Highlights
- Sale of LV= General Insurance business in 2017 and 2019 was necessary to bolster a weak capital position
- 2020 strategic review concluded that LV= was a sub-scale, life and pensions business with an insufficiently strong capital structure and a loss-making new business unit, in need of investment
- Pursuing a ‘business as usual’ strategy as an independent mutual was not fair for members given the need for investment, the associated high execution risks and the possibility that many of them would not see a return
- We could only use our own capital, which could otherwise have been used to return to members, to make this investment. Without any guarantee of success, this would create more risk for the pay-outs to LV= With-profit members over the coming years
- Proposed Bain Capital transaction results in £212 million of capital being available for distribution to members, increasing the total expected member distributions to £616 million including the proceeds from the General Insurance sale. This equates to approximately 50% increase on the ‘business as usual scenario and is split as follows:
- £533 million of capital to be distributed to 271,000 LV= Main Fund With-profit members
- £83 million of capital to be distributed to non-profit members*
LV=’s recent history and the sale of General Insurance business
During 2016, after the Solvency II rules came in and a spell of significant market volatility after the Brexit referendum, LV=’s capital position worsened materially. At the end of 2016, LV= had capital of £1.4bn against a capital requirement of £1.0bn and a coverage ratio of 135%, at the low end of its peers. This capital position included £350m of debt.
LV= decided that the only practical way to restore its capital position was to sell its General Insurance business. It was sold to Allianz for £1.1 billion, paid in 2017 and 2019.
The cash of £1.1 billion received from Allianz, after adjusting for net assets of approximately £500 million transferred with the General Insurance business, was used to support LV=’s capital position. Including additional capital which could be released due to the sale LV= was able to allocate:
- £398 million to meet our on-going debt obligations (£350 million of debt repayments and £48 million of interest payments); and
- £404 million to be returned to With-profit members over time.
The ability to make these distributions is predicated on LV= being able to successfully execute on its ‘business as usual’ strategy.
Strategic Review
After the sale of the General Insurance business, it was the logical and responsible next step for the Board of LV= to consider strategic options for the life and pensions business. This had the primary objective of maximising value, certainty and security for With-profits and all other members over the long term, while considering the impact on our other stakeholders and communities within which we operate.
The review looked at all options equally and without preconception:
- Continue operating the business as we do today - “business as usual”;
- Close to new business; or
- Explore a transaction with a third party.
Why ‘business as usual’ does not work
The Board weighed up a number of key factors, including:
- LV=’s business: LV= was a sub-scale, life and pensions business with a loss-making new business unit. The group had a challenged capital structure and operated in an increasingly competitive market dominated by well-capitalised, global insurers.
- Need for investment: LV= needed significant capital investment for IT modernisation, business operational improvements, product developments and customer service. This is estimated to be over £100 million.
- Access to capital to fund investment: Any new investment would have to be funded from the LV= Inherited Estate which could negatively impact distributions to With-profit members, who would bear the risks associated with this investment. We could not borrow more than the existing £350 million of debt.
- Membership: We have 271,000 LV= With-profit members who participate in the wider business risks of running the business and bear the economic risk and reward of the performance of the business. This membership base has already dropped by over 40% since 2017. Given the long-term nature of our products and the expected further fall in member numbers by 60% in the next 10 years, it is highly likely that a significant proportion of our members today would not see the benefit of the investment before their policies mature.
- Level of execution risk: Given LV=’s historical performance, the risk of delivering the ‘business as usual’ plan was considered to be too high. If execution on this plan was unsuccessful it could be necessary to cut back on the GI sale distributions to With-profit members.
Under this ‘business as usual’ option, it is assumed execution of the ‘business as usual’ strategic plan is achieved, which the Board acknowledged inherently had high execution risks. We estimated that the capital that would be returned to With-profit members, would be £404 million (primarily the proceeds from the General insurance sale).
Closing the business
Under the closure option, there would be reduced need for on-going investment and the capital needed to support the existing business would fall over time enabling this to be available for member distributions. However, there would be significant costs to close and restructure the business, which would need to be funded by With-profit members. This option would also lead to significant employee redundancies.
Due to the closure costs we estimated that the capital that would be returned to members over time under the closure option would be lower compared to the ‘business as usual’ option, and would potentially take place over a longer timeframe, along with significant execution risks.
Transaction with a third party
As part of exploring an external transaction, the Board ran a structured process involving numerous interested parties, including other mutuals, insurance companies and financial investors. The goal was to identify parties willing to:
- Buy the life and pensions franchise, crystallising the greatest value for our members;
- Offer certainty and security for our members over the longer term; and
- If the above fulfilled, then invest in its future, thereby removing this burden from our With-profit members.
The Board received several proposals and after due diligence and negotiation, concluded unanimously, having taken advice from the With-Profits Committee, With-Profits Actuary and its advisers, that Bain Capital offered the best outcome for LV= members, employees and other stakeholders compared to all other proposals received and all strategic options considered.
It preserved the brand, heritage and values of LV=, provided significant expertise and investment capital for growth and allowed for the continuation of the LV= presence at Bournemouth, Hitchin and Exeter. These benefits were not available under other external proposals.
Under the Bain Capital option, we estimate that the total capital that would be returned to members over time would be £616 million, comprising:
- £212 million of capital available for distribution to members through the transaction with Bain Capital; and
- £404 million consisting of the remaining proceeds from the sale of the General Insurance business.
Our plan is to return this capital to members as follows:
- £533 million for our 271,000 LV= Main Fund With-profit members through:
- A one-off member payment of £100 per member if the proposals go ahead in full, totalling £28 million
- Pay-out enhancements of £101 million from the Bain Capital transaction
- Exit bonus and maintenance of mutual bonuses totalling £404 million, consistent with the ‘business as usual plan’
- £83 million for our non-profit members* through a one-off upfront payment with each non-profit member receiving £100 if the proposals go ahead in full.
We have noted references in the press regarding the relative size of the £100 one-off payment for all members under the proposed transaction with Bain Capital compared to other precedent demutualisations. This is a misleading comparison. The total return to 271,000 LV= With-profit Members following both the sale of the General Insurance business and the transaction with Bain Capital is £533 million over time. Consistent with precedent demutualisations, With-profit members are receiving the greatest portion of the distributions with non-profit members receiving a fixed payment upfront.
The Board unanimously recommends members vote in favour of the transaction.
The conclusions and recommendation of the Board have been reviewed and considered with full visibility of all the information by the LV= With-Profits Actuary, the LV= With-Profits Committee, the Independent Expert, the Financial Conduct Authority and Prudential Regulation Authority.
LV= MEMBERS ARE URGED BY THE BOARD TO SUBMIT THEIR VOTES OR VOTE IN PERSON AT THE MEETING ON 10 DECEMBER, AND VOTE IN FAVOUR OF ALL RESOLUTIONS IN ORDER TO RECEIVE THE EXPECTED FINANCIAL BENEFITS.