LVNov 22 2021

LV was 'sub-scale' and needed Bain deal, chairman says

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LV was 'sub-scale' and needed Bain deal, chairman says
LV chairman Alan Cook

Liverpool Victoria has published yet further insight into the reasons behind its proposed acquisition by private equity firm Bain Capital, following calls from MPs for more tender documents and a clear rationale to be published by the insurer.

In a statement published today (November 22), LV's chairman Alan Cook said: "There have been numerous theories and opinions about the process and decision.

“So that members can vote [on December 10] with the facts in front of them, we are showing the analysis we did and the conclusions we reached.”

The mutual said its 2020 strategic review had concluded 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”.

Given LV’s historical performance, the mutual said the risk of delivering a 'business as usual' plan was considered to be “too high”. 

“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,” the insurer said.

It also said that without investment, the £1.1bn sale of its general insurance arm to Allianz could be cut back in terms of sale distributions to with-profit members.

The mutual said it needed “significant capital investment” for IT modernisation, business operational improvements, product developments and customer service. It estimated this much-needed investment to be more than £100m.

But LV has argued an investment alone would not have sufficed.

“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,” it said. “We could not borrow more than the existing £350m of debt.”

The insurer added that its membership base has already dropped by more than 40 per cent since 2017. 

Given the long-term nature of our products and the expected further fall in member numbers by 60 per cent 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,” it concluded.

On a closure option, LV said 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," the insurer said.

"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."

Adding up the numbers

The mutual also clarified its position on member payouts, having previously promised a one-off member payment up to £100 and pay-out enhancements totalling £101m.

LV has now said its 271,000 main fund with-profit members will also benefit from a further £404m, which it accredited to an exit bonus and maintenance of mutual bonuses following its the £1.1bn sale of its general insurance arm to Allianz.

“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,” LV said.

“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 £533m 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 sale of LV’s general insurance business between 2017 and 2019 was necessary, according to the mutual, “to bolster a weak capital position” - in line with the 2020 strategic review which followed.

In total, LV estimates total capital to be returned to all members over time will be £616m, which comprises £212m from the Bain deal, and £404m from the remaining proceeds of the sale of its general insurance business.

Ahead of LV’s member vote next month, MPs will this week be discussing the future of mutuals.

According to the Treasury Committee, MPs may question witnesses on the implications of LV’s proposed sale to Bain Capital, and whether there could be a wider impact on the market.

The latest details follow LV’s breakdown of why Royal London’s bid for the insurer late last year fell short of Bain Capital’s £530m takeover.

ruby.hinchliffe@ft.com