16 LV= Annual Report 2012
Risk appetite
We have embedded our approach to risk management through our a repeat of the credit crunch of 2008 and 2009, where we know the
risk appetite. This defines a corridor of capital we wish to maintain exact economic conditions which affected the investment markets,
by risk and entity and we regularly monitor and report our position and this enables us to test the robustness of our business model
against our risk appetite. If capital moves outside of our defined should these conditions be repeated.
risk appetite we have a pre-determined and documented series of
management actions which we will take to restore the position. We use the outcomes of the stress and scenario testing to
develop the management actions we would undertake if our
Capital management actions 2012 capital or other performance measures move outside of our
During 2012 we have taken a number of actions to improve defined risk appetite. The impact of some of these stresses is
our capital position and to reduce the sensitivity of our capital given in note 3 of these accounts. As a result of this work and
position to market movements. Examples of actions taken: the potential impact that a return to volatile markets would have
l Refining the investment strategy in our annuity book; on our capital base we have developed a number of potential
l Hedging fixed interest exposure for our deferred annuity book management actions, for example, increasing capital resources
within the with-profits business; through reinsurance structures or other forms of external capital
l Hedging of the majority of our longevity risk in our staff pension raising which would increase our financial flexibility.
scheme; and
l Hedging the majority of economic exposure to interest rates Liquidity management
and inflation risk for the staff pension scheme. Following continued growth in profits the general insurance
business returned funds of £38 million to the group.
Stress and scenario testing
In addition to calculating capital on the required regulatory regime, The group manages liquidity primarily through its asset and
we undertake a series of stress and scenario tests to ensure liability management process which ensures that, on a fund by
the robustness of our solvency position in regard to different fund basis and also at legal entity level, assets are held to match
levels of new business growth, movements in investment markets liabilities both by amount and by maturity.
and changes in other assumptions such as the longevity of our
enhanced annuity business. The group generates cash from profitable trading in the general
insurance business and from realised margins on in-force
In looking at movements in investment markets we consider a long-term insurance policies. Surplus cash is used to fund new
number of single stresses (e.g. equities falling by 40%) and also a business growth and central costs.
number of multivariate stresses (because markets are correlated we
expect extreme movements, in say equity markets, to affect other When reserves are strengthened or released at a fund level,
markets, such as the level of credit spreads). These are considered assets are either transferred from or paid to the LVFS Estate
by looking at our distribution of expected market events and we test Fund. In addition, surplus capital is held at subsidiary level to
a number of points on the distribution i.e. one in 10, one in 100, one ensure that individual entities are adequately capitalised and have
in 200. In addition we run a number of ‘real world’ scenarios such as sufficient liquidity to meet their obligations as they fall due.
Heritage with-profits payouts and industry comparison
Recent maturity and surrender values for LVFS with-profit policies show that LV=
continues to perform in the top quartile when compared against industry payouts.
Endowment Pension (regular) Bond
£106,788
Upper Quartile
LV=
£85,744
£51,410
£46,521 £50,944
£33,549
£36,052
£24,283 £31,969
£21,756 £14,349 £17,519
£12,603
£7,407 £14,322 £12,060 £16,698
£12,009
£7,115 £11,758
10 yrs 15 yrs 20 yrs 25 yrs 5 yrs 10 yrs 15 yrs 20 yrs 5 yrs 10 yrs
Notes
1. The payouts are based on the following policies: 2. The industry payouts are taken from the most recent past performance surveys
• Endowment – Policyholder aged 30 at entry; monthly premium and relate to maturities during 2012 and 2013. The sources are:
of £50, maturing 1 February 2012. • Endowment – Money Management survey published May 2012.
• Bond – An investment of £10,000 as at 1 November 2012. • Bond – Money Management survey published December 2012.
• Pension (regular) – Policyholder retiring at age 65; monthly • Pension – Money Management survey published March 2013.
premium of £200, maturing 1 January 2013.
Conclusion
Overall 2012 was a strong year for the LV= group, despite the actively, maintain a robust business model and so feel confident
challenging economic climate. While the signs of economic recovery that we are well placed to continue growing profitably in our
remain fragile, we have a sufficient capital base, manage risk respective markets.