit rate quoted on the interest reset date, plus 2.45%. Following the first interest reset date, interest becomes payable three-monthly in arrears on 15 March, 15 June, 15 September and 15 December in each year.

28. Unallocated divisible surplus

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2012 2011 2012 2011

£m £m £m £m

Loans from credit institutions 75 76 – –Amounts due to customers 89 79 71 66Payables arising under reinsurance contracts 29 34 27 32Amounts due to brokers 39 63 31 29Finance lease obligations 7 7 7 7Collateral loans 50 249 50 249Derivative liabilities (note 19 (d)) 76 215 46 170Amounts due to other Group entities – – 20 20Bank overdrafts (note 23) 7 17 7 12Other payables 88 86 34 22

460 826 293 607

Expected to be settled within 12 months 409 636 244 495Expected to be settled in more than 12 months 51 190 49 112

460 826 293 607

Derivative liabilities are stated at fair value. All the remaining balances above are carried in the balance sheet at amortised cost. Their fair values at 31 December 2012 are not materially different from the values shown above.

(a) Loans from credit institutions


2012 2011 2012 2011

£m £m £m £m

Not later than one year 75 76 – –

Interest on the above loans is payable at floating rates. The average interest rate for the year was 6.1% (2011 6.1%).

(b) Finance lease obligations

Leased investment property is accounted for as if it had been acquired under a finance lease. At the commencement of the lease a liability is established to represent the financing element of the lease contract. As lease payments are made, these are split between an interest element, calculated on an effective interest basis, which is charged to the statement of comprehensive income and a capital element, which reduces the finance lease liability. The average term of finance leases entered into is 195 years for the Group (2011 195 years) and 195 years for the Parent company (2011 195 years). The interest rate inherent in the leases is fixed at the start of the lease.

30. Payables and other financial liabilities


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30. Payables and other financial liabilities (continued)(b) Finance lease obligations (continued) Group Parent company

2012 2011 2012 2011

£m £m £m £m

Obligations under finance leases – minimum lease payments: Not later than one year 1 1 1 1Later than one year and not later than five years 2 2 2 2Later than five years 50 50 50 50

53 53 53 53Less: future charges (46) (46) (46) (46)

Present value of obligations under finance leases 7 7 7 7

Present value of obligations under finance leases:Later than one year and not later than five years 2 2 2 2Later than five years 5 5 5 5

7 7 7 7

(c) Collateral loans


2012 2011 2012 2011

£m £m £m £m

Collateral loans – contractual maturity analysis:Not later than one year 9 200 9 200Later than one year and not later than five years 19 5 19 5Later than five years 22 44 22 44

50 249 50 249

31. Provisions


2012 2011 2012 2011

£m £m £m £m

Provision for future commission 198 151 193 146Other provisions 40 50 35 45

238 201 228 191


238 201 228 191

The provision for future commission relates to payments that the Group is contractually committed to make in future periods for investment contracts sold as at the balance sheet date. These payments are contingent on the related policies remaining in force.

Other provisions comprise amounts in respect of the long-term incentive plan, the mortgage endowment review provision, past business review provisions and surplus sales and administration offices which have been closed and for which the Group retains lease commitments. Sublease receipts on redundant property leases have been taken into account in arriving at the above provisions. For the Group and Parent company this amounts to £3m (2011 £4m).

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31. Provisions (continued)The movement in provisions during the year is shown in the following table.


Provision for future

commissionOther

provisions

Provision for future

commissionOther

provisions

£m £m £m £m

At 1 January 2012 151 50 146 45Additional provisions 57 23 56 21Utilised during the year (19) (33) (18) (31)Unwind of the discount rate 4 – 4 –Change in basis 5 – 5 –

At 31 December 2012 198 40 193 35

32. Other liabilities


2012 2011 2012 2011

£m £m £m £m

Deferred fee income 259 215 231 209Accrued expenses 37 40 – 4Other 26 25 26 25

322 280 257 238


322 280 257 238

Deferred fee income is front-end fees received from investment contract holders as a prepayment for asset management and related services. These amounts are non-refundable and are released to income as the services are rendered.

Other liabilities are carried in the balance sheet at amortised cost. Their fair values at 31 December 2012 are not materially different from the values shown above.

33. Balances in respect of external unit holders(a) Investment return attributable to external unit holdersThe investment return attributable to external unit holders represents the portion of the investment return included within the Group statement of comprehensive income that relates to the consolidated funds that are owned by third parties.

(b) Liability to external unit holdersThe liability to external unit holders represents the portion of the consolidated funds included within the Group balance sheet but which are owned by third parties. The balance is stated at fair value being the quoted bid price of the relevant fund on the last day of the accounting period on which investments in such funds could be redeemed. As this price is a quoted price, the liability has been classified at level 1 of the fair value hierarchy (see note 19 (f )).

For the purposes of the disclosure required by IAS 1, none of the balance (2011 none) is classified as being expected to be settled in more than 12 months from the balance sheet date.


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34. Deferred tax (assets)/liabilities(a) Net deferred tax balanceThe tables below show the movement in the net deferred tax balance in the year. The deferred tax assets and liabilities are considered to be non-current.

As set out in note 1 (a), the Group has elected to early adopt the Amendment to IAS 12, ‘Income taxes’ – deferred tax: recovery of underlying assets and consequently the 2011 comparatives shown below have been restated.

Group – 2012

1 Jan

Recognised in the statement of

comprehensive income 31 Dec

£m £m £m

Deferred acquisition expenses (76) (17) (93)

Excess management expenses carried forward – (32) (32)

Revaluation of investments (9) 23 14

Other short-term timing differences – (10) (10)

(85) (36) (121)

Group – 2011 – restated

1 Jan

Recognised in the

statement of comprehensive

income 31 Dec

£m £m £m

Deferred acquisition expenses (89) 13 (76)

Revaluation of investments 34 (43) (9)

Other short-term timing differences 4 (4) –

(51) (34) (85)


1 Jan

Recognised in the statement of

comprehensive income 31 Dec

£m £m £m

Deferred acquisition expenses (76) (16) (92)

Excess management expenses carried forward – (32) (32)

Revaluation of investments (9) 22 13

Other short-term timing differences 9 (6) 3

(76) (32) (108)

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34. Deferred tax (assets)/liabilities (continued)(a) Net deferred tax balance (continued)

Parent company – 2011 – restated

1 Jan

Recognised in the

statement of comprehensive

income 31 Dec

£m £m £m

Deferred acquisition expenses (89) 13 (76)

Revaluation of investments 34 (43) (9)

Other short-term timing differences 13 (4) 9

(42) (34) (76)

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same fiscal authority. An overall deferred tax asset has been recognised to the extent that forecast future taxable profits are expected to arise, within a reasonable period of time, against which the asset can be utilised.

(b) Unrecognised deferred tax balances(i) Unrecognised deferred tax assetsDeferred tax assets arising from certain capital losses, excess management expenses, surplus trading losses and capital allowances are recognised to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred tax assets of £9m (2011 restated £74m), of which £8m (2011 restated £71m) related to the Parent company. These unused losses and allowances can be carried forward and utilised as long as the company in which they arose is active or trading.

There is an amount of £nil (2011 £15m) recognised within the Parent company’s value of in-force business in respect of carried forward tax losses and reliefs. The total value of the carried forward tax losses and reliefs recognised within these accounts, both as an explicit deferred tax asset above and within the Parent company’s value of in-force business, does not exceed the total available to the Group.

(ii) Unrecognised deferred tax liabilitiesDeferred tax liabilities arising from gains on subsidiary holdings have not been recognised by the Parent company as it controls the timing of any sale of a subsidiary and the repatriation of any dividend and it is not probable that a sale or repatriation will happen in the foreseeable future as the Group's intention is that these investments will be held to provide long-term returns. The potential tax liability arising is less than £1m (2011 less than £1m).

There are no other unrecognised deferred tax liabilities within the Group.


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35. Pension schemesThe Group operates three funded defined benefit schemes, which are established under separate Trusts. The main scheme is the Royal London Group Pension Scheme (‘RLGPS’). On 1 September 2005, RLGPS was closed to new entrants. The Group has established a contributory, defined contribution arrangement for new employees joining the Group after that date.

As a result of the Royal Liver acquisition on 1 July 2011, the Group took responsibility for two further defined benefit pension schemes: the Royal Liver Assurance Limited Superannuation Fund (‘Royal Liver UK’) and the Royal Liver Assurance Limited (ROI) Superannuation Fund (‘Royal Liver ROI’). Royal Liver employees in these schemes stopped earning additional defined benefit pensions on 30 June 2011.

(a) Amounts recognised in the balance sheetThe amounts recognised in the balance sheet are as follows for the Group and Parent company:

Total RLGPS Royal Liver UK Royal Liver ROI

2012 2011 2012 2011 2012 2011 2012 2011£m £m £m £m £m £m £m £m

Fair value of plan assets 2,524 2,383 2,042 1,919 290 284 192 180Pension scheme obligation (2,389) (2,112) (1,980) (1,762) (242) (216) (167) (134)

Pension scheme surplus 135 271 62 157 48 68 25 46Less: restriction of surplus (17) (24) – – (17) (24) – –

Net pension scheme asset 118 247 62 157 31 44 25 46

In accordance with paragraph 58(b) of IAS 19, ‘Employee Benefits’, the value of the net pension scheme asset that can be recognised in the balance sheet is restricted to the present value of economic benefits available in the form of refunds from the scheme or reductions in future contributions. For the Royal Liver UK scheme, the benefit is only available as a refund, as no additional defined pension benefits are being earned. Under UK tax legislation an income tax deduction of 35% is applied to a refund from a UK pension scheme, before it is passed to the employer. This tax deduction has been shown above as a restriction to the value of the net pension scheme asset that can be recognised for this scheme.

(b) Analysis of plan assets


2012 2011 2012 2011 2012 2011 2012 2011£m £m £m £m £m £m £m £m

Fixed interest bonds 21 98 21 33 – 36 – 29

High-yield bonds 80 – 80 – – – – –

Index-linked bonds 545 481 545 478 – – – 3

Corporate bonds 787 734 640 669 81 53 66 12

Liability driven investment 232 174 – – 148 91 84 83

Equities 702 771 629 649 40 77 33 45

Property 102 104 78 76 19 22 5 6Cash 55 21 49 14 2 5 4 2

Fair value of plan assets 2,524 2,383 2,042 1,919 290 284 192 180

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Changes in the fair value of plan assets during the year can be analysed as follows:


2012 2011 2012 2011 2012 2011 2012 2011£m £m £m £m £m £m £m £m

At 1 January 2,383 1,867 1,919 1,867 284 – 180 –

Acquired through business combinations – 428 – − – 248 – 180

Expected return on plan assets 110 109 92 99 12 6 6 4

Actuarial gains 119 71 95 19 5 35 19 17

Employer contributions 13 8 13 8 – – – –

Employee contributions 2 2 2 2 – – – –

Benefits paid in year (97) (89) (79) (76) (11) (5) (7) (8)

Exchange rate movements (6) (13) – – – – (6) (13)

At 31 December 2,524 2,383 2,042 1,919 290 284 192 180

Actual return on scheme assets 231 184 190 121 17 42 24 21

It is anticipated that the Group and Parent company will make contributions of £7m to RLGPS in the year to 31 December 2013. No contributions are anticipated to be made to the Royal Liver pension schemes.

(c) Analysis of pension scheme obligation The movement in the obligation during the year can be analysed as follows:


2012 2011 2012 2011 2012 2011 2012 2011£m £m £m £m £m £m £m £m

At 1 January 2,112 1,679 1,762 1,679 216 – 134 –

Acquired through business combinations – 365 – – – 221 – 144

Current service cost 8 9 8 9 – – – –

Interest on pension scheme liabilities 101 100 85 91 10 6 6 3

Benefits paid in year (97) (89) (79) (76) (11) (5) (7) (8)

Employee contributions 2 2 2 2 – – – –

Past service cost 6 16 6 16 – – – –

Actuarial loss/(gain) 260 40 196 41 27 (6) 37 5

Exchange rate movements (3) (10) – – – – (3) (10)

At 31 December 2,389 2,112 1,980 1,762 242 216 167 134

The past service cost of £6m (2011 £16m) shown above, represents the increase in the pension scheme obligation due to the granting of discretionary pension increases to certain categories of scheme members.


35. Pension schemes (continued)(b) Analysis of plan assets (continued)

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35. Pension schemes (continued)(d) Amounts recognised in the statement of comprehensive income


2012 2011 2012 2011 2012 20111 2012 20111

£m £m £m £m £m £m £m £m

Current service cost 8 9 8 9 – – – –

Interest cost on pension scheme liabilities 101 100 85 91 10 6 6 3

Expected return on plan assets (110) (109) (92) (99) (12) (6) (6) (4)

Actuarial losses/(gains) 141 (32) 101 21 22 (41) 18 (12)

Past service cost 6 16 6 16 – – – –

Exchange rate movements 1 1 – – – – 1 1

Restriction on surplus (7) 14 – – (7) 14 – –

Net expense/(income) recognised in the statement of comprehensive income 140 (1) 108 38 13 (27) 19 (12)

1 The 2011 figures for the Royal Liver pension schemes cover the period 1 July 2011 to 31 December 2011.

The net expense of £140m recognised in the statement of comprehensive income is included within ‘other operating expenses’ £127m (2011 £9m in other operating income) and within ‘staff costs’ £13m (2011 £8m).

(e) Historic information Amounts for the current and previous four periods are shown in the following tables.

RLGPS

2012 2011 2010 2009 2008£m £m £m £m £m

Fair value of plan assets 2,042 1,919 1,867 1,725 1,576Present value of the pension scheme obligation (1,980) (1,762) (1,679) (1,665) (1,486)

Net pension scheme asset 62 157 188 60 90

Experience gains/(losses) on plan assets 95 19 100 123 (275)Experience (losses)/gains on plan liabilities (196) (41) 31 (251) 233

Royal Liver UK

2012 2011 2010 2009 2008£m £m £m £m £m

Fair value of plan assets 290 284 – – –Present value of the pension scheme obligation (242) (216) – – –

Pension scheme surplus 48 68 – – –

Less: restriction on surplus (17) (24) – – –

Net pension scheme asset 31 44 – – –

Experience gains on plan assets 5 35 – – –Experience (losses)/gains on plan liabilities (27) 6 – – –

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35. Pension schemes (continued)(e) Historic information (continued)

Royal Liver ROI

2012 2011 2010 2009 2008£m £m £m £m £m

Fair value of plan assets 192 180 – – –Present value of the pension scheme obligation (167) (134) – – –

Net pension scheme asset 25 46 – – –

Experience gains on plan assets 19 17 – – –Experience losses on plan liabilities (37) (5) – – –

Experience gains/(losses) on plan assets are the difference between the expected and the actual return on the assets of the scheme. Similarly, experience gains/(losses) on plan liabilities are the difference between the expected and the actual change in scheme liabilities in the year.

(f ) Assumptions The major assumptions used to calculate the pension scheme asset for both the Group and the Parent company were:

2012 2011

RLGPS UK ROI RLGPS UK ROI

% % % % % %

Discount rate 4.4 4.4 3.3 4.9 4.9 5.0Future salary increases2 3.7 n/a n/a 3.5 n/a n/a

Price inflation (RPI) 2.9 2.9 n/a 3.0 3.0 n/aPrice inflation (CPI) 2.2 2.2 2.0 2.0 2.0 2.0Expected return on scheme assets 4.8 4.0 2.6 4.9 4.4 3.3

2 Only applicable to RLGPS. Pensionable salary increases on benefits accrued post April 2011 are capped at 2.5%. Pension increase assumptions reflect the inflation assumption adjusted for the impact of minimum and maximum increases as set out in the schemes’ rules.

The expected return on assets has been derived as the weighted average of the expected returns from each of the main asset classes (i.e. equities and bonds). The expected return for each asset class reflects a combination of historical performance analysis, the forward-looking views of the financial markets (as suggested by the yields available), and the views of investment organisations.

The most significant non-financial assumption is the assumed rate of mortality. The table below shows the life expectancy assumptions used in the accounting assessments based on the life expectancy of a scheme member aged 60 (non-pensioner is assumed to be 45 now). A weighted average is shown for the UK schemes.


2012 2011

UK ROI UK ROI

Pensioner

Male 26 27 26 27

Female 28 28 28 28

Non-pensioner

Male 28 29 28 29

Female 29 30 29 30


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36. Contingent liabilitiesRegulatory reviewsDuring the year, the Group and Parent company continued to address issues from past inappropriate selling practices and other regulatory matters. The directors consider that they have made prudent provision for any liabilities arising across the Group and, as and when the circumstances calling for such provision arise, that the Group and Parent company have adequate reserves to meet all reasonably foreseeable eventualities.

37. Commitments(a) Capital expenditureThe Group and Parent company have the following commitments to make capital purchases as at the balance sheet date:


2012 2011

£m £m

Investment property 7 2

(b) Investments in private equity fundsThe Group and Parent company have a portfolio of investments in private equity funds. The structure of these funds is such that the commitment is drawn down over the investment period. The total amount committed, net of drawdown, at the balance sheet date for the Group and Parent company is £91m (2011 £111m).

(c) Operating lease commitments Operating lease payments represent rentals payable by the Group for land and buildings. The total future minimum lease payments due under these arrangements, net of any related sublease receipts, is shown in the following table.


2012 2011

£m £m

Total future minimum lease payments under non-cancellable leases: Not later than one year 4 3Later than one year and not later than five years 6 8Later than five years 2 1

12 12

Less: total future minimum sublease payments under non-cancellable subleases expected to be received (3) (4)

9 8

Lease and sublease payments recognised as an expense for the period:Minimum lease payments 1 2Sublease receipts (1) (1)

– 1

38. Related party transactionsThe Parent company is the ultimate parent undertaking of the Group. The Group and Parent company carried out the following transactions with related parties.

(a) Related party transactions of the GroupTransactions between Group entities are eliminated on consolidation. The following are those transactions carried out by Group entities with those related parties that are outside the Group.

(i) Subsidiaries’ transactions with OEICs and other investment fundsThe Group markets a portfolio of OEICs and other investment funds. A number of these funds are classified as subsidiaries for the purposes of financial reporting and hence are included within the Group. For those funds not consolidated within the Group the transactions during the year were as follows:

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38. Related party transactions (continued)(a) Related party transactions of the Group (continued) (i) Subsidiaries’ transactions with OEICs and other investment funds (continued)

2012 2011

£m £m

Management fees earned during the year 16 5

There were no amounts outstanding between the Group and the funds at the year end (2011 £nil). The total value of units held by the Parent company at 31 December 2012 in the funds that are not consolidated into the Group was £263m (2011 £224m). The acquisition and sale of units in the funds during the year were as follows:

2012 2011

£m £m

Acquisition of funds 16 35Proceeds from sale of funds 9 9

(ii) Subsidiaries’ transactions with the Royal London Group Pension Scheme (RLGPS)RLGPS invests in units in various internal linked funds of the Royal London Pooled Pension Company Limited (RLPPC). During the year, RLGPS disinvested £nil (2011 £7m) from RLPPC. The total market value of the units held by RLGPS in RLPPC as at 31 December 2012 was £12m (2011 £11m).

(b) Related party transactions of the Parent companyThe significant subsidiaries of the Parent company are shown in note 20 (a). Transactions between the Parent company and its subsidiaries and other related party transactions of the Parent company are shown below.

(i) Administration and investment management services provided by subsidiariesSubsidiary companies perform the administration and investment management activities of the Parent company. The Parent company is charged fees for these services under management services agreements and for business transferred to the Parent company, in accordance with the appropriate scheme of transfer.

The following table summarises the fees and recharges incurred by the Parent company during the year.

Parent company

2012 2011

£m £m

Administration fees 224 198Investment management fees 15 12

239 210

(ii) Financing transactions undertaken with subsidiariesThe Parent company has provided loans to subsidiaries and charges interest on an arm’s length basis.

As set out in note 29, a subsidiary has issued subordinated liabilities, lending the proceeds to the Parent company on the same terms as the original debt issue.

The following table summarises the interest income and expense incurred by the Parent company during the year in relation to these transactions.

Parent company

2012 2011

£m £m

Interest income on loans to subsidiaries 2 2

Interest expense on subordinated liabilities (25) (25)


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38. Related party transactions (continued)(b) Related party transactions of the Parent company (continued)(iii) Other income received from subsidiaries

Parent company

2012 2011

£m £m

OEIC management fee rebates 37 43OEIC distributions 184 187Other dividends receivable from subsidiaries 1 3Rental income 3 3

225 236

The OEIC management fee rebates relate to the investment in Group OEICs made by certain unit-linked funds of the Parent company. The Parent company deducts an investment management fee from the unit-linked fund. The authorised corporate director of the OEICs, which is a subsidiary of the Parent company, deducts an investment management fee from the OEIC in which the unit-linked fund has invested. In order to avoid the unit-linked fund bearing both these investment management fees, the subsidiary company rebates the portion of its charge relating to the internal holding of OEICs to the unit-linked fund.

OEIC distributions are those received from OEICs that are classified as subsidiaries for financial reporting purposes.

(iv) Outstanding balances with Group entities at the year endAt the year end, the following balances were outstanding with Group entities in relation to the transactions above.

Parent company

2012 2011

£m £m

Amounts due from Group entities 3 5Loans to Group entities 45 47

48 52

Subordinated liabilities (398) (398)Amounts due to Group entities (20) (20)

(418) (418)

The amounts due to and from Group entities are due on demand and are not secured.

(v) Other transactions of the Parent company with related partiesAs part of its portfolio of investment assets, the Parent company has holdings in OEICs and other funds, managed by subsidiaries. The Parent company’s acquisitions and sales of these funds during the year were as follows:

Parent company

2012 2011

£m £m

Acquisition of funds 403 256Proceeds from sale of funds 545 102

(vi) Transactions with key management personnelNo director had transactions or arrangements with the Group that require disclosure, other than those given in the Directors’ remuneration report. Key management remuneration is disclosed in Note 10(b).

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39. Additional cash flow information(a) Adjustments for non-cash itemsAdjustments in the statements of cash flows for non-cash items comprise the following:


2012 2011 2012 2011

£m £m £m £m

Tax credit (27) (24) (32) (31)Depreciation of property, plant and equipment 2 3 – –Fair value loss/(gain) on investment property 59 (50) 73 (43)Amortisation and impairment charges on acquired PVIF and other intangible assets 105 103 79 88Change in deferred acquisition costs (78) (62) (51) (52)Impairment loss on property, plant and equipment 2 – – –Change in reinsurers’ share of insurance liabilities (116) (153) (117) (152)Change in pension scheme asset 129 (6) 129 (6)Fair value gain on financial investments (1,867) (36) (1,528) (54)Net foreign exchange loss on financial investments 18 6 13 6Change in participating insurance contract liabilities (264) 160 (264) 160Change in participating investment contract liabilities 24 17 24 17Change in non-participating value of in-force business (167) 9 (135) 14Change in non-participating insurance contract liabilities (257) (223) (96) (142)Change in non-participating investment contract liabilities 1,926 1,095 1,871 540Change in provisions 37 35 37 31Non-cash transfer of investments 17 (93) – –Other non-cash items (134) 26 (127) (25)

(591) 807 (124) 351

The non-cash transfer of investments shown above relates to assets transferred to external clients of £17m (2011 £93m transferred in from external clients).

(b) Adjustments for non-operating itemsAdjustments in the statements of cash flows for non-operating items comprise the following:


2012 2011 2012 2011

£m £m £m £m

Fair value (gain)/loss on investments in Group entities – – (18) 1Dividends received from subsidiaries – – (1) (3)Finance costs 30 30 25 25

30 30 6 23

The fair value (gain)/loss on investments in Group entities and the dividends received from subsidiaries shown above exclude amounts in relation to OEICs and other funds treated as subsidiaries for financial reporting purposes.


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39. Additional cash flow information (continued) (c) Dividends and interest Interest and dividend receipts and payments included in the statements of cash flows are as follows:


2012 2011 2012 2011

£m £m £m £m

Dividends received:– Operating cash flows (including Group OEICs) 399 417 328 301– Investing cash flows – – 1 3

399 417 329 304

Interest received:– Operating cash flows 669 690 510 491

Interest paid:– Operating cash flows 5 5 1 –– Financing cash flows 25 25 25 25

30 30 26 25

(d) Acquisition and disposal of Group entitiesThe Parent company’s operating portfolio of investment assets includes OEICs and other investment funds that are classified for financial reporting purposes as subsidiaries. Cash flows in relation to these assets are classified as operating cash flows for the Parent company statement of cash flows. The amount included within ‘Net proceeds from sale/acquisition of financial investments’ relating to the acquisition and disposal of such funds was a net disposal of £142m (2011 net acquisition of £154m).

The figures for the acquisition and disposal of Group entities in the statements of cash flows can be analysed as follows:

• The 2012 Parent company figure of £7m relates to capital injections into subsidiaries (2011: £7m). The 2011 Group and Parent company figures of £137m and £130m respectively included the net cash acquired on the acquisition of Royal Liver Assurance Limited (Royal Liver).

• The £1m proceeds from disposal of Group entities in the 2012 Parent company statement of cash flows relates to the repayment of a subsidiary loan investment (2011 £3m).

40. Risk managementAs a financial services provider, the Group’s business is the managed acceptance of risk. The Group has a set of risk preferences which define the types of risk the Group views as being desirable, neutral towards or undesirable and which form a core part of the Group’s risk management framework and control techniques. The Group seeks to manage its exposures to risk through its risk management framework ensuring that the residual risk exposures are within acceptable tolerances agreed by the Board. The risk management framework established within the Group is designed to manage, rather than eliminate, the risk of failure to meet business objectives as well as to ensure that the Group is well capitalised. The ‘Governance section’ of this Annual Report and Accounts includes a summary of the Group’s risk management and internal controls approach.

The key control techniques for the major categories of risk exposure are summarised in the following sections:

(a) Insurance riskInsurance risk arises from the uncertainty over the occurrence, amount and timing of claims payments arising under insurance contracts.

The exposure of the Group depends to a significant extent on the value of claims to be paid in the future, relative to the assets accumulated to the date of claim. The amount of such future obligations is assessed by reference to assumptions with regard to future mortality or (if applicable) morbidity rates, persistency rates, expenses, investment returns, interest rates and tax rates.

The main insurance risks can be summarised as follows:

•Mortality – the risk that the Group’s experience of life assurance policyholders is different from that expected. For life assurance the risk is that more policyholders die than expected.

• Morbidity – the risk that more of the Group’s health insurance policyholders fall ill or become incapacitated than expected.• Persistency – the risk that policies do not remain in force and are for any reason lapsed, made paid-up, surrendered or transferred prior to

maturity or expiry. For policies without guarantees, the risk is generally that fewer policies remain in force than expected. For those with guarantees, the risk is generally that more remain in force than expected.

• Annuitant Longevity – the risk that the annuitant lives longer than assumed in the pricing and reserving basis used.• Expenses – the risk that actual expenses are higher than those expected.

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In addition, it is necessary for the Group to make decisions which ensure an appropriate accumulation of assets relative to liabilities. These decisions include the allocation of investments between asset classes, the setting of policyholder bonus rates (some of which are guaranteed) and the setting of surrender terms.

The primary responsibility for managing insurance risk falls to the Insurance Committee. This Committee has responsibility for the setting of policy and for monitoring the levels of risk arising from mortality, morbidity, persistency and expenses. The Committee also considers the Group’s reinsurance coverage.

Insurance risks are managed through the following mechanisms:

• The use of guidelines, limits and authority levels for concluding insurance contracts, assuming insurance risks and handling insurance claims.• Regular monitoring of actual exposure compared to the agreed limits to ensure that the insurance risk accepted remains within risk

appetite.• The use of reinsurance to mitigate exposures in excess of risk appetite, to limit the Group’s exposure to large single claims and

catastrophes and to alleviate the impact of new business strain. • The diversification of business over several classes of insurance and over large numbers of individual risks to reduce variability in

loss experience.• Control over product development and pricing.

These techniques are supported by the use of actuarial models, to calculate premiums and monitor claims patterns. Past experience and statistical methods are also used to determine appropriate assumptions for those models.

Concentration riskThe Group and Parent company write a diverse mix of business across a diverse group of people. However, as the Group and Parent company have written substantially all of their business in the UK, results are sensitive to demographic and economic changes arising in the UK. Concentrations of insurance risk are considered by the Insurance Committee to ensure that the risk is within the Group’s overall risk appetite.

The Group seeks to mitigate the risk of excess concentrations of risk through the use of reinsurance, asset liability matching and where appropriate, innovative market solutions.

Sensitivity analysisThe following tables present the sensitivity of insurance and investment contract liabilities to the insurance risks set out above. Sensitivities are only shown in one direction as an equal and opposite movement in the variable for the majority of business would have an equal and opposite impact on the value of insurance and investment contract liabilities.

• Mortality and morbidity 5% proportionate decrease in base mortality and morbidity rates. This sensitivity demonstrates the effect of a decrease in the rate of

deaths and serious illness.

The impact of such a change on the contract liabilities varies depending on the type of business written. For life assurance business a decrease in mortality rates will typically decrease the liabilities as there will be fewer payouts for early death. However, for those policies which contain a guaranteed annuity option the policy liability may increase as its value depends in part on the length of time over which the guaranteed rate will be paid. Likewise, for annuity business a decrease in mortality rates will increase the liability as the average period over which annuity payments have to be made will be extended.

• Persistency 10% proportionate decrease in lapse rates. This sensitivity reflects a single, downward movement in lapse rates. This means that fewer

policies are being surrendered or terminated early, with the result that more policies are assumed to remain in force.

• Expenses 10% decrease in maintenance expenses – the ongoing cost of administering contracts. This sensitivity is applied to the projected level of

expenses. There is no change to the assumed rate of future expense inflation. A reduction in expenses will reduce the value of the liabilities for most classes of business. For some unit-linked contracts where future charges cover expenses, however, the liability may be unaffected.

The tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In practice, the assumptions may be interdependent. It should also be noted that the impact on the liabilities from changes in these assumptions may not be linear as implied by these results. Larger or smaller impacts should not be interpolated or extrapolated from these results.


40. Risk management (continued)(a) Insurance risk (continued)

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Group

2012 2011

Impact of change in variable Impact of change in variable

Liability as reported

Mortality &

Morbidity Lapses ExpensesLiability as reported

Mortality &

Morbidity Lapses Expenses

£m £m £m £m £m £m £m £mInsurance contract liabilities, gross Participating insurance contracts 11,717 5 6 3 11,981 6 8 1Non-participating insurance contracts– Unit-linked 2,087 6 3 (1) 2,225 6 4 (1)– Non-profit, other

than annuities 583 (127) 4 (24) 812 (127) (1) (28)– Non-profit annuities 1,202 17 – (5) 1,094 15 – (5)– Claims outstanding 197 – – – 195 – – –

4,069 (104) 7 (30) 4,326 (106) 3 (34)

15,786 (99) 13 (27) 16,307 (100) 11 (33)

Insurance contract liabilities, net Participating insurance contracts 11,717 5 6 3 11,981 6 8 1Non-participating insurance contracts– Unit-linked 2,087 6 3 (1) 2,225 6 4 (1)– Non-profit, other

than annuities 293 (24) (9) (24) 542 (27) (11) (28)– Non-profit annuities 368 7 – (4) 356 6 – (4)– Claims outstanding 162 – – – 160 – – –

2,910 (11) (6) (29) 3,283 (15) (7) (33)

14,627 (6) – (26) 15,264 (9) 1 (32)

Non-participating value of in-force business (963) (10) (45) (46) (796) (6) (30) (47)

Investment contract liabilitiesParticipating investment contracts 1,946 (8) (3) (4) 1,922 (8) (3) (3)Non-participating investment contracts 17,501 – – – 15,575 – – (1)

19,447 (8) (3) (4) 17,497 (8) (3) (4)

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Parent company

2012 2011

Impact of change in variable Impact of change in variable

Liability as reported

Mortality &

Morbidity Lapses ExpensesLiability as reported

Mortality &

Morbidity Lapses Expenses

£m £m £m £m £m £m £m £m

Insurance contract liabilities, gross Participating insurance contracts 11,717 5 6 3 11,981 6 8 1Non-participating insurance contracts– Unit-linked 1,819 6 3 (1) 1,798 6 4 (1)– Non-profit, other

than annuities 580 (127) 4 (24) 807 (127) (1) (28)– Non-profit annuities 1,202 17 – (5) 1,094 15 – (5)– Claims outstanding 196 – – – 194 – – –

3,797 (104) 7 (30) 3,893 (106) 3 (34)

15,514 (99) 13 (27) 15,874 (100) 11 (33)

Insurance contract liabilities, net Participating insurance contracts 11,717 5 6 3 11,981 6 8 1Non-participating insurance contracts– Unit-linked 1,819 6 3 (1) 1,798 6 4 (1)– Non-profit, other

than annuities 290 (24) (9) (24) 537 (27) (11) (27)– Non-profit annuities 368 7 – (4) 356 6 – (4)– Claims outstanding 161 – – – 160 – – –

2,638 (11) (6) (29) 2,851 (15) (7) (32)

14,355 (6) – (26) 14,832 (9) 1 (31)

Non-participating value of in-force business (906) (10) (45) (46) (771) (6) (30) (47)

Investment contract liabilitiesParticipating investment contracts 1,946 (8) (3) (4) 1,922 (8) (3) (3)Non-participating investment contracts 13,397 – – – 11,526 – – (1)

15,343 (8) (3) (4) 13,448 (8) (3) (4)



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Market risk arises from the possibility that the fair value or cash flows of the Group’s financial instruments change as a result of movements in interest rates, foreign currency exchange rates and other market prices. Each of these risks is discussed in more detail below. Market risk arises for the Group from fluctuations in the value of both assets and liabilities and in particular where the impact of a market change impacts differently on the value of assets from the effect on liabilities.

The Group manages market risk within the risk management framework outlined above and in accordance with the relevant regulatory requirements. The principal techniques employed are the establishment of asset allocation and performance benchmarks consistent with the Group’s risk appetite and asset liability matching. This balances the risks relating to the liabilities under the Group’s insurance and investment contracts against the risks inherent in its assets and the capital available. The Group has established approaches for matching assets and liabilities, including hedging policyholder options and, where cost effective, unrewarded risks. Where appropriate matching cannot be achieved, management actions are in place to manage the market risk resulting from the mismatch. The Capital Management Committee provides regular monitoring of these processes.

The Group is not exposed to market risk in respect of assets held to cover unit-linked liabilities as these risks are borne by the holders of the contracts concerned, except to the extent that income from the fund-based management charges levied on these contracts varies directly with the value of the underlying assets. Such assets are, however, prudently managed in order to meet policyholders’ risk and reward expectations. In addition, regulatory requirements prescribe the type and quality of assets that can be held to support these liabilities.

(i) Asset price riskAsset price risk is the risk that the fair value or future cash flows of an asset or liability will fluctuate because of changes in market prices, other than those arising from interest rate or currency risks. Those changes may be caused by factors specific to the asset or liability or its issuer or by factors affecting all similar assets or liabilities.

The Group’s exposure to this risk arises principally from its holdings in equities and investment property. The Board sets the Group’s investment policy and strategy. Day-to-day responsibility for implementation is delegated to the Group’s investment management subsidiary with monitoring procedures in place.

The investment management agreement in place between the Parent company and its asset management company specifies the limits for holdings in certain asset categories. Asset allocation and performance benchmarks are set, which ensure that each fund has an appropriate mix of assets and is not over or under exposed to a particular asset category or specific investment. The Capital Management Committee monitors the actual asset allocation and performance against benchmark.

A sensitivity analysis to changes in the market prices of equities and property is included in section (iv).

(ii) Interest rate riskInterest rate risk is the risk that the fair value or cash flows of a financial instrument will vary as market rates of interest vary. For the Group, interest rate risk arises from holding assets and liabilities – actual or notional – with different maturity or repricing dates, creating exposure to changes in the level of interest rates, whether real or notional. It mainly arises from the Group’s investments in debt and fixed-income securities, which are exposed to changes in interest rates. It also arises in certain products sold by the Group which include guarantees which can lead to claim values being higher than the value of the backing assets where interest rates change.

Exposure to interest rate risk is monitored using scenario testing, stress testing, Value-at-Risk analysis and asset and liability duration control.

The Group manages interest risk using performance benchmarks with appropriate durations and in some instances, using derivatives to achieve a closer cash flow match. At 31 December 2012, the Parent company used government securities to provide interest rate sensitivity matching although it also had a number of interest rate swap and swaption agreements in place to hedge against adverse movements in interest rates.

A sensitivity analysis to interest rate risk is included in section (iv).

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(iii) Currency riskCurrency risk is defined as the risk that the fair value or future cash flows of an asset or liability will change as a result of a change in foreign exchange rates. For investment assets, the Group’s investment management policies and procedures allow for a small exposure to overseas markets, via both equities and fixed interest securities. The resulting currency risk is managed by the use of exposure limits and authorisation controls operated within the Group’s risk management framework.

The tables below demonstrate the extent to which the assets and liabilities of the Group and the Parent company are exposed to currency risk. Linked assets are not subject to currency risk as this risk is borne by the policyholders concerned. A sensitivity analysis of the Group and Parent company’s exposure to currency risk is included in section (iv).


2012£m

2011£m

2012£m

2011£m

Non-linked assets denominated in Sterling 18,308 18,790 16,607 16,842Non-linked assets denominated in Euro 996 1,410 994 1,403Non-linked assets denominated in USD 438 419 539 465Non-linked assets denominated in JPY 186 152 186 152Non-linked assets denominated in other currencies 233 187 233 187

20,161 20,958 18,559 19,049Linked assets not subject to currency risk 19,588 17,800 15,216 13,324

39,749 38,758 33,775 32,373

Non-linked liabilities denominated in Sterling 18,722 19,449 17,120 17,540Non-linked liabilities denominated in Euro 1,439 1,509 1,439 1,509

20,161 20,958 18,559 19,049Linked liabilities not subject to currency risk 19,588 17,800 15,216 13,324

39,749 38,758 33,775 32,373

At 31 December 2012, the Group and Parent company held currency forwards with a sterling notional value of £92m (2011 £235m) in respect of the non-linked assets denominated in currencies other than sterling. These are included in the table above.

(iv) Market risk sensitivity analysisThe following table shows the impact on the unallocated divisible surplus (before tax) from changes in key market variables. Each sensitivity is performed with all other variables held constant. The sensitivity scenarios used are as follows:

Interest rates100 basis point per annum reduction and increase in market interest rates. For example, if current market rates are 4%, the impact of an immediate change to 3% and 5%. A reduction in interest rates increases the current market value of fixed interest assets but reduces future reinvestment rates. The value of liabilities is also increased when interest rates fall as the discount rate used in their calculation will be reduced. An increase in rates will have the opposite effect.

Currency rates10% increase and decrease in the rates of exchange between sterling and the overseas currencies to which the Group is exposed. An increase in the value of sterling relative to another currency will reduce the sterling value of assets and increase the sterling value of liabilities denominated in that currency. As the Group holds relatively few liabilities in overseas currencies, an increase in the value of sterling will reduce the unallocated divisible surplus.

Equity/property capital values10% increase and decrease in equity and property capital values at the valuation date, without a corresponding fall or rise in dividend or rental yield. This sensitivity shows the impact of a sudden change in the market value of assets. The value of liabilities will decrease when asset values fall, but other than for unit-linked business, the decrease will be less than the fall in asset values because of the presence of financial guarantees and options in the underlying contracts. Consequently, the unallocated divisible surplus will be reduced by a fall in asset values.


40. Risk management (continued)(b) Market risk (continued)

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Impact before tax on the UDS


2012£m

2011Restated

£m2012

£m

2011Restated

£m

Interest rates +100bp 133 83 133 83Interest rates -100bp (232) (128) (232) (128)10% increase in Sterling/Euro exchange rate 12 (154) 12 (154)10% decrease in Sterling/Euro exchange rate (15) 188 (15) 18810% increase in Sterling/USD exchange rate (26) (26) (26) (26)10% decrease in Sterling/USD exchange rate 32 32 32 3210% increase in Sterling/JPY exchange rate (15) (14) (15) (14)10% decrease in Sterling/JPY exchange rate 19 17 19 1710% increase in Sterling/other currencies exchange rates (17) (13) (17) (13)10% decrease in Sterling/other currencies exchange rates 19 14 19 14Equity/property prices +10% 235 259 235 259Equity/property prices -10% (257) (265) (257) (265)

The sensitivities for 2011 have been restated to include the impact of the Royal London Group Pension Scheme.

Limitations of sensitivity analysisThe above table demonstrates the effect of a change in a key assumption while other assumptions remain unchanged. In practice, there may be dependencies between the underlying risks.

The Group’s assets and liabilities are actively managed. For example, the Group’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment market conditions change, management actions could include selling investments, changing investment portfolio allocation, adjusting bonuses credited to policyholders and taking other protective action.

It should also be noted that the impact on the unallocated divisible surplus from changes in these assumptions may not be linear as implied by these results. Larger or smaller impacts should not be interpolated or extrapolated from these results.

(c) Credit riskCredit risk is defined as the risk of loss if another party fails to perform its obligations or fails to perform them in a timely fashion. Exposure to credit risk may arise in connection with a single transaction or to an aggregation of transactions (not necessarily of the same type) with a single counterparty.

The Group’s exposure to credit risk arises principally from its investment portfolio, reinsurance arrangements and from its holdings in bonds, derivatives and cash in particular. The market, credit and liquidity risks policy and procedures and the investment management agreement stipulate approved counterparties, permitted investments and exchanges as well as detailing specific asset class exposure limits. The policy also requires that asset holdings are within the regulatory limits that restrict excessive concentrations with individual counterparties or with particular asset classes. For derivatives, the policy also details legal, collateral and valuation requirements. Where possible, significant counterparty exposures, particularly in respect of stock lending and derivatives, are mitigated by the use of collateral.

Exposures to individual counterparties are monitored against the agreed limits by the Credit and Market Risk Committee, which reports to the Capital Management Committee. For bond holdings, exposures are also monitored by industry sector and by credit rating. The Credit and Market Risk Committee may recommend changes to specific exposure limits to the Capital Management Committee.

The Group is also exposed to credit risk in respect of its reinsurance arrangements. The credit exposures for reinsurance contracts are monitored by the Credit and Market Risk Committee as part of the overall credit risk policy.

The following table shows the assets of the Group that are subject to credit risk and a reconciliation to the balance sheet carrying value. The credit risk in respect of linked assets is borne by the holders of the contracts concerned.

40. Risk management (continued) (b) Market risk (continued) (iv) Market risk sensitivity analysis (continued)

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Group

2012 2011

Non-linked assets

subject to credit risk

Linked assets

Balance sheet

carrying value

Non-linked assets

subject to credit risk

Linked assets

Balancesheet

carryingvalue

£m £m £m £m £m £m

Financial investments (note 19(b))– Debt and fixed-

income securities 8,861 6,298 15,159 8,903 6,529 15,432– Derivatives 92 8 100 489 36 525Cash and cash equivalents 1,152 1,749 2,901 937 1,575 2,512Reinsurers’ share of insurance liabilities 1,159 – 1,159 1,043 – 1,043Loans and receivables, including insurance receivables 152 125 277 214 139 353

11,416 8,180 19,596 11,586 8,279 19,865

The following table shows an analysis of the credit quality of those assets that are subject to credit risk, using credit ratings issued by companies such as Standard & Poor’s, where these are available. AAA is the highest rating possible for assets exposed to credit risk.

The credit ratings in respect of derivative financial investments are those of the counterparties to the derivative contracts. The debt and fixed-income securities which have not been rated by an external agency are subject to internal analysis to provide an internal rating, the average of which at 31 December 2012 was BB.

The internal rating process used by the Group is to assess credit risk within the context of the bond issuer’s financial position, the bond’s covenants and structure and the likely recovery should default occur. Three major sectors which are significant issuers of Sterling denominated unrated bonds, social housing, investment trusts and property, are each asset rich. For these sectors, documented specific credit analysis is undertaken, which assesses the individual risks of bonds in the sector and relates the risk of loss with that implied by the rating bands of the rating agencies. The internal ratings produced are compared for consistency with formally rated, broadly equivalent stocks in the same sector and for consistency with the market pricing of the underlying bond. For stocks in other sectors, the background of issuer and bond characteristics are assessed within a framework similar, where possible, to credit rating agency methodology.

In order to minimise its exposure to credit risk the Group invests primarily in higher graded assets, rated BBB or above. The Group also makes use of collateral arrangements in respect of its derivative exposures and stock lending activity, wherever possible. Further details of the collateral held are shown in note 19 (e).


40. Risk management (continued) (c) Credit risk (continued)

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Group – 2012

AAA AA A BBB BB/B CCNot

rated Total

£m £m £m £m £m £m £m £m

Assets subject to credit risk:Financial investments– Debt and fixed-income securities 5,718 903 877 811 138 1 413 8,861– Derivatives – – 56 4 – – 32 92Cash and cash equivalents 11 503 638 – – – – 1,152Reinsurers’ share of insurance liabilities – 1,094 65 – – – – 1,159Loans and receivables, including insurance receivables – – – – – – 152 152

5,729 2,500 1,636 815 138 1 597 11,416

Group – 2011

AAA AA A BBB BB/B CCNot

rated Total

£m £m £m £m £m £m £m £m

Assets subject to credit risk:Financial investments– Debt and fixed-income securities 6,110 624 933 671 132 6 427 8,903– Derivatives – 140 169 – – – 180 489Cash and cash equivalents 35 503 396 – – – 3 937Reinsurers’ share of insurance liabilities – 991 50 2 – – – 1,043Loans and receivables, including insurance receivables – – – – – – 214 214

6,145 2,258 1,548 673 132 6 824 11,586

The Parent company has a similar credit risk profile to that shown for the Group above and therefore it has not been analysed separately.

The following table shows the financial assets that are exposed to credit risk, analysing them between those that are neither past due nor impaired, those that are past due (by age band) but are not considered to be impaired and those that have been impaired.

Group – 2012

Assets that are past due but not impaired

Neither past

due nor impaired

0-3 months

3-6 months

6 months-

1 year > 1 year

Assets that have

been impaired Total

£m £m £m £m £m £m £m

Assets subject to credit risk:Financial investments– Debt and fixed-income securities 8,861 – – – – – 8,861– Derivatives 92 – – – – – 92Reinsurers’ share of insurance liabilities 1,158 1 – – – – 1,159Loans and receivables, including insurance receivables 129 22 – – 1 – 152

10,240 23 – – 1 – 10,264

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Group – 2011

Assets that are past due but not impaired

Neither past

due nor impaired

0-3 months

3-6 months

6months-

1 year > 1 year

Assets that

havebeen

impaired Total

£m £m £m £m £m £m £m

Assets subject to credit risk:Financial investments– Debt and fixed-income securities 8,903 – – – – – 8,903– Derivatives 489 – – – – – 489Reinsurers’ share of insurance liabilities 1,043 – – – – – 1,043Loans and receivables, including insurance receivables 171 39 – – 4 – 214

10,606 39 – – 4 – 10,649

The Parent company has a similar profile to that shown for the Group and therefore it has not been analysed separately.

No collateral was held against assets that are past due or impaired (2011 £nil). There were no material financial assets that would have been past due or impaired had the terms of the instrument not been renegotiated.

(d) Liquidity risk Liquidity risk is the risk that adequate liquid funds are not available to settle liabilities when these fall due. The Group’s liquidity management process includes:

• Maintaining forecasts of cash requirements and adjusting investment management strategies as appropriate to meet these requirements, both in the short and longer term.

• Holding sufficient assets in investments which are readily marketable in a sufficiently short timeframe to be able to settle liabilities as these fall due. Where liabilities are backed by less marketable assets, for example, investment property unit-linked funds, contract terms permit the company to delay settlement in order to provide the time to sell investments in an orderly fashion to provide the required funds should the need arise.

• Maintaining a contingency funding plan that covers the framework to enable ongoing monitoring of the Group’s capacity to meet its short- and medium-term liabilities. It also includes a clear management action plan providing an analysis of available financing options, regular and alternative sources of liquidity and an evaluation of a range of possible adverse scenarios.

• Appropriate matching of the maturities of assets and liabilities. The Group has an Asset Liability Management (ALM) policy to ensure the duration of liabilities is matched by assets.

The Group’s exposure to liquidity risk principally arises from its insurance and investment contracts. The following tables show a maturity analysis for the Group and Parent company’s insurance and investment contract liabilities. As permitted by IFRS 4, for insurance and participating investment contracts, this has been presented as the expected future cash outflows arising from the liabilities. The analysis for the non-participating investment contracts has been shown on the same basis for consistency. Had the analysis for these liabilities been presented on the basis of the earliest contractual maturity date (as required by IFRS 7) then the whole balance would have been included in the 0-5 years column, as policyholders can exercise surrender options at their discretion. In such a scenario the liability may be reduced by the application of surrender penalties. The tables also show a maturity analysis for the Group and Parent company’s derivative liabilities, presented on a contractual cash flow basis.

The longer-term matching of assets and liabilities is covered within market risk, note 40 (b). As a result of the policies and procedures in place for managing its exposure to liquidity risk, the Group considers the residual liquidity risk arising from its activities to be immaterial. Therefore, an analysis of the Group’s asset cash flows by contractual maturity is not considered necessary to evaluate the nature and extent of the Group’s liquidity risk.

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Group – 2012

Cash flows (undiscounted)

Balance sheet carrying value

0-5 years

5-10 years

10-15 years

15-20 years

> 20 years Total

£m £m £m £m £m £m £m

Participating insurance contract liabilities (11,717) (4,592) (2,915) (2,446) (2,323) (2,310) (14,586)Participating investment contract liabilities (1,946) (710) (509) (392) (285) (591) (2,487)Non-participating insurance contract liabilities (4,069) (857) (706) (618) (466) (561) (3,208)Non-participating investment contract liabilities (17,501) (6,299) (4,889) (3,749) (2,683) (3,038) (20,658)

(35,233) (12,458) (9,019) (7,205) (5,757) (6,500) (40,939)

Derivative liabilities (76) (71) (49) (24) (5) 110 (39)

Group – 2011



0-5 years

5-10 years

10-15 years

15-20 years

> 20 years Total

£m £m £m £m £m £m £mParticipating insurance contract liabilities (11,981) (4,938) (3,078) (2,363) (2,193) (2,480) (15,052)Participating investment contract liabilities (1,922) (696) (486) (395) (303) (619) (2,499)Non-participating insurance contract liabilities (4,326) (1,162) (761) (616) (450) (564) (3,553)Non-participating investment contract liabilities (15,575) (5,877) (4,437) (3,321) (2,417) (2,933) (18,985)

(33,804) (12,673) (8,762) (6,695) (5,363) (6,596) (40,089)

Derivative liabilities (215) (147) (84) (72) (67) (397) (767)



Balance sheetcarrying value

0-5 years

5-10 years

10-15 years

15-20 years

> 20 years Total

£m £m £m £m £m £m £m


(30,857) (9,964) (7,806) (6,621) (5,476) (6,274) (36,141)

Derivative liabilities (46) (70) (48) (23) (4) 111 (34)

40. Risk management (continued)(d) Liquidity risk (continued)

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0-5 years

5-10 years

10-15 years

15-20 years

> 20 years Total

£m £m £m £m £m £m £m


(29,322) (10,174) (7,499) (6,055) (5,037) (6,276) (35,041)

Derivative liabilities (170) (110) (81) (70) (65) (399) (725)

(e) Pension schemesThe Group maintains three defined benefit pension schemes for past and current employees. The ability of the pension schemes to meet the projected pension payments is maintained through investments and, where applicable, regular contributions from employees and the Group. Risk arises because the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, the Group could be required to make additional contributions. Management of the assets of the pension schemes is the responsibility of each scheme’s Trustees, who each appoint a Scheme Actuary to perform triennial valuations to assess the level of funding required to meet the scheme’s liabilities. The schemes’ main exposures are to equity, interest rate, inflation and longevity risk. For further information on pension scheme assets and liabilities, see note 35.

The Group monitors its pension schemes’ exposure using a variety of metrics which are regularly reviewed by the Group’s Capital Management Committee and used in discussions with the Trustees, through whom any risk management activity is conducted.

(f ) Operational riskOperational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risks include, but are not limited to, information technology, information security, human resources, project management, tax, legal, fraud and compliance. Senior management has primary responsibility for the management of operational risks through developing policies, procedures and controls across the different products, activities, processes and systems under their control and for the allocation of responsibilities.

The Group acknowledges that to be in business a certain level of operational risk needs to be taken and articulates an appetite for operational risk exposures. Business units and supporting functions take actions against those risks which are assessed as being outside appetite and report these matters to their risk committee with escalation to the Group Operational & Regulatory Risk Committee, Executive Risk Committee and Board Risk Committee. A risk management training programme is in place with a series of computer-based training packages on subjects such as financial crime and data protection as well as a more generic risk package which all staff have to pass annually. This is supplemented by training on Solvency II developments which enhances the risk and capital management in Royal London. Tailored training has been delivered to the Board and senior management and informal training sessions have been arranged at all the main sites to increase knowledge and understanding for all staff.

Each part of the business is responsible for identifying, assessing, managing and reporting on its operational risks on a monthly basis and for implementing and maintaining controls within its remit in accordance with the Group’s operational risk methodology. In performing these assessments, account is taken of the Group’s risk appetite with greater significance being placed on those risks that fall outside these parameters.

Details of risks on inherent (before controls) and residual (after controls) bases are maintained on a Group Risk Register, which is maintained on proprietary software. This is used as a basis for review and challenge by senior management, Risk Committees and the Board of Directors. Management attention is focused upon those controls identified as not working as effectively as desired and upon action plans which are put in place when any weakness is identified. In addition, on a quarterly basis, operational losses are collated and provided to senior management and Risk Committees including the Board Risk Committee with the causes of these analysed so that controls can be adjusted appropriately. This loss information is also built into the suite of operational risk scenarios analysed at business unit and central function level.

(g) Emerging risk All insurers may be impacted by risks that are potentially significant but which are currently only just beginning to emerge. Royal London has defined emerging risks as being “newly developing or changing risks which are difficult to quantify or may be uncertain and which could have a major impact on an organisation.” Typically the drivers for these risks are socio-political, technological, economic or regulatory. The Group’s Emerging Risk Forum


40. Risk management (continued)(d) Liquidity risk (continued)

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comprises members from across the Group who identify and assess emerging risks and possible mitigating actions. Information about emerging risks is provided to senior management and the Board and is used to inform decision making.

Risk GovernanceAn independent Risk and Compliance function provides challenge to the business on the effectiveness of the risk management practices being followed, on the risks identified, the strength of the controls in place and any actions being progressed. In many parts of the Group governance and risk teams are embedded within business units supporting the process. The function provides advice and guidance on the impact of regulatory change and undertakes risk-based monitoring reviews to assess the quality of business processes and controls, reporting the results of its findings to management and to the Board on a monthly basis.

Stress and Scenario TestingGroup Risk and Compliance and Group Actuarial consider a range of stress and scenario tests which are used directly to assess the level of capital required to run the business at a given confidence level and to take mitigating action to manage these risks. These include:

a) Real world economic scenarios, produced from an economic scenario generator, which allow the calculation of the capital required in each scenario.

b) Insurance risk stresses, which allow the calculation of the value of technical provisions or claims outgo in extreme circumstances for each given risk.

c) Operational, reputational and regulatory risk stresses and scenarios: a wide range of scenarios is analysed across the business units and central functions looking at the most significant operational risks ranging from business continuity to customer servicing.

d) A monthly report, which shows the sensitivity of the capital position to stresses in individual economic parameters is monitored by the Capital Management Committee. These stresses are typically movements in equity markets, yield curves, credit spreads, equity volatility, the equity backing ratio of the fund and a combined stress of equities and yields. Other parameters could potentially be stressed and reported if required. In addition, monthly reporting to the Board includes “contour charts” showing the sensitivity of the capital position to movements in key economic parameters.

e) Reverse-stress tests which are used to identify the high impact stress events which would cause the firm’s business model to fail and to consider the appropriate action, if any, to protect against such failure.

41. Capital management(a) Capital management policies and objectivesThe Group’s capital management objectives are:• to protect the Group’s financial strength, providing security to policyholders;• to ensure that the Group’s capital position is sufficient to enable it to invest in the development of the business in order to fulfil its stated

core strategic objectives as determined by the Board; and• to comply with the FSA’s capital requirements. The Group has not breached these requirements at any point in the current or prior year.

The capital position of the Group is monitored on a regular basis and reviewed formally by the Capital Management Committee. The Group’s capital requirements are forecast on a regular basis. Those forecasts are compared against the available capital and the Group’s required minimum internal rate of return. The internal rate of return forecast to be achieved on potential investments is also measured against minimum required benchmarks taking into account the risk associated with the investment.

The FSA’s capital requirement is that the Group must hold capital in excess of the higher of two amounts – the Pillar I and Pillar II requirements. The Pillar I capital requirement is reported in the publicly available FSA return. It is equal to the statutory minimum capital requirement plus an additional component for each with-profits fund for which regulatory excess assets would otherwise exceed realistic excess assets as reported in the realistic balance sheet. The statutory minimum capital requirement is based on EU directives. It is broadly equivalent to the capital needed by an ‘average’ life insurance company with good risk controls, to cover adverse experience likely to occur once in every two hundred years.

The Pillar II capital requirement is based on the Group’s Individual Capital Assessment which is reported privately to the FSA. It is broadly equivalent to the capital needed to cover the Group’s actual portfolio of risks at the same ‘one in two hundred year event within the next twelve months’ risk level, but having regard to the Group’s own risk controls.

As the Parent company is a mutual insurance company, all business, including non-participating business, is written within its with-profits fund and all the subsidiaries of the Group are owned by that fund. The capital resources and capital resource requirements of the Group’s regulated subsidiaries are included within the calculation of the Parent company’s capital. As a result, the capital position of the Parent company and the Group are the same and hence only the Group’s figures are shown in the following tables.

40. Risk management (continued)(g) Emerging risk (continued)

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A summary realistic balance sheet is shown below, split between those funds currently open to new business and those that are closed. The closed funds are the Refuge Industrial Branch fund, the United Friendly funds, the Scottish Life Fund, the PLAL with-profits fund and the Royal Liver fund, which were transferred on the acquisitions of United Assurance, Scottish Life, Phoenix Life Assurance Limited and Royal Liver Assurance. Further details on the Group’s fund structure are described on page 20.

Realistic available capital for both the open and closed funds is determined in accordance with the FSA’s realistic balance sheet methodology. This can be broadly described as placing a market value on both the assets and participating liabilities, including both benefits already guaranteed and future discretionary benefits. Additionally, the value of future profits on all acquired in-force long-term business as well as on non-participating business issued by the Group may be included as an asset.

Participating liabilities comprise asset shares, plus the costs of smoothing, plus the value of guarantees and options which have been granted to policyholders. The asset share represents the premiums received to date, together with investment return earned, less expenses and charges.

There are two principal types of financial option and guarantee:• Guaranteed lump sum payments due on specified dates. These mainly comprise the sum assured together with annual bonuses added onto participating contracts. Although the Group invests in a

broad spread of asset types, there is still a risk that assets held to back any individual policy (the asset share) may be depressed at the time that the guaranteed payment due at maturity falls to be paid. The potential cost of honouring these guarantees is quantified as part of the liability for participating contracts.

• Guaranteed annuities. These primarily arise in connection with pension business and occur in one of two forms: – a guaranteed income specified in the contract; – guaranteed terms for converting lump sum maturity benefits into an income at maturity.

When calculating the participating liabilities, allowance has been made for actions that management would be expected to undertake on key assumptions, for example future bonus or investment policy in varying market conditions, in line with the Parent company’s PPFM. The costs of financial options and guarantees are measured using a market-consistent stochastic model.

For the purpose of the capital statement, all excess assets associated with policies written within the closed funds, amounting to £1,045m (2011 £895m), are reported as liabilities because they are not available for distribution to other policyholders or for other business purposes. However, those excess assets are available to provide support to the relevant policies under stressed financial conditions before any call on the reported excess capital within the open funds need be made.

2012 2011

Open funds

Closed funds Total

Open funds

Closed funds Total

£m £m £m £m £m £m

Total realistic participating assets 6,267 8,700 14,967 6,168 9,063 15,231Value of in-force business on a realistic basis 1,524 146 1,670 1,418 166 1,584Current liabilities and subordinated liabilities (598) (266) (864) (687) (460) (1,147)

Total realistic participating net assets 7,193 8,580 15,773 6,899 8,769 15,668

Realistic participating liabilities – Participating benefit reserve 4,524 6,834 11,358 4,407 7,094 11,501– Costs of smoothing (12) 67 55 20 27 47– Guarantees 282 446 728 325 561 886– Options (guaranteed annuities) 165 332 497 193 371 564– Other 28 (144) (116) 45 (179) (134)

Total realistic participating liabilities (before closed fund transfer commitments) 4,987 7,535 12,522 4,990 7,874 12,864

Total realistic available capital (before closed fund transfer commitments) 2,206 1,045 3,251 1,909 895 2,804Closed fund transfer commitments – (1,045) (1,045) – (895) (895)

Total realistic available capital 2,206 – 2,206 1,909 – 1,909


41. Capital management (continued)(b) Realistic balance sheet

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£m £m

Unallocated divisible surplus 2,648 2,388Adjustments onto a regulatory basis– Inadmissible goodwill, other intangibles, pension schemes and deferred tax assets (514) (684)– Other adjustments to the value of net assets 19 75– Adjustments to liabilities on a regulatory basis 53 130

Total available capital resources 2,206 1,909

Capital requirementRisk Capital Margin (39) (50)

Excess capital 2,167 1,859

Analysis of liabilitiesParticipating insurance contract liabilities 11,717 11,981Participating investment contract liabilities 1,946 1,922Unallocated divisible surplus 2,648 2,388Non-participating value of in-force business (963) (796)

15,348 15,495Non-participating insurance contract liabilities– Unit-linked 2,089 2,225– Other 1,980 2,101Non-participating investment contract liabilities – Unit-linked 17,501 15,575

21,570 19,901

Total contract liabilities 36,918 35,396

The capital statement sets out the financial strength of the Group and provides a reconciliation of the unallocated divisible surplus to the available capital resources. The available capital resources are determined using FSA valuation rules. The asset valuation rules are based on IFRS, adjusted to exclude certain assets not admissible for regulatory purposes and for other specific valuation differences.

The capital requirement for the Group is the Risk Capital Margin (RCM). This represents the level of capital that the Group is required to hold in a stress event. The RCM is calculated assuming that persistency improves by 32.5% (2011 32.5%), that equity markets fall by 20.0% (2011 20.0%), property values fall by 12.5% (2011 12.5%) and risk-free yields fall by 41 basis points (2011 43 basis points). Credit risk is allowed for by assuming an immediate and permanent widening in yield spreads on corporate bonds over risk-free rates, calculated on a stock-by-stock basis.

During 2012, the Group remained on the regulatory peak. On the regulatory basis, the Group’s total available capital was £5,416m (2011 £4,703m), the capital resources requirement was £3,042m (2011 £2,797m) and the excess capital was £2,374m (2011 £1,906m).

41. Capital management (continued)(c) Capital statement

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2012 2011

Open funds

Closed funds Total

Open funds

Closed funds Total

£m £m £m £m £m £m

At 1 January (after closed fund transfer commitments) 1,909 – 1,909 1,802 – 1,802Closed fund transfer commitments – 895 895 – 752 752

At 1 January (before closed fund transfer commitments) 1,909 895 2,804 1,802 752 2,554Changes in assumptions 116 8 124 (211) (291) (502)Investment performance 161 134 295 182 298 480New business 54 – 54 47 – 47Changes in management policy (52) (46) (98) (52) (124) (176)Other movements 18 54 72 141 260 401

Movement 297 150 447 107 143 250

At 31 December (before closed fund transfer commitments) 2,206 1,045 3,251 1,909 895 2,804Closed fund transfer commitments – (1,045) (1,045) – (895) (895)

At 31 December (after closed fund transfer commitments) 2,206 – 2,206 1,909 – 1,909

The table above shows key elements of the movement in available capital resources analysed by open and closed funds. The impact from assumption changes includes economic, persistency, mortality, expense and regulatory valuation assumption changes and their effects on the costs of guarantees, options and smoothing, the value of in-force business and the participating benefit reserve. The dominant effect arises from changes in demographic assumptions, including expenses.

The investment performance impact arises from investment return, which was greater than the risk-free rate anticipated. Investment performance comprises the after-tax return on opening capital, including the unwind of discount rate from, and the effect of, the better than expected return on the value of in-force business, out-performance on assets backing liabilities in respect of guarantees, options and smoothing and other Future Policy Related Liabilities, and the reduction in cost of guarantees caused by the higher than expected value of underlying asset shares.

Value of new business is calculated on the basis used to value liabilities within the Realistic Balance Sheet and is quoted net of development costs and tax.

Changes in management policy reflect actions taken by the Board of Directors which affect the value of liabilities set aside to meet future payments to with-profits policyholders. Other movements include experience profits over the year including those earned on non-life subsidiaries, the impact of acquisitions in the open and closed funds and opening adjustments to reflect improved modelling and residual items.

There were no significant changes in regulation or other similar external developments.

(e) Sensitivity of capitalThe capital position of the Group is sensitive to changes in economic conditions and financial markets both through the impact on asset values and also the effect that changes in interest rates and investment returns may have on liability valuations. The liabilities are also sensitive to the other assumptions that have been used in their calculation, such as mortality and persistency. The Group’s approach to managing these risks is detailed in note 40.

41. Capital management (continued)(d) Movement in available capital resources


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(i) Economic conditions and f inancial marketsThe liability valuation will include assumptions about interest rates and investment returns. An adverse change in either variable will increase liabilities and hence reduce the available capital. For example, a reduction in long-term interest rates would increase the amount of the Group’s liabilities and could therefore reduce its available capital, depending upon the extent to which the liabilities are matched by assets with similar anticipated cash flows.

Similarly, an adverse change in the markets for the Group’s investment assets will reduce the available capital of the Group to the extent that it cannot be reflected in reductions in payments to policyholders because of the presence of guarantees and options in the underlying contracts.

(ii) AssumptionsThe Group monitors actual experience in mortality, morbidity and persistency rates against the assumptions used, and applies that outcome to refine its long-term assumptions. Amounts paid will inevitably differ from estimates, particularly when the expected payments do not occur until well into the future. Liabilities are evaluated at least half yearly, allowing for changes in the assumptions used, as well as for the actual claims experience. If actual claims experience is less favourable than the underlying assumptions, or it is necessary to increase provisions in anticipation of a higher rate of future claims, then available capital will be reduced.

41. Capital management (continued)(e) Sensitivity of capital (continued)

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Statement of directors’ responsibilities in relation to the European Embedded Value basis supplementary informationThe directors of Royal London have chosen to prepare supplementary information in accordance with the European Embedded Value Principles (the EEV Principles) issued in May 2004 by the CFO Forum, as supplemented by the Additional Guidance on European Embedded Value Disclosures issued in October 2005. When compliance with the EEV Principles is stated, those principles require the directors to prepare supplementary information in accordance with the Embedded Value Methodology (EVM) contained in the EEV Principles and to disclose and explain any non-compliance with the EEV Guidance included in the EEV Principles. The directors have chosen not to adopt the ‘Market Consistent Embedded Value’ Principles published by the CFO Forum in June 2008.

In preparing the EEV supplementary information, the directors have:

• prepared the supplementary information in accordance with the EEV Principles;• identified and described the business covered by the EVM;• applied the EVM consistently to the covered business;• determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external

data and then applied them consistently;• made estimates that are reasonable and consistent; and• determined the basis on which business that is not covered business has been included in the supplementary information.

European Embedded Value supplementary information

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Independent auditors’ report to the directors of The Royal London Mutual Insurance Society Limited on the supplementary financial statements – European Embedded Value BasisWe have audited the Supplementary Financial Statements – European Embedded Value Basis of The Royal London Mutual Insurance Society Limited (‘the Company’) for the year ended 31 December 2012 which comprise the Consolidated Income Statement – European Embedded Value Basis, Consolidated Balance Sheet – European Embedded Value Basis and the related notes (“the supplementary financial statements”) which have been prepared in accordance with the European Embedded Value (“EEV”) basis set out in Note (a) – Basis of Preparation and which should be read in conjunction with the Group’s financial statements.

Respective responsibilities of directors and auditorsAs explained more fully in the Statement of Directors Responsibilities, the directors are responsible for preparing the supplementary financial statements in accordance with the EEV basis set out in Note (a) – Basis of Preparation. Our responsibility is to audit and express an opinion on the supplementary financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinion, has been prepared for and only for the Company’s directors as a body in accordance with our letter of engagement dated 27 June 2012 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the supplementary financial statements An audit involves obtaining evidence about the amounts and disclosures in the supplementary financial statements sufficient to give reasonable assurance that the supplementary financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the supplementary financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited supplementary financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on the supplementary financial statementsIn our opinion, the supplementary financial statements for the year ended 31 December 2012 have been properly prepared in all material respects in accordance with the European Embedded Value basis set out in Note (a) – Basis of Preparation.

PricewaterhouseCoopers LLP Chartered Accountants London 27 March 2013

Notes:

(a) The supplementary financial statements are published on the website of the Royal London Group, www.royallondongroup.co.uk. The maintenance and integrity of the Royal London Group website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the supplementary financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of supplementary financial statements may differ from legislation in other jurisdictions.

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Consolidated income statement – EEV basisfor the year ended 31 December 2012

2012 2011

Notes £m £m

Contribution from new business (g) (i) 89 77Profit from existing business (g) (ii) – Expected return 64 84– Operating experience variances 34 31– Operating assumption changes 61 15Expected return on opening net worth (g) (iii) 29 31Profit on uncovered business (g) (iv) 8 9Other items (g) (vi) (39) (10)

Operating profit before business combinations 246 237Gain arising on business combinations (g) (v) – 97

Operating profit before tax 246 334Economic experience variances (g) (vii) 127 116Economic assumption changes (g) (viii) 83 (162)Movement in pension scheme surplus (RLGPS) (g) (ix) (95) (31)Financing costs (g) (x) (25) (25)

EEV profit before tax and mutual dividend 336 232Mutual dividend (g) (xi) (93) (94)

EEV profit before tax 243 138Attributed tax charge (g) (xii) (18) (16)

EEV profit after tax 225 122

Supplementary information

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Consolidated balance sheet – EEV basisas at 31 December 2012

2012 2011

£m £m

AssetsAssets held in closed funds 9,903 10,362Assets backing non-participating liabilities 17,992 16,713Reinsured liabilities 1,159 1,043Assets backing participating liabilities and net worth – UK equities 1,762 1,710– Overseas equities 425 402– Land and buildings 853 887– Approved fixed interest securities 1,915 1,848– Other fixed interest securities 1,176 1,053– Other assets 481 603Value of in-force business 1,386 1,264Pension scheme surplus (RLGPS) 62 157

Total 37,114 36,042

LiabilitiesLiabilities in closed funds 9,903 10,362Non-participating liabilities 17,992 16,713Reinsured liabilities 1,159 1,043Participating liabilities 5,053 5,048Current liabilities 592 686

Total 34,699 33,852

Embedded Value Net worth 967 769Value of in-force business 1,386 1,264Pension scheme surplus (RLGPS) 62 157

Total 2,415 2,190

Value of in-force business – EEV basisas at 31 December 2012 2012 2011 £m £m

Value of in-force business before allowance for burn-through and capital costs 1,407 1,293Burn-through cost (1) (10)Cost of capital (20) (19)

Value of in-force business 1,386 1,264

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Notes to the EEV supplementary information

(a) Basis of preparationThe EEV results presented in this document have been prepared in accordance with the EEV Principles and the Additional Guidance issued in 2005 by the CFO Forum. They provide supplementary information for the year ended 31 December 2012 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 Principles and Guidance 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 and Guidance accordingly. With-profits policies held by members do not generally contribute to the value of in-force business. However, the liabilities associated with these contracts are deducted from total assets to arrive at net worth. Hence, any movement in liabilities not matched by a corresponding movement in assets will change the net worth and flow through the income statement. The reported embedded value provides an estimate of Royal London’s value to its members.

EEV operating profit follows the same principles, in terms of items to include and exclude, as the definition of operating profit on the IFRS basis given on page 18 with the exception of certain items which are recognised under IFRS but are excluded from EEV. This is a consequence of the basis of preparing the Group EEV results, which is by reference to the Realistic Balance Sheet (RBS). Some items recognised under IFRS are inadmissible in the RBS and are therefore not recognised in our EEV reporting. Most notably, operating profit on the IFRS basis includes amortisation of intangibles (and impairment if relevant) whereas in EEV reporting, goodwill or other intangible assets arising on the acquisition of a subsidiary or business (other than Value of In-Force business) are excluded because such items are not permitted to be recognised in the RBS.

(b) EEV methodology(i) OverviewThe EEV basis of reporting is designed to recognise the economic value of a new policy at the point it is written. The total profit recognised over the lifetime of a policy is the same as that recognised under the IFRS basis of reporting, but the timing of recognition is different.

For the purposes of EEV reporting, the Group has adopted a market-consistent methodology. Within a market-consistent framework, assets and liabilities are valued in line with market prices and consistently with each other. In principle, each cash flow is valued using a discount rate consistent with that applied to such a cash flow in the capital markets.

(ii) Covered businessThe EEV Principles require an insurance company to distinguish between covered and uncovered business according to whether the business is valued on EEV Principles. The covered business, in the case of Royal London, incorporates:• life and pensions business defined as long-term business by UK and overseas regulators; and• asset management business; both that derived from the life and pensions business and that arising from external clients (except that arising

from cash mandates, which is treated as uncovered).

This business, which represents the vast majority of the Group’s total business, is valued on an EEV basis.

(iii) Embedded valueThe reported embedded value provides an estimate of the value of the covered business, including future cash flows expected from the existing business but excluding any value that may be generated from future new business. For covered business, it comprises the sum of the net worth calculated on an EEV basis and the value of the in-force business. For uncovered business, it comprises the IFRS net worth.

The net worth is the market-consistent value of the net assets (excluding the value of in-force business and pension scheme surplus) over and above those required to manage the business in line with the published Principles and Practices of Financial Management (PPFM). It is based on the RBS working capital in those funds within the Group that are open to new business and allows for the value of the sub-debt on a market-consistent basis.

The value of in-force business is the present value of the projected streams of future cash flows available from the existing business at the valuation date, on a best estimate basis allowing for risk, adjusted for the cost of holding the required capital.


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(b) EEV methodology (continued)(iv) Allowance for riskThe allowance for risk is a key feature of the EEV Principles. The table below summarises how each item of risk has been allowed for:

Type of risk EEV methodology

Market-related risks Allowed for explicitly in the EEV calculations

Non-market risks which are symmetrical in terms of the impact Allowed for within the estimates of future operating experience on EEV

Non-market risks which are asymmetrical in terms of the impact Allowed for in the calculation of VIF and financial options by way of an on EEV additional margin in the estimates of future operating experience

• MarketriskThe approach adopted to calculate the Market Consistent Embedded Value combines deterministic and stochastic techniques. Deterministic techniques have been used to value ‘non-option cash f lows’; that is cash f lows whose values vary linearly with market movements. Stochastic techniques have been used to value cash f lows with an asymmetric effect on profit, such as investment guarantees on with-profits products.

In principle, each cash f low is valued using the discount rate consistent with that applied to such a cash f low in the capital markets. For example, an equity cash f low is valued using an equity-risk discount rate and a bond cash f low is valued using a bond-risk discount rate. If a higher return is assumed for equities, the equity cash f low is discounted at this higher rate. In practice, it is not necessary to discount each cash f low at a different rate. For cash f lows that are either independent or move linearly with the market, a method known as the ‘certainty equivalent approach’ will achieve the same results. Under this method all assets are assumed to earn the risk-free rate of return and all cash f lows are discounted using the risk-free rate. This approach has been adopted to value the ‘non-option cash f lows’ within a deterministic model.

• Non-marketriskIn general, the allowance for non-market risk is covered by the margin incorporated into the Group’s estimates of future operating experience assumptions. However, there are certain situations in which the impact of fluctuations in experience is asymmetric, namely that adverse experience can have a higher negative impact on value than the positive impact generated by favourable experience.

In these cases, an additional margin over best estimate is incorporated into the experience assumptions. The methodology used to determine the appropriate allowance for non-market risk is based on the analyses undertaken as part of the development of the RBS and the Individual Capital Assessment.

(c) Cost of capitalThe EEV Principles require capital allocated to the covered business to be split between required capital, the future distributions of which are restricted, and free surplus. We have defined the amount of required capital to be that necessary to meet the more onerous of the FSA Pillar 1 and Pillar 2 capital requirements, which for Royal London is currently Pillar 2.

The EEV includes a deduction for the frictional cost of holding the required capital. Frictional costs, being the tangible costs of holding capital, have been allowed for on a market-consistent basis. These consist of the total taxation and investment expenses incurred on the required capital over the period it is anticipated to be required. They reflect the cost to a member of having an asset held within a mutual insurance company, rather than investing in the asset directly.

No allowance has been made for any agency costs. These represent the potential markdown to value that members might apply because they do not have direct control over their capital. Any adjustment would be subjective and different members will have their own views of what adjustment, if any, should be made.

(d) Burn-through costUnder adverse conditions the funds that remain open to new business may be required to make good any deficits that arise in the closed funds. The time value cost of this potential liability, known as the burn-through cost, is modelled stochastically, as it will only occur in adverse scenarios.

The burn-through cost is calculated as the average value of the capital support supplied in a large number of market-consistent scenarios. Allowance has been made under the different scenarios for management actions, such as altered investment strategy, consistent with the PPFM.

The stochastic model used to calculate this liability has been calibrated to market conditions at the valuation date. In addition, due to the asymmetric nature of this liability, an additional margin has been incorporated into the operating assumptions.

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(e) ExpensesThe EEV Guidance requires companies to perform an active review of expense assumptions, and include an appropriate allowance for corporate costs and service company costs.

• CorporatecostsCorporate costs are those costs incurred at a corporate level that are not directly attributable to the covered businesses. To the extent that future corporate costs have not been anticipated within the EEV they are accounted for as they arise.

• ServicecompanycostsAn in-house administration service company, that receives a fee in respect of each policy it administers, is responsible for the administration of the majority of Royal London’s policies. A similar arrangement exists for asset management services, although the fee is applied as a percentage of assets. The value of the in-force life and pensions business has been calculated using the service company (including asset management) fees.

Costs within the in-house administration service company have been classified as either ongoing (including an element of development expenditure) or exceptional development costs. Exceptional development costs have not been anticipated within the EEV and instead are accounted for as they arise. For 2012, £16m (2011 £7m) of development costs were classified as exceptional. The profits expected to arise from life and pensions business within the administration service company from activities related to the maintenance of existing business and within Royal London Asset Management (RLAM) in respect of investment management services have been capitalised within the EEV. These calculations result in the recognition of further value in the in-force business. £27m (2011 £26m) is recognised in respect of the administration service company and £41m (2011 £39m) is recognised in respect of RLAM’s investment management services.

No allowance has been made for future productivity gains

(f ) New businessNew covered business includes:• premiums from the sale of new contracts, (including any contractual future increments on new contracts);• non-contractual increments (both regular and single premium) on existing policies;• premiums relating to new entrants in group pension schemes; and• rebate premiums received from the Department for Work and Pensions (DWP).

(g) Analysis of EEV profit(i) Contribution from new businessThe contribution from new business is calculated using economic assumptions at the end of the period. It is shown after the effect of required capital, calculated on the same basis as for in-force covered business.

New business sales are expressed on the present value of new business premiums (PVNBP) basis. PVNBP is calculated as total single premium sales received in the year plus the discounted value, at point of sale, of regular premiums expected to be received over the term of the new contracts. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate the new business contribution, so the components of the new business margin are on a consistent basis.

The new business contribution in the table below represents the new business contribution grossed up for tax at 23% (2011 26%). This is to aid comparability with proprietary companies which typically pay tax at the main corporation tax rate of 23% (2011 26%).

The new business margin represents the ratio of the new business contribution to PVNBP.


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(g) Analysis of EEV profit (continued)(i) Contribution from new business (continued)

2012 Present value New New of new business business business premiums contribution margin £m £m %

Scottish Life 2,438 30.4 1.2Bright Grey/Scottish Provident 482 41.0 8.5Caledonian Life 32 3.2 10.0Royal London (Retail) – – –Royal London 360° 364 8.8 2.4Royal London Plus 208 12.9 6.2

Total life and pensions 3,524 96.3 2.7

Royal London Asset Management 2,264 11.5 0.5

Total 5,788 107.8 1.9

2011 Present value New New of new business business business premiums contribution margin £m £m %

Scottish Life 2,251 26.1 1.2Bright Grey/Scottish Provident 393 23.0 5.9Caledonian Life 7 (0.8) (11.4)Royal London (Retail) 69 16.6 24.0Royal London 360° 398 8.2 2.1Royal London Plus 173 15.3 8.8

Total life and pensions 3,291 88.4 2.7

Royal London Asset Management 1,363 7.7 0.6

Total 4,654 96.1 2.1

Scottish Life sold 8% more business in 2012 than in 2011 and has managed to maintain its margins in a very competitive market.

Bright Grey/Scottish Provident volumes are up 23% on 2011 with margins also higher, due largely to the associated economies of scale and improved reinsurance terms.

Caledonian Life is a small Irish protection business, acquired in July 2011 as part of the Royal Liver transaction. The business was initially sub-scale and loss-making but has now been restructured and successfully returned to profit.

Royal London (Retail) business was sold via Santander’s retail network. The distribution contract with Santander ceased at the end of June 2011.

Royal London 360º new business contribution and margins have increased, due to greater focus on higher margin regular premium business.

Royal London Plus business is largely incremental DWP rebate income to the legacy book, with low attaching expenses of acquisition, making it relatively profitable business. The reduction in margin arises mainly from a reclassification of expenses between acquisition and maintenance. Legislative changes mean this income stream will largely cease after 2012.

The new business volumes from new asset management mandates acquired by RLAM are up 66% on 2011, written on similar margins.

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(g) Analysis of EEV profit (continued)(ii) Prof it from existing businessProfit from existing business comprises:• the expected return on the value of in-force business at the start of the period; plus• profits and losses caused by differences between actual experience for the period and that assumed in the embedded value calculations at

the start of the period; plus• the impact of any changes in the assumptions regarding future operating experience.

2012 2011 £m £m

Expected return 64 84Operating experience variance 34 31Operating assumption changes 61 15

Total 159 130

The decrease in expected return reflects the decrease in the risk-free rate from 4.0% at the start of 2011 to 2.5% at the start of 2012. Experience variances include the impact of the difference between demographic, expense and persistency assumptions and the actual experience incurred in the year. In 2012, the positive operating experience variance arises mainly due to more favourable than expected persistency and better than expected mortality experience for the protection business.

Future assumptions have been changed, where appropriate, to reflect the improved experience, and this is the main factor behind the favourable operating assumption change impact.

(iii) Expected return on opening net worthThe expected return on opening net worth represents the expected investment return on the net worth over the period. The 2012 and 2011 figures are similar despite the prevailing interest rates at the start of each period having reduced from 2011 to 2012. This is because the opening net worth has gone up by an offsetting amount.

(iv) Prof it on uncovered businessProfit on uncovered business has been valued on an IFRS basis, as used in the primary financial statements. A breakdown of the profit reported on uncovered business is shown in the table below:

2012 2011 £m £m

General insurance commissions 8 9Annuity and other commissions 5 4Ascentric (1) –MoneyVista (4) (4)

Total 8 9

(v) Gain arising on business combinationsOn acquiring Royal Liver in 2011, we agreed to administer the Royal Liver business and to carry out the associated investment management in return for fixed fees payable by the Royal Liver closed sub-fund. It is anticipated that the Royal Liver business can be administered and managed for less than the fixed fees, thereby generating future profits in the Royal London open fund. For 2011, the estimated value of these future profits is shown in this item.


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(g) Analysis of EEV profit (continued)(vi) Other itemsOther items represent a combination of:• exceptional development costs, which are typically investments made to improve future EEV profits (for example by reducing ongoing expense

levels or increasing new business volumes);• corporate costs; and• other exceptional items. As an example, this would include the impact of any changes in the way the business is modelled and improvements to

valuation techniques.

A breakdown of these items is shown in the table below:

2012 2011 £m £m

Exceptional development costs (16) (7)Corporate costs (32) (29)Modelling and other changes 9 26

Total (39) (10)

The exceptional development and corporate costs include costs associated with the acquisition of Royal Liver, the Solvency II project and other corporate transactions.

The ‘modelling and other changes’ component reflects a number of small modelling changes.

(vii) Economic experience variancesThis shows the impact of actual investment returns relative to those expected. Economic experience variances have an impact on the value of in-force (VIF) business and on the net worth.

The economic experience variance on the VIF arises from the change in policy values in which Royal London has an interest. The economic experience variance on the net worth represents the impact that investment returns, being different to those anticipated, has on:• the value of the opening net worth;• the value of financial options and guarantees (*); and• the value of the assets backing the financial options and guarantees (*).

(*) Excluding those movements due solely to changes in the yield curve, which have been netted off against the movement in the value of assets caused by the shift in the yield curve.

The value of the second and third items above is generally far more significant for Royal London, as a mutual insurance company, than would be the case for an equivalent proprietary company, whose interest in the surplus in its with-profits funds is restricted typically to 10% of the distributable surplus.

In general, investment markets performed well in 2012. For assets held within the Royal London fund, UK and overseas equities returned 13% and corporate bonds returned 16%. Returns on property and on government bonds were lower but still in excess of the opening risk-free rate.

(viii) Economic assumption changesLong-term economic assumptions were revised to take into account the financial conditions at the end of the period including the impact of related management actions. The effect of these changes contributed £83m (2011 £(162)m) to the pre-tax result. Further details of the economic basis used are provided in section (i).

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(g) Analysis of EEV profit (continued)(ix) Pension scheme surplusThe principal scheme is the Royal London Group Pension Scheme, a final salary scheme that is closed to new entrants. On an International Accounting Standard (IAS) 19 basis, the scheme had a surplus of £62m at 31 December 2012 (2011 £157m).

The surplus in the two pension schemes acquired as part of the Royal Liver transaction, is part of the closed Liver sub-fund and so is not included in the EEV income statement.

(x) Financing costsIn December 2005, Royal London raised £395m (after expenses) of subordinated debt, which carries a coupon of 6.125% per annum. The cost of servicing the debt over the year is £25m (2011 £25m) and is included as a financing cost.

(xi) Mutual dividendIn 2012, Royal London’s Board exercised its discretion to allocate a proportion of the profits to certain asset shares by crediting an investment return in excess of the rate earned on the underlying assets, thereby directly increasing the value of the liabilities set aside to meet future payments to relevant policyholders. This is the ‘mutual dividend’ of £88m referred to in the Chairman's statement (£88m being the net of tax amount). In 2011, the corresponding figure was £88m.

(xii) Attributed tax chargeEEV profits are calculated net of tax and then grossed up at an appropriate tax rate. In general, this will be 6%, the expected long-term rate of tax payable by Royal London, although subsidiary companies may be subject to different rates of tax.

(h) EEV assumptions(i) Principal economic assumptions – deterministicEconomic assumptions are reviewed actively and are based on the prevailing market yields on risk-free assets at the valuation date.

2012 2011 % %

Risk-free rate 2.30 2.50Retail price inflation 2.50 2.75Expense inflation 3.50 3.75

(ii) Principal economic assumptions – stochasticThe value of financial options (including premium rate guarantees and guaranteed annuity options), smoothing costs and future deductions from asset shares are calculated using market-consistent techniques. Market consistency is achieved by running a large number of economically credible scenarios through a stochastic valuation model. Each scenario is discounted at a rate consistent with the individual simulation. The economic scenarios achieve market consistency by:• deriving the underlying risk-free rate from the forward gilt curve, with a margin of 10 basis points to reflect empirical evidence that gilt

yields may understate the true risk-free rate;• calibrating equity and interest rate volatility to observed market data by duration and price, subject to interpolation/extrapolation where

traded security prices do not exist. We attempt to achieve the best possible fit, although modelling restrictions prevent this from being perfect.


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(h) EEV assumptions (continued)(ii) Principal economic assumptions – stochastic (continued)The tables below show the implied volatilities used in the modelling by asset class:

2012 Term (years) 5 10 15 20 30

15-year risk-free zero coupon bonds 9.3% 7.1% 5.7% 5.2% 5.5%15-year AA-rated corporate bonds 11.7% 9.7% 8.3% 7.6% 7.4%Equities 23.7% 25.8% 27.0% 28.0% 28.5%

2011 Term (years) 5 10 15 20 30

15-year risk-free zero coupon bonds 9.1% 5.1% 2.7% 2.4% 5.8%15-year AA-rated corporate bonds 12.7% 9.1% 7.3% 6.6% 7.7%Equities 25.1% 26.0% 27.2% 28.3% 29.2%

(iii) Expected returns in reporting periodFor the purposes of calculating the expected returns over the period, allowance is made for a risk premium as set out in the following table:

2012 2011 % %

Risk premium – equities 2.50 2.50Risk premium – property 2.00 2.00

All other assets are assumed to earn the risk-free rate.

(iv) Other assumptionsDemographic assumptions are regularly reviewed having regard to past, current and expected future experience, and any other relevant data. These are generally set as best estimate with an appropriate margin for adverse deviations.

(i) Sensitivity analysesThe table below shows the sensitivity of the embedded value at 31 December 2012 and the 2012 contribution from new business to changes in assumptions.

Change in Change in embedded new business value contribution

Notes £m £m

100 basis point increase in risk discount rates (158) 410% increase in market values of equities and property 1 271 –10% proportionate decrease in lapse and paid-up rates 52 1210% proportionate decrease in expenses 108 195% proportionate decrease in mortality and morbidity (7) 250% increase in capital requirements (10) –

Notes:1. The value of new business is assessed at the point of sale. Increases in the value of equities and property at this date have no impact on the

value of new business.2. The sensitivities in the table include the impact of stress testing the Royal London Group Pension Scheme.

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Notice of AGM and resolutions168

Commentary on the resolutions

Resolutions 5 to 14 Reappointment of directorsIn accordance with The Association of Financial Mutual’s Annotated UK Corporate Governance Code and to increase accountability,all directors will retire at each AGM and stand for reappointment. Accordingly, all of your continuing directors are retiring and offering themselves for reappointment at this AGM.

Jane Platt, Stephen Shone, Tim Melville-Ross and David Williamswill be stepping down from the Board at the forthcoming AGM and so will not be offering themselves for reappointment.

The Board considers that each of the directors offering themselves for re-election brings a wealth of valuable experience to the Board, enhancing its skill and knowledge base and should be reappointed. Biographical details of all directors are included on pages 40 and 41 of this Annual Report and Accounts and on pages 7 to 9 of the Summary Financial Statement 2012.

Note: The terms and conditions of appointment of non-executive directors are available for inspection at the Company’s registered office at 55 Gracechurch Street, London, EC3V 0RL during business hours on any weekday (except public holidays) and will be available for inspection at the AGM.

Resolution 15 New Articles of AssociationWe are asking members to approve the adoption of new Articlesof Association to take account of a number of developmentsin law applicable to companies since the current Articles of Association were adopted at the Annual General Meeting in 2008, primarily the remaining provisions of the Companies Act 2006, which came into force in October 2009.

An explanation of the main differences of substance between the current Articles of Association and the new Articles of Associationis set out on the next page. We have also taken the opportunityto revise the current Articles of Association in order to update the language, style and approach in line with best practice.

Resolution 1 Annual Report and Accounts 2012Following changes introduced by the Companies Act 2006, the Company is not required to lay its accounts before a general meeting. The Board nonetheless considers it best practiceto do so and will continue to present the Annual Report and Accounts to the Annual General Meeting (AGM).

Resolution 2 Directors’ remuneration reportThe Companies Act 2006 requires a company that is quotedon the London Stock Exchange to include at the AGM a resolution to approve the Directors’ remuneration report. The resolution is advisory. This requirement does not apply to the Company because it is a mutual and not a quoted company. The Board, however, believes that such a resolution has become a part of good corporate governance and accordingly has voluntarily included it as a resolution to be considered at this AGM.

The Directors’ remuneration report appears on pages 56 to 67 ofthis Annual Report and Accounts and a summary of the report is on pages 14 to 17 of the Summary Financial Statement 2012.

Resolutions 3 and 4 Appointment and remuneration of auditorsThe Board considers it best practice that at each general meetingat which accounts are laid, the Company appoints an auditor to hold office until the next general meeting at which accounts are laid. The general meeting must also determine the remuneration or the way in which it will be determined. PricewaterhouseCoopers LLP are the Company’s existing auditors and the directors recommendthat they be reappointed and their remuneration be determinedby the directors.

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Main changes to the Articles of Association

1. Memorandum of AssociationUnder the Companies Act 2006 the Memorandum of Association of a company are no longer required. The key provisions of the Memorandum have now been includedin the Articles of Association.

2. RequisitionsArticles 4 and 5 contain provisions dealing with the requisition by members of an extraordinary general meeting and a resolution to be passed at an annual general meeting. They allow the Board to disregard a requisition in certain circumstances. Article 4.5 specifies that the Board shall put forward a resolution that can ‘properly be moved’. The Articles do not however specify how to determine whether a resolution is capable of being properly moved. Practice in relation to the requisitionof resolutions by members has developed since the Articles were last amended. The Articles have been updated to make reference to the criteria in relevant legislation, which sets out the circumstances in which a requisitioned resolution may be properly moved, in order to avoid disputes as to whether the Board should put a resolution to members.

These amendments in respect of requisition by members of an extraordinary general meeting are not essential changes but may help avoid disputes in relation to requisitions in the future.

3. Electronic communicationsUnder article 6.8 there is provision for notice of general meetings to be sent via the website where a member has consented(or is deemed to have consented) to that method of service. There is currently no reference to other documents or information (such as annual reports) being sent in this way. Therefore the Articles have been updated so that memberscan receive documents other than notices via the website.

4. Delegation of directors’ powersArticle 16.1 relates to Board committees consisting of a majority of directors. This amendment is required to takeinto account the independent non-director elements of the With-Profits Committee and the Royal Liver Supervisory Committee (established by the scheme of transfer).

5. Directors’ feesThe new Articles of Association remove the aggregate annual limit on fees payable to directors. This is to enable the Board to continue recruiting and paying non-executive directors in line with the market rate. There has also been an increase in the number of Board Committees that the non-executive directors are required to attend and chair as well as the establishmentof the With-Profits Committee and the Investment Committee which in turn has also led to an increase in the number of non-executive directors. In addition, overall growth of the business, the proposed acquisition of the life, pensions and asset management businesses from The Co-operative Banking Group and increased regulatory focus have made it necessary to increase the size of the Board.

New legislation is being introduced this year to strengthen the current requirements for companies to disclose remuneration matters, including Remuneration Policy, in their report and accounts. One of the key proposals is that, as well as the vote on historical remuneration, there will also be a vote on future Remuneration Policy which will include non-executive directors’ fees. Although the Company is not required to comply withall the legislation, it is envisaged that the key principles willbe adopted including the votes on remuneration, therebygiving members added protection to that afforded in the current Articles of Association.

6. Quorum of directors’ meetingsArticle 20.6 states that the quorum of the Board must be a majority of directors who are eligible to vote on that resolution. It is much more usual to have a minimum quorum of two directors.

7. Definitions and housekeepingThere are some minor changes to definitions and references to legislation that require amending to reflect enactments since the last change to the Articles.

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Notice of AGM and resolutions

Notice of Annual General Meeting

Notice is hereby given that the 2013 Annual General Meeting of The Royal London Mutual Insurance Society Limited (the Company) will be held at 11.30 a.m. (or immediately following the EGM, which commences at11.00 a.m., if later) on Tuesday 4 June 2013, at Dexter House (etc. Venues) No.2 Royal Mint Court, Tower Hill, London, EC3N 4QN for the following purposes:

1. That the audited Annual Report and Accounts for the year ended 31 December 2012 be received.

2. That the Directors’ remuneration report be approved.

3. That PricewaterhouseCoopers LLP be reappointed as auditors to the Company until the conclusion of the next Annual General Meeting.

4. That the remuneration of PricewaterhouseCoopers LLP be fixed by the directors.

5. That Andrew Carter be reappointed a director.

6. That Duncan Ferguson be reappointed a director.

7. That Tracey Graham be reappointed a director.

8. That Phil Loney be reappointed a director.

9. That Kerr Luscombe be reappointed a director.

10. That Jon Macdonald be reappointed a director.

11. That Kathryn Matthews be reappointed a director.

12. That Andrew Palmer be reappointed a director.

13. That Rupert Pennant-Rea be reappointed a director.

14. That David Weymouth be reappointed a director.

15. Special Resolution: That

(a) the Articles of Association of the Company be amended by deleting all the provisions formerly in the Company’s Memorandum of Association which, by virtue of section 28 of the Companies Act 2006, are to

be treated as provisions of the Company’s Articles of Association; and

(b) the Articles of Association contained in the document produced to the meeting and initialled by the chairman of the meeting, for the purpose of identification, be approved and adopted as the new Articles of Association of the Company in substitution for, and to the exclusion of, the existing Articles of Association.

A form of proxy for use at the AGM is enclosed. To be valid, the form of proxy should be completed and returnedin accordance with the instructions as soon as possible but in any event so as to arrive no later than 2 June 2013.

By order of the Board


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Glossary

AAssociation of British Insurers (ABI) The ABI represents the collective interests of the UK’s insurance industry.

Acquired present value ofin-force businessThe present value of in-force business acquired through the purchase of a portfolio of insurance and investment contracts, either directly or through the purchase of a subsidiary company.

Acquisition costsThe costs of acquiring and processing new business, including a share of overheads.

Admissible assetsThe assets which can be included in the regulatory balance sheet of a life insurance company under UK legislation.

AdviserSomeone authorised by the Financial Services Authority, who is qualified by experience and examination to provide financial advice.

AnnuityAn insurance policy that provides a regular income in exchange for a lump sum payment.

AscentricRoyal London business unit providing investment administration and consolidation services to long-term investors and financial advisers through its online Ascentric Wrap service.

Asset shareA policy’s asset share is calculated by accumulating the premiums paid, deducting all applicable expenses and tax, and adding its share of the investment returns achieved by the with-profits fund over the policy’s lifetime.

Asset share enhancementAn increase to asset shares arising, for example, from the allocation of themutual dividend.

Assets under administration (AUA) The total assets administered on behalf of individual customers and institutional clients. It includes those assets for which the Group provides investment management services, as well as those that the Group administers where the customer has selected an external third party investment manager.

Auto-enrolmentThe government has introduced a new law designed to help people save more for their retirement. It requires all employers to enrol their workers into a workplace pension scheme if they are not already in one.

Available regulatory capitalThe excess of admissible assetsover liabilities, as measured followingthe Financial Services Authority’s regulatory reporting requirementsfor UK life insurers.

BBright GreyRoyal London business unit providing protection products in the UK through intermediaries.

Burn-through costUnder adverse conditions, the fund that remains open to new business may be required to make good any deficits that arise in the closed funds. This potential liability is known as the burn-through cost. It is modelled using stochastic techniques as it will only occur in adverse scenarios.

Business unitA sub-division of the Group that focuses on a specific product offering, marketor function. A business unit may be a statutory entity or part of one or more separate statutory entities.

C Caledonian LifeRoyal London business unit providing protection products in the Republic of Ireland through intermediaries.

Capital MarketsMarkets in which institutions and individuals trade financial securities suchas long-term debt and equity securities. These markets are also used by boththe private and public sectors to raise funding from investors, typically for the longer term.

CFO ForumA high-level discussion group formedand attended by the Chief Financial Officers of major European insurance companies to discuss and harmonise reporting standards.

CompanyThe Royal London Mutual Insurance Society Limited.

Covered businessThe business covered by the EEV methodology. This includes life and pensions business defined as long-term business by UK and overseas regulators and asset management business (excluding cash management).

Critical illness coverCover that pays a lump sum if the insured person is diagnosed with a serious illness that meets the cover’s definition.

D Deferred acquisition costs (DAC)The method of accounting whereby certain acquisition costs on long-term business are deferred and therefore appear as an asset. This leads to a smoothed recognition of acquisitioncosts instead of recognising the full amount in the year of acquisition.

Deferred fee incomeThe method of accounting whereby up-front policy charges are deferred and therefore appear as a liability. This leads to a smoothed recognition of these charges instead of recognising the full amount in the year of acquisition.

Defined benefit schemeA type of occupational pension scheme, where the benefits are based on the employee’s salary and service.

Direct to consumerInsurance business sold by the Group directly to end-customers, rather than through advisers.

DiscountingThe process of expressing a future cash transaction in terms of its present value using a discount rate which reflects the time value of money.

EEconomic assumptionsAssumptions of future interest rates, investment returns, inflation and tax. The impact of variances in these assumptions is treated as non-operating profit or loss under EEV.

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Additional information

EEV operating profitThe profit on an EEV basis resulting from our primary business operations namely: life insurance and pensions; managing and administering investments; and acquiring and administering closed long-term insurance funds. We describe this in more detail on page 160.

European Embedded Value (EEV) The EEV basis of reporting attempts to recognise the true economic value added over a period and is calculated accordingto guidelines issued by the CFO Forum. The total profit recognised over the lifetime of a policy is the same as that recognised under the IFRS basis of reporting butthe timing of the recognition is different.

Excess realistic capitalThe excess of realistic working capital over the risk capital margin.

Excess regulatory capitalThe excess of available regulatory capital over the regulatory capital required.

Exempt Property Unit Trust (EPUT)An onshore unit trust with strict restrictions on who can hold units.

F Fair valueThe amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Financial adviser fee (FAF)An upfront fee paid to an IFA witha corresponding deduction from theclients’ plan.

Financial Conduct Authority (FCA)An independent conduct of business regulator, which will ensure that businessis conducted in such a way that advancesthe interests of all users of, and participants in, the UK financial sector. ‘Legal cutover’is when the FCA will officially come into existence, and will take place on 1 April 2013.

Financial options and guaranteesFor Royal London business, ‘financial options’ refers principally to guaranteed annuity options. ‘Guarantees’ refers to with-profits business where there are guarantees that part of the benefits will not reduce in value, or are subject to a minimum value.

Financial Services AuthorityThe independent body that regulates theUK financial services industry. It has a wide range of rule-making, investigatory and enforcement powers. With effect from1 April 2013 the regulation of prudentialand conduct operations is to be carriedout by two new organisations; the ‘Financial Conduct Authority (FCA)’ and the ‘Prudential Regulation Authority (PRA)’.

FSA Pillar IIThe Financial Services Authority’s capital regime, also known as Individual Capital Assessment.

Funds under management (FUM)The total of assets actively managed or administered by, or on behalf of, the Group, including funds managed by third parties.

GGroupThe Royal London Group.

Group pensionsA pension plan generally operated by an employer for a group of employees.

Guaranteed annuitiesThese primarily arise in connection with pension business as either:- a guaranteed income specified in the policy, or- guaranteed terms for converting the pension fund of a policy into an income for life at the policy’s pension date.

I Industrial Branch (IB)Life insurance where (often relatively small) premiums were originally collected at the policyholder’s home.

Income drawdownA facility which allows a policyholder to draw an income from their pension policy instead of buying an annuity.

Independent Financial Adviser (IFA) Someone authorised by the Financial Services Authority, qualified by experience and examination to provide financial advice, who is not working for any single product provider company.

Individual Capital Assessment (ICA)An assessment of the capital required by the Group, reported privately to the FSA. It is broadly equivalent to the capital needed to cover the Group’s actual portfolio of risks at a ‘one in two hundred year event’ risk level, having regard to the Group’s own risk controls.

Internal modelThe processes, systems and calculations that together allow the Group to control the risks that it faces and quantify the capital needed to support those risks. It includes a calculation engine to quantify capital requirements, the Group’s risk management framework and its system of governance.

Internal rate of return (IRR)The discount rate at which the present value of the after-tax cash flows we expect to earn over the lifetime of the business written is equal to the total capital invested to support the writing of that business.

International Financial Reporting Standards (IFRS)Accounting standards issued by the International Accounting Standards Board (IASB).

Individual Savings Account (ISA)A tax-free investment contract, allowing investment into cash and stocks and shares.

Investment gradeAn investment grade corporate bond is one that has a credit rating of ‘BBB’ or above from one or more recognised rating agencies (such as Standard & Poor’s, Moody’s or Fitch), indicating that it has a relatively low risk of default.

KKey performance indicator (KPI)An indicator used by a business to measure its development, performance or position.

LLifestylingThe method of reducing the proportion of a policy’s investments in equity and property, together with increases in the proportion in fixed interest investments, each year during the 10 years before the policy’s maturity or pension date.

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MMaintenance expensesExpenses related to the servicing of the in-force book of business, including investment and termination expenses and a share of overheads.

Market-consistent basisA basis of valuation in which assets and liabilities are valued in line with market prices and consistently with each other. In principle, each cash flow is valued using a discount rate consistent with that applied to such a cash flow in the capital markets.

Mathematical reservesRequired under the regulatory reserving basis, it is an estimation of the value, in today’s money, of claims we will pay out in the future, calculated on a prudent basis.

Minority interestA non-controlling interest in an entity, typically associated with an ownership interest of less than 50%.

MoneyVistaRoyal London business unit that provides an online service that helps users create and maintain their own financial plan.

Mortality chargeA charge for life cover under a policy. Mortgage endowmentAn insurance contract combining savings and protection elements designed to repay the principal of a loan or mortgage.

MutualA company owned by its members which is not listed on the stock market. A member of a mutual company can attend and vote at its Annual General Meeting.

Mutual dividendAn allocation of part of the Group’s operating profits by means of a discretionary enhancement to asset shares of eligible policies.

NNet worthThe excess of assets over liabilitieson the EEV basis of reporting, where assets exclude PVIF and the pension scheme surplus.

New business contributionThe expected present value of all cash flows arising from new business.

New business marginThe new business contribution as a percentage of the present value of new business premiums.

Non-profit policyLong-term savings and insurance products other than with-profits policies.

O Open ended investment company (OEIC)Investment funds which pool together investors’ money and invest this in a broad range of shares and other assets. They are similar to unit trusts.

Operating assumptionsAssumptions in relation to future levels of mortality, morbidity, persistency and expenses. The impact of variances in these assumptions is included as operating profits under EEV.

Operating experience variancesThe impact of actual mortality, morbidity, persistency and expense experience being different to that expected at the start of the period.

Operating profit (IFRS basis)Operating profit (IFRS basis) is the profit resulting from our business operations as measured in accordance with IFRS accounting policies. We describe this in detail on page 18.

Ordinary Branch (OB)Life insurance business that is not Industrial Branch.

P Parent companyThe Royal London Mutual Insurance Society Limited.

ParticipatingContracts which are with-profits in type.

Payback periodThe period required for the after-tax cash flows expected to arise on new business to be equal to the capital investedto support the writing of the business.

PensionA means of providing income in retirement for an individual and possibly his/her dependants. Our pension products include personal and group pensions, stakeholder pensions and income drawdown.

Pension dateThe date at which income can be taken from a pension either through a cash lump sum or investment in an annuity.

Personal pensionA pension plan for an individual policyholder.

PLALPhoenix Life Assurance Limited. PLAL’s assets and liabilities were transferredinto Royal London Group with effect from 29 December 2008.

Present value of in-force business (PVIF)

The present value of the projected future profits after tax arising from the business in-force at the valuation date.

Present value of new business premiums (PVNBP)

The PVNBP is the total of new single premium sales received in the year plus the discounted value, at the point ofsale, of the regular premiums we expect to receive over the term of the new contracts sold in the year.

Principles & Practices of Financial Management (PPFM)

A document detailing how we manage our with-profits funds.

ProtectionA policy providing a cash sum orincome on the death or critical illnessof the life assured.

Protection divisionRoyal London’s Protection division consists of three protection brands: Bright Grey, Scottish Provident and Caledonian Life.

Prudential Regulation Authority (PRA) Part of the Bank of England that will be responsible for the authorisation, regulation and day-to-day supervision of all insurance firms that are subject to prudential regulation. ‘Legal cutover’ is when the PRA will officially come into existence and will take place on 1 April 2013.

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RRealistic balance sheet (RBS)The Group’s balance sheet as calculated on the realistic reporting approach.

Realistic reporting approachThis is prescribed by the FSA and recognises the potential for future final bonus payments under with-profits business, the valueof in-force business and the cost of future financial options and guarantees, which is calculated explicitly using stochastic techniques.

Realistic working capitalSee definition of ‘working capital’.

Regular premiumA series of payments for an insurance contract, typically monthly or annually.

Regulatory reserving basisThe basis of reserving for liabilities following the regulatory approach. This is prescribed by the FSA and is a prudent approach but does not recognise the potential for future final bonus payments under with-profits business.

Regulatory capital requiredThe amount of capital that the FSA requires a UK life insurer to hold which is calculated using the European Union solvency requirements basis, also known as the Insurance Groups Directive requirement.

Required capitalAn amount that an insurer must set aside in addition to the value of the technical provisions to give additional comfort that an insurer will be able to meet policyholder liabilities as they fall due.

Retail Distribution Review (RDR)A major FSA regulatory reform programme, implemented on 31 December 2012, which changes the way investment and pension products are sold.

Risk adjusted profitEEV operating profit which recognises an additional charge for risk.

Risk capital marginThe required capital amount as prescribed by the FSA’s realistic reporting approach.

Risk-free rateThe theoretical rate of return of an investment with no risk of financial loss.

Royal London 360°Royal London business unit responsible for international business.

Royal London Asset Management (RLAM)Royal London business unit responsible for managing the Group’s financial assets aswell as funds for external clients, includingmulti- managers, pension funds for FTSE 250 companies, local authorities, universities, charities and individuals.

Royal London Asset Management Channel Islands (RLAM CI) Royal London Cash Management (RLCM)Royal London’s two cash management operations which provide specialist cash management services for a wide rangeof clients including charities, insurance companies, universities and plcs.

Royal London Foundation Launched in April 2011, the foundation provides grants to charities and projects nominated by members of Royal London.

Royal London GroupThe Royal London Mutual Insurance Society Limited and its subsidiaries.

Royal London Open FundThe part of the Royal London With-Profits Fund into which all of the Group’s new insurance business is written, with the exception of business written by Royal London 360° and Royal London Pooled Pensions Company Limited. Also known asThe Royal London IB and OB sub-fund.

Royal London PlusRoyal London business unit responsible for managing the Group’s direct to consumer businesses. This includes customers who were transferred from Refuge Assurance, United Friendly, Phoenix Life Assurance Limited and Royal Liver.

Royal London Pooled Pensions Company Limited (RLPPC)A subsidiary of the Company providing managed fund facilities to pension schemes.

Royal London With-Profits FundThe long-term business fund of Royal London, comprising the Royal London Open Fund and a number of closed sub-funds, from businesses acquired in the past.

Glossary (continued)

SScottish LifeRoyal London business unit providing pensions and retirement planning products to the UK market and third-party administration services to external clients.

Scottish ProvidentRoyal London business unit, providing protection products in the UK through intermediaries.

Self-invested personal pension (SIPP)A personal pension scheme underwhich the member has some freedomto choose investments.

Single premiumA single payment for an insurance contract.

Solvency IIA major European Union directive whichwill transform how we manage and report risk and capital.

Stakeholder pension planA low-cost pension introduced by the Government in 2001 to promote wider pension saving and which has to meet certain standards and conditions. For example, the pension provider cannot charge more than 1% of the value of the individual’s fund each year for administering the plan.

Stochastic techniquesValuation techniques that allow for the potential future variability in assumptions by the running of multiple possible scenarios.

Subordinated debtIn the event of bankruptcy, dissolution or winding-up, the payments arising from this debt rank after the claims of other creditors.

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U UK Corporate Governance Code (the Code)This sets out guidance in the formof principles and provisions onhow companies should be directedand controlled to follow good governance practice.

The FSA requires companies listed inthe UK to disclose how they have applied the Code’s principles and whether they have complied with its provisions throughout the accounting year. Where the provisions have not been complied with, companies must provide an explanation.

Unit-linked policyA policy for which the premiums buy units in a chosen investment fund.

Unit trustA collective investment which invests ina range of assets such as equities, fixed interest investments and cash. A unit trust might be a general fund or specialisein a particular type of asset, for example property, or in a particular geographical area, for example South East Asia.

Unitised with-profit policyA policy for which the premiums buy units in a with-profits fund.

Upper Tier 2 capitalThe value of our subordinated debtwhich is treated as capital within the available regulatory capital and working capital calculations.

VValue of in-force business (VIF)See definition of ‘Present value of in-force business (PVIF)’.

WWhite-label platformA wrap platform provided by Royal London but sold under the brand name of a third-party distributor.

With-profits policyA policy which participates in the profits of a with-profits fund. This participation may be in the form of one or more of a cash bonus, an annual bonus or a bonus paid on the exit of the policy.

Working capitalThe excess of assets over liabilities, as measured by the FSA’s realistic reporting approach.

Wrap platformA trading platform enabling investment funds, pensions, direct equity holdings and some life assurance contracts to be held in the same administrative account rather than as separate holdings.

Wrap providerAn investment company, such as Ascentric, that offers investors the opportunityto consolidate their different investments under a single administrative account.

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Governance



Notice of A

GM

and resolutionsA



Business review

Contact offices The Royal London Mutual Insurance Society LimitedRegistered in England and WalesNo. 99064

Registered office55 Gracechurch StreetLondonEC3V 0RLTel: 08450 502020www.royallondongroup.co.uk

Bright Grey2 Queen StreetEdinburghEH2 1BGTel: 0845 609 4500www.brightgrey.com

Royal London 360°Royal London HouseIsle of Man Business ParkCooil RoadDouglasIsle of ManIM2 2SPTel: 01624 681 682www.royallondon360.com

Scottish LifeSt Andrew House1 Thistle StreetEdinburghEH2 1DGTel: 0845 60 50 050www.scottishlife.co.uk

AscentricTrimbridge HouseTrim StreetBathBA1 1HBTel: 0845 600 5360www.ascentric.co.uk

Scottish Provident301 St Vincent StreetGlasgowG2 5PBTel: 0845 271 0900www.scottishprovident.com

Royal London PlusRoyal London HouseAlderley RoadWilmslowCheshireSK9 1PFTel: 08450 502020www.royal-london.co.uk

Royal London Asset Management55 Gracechurch StreetLondonEC3V 0UFTel: 020 7506 6500www.rlam.co.uk

Caledonian LifeCaledonian House47 St. Stephen’s GreenDublin 2Tel: 0044 353 1429 3333www.caledonianlife.ie

MoneyVistaReading Bridge HouseKings Meadow RoadReadingBerkshireRG1 8LSwww.moneyvista.com

2013 Financial calendar

Date Event28 March Financial results for 2012.14 May Interim management statement and first quarter new business figures.4 June Extraordinary General Meeting and Annual General Meeting.20 August Interim financial results.5 November Interim management statement and third quarter new business figures.

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This report and accounts has been printed on a paper which is made from 15% de-inked, Recycled FSC Fibre,85% Virgin FSC Fibre. The mill at which the paper is manufactured, and theprinter, have been certified for ISO14001, ISO9001 & are FSC certified. The pulpis bleached using an element chlorinefree process.

www.royallondongroup.co.uk


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