LV’s move to go it alone is bold
LV’s move to go it alone is bold
This article by AFM CEO Martin Shaw was first published in FT Adviser _ 11 February, 2022
Right after the members of LV= rejected the proposed sale of the business to the US private equity firm Bain, 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.
Then
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 firms to prioritise good outcomes for customers, but for LV= and other mutuals that’s 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 GI business, the money was returned to the members’ fund.
That model works well in a mutual, so long as (1) its capital is sufficient to meet its future ambitions, and (2) 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 has 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 over 40% 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 £16 billion 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.
Now
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 amongst 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’s 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 last few years, has potential to succeed, in the protection market in particular. However, it also has to be realistic about its growth options and needs to decide where its priorities for spending will be: it has £350 million of subordinated debt which it was expected to settle in 2023, and wants to make a significant investment in its IT.
It also needs a solution to its dwindling membership: and that is something it can certainly learn about from Royal London, as they acted a few years back to successfully reverse a declining membership base. And the interim chair can look back to experience of Reliance Mutual, where he was previously Chair, and which went through a capital restricting exercise, and subsequent demutualisation: the same can’t happen here.
I was encouraged by recent comments in Financial Adviser that markets need more competition from mutuals, and I hope advisers stand by that, and work with LV=, Royal London and the entire mutual sector, to bring better products and more choice to consumers.
Martin Shaw, Association of Financial Mutuals