Mutual insurance, retirement and investment group LV= announces its financial results for the year to 31 December 2018, plans to convert to a company limited by guarantee and publishes its annual report.
Strategic and operational highlights:
Financial highlights:
Following the actions taken in 2017 to strengthen our capital position, 2018 has been all about putting the foundations in place from which to build a sustainable future as a focused, independent Life & Pensions business.
Our capital position continues to be strong and our Capital Coverage Ratio stands at a healthy 172% with positive contributions from both trading businesses. At this level it is well within our risk appetite and maintaining this relative position will continue to be an area of management focus in the future.
Operating profit of £136 million (FY 2017: £134 million) includes £60 million from Life and £107 million from General Insurance partially offset by strategic investment and group items of £31 million. Profit before tax was hit by deteriorating financial markets in 2018 leading to a significantly reduced profit of £20 million (FY 2017: £122 million).
Our General Insurance strategic partnership with Allianz which came into effect at the start of 2018 is working well. We will complete the process of transferring the renewal rights for Allianz personal lines business to LV= in May and remain on track to complete the operational separation of the General Insurance business ahead of plan.
Looking to the future, we are today announcing plans to convert from a friendly society to a company limited by guarantee. Our proposed changes are about LV=’s future as a thriving, successful mutual creating value for our members. If implemented they will improve our ability to manage the business in the best interest of members and provide greater flexibility and freedom to compete over the medium to long term.
Currently, LV= is a friendly society (a type of mutual insurer) and therefore governed by the Friendly Societies Act. Many of that Act’s provisions are out of date and the Board believes it restricts its ability to manage the business effectively and in the best interest of LV= members.
The proposed change to a company limited by guarantee would result in LV= being governed by the Companies Act rather than the Friendly Societies Act. Importantly it will not change the company’s mutual status.
Our friendly society status has served us well for many years but the Friendly Societies Act is becoming outdated and restricts our opportunities for growth and future development. While our ethos remains the same, we need the right mutual structure in place to truly flourish moving forward. Converting to a company limited by guarantee provides the foundations from which to build on our heritage and strong brand to create a better mutual for the future, where being a member has more meaningful benefits.
This change will be subject to a vote among LV= members at a Special General Meeting on 22 May.
During 2018 we focused on reducing our cost base to prepare for the future as an independent Life & Pensions business once we exit from the agreement to provide transitional support services to the General Insurance business. This focus has resulted in a further £19 million decrease in Group operating costs. We will continue to exercise rigorous cost control in the future.
Operating capital generation of £89 million includes positive contributions from both trading businesses and is down from £159 million in 2017 largely due to a reduced contribution from our now 51% owned General Insurance business.
At the end of 2018 the group capital surplus remained strong at £687 million (FY 2017: £698 million) and included the removal of the management action to claw back mutual bonus announced at the half year which reduced the overall surplus by £166 million. The capital surplus also includes the positive benefit of £490 million from TMTP, if a TMTP recalculation was performed this would reduce the surplus by £113 million resulting in a capital coverage ratio of 160%.
Operating profit from Life is flat year-on-year as the reduction in new business contribution of £18 million is offset by strong cost control and an improved performance in Heritage which was impacted by legacy portfolio review actions in 2017. Operating profit from the General Insurance business of £107 million (2017: £120 million) includes an underwriting result of £99 million (2017: £102 million) and investment returns of £8 million (2017: £18 million). The reduction in underwriting result is primarily due to adverse current year claims experience, offset by favourable prior year run off of £106 million (2017: £46 million).
The General Insurance business has again performed strongly despite severe bad weather affecting the household account and significant continued motor insurance claims inflation. Gross written premiums are broadly flat year-on-year at £1.58 billion, however excluding the Commercial lines business which is in the process of transferring to Allianz, underlying premiums have grown by 6% to £1.40 billion (FY 2017: £1.32 billion).
The combined operating ratio remained flat at 92.0% and operating profit of £107 million (FY 2017: £120 million) also includes the discontinued Commercial lines business. If this is stripped out, profit from on-going Personal lines business is up 7% to £135 million (FY 2017: £126 million). Total customer policy numbers have grown by 7% overall to 5.2 million.
Prior year reserve releases of £106 million (FY 2017: £46 million) benefited from a combination of continued anti-fraud detection and the settlement of a number of higher value claims. Following the Civil Liability Act gaining Royal Assent we revised our assumption for the Ogden Discount Rate to 0% from minus 0.75%.
Our direct business continued to grow particularly in LV= branded motor with strong sales following the launch of our multi car product and continuing high renewal retention. Direct customer policies grew 8% passing the 4 million milestone to 4.1 million with gross written premiums up 4% to £998 million (FY 2017: £960 million).
2018 has been a year of significant changes in the broker division with the successful new business transfers between LV= and Allianz which have enabled us to broaden our personal line product range with five new products. Broker premiums were down 8% at £583 million (FY 2017: £636 million) reflecting the impact of the planned transfer of Commercial lines business to Allianz but Personal lines premiums continue to grow strongly.
Trading conditions for our Life businesses were tough in 2018 and while we delivered an operating profit of £60 million (FY 2017: £60 million), new business sales were down 13% at £1.8 billion (FY 2017: £2.07 billion).
Protection sales were adversely impacted by a combination of increased competition, lower volumes in the first half of the year and the closure of certain niche product lines in 2017. In Retirement we saw strong growth in equity release, up 77% to £211 million (FY 2017: £119 million) and annuities up 16% to £137 million (FY 2017: £118 million). Pensions new business sales fell in particular reflecting reduced levels of defined benefit to defined contribution pension transfers following their peak in 2017. Lower new business contribution across both Protection and Retirement reflects the reduced volumes, withdrawal from capital inefficient product lines and a change in business mix.
Income from our Retirement Advice Service grew 6% year on year driven largely by our largest corporate partner Reassure and reflects our belief that anyone should have access to affordable advice as this leads to better outcomes for customers.
During the second half of 2018 we took a number of actions to stimulate growth across both Protection and Retirement including a product refresh of individual income protection where we are now the only provider to offer parent and child cover at no extra cost and signing a deal with specialist fund manager Vanguard to offer a low-cost, high-value, passive investment option for our pension customers and advisers. These initiatives have been well received in the market and provide good momentum going into 2019.
Our Heritage business includes ordinary branch and industrial branch with-profits policies along with some non-profit business. In the face of challenging investment conditions during the year the main LV= with profits fund returns were negative at -4.2%.
The full LV= results can be found at:https://www.lv.com/about-us/company-information/returns
These numbers are unaudited.
Certain statements in this press release may constitute "forward-looking statements". These statements reflect the Issuer's expectations and are subject to risks and uncertainties that may cause actual results to differ materially and may adversely affect the outcome and financial effects of the plans described herein. You are cautioned not to rely on such forward-looking statements. The Issuer disclaims any obligation to update their view of such risks and uncertainties or to publicly announce the result of any revisions to the forward-looking statements made herein, except where they would be required to do so under applicable law.
