Background to the process and engagement with Royal London to date
LV= undertook the sale of its General Insurance business in 2018 and 2019 in response to the need to improve its capital position. Following the sale, LV= was left with a sub-scale life insurance business that required investment in IT modernisation, business operational improvements, product development and customer service.
As part of our proposal to convert to a company limited by guarantee, we explained to our members that we were considering options to create two separate funds in order to give our business more flexibility to grow and prosper, without our With-Profits members having to bear the burden of future investment.
Against this backdrop, the Board of LV= initiated a strategic review in early 2020. The strategic review considered:
(i) continuing to operate LV= on a ‘business as usual’ basis;
(ii) closure to new business and distributing the Inherited Estate to members over time; and
(iii) an external transaction with a strategic partner which would de-risk existing With-profits members from the risks of future investment.
The strategic review concluded that an external transaction offered members the best possible outcome. Throughout this strategic review and the subsequent process, LV= kept both the FCA and PRA fully updated on its progress including full details of the proposals received from third parties.
As part of exploring an external transaction, the Board led a structured, competitive auction process with a timetable applying to all parties invited to participate in the process. This resulted in the receipt of 12 indicative, non-binding proposals. Of these, four parties were invited to participate in more detailed discussions with LV= about a possible transaction and were provided with access to confidential information to carry out due diligence and substantially reduce conditionality in their proposals. This resulted in LV= receiving three offers of which one was materially lower from a value perspective. The two remaining parties were Bain Capital and Royal London and both were asked to clarify certain aspects of their proposals, advance their outstanding due diligence and submit a best and final binding offer.
In comparing the final proposals from Bain Capital and Royal London, the Board of LV=, taking advice from the With-Profits Committee, the With-Profits Actuary and its advisers, unanimously concluded that Bain Capital offered the best outcome for LV= members. The Board continues to recommend members vote in favour of the transaction for the following reasons:
- Bain Capital offered £530 million for LV=’s non-profit business and would also assume all material historic and future liabilities in respect of the non-profit business. Bain Capital also offered a perpetual fixed rate card for both administration and investment management.
- Royal London offered a marginally higher headline value of £540 million. However, unlike Bain Capital, Royal London was proposing to leave material liabilities in respect of the non-profit business with LV=’s With-Profit Fund. Additionally, Royal London’s proposal included higher and less certain administration and investment management costs. Reflecting these differences, the value offered by Royal London was lower than the value offered by Bain Capital, on a comparable basis.
- Therefore, the Board of LV= concluded that Bain Capital offered greater value to LV= members when compared on a like-for-like basis and would result in greater and more certain pay-outs to members, on a more accelerated basis.
- Bain Capital submitted a final offer which was substantially complete from a due diligence perspective and provided execution certainty.
- Royal London’s proposal had material due diligence outstanding which could have further impacted value and / or risk to LV= members.
- The Board of LV= was surprised and disappointed that Royal London declined LV=’s request to progress its due diligence investigations during the final stages of the process. In contrast to the position of other bidders in the process and general market practice, Royal London insisted that it did not wish to incur the additional marginal cost ahead of being granted exclusivity. This was not a request that LV=’s Board could accept as it would have significantly weakened its negotiation position with Royal London and would have involved terminating discussions with other parties who ultimately put forward a better and more certain transaction to the benefit of LV= and its members.
Investment in LV= and building on its heritage:
- Bain Capital is committed to investing in and supporting the growth of the LV= new business franchise and brand. As mentioned in Bain Capital’s announcement yesterday, it is committed to investing up to £160 million as part of its go-forward plan for LV=.
- By contrast, Royal London’s proposal would have resulted in the rationalisation of our operations and significant headcount reductions which were positioned as an important element of value creation for Royal London. Additionally, no commitment was offered with respect to our office locations in Exeter and Hitchin. Consistent with its precedent acquisitions of other mutuals, Royal London would have likely extracted material value from LV= for the benefit of Royal London’s own members1. The most recent press statement by Royal London proposing a three-way transaction with Bain Capital underlines its lack of interest in supporting LV=’s new business franchise and its intentions to break-up LV=.
- Bain Capital is proposing to structure the transaction as a full acquisition of the non-profit business into a separate fund open to new business. The LV= With-Profit Fund will receive the purchase consideration of £530 million and become a closed ring-fenced fund, protected from the risks associated with the existing and new non-profit business and operated solely for the benefit of LV= With-profits members. It will also have oversight from a dedicated supervisory committee.
- Royal London’s proposal would have similarly transferred LV=’s With-profits business into a closed ring-fenced sub-fund of the group with the non-profit business transferred to the Royal London main fund. However, unlike Bain Capital, Royal London was proposing to leave material liabilities in respect of the non-profit business with LV=’s With-Profit Fund and it was not willing to offer a dedicated supervisory committee to safeguard the interests of LV=’s With-profits members. Importantly, Royal London’s proposal would not have resulted in LV= members having any membership rights in the enlarged mutual group, consistent with its precedent acquisitions of other mutuals2. To describe Royal London’s proposal as offering ‘a mutual alternative, more favourable to LV= members’, is grossly misleading.
Response to Royal London statement
The Board confirms that an e-mail was received from Royal London last week, being almost a full year after our transaction with Bain Capital was announced. It proposed the dismantling of LV=. The Board of LV= continues to unanimously recommend the transaction with Bain Capital to its members ahead of the Special General Meeting on 10 December. We invite our members to attend the two webinars organised for Monday 29 November in order to learn more about our proposals as well as the three Q&A sessions that we have planned for Monday 22 November, Friday 3 December and Monday 6 December which are an opportunity to ask questions to our Chair, CEO, Bain Capital and the Independent Expert. Full details and sign-up are available at www.lv.com/future.