Royal London profits reveal margin pressures

Royal London Group saw its overall operating profit rose 16% last year, but comments expressed by the firm suggests life offices are being increasingly squeezed by low margin rates.

According to the end of year results for 2006 published this morning, Royal London saw its overall operating profit before tax rise to £116m compared with £100m in 2005, as each division of the firm is reported to have continued to make positive gains.

That said, both Bright Grey and Scottish Life International are highlighted as businesses whose profitability has been hit compared with last year as margins are tight.

The group reports Bright Grey’s volumes of business continued to “increase strongly” but the complexities of life office financial reporting and the use of business persistency assumptions to calculate annual profit means profitability is down on the previous year – along with present value of new business premiums – because the firm has had to adjust its new business margins to reflect lower than expected persistency of policies.

“We have strengthened the persistency assumptions used to value our protection business, which reduced new business margins for Bright Grey,” says Mike Yardley, chief executive of Royal London Group.

According to figures calculated under European Embedded Value (EEV), the value of profits for the overall group, at a value of new business rate (VNB), rose from £40.1m to £47.3m, however, the amount of business Bright Grey did fell from £7.2m in 2005 to £2.8m in 2006.

Yardley stresses all markets were “intensely price-competitive” in 2006 but Bright Grey remains “a relatively immature business and has yet to realise the economies of scale that should ultimately be achieved” so the firm expects Bright Grey profitability to improve.

Similarly, Scottish Life International saw its profitability decrease as a result of “a change in the mix of business written, with an increased proportion of lower margin products” from £4.9m to £4.7m.

Elsewhere, profits rose at Scottish Life - which include business earned from the Royal London-branded Riley product - Royal London Asset Management and Royal London Admin Services but Yardley points out all divisions experienced “relatively low margins”.

“Looking forward, our strategy is unchanged. We recognise that the short-term consequence is that our pensions business volumes and market share may fall, given the pricing strategies still being followed by some providers, especially in the group pensions market,” says Yardley.

“We will not adopt similar pricing practices, which we believe are designed to suit short-term purposes. In this respect, we have been encouraged by the increasing number of providers who have recognised the importance of this issue, with several starting to follow a similar pricing approach to our own,” he adds.

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