ISSUED 15 DECEMBER 2017 PROVIDER SECTOR LV= FINANCIAL STRENGTH ASSESSMENT

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1 ISSUED 15 DECEMBER 2017 PROVIDER SECTOR LV= FINANCIAL STRENGTH ASSESSMENT

2 LV= P R O V I D E R S E C T O R ABOUT THIS FINANCIAL STRENGTH ASSESSMENT This AKG report and the analysis and ratings contained within it provide assessment of financial strength and associated considerations. Financial Strength is focused on the ability of a company to deliver ongoing operational capability in the interest of its customers and in line with their fairly held expectations. AKG s perspective in the assessment of financial strength is wholly that of a customer of a product or service. From that foundation, this analysis is specifically designed to inform financial advisers and assist in their required understanding of a company s operational financial strength. Given the underlying customer perspective, the financial strength of companies needs to be focused at an operational level (i.e. the elements and functions of an organisation which operate to specifically deliver and manage a proposition or service to the customer), specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer s perspective it is that company that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers advisers must be met. This contrasts to credit rating, which will be undertaken at group or parent company level where investment or debt placement etc. is made. Further details on how analysis is undertaken is provided at the end of this report and may also be obtained from AKG. TABLE OF CONTENTS Company Analysis Rating & Assessment Commentary... 3 Ratings... 3 Summary... 3 Commentary... 3 Group & Parental Context... 6 Background... 6 Group Structure (simplified)... 7 Company Analysis: Liverpool Victoria Friendly Society Ltd... 8 Basic Information... 8 Operations... 9 Strategy Key Company Financial Data Company Analysis: Liverpool Victoria Life Company Ltd Basic Information Operations Strategy Key Company Financial Data Guide Introduction Rating Definitions About AKG CONTACT INFORMATION Guide AKG Financial Analytics Ltd, Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel: +44 (0) akg@akg.co.uk Web: AKG Financial Analytics Ltd 2 15 December 2017

3 LV= P R O V I D E R S E C T O R Rating & Assessment Commentary Rating & Assessment Commentary RATINGS Overall Financial Strength B+ B+ PROVIDER SECTOR VERY STRONG PROVIDER SECTOR VERY STRONG LIVERPOOL VICTORIA FRIENDLY SOCIETY LTD LIVERPOOL VICTORIA LIFE COMPANY LTD Additional Financial Strength and Supporting Ratings Group & Parental Context Liverpool Victoria Friendly Society Ltd Liverpool Victoria Life Company Ltd Non Profit Financial Strength Unit Linked Financial Strength With Profits Financial Strength Service Image & Strategy Business Performance SUMMARY Company Analysis UK's largest Friendly Society with total group assets of 16.9bn Record levels of Life new business and operating profits Strategic partnership with Allianz announced in August 2017 expected to improve capital position and allow greater investment in life and new pensions and digital opportunities Internal model application withdrawn due to 'material change' in risk profile following completion of the transaction with Allianz Withdrawal from the Enhanced Annuity market YouGov s most recommended insurer for the third year and voted the UK s most trusted insurer for the second year by Moneywise in COMMENTARY Financial Strength Ratings Liverpool Victoria Friendly Society Ltd Liverpool Victoria Friendly Society Ltd (LVFS) is the UK's largest Friendly Society and is demonstrating a healthy level of trading performance. Guide As a mutual, access to capital is not as readily available as it is to some of its proprietary rivals. LVFS has recognised this and has successfully looked at other options, such as the raising of subordinated debt. The acquisition of Teachers Assurance, which brought with it an element of additional scale and helps with the strategic intention of growing the life part of the group's business and, more significantly, the recently announced partnership with Allianz, which should further benefit the growth of the Life business and is expected to improve the capital position, are positive developments here. AKG Financial Analytics Ltd 3 15 December 2017

4 LV= P R O V I D E R S E C T O R Rating & Assessment Commentary The group's capital position has also improved, to 153% as at 30 June 2017, with surplus capital increasing from 367m at 31 December to 470m and getting closer to the group's risk appetite buffer of 550m. The recent strategic refresh, which includes a cost reduction programme, bringing with it a clear focus on cost and underwriting discipline, also provides comfort. Non profit business in the Society is secure, given its heightened focus and the level of with profits business alongside it. Similarly, the small amount of non profit business retained in Liverpool Victoria Life Company Ltd (LVLC) is secure and enjoys the support of the parent. Unit linked business is now key to the overall proposition and AKG expects appropriate support and attention to be given. This line enjoys the comfort and support that the Society and its level of free assets brings. In recent years, the Society has generally shown good with profits performance, and it maintains a reasonable equity backing ratio. Whilst the largest of the Friendly Societies, it remains a relatively small fund when compared with the larger life companies. Although other business lines now dominate marketing activities, with profits business remains important. Group & Parental Context Company Analysis The transfer of Teachers Provident to LVFS and sale of goodwill, subsidiaries and non profit business has improved the financial position of the Teachers Assurance Fund, although in part offset by the payment of 250 to each qualifying member for loss of membership rights and a similar rating for with profits business applies for this fund. The with profits rating shown does not apply to the smaller RNPFN fund, which is not as financially strong and has a rating of 3 stars. Liverpool Victoria Life Company Ltd LVLC is a small declining company. The solvency coverage is reasonable, with the minimum capital requirement biting, in the context of the run off of the small block of remaining UIA business. The company also benefits from its presence within the LV= Group. Service Rating LV= states that one of its core aims is to deliver a strong and reliable service proposition to clients and advisers. The appointment of a Chief Customer Officer in, with responsibility for delivering LV= s strategic objective of being a truly customer centric organisation is a demonstration of this and LV= remains highly regarded both by intermediaries and consumers. LV= s Fastway quote and apply technology is enabling a swifter Protection service experience for advisers. LV= s adviser toolkit for Protection and Retirement is comprehensive and designed to provide advisers with value added planning support. Image & Strategy Rating LV= offers a comprehensive Protection and Retirement proposition for advisers. LV= s focus on the development of digital functionality and services is seeing it involved in innovative areas such as online advice. LV= has responded well to the pension freedoms changes. With drawdown already in place within its range, LV= has sought to provide advisers with a retirement toolkit and resources to support the retirement planning process. Guide In brand terms LV= has seen significant growth in the last decade, establishing it from a relatively modest position, to be one of the UK's leading financial services brands, both from general recognition and positive perception perspectives. This is now a significant strength, enabling development of adjacent product offerings and distribution approaches. Following the transaction with Allianz, the Society will continue to benefit from a presence in the general insurance market, while being better placed to invest in its core life and pensions business and pursue new digital opportunities. AKG Financial Analytics Ltd 4 15 December 2017

5 LV= P R O V I D E R S E C T O R Rating & Assessment Commentary Business Performance Rating saw Liverpool Victoria report record Life operating profits and new business levels. However, the group reported an overall pre-tax loss, due to the significant impact of the Ogden rate change for general insurance business, model and basis changes in its legacy business and a number of one off costs, mostly relating to the introduction of Solvency II. The group undertook a range of actions to improve its capital position, which have continued into There is also a continued emphasis on costs. LV= remained highly regarded both for its service and its overall proposition. Guide Company Analysis Group & Parental Context AKG Financial Analytics Ltd 5 15 December 2017

6 LV= P R O V I D E R S E C T O R BACKGROUND Group & Parental Context Established in 1843, Liverpool Victoria Friendly Society Ltd (LVFS) has grown to become the UK's largest Friendly Society, with group assets of 16.9bn and a group Solvency II coverage ratio of 140% as at 31 December. The Society had widened its operations substantially via new activities and acquisition. Acquiring Frizzells in 1996 and Landmark in 1997 broadened its scope to include general insurance, banking and the provision of independent financial advice. In February 2001, the group acquired Permanent Insurance Company Ltd from Equitable, renamed it Liverpool Victoria Life Company Ltd (LVLC) and in December 2001 used this structure to acquire the Royal National Pension Fund for Nurses (RNPFN). In 2002, Bishopscourt, an IFA group specialising in affinity services, was acquired. In November 2005, LVLC acquired a small portfolio of business from UIA Insurance (UK) Ltd. January 2007 saw the Group acquire Britannia Road Rescue Services and in December 2007 the Group acquired the new business operations of Tomorrow (previously GE Life) from Swiss Re and entered the unit linked pensions market. In October 2008, LV= acquired the Highway Insurance Group, an organisation complementary to its existing general insurance operations. The group transferred much of the life business of LVLC to LVFS in two tranches, December 2008 and December In recent years, the group has tightened its focus on core businesses and currently operates through two Strategic Business Units (SBUs): Life, which now includes Heritage, and General Insurance. The Partnership SBU was dissolved in 2010 and the Banking operation has also been disposed of, apart from remaining obligations and liabilities of around 25m which have been transferred to LVFS. In 2011, the asset management arm, Liverpool Victoria Asset Management Ltd (LVAM), was sold to Threadneedle Investments (now Columbia Threadneedle Investments) to whom it now outsources its asset management, enabling the Society to focus on general insurance, protection and retirement solutions. All life and pensions business is now written directly into the Society. Equity release is written by LV Equity Release Ltd. The group also transacts motor, home and travel insurance through Liverpool Victoria Insurance Company Ltd. General Insurance is also written through 3 other subsidiaries, LV Protection Ltd, Highway Insurance Company Ltd and Teachers Assurance Company Ltd. The group disposed of its Whole of Market advice business in also saw the group carry out a major rebranding exercise, introducing the brand LV= and reconfirming its commitment to mutuality. In May 2013, the Society issued 350m of subordinated debt, enabling it to improve capital efficiency and support growth ambitions. LV= acquired a majority stake in Wealth Wizards Ltd in August. The group acquired most of the business of Teachers Assurance in June. Richard Rowney, previously managing director of the group's life and pensions business, replaced Mike Rogers as Chief Executive in July. Similarly Steve Treloar was appointed as managing director of general insurance in May, joining the board from Aviva as successor to John O Roarke. Recognising the importance of customers and members to the long-term success of the Society, Katie Wadey was appointed to the new role of customer and member director in January. Alan Cook also replaced Mark Austen as chairman in January In August 2017, LV= announced a strategic partnership with Allianz, subject to regulatory approval, with a target date of 31 December The transaction is structured in two phases. Allianz will pay LV= an initial 500m in exchange for a 49% stake in LV= s General Insurance businesses. LV= will acquire Allianz s personal home and motor insurer s renewal rights, while Allianz will obtain LV= s commercial insurer s renewal rights. In 2019 Allianz will pay 213m for a further 20.9% stake in the general insurance business, taking Allianz's holding to 69.9%. AKG Financial Analytics Ltd 6 15 December 2017

7 LV= P R O V I D E R S E C T O R GROUP STRUCTURE (SIMPLIFIED) AKG Financial Analytics Ltd 7 15 December 2017

8 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R Company Analysis: Liverpool Victoria Friendly Society Ltd BASIC INFORMATION Company Type Life Friendly Society Ownership & Control Mutual Year Established 1843 Country of Registration UK Head Office County Gates, Bournemouth, BH1 2NF Contact Tel: feedback@lv.com Web: Key Personnel Role Chairman Group Chief Executive Group Finance Director Group Actuarial Services Director Managing Director, Life & Pensions Life Commercial Director Chief Risk Officer Chief Operating Officer, Life Chief Information Officer Chief Customer Officer Life Chief Actuary With Profits Actuary Name A R Cook R A Rowney A M Parsons J M Laidlaw J T Perks N Austin S R Haynes S Knight R A Warner K Wadey P M Downey A R Walton Company Background Established in 1843, the Society is the UK's largest friendly society. Operating for many years as a traditional home service insurance company, writing both Ordinary and Industrial Branch business, it had re-positioned itself with a much broader range of activities, via a number of different subsidiaries. Some of these have since been exited as part of a more tightened focus. It stopped writing industrial business in 1999 and entered the IFA market in The acquisition of the new business operations of Tomorrow, late in 2007, and the transfers-in of the business from LVLC in 2008 and 2011 changed the profile of the Society, having previously almost exclusively written with profits business. The business of Teachers Provident Society Ltd was transferred into the Society, as part of the Heritage business, in June, amounting to assets of around 750m. AKG Financial Analytics Ltd 8 15 December 2017

9 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R OPERATIONS Governance System and Structure The Group s Board has adopted a governance structure based on the principles and provisions of the Financial Reporting Council s UK Corporate Governance Code (the Code ). The Board has chosen to adopt early the April amendments to the Code. As a Friendly Society, it has voluntarily complied with the Code and its principle of comply or explain. The Board has confirmed its compliance with the Code, with the exception of two decisions approved by the Board; to allow the Chairman to be a member of the Audit Committee; and for only the Chairman to stand for annual re-election at the Annual General Meeting. The Board believes that its practices are consistent with the principles of the Code and are appropriate and suitable for the Society and its members. Within its Systems of Governance, the key functions are Risk, Compliance, Actuarial and Internal Audit. In setting up these functions, the Board has 'ensured that: they are free from influences that may compromise their ability to undertake duties in an objective, fair and independent manner each function operates under the ultimate responsibility of, and reporting to the Board they have the necessary authority, resources and expertise, as well as unrestricted access to all relevant information necessary to carry out their responsibilities'. Each of these key functions has a Board approved Terms of Reference (ToR), setting out their scope, authority and an overview of objectives. The ToR also confirms 'how each function achieves independence, and how potential conflicts of interest are managed'. The LV= Member Panel is a group of around 40 members who represent a cross-section of membership and challenge the group's performance. They meet with the board, executives and senior leaders twice a year. The Member Panel Hub was established in so that the panel can stay in touch with news throughout the year and comment on developments and changes via posts and online forum. Risk Management The LVFS Board bears ultimate responsibility for management of all risk across the Group and has established a consistent approach to be followed across all Group entities. In particular, the Board takes responsibility for: approving the Group risk strategy and associated risk appetite statements; setting out a three lines of defence model to be followed for risk management; monitoring the overall Group risk profile on a regular basis; and reviewing and approving the Group ORSA report. This 'ensures that a robust and effective risk management framework is applied consistently, aligned with recognised good practice and with the nature and sophistication of the risks involved. Active monitoring and control is exercised across risks of all types, whilst maintaining compliance with all policies, appetite statements and regulations'. The LVFS Board delegates authority for oversight of risk management to the Risk Committee, who review regular reports on the effectiveness of risk management across the Group. In, the Risk Committee commissioned an external review to provide additional insight, and initiated a Risk Development Programme to support the ongoing development of risk capability through 2017 and The Group operates an Enterprise Risk Management Framework (ERMF), which brings together risk management strategies, objectives, processes, and reporting procedures. The ERMF has been developed by Group Risk Management. It is reviewed at least annually, with changes approved by the Chief Risk Officer and the Risk Committee. The framework is centred on the traditional risk management processes of Identification, Assessment and Management. AKG Financial Analytics Ltd 9 15 December 2017

10 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R Administration From a structural perspective, LV= stated that the June 2017 move to bring its Protection, Retirement Solutions and Heritage businesses under one management would allow for greater operational efficiencies. LV= states that over 80m has been invested on the development of digital propositions since June with a specific requirement to improve core operating systems within the GI and Protection businesses as well as a current focus within Retirement Solutions on systems and digital propositions. As a key component of this work, LV= has now completed the roll out of its new quote and apply technology, Fastway, to financial advisers, offering a faster way for advisers to protect clients. This technology can be used for LV= s personal Life Insurance, Life with Critical illness, Income Protection and Personal Sick Pay (PSP) product lines. A new pre-underwriting tool is available online, 24/7, which enables advisers to submit business outside of regular working hours and receive instant decisions without having to call an underwriter. The tool can provide an indication of the final underwriting outcome, and can also be used for multiple conditions and confirming any necessary medical evidence. LV= operates a tele-interview booking system which enables customers to book an appointment online as part of the application process for the Flexible Protection Plan. Recent service-based recruitment has included the appointment of a Technical Claims Manager, Protection, with specific focus on customer outcomes and consistent claims processes, and a Rehabilitation Manager to focus on helping individuals suffering from illness or injury with their recovery. LV= operates with a large case team, to support the management of protection servicing for adviser s high value clients, and has a Business Protection Specialist team, to help advisers with underwriting and application processes. Benchmarks LV= states that its Fastway quote and apply technology can give advisers an immediate underwriting decision for over 75% of LV= Life and Life with Critical illness customers, and almost 70% of LV= Income Protection and Personal Sick Pay customers. LV= publishes claims performance data on its Adviser Centre. In, LV= stated that it had paid out 94% of all new individual protection claims, totalling close to 77m over the year, and that it had paid 100% of 50 Plus claims, 98% of life insurance claims, 92% of critical illness claims and 90% of income protection claims. In total, LV= paid out almost 7,000 claims over the year. LV= was named Insurance Provider of the Year at the Which Awards 2017, remained YouGov s most recommended insurer for the third year and was voted Most Trusted Insurer for the second year at the Moneywise Awards. The LV= Protection and Retirement Solutions businesses continue to win awards and recognition for quality of products and proposition. These include Gold Standard Awards in, and for Protection, Retirement and Individual Pensions and ILP Moneyfacts Awards for Income Protection, SIPP and Equity Release. LV= was awarded five stars in the Life & Pensions and Investments categories at the Financial Adviser Service Awards in and LV= was awarded four stars in the Life & Pensions category and three stars in the Mortgages category at the FTAdviser Online Innovation and Service Awards Outsourcing To ensure a consistent approach across the Group, the Group maintains an Outsourcing and Sourcing Policy. This policy is reviewed on an annual basis and sets out detailed requirements on areas including: overall sourcing strategy supplier assessment criteria principles for identifying Critical and Important relationships, and contractual and operational requirements and ongoing supplier relationship management. In January 2004, the Society concluded a long term contract with EDS Ltd to outsource the administration of its life business, whilst retaining all customer contact. This business was brought back in-house in 2007/8 in line with the Society's AKG Financial Analytics Ltd December 2017

11 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R views on service. Some administration of investment products is outsourced to Outsourced Professional Administration Ltd (OPAL). A fundamental reappraisal of the group's strategy saw it outsource the investment management function in The mandate was awarded to Columbia Threadneedle Investments, with the transfer of fund management completed during the final quarter of LV= has governance processes in place to oversee the arrangement, including designing and implementing asset allocations to reflect the risk tolerances with the strategic business units, setting benchmarks and monitoring performance. SLAs have been established and are reviewed at the monthly Client Relationship Meeting. A number of other functions are also outsourced, including infrastructure management & systems development, desktop services & telephony and outbound printing & inbound scanning services, STRATEGY Market Positioning In 2017, LV= launched a refreshed strategy, which included a cost reduction programme, targeting 40m of savings in group costs by To help deliver on its ambition to become the 'challenger brand' in the financial services industry, LV= has recently launched a clear and simple blueprint for its future. Its strategic priorities focus on three themes: eradicating waste and building stronger financial foundations; harnessing the power of the latest digital technologies and creating solutions for customers that leave them feeling more confident about life and more confident in LV=. LV= has a proposition which stretches across the Retirement and Protection markets. LV= also remains committed to its with profits proposition and has experienced an increase in interest for this, primarily through its investment bond. LV= has an equity release proposition within its product portfolio, provided by LV Equity Release Ltd, meaning that it can also target the use of housing equity in retirement. On the Life side, distribution is primarily through intermediaries (96% of sales), with 2% direct and 2% through tied advisers. On the General side, the spilt is 40% brokers/60% direct. In aggregate this equates to 71% intermediary/broker, 28% direct and 1% tied. LV= has a small team of 40, which includes 20 financial advisers (tied agents). operating in its in-house advise service. LV= closed its Protection Advise Service, which operated in the term assurance market, because its offering is not aimed at this market, which is more suited to commoditised, price driven products. As part of a focus on its digital presence, LV= has invested in the development of an online retirement income advice service in conjunction with Wealth Wizards. LV= Retirement Wizard (on-line regulated advice) was launched in July, opening up the online distribution channel as another option. The business has been actively developing a range of corporate partners for its digital and adjacent retirement solutions. The partners for these are notable in their mix, including financial services providers in other sectors, such as The People's Pension (B&CE), but also advisory businesses, 'end' employers and other third parties. LV= has subsequently appointed a new head of its Corporate Solutions business, which works with organisations to provide specialist retirement advice and tools to pension scheme members. This role will form part of LV= s commitment to deliver engaging, accessible and affordable retirement solutions that support members of both Defined Benefit and Defined Contribution pension schemes. LV= has responded to a range of industry consultations in recent times, including the government s consultation on a new public financial guidance body. LV= has signed up and committed its support to the Treasury s Cross-Industry Project Group to build a Pensions Dashboard Prototype. In December, LV= announced the removal of all pension wrapper exit charges, allowing customers the freedom to switch to another product or provider if they wish without incurring a charge. This move came as part of LV= s commitment to 'ensuring all customers are able to get the best possible outcome in retirement'. AKG Financial Analytics Ltd December 2017

12 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R Proposition In November, LV= announced that it was consulting with its employees on proposals to stop selling enhanced annuities in order to increase its focus on secure drawdown options and its wider Retirement Solutions business. LV= subsequently withdrew from the enhanced annuity market. LV= operates with a Flexible Transitions Account, a Self-Invested Personal Pension, which can serve as a Personal Pension or Drawdown Pension solution for customers, offering a wide range of investment options including access to DFMs. LV= s Protected Retirement Plan is a fixed term annuity, which aims to provide a secure income over a set term, with a guaranteed value at maturity. Development activities have subsequently focused on enabling advisers to recommend and blend a combination of LV= product solutions through one overarching account, the LV= Retirement Account. Investment options within the LV= Pension are categorised as LV= Value, LV= Secure, LV= Choice and LV= Wealth. Under LV= Choice, LV= states that it is working with advisers to develop a new Model Portfolio Service. LV= has designed a set of three funds to offer the potential for capital growth over the longer term with ongoing flexibility and guarantee options. The LV= Flexible Guarantee Bond (FGB) has a structure and features which aim to provide an element of protection and investment security for customers investments, while the funds are actively managed on LV= s behalf by Columbia Threadneedle Investments. The Flexible Guaranteed Funds are also available as fund options within the SIPP wrapper. LV= offers a comprehensive range of Personal and Business Protection lines. The Personal Protection range includes Income Protection, Life Insurance, Life and Critical Illness, Flexible Protection Plan (a menu plan), Personal Sick Pay, Inheritance Tax Protection, Family Income Assurance and Gift Inter Vivos. The Business Protection range includes Key Person Cover, Share & Partnership Protection and Relevant Life Cover. LV= offers Flexible Lifetime Mortgage and Lifetime Mortgage - Lump Sum+ product lines in the equity release market. LV= is a member of the Equity Release Council and, in adherence with the Safe Home Income Plans (SHIP) standards, therefore offers additional features and safeguards to LV= s lifetime mortgage products. This includes offering a 'No Negative Equity Guarantee' and a guarantee that the customer is safe to stay in their home for as long as they wish, provided all terms and conditions of the mortgage are met. LV= continues to work on integration of its products from a quote, apply and valuation perspective with back office systems providers and quotation portals. It has back office systems links in place with suppliers including IRESS Adviser Office, Best Practice, Intelliflo, Plum Software and True Potential, and portal links in place with suppliers including ipipeline, Lifequote, Webline, Hub Financial Solutions (previously TOMAS) and Annuity Exchange. Investment management of the various funds is completely outsourced to specialist investment managers. The asset management undertaken by LV= Asset Management was transferred to Columbia Threadneedle Investments in 2011, who are given specific objectives and benchmarks on how to run the funds. These funds include tracker funds and actively managed equity funds covering the world's major markets. Fund managers include: 7IM, Artemis, BlackRock, Fidelity, Invesco Perpetual, Investec, JPMorgan, Jupiter, Liontrust, M&G, Newton, Old Mutual and Schroder as well as Columbia Threadneedle Investments. LV='s flagship SIPP, the Flexible Transitions Account, also offers: Discretionary Management (through Brewin Dolphin, Cazenove Capital Management, Charles Stanley, Investec Wealth & Investment, Quilter and Rathbones); access to Cofunds, FundsNetwork and a Self Investment option. The return on the main with-profits fund in was 14.5%, which is a significant increase on the performance of 3.8%. The with-profits fund performance was 1% below benchmark, driven by underperformance in equities, partially offset by over performance in gilts and bonds. AKG Financial Analytics Ltd December 2017

13 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R KEY COMPANY FINANCIAL DATA Last 3 reporting periods up to 31 December Assets Fixed interest 5,052 Equities 872 Collectives 2,732 Property 5 Linked 2,001 Derivatives 179 Loans and mortgages 884 Reinsurance recoverables 673 Cash 143 Other 897 Total Assets 13,436 Liabilities Technical provisions - nonlife Technical provisions - health (similar to life) 0 (26) Technical provisions - life 8,808 Technical provisions - linked 2,517 Other 1,021 Total Liabilities 12,321 Excess of assets over liabilities The return on the main LVFS with-profits fund was 14.5% in [: 3.8%]. The return has increased significantly from the previous year, due to the performance of equities and gilts and bonds, which collectively form 75% of the fund s assets. Outside of the main LVFS with-profits fund and the RNPFN and Teachers ring-fenced funds, the majority of assets are invested in UK corporate bonds and UK gilts. Returns in these areas were strong in the face of decreases in yields and narrowing credit spreads. The Group had total assets of 16.9bn at 31 December, up 16% [: 14.5bn]. Columbia Threadneedle Investments had funds under management of $473bn at 30 June Life & Health SLT Technical Provisions Insurance with profit participation 5,351 Linked insurance 2,517 Other life insurance 3,457 Annuities - from non-life health Annuities - from non-life non-health Health insurance (26) Health reinsurance 0 Life reinsurance 0 Total life and health SLT technical provisions ,300 Life Expenses 1,115 Health insurance 47 Insurance with profit participation Linked insurance 22 Other life insurance 90 Annuities - from non-life health Annuities - from non-life non-health Health reinsurance 0 Life reinsurance 0 Other expenses 29 Total life expenses Technical provisions were split 47% with profits, 22% linked and 31% other life insurance as at 31 December. A large proportion of with profits business is heritage, with most new business written on a linked or other life insurance basis, although some new business is still written on a with profits basis. AKG Financial Analytics Ltd December 2017

14 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R Solvency Capital Requirement (SCR) Market risk 1,319 Counterparty default risk 23 Life underwriting risk 447 Health underwriting risk 91 Non-life underwriting risk 0 Diversification (348) Intangible asset risk 0 Operational risk 50 Capital add-ons already set 0 Other items (905) Solvency capital requirement 676 Own Funds Tier 1 unrestricted 1,027 Tier 1 restricted 0 Tier Tier 3 0 Eligible own funds 1,365 Excess of own funds over SCR 688 SCR coverage ratio (%) LVFS' largest risk exposures relate to market risk (62%) and underwriting risk (30%). Market risk is further broken down as Spread - 55%, Equity - 36%, Interest rates - 5%, Currency - 2% and Property - 2%, whilst underwriting risk is further broken down as follows: Lapses - 64%, Longevity - 19%, Expenses - 9%, Health Claims - 7%, and Other - 1%. At 31 December the Solo capital surplus on a standard formula basis for LVFS was 688m (giving an SCR ratio of 202%) compared with 543m as at 1 January (172%). At the end of the group capital surplus on a Solvency II Standard Formula basis was estimated to be 367m [: 383m] and the capital coverage ratio was 140% [: 146%]. The 16m reduction in the capital surplus was largely due to the 100m impact of the Ogden rate change as well as negative market movements, offset by the impact of recalculation of Transition (reflecting the changes in the group s risk profile), the implementation of the Matching Adjustment and other capital optimisation actions. The Ogden rate change is a significant factor causing the end of capital surplus to be below the group s target level, which is now 550m. Throughout the course of a range of actions was undertaken to improve the capital position and the capital coverage ratio increased to 140% from 126% at 30 June. Additional reinsurance treaties, for example, have been introduced for annuities as one of several management actions during the year to manage risk and protect the Solvency II capital position. A key focus for the group in 2017 is on strengthening the group s capital position and further reducing the balance sheet exposure to volatility in risk-free interest rates and other market changes. The capital position of the group improved at 30 June 2017, with a Solvency II capital coverage ratio of 153% [31 December : 140%]. Group capital surplus has increased by 103m due to capital optimisation initiatives 62m, economic conditions 65m, General Insurance profits and recognition of SCR tax benefit 72m and partially offset by Transitional Measure on Technical Provisions (TMTP) run off, sub debt coupon and project costs ( 90m). The capital position as at the end of 2017 is expected to benefit from the transaction with Allianz and be adversely impacted by the recalculation of TMTP. LV= has withdrawn its current internal model application, following the announcement of the transaction with Allianz, and is discussing the next steps with the PRA. Subordinated debt is shown as Tier 2. AKG Financial Analytics Ltd December 2017

15 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R Gross Life Premiums Written By Line of Business Health insurance 81 Insurance with profit participation 609 Linked insurance 0 Other life insurance 538 Annuities - from non-life health Annuities - from non-life non-health Health reinsurance 0 Life reinsurance 0 Total gross life premiums written 0 0 1,228 Gross Life Premiums Written By Country Home country 1,228 Country 1 0 Country 2 0 Country 3 0 Country 4 0 Country 5 0 Other countries 0 Total gross life premiums written All business is written in the UK. Almost half of gross written premiums were on a with profits basis, recognising the relative size of the heritage business and also investment into the Flexible Guaranteed Bond. From a new business perspective results were good, APE written into LVFS increased by 5% from 189m to 198m. New single premiums increased by 3.8% to 1.4bn, with pension business steady at 894m [: 893m], fixed term annuities up to 239m [: 193m] and flexible guarantee bonds up to 217m [: 194m]. Sales of enhanced annuities reduced from 116m to 99m, impacted by the decision to exit this market. New regular premiums increased slightly from 49m to 53m, with pension sales up from 14m to 16m and protection sales up from 35m to 37m. Elsewhere in the group, equity release sales increased from 63m to 102m, benefiting from the new funding agreement signed in and growing its market share from 4% to 7%. 1,228 AKG Financial Analytics Ltd December 2017

16 Liverpool Victoria Friendly Society Ltd P R O V I D E R S E C T O R Profit Profit (loss) before taxation Taxation 1 (45) Profit (loss) after taxation Other comprehensive income (27) (17) Dividends 0 0 Retained profit (loss) 92 (15) Flows Net life premiums earned 1,150 1, Net life claims incurred (751) (957) (617) Net flow of business The Society reported an IFRS profit before tax, mutual bonus and unallocated divisible surplus transfer of 47m in [ : 118m]. However, the result benefited from good trading profits in the life business. The result included a 35m loss in the heritage business generated by changes made to the reserving assumptions, partially reversing the 88m benefit arising in. The Society distributes its surplus within both with profits funds on a 100% basis to with profits policyholders, subject to smoothing. A mutual bonus of 17m was paid in respect of [: 27m], bringing the total since its introduction in 2011 to 130m. Life has seen new business volumes grow across all product segments, with the increase in contribution from this new business helping to drive profit. There have also been favourable one-off model and valuation changes in the year, mainly driven by savings from reduced unit costs in the protection business as volumes increase. During the year the business took out an annuity reinsurance treaty in order to strengthen the group capital position which had an adverse impact on the life result of 14m. The heritage business has seen a loss driven by model and valuation changes relating to the OB pensions payout basis and cash take-up rate and unit costs of 22m and claims experience variances of 11m; mainly generated by additional payments made to ensure policyholders are treated in line with the Principles and Practices of Financial Management (PPFM). LV Equity Release Ltd again reported a reduced pre-tax profit down from 4.5m to 2.5m. There was also a share capital reduction of 11.7m, followed by a dividend payment of 18m [: nil]. A further dividend of 5m was paid in April The Group reported an IFRS loss before tax, mutual bonus and unallocated divisible surplus transfer of 49m for the year [: profit 124m]. This reflected the impact of the Ogden rate change of 139m. The result benefited from good trading profits in both the general insurance and life businesses, but also included the operating loss in the heritage business. group gross earned premiums grew by 20% compared with predominantly driven by strong new business sales across all life product categories. The increase in gross earned premiums was mitigated at a net earned premium level by increases in reinsurance ceded. A 3m gain was recognised on the acquisition of Teachers Assurance, mainly from future margins, which are expected to be generated by an agreed service fee. AKG Financial Analytics Ltd December 2017

17 Liverpool Victoria Life Company Ltd P R O V I D E R S E C T O R Company Analysis: Liverpool Victoria Life Company Ltd BASIC INFORMATION Company Type Life Insurer Ownership & Control Liverpool Victoria Friendly Society Ltd Year Established 1958 Country of Registration UK Head Office County Gates, Bournemouth, BH1 2NF Contact Tel: feedback@lv.com Web: Key Personnel Role See Liverpool Victoria Friendly Society Ltd Company Background Established as Medical Sickness & Life Assurance Society Ltd to operate in the intermediary market, the company was renamed Permanent Insurance Company Ltd in 1982 when it acquired the business of the Contingency Insurance Company Ltd and Minster Insurance Company Ltd. Equitable Life bought a controlling interest in 1995 (100% ownership in 1997), selling the company to LVFS in February 2001, when it was renamed Liverpool Victoria Life Company Ltd (LVLC). Until the business transfer in 2008, LVLC was the protection specialist within the Liverpool Victoria group, operating from its own offices in Exeter. In December 2001, the company acquired the business of the Royal National Pension Fund for Nurses (RNPFN). At the same time, it accepted reinsurance of around 300m of with profits bonds from LVFS. It also exited the Group PHI market, reinsuring this business, other than claims in payment, to Unum. In November 2005, the company acquired a small portfolio of business from UIA Insurance (UK) Ltd, as a result of the group s relationship with Unison, a key affinity partner. The majority of the business of LVLC, including the ring fenced RNPFN fund, was transferred into LVFS in December 2008, followed in December 2011, by the remainder of the business, excluding the UIA business, which remains in LVLC. LVLC is now closed to all new business and all reinsurance treaties with LVFS have been cancelled. Its main purpose is to manage the run-off of the UIA business; 1,288 policies in force at 31 December [: 1,683]. In November 2009 the company sold all of its subsidiaries to LVFS to simplify the group's legal structure and corporate governance. LVLC's substantial reduction in size led to a capital reduction in December 2010 of 530m, together with settlement of 82m of subordinated loan debt and a transfer of investments and cash totalling 164m. In November 2012, the company further reduced its share capital by 9.9m, 5m of which was paid as a dividend. Name AKG Financial Analytics Ltd December 2017

18 Liverpool Victoria Life Company Ltd P R O V I D E R S E C T O R OPERATIONS Governance System and Structure See LVFS Risk Management See LVFS Administration See LVFS Benchmarks See LVFS Outsourcing See LVFS STRATEGY Market Positioning LVLC s main purpose during the year was to manage the run-off of the UIA (Insurance) Limited business acquired in 2005 which relates to 98% of the insurance contract liabilities reported. LVLC is also the reinsurer of Protection contracts consisting of term assurances and critical illness policies for which it receives premium income. Proposition The product range in LVLC principally covers a mixture of whole of life assurances, endowment assurances and term assurances acquired from UIA Ltd in 2005, in addition to accepting a small volume of reinsurance business from external organisations. The company does not cede any reinsurance to other parties and all lines are closed to new business. AKG Financial Analytics Ltd December 2017

19 Liverpool Victoria Life Company Ltd P R O V I D E R S E C T O R KEY COMPANY FINANCIAL DATA Last 3 reporting periods up to 31 December Assets Fixed interest 16.6 Equities 0.0 Collectives 1.4 Property 0.0 Linked 0.0 Derivatives 0.0 Loans and mortgages 0.0 Reinsurance recoverables 0.0 Cash 1.9 Other 1.1 Total Assets 21.0 Liabilities Technical provisions - nonlife Technical provisions - health (similar to life) Technical provisions - life 15.4 Technical provisions - linked 0.0 Other 0.4 Total Liabilities 15.9 Excess of assets over liabilities Assets are predominantly fixed interest in nature, 79% as at 31 December. 97% of total liabilities related to life business. Life & Health SLT Technical Provisions Insurance with profit participation Linked insurance 0.0 Other life insurance 15.2 Annuities - from non-life health Annuities - from non-life non-health Health insurance 0.0 Health reinsurance 0.0 Life reinsurance 0.2 Total life and health SLT technical provisions Life Expenses Health insurance 0.0 Insurance with profit participation Linked insurance 0.0 Other life insurance 0.1 Annuities - from non-life health Annuities - from non-life non-health Health reinsurance 0.0 Life reinsurance 0.0 Other expenses 0.0 Total life expenses % of technical provisions related to Other life insurance as at 31 December, with the balance being reinsurance accepted AKG Financial Analytics Ltd December 2017

20 Liverpool Victoria Life Company Ltd P R O V I D E R S E C T O R Solvency Capital Requirement (SCR) Market risk 0.3 Counterparty default risk 0.1 Life underwriting risk 0.1 Health underwriting risk 0.0 Non-life underwriting risk 0.0 Diversification (0.1) Intangible asset risk 0.0 Operational risk 0.1 Capital add-ons already set 0.0 Other items 0.0 Solvency capital requirement 0.4 Own Funds Tier 1 unrestricted 5.1 Tier 1 restricted 0.0 Tier Tier Eligible own funds Excess of own funds over SCR SCR coverage ratio (%) 1,180.1 LVLC's largest risk exposures relate to market (56%), credit counterparty (17%), operational (16%) and underwriting risk (11%). Market risk is further broken down as interest rates - 76% and concentration - 24%, whilst underwriting risk is further broken down as follows: expenses - 99% and mortality - 1%. However, at 31 December, the SCR falls below the Absolute Minimum Capital Requirement (AMCR) that LVLC is required to hold. It is expected that this position is likely to continue going forward. The AMCR at December was 3.3m and had a coverage ratio of 153%. LVLC does not cede any business to either internal or external reinsurance parties, nor does it engage in any hedging strategies. Gross Life Premiums Written By Line of Business Health insurance 0.0 Insurance with profit participation Linked insurance 0.0 Other life insurance 0.1 Annuities - from non-life health Annuities - from non-life non-health Health reinsurance 0.4 Life reinsurance 0.0 Total gross life premiums written Gross Life Premiums Written By Country 4.7 Home country 0.6 Country Country Country Country Country Other countries 0.0 Total gross life premiums written All business is written within the UK. The majority of premiums written relate to health reinsurance accepted. 0.6 AKG Financial Analytics Ltd December 2017

21 Liverpool Victoria Life Company Ltd P R O V I D E R S E C T O R Profit Profit (loss) before taxation Taxation 0.0 (0.4) Profit (loss) after taxation Other comprehensive income Dividends (10.0) 0.0 Retained profit (loss) (9.9) 0.3 Flows Net life premiums earned Net life claims incurred (2.0) (3.0) (1.5) Net flow of business (1.3) (2.4) (0.9) The company reported an increased Profit Before Tax of 713k in [: 102k]. No dividend was paid [: 10m]. Net premiums reduced by 5% from 595k to 564k. The majority of this, 78% [: 72%] related to reinsurance accepted. With net claims reducing from 3,019k to 1,454k, there was a reduced net outflow of 890k [: 2,424k]. AKG Financial Analytics Ltd December 2017

22 LV= P R O V I D E R S E C T O R INTRODUCTION Guide For over 20 years AKG has particularly focused on the financial strength requirements of financial advisers, who when acting on behalf of their clients, need to ascertain a company's ability to deliver sustained provision. From this customer perspective, the financial strength of companies needs to be focused at an operational level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers advisers must be met. It is also important to understand the sector approach (comparative peer groups) that is adopted in financial strength assessment and rating process. At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this purpose, i.e. as a component in helping customers advisers to select between comparable companies competing to deliver relevant products or services. AKG s focus and approach has remained consistent over the years since it commenced assessment and rating support for the market. However, coverage, format and presentation has rightly evolved over this period, in line with the needs and expectations of assessment and rating users in the market. And AKG considers further changes on a continual basis. Further details including an explanation of what is included in the assessment reports and coverage can be found online at AKG s process for assessment and rating is to use a balanced scorecard of measures and comparative information, relevant to the companies contained within each peer group. This is gathered via Public Information only for non-participatory assessments and public information plus company interactions with companies for participatory assessments. Further details on AKG s process can be found at This includes further information on the different participatory and non-participatory basis and for companies wishing to learn more about participatory assessment AKG is pleased to outline this and welcomes contact. This is a participatory assessment. RATING DEFINITIONS Overall Financial Strength Rating The objective is to provide a simple indication of the general financial strength of a company from the perspective of those of financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained operational provision of products or services. The overall rating inherently reflects the mix of business within the company, since different types of customer or policyholder have different requirements and expectations, and the company may have particular strengths and weaknesses in respect of its key product or service areas. However, it also takes account of comparison across the sector in which it is assessed. The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital and asset position, expense position and profitability, any specifically onerous elements such as guarantees, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, AKG Financial Analytics Ltd December 2017

23 LV= P R O V I D E R S E C T O R typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces. Rating Scale A B+ B B- C D Superior Very Strong Strong Satisfactory Weak Very Weak Not applicable With Profits Financial Strength Rating The objective is to assess the overall strength of the company s with profits funds. The initial concern is the company's ability to meet its ongoing guaranteed, or promised, commitments to customers, i.e. existing sum assured and bonuses. However, the company's ability to continue to compete successfully in the with profits market is also particularly relevant, given that closed funds are sometimes bad news for policyholders. In such situations, overall expenses tend to increase as a proportion of the fund and investment performance may well deteriorate. These, together with other factors, may make it difficult for companies in such situations to maintain competitive bonus rates at future declarations, although existing declared bonuses are not affected (other than possibly by MVRs). This is from the perspective of those of financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of with profits funds, products or propositions. Its comparison is with other companies within the assessment sector that offer or have with profits business. The main criteria taken into account are: capital and asset position, expense position and profitability, the amount of with profits business in-force, parental strength (and likely attitude towards supporting the company), and image and strategy. NOTE: More detailed analysis of with profits companies is included in AKG s UK Life Office With Profits Reports. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Unit Linked Financial Strength Rating The objective is to provide a simple indication of the unit linked financial strength of a company, where it currently offers unit linked business or has existing unit linked business within it. This is from the perspective of those of financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of unit linked products or propositions. Its comparison is with other companies within the assessment sector that offer or have unit linked business. The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Non Profit Financial Strength Rating The objective is to provide a simple indication of the non profit financial strength of a company, where it currently offers or has existing products and propositions such as term assurance and annuities. This includes the company s ability to meet all guaranteed payments arising from such products, but also the company s wider ability to deliver sustained operational provision of such non profit products or propositions. Its comparison is with other companies within the assessment sector that offer or have non profit business. AKG Financial Analytics Ltd December 2017

24 LV= P R O V I D E R S E C T O R The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, product / service features, its operating environment and ability to withstand external forces. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Service Rating The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned. Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Image & Strategy Rating The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position. Criteria taken into account include: overall trends in the company s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG s view of the company s general strategy. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Business Performance Rating This review is an assessment of how the company and the brand has fared against its peers, and how it is perceived externally. Effectively this is how it has performed recently in the market. Whilst it will include performance indicators from the most recent available statutory reporting (report and accounts and SFCRs in the case of insurance companies, for example) it will also draw on other recent key performance elements before and after such disclosure, up to the point at which the assessment is undertaken. Criteria taken into account include: increase/decrease in market shares, expense containment, publicity good or bad, press or market commentary, regulatory fines, and competitive position. Rating Scale Excellent Very Good Good Adequate Poor Not Rated AKG Financial Analytics Ltd December 2017

25 LV= P R O V I D E R S E C T O R ABOUT AKG AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 20 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry. As the market has evolved over this period, the range of entities considered by AKG has expanded. Consequently, AKG has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability. Today AKG s core purpose is in the provision of financial analysis and review services to support the wider financial services sector and its customers. AKG Financial Analytics Ltd (AKG) 2017 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report or ratings available. The report contains assessment based on available information at the date as shown on the report s cover and in its page footer. This includes prior regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not covered within it, but AKG continually monitors and reviews such events and information and where individually or in aggregate such events or information give rise to rating revision an updated report under an updated date is issued as soon as possible. All rights reserved. This report is protected by copyright. This report and the data/information contained herein is provided on a single site multi user basis. It may therefore be utilised by a number of individuals within a location. If provided in paper form this may be as part of a physical library arrangement, but copying is prohibited under copyright. If provided in electronic form, this may be by means of a shared server environment, but copying or installation onto more than one computer is prohibited under copyright. Printing from electronic form is permitted for own (single location) use only and multiple printing for onward distribution is prohibited under copyright. Further distribution and uses of the report, either in its entirety or part thereof, may be permitted by separate agreement, under licence. Please contact AKG in this regard or with any questions: akg@akg.co.uk, Tel +44 (0) AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. AKG Financial Analytics Ltd December 2017

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