Iconic insurance mutual LV= has said it will share out £111m among its members – £100 each – if they back takeover plans by private equity firm Bain Capital, a payment condemned as ‘paltry’ by MPs.
The move follows an announcement by the Financial Conduct Autbority that it would raise no objections to the takeover of the insurer by US investment firm Bain Capital.
Members will vote on the £530m deal, which needs 75% approval, to go ahead.
Those holding eligible with-profits policies will also receive enhancements to their future payouts amounting to £101m.
MPs on the All Party Parliamentary Group on Mutuals, which has been conducting in enquiry into the takeover, have been highly critical of the deal. In April they published a scathing report from sector thinktank Mutuo which criticised a lack of transparency in presenting the deal to LV=’s members, and highlighted concerns over regulatory oversight of the process. The APPG also claims similar benefits could have been gained through a sale offered by fellow mutual Royal London.
The APPG’s chair, Labour/Co-op MP Gareth Thomas, has condemned the proposed payment to members.
“When we published our report, we thought members didn’t have enough information to judge what’s in their interests,” he said. “Now we can categorically say that this is a bad deal. A paltry £100 in return for membership rights to hand over a business focused on its customers to a private equity shark intent on screwing the maximum profit for itself.”
The head of the Association of Financial Mutuals, Martin Shaw, was also critical of the offer.
“If members feel aggrieved that the sale to Bain Capital for £530mmeans that only £111m will be paid to members in 2022 in return for their vote, with a 0.1% top up to with-profits policies for each year it was held, then that’s something they may have to get used to.
“In fact, the one-off payment, of either £60 or £100 is low compared to previous demutualisations and the 0.1% policy enhancement is no more than the annual ‘mutual bonus’ that LV has paid its members in recent years. Historically, demutualisation means managers focus less on customer service and policyholder returns, so the value of any payment may soon be lost.
“The sad fact, for a small mutual seeking to discover its future direction, is that the amount of money it has spent on dressing itself up for sale has been colossal, the money earned for selling its general insurance business has been lost, and members are being asked to sell their rights in the business for less than the cost of a good meal out.”
The FCA last week said it raised no objection to the takeover. In a letter to stakeholders, it said it had “scrutinised the fairness of the proposed transaction and process for how it is decided” and had given the green light for LV= to hold a Convening Hearing on the Scheme of Arrangement and, subject to the outcome of this hearing, to send voting packs to its members, in advance of a Special General Meeting (SGM) for a vote on the proposals.
It added: “The PRA’s and FCA’s consideration of the change in control application is ongoing, and approval of this change in control would be required for the transaction to proceed, regardless of the outcome of the member votes.”
It said it had not been granted the duty by Parliament “to consider form of ownership of an acquirer when considering transactions such as these. We consider such transactions in the context of our statutory objectives in relation to consumer protection, market integrity and competition in the interests of consumers.”
But the regulator added that communication between LV= and its members over the deal is a concern and it would be monitoring the process. It wants the mutual to hold extended opening hours on its customer helpline and to host regular Zoom meetings and webinars to answer members’ questions.
“It is important that there is maximum opportunity during this window for LV’s policyholders and members to engage with the proposals once they have received the member voting packs,” it added.
“We have challenged LV= on their current and planned engagement and communications strategy with their policyholders and members, as an area of particular concern for us. Given the complexity of the proposed transaction and the need for policyholders and members to engage with and understand the proposals before voting on them, we have focused on ensuring that LV= does all it can to support them.”
LV= CEO Mark Hartigan has said the Bain deal would include an injection of £168m to support the two existing company, pension schemes. He added that LV= had been waiting for court and regulatory approvals before being able to provide full details of the deal, but was now holding webinars on it with members and financial advisers.
Summoned to a hearing with the APPG last week, LV= chair Alan Cook said the board’s objective was to fix the company’s “capital shortfall” and had not specifically planned to demutualise.
“To be able to compete effectively in the future, we need long term investment in this business,” he said.
“In the normal course of events, you would use internal capital to fund this, but the majority of our with-profits members are unlikely to benefit because their policies will mature in the relatively near future.
“There’s quite a bias in the policyholder space. Within a relatively small number of years, the number of policyholders will drop off quite remarkably.
“So from the board’s perspective, that does not seem a good thing to do with their money, when they won’t be around when the proceeds of the deal, the success that results from the investment, takes place.
“We’ve seen that with the general insurance sale, that policyholders have done very well out of it, but it’s been a number of years before that benefit emerged.”
While he was sorry the business would demutualise, he claimed it would “still be the same company with the same people working for it”. Three current board members – Mr Cook, chief executive Mark Hartigan and non-executive director Seamus Creedon – are expected remain in place after the sale. The rest will step down and be be replaced with three new independent non-executive directors, subject to approval.
Mr Cook said he did not intend to say on longer than the six-year term he accepted on joining in 2017.
After the hearing, Mr Thomas said: “Whatever inducement members are offered, long-term, all the evidence shows that they’re better off with a mutual, even Alan Cook himself admitted that members would have had at least the same benefits if they had taken the Royal London offer.
“The only major difference between the deal with Bain and the offer from Royal London is that Mr Cook and Mr Hartigan will stay on the board earning very large sums of money.
“There is a massive conflict of interest that the two people set to benefit most from the sale of LV are leading all the negotiations about its future. Bain will be laughing all the way back to Wall Street about just how good of a deal they have done.”
In a statement, Mr Cook said the Bain deal is the only option that “offered both an excellent financial outcome for members and gave unrivalled support for the LV brand, our people and locations”, and that no option would have allowed LV= to remain as a standalone mutual.
Mr Hartigan told the Financial Times: “If anyone else had produced more money, we would’ve sold it to them,” adding that neither he nor Mr Cook would receive “a penny” as a result of the outcome of the deal. In terms of future remuneration, he said he did not yet have a “contract on the table” with Bain.
The proposed deal follows the £1.1bn sale of LV=’s general insurance business to German insurer Allianz in January 2020.
The loss of businesses to the mutual sector was criticised in the APPG report. “Demutualisation is bad for members, for consumer competition and choice and for financial market stability,” it said. “The UK economy needs mutuals. More importantly, customers need mutuals. It is incumbent on us all to ensure that individual mutuals play their part as responsible and well governed businesses.”
In a statement, Bain managing director Matt Popoli said it looked forward to “investing in the LV brand and its people for the long-term, to preserve and grow the business for future generations of customers”.
A spokesperson for LV= said: “This transaction is not about the views of any one individual. The decision to pursue a transaction with Bain Capital was taken by the board as a whole and the board was unanimous in its decision which followed a process and strict criteria that was approved by the regulator.”
He added: “The proposal from Bain Capital was the only option that offered all of the following; an excellent financial outcome for all members, an independent future for the LV= brand and the protection of jobs for our people enabling us to maintain our position as a significant employer in Bournemouth, Hitchin and Exeter. In total £212m will be distributed in the form of payments to members and the board firmly believes this transaction is the right thing to do for our members, our business and our people.
“The chair and non-executive directors receive a flat fee for their work on the board. They do not receive bonuses and never will. The CEO will receive no bonus directly related to the transaction. In terms of the CEO position going forward, there have been no firm decisions regarding this role or the terms of any contract and there won’t be until the outcome of the transaction. Future CEO remuneration will be a matter for the remuneration committee of the new board.”