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Mutual insurance, retirement and investment group LV= announces its interim results for the six months ending 30 June 2018. The full LV= interim results including financial statements can be found at https://www.lv.com/about-us/company-information/returns.
Strategic and operational highlights:
We have made steady progress in the first six months of the year with good underlying trading results partially masked by the impact of the ‘Beast from the East’ bringing severe weather across the UK in February and March. Tackling competitive trading conditions and a significant change agenda, the business continues to perform well with top-line growth in General Insurance and increased profits in Life.
Our capital position continues to be strong and our Capital Coverage Ratio (CCR) stands at a healthy 178%, compared with 180% at the end of 2017. 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.
In Life & Group, we delivered an increased operating profit of £19 million (HY 2017: £7 million). However new business sales are down 5% at £983 million (HY 2017: £1,035 million) reflecting the withdrawal from capital intensive product lines in Protection and a reduction in pensions sales which was expected following the high levels of defined benefit to defined contribution transfers in 2017.
In common with most other home insurers our General Insurance business was adversely impacted by severe weather at the start of the year which resulted in £17 million of net claims leading to an operating profit of £23 million for the first six months (HY 2017: £49 million). The underlying business continues to perform well with top line growth in both our Direct and Broker personal lines businesses.
Our strategic partnership with Allianz, originally announced in August 2017, is progressing smoothly and we have recently begun the process of transferring the renewal rights for Allianz’s personal lines business to LV=. I remain excited by the potential of the partnership and we continue to explore ways of working together.
One of the foundations of our success over the years has been the strength of the LV= brand and this remains in good health. We are particularly pleased to have won Best Technology Innovation of the Year with our partner Wealth Wizards at the Pensions Awards in May for our ground-breaking Robo-paraplanner tool, which automates the financial advice process for advisers. In a sector plagued by a lack of trust this is fantastic recognition of our passion to do the right thing for customers that our people display day in day out.
The capital position strengthened significantly during the first half of 2018; helped by positive operating capital generation from the Life and GI businesses of £45 million (+7% on CCR), including positive model and basis changes from a modelling improvement for our pensions business to better reflect policyholder behaviour post pension freedoms, and favourable economic conditions. As a result of the improved capital position we have decided to remove the benefit from the potential claw back of previously awarded mutual bonus (£164 million) from our reported capital position at HY 2018, improving the quality of our reported capital.
LV= reports using the Standard Formula approach to determine its regulatory capital, with Group surplus capital at 30 June 2018 of £764 million (FY 2017: £698 million) including the removal in H1 of the management action to claw back mutual bonus. This translates to a Capital Coverage Ratio at 30 June 2018 of 178% (FY 2017: 180%). Eligible own funds include the positive benefit of TMTP of £528 million. If a TMTP recalculation was performed at 30 June 2018, this would reduce the surplus by £107 million, resulting in a CCR of 167%.
Overall operating profit of £42 million (HY 2017: £56 million) includes an encouraging £12 million increase in Life and Group operating profits, partly offsetting the £26 million reduction in the General Insurance result due to the bad weather in Q1. Life and Group operating profits of £19 million included £14 million of new business contribution and £19 million from model and basis changes, offset by strategic investment spend of £15 million.
Profit before tax of £42 million (HY 2017: £56 million) benefits from favourable short term investment fluctuations of £6 million (HY 2017: £14 million) and the impact of the GI transaction with Allianz of £7 million, partially offset by subordinated debt interest costs of £12 million which are in line with prior year.
Continued good cost control has resulted in a further £2 million reduction in operating costs across Life and GI. Increased strategic investment spend has been incurred as we continue to invest for the future, nearing completion of the Pioneer re-platforming programme in GI.
Over the past two years we have also been focused on strengthening our liquidity position and at 30 June 2018 this stands at £888 million (FY 2017: £947 million). Liquidity outflow of £59 million (HY 2017: £42 million) includes inflows from our trading business of £19 million offset by £23 million full year debt coupon, £18 million working capital changes and £37 million of one-off items and strategic costs.
|HY 2018||HY 2018||Change(%)|
|Premium Income||£827 million||£817 million||1|
|Operating Profit||£23 million||£49 million||53|
|Underwriting profit||£26 million||£39 million||33|
In the first six months of the year, the General Insurance business delivered underlying growth of 4%, excluding discontinued commercial business. Overall, premiums grew 1% to £827 million (HY 2017: £817 million). Growth has been driven by the Direct business where premiums have increased by 3% following the successful launch of our Multicar product backed by a high profile advertising campaign at the start of the year. The Broker business has reduced slightly by 1% pending the transfer of the commercial lines to Allianz in the second half of the year.
The transfer in of the Allianz personal home and motor business started successfully in May with the launch of five new Broker products across 1,400 brokers, of which around 150 are potential new partners for LV= General Insurance.
Operating profit of £23 million is lower than HY 2017 (£49 million) including a reduced underwriting result of £26 million (HY 2017 £39 million), as a result of increased claims from the poor weather at the start of the year with Storm Eleanor and the ‘Beast from the East’ resulting in £17 million of net claims. Investment returns were lower than last year by £13 million, mainly due to market movements on hedges protecting the Solvency II balance sheet. Excluding the impact of the bad weather and reduced investment returns - which are viewed as one-offs - the underlying operating profit is £55 million. Prior year releases of £21 million are similar to those in 2017 HY (£23 million) and 2018 claims margin has been maintained in line with the revised methodology implemented at HY 2017. Overall this has resulted in a combined ratio of 95.7% (HY 2017: 93.6%).
The Civil Liability Bill, which if passed will introduce a new framework for setting the Ogden rate as well as tackle whiplash, has started its progress through the parliamentary process. We welcome the proposed changes and note the Ministry of Justice’s view from last year that, if implemented at that time, it would have given a new rate in the range of 0% p.a. to +1% p.a. Pending this, we continue to reserve prudently at the current rate of -0.75% p.a. and stand by our commitment to pass 100% of any savings produced from such a change to our customers.
Our award winning service continues to attract and retain our customers with satisfaction levels remaining very high and our net promoter score is +69.4 (HY 2017: +64.4).
|Operating profit||£19 million||£7 million||171|
|News Business Contribution||£14 million||£20 million||30|
|Life new business sales(PVNBP basics)||£983 million||£10835 million||5|
|Retirement Solutions||£831 million||£857 million||3|
|Protection||£152 million||£178 million||15|
Overall Life new business premiums were down 5% at £983 million (HY 2017: £1,035 million) on a PVNBP basis.
In Retirement, we have seen lower defined benefit to defined contribution transfers following record levels in 2017, with strong growth in equity release sales up 66% to £88 million (HY 2017 £53 million), more than offsetting a reduction in annuities and flexible guarantee bonds. We expect the new contract for investment funds with Vanguard, for ten low cost index funds in our pension investment portfolio, to stimulate growth in the second half of the year.
During 2017 we took a number of management actions to improve the sustainability of our Protection business with the closure of our whole-of-life offering and also our mortgage and lifestyle protection product. This is reflected in an overall 15% fall in sales to £152 million (HY 2017: £178 million), with the mix of business also shifting towards term assurance. Individual income protection remains an attractive market and following management action, including a range of pricing changes, we expect to see growth in the second half of the year.
New business contribution has reduced to £14 million (HY 2017: £20 million) with Retirement marginally up to £12 million and Protection down to £2 million. The reduction in Protection is due to a combination of £4 million from the exit from the higher margin but capital intensive 50+ product and £3 million from a change to the business mix which saw an increased proportion of sales of lower margin term-life assurance.
Operating profit has increased by £12 million to £19 million driven by a strong performance in Retirement Solutions which has benefited from a number of one off basis changes to more accurately reflect our pensions experience.
We enter the second half of the year with both of our trading businesses in good health and a clear vision for the future. We will continue to maintain a tight grip on our costs while seeking to grow through a combination of good value products and the excellent customer service LV= is proudly famous for as we deliver on our vision of building a sustainable modern mutual.
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.
ii New business contribution is before investment in new propositions
iii Centrally managed costs are now included within Operating profit, HY 2017 has been restated accordingly
iv Expenses are presented before strategic investment, HY 2017 has been restated accordingly
v Expenses are presented before strategic investment, HY 2017 has been restated accordingly