Could LV members go through demutualisation unscathed?

The proposed deal has not come without criticism, with an online petition to “stop the demutualisation of LV” receiving more than 1,460 signatures. And in April the All-Party Parliamentary Group for Mutuals concluded, among other things, that the planned demutualisation “damages the diversity of financial services providers in the UK and weakens the mutual sector unnecessarily”.

The regulator has also come under fire. Martin Shaw, chief executive of the Association of Financial Mutuals, answered in the negative when MP Siobhain McDonagh asked in a Treasury Committee session if he was convinced the Financial Conduct Authority and Prudential Regulation Authority had done “all that they might to stand up for the consumer or members’ interests”.

What is being promised?

Bain Capital has issued reassurances, saying it is committed to the long-term growth and success of LV, and that its aims include increasing policyholders from 1.2m to more than 2m, doubling smooth managed fund product sales and “[extending] the footprint” of LV’s equity release mortgage product.

The investment company adds that it plans to reinvest capital in the business that will enhance the provider’s IT infrastructure, operations, product development and customer service.

“This will ultimately lead to better products and greater choice for LV policyholders as well as improve upon the company’s competitive position in the market,” it says.

“Additionally, to ensure the long-term financial stability of LV, no new debt will be added to LV’s balance sheet from this transaction.”

In an explanatory booklet to members, the provider echoes Bain Capital’s assurances, saying the business's investment will deliver better technology, new products and develop its service for customers.

LV are promoting the deal as preserving the LV brand and providing for the growth of the business. However, once members have allowed LV to be sold to Bain they will have no financial interest in its growth or in what happens to the brand, all the benefits of which will accrue to Bain – so why is this being touted as a reason to vote for the deal?John Gilbert, M&G Advisory Services

According to LV, the life and pensions market is becoming increasingly competitive, driven by large insurers with access to capital. “We would need significant investment to be able to compete effectively, especially with the rapid change in technology and digital services that our customers now expect,” it adds.

A report on the strategic landscape for mutual insurers and friendly societies, published by the AFM and Whitecap Consulting last month, found nine in 10 AFM members agreed that digital technology would be critical for operating effectively in their markets.

A similar proportion (88 per cent) believed that digital technology would be required to keep pace with other providers and customer needs going forward.

The results suggest a strong awareness and acceptance by the AFM’s members that modernising their technology will need to be an investment priority, to maintain competitiveness and continue attracting a new generation of members, the report says.

What have reactions been to the deal?

In an open letter to members Greg Batterbee, the chair of LV’s employee consultative forum, said the deal represents an investment of £160m to help grow the business and “reclaim LV’s position as a top three provider”.

LV’s board is also unanimously recommending that members vote in favour of the deal, after arriving at the “firm conclusion” that it would not be fair to ask with-profit members to finance a future that it says requires significant investment, which many would not benefit from.

The provider also says Bain Capital will “support the leadership team to grow the company, so the strong and vibrant LV brand continues to attract customers and financial advisers”.

But Peter Hunt, managing partner at Mutuo, a cross mutual sector body, says many customers would have chosen LV because of its status as a mutual.

“It is not the brand that is valuable, but the mutual business purpose, focussed on service and price,” he adds.

John Gilbert, a director at M&G Advisory Services, which offers consultancy to friendly societies and mutual insurance companies, says: “Once members have allowed LV to be sold to Bain, they will have no financial interest in its growth or in what happens to the brand, all the benefits of which will accrue to Bain – so why is this being touted as a reason to vote for the deal?”

How have demutualisations fared in the past?

Hunt at Mutuo says policyholders in previous demutualisations have experienced a lower quality of service and higher pricing.

But in his assessment of the deal’s impact, Ian Farr, LV’s with-profits actuary, refers to an agreement that requires service standards to be maintained at levels that are set out.

“I understand from discussion with LVFS management [these] are based on the standards in place immediately prior to the transaction. I therefore have no reason to believe that the proposed transaction will have a material adverse impact on the standards of administration for with-profits policies,” Farr writes.

On previous demutualisations, AFM’s Shaw likewise notes that they have not been positive.

“A number of insurers demutualised between 1996 and 2006, paying an average incentive to members of more than £1,500,” says Shaw.

“However, once members lost their controlling rights in the business, they soon experienced a reduction in the quality of service, increased charges and plummeting investment returns.

“Despite the bold vision provided by management of a better future, only one of those demutualised insurers has continued to prosper (Norwich Union, now Aviva); the rest are now either closed or owned by a bank, an overseas insurer, or a firm that runs down closed insurers.”

While LV says Bain Capital’s investment will develop its service for customers, Shaun Tarbuck, chief executive of the International Co-operative and Mutual Insurance Federation, takes a more sceptical view, saying that mutuals, which are owned and run for the benefit of members, “far out-deliver” on service to customers.

Whether LV will defy the negative expectations associated with demutualisation – if the provider goes down that road – only time will tell.

Chloe Cheung is a features writer at FTAdviser