Scottish Life owner warns of challenges still to come

Royal London, the owner of Scottish Life and Britain's biggest mutual insurer, has booked a 3 per cent rise in operating profits, but warned of a "challenging" outlook.

Stripping out the performance of investment markets, profits rose to 111 million in the six months to the end of June from 108m in the same period last year. New life and pensions business contributed 51m to the figures, up 24 per cent on 2009.

However, at the pre-tax level the group fell into the red. It notched up pre-tax losses of 2m compared with profits of 18m in the first half of last year.

Alasdair Buchanan, group head of communications, said the figures were largely attributable to the level of investment markets as of the end of June.

"Markets were volatile over the period, but the critical thing was where they were at 30 June - and they were relatively low," said Buchanan.

"Mutuals perform well when markets have done better than expected, but have relatively weak performance when markets have performed worse than expected.

"This is why it's difficult to compare a mutual with a plc; it's not a like-for-like comparison."

Mike Yardley, chief executive of Royal London, who on Friday announced his decision to stand down after 12 years at the helm, said the group had achieved a "good result given the current economic environment".

"We continue to focus on our core markets - pensions, protection and asset management - and on writing profitable new business," he noted.

"The success of this strategy is demonstrated by the continuing significant improvements in the contribution from new business. Compared with the first six months of 2009, overall margins for new life and pensions business were fairly stable at 3.2 per cent.

"The overall financial results reflect an improved operating profit, increased contribution from new business and an underlying fund performance that was ahead of benchmark."

The total value of new life and pensions business premiums was up 35 per cent to 1.6 billion, driven by Scottish Life - a figure that had already been disclosed in a trading statement in July.

The Royal London with-profits fund generated investment returns of 3.8 per cent during the half year, 0.8 per cent ahead of its benchmark.

This reflected a strong performance from bonds and, in particular, property, which returned 10.4 per cent during the first half.

However, relatively poor returns from equity markets both in the UK and overseas offset this performance, dragging down returns by 5.7 per cent and 2.9 per cent respectively.

Yardley sounded a note of caution for the near term.He said the group's performance had been "satisfactory" in the third quarter, but added: "Any outlook must be tempered with some caution given the current economic environment."

The figures were released just days after Yardley, 53, said he had decided "the time is now right" to move on. He will head the group until a successor has been found. Likely candidates from within Royal London include finance director Stephen Shone; the head of Royal London Asset Management, Andy Carter; and the boss of the group's intermediary division, John Deane.

Royal London employs almost 3,000 staff, including 1,300 in Scotland, with a further 300 jobs north of the Border outsourced to Capita. Brands include Scottish Provident and Bright Grey.