Safeguarding our strength for you and your clients podcast

Our CEO, Barry O’Dwyer and Chief Actuary, Shaun Cooper discuss our response to the current crisis and how we’re safeguarding our financial strength.

Hear Barry discuss our operational resilience during the coronavirus outbreak and how he sees our plans for the business in the future once the crisis is behind us.

While Shaun gives reassurance around our financial strength, our hedging strategies and his view that he doesn’t see the virus having a long-term effect on our business.


Shaun Cooper

Shaun Cooper
Chief Actuary
Royal London

Barry O’Dwyer

Barry O’Dwyer
CEO
Royal London

[Clare]

Hello my name is Clare Moffat and I head up the Intermediary development and technical team at Royal London.

I'm delighted to be joined today by Royal London Group’s CEO, Barry O'Dwyer, and Chief Actuary, Shaun Cooper. In these times of great uncertainty, we understand confidence and Royal London is key for advisers and for their clients.

So I'll be asking Shaun and Barry some questions about Royal London's response to the current crisis, how we're safeguarding our financial strength and how we move forward into the rest of the year.

Barry, the last few weeks have been some of the most challenging in living memory. How has Royal London responded?

[Barry]

Hello Clare, yes well you're right, none of us have lived through a health crisis like this that has quite so many economic ramifications. The virus represents a new risk to the world economy and therefore for our business. But our business is risk management so we've taken a clear and straightforward approach to addressing this new risk.

Shaun will talk about how we've managed our balance sheet which is really important as we need to keep our customers’ money safe and secure. But our operational priority has been the health and well-being of our colleagues so that we can continue to deliver an excellent service for advisers and customers.

In just six days we were able to move our service operations out of our offices and into our homes. 99% of our teams are now working from home with only a small number of colleagues working in our offices to handle the incoming post. All of our processes are fully operational and our telephone lines are open as normal.

[Clare]

And what have you learned about Royal London throughout all of this?

[Barry]

Well I'm very proud of the way that our people have reacted. There has been a quiet determination to get on with things. And it's amazing how quickly we've all adapted to the new normal.

It doesn't happen by accident of course and good people need to be backed up by great systems and our investment over the years in building our operational resilience is now clear for everyone to see.

We've also changed some things to make it easier to deal with us remotely. For instance, going into this crisis we still required wet signatures for applications, moving to signature free applications in our pensions business is something that we have been planning for a while and was a clear gap in our proposition. However, I'm delighted to say that we fast tracked these changes to our process. This has been really well received by advisers and clients especially in the run up to tax year end.

[Clare]

Thanks Barry. Shaun, advisers are interested to know about the impact this crisis is having on the financial strength of Royal London so that they can reassure their clients. Can you give us the latest position please?

[Shaun]

Thanks Clare. I think the first thing I'd like to say is that Royal London is very strong and it's a well capitalised business.

This could be seen clearly in our year end 2019 results where we had £10.3 billion of available capital - that's the excess of our assets over our liabilities across all of our funds. This compared with regulatory capital requirements of £4.3 billion. So we covered our regulatory capital requirement two point three times which is a very healthy position to be in.

So why is this important? Well capital is the lifeblood of the company. It allows us to continue to invest in the business for the benefit of our customers. It allows us to pay our ProfitShare and of course it allows us to withstand shocks like the one that we're currently experiencing with the coronavirus.

The virus has caused stock markets to tumble and long-term interest rates to fall further from what were already very low positions. But despite this our capital position has held up really well. This is in part due to the effectiveness of our hedging strategy. A key metric that we often use is something called the investor ratio which was 231% at year end, and we estimate that has remained virtually unchanged at the end of quarter one.

[Clare]

You mentioned hedging strategies, how do these help?

[Shaun]

Yeah indeed hedging strategies are really important to us. Basically we use hedging to boost our assets when market shocks occur. Otherwise, what you would see in a market shock is that our assets would fall by more than our liabilities and that could undermine our capital strength.

So we use hedging really to balance out that move between assets and liabilities. So, for example, when equity markets fall the value of our customers’ pensions fall and therefore the amount we collect in charges falls. But we look to offset the impacts of this by holding equity hedges that increase in value when markets fall, so far this year the equity hedging that we've had in place has meant that that’s grown our assets by £200million.

Similarly, when interest rates fall the cost of meeting guarantees on our policies increases. But again we can offset the impacts of that by giving ourselves the option to lock into long term interest rates that we set in advance so our effective equity and interest rate hedging strategies have meant that our cover ratios have remained steady during the current financial stresses that we've seen.

[Clare]

And do you think that the current crisis will have a material impact on Royal London's future financial position?

[Shaun]

Well as I've already said the Group is very well capitalised and it remains so - and we’ll continue to take appropriate action to protect that capital position. We're confident about our financial strength and our ability to withstand this current crisis. We constantly monitor our capital and liquidity positions and we regularly test against a whole range of scenarios - that we're able to withstand those.

So given that strength I am confident that over the longer term we can continue to balance the need to preserve that financial strength to invest in strengthening our propositions and also to make our ProfitShare payments.

[Clare]

Thanks Shaun. Barry, I appreciate that it’s really hard to think too far ahead but what is your immediate focus for the remainder of this year and what impact do you think this crisis will have on the medium term strategy for Royal London?

[Barry]

Well you're right that we're all finding our way to some extent and trying to figure out how we will fix the economic damage done by this virus, more generally. I'll concentrate though on three areas - two of which I don't see changing and one where I think there will be change.

The first constant is our commitment to mutuality. I can see first-hand the benefit of mutuality - we're able to take a longer term perspective and invest in long term resilience. Investment in core infrastructure isn't glamorous and it's often unseen but our mutuality allows us to invest like this for the long term. Hopefully customers and advisers are now seeing the benefit of that investment.

I believe being mutual is the best corporate structure for our kind of business. Hopefully there will be some good to emerge from all this misery around us. And it feels like it might leave us with a strong sense of community and shared responsibility. These of course are the very foundation stones of mutuality and, of course, of Royal London.

The second constant should be the value of advice. I think this crisis has underlined the valuable role that advice can play. The customers and families that emerge from this crisis in the best shape financially will be the ones who took financial advice.

Advisers will have been able to help people put in place the protection they and their families need. Advisers will also have ensured that people are appropriately invested for their risk tolerance and their life stage.

I worry about customers who've tried to tackle these questions without professional advice. I think they might reconsider whether they want to continue down a DIY path in the future. Ultimately professional advisers have really demonstrated their value in this crisis.

The area though of accelerated change I think will be in the area of responsible investment. I think the crisis has brought into sharp focus the fragility and interdependencies in the economy that impact our day to day lives. At the same time there'll be renewed focus on not just getting back to the way things were. The reductions in emissions that we're likely to see in 2020 will make us all reconsider whether there are alternative ways of running an economy.

I think there will be a renewed and increased interest in all elements of responsible investing. Advisers already expect good governance and oversight from Royal London. But I think we'll need to do more work with advisers to understand and respond to how climate demands are changing in respect of how their investments are managed.

[Clare]

Thank you to Barry and Shaun for explaining why we should feel confident in Royal London. Thank you for listening. Have a good day and stay safe.

Share the customer version of our podcast with your clients

The button below will open an email containing a link to the customer version of our podcast on our customer website. You can edit the content of the email before sending it to your clients.

Share this podcast

Share the customer version of our podcast with your clients

The button below will open an email containing a link to the customer version of our podcast on our customer website. You can edit the content of the email before sending it to your clients.

Share this podcast

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.