LV has dismissed a hit to the group’s financial strength due to changes to how compensation for severely injured people is calculated, as a “one off”.
The industry-wide Ogden discount rate used to calculate the amount of compensation paid to severely injured claimants was reduced earlier this year from 2.5 per cent to -0.75 per cent, meaning that those who suffer from serious injuries will receive significantly higher payments than previously.
The change took a toll on the business, causing LV’s general insurance business to shed £26m last year following the changes, compared to a £72m profit in 2015.
While the company ran an £159m operating profit from trading operations leading up to the changes, this dropped to £20m post-Ogden – 81 per cent down on the same period during 2015.
Richard Rowney, LV group chief executive, called the Ogden discount rate reduction a “significant one-off impact” on the group, and added that the company has increased its reserves by £139m to reflect higher claims costs.
“We've long argued that the methodology used to set the new rate is obsolete and will work with government to ensure a fair outcome for all and that car insurance premiums aren't unjustly hit.”
Mr Rowney added that he is “reassured that the business is moving in the right direction” despite ongoing challenges of the low interest rate environment, increased capital requirements as part of the transition to Solvency II, and the continued impact of claims inflation.
Overall the group suffered a £49m loss before tax in 2016, compared to a £124m profit the year previous, due to the impact of a £35m operating loss from the Heritage business.
The retirement business has begun to recover from the “shockwaves” created by the pension freedoms, as its life and pensions business delivered an operating profit of £45m on sales of £1.9bn.
The trend towards blended solutions boosted annuity sales by 9 per cent, flexible guarantee bonds by 12 per cent, and equity release products by 62 per cent.
The group has been a rumored takeover target, with the latest speculation of a merger with Royal London shut down by the company last month.