FY Results 2015
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Agenda 3 Group Results Overview GI Results Life Results Capital Operational Liquidity Expenses & Commission Best Loved Outlook
Group Result Overview: Operating Profit 4 m 2015 2014 Change FY FY Underwriting result 44 51 (7) Investment return 28 41 (13) General Insurance 72 92 (20) Life 41 (7) 48 Heritage 88 9 79 Group (6) (8) 2 Operating Profit 195 86 109 Group Operating profit increased by 109m (+127%) to 195m reflecting strong performance in all SBU s particularly in Life and Heritage, which also benefitted from model and valuation basis changes. General Insurance (GI) Price increases introduced in 2015 are holding despite competitive pressures. Severe flooding at the end of the year has contributed to a reduction in underwriting result. The result benefited from favourable prior-year claims run-off of 93m (2014: 109m). The decrease in operating profit to 72m also reflects lower investment returns reflecting the less favourable and more unpredictable market conditions. Life Operating profit has increased to 41m reflecting higher new business volumes particularly in Protection, Flexible Guarantee Bonds (FGB) and Pensions. This was partially offset by a fall in Annuity sales, specifically in Enhanced Annuities. Model and valuation basis changes have also had a significant impact on operating profit of 23m (2014: -14m) Heritage & Group The 2015 improvement in the Heritage result is mainly due to favourable model and basis changes ( 91m) relating to OB Pensions. Group operating profit includes unallocated group overheads and also the return on the group s free capital. N.B. Flexible Guaranteed Bonds are now reported within Retirement and prior year figures have been restated accordingly
Group Result Overview: Transfer to UDS 5 m 2015 2014 Change FY FY Operating Profit 195 86 109 Pensions business IFRS adjustment (5) 1 (6) Short-term investment fluctuations and related items (10) (2) (8) Centrally managed costs (incl amortisation) (32) (24) (8) Finance costs (24) (24) 0 Profit before tax and mutual bonus 124 37 87 Mutual Bonus (27) (24) (3) Income tax expense (6) (47) 41 Pension scheme actuarial gain net of tax 51 19 32 Transfer to/(from) the Unallocated Divisible Surplus 142 (15) 157 Headline The steep increase in Profit before Tax/Transfer to UDS is primarily driven by the increase in operating profit. Income Tax Expense The reduction in the tax charge during the year reflects lower gains made in policyholders fixed-interest investments compared to 2014. This tax on investment gains in the with-profit business, which gets charged to policyholders asset shares, fell from 34 million to nil million. The balancing reduction in the tax charge mainly reflects reduced general insurance profits. Pension scheme actuarial gain net of tax The gain in the year of 51m (2014: 19m) is mainly driven by an increase in the discount rate, partially offset by a reduction in the value of plan assets driven by unfavourable market movements in the second half of the year.
GI Results GI Results m 2015 2014 Change FY FY Motor 1,013 948 65 Home 175 182 (7) Commercial Lines incl SME 245 227 18 Other 39 37 2 GWP ( m) 1,472 1,394 78 Motor policies in-force 3.0m 3.0m 0.0 Non-Motor policies in-force 1.7m 1.6m 0.1 Total policies in-force 4.7m 4.6m 0.1 Underwriting result 44 51 (7) Investment return 28 41 (13) Operating Profit ( m) 72 92 (20) ROCE (pre tax) 9.5% 12.3% Loss ratio 66.3% 71.8% Expense ratio 29.8% 24.3% Combined ratio 96.1% 96.1% Headlines Operating profit of 72 million was down 22% (2014: 92m) due to the lower investment returns and the impact of 36 million of floodrelated claims. Direct business recorded a record Operating profit of 91m driven by a strong underwriting result, whilst the Broker business recorded a 19m Operating loss due to December floods and storm claims amounting to 23m. Non-motor policies now at 36% (2014: 35%) reflects a significant proportion of the net growth in policy numbers coming from nonmotor lines. Business Lines Both Direct at 837m and Broker at 635m saw an increase in premium up 6% and 5% respectively on 2014. Motor premium increase of 7% is mainly driven by price increases beginning to hold in the market as in force polices only grew by 2%. The impact of the rate increases achieved was eroded by an acceleration in market claims inflation and the level of large value claims. Competition remained intense in Home with average premiums falling and despite the growth in home policy numbers, premium income of 175m decreased 4% on 2014. Additionally with the adverse weather operating profit was 4m, down 24m on 2014. Commercial lines saw the greatest growth in premium of 8% to 245m, the eighth consecutive year of significant premium growth. The December weather led to an operating loss of 9m in 2015 down 23m on 2014. 6
Life Results Life Results m 2015 2014 Change FY FY New Business (PVNBP *) Pensions 801 636 165 Enhanced Annuities 116 205 (89) Fixed Term Annuities 193 182 11 Annuities 309 387 (78) Flexible guarantee bond 379 153 226 Equity Release 63 105 (42) Retirement Solutions 1,552 1,281 271 Protection 272 217 55 Total Life 1,824 1,498 326 New Business Contribution Pensions 6 1 5 Annuities 4 3 1 Flexible guarantee bond 9 3 6 Equity Release 7 8 (1) Retirement Solutions 26 15 11 Protection 21 10 11 Total Life before Investment 47 25 22 Investment in new propositions (17) (11) (6) Net New Business Contribution 30 14 16 Operating Profit/(Loss) 41 (7) 48 *PVNBP Present Value of New Business Premiums Headlines One of the key objectives is to grow the Life business to scale, both business areas made excellent progress towards this with strong growth in new business. New business premiums (PVNBP) increased by 326m and overall operating profit increased by 48m. Model and valuation basis changes of 23m (2014: -14m) have also had a significant impact on operating profit. Retirement Solutions Our Retirement Account proposition was launched in 2015 and a majority stake in Wealth Wizards Ltd was secured to support the development of digital regulated advice solutions robo advice. Through this partnership we became the first provider to create a fully regulated online advice service, LV= Retirement Wizard. Although Annuity sales have decreased year on year new business contribution has increased as a result of stronger margins. FGB volumes have grown by 148% reflecting customers preferring the benefits of a guaranteed return later in life. Protection New business contribution has more than doubled, reflecting continued sales growth, high margins plus strong cost control. We have widened our proposition for small and medium business owners by launching LV= Business Protection. A newly designed operating model is being developed to enable increased automation, faster and cheaper innovation, and a more intuitive new business platform. 7
m Capital 8 Pillar 1 Capital Surplus Solvency I headlines 1000 800 600 400 200 306 720 689 854 290 235 186 The Group capital position as at 31 December 2015 remained strong with excess capital on a Solvency I Pillar 1 (Peak 2) basis at 854m (FY 2014: 689m). The increase in surplus is due to the impact of changes made to the OB Pensions cash benefits basis, amendments made to the reinsurance arrangement for 50+ policies, model and valuation changes and GI Loss Portfolio Transfer. 0 2009 2010 2011 2012 2013 2014 2015 Solvency II headlines Tier 1 Capital Surplus Tier 2 Capital The Group is complying with the Solvency II requirement with effect from 1 st January 2016. LV= has adopted the Standard Formula approach to determining its regulatory capital from 1 st January 2016. The Group will work with the PRA to agree a timeline to transition to the internal model approach at a future date. In addition LV= has received PRA approval to utilise transitional relief and the volatility adjuster (VA) under the Solvency II regime from 1 January 2016. The group is working with the PRA to agree the use of the matching adjustment at a future date. Whilst LV= will use the Solvency II standard formula approach to determine its regulatory capital position from 1 January 2016, it will continue to manage the group s business primarily on an economic capital basis. Work is underway to calculate the group s capital position under Solvency II as at 1st January 2016. The group currently expects that it will be reporting a surplus of approximately 35% over the standard formula (with VA) capital requirement. Work is also underway on a number of capital optimisation initiatives which are aimed at increasing this surplus.
Operational Liquidity m 2015 2014 Change FY FY General insurance surplus cash remitted 37 37 0 Life (10) (11) 1 Group items * (24) (24) 0 Tax paid (4) 9 (13) LVFS (outflow)/inflow before non-recurring items, debt interest and mutual bonus (1) 11 (12) Non-recurring items 34 (1) 35 LVFS net inflow before debt interest and mutual bonus 33 10 23 Debt interest paid (23) (23) 0 Mutual bonus (27) (24) (3) LVFS net outflow ** (17) (37) 20 *Group items comprise centrally managed costs and also the net impact of cash flows relating to the heritage with-profits business. ** Excludes intra-group capital investments and repayments. General Insurance Surplus Cash remitted GI cash remitted to Group in 2015 in the form of dividends is consistent with 2014. Life The Life business is similar to the prior year, with investment in new business offsetting cash generated from in-force business. Increased new business sales of pensions and protection products have increased the level of new business cash consumption. However, this has been offset by cash generated from sales of flexible guarantee bonds and annuities, although the latter being at lower levels than in 2014. Non - recurring items The movement on prior year mainly reflects the assumption changes in the Heritage business. Stock The amount of LVFS operational liquidity held at 31 st December 2015 was 507m (2014: 524m). 9
Expenses and Commission 10 m 2015 2014 Change FY FY General insurance 256 243 13 Life 122 108 14 Heritage 27 31 (4) Central items and other 20 17 3 Amortisation of acquired intangibles 3 3 0 Total expenses pre-commission 428 402 26 Commission 195 182 13 Total expenses 623 584 39 Group Total Group Expenses before commission have increased by 6% compared to last year, driven by higher accrued performance incentives relating to the increase in the Group s Operating Profit, and an increase in commission mainly due to the increase in new business volumes in the Life business. Excluding these items, underlying costs are stable year on year, reflecting the Groups continued focus on cost control and improving productivity whilst managing growth. General Insurance General Insurance costs have increased by 5% reflecting an increase in the divisional performance incentive schemes, higher accrued performance incentives relating to the increase in the Group s Operating Profit and an increase in project costs mainly due to upgrading our policy system. Life Life expenses before commission have increased by 13% reflecting higher accrued performance incentives relating to the increase in the Group s Operating Profit and increased spend on projects to develop our Retirement proposition following the Pensions reforms. Project expenditure is predominantly offset by savings across the Life business through cost control.
Best Loved 11 Our focus on being the UK s best loved insurer is another key objective validated by being voted the UK s most recommended insurer again, according to YouGov. We are also currently the UK s number one brand for Insurance and Investments, according to the 2015 YouGov Brand Index Buzz Rankings. Within the General Insurance business the customer satisfaction surveys carried out by the Institute of Customer Service (ICS) showed that consumers ranked us one of the best insurers in the UK for customer satisfaction, as well as winning the Customer Care Award at The British Insurance Awards. Along with Direct Insurer of the Year at the Insurance Times Awards. The Life business have been delighted to be recognised by consumers and the industry as the Most Trusted Life Insurer (MoneyWise). In addition we were proud to be awarded Outstanding Achievement from the Financial Adviser Service Awards alongside a further twenty five awards for our range of products and services.
Outlook 12 The general insurance market remains competitive however we expect to see continued rate strengthening in motor in order to offset claims cost inflation. Our General Insurance business is well placed to take advantage of this with its reputation for excellence in customer service and fair pricing. In the Life business growth is not expected to be sustained at 2015 levels. There appears to be no let-up in the pace of regulatory change, the launch of the secondary annuity market and forecast tax changes are all areas that will keep the life industry busy over the coming years. We do however believe that we are well positioned and have laid strong foundations for future profitable growth. Our agility and understanding of the needs of our customers has enabled us to move faster than the competition and we remain confident that we will see continued success over the medium term. We continue to explore and embrace emerging trends such as robo-advice which we believe can make financial services more accessible to the general public. The developments required for the transition to the Solvency II regime have been a key focus for the group for the last few years. We are confident that the LV= group will continue to operate sustainably under the Solvency II regime during 2016 and in the longer-term, including moving to the Internal Model basis. Our strong brand and increasing customer centric approach means that LV= is well placed to retain existing customers and to attract new business. The combination of offering new products which people want, alongside market leading customer service, means that we can expect to see continued strong profit contributions being delivered across the group for the foreseeable future. We remain focused on diversifying our General Insurance business through cross selling and improved aggregator pricing, and growing our Life business to scale, particularly the Retirement business through robo-advice and our blended retirement account. Both of which will support a sustainable business model for the future. We remain focused on achieving positive capital and cash generation in Life, focusing on the Retirement business moving towards less capital intensive products such as Pensions.