Mutual insurance, retirement and investment group LV=, the UK’s largest friendly society, announces its interim results for the six months ending 30 June 2017.
Strategic and operational highlights
Richard Rowney, LV= Group Chief Executive said: “The Group has delivered a very strong trading performance in the first six months of the year with overall steady sales growth in both general insurance and life and pensions and an increase in operating profit from our trading businesses of 58% to £82 million (HY 2016: £52 million) as we delivered on our strategy of growing our business through customer excellence, while maintaining a clear focus on cost and underwriting discipline.
“I am particularly pleased that this strong performance is reflected across both of our trading businesses. In general insurance we have successfully managed the impact of the Ogden discount rate change and premiums are up 4% to £817 million (HY 2016: £785 million) and the combined operating ratio has improved to 93.6% (HY 2016: 98.5%) reflecting our improved efficiency and productivity in pricing and underwriting. Across life we delivered an increased operating profit, up 18% to £33 million (HY 2016: £28 million), and an 8% increase in new business sales to £1,009 million, excluding enhanced annuities which we exited in 2016.
“Over the last two years we have invested over £80 million in improving our core systems and developing new digital propositions such as our robo-advice service, Retirement Wizard. Our continued investment in digital initiatives is enabling us to both reduce costs and improve productivity. At the same time we are improving customer satisfaction levels and we remain the UK's most trusted, most recommended and best loved insurer. This combination of factors underpins the growth in both our trading businesses and together with the significant capital strengthening actions underway leaves the Group well positioned for the future.
“Since I took over as Chief Executive in July last year, improving the capital position of the Group has been my number one priority. Throughout the first six months of 2017 we have continued to take actions in this area and our capital coverage ratio has increased further to 153% with a further substantial improvement anticipated on completion of the Allianz deal.
“At the beginning of August we announced a strategic partnership with Allianz, subject to regulatory approval. Following completion of the transaction we will continue to benefit from a growing general insurance venture while being better able to invest in our core life and pensions business and pursue new digital opportunities. I’m also excited by the potential to work together with Allianz in other areas over the long term.”
The transaction is structured in two phases. Allianz will pay LV= an initial £500 million in exchange for a 49% stake in LV=’s General Insurance businesses. LV= will acquire Allianz’s personal home and motor insurer’s renewal rights while AIlianz will obtain LV=’s commercial insurer’s renewal rights. In 2019 Allianz will pay £213 million for a further 20.9% stake in the general insurance business through an agreed, forward purchase based on a total valuation of £1.020 billion for 100% of the business.
Andy Parsons, LV= Group Finance Director, said: “General insurance operating profit of £49 million (HY 2016: £22 million) has been achieved while also strengthening our reserve margin. This result was underpinned by a strong underwriting result of £39 million (HY 2016: £8 million) driven by continued growth in motor rates and favourable claims experience in personal motor, which contributed to the reduction in the combined ratio to 93.6% (HY 2016: 98.5%).
“Life operating profit of £33 million (HY 2016: £28 million) included a £20 million contribution from new business, £2 million higher than half-year 2016 after adjusting for the withdrawal from enhanced annuities in 2016, with sales growth driven by improved performance in the Pensions business.
“Profit before tax for the Group of £56 million (HY 2016: £1 million) is impacted by £16 million of operating losses from the Heritage business (HY 2016: £19 million loss) including £12 million driven by changes associated with the FCA Legacy Review as well as short-term investment fluctuation gains of £14 million (HY 2016: £11 million losses), centrally managed costs of £10 million, in line with prior year, and Finance costs of £12 million, relating to subordinated debt interest.
“A strategic cost reduction programme targeting over £40 million of real cost savings by the end of 2018 was initiated this year, the early results of which are evidenced by the reduction in gross expenses by £12 million to £200 million (HY 2016: £212 million). Savings have largely been achieved through strong day-to-day cost management discipline and an ongoing review of discretionary spend. Management continues to focus on underlying trading cost control.
“LV= reports using the Standard Formula approach to determine its regulatory capital. The capital position of the group at 30 June 2017 was satisfactory with a Solvency II solvency capital requirement coverage ratio of 153% (FY 2016: 140%). This is impacted by the timing benefits of economic gains since the last recalculation of Transitional Measure on Technical Provisions in August 2016. There is expected to be a market wide recalculation of transition at the end of 2017. Had this occurred at half year we estimate it would have reduced the solvency position by c.30 percentage points. These numbers do not allow for the impact of the announced transaction with Allianz which we estimate will improve the forecast end of 2017 surplus position by c.50 percentage points. The eventual impact will depend on a number of factors including actual solvency capital requirements at the end of 2017.
“The transaction with Allianz is not reflected in our half year position and is subject to regulatory approval. The sale of a stake in our general insurance business represents a material change to the LV= risk profile and therefore we have agreed with the PRA that it is appropriate to withdraw our current Internal Model application.”
Breakdown of operating profit from trading operations
| HY 2017
|| HY 2016
| General Insurance
|| £49 million
|| £22 million
| Life & Pensions
|| £33 million
|| £28 million
|| £- million
|| £2 million
| Operating profit
|| £82 million
|| £52 million
General Insurance financial highlights:
| HY 2017
|| HY 2016
|| Change %
| Premium income
|| £785 million
| Operating profit
|| £49 million
|| £22 million
| Underwriting profit
|| £39 million
|| £8 million
| Combined ratio
General insurance has had an excellent performance in the first six months with 4% growth in premiums to £817 million (HY 2016: £785 million), operating profit up 123% at £49m (HY 2016: £22 million), and an improved combined ratio of 93.6% (HY 2016: 98.5%). Our approach in general insurance has been to deliver profitable growth.
While motor premium income was up 4%, home income fell by 6%, reflecting the withdrawal from the broker home market we announced last year. The increased operating result was mainly driven by stronger underwriting performance up from £8 million to £39 million, offset partly by lower investment returns.
In February the Ministry of Justice announced a reduction in the Ogden discount rate to -0.75% p.a. Along with the rest of the industry, we had to respond with increased prices and we welcome the Government’s announcement on 7 September confirming that it plans to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly. If passed, the draft legislation should not only ensure fair payments for those making claims but will also help reduce the cost of car insurance for drivers and we commit to passing on 100% of the savings produced. The current Ogden discount rate of -0.75% p.a. which is used as part of our reserves valuation is expected to increase under the new framework. The MoJ has indicated that if the rate were calculated using September 2017 economic conditions, the rate would fall in the range 0% p.a. and +1% p.a.
Reserve releases of £23 million over the half year have largely offset a £31 million strengthening of the claims margin held to cover uncertainty in claims development.
The combined operating ratio improved to 93.6% from 98.5%, driven by improved efficiency and productivity as well as underlying claims performance benefiting mainly from low claims frequency on the motor accounts in the current year.
Total policies in-force are stable at 5.0 million (FY 2016: 5.0 million) and our satisfaction levels remain very high with 84% of customers saying that they are “very” or “extremely” satisfied.
Life and pensions business financial highlights:
| HY 2017
|| HY 2016**
|| Change %
|| £33 million
|| £28 million
| New business contribution ***
|| £20 million
|| £18 million
| Life new business sales (PVNBP * basis)
|| £1,009 million
|| £935 million
| Retirement Solutions
|| £855 million
|| £789 million
|| £154 million
|| £146 million
The Life business has had another successful first six months with operating profit up 18% to £33 million (HY 2016: £28 million). Excluding enhanced annuities, which we exited in 2016, overall new business premiums increased by 8% to £1,009 million (HY 2016: £935 million) on a PVNBP basis with mid-single digit growth in both retirement solutions and protection.
In retirement we have seen significant growth in pensions up 29% to £654 million (HY 2016: £506 million) partly driven by transfers from final salary schemes as people continue to exercise their options under the pension freedom reforms. We are also seeing strong year on year growth in our Corporate Solutions business where we work with employee benefit consultants and corporate partners to provide specialist retirement advice and tools to their pension scheme members. In the first half of the year this business has grown from its initial phase and is now creating a steady flow of business into our advice teams. We have 19 schemes either live or in implementation stage ranging from small scheme transfers, to ongoing provision of retirement advice to scheme members.
We believe in the importance of taking advice at retirement and are seeing an increased interest in the provision of automated regulatory advice services. With our investment in Wealth Wizards we are well placed to play a leading role in this growing area of the market.
In the first half of this year we took a number of management actions to improve the long-term performance of our protection business such as closing the Mortgage and Lifestyle Protection product as well as our underwritten whole of life offering. Despite these changes new business sales are up 5% to £154 million (HY 2016: £146 million) on a PVNBP basis.
As part of our continued investment in technology, we launched an LV= Doctor Services app for new protection customers, which enables people to access a GP or second opinion service at any time via a smart phone. For financial advisers we introduced an online pre-underwriting tool which enables them to check instantly whether a specific illness or condition will result in standard rates, increased premiums, or an exclusion being added to the policy. We have also continued to invest in our new business application systems Fastway in protection and Retirement View in retirement.
Commenting on the outlook, Richard Rowney said: “The first six months of 2017 have seen good top and bottom line growth. We continue to exercise discipline in the management of the business and this is reflected in the improved capital position of the Group. The strategic partnership announced with Allianz in August provides significant opportunities for the LV= Group. With sharpened underwriting and pricing in general insurance and the refocusing of our life and pensions portfolio to reduce the capital requirements on the business we are well positioned to build on the first half performance to deliver continued profitable growth.”