MPs and peers condemn plans to demutualise LV=

‘We are not convinced that either the board or the executive team genuinely have the interests of the current owners at heart’

The All-Party Group for Mutuals (APPG) has today issued a damning report into the proposed sale of LV= mutual, accusing the board of a lack of transparency with members.

The APPG – which includes former ministers and senior figures in both Houses of Parliament – has conducted an inquiry into plans to sell LV=’s  life and pensions business to Bain Capital, a US private investor.

It states concerns over the governance and regulatory processes around the sale and calls for a fuller inquiry by the House of Commons Treasury Select Committee and/or the Economic Affairs Committee of the House of Lords, and recommends an overhaul of legislation for the mutual sector.

The report on the findings was written on a pro bono basis by Peter Hunt and Mark Willetts of sector think tank Mutuo.

“Demutualisation is bad for members, for consumer competition and choice and for financial market stability,” says the report. “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.”

Related: MP writes to LV= chief executive for answers on its demutualisation

The report says that LV= – which last month reported pre-tax profits of £37m and a Solvency II capital surplus of £690m in its annual results – has stated a need for capital as a motive for the sale “but will not disclose how much, or for what purpose. It has not shared even the outline of a business plan with members and it appears unwilling to do so”.

“Mutuals are owned by their members and no one else,” it argues. “Boards are responsible to those members and must act in members’ interests, but this cannot happen without the presence of trust and confidence which is built through transparency and shared experience.”

LV= recently completed the sale of its general insurance business to Allianz, which “has strengthened the balance sheet significantly”, adds the report. Since the sale, it says LV= has made “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.

“We cannot identify a ‘burning platform’ to force such a sale and found no evidence of any regulatory pressure to demutualise the business.”

The report adds: “In deciding their vote, members are expected to rely upon the judgement of others who it could be argued have a conflict of interest. The directors and senior management at LV= are conflicted because they may have a personal interest in pursuing demutualisation.

“Bain Capital is clearly interested in making a profit from the acquisition … Executive management may well likewise benefit from enhanced remuneration and incentives attached to this and we might expect departing directors to be compensated for loss of office.

“It is likely that the rewards to Bain and the leadership will dwarf any payments made to members. It is likely that the money for the payments will come from members’ own money.”

It also accuses the leadership of LV= of a lack of transparency with its members. “Despite repeated assurances that there was no intention to alter the mutual status of the company, it is clear that plans were well advanced to seek alternative arrangements which could include a change of corporate status, if not a full demutualisation.

“The LV= leadership chose to re-affirm its commitment to mutuality
at the precise moment that it had instructed its advisors to seek a purchaser of the business, regardless of its ownership status. Indeed, the membership would have been completely unaware of what was happening had the story not been reported in the media, and even then, it took four days for LV= to make any public comment.”

The report adds: “Equally concerning to us is the manner in which the company converted from a friendly society to a company limited by guarantee in 2019. Throughout this process, members were reassured that there were no plans to alter the mutual status of the business, yet just a few months later, it put in train the process which led to the demutualisation we are examining now.

“Bain confirmed that it has conducted due diligence on LV=, examining company information in detail including its forward plan … It appears the planned future owners of LV= have been given more information about the board’s proposed business plan and its alleged capital needs, than the current owners.

“We are not convinced that either the board or the executive team genuinely have the interests of the current owners at heart.”

The report is critical of the governance process at the mutual, singling out the 2020 AGM which it says was held “behind closed doors with only the board and two employee policy holding members” – while most other mutuals held AGMs online to include the membership.

It adds: “Under the cloak of Covid-19 the leadership chose not to hold a
normal AGM. The LV= approach was certainly legal, but definitely inadvisable.

“We might have expected the UK’s second largest mutual insurer, in the throes of negotiating the sale of its business, that it had not so far justified to its members, to take this obvious opportunity to explain what was going on to its owner members. Instead, the AGM was held with 12 people in attendance, approved 14 resolutions, considered 31 questions, and lasted a total of 10 minutes.”

Related: Members of Canada’s MEC consider life after demutualisation

The report says the mutual’s leadership scrapped a rule requiring a turnout threshold of 50% of members to approve a demutualisation.

“Members placed their trust in the leadership and accepted the change. Less than a year later we are now witnessing a small group of executives and non-executives, intent on demutualising the business.”

The APPG also criticises the regulators, accusing them of failing to act fully in the interests of members, customers, and the wider economy. It calls for a complete overhaul of legislation on financial mutuals to modernise the rules, help them raise capital sensibly and avoid losing control of assets built up over many generations.

“We were surprised that regulators had not undertaken any review of previous demutualisations in financial services businesses and their role in helping to create ‘institutions too big to fail’ before the financial crash,” says the report. “It is impossible to have a sophisticated understanding of the market without this information.

“We were not convinced that the regulatory authorities understood, or were giving sufficient priority, to the significance of the part of their role that involves defending the interests of the current owners of this mutual … We believe that the presumption should be that it is bad for customer-owned institutions to demutualise and the onus should be on proving that it is beneficial.”

The report recommends a select committee inquiry into the deal, looking at the role of LV+’s board in the sale, and to look at future policy and legislation towards financial mutuals.

“The legislative framework for friendly societies and mutual insurers requires updating, particularly in relation to the flexibilities available to friendly societies and the capacity of both types of mutual insurer to raise capital. New legislation should examine global best practice around demutualisation and enact changes that remove the incentives driving demutualisation by offering options for securing legacy assets.”

Mr Thomas, a Labour / Co-op MP, said: “The All-Party Parliamentary Group for Mutuals was dismayed to have to conduct this inquiry into the planned demutualisation of LV=.  It is perverse that at a time when mutuality is growing in other parts of the world that this course is being chosen by the UK’s second largest mutual insurer. 

“Our report finds this demutualisation to be unnecessary, rushed and ill-advised. The APPG has members from across the political spectrum and we were unanimous in our findings. The UK already has one of the smallest mutual insurance sectors in comparison to many of our international competitors; the completion of this transaction is regrettable and only exacerbates that trend.”

Asked for comment by Co-op News, a spokesperson for Bain Capital said: “Bain Capital was pleased to appear before the APPG for Mutuals to discuss our role in the LV= transaction.  

“We are excited about the prospect of being able to help strengthen LV’s financial position and provide significant value to its members.  LV= has a rich history and heritage and we look forward to the opportunity to support LV= in their mission of providing its members with valuable insurance products.””

LV= and the FCA have also been contacted for comment.