Insurer Unsure: Insurance company LV= backs controversial takeover bid

December 4, 2021

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3 min read

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What's going on here?

The board of LV=, one of the United Kingdom’s largest insurance companies, (which we’ll call  “LV”) has issued more information about Bain Capital’s offer to its member-customers in a bid to encourage them to back the contentious £530m takeover, which would mean the end of the insurer’s mutual status.

What does this mean?

A mutual organisation is one that is owned and run for the benefit of its members. Since it was founded in 1843, LV has always operated as a mutual. This means that it is currently owned by its 1.2m members, with the sole purpose of providing insurance coverage to its policyholders. Any profits from investments of the funds are distributed back to the members, and mutual status gives policyholders the power to select management. 

Voting for Bain’s proposal will mean moving away from this structure, which has often been a key selling point for customers choosing LV. This decision comes after LV announced in June 2020 that a sale of LV was necessary to attract the investment required for the business to upgrade itself and prevent being squeezed out by bigger insurers. 

Bain’s offer is one of 12 formal bids for LV, including one from Royal London, another mutual insurance company. Despite criticism that the offer will demutualise LV, LV’s chief executive has defended the proposal claiming it’s ‘the only deal that keeps us going’. In an effort to sway the members’ vote, LV has released its analysis of the offer to illustrate that the takeover will provide the best outcome for them and other stakeholders, ahead of a vote on 10th December.

What's the big picture effect?

LV’s proposed sale to Bain has reopened the debate surrounding the upsurge of foreign private equity activity in the UK. Since the beginning of 2021, there have been 423 private equity-backed transactions of UK companies. Whilst the UK government is keen to attract investment into post-Brexit Britain, some politicians and critics are concerned that these new owners are simply bargain-hunting and will ultimately harm a company’s overall prosperity by ladening them with debt and stripping their assets. Clearly, this is not in the best interest of the company, its stakeholders (including its customers).

LV’s chief executive, Mark Hartigan, claims that Bain’s £530m proposal for LV was the only one which was ‘prepared to invest in [their] growth,’ saving the jobs and sites which they operate. But is the offer really good value for members of the mutual? Critics say no. Currently, each LV non-profit member would receive a pay-out of £100. Additionally, the 271,000 policyholders who share in the profits would also see an increase in their bonus pot of £212, which would equate to about £2,000 a member if evenly distributed. The latter payment has been defended as being in line with precedent “demutualisations”, but it is the former payout which has caused an outcry by politicians and members. Lord Heseltine, a former Conservative MP, described the offer as ‘derisory’ to LV’s members. Such a small payment is seen as  indicative of the fact that Bain’s interests do not truly align with LV’s members, and the sale is not good value.

Adding to the controversy is the fact that Bain’s offer was recommended above Royal London, a fellow mutual insurance company. Royal London has suggested their proposal had offered to protect LV’s mutual status, although this has been vehemently denied by LV’s board. This is pivotal because many policyholders chose LV as an insurer because its mutuality meant it would always act in their interests, rather than to seek profits for external shareholders. Thus, they oppose Bain’s offer for its demutualisation. The board’s decision to go with Bain, in the wake of these claims, has been criticised as representing self-interest rather than an effort to preserve LV’s values. Yet, it may also perhaps be evidence of the declining viability of mutuals as a business in today’s market, as LV’s board suggests. 

For now, LV’s future rests with its members, who will vote on the proposed bid next month. If Bain’s proposal is accepted, the future of LV will determine whether the private equity firm really intends to preserve its mutual values, as they claim they will. Indeed, Bain’s actions may serve either as a defence, or a warning, of foreign private equity firms activity in the UK market.

Report written by Iris Best

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