LV= posts £35m pre-tax profit despite £43m underwriting loss

Investment income rescued LV=’s general insurance result in 2010, as the company revealed a combined ratio of 104.2%. However, managing director John O’Roarke has vowed that the business will return to underwriting profitability in 2011, predicting a combined ratio as low as 97%.

“We are very confident about getting a combined ratio below 100% and hitting 97% or 98% in 2011,” he said.

LV=’s general insurance business made a profit before tax of £35m in 2010, almost 18 times the £2m it made in 2009. The profit was driven by a four-fold increase in trading profit (underwriting result plus investment income) from £7m to £30m.

However, the 2010 trading profit comprises £73m of investment income offset by £43m of underwriting loss. This compares with £41m of investment income offset by £34m of underwriting loss in the previous year.

LV=’s 2010 combined ratio of 104.2% was a slight improvement on 2009’s 104.3%. Excluding claims for the UK freeze, which pushed the insurer’s claims costs £30m higher than normal, the combined ratio was 101%.

O’Roarke praised LV=’s combined ratio in a year when he predicts that industry-wide motor ratios will come in at between 112% and 115% as a result of rising bodily injury claims.

He is confident that the new business written in 2010 will be profitable. Overall, LV=’s gross written premium (GWP) grew 46% to £1.2bn in 2010 from £811m in 2009. GWP in direct car insurance increased 42% to £378m. The broker channel saw particularly strong growth in GWP, by 64% to £657m. Within the broker segment, motor personal lines sales grew by 68% to £546m.

O’Roarke argued that profitability in the new business will improve in 2011, in part because it will have overcome “new business strain” – in its first year, the loss ratio of business is typically 10% worse. “The effect of that new business strain is going to diminish from 2011 onwards because new business will be a relatively smaller part of the overall business written,” he said.

Also the motor rate increases seen in 2010 have only partially shown up in earned premiums. More of the increases will be earned in 2011, improving profitability. There are more rate rises to come. LV= has put up motor rates by between 5% and 10% in the first quarter of this year.

O’Roarke said the industry as a whole could not continue to depend on investment income to prop up profits. “Although people are talking about interest rates going up, even if they do go up they are not going to go up by a lot, so investment returns are going to be squeezed again and people are going to have to start making a proper underwriting profit,” he said.