‘Where has that money gone?’ LV members question private equity sale as deadline looms

Two years ago, one of the UK’s oldest mutually owned life insurers announced it had sold the final chunk of its general insurance business to Germany’s Allianz, taking the total received to £1.1bn.

At the time, LV’s management hailed the disposal as strengthening its financial position and said a separate change to its legal structure would give the group — founded in Liverpool in 1843 to offer poor families policies that covered the costs of a decent funeral — the “flexibility and freedom” to build for the future.

Now that future, as an independent mutual run for the benefit of its members, could be cut short. By the end of this week, LV’s 1.2m members will have had the chance to vote on what its leaders now say is the best way forward: a sale of the remaining life insurance operations to private equity group Bain Capital, for £100 per member, and more for those with certain policies. Under the £530m deal announced in December, Bain has pledged to invest in and grow the business.

Those LV members who decry the potential loss of mutuality say they struggle to understand how more external capital was needed so quickly.

Speaking to the Financial Times, LV member Rob Davies queried the need for cash, given the deal with Allianz: “Where has that money gone?” 

Another member, Laurence Whitehouse, wrote to the Financial Conduct Authority last month in a letter seen by the FT, saying that information sent by the insurer to its members “argues that capital was required but does not explain why, after operating for 178 years, this was the case,” adding that “financial problems” were not disclosed in the 2020 accounts.

The 2020 report, published after the Bain deal was sealed, put LV’s solvency ratio — a measure of its capital above the required minimum — at 198 per cent, right at the top end of management’s target range.

LV’s solvency has improved in recent years. Chart showing eligible capital as a proportion of regulatory requirement (%)

In recent days, a law firm representing two other members has written to the Financial Conduct Authority, in a letter seen by the FT, asking it to pause the demutualisation process, citing concerns including “contradictory and confusing” information released about LV’s financial health, highlighting public comments from the insurer’s management that the Bain deal would “save” the company.

LV said it was “very aware of our responsibility to communicate clearly with members and, in addition to the extensive information around the transaction publicly available on our website, have directly responded to a significant number of written questions.” 

An FCA spokesperson said its “role, under law, is to ensure that customers are treated fairly and that there is no material adverse impact on them should the transaction go ahead,” adding: “We have challenged the firm to make sure this happens.” In October, it green lit the deal to go to a vote.

It is not just members asking these questions. “We never got clarity as an all-party group on the capital needs of LV,” said Gareth Thomas MP, chair of the All Party Parliamentary Group for Mutuals, which concluded an inquiry into the deal earlier this year.

The saga has reopened the debate over the structural challenges faced by mutuals, which can borrow or retain profits to fund growth, but lack shareholders that they can tap for cash.

This week, a group of more than 100 MPs and peers signed a letter to the Treasury demanding a review of the law that would allow them “to compete on equal terms as companies in capital markets” and strengthening rights of members in demutualisations, among other demands.

A Treasury spokesperson said the mutuals sector “plays an important role in the UK’s financial services industry” and it will “explore ways to ensure they can grow”.

The Prudential Regulation Authority declined to comment. In June, Bank of England governor Andrew Bailey wrote to Thomas pointing out that a demutualisation itself does not require PRA approval, but that the regulator would scrutinise a change in control in the LV-Bain deal.

The LV-Bain deal saga has reopened a debate over mutuals, which have fewer options than regular companies to raise cash © Geoffrey Swaine/Shutterstock

October 2020

LV discloses it is in exclusive takeover talks with Bain Capital, choosing the firm over bidders including rival mutual Royal London


LV announces deal to sell itself to Bain in £530m takeover

APRIL 2021

All-Party Parliamentary Group for Mutuals issues report criticising sale


Financial Conduct Authority approves the deal going to a vote, but asks LV to beef up its communication with members


LV announces that its members will get £100 each if they agree to deal, and more for with-profits members


LV launches defence of takeover offer after rival Royal London makes last-minute intervention

As pressure has grown, LV has published more detailed explanations of its reasoning. These focused on the treatment of so-called with-profits members, core contributors of LV’s capital: those customers who have paid into long-term investment products and then share the benefits and risks of the mutual’s investments.

The general insurance sale, which began in late 2017, was needed to bolster a weak capital position, LV said. The proceeds, after debt repayments and assets transferred with the disposal, amounted to £404m that could be returned over time to with-profits members.

Considering the remaining business, an S&P Global Ratings report from 2020 said LV’s “limited sources of capital and funding weigh on [its] ratings”, and its operational performance was hurting due to competition and low interest rates.

LV’s strategic review following the Allianz deal marked a change in tone, concluding the life insurance business was subscale with an insufficiently strong capital structure.

The insurer says it was faced with three options: close down, continue, or sell. The first was dismissed, due partly to the significant costs involved.

Business as usual would see the £404m returned to with-profits members but would leave LV needing to find more than £100m for IT spending and other necessary investments, with management saying the mutual “could not borrow more” than the existing £350m of debt.

By comparison, a sale to Bain would mean an extra £212m for members, LV has promised, on top of the general insurance proceeds. Bain has also committed to pay for the operational improvements. The private equity giant is also offering £264m to fund two staff retirement funds: helping to meet liabilities that sit with with-profits members.

“What we are effectively doing here is de-risking the scheme,” LV chief executive Mark Hartigan told the FT. “We either take external capital . . . or we close to new business and we don’t get any money. Or we take the members’ money and invest it in the non-profit business. And we won’t get it back to those members before [many of their policies expire].”

In an email to members last week, seen by the FT, LV’s board said that it will “still have to seek a buyer” even in the event of a no vote, with the “likelihood” that would mean lower returns.

The challenge is getting members to assess a complex deal based partly on predictions of the future.

“Let’s assume that LV had carried on as they are, and not gone to be taken over,” said Davies. That might have meant a worse return over time for his fellow with-profits members, he added. “But the thing is, nobody’s got a crystal ball, have they?”


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