O’Roarke: LV=’s 31% profit drop ‘disappointing’

LV= general insurance managing director John O’Roarke said that his company’s 31% drop in first-half operating profit was “disappointing” because it meant the company missed its 15% return-on-capital target.

He also said it would be “a stretch” to hit the company’s medium-term target of between 6% and 7% premium growth a year.

However, he added that the result was good given the circumstances, and that he was pleased with the company’s underlying performance.

Following the dip in operating profit to £43m from the £62m, LV=’s general insurance business generated a return on capital of 11.7% – 7.6 percentage points lower than the 19.3% it reported in the first half of 2012.

O’Roarke said: “It is not where we want to be because we have a target return on capital of 15% and based on performance to date we are not getting that level of margin.”

However, he added: “We understand the reasons why, and overall the performance against that backdrop is reasonably good.”

LV=’s first half profit was hit by a 37% drop in investment return after the company could not repeat the “surprisingly strong” results achieved in 2012.

The company also suffered from the 10% decline in private motor rates – a business line that makes up about 70% of LV=’s general insurance portfolio.

O’Roarke said: “We can’t escape the fact that for every motor policy we are servicing, we are getting 10% less premium for it. For us to have had the bottom line result that we’ve had against that 10% erosion in rate strength is a pretty good outcome.”

Commercial growth

On a positive note, O’Roarke believes the company’s small-but-growing commercial business has reached critical mass, in that it is now bringing in enough premium volume to offset the expenses of running the business.

O’Roarke said: “We are getting very close to break-even on it and once you get the commercial business on the books it tends to be quite sticky. The retention ratio is about 85%.”

O’Roarke said there was scant opportunity for rate increases with new commercial business because of heavy competition, but added that renewal business across the industry was attracting rate increases of between 5% and 6%.

He said: “It could do with a little bit more than that. If there was a good, solid year of 10% the industry would be in a much better place.”