Why LV’s statement in support of Bain Capital takeover doesn’t add up

LV=, the customer owned insurer, seems to have woken up to the fact that it may have a problem with convincing its customers to sell up to a private equity firm, Bain Capital, for 100 quid a pop.

As such, it has issued the snappily titled “Further Detail On the 2020 Strategic Review & How the Proposed Bain Capital Transaction Was Carefully Compared To Other Options”. Try saying that twice at speed.

The first, and most obvious, question for LV is why only now?

But let’s dig into the statement, which LV presumably hopes will convince some of its critics to change tack. Those critics find it hard to imagine a worse fit for a business that has stewarded the savings of ordinary Britons for more than a century than a ruthless American outfit dedicated to making its mega rich partners even richer.

LV says its strategic review led it to the conclusion that it had a “sub scale” life insurance and pensions business, which was short of capital and investment and losing money on new business. It didn’t feel it could ask its with-profits policyholders to shoulder the risk of fixing the thing, so went looking for help.

The windy statement can basically be boiled down to: “We looked at the numbers and decided we were screwed without a partner.”

Now, this is far from the first customer owned mutual to find itself in such a position. It’s an ownership structure people find attractive, for the obvious reason that these businesses are supposed to be run in the interests of their policyholders rather than their shareholders. Unfortunately, it can make be quite difficult for owners to properly hold the directors of such organisations to account. Problems have been endemic to the sector in the past few decades, with poor governance at the root of them.

But, wait, there’s more. LV, formerly Liverpool Victoria, also wags a stern finger at journalists who’ve pointed out that the £100 one-off payment, dangled before both with-profits and non-profit policyholders, represents so much small change when compared to other recent demutualisations, which have sometimes paid out thousands of pounds.

“This is a misleading comparison,” LV growls, arguing that the 271,000 members holding “with-profits” policies will share in an additional £533m “over time” through the deal. The pot includes £212m from Bain plus the proceeds from the sale of LV’s insurance business. Which was already theirs. LV, however, says the deal is necessary for the cash to be released.

Now, that looks like an average of nearly £2,000 each. And I would have used that number if I were trying to sell this deal to a reluctant membership because there aren’t many people for whom two grand isn’t a lot of pop. The exceptions, along with premiership Premier League footballers, celebrities and Tory MPs with second jobs, would be, I don’t know, insurance company CEOs, and Bain Capital partners?

But perhaps someone somewhere said, best not, because we might get into trouble if we started telling people it’s two grand if you vote in favour.

So it really is just £100 each. Bain will put some cash in, and your policy might look a bit better in future subject to investment returns, future market conditions, you know the drill. The board is saying “trust us”.

I wouldn’t. What none of this does is address the elephant in the room, which is Bain, and why its absurdly wealthy partners are so keen on buying what the LV board is telling us is a faltering, sub scale life insurer that needs help.

The natural conclusion is that they think there’s a pot of gold in here that they can unlock. Organisations like Bain tend not to act unless they’re very sure that they’re on to a winner.

Nor does the statement address an alternative proposal from Royal London, which, it’s true, hasn’t been terribly well communicated either, but would seem to offer an alternative worth pursuing.

Holding talks would be complicated by the contract between LV and Bain, but Royal London says this could be overcome via a three-way discussion. It also says it is willing to retain LV’s status as a mutually owned organisation, run in the interests of members.

The final question left unaddressed by the statement is what LV’s executives may, or may not, have to gain under Bain, an issue raised by Lord Heseltine, who described the offer as “insulting and disreputable” in the Daily Mail.

Lord Heseltine, who served as president of the Board of Trade during his time in government, and enjoyed a successful business career, is the sort of person who members probably ought to listen to when he says they’re being sold a pup by a ruthless foreign predator.

Anyhoo, the board needs 75 per cent approval on a 50 per cent turnout to get the deal through (although that’s the subject of controversy in itself).

The hard fact is this doesn’t smell right and, based on the statement, neither LV’s board, nor Bain, deserves LV members’ support.