The management of LV= has been heavily criticised by MPs for failing to provide a clear and reliable picture of its capital position in light of its proposed sale to Bain Capital.
The firm’s demutualisation has been the subject of an enquiry by the All-Party Parliamentary Group (APPG) for Mutuals.
LV= had stated it needed a significant amount of investment to remain viable, but this has now scrutinised by the APPG. In 2019, LV= sold its general insurance business to Allianz for £1.1bn and MPs said this conflicted with the board’s current statements.
The APPG’s report said: “In the space of one year, LV= has made a number of inconsistent statements to members in relation to its capital position. On the one hand, both before and after the Allianz deal was concluded, it stated that it is a well-capitalised business, but then on the other hand, that it is unable to raise sufficient capital as a mutual to continue trading independently.
“Both statements cannot be correct. Indeed, had no deal for sale been reached, LV= itself said that it expected to continue as an independent entity. Members would be forgiven for their confusion.”
For instance, the report pointed out that LV= had been able to pay outgoing CEO Richard Rowney a full year’s salary and bonus on his departure (a total of £1.9m, which included an annual bonus of £316,000).
MPs commented this could confuse members given the apparent need for an external injection of capital.
LV= has since issued a statement, defending its ambitions and confirming the business will still strive to conclude a sale to Bain Capital. This will include a comprehensive information pack being distributed with its membership and the regulator, with a webinar also to be hosted and field further questions.
A spokesperson said: “We are disappointed by the report and we have always recognised the importance of equipping our 1.25 million members with all of the information they need to help them make an informed decision in advance of the vote and this continues to remain our absolute priority.
“We have been clear that the business, while well capitalised, requires significant further investment to compete in an increasingly competitive market. This investment would need to come from our existing capital, and this creates an inherent tension between balancing the requirement to invest for the future success of the business while providing meaningful returns to with-profits policyholders.”
In March 2020, only months before the intention to sell was announced, newly-installed CEO Mark Hartigan told members the firm’s capital position was strong.
The APPG has pointed to conflicting statements as a source of confusion, as well as a lack of guidance as to what Bain Capital’s business plan would be for LV= following a sale.
The APPG report added: “Without even a ballpark estimate of the investment requirements it is impossible to come to a view on this and the reluctance of the leadership of LV= to share any information on this is a source of frustration.
“In the 2019 Annual Report there is a Risk Management section which considers the potential emerging risks to the business. In it, we are surprised that there is no mention of an existential threat to the business as a result of an inability to remain independently in business.”
Overall, the APPG found the timeline of the proposed sale to be “remarkable” given how it had progressed in the first 12 weeks of CEO Mark Hartigan’s tenure.
Hartigan, appointed in December 2019, told MPs the decision to engage advisers on a sale took place around April/May 2020. Regulators were first informed of the sale in June.
The APPG report continued: “We find it remarkable that the new CEO, a mere 12 weeks into running what he apparently expected to be a standalone mutual business could rapidly conclude that the firm needed to be put up for sale, and had contacted advisors, even as the business continued to report on its surplus capital position and commitment to mutuality on 19 March 2020.”
As a result, MPs have recommended this timeline of events warrants further clarity and owner members deserve to be better informed.
Twelve bidders expressed an interest in the business and by August this had been shortlisted down to two, with Bain Capital entering exclusive talks from October.
The APPG report adds: “We simply cannot know if the sale process undertaken was sufficiently thorough, except to remark on the speed of its execution. That all of this was achieved without any engagement with owner members is to be regretted.”