LV=, the friendly society that is one of Britain’s biggest financial services mutuals, is close to wrapping up a landmark deal with the German insurance giant Allianz.
Sky News has learnt that LV=, which boasts nearly six million British customers, is within days of sealing the sale of a big minority stake in its general insurance operations to allay lingering concerns about its capital position.
Sources said a deal, which would value the LV= division at approximately £1bn, could be announced as early as Friday.
It would come after months of talks between the group formerly known as Liverpool Victoria and a pack of investors – revealed by Sky News in May – about a potential transaction.
The deal with Allianz will not involve any change to LV=’s mutual status and will only involve the sale of 49% or less of the general insurance business, according to a City source.
Analysts said it would transform Allianz’s position in the UK market.
The German insurer has a vast asset management business which includes Pimco, the bond fund manager.
Earlier this year, LV= 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.
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= 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.
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 at the time: “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.”
LV= and Allianz both declined to comment.