Key performance indicators Our key performance indicators are chosen to measure performance against our goal of growing member value, and our vision of being Britain s best loved insurer. Our board also assess progress against our strategic agenda, the way we manage risks plus a range of other financial and qualitative measures covering the significant aspects of our business. Additional performance indicators are reported in the individual business sections of this report. Britain s best loved insurer To be Britain s best loved insurer We use a combination of surveys to assess our performance against our vision to be Britain s best loved insurer. To be one of the best loved insurers by continuing to rank in the top five for relevant opinion surveys and delivering excellent customer service levels whilst consistently treating the customer fairly. 2 nd UK best loved 2013: 4 th UK customer satisfaction index of insurance companies: 1st 2013: 3rd 2014: 80% 2013: 77% Staff engagement Our people are a major differentiator for LV= and are crucial to delivering our best loved vision so it is important they are engaged with the work we do. Focus on retaining engage scores at or above UK financial services organisations norm of 74% as defined by Towers Watson, a global HR consultancy. 85% engagement LV= 2014: 85% LV= 2013: 83% IFA s quite/very satisfied: 90% YouGov: Most recommended insurer General insurance customers very/ extremely satisfied UK financial services organisations norm: 74% UK high performing organisations: 78% In an independent survey by Research Now 1,056 insurance consumers, ranked us the second best loved insurer. As well as the results of opinion surveys our best loved vision is demonstrated through the many awards LV= has won during the year including the Moneywise most trusted insurer, a five star rating for Life and Pensions in the Financial Adviser Service awards and the gold standard awards for both protection and pensions. Our aim is to maintain our position as one of the best loved insurers by continuing to rank in the top five for relevant opinion surveys and delivering excellent customer service levels whilst consistently treating the customer fairly. LV= has demonstrated strong levels of staff engagement with improvements against the prior year and widening the gap to the UK financial services organisations and UK High performing organisations norms. Focus on retaining engage scores at or above UK financial services organisations benchmark as defined by Towers Watson.
Grow member value Enterprise Value Enterprise Value is an internal measure that is used to help estimate the value of the business and is regarded as a good indicator for member value. See page 96 for definition. To grow Enterprise Value whilst taking appropriate levels of risk. 2013: 7% 4% 11.4% growth 2014: 4% Heritage with-profits fund performance Achieved target Progressing towards target Missed target This is the pre-tax return made on the main LV= with-profits fund, which is an actively managed investment fund consisting of our with-profits policyholders funds that we manage on their behalf. To deliver fund performance at or above benchmark levels of 11.3%. LV with profits 2014: 11.4% Benchmark 2014: 11.3% The overall Enterprise Value growth of 4% has been driven by both the general insurance and heritage business units and an increase in the value of the group estate. General insurance growth is driven by positive trading profits and higher net tangible assets. Similarly, heritage growth is as a result of improving heritage underlying profitability. Life Enterprise Value has fallen due to the impact of the 2014 Budget on the life business. See page 32 for further details. Growing enterprise value whilst taking appropriate levels of risk. LV with profits 2013: 11.1% Benchmark 2013: 8.6% LV with profits 2012: 9.9% Benchmark 2012: 8.4% The return on the with-profits fund in 2014 was 11.4%, just above the benchmark. The fund is managed on our behalf by Threadneedle Asset Management and saw out-performance on UK equities being offset by under-performance on property and alternative asset classes. See page 28 for further details. To deliver fund performance at or above benchmark levels. Operating profit Our operating profit measure is the key performance measure for the profitability of the LV= group. See page 96 for definition. To deliver superior returns commensurate with the markets in which we operate. Planned operating profit was 95 million. Capital strength To ensure the sustainability of the Society we monitor our regulatory capital cover ratio. See page 118 for definition. To manage regulatory capital cover ratio within the group s risk appetite framework. 86m 171% 2014: 86m 2014: 171% 2013: 105m 2013: 178% 2012: 88m 2012: 121% As a result of the very challenging market conditions we have experienced in our life business operating profits were below planned levels. See page 25 for further details. To deliver returns in line with the markets in which we operate. At the end of 2014 our regulatory capital cover ratio was 171%. Our successful capital raise in 2013 has helped us to maintain a strong capital position. See page 29 for further details. To continue to manage capital cover ratio within the group s risk appetite framework in a Solvency II environment.
Our Objectives, Strategy and Business Model E a s y t o d o b u s i n e s s w i t h i l f u l S k C a r i n g Our vision: To be Britain s Our brand promises best loved insurer G o o d Our goal: To grow member value v a l u e, g Our mission: To humanise insurance The LV= difference: Sharp with a heart r e a t v a l u e s E x t r a o r d i n a r y
Our goal is to grow value for our members. Our vision is to be Britain s best loved insurer and we also want to make insurance something that people can relate to by achieving our vision and humanising insurance we believe people will trust us to look after their insurance needs. We have a clear point of difference which we call sharp with a heart. This guides the way we do things and combines the competitive performance of a PLC with the trusted behaviours of a mutual. Our brand promises reflect aspects that we consider to be important to our customers: Easy to do business with Skilful Caring Good value, great values Extraordinary Offering a simple, hassle-free journey for all who deal with us, regardless of how they choose to do business. Use our expertise to deliver solutions to financial issues that people come across throughout life. Caring about our customers and their loved ones when they need us most. Offering affordable well designed products but not at the expense of doing the right thing. Delighting our customers and members so we stand out from other companies.
Strategic agenda Our strategic agenda outlines eight key areas and the activities we will undertake in order for LV= to continue to grow and succeed well into the future. 1 Sustainable business model Diversified general 2 5 insurance earnings Go digital 3 Grow life to scale 6 Build a distinctive and relevant brand Exploration of adjacent 4 7 business areas Deepen customer engagement 8 Broaden and deepen talent pool Strategic risks The strategic risks are regularly monitored through the LV= risk governance framework to ensure that action is taken as needed. The risks and the risk appetite are detailed in the risk management section on pages 44 to 48. 1 Sustainable business model LV= does not face any immediate threats to its future sustainability. However, it is imperative that we continue to focus on methods of improving the sustainability of the Society, and any regulatory developments which arise, which will need addressing to ensure the Society remains a vibrant ongoing business fit for the future. The first of these regulatory developments is Solvency II, an EU-wide initiative designed to strengthen protection for consumers, by ensuring that companies hold adequate capital to cover their business risks. The Solvency II regime comes into effect on 1 January 2016 and we have invested a significant amount of resources to ensure that LV= is ready and well-placed for this regulatory change. The second pertinent regulatory development concerns new guidance from the regulators regarding the governance and future of with-profits funds particularly for those who are not writing material volumes of new business. This situation does not apply to LV= because we continue to write healthy volumes of new with-profits business, however the recent regulatory guidance offers a more flexible approach to the long-term sustainability of mutuals. In addition to these, we recognise that the markets in which we operate are becoming increasingly competitive and that the healthy rate of growth seen over recent years will likely moderate. We have therefore initiated a group-wide cost reduction programme to ensure that the cost structure of the business is appropriate to help us meet the challenges ahead. Another strand of sustainability relates to the capital structure. A challenge in the mutual model is the difficulty that mutuals have in raising capital flexibly mutual capital has traditionally consisted of retained earnings after distributions have been made to members together with a limited amount of debt capital. This results in the relatively slow growth of mutual capital (even for strongly performing mutual organisations) which can mean that opportunities to grow may need to be foregone and during economic shocks, the resilience of mutuals may be threatened. To help address this, in 2013 LV= raised 350 million of capital in the form of debt. The oversubscription for this instrument indicated strong market interest in the LV= proposition which we believe would exist were we able to issue shares. To this end, LV= has been supporting the Mutuals Deferred Shares Bill which has progressed through the Houses of Parliament this bill will enable mutuals to issue shares, potentially opening other opportunities for us to increase our capital base.
Diversified general 2 3 Grow life to scale insurance earnings Our general insurance business is well established in the UK selling personal and commercial insurance products direct to consumers and via brokers. Personal motor insurance is our most significant product line and we are the third largest provider in the UK, with around 12% market share based on the number of vehicles we insure (extrapolated from 2013 PRA returns). This is testament to the success of our general insurance business but with this comes the risks associated with the short lifespan of policies and the potential volatility of the motor insurance industry. To help manage these risks we are focusing on growing our other product lines to diversify our earnings. We are using our strong brand and the success of our direct motor business as a lever to increase volumes across other lines. Our brand has been central to our achievements in motor so we have extended our television advertising to include home insurance. We are also actively promoting home insurance to our motor customers. Our reach has been expanded by launching several new broker schemes. These initiatives have had a positive impact and we now insure over 800,000 homes. We also launched a new direct landlord insurance product in the summer which is proving popular. In addition, over the last few years, we have built an SME insurance business which is now reaching scale and being recognised in the industry. As a result of the increased activity in business lines other than personal motor we have seen the proportion of non-personal motor premiums growing from 27% in 2013 to 32% in 2014 and we aim to improve further on this over the next five years. 32% of premiums from business lines other than personal motor 848k UK homes insured Life partnerships +5% from 2013 Within the mutual with-profits market, our heritage business is one of the largest players by asset size. Our life business is focused on retirement and protection in the UK market and we include our heritage business within this strategic agenda item. Although our business has competed well in its chosen markets, it is still markedly smaller than the general insurance business and it would be advantageous for LV= to have two comparably sized businesses. As a result, we have been focusing on ways of growing the life business quicker than the general insurance business. However, in March 2014 the Chancellor announced a number of changes to the way retirees are able to access their pension savings and in so doing put an end to compulsory annuity purchases in the retirement market. Given our strength in enhanced annuities, this announcement had a major impact on us (as well as many other companies within the retirement industry) and disrupted the progress that was being made towards growing the life business to scale. However, we are advantaged in having a wide range of retirement products and are working on a number of innovations to coincide with the new rules which come into place in April 2015. We expect this to restore the growth trajectory of the business over the medium-term. We have also been exploring growth opportunities by establishing partnerships with selected organisations whose customers would benefit from our products and expertise. For example we have secured a partnership with Reassure, one of the UK s largest closed book pension providers, to provide an at retirement service for their pension policyholders. LV= was chosen based on the quality and breadth of our financial advice and digital proposition, where we can provide both an advised and non-advised service across a range of retirement income options. In the protection space, Phoenix Life chose LV= as its partner to provide a range of protection solutions including our award winning flexible protection plan and whole of life products. With access to over five million customers through brands including Royal & Sun Alliance and Scottish Provident, this new partnership will allow LV= to continue to expand within the direct to consumer market. We also achieved a place on the panel for St James Place Wealth Management to offer our suite of protection products. Within the mutual with-profits market, our heritage business is one of the largest UK players by asset size. We believe that the consolidation of smaller mutuals, who are looking to go into orderly run-off, is a good opportunity for us. To that end, in December 2014, we announced a transaction to take over the majority of Teachers Assurance business lines (subject to regulatory and Teachers Assurance members approval). This deal will benefit members of both entities and will bring around 70,000 with-profits life and pension policies into LV=. We will continue to investigate other opportunities as and when they arise.
4 Exploration of adjacent business areas Although our structure currently supports two broad categories, those of general insurance and life and heritage, our group and shared service structure would allow us to support other relevant business areas. We are therefore investigating potential adjacent business areas which may give us greater diversification, make the most of our capabilities and assets and bring new profit streams into LV=. Although mergers and acquisitions might be considered for the right opportunities, it is more likely that initial ventures into other areas will be via partnerships with selected organisations. Our group and shared service structure would allow us to support other relevant business areas. 5 Go digital 6 Build a distinctive and relevant brand The world around us continues to become increasingly digital which is driving consumers to do business with us in new ways and is increasing the technological skill of our employees. LV= has made substantial progress in this space where we have evolved our core technology infrastructure, undertaken test and learn activities, focused on improving the customer journey and our understanding of opportunities to change the risk model and introduced a culture of innovation with digital solutions. For us, digital not only means using technology to help our customers interact with us more effectively and easily, but it also involves rethinking the way we work as an organisation. To that end, over the course of 2014, we have spent time defining what it means to be a digital winner which will allow us to focus our efforts and investment. Key areas for us are continuous improvements to customer and intermediary journeys, enhancements to the way we use the data we hold and optimising the technology we have to help us drive greater efficiency. In seven years the LV= brand has gone from being recognised by 55% of our target market to an impressive 84%. It is well known for being vibrant and modern and whilst we are proud of this achievement, we also realise that we need to ensure our brand remains fresh, relevant and distinctive, particularly to our target audiences and in our distribution channels. During 2014, we carried out a brand refresh to identify where we could optimise the brand s value and make further enhancements. We found that despite insurance being a very human concept (allowing people to share risk with each other) the insurance industry is increasingly viewed as inhuman. Setting this in context, alongside our own focus on the customer, ethical approach and mutual values, led us to believe that we were in a strong position to alter this mind-set and we set out a new mission to humanise insurance. Our brand promises have also been updated to reflect this new mission and help us deliver on it. Over the course of 2015, we will ensure that our refreshed brand is embedded across our communications. 84% Brand recognition in our target market Go digital involves rethinking the way we work as an organisation.
The key to our success is our people and we are committed to encouraging the recruitment, motivation and retention of those with the right calibre and talent. Deepen customer 7 engagement 8 Broaden and deepen talent pool Providing all our customers and members with top quality service is core to our business ethos and we have a strong track record in this which is demonstrated by our excellent customer satisfaction and recommendation scores, our market-leading retention levels and the numerous industry awards we receive for customer satisfaction and recommendation. Over the next few years, we are committed to building even greater engagement with our customers. This has a number of facets: we will improve our understanding of our customers needs based on combining data analysis and direct customer feedback and from that, we will seek to further enhance the customer experience and to develop relevant propositions which are underpinned by a consistent delivery of our brand promises. From an LV= perspective, we expect greater engagement with our customers to drive economic returns by increasing product penetration, improving retention rates and reducing acquisition and service costs. The key to our success is our people and we are committed to encouraging the recruitment, motivation and retention of those with the right calibre and talent to ensure the continued success of the business. Although our employee engagement is already high, and exceeds the benchmark for companies who excel at employee engagement, we are committed to building on our existing culture by providing our employees with the appropriate support, whatever their background or ambitions. In 2014 we have made a significant investment in our diversity and inclusion programme (for more details see page 53). In 2015 we intend to do more in this area and continue to identify other ways we can broaden and deepen our talent pool. Named best performing insurer for customer satisfaction, according to research conducted by the Institute of Customer Service.
Product set and organisation structure General Insurance Life Personal Commercial Retirement Protection Car Car Enhanced Annuity 50+ Motorcycle Van Fixed-Term Annuity Term/Life Assurance Specialist Vehicles Truck Equity Release Income Protection Britannia Rescue Fleet SIPP Critical Illness Home Motor Trade Income Drawdown Whole of Life Travel Hire & Reward Pet Business Insurance Heritage Landlord Flexible Guarantee Bond Pension Income Plus Annuity Flexible Savings plan Finance Human Resources Risk IT Internal Audit The diagram represents the major product lines we currently sell, which are distributed directly or via intermediaries. We have a significant number of additional product lines that are closed to new business including our Industrial Branch whole of life policies, Ordinary Branch pensions, and products sold by RNPFN.
Products and approach The products we sell fall into three broad categories: l Life: protection and retirement products covering people s lives and incomes; l General Insurance: insurance for those more tangible items people love; their vehicles, homes, pets and holidays; l Heritage: savings and investment products. The combination of product sectors that we have chosen to compete in enables LV= to benefit from diversification of risks, economies of scale and mitigates the impact of adverse market conditions and business cycles which affect specific products or distribution channels. Our business model also benefits from our relationship with Threadneedle Asset Management who invest the premiums we receive together with our members assets in order to generate investment returns. This allows us to focus on where we have expertise our core risk-based insurance businesses. This arrangement, which is now in its fourth year, is regularly reviewed to ensure we balance risk and return. LV= uses reinsurance where appropriate across our business lines. The benefits of this are that it enables the transfer of risk of insurance losses that are outside our risk appetite, reduces the regulatory capital requirements imposed on the business, and helps improve our pricing competitiveness. Used judiciously, it drives an improved quality of our earnings by reducing volatility and risk at an acceptable price. Our goal is to grow member value and in doing so provide further security for our members investments. Whilst we are firmly focused on the present we also need to plan for the future and how it might impact us, our customers and their expectations. In doing so we can ensure we invest in the right assets and capabilities for the ongoing success of the business. The combination of product sectors that we have chosen to compete in enables LV= to benefit from diversification of risks, economies of scale, and mitigates the impact of adverse market conditions and business cycles which affect specific products or distribution channels.