Mutual insurance, retirement and investment group LV=, the UK’s largest friendly society, announces its financial results for the year to 31 December 2016 and publishes its annual report.
Financial highlights:
- Net earned premiums up 16% to £2.2 billion (2015: £1.9 billion)
- Operating profit from trading operations [1] - pre Ogden - £159 million (2015: £107 million)
- Operating profit from trading operations – post Ogden - £20 million (2015: £107 million)
- General Insurance operating profit – pre Ogden - £113 million (2015: £72 million)
- General Insurance operating loss – post Ogden - £26 million (2015: £72 million operating profit)
- Life operating profit £45 million (2015: £41 million)
- Heritage business operating loss of £35 million (2015: £88 million profit)
- Group loss before tax [2] £49 million (2015: £124 million profit)
- Group Solvency II capital coverage ratio of 140% post Ogden [3]
- The LV= with-profits fund earned an investment return of 14.5% [4] , 1.0% below market benchmarks
Operational highlights
- Named YouGov’s most recommended insurer and Moneywise’s most trusted life insurer for the fourth year running and most trusted insurer
- Employee engagement 83%, 7% higher than the UK financial services organisations norm [5]
- LV= brand strength assessed as AA+ by Brand Finance [6]
- Good progress on digital strategy. Completed rollout of protection online quote and apply system and general insurance digital transformation programme on track to deliver in 2017
- Investment in Wealth Wizards performing well with five deals signed for our Retirement Wizard service
- Completed acquisition of Teachers assurance business on 1 June 2016
Richard Rowney, LV= Group Chief Executive, said: “I am pleased with the Group’s trading performance with sales increasing in both general insurance and life and pensions and an increase in operating profit from our trading businesses – pre Ogden - to £159 million compared to £107 million in 2015.
“The reduction in the Ogden discount rate has had a significant one-off impact on the Group’s financial results as we have increased our reserves by £139 million to reflect higher claims costs. We’ve long argued that the methodology used to set the new rate is obsolete and will work with Government to ensure a fair outcome for all and that car insurance premiums aren’t unjustly hit.
“Against the wider challenging backdrop of a sustained low interest rate environment, increased capital requirements resulting from the transition to Solvency II and the continued impact of claims inflation, I am reassured that the business is moving in the right direction.
“Throughout the second half of the year we have taken a range of actions to improve our capital position and our capital coverage ratio has increased to 140% from 126% at the half year, measured on a Standard Formula basis. At this level the capital coverage ratio is still not where we want it to be and we will pursue a number of options which are intended to bring the Group’s capital surplus within risk appetite. We expect to move to an Internal Model following PRA review and approval.”
“The reduction in the Ogden discount rate has had a significant one-off impact on the Group’s financial results as we have increased our reserves by £139 million to reflect higher claims costs. We’ve long argued that the methodology used to set the new rate is obsolete and will work with Government to ensure a fair outcome for all and that car insurance premiums aren’t unjustly hit.
“Against the wider challenging backdrop of a sustained low interest rate environment, increased capital requirements resulting from the transition to Solvency II and the continued impact of claims inflation, I am reassured that the business is moving in the right direction.
“Throughout the second half of the year we have taken a range of actions to improve our capital position and our capital coverage ratio has increased to 140% from 126% at the half year, measured on a Standard Formula basis. At this level the capital coverage ratio is still not where we want it to be and we will pursue a number of options which are intended to bring the Group’s capital surplus within risk appetite. We expect to move to an Internal Model following PRA review and approval.”
Breakdown of operating profit and trading operations
| 2016 | 2015 | Change (%) | |
| General Insurance | £113 million | £72 million | 57 |
| Life & Pensions | £45 million | £41 million | 10 |
| Group | £1 million | £(6) million | 117 |
| Operating profit - pre Ogden | £159 million | £107 million | 49 |
| Reserve increase due to Ogden rates changes | £(139) million | £nil | n/a |
| Operating profit - post Ogden | £20 million | £107 million | (81) |
At a Group level loss before tax of £49 million (2015: £124 million profit) has been adversely impacted by £35 million of operating losses from the Heritage business (2015: £88 million profit).
General Insurance business
| 2016 | 2015 | Change (%) | |
| Gross written premiums | £1.58 billion | £1.47 billion | 7 |
| Underwriting profit | £70 million | £44 million | 59 |
| Investment return | £43 million | £28 million | 54 |
| Operating profit - pre Ogden | £113 million | £72 million | 57 |
| Reserve increase due to Ogden rate changes | £(139) million | £nil | n/a |
| Operating (loss)/profit - post Ogden | £(26) million | £72 million | (136) |
| Combined ratio - pre Ogden | 94,1% | 96.1% | |
| Combined ratio - post Ogden | 105.8% | 96.1% |
Our general insurance business had a successful 2016 with premiums, underwriting profit and policies in-force all up on the previous year. Gross written premiums increased to £1.58 billion with growth in both our direct and broker businesses and the underwriting profit, pre Ogden of £70 million was up 59% on 2015 (£44 million). Total policy count increased by over 260,000 and customers now hold close to 5 million of our policies.
Conditions in the general insurance market have remained mixed in 2016 and with our disciplined approach to underwriting we will only grow where it makes financial sense to do so. The rate recovery in motor that we saw in the second half of 2015 has continued this year however the home insurance market remains soft and as a result we have chosen to exit the broker home market. Our commercial business continues to perform well and this is a market where we see considerable potential to grow profitably in the future.
The operating loss post Ogden of £26 million is reported after charging an additional £139 million in respect of the recent change to the Ogden discount rate from 2.5% to minus 0.75%. Excluding this the operating profit was £113 million, reflecting a strong underlying trading performance which improved by £41 million despite absorbing the impact of increased claims inflation and lower levels of prior year reserve releases.
Over the next five years we expect to see increasing disruption in the general insurance market. We intend to fully play our part in this and our focus is on combining the best of technology with the excellent customer service for which LV= is well known.
Conditions in the general insurance market have remained mixed in 2016 and with our disciplined approach to underwriting we will only grow where it makes financial sense to do so. The rate recovery in motor that we saw in the second half of 2015 has continued this year however the home insurance market remains soft and as a result we have chosen to exit the broker home market. Our commercial business continues to perform well and this is a market where we see considerable potential to grow profitably in the future.
The operating loss post Ogden of £26 million is reported after charging an additional £139 million in respect of the recent change to the Ogden discount rate from 2.5% to minus 0.75%. Excluding this the operating profit was £113 million, reflecting a strong underlying trading performance which improved by £41 million despite absorbing the impact of increased claims inflation and lower levels of prior year reserve releases.
Over the next five years we expect to see increasing disruption in the general insurance market. We intend to fully play our part in this and our focus is on combining the best of technology with the excellent customer service for which LV= is well known.
Life & Pensions Business
| 2016 | 2015 | Change (%) | |
|
Retirement new business sales (PVNBP basis)
Pensions
Annuities
Flexible Guarantee Bonds
Equity Release
|
£1.65 billion
£996 million
£338 million
£217 million
£102 million
|
£1.55 billion
£986 million
£309 million
£194 million
£63 million
|
6
1
9
12
62
|
| Protection new business sales (PVNBP basis) | £284 million | £272 million | 4 |
| Operating profit | £45 million | £41 million | 10 |
2016 was another successful year for our life and pensions business. We delivered an operating profit of £45 million on sales of £1.94 billion driven by a strong trading performance in retirement and the benefit of scale and efficiency releasing expense reserves in protection.
Our retirement business has recovered from the shockwaves created by pension freedoms and we have seen encouraging top and bottom line growth over the year. The trend towards blended solutions that we identified in 2015 has continued and we have seen increased sales of annuities 9%, flexible guarantee bonds 12% and equity release products 62%.
To help defined benefit scheme members understand their retirement options, we launched an education and guidance service, LV= Pension Compass, and signed our first agreement with Essar Oil and have agreed a number of other deals (subject to contract). Our investment in Wealth Wizards to develop regulated online robo-advice is performing well and in 2016 we signed agreements with B&CE, Key Retirement Solutions, Reassure, Berkeley Burke, and Capita to offer the LV= Retirement Wizard service to their customers. We continue to see significant interest in advice services from a range of organisations and expect to announce a number of new partnerships in 2017.
In protection the introduction of our Fastway quote and apply system has been very well received by IFAs and we have seen an increase in both the number of IFAs transacting with LV= and also in new business volumes. Growth in our protection business has been driven by sales of critical illness and term life which have both achieved double digit increases.
Across our retirement and protection businesses IFAs will remain our primary distribution channel and we are making smart investments in digital solutions to make it easier for them to do business with us while at the same time reducing our costs.
Our retirement business has recovered from the shockwaves created by pension freedoms and we have seen encouraging top and bottom line growth over the year. The trend towards blended solutions that we identified in 2015 has continued and we have seen increased sales of annuities 9%, flexible guarantee bonds 12% and equity release products 62%.
To help defined benefit scheme members understand their retirement options, we launched an education and guidance service, LV= Pension Compass, and signed our first agreement with Essar Oil and have agreed a number of other deals (subject to contract). Our investment in Wealth Wizards to develop regulated online robo-advice is performing well and in 2016 we signed agreements with B&CE, Key Retirement Solutions, Reassure, Berkeley Burke, and Capita to offer the LV= Retirement Wizard service to their customers. We continue to see significant interest in advice services from a range of organisations and expect to announce a number of new partnerships in 2017.
In protection the introduction of our Fastway quote and apply system has been very well received by IFAs and we have seen an increase in both the number of IFAs transacting with LV= and also in new business volumes. Growth in our protection business has been driven by sales of critical illness and term life which have both achieved double digit increases.
Across our retirement and protection businesses IFAs will remain our primary distribution channel and we are making smart investments in digital solutions to make it easier for them to do business with us while at the same time reducing our costs.
Heritage business
The heritage business consists of policies that are closed to new business or not actively marketed. As a legacy business it is in controlled run-off and is therefore managed to be financially neutral rather than for profit. The operating loss of £35 million in 2016 (2015: £88 million operating profit) is driven by model and valuation changes and adverse claims experience reflecting changes in the basis used to calculate the amount payable when a policyholder takes the proceeds from the policy as cash rather than as an annuity as a result of the volatility following the changes to pensions freedoms.Commenting on the outlook, Richard Rowney said: “We are a successful mutual with a powerful brand and employee franchise. As such we expect our trading businesses to continue to make strong profit contributions and return good value for our members. We will remain disciplined in the management of the business, exercising strict controls over the allocation of capital to the right product areas.
“In a changing financial world, our approach remains consistent; earning the trust of our customers and members by providing good value products backed up with a culture famous for great values.”
[1] Operating profit from trading operations excludes heritage as a legacy business in run-off, short-term investment fluctuations, amortisation of acquired intangibles and other one off costs.
[2] Loss before tax is IFRS loss before mutual bonus, tax and transfer to or from the unallocated divisible surplus.
[3] Calculated on a Solvency II Standard Formula basis.
[4] Gross of tax.
[5] As measured by Willis Towers Watson through our annual employee opinion survey; 7% above other financial services companies.
[6] LV= brand strength of AA+ compares to an average AA- across the 2016 Most Valuable 100 Global Insurance brands (Brand Finance).