Friday, 12 May 2017

Mutual LV= in talks with Allianz over insurance stake sale

One of the UK's biggest financial services mutuals has been approached by a German insurance giant about a deal that would alleviate lingering concerns about the health of its balance sheet.
Sky News has learnt that LV=, the friendly society with nearly six million British customers, is in talks with Allianz over the sale of a minority stake in its general insurance operations.

The discussions are said to be at an early stage, but one analyst suggested that any deal would value the entirety of LV='s general insurance arm at well over £1bn.

Insurance industry sources said on Friday that LV= had been approached by a number of parties, including pension funds and sovereign wealth funds, in recent months about a range of potential transactions.

The discussions between the mutual and Allianz, which owns the giant bond house Pimco, are also said to include a possible reinsurance deal for LV='s balance sheet.

News of the talks comes nearly two months after Sky News revealed that LV= had held aborted merger talks with Royal London, its fellow mutual, about a possible merger.

The move to explore potential transactions has been prompted by a combination of tougher capital requirements and low interest rates hamper the profitability of insurers.

Recent Government moves to amend the rate at which compensation rates are calculated in personal injury claims have also hit the insurance sector hard, although a source close to LV= pointed out that it had already increased prices to reflect the changes.

LV= - previously known as Liverpool Victoria - employs more than 6,000 people, and counts 1.1 million of its customers as members, making it the biggest friendly society in the country.

It operates across the life and general insurance sectors, and is the UK's biggest provider of individual income protection.

The mutual is also the third-largest car insurance provider in Britain, and has been set the objective by its new chief executive, Richard Rowney, of becoming the industry's "challenger brand".

That target has, however, been set against a backdrop of rapid and profound regulatory reform, with mutuals such as LV= at a comparative disadvantage to their competitors because they are unable to issue new shares to raise capital.
Proposals from the Treasury to enable mutuals to issue shares are expected at some point, but would require secondary legislation to enact.

Solvency-II - the new European regulatory regime governing the Continent's insurance sector - has been heavily criticised by big UK-based insurers, including Legal & General and Prudential.

LV= is adhering to a more onerous standard formula, as opposed to a so-called internal model, under the Solvency-II rules, further adding to its regulatory burden.

General insurers are currently relatively highly valued by investors, suggesting that an auction could be attractive to LV=.

In April, the mutual announced that its general insurance business plunged to a full-year loss of £26m when the impact of the Ogden discount rate reduction was taken into account, against an operating profit in 2015 of £72m.

Without the Ogden effect, operating profit at the unit improved to £113m.

Richard Rowney, LV='s chief executive, said: "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 £139m 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."

SKY     News.