Allianz Group's U.K. business expects to be "one of the consistently strong performers" in the country's personal lines market, a divisional CEO said, despite expanding rapidly in a competitive market.
The company announced May 31 that it was spending a total of £820 million to buy Legal & General Group PLC's general insurance business and the 51% of Liverpool Victoria Friendly Society Ltd.'s general insurance business that it does not already own. The acquisitions, which are expected to close by the end of 2019, will make the combined entity the U.K.'s second-largest nonlife insurer, measured by gross written premium.
Allianz's U.K. business alone was ranked fifth in the U.K. nonlife market, measured by 2017 net written premium, according to S&P Global Market Intelligence data.
The L&G general insurance business, which is mainly U.K. personal home insurance, will be combined with the LV general insurance business — effectively Allianz U.K.'s personal lines arm — over a three-year period. Steve Treloar, CEO of the LV general insurance business, told journalists May 31 that the addition of the L&G business would double the size of his unit's home insurance book.
The U.K. personal lines business is highly competitive, and personal motor in particular has a long record of underwriting losses industrywide. L&G's general insurance business reported an operating profit of zero in 2018 and reported a combined ratio of 104%, indicating an underwriting loss.
"Some may question the virtue of being big in U.K. insurance given the market's track record for painful competition," KBW analyst William Hawkins said in a research note.
Treloar acknowledged the competitive nature of U.K. personal lines but said "[t]here are winners and losers in that market." He said the combined ratio for LV's general insurance business had stood at 92% "for the last couple of years."
He said the L&G general insurance business has "had a couple of challenging years recently," though he highlighted that all home insurers had suffered because of claims from storms and subsidence during the year. "If you look back over time, you will see that theirs is a pretty robust business that delivers good returns over the longer term," he said.
The additional scale, coupled with LV's investment in technology and the addition of L&G's home insurance skills meant that "we are very much in a position where we think we can be one of the consistently strong performers in the personal lines market," according to Treloar.
He also said that L&G's home insurance distribution is "very complementary" to LV's. He added: "We are looking very much to benefit from that broader distribution, which obviously helps us to manage our risk profile and will also bring scale benefits."
Hawkins said in the research note that the heavy U.K. competition "has been more a motor complaint than household" and that, competition aside, "both deals seem to us financially and strategically sensible."
Ratings agency Moody's said in a statement that it viewed both the L&G and LV deals as "credit positive for both Allianz and L&G" because it will "strengthen Allianz's presence in the U.K. within the P&C sector, becoming the second largest player, and will allow L&G to focus on its core life market."
Jon Dye, Allianz's U.K. CEO, told journalists the acquisitions showed "a big commitment and a big signal from [Allianz group] in terms of what they think about the U.K. market."
He said it was too early to tell whether the deals would result in job losses. "These businesses are complementary, so it is certainly not a deal which is predicated on large numbers of job cuts," he said.
For L&G, the sale of the general insurance business allows the company to focus on its core markets of life, pensions and investments, according to corporate affairs director John Godfrey. He said in an interview that although the sale of the general insurance business would mean a roughly two-percentage-point boost to the insurer's Solvency II ratio, the sale "was much more about the strategic direction of the company" than capital.
"It is really not a core business for us," Godfrey said, noting that the general insurance unit's operating profit "has never been more than about 2% or 3% of total profits." He added: "It is a different sort of risk profile to the stuff that is our bread and butter."
L&G reported a pretax profit of £1.2 billion in 2018.
Godfrey also suggested there is a general shift away from the theory that customers wanted to buy all their coverage from one company, which had originally driven L&G's desire to enter the personal home insurance market. "That theory didn't really work terribly well," he said.