LV= car insurance premiums to rise as profits plummet

LV= has warned that car insurance premiums are to increase as it blamed the rising cost of accident payouts and low interest rates for a dramatic drop in profits in the first six months of 2016.

The insurer, Britain’s biggest mutual, said pre-tax profits to 30 June had fallen to £1m, compared with £49m a year earlier.

Since the period covered by the results, interest rates have been cut as the Bank of England tries to stabilise the economy after the British vote to leave the European Union on 23 June.

Richard Rowney, LV= chief executive, said: “We are operating in a prolonged low interest rate environment with significant volatility and this has created challenging market conditions.”

Profits for the company’s general insurance business, which covers home and vehicle policies, fell from £70m a year ago to £22m. The insurer reported good growth in motor and commercial policy sales, but home insurance premiums were flat. In the first half of 2015 there had been several “favourable one-offs” that had not been repeated this year, it said.

Car insurance claims had been at the top end of expectations, LV= said, after increases in technology added to the cost of repairs. Low interest rates have also put pressure on the returns the insurer can get from the money it holds to cover payments.

Rowney suggested this could mean higher prices for customers: “As a consequence of the combination of reduced investment income and higher claims inflation, we expect to see the strengthening of motor rates continue in the second half of the year.”

LV= said profits from its life and pensions business had increased to £28m, from £12m in the first half of 2015. Total sales had exceeded £1bn, and the firm said demand for its specialist retirement products had increased since the government’s pension freedoms were introduced in April 2015.

Sales of fixed-term annuities, which offer retirees a guaranteed payout for a fixed period, were up by 42% year on year, while sales of its flexible guarantee products rose by 39%.

“We continue to see a trend towards blended and hybrid products following the government’s pension reforms, as people increasingly exercise their ability to choose how they fund their retirement,” LV= said.

Last year, LV= executives shared a bonus pool of almost £40m despite a profits slump.