Right after the members of LV rejected the proposed sale of the business to US private equity company Bain Capital, Royal London reaffirmed its interest in talking about a merger.
That now seems to have fallen through, but before I look at the latest developments, a quick reminder of how we got here.
LV is one of the UK’s most venerated insurers, and throughout its 179 years being owned by its customers has ensured it has avoided the conflict of interest that shareholder-owned businesses frequently suffer from.
The new consumer duty forces all financial companies to prioritise good outcomes for customers, but for LV and other mutuals that is simply business as usual.
Generations of members of LV have contributed to the profits and capital strength of the business, and that has enabled the business to grow and innovate.
The members’ fund also enables the acquisition of other businesses, such as Highway, which LV purchased in 2008, to develop its general insurance venture. When Allianz bought the general insurance business, the money was returned to the members’ fund.
That model works well in a mutual, so long as:
- its capital is sufficient to meet its future ambitions; and
- the number of members is either stable or growing.
LV’s core problem was not so much capital as it was that its traditional with-profits membership started to tail off dramatically, and most of the capital is ring-fenced for the benefit of these members.
According to LV, with-profits membership fell more than 40 per cent between 2017 and 2021. If that situation were allowed to continue, before long there would be next to no participating members left.
For a member business with £16bn in assets that is a problem. In theory the last person standing scoops the balance, though in reality a solution must be found much sooner.
A sale to Bain would have resolved that, by buying out membership rights and by establishing a new capital fund. I advocated against this for two reasons: historically, customers in a demutualised business always come off worse, as do all but the most senior of staff; and, secondly, because of the inequity of surrendering an estate built up over generations to a small group of members today.
News that the refreshed LV board is seeking to go it alone without a merger with Royal London is bold: a transfer into the bigger mutual would have resolved the capital and membership challenges.
However, the failure to assure members of the Bain deal appears to have given LV pause to reflect, because as the incoming interim chair explained, research among members indicates that they failed to support the deal with Bain because the money on offer (£100) was insufficient to compensate for the loss of ownership and voting rights.
It is encouraging that members do recognise the value of being part of a mutual, and that seems the likely destiny now – few courters would risk a dalliance after two such costly rejections.
A revitalised LV with a focus on remaining independent, and avoiding the distractions of the past few years, has potential to succeed, in the protection market in particular.