"Our Board carried out a careful and detailed strategic review of LV= in 2020. We examined all the options, drawing on our own wide business and transaction experience and that of our professional advisors. We all came to the firm conclusion it would not be fair for us to ask our With-profit members to finance a future that requires significant investment, which many would not benefit from. Therefore, we explored an external transaction and having considered 12 bids unanimously concluded that the best outcome for our members, employees and all of our stakeholders was the proposed transaction with Bain Capital. It was a decision we didn’t take lightly given our mutual heritage, but we know it is the right choice because it saves the future of LV=.
“There have been numerous theories and opinions about the process and decision. So that members can vote with the facts in front of them, we are showing the analysis we did and the conclusions we reached.
“We urge members to vote at the meetings on 10 December and vote in favour of the transaction with Bain Capital to protect both their interests and the future of LV=.”
During 2016, after the Solvency II rules came in and a spell of significant market volatility after the Brexit referendum, LV=’s capital position worsened materially. At the end of 2016, LV= had capital of £1.4bn against a capital requirement of £1.0bn and a coverage ratio of 135%, at the low end of its peers. This capital position included £350m of debt.
LV= decided that the only practical way to restore its capital position was to sell its General Insurance business. It was sold to Allianz for £1.1 billion, paid in 2017 and 2019.
The cash of £1.1 billion received from Allianz, after adjusting for net assets of approximately £500 million transferred with the General Insurance business, was used to support LV=’s capital position. Including additional capital which could be released due to the sale LV= was able to allocate:
The ability to make these distributions is predicated on LV= being able to successfully execute on its ‘business as usual’ strategy.
After the sale of the General Insurance business, it was the logical and responsible next step for the Board of LV= to consider strategic options for the life and pensions business. This had the primary objective of maximising value, certainty and security for With-profits and all other members over the long term, while considering the impact on our other stakeholders and communities within which we operate.
The review looked at all options equally and without preconception:
Why ‘business as usual’ does not work
The Board weighed up a number of key factors, including:
Under this ‘business as usual’ option, it is assumed execution of the ‘business as usual’ strategic plan is achieved, which the Board acknowledged inherently had high execution risks. We estimated that the capital that would be returned to With-profit members, would be £404 million (primarily the proceeds from the General insurance sale).
Closing the business
Under the closure option, there would be reduced need for on-going investment and the capital needed to support the existing business would fall over time enabling this to be available for member distributions. However, there would be significant costs to close and restructure the business, which would need to be funded by With-profit members. This option would also lead to significant employee redundancies.
Due to the closure costs we estimated that the capital that would be returned to members over time under the closure option would be lower compared to the ‘business as usual’ option, and would potentially take place over a longer timeframe, along with significant execution risks.
Transaction with a third party
As part of exploring an external transaction, the Board ran a structured process involving numerous interested parties, including other mutuals, insurance companies and financial investors. The goal was to identify parties willing to:
The Board received several proposals and after due diligence and negotiation, concluded unanimously, having taken advice from the With-Profits Committee, With-Profits Actuary and its advisers, that Bain Capital offered the best outcome for LV= members, employees and other stakeholders compared to all other proposals received and all strategic options considered.
It preserved the brand, heritage and values of LV=, provided significant expertise and investment capital for growth and allowed for the continuation of the LV= presence at Bournemouth, Hitchin and Exeter. These benefits were not available under other external proposals.
Under the Bain Capital option, we estimate that the total capital that would be returned to members over time would be £616 million, comprising:
Our plan is to return this capital to members as follows:
We have noted references in the press regarding the relative size of the £100 one-off payment for all members under the proposed transaction with Bain Capital compared to other precedent demutualisations. This is a misleading comparison. The total return to 271,000 LV= With-profit Members following both the sale of the General Insurance business and the transaction with Bain Capital is £533 million over time. Consistent with precedent demutualisations, With-profit members are receiving the greatest portion of the distributions with non-profit members receiving a fixed payment upfront.
The Board unanimously recommends members vote in favour of the transaction.
The conclusions and recommendation of the Board have been reviewed and considered with full visibility of all the information by the LV= With-Profits Actuary, the LV= With-Profits Committee, the Independent Expert, the Financial Conduct Authority and Prudential Regulation Authority.
LV= MEMBERS ARE URGED BY THE BOARD TO SUBMIT THEIR VOTES OR VOTE IN PERSON AT THE MEETING ON 10 DECEMBER, AND VOTE IN FAVOUR OF ALL RESOLUTIONS IN ORDER TO RECEIVE THE EXPECTED FINANCIAL BENEFITS.
 Includes With-profit and non-profit members of RNPFN and Teachers who will also continue receiving distributions from the ring-fenced sub-funds of RNPFN and Teachers respectively.