TIDMCSN
RNS Number : 0943B
Chesnara PLC
31 March 2017
Chesnara plc
A year of delivery: Chesnara announces Legal and General
Nederland acquisition and delivers strong value growth.
"2016 has been one of the busiest and most successful years in
Chesnara's history and ended with a very well supported equity
raise to fund the acquisition of Legal and General Nederland. We
have delivered against each of our core strategic objectives,
continued to embed Solvency II and delivered value to our
customers. The business growth has been achieved without
compromising our risk appetite, building on our reputation for
solid returns to our shareholders."
Financial Highlights
-- Economic Value (EcV) of GBP602.6m (Note 1 Note 2) (31
December 2015: GBP453.4m). Growth of 33% during the year, which
includes the impact of the equity raise (see note 2), earnings in
the year and foreign exchange gains. Excluding the equity raise the
EcV of the group has grown by 18%.
-- Economic Value earnings net of tax of GBP72.5m (31 December
2015: GBP57.5m). Growth achieved through a combination of strong
operating earnings, new business growth in Sweden and economic
earnings.
-- Movestic EcV new business contribution of GBP11.7m (31
December 2015: GBP5.7m). Improvements due to the combined impact of
increased market share and higher average gross margins result in
record new business profits.
-- Total group cash generation of GBP85.4m (Note 2) (Note 3) (31
December 2015: GBP82.4m). Total cash generation includes the impact
of the equity raise (see note 2), whilst 2015 includes GBP39.9m
gained on the acquisition of Waard Group.
-- Total group cash generation (excluding the impact of equity
raise) GBP36.5m (Note 2) (Note 3) (31 December 2015: GBP50.9m). UK
cash generation remains in line with expectations but is lower than
last year in part due to an increase in capital requirements driven
by growing asset values. Movestic has reported a modest negative
cash generation result as a consequence of continuing to invest in
its new business operation. Waard has made a positive contribution
of GBP15.7m which includes one-off gains from asset disposals and a
foreign exchange gain.
-- IFRS profit before tax of GBP40.7m (31 December 2015:
GBP42.8m). A strong result delivered for the current period despite
the adverse impact of a reduction in yield curves during the year.
The prior year result includes a gain of GBP16.6m recognised on the
acquisition of the Waard Group.
-- IFRS Total Comprehensive Income of GBP55.4m (31 December
2015: GBP39.6m). The current period includes a foreign exchange
gain of GBP20.1m compared to a corresponding loss of GBP0.2m in
2015.
-- Group solvency ratio of 158% (Note 2) (31 December 2015:
146%). After taking account of the dividend the Group solvency
ratio has improved and subsidiary solvency ratios remain strong and
above internal targets. This metric includes the impact of the
equity raise (see note 2). In calculating the group's solvency
position we have applied the "standard formula" and have not used
transitional arrangements or any other elements of the long-term
guarantee package.
-- Group solvency ratio (excluding the impact of equity raise)
of 144% (Note 2) (31 December 2015: 146%).
The Group solvency ratio has reduced marginally though
subsidiary solvency ratios remain strong and above internal targets
after accounting for dividends, with the UK at 128% (31 December
2015: 135%); Movestic at 140% (31 December 2015: 154%) and Waard
Group at 712% (31 December 2015: 597%).
-- 2.9% increase in final dividend compared with 2015.
Recommended final dividend of 12.69p per share (2015: 12.33p per
share). This increase represents the twelfth successive rise in
final dividends.
Strategic delivery highlights
-- Announcement of the acquisition of Legal and General
Nederland. In November we announced the acquisition of LGN for a
price of EUR160m at a discount to Economic Value of approximately
33%. The deal offers potential for phased, orderly extraction of
excess capital and is expected to create an Economic Value gain of
cGBP56m on completion. The DNB have confirmed their non-objection
to the acquisition which is expected to complete in the week
commencing 3 April 2017.
-- Movestic dividend. Several years of growth have generated
sufficient surplus for Movestic to declare its maiden dividend to
Chesnara.
John Deane, Chief Executive said:
'2016 has been a year of significant development for the
Chesnara group and we have delivered strongly against all of our
strategic objectives.
The value of our existing businesses has grown across all
territories, with cash emergence sufficient to fund a further
increase in the annual dividend, the twelfth successive year of
dividend growth. The increase in value includes an increasingly
material contribution from new business profits in Sweden where we
have delivered our best ever results.
Finally, the acquisition of Legal and General Nederland,
announced in November 2016, represents a continuation of Chesnara's
successful acquisition strategy. The acquisition will create
significant scale in the Netherlands making Chesnara a well
balanced three territory group. Legal and General Nederland is
expected to have a significant positive impact on the Economic
Value of the group and will further enhance ongoing cash generation
thereby supporting the continuation of our dividend strategy.'
Note 1 Transition of our valuation methodology from Embedded
Value reporting to Economic Value reporting has resulted in a small
decrease in the valuation of Chesnara by GBP1.7m. Economic Value is
based on the Solvency II "Own funds" valuation with adjustments for
contract boundaries, risk margin and adding back the impact of
restrictions placed on the value of certain ring-fenced funds. We
consider the Solvency II rules understate the commercial value of
these items. Contract boundary rules require Solvency II Own Funds
to assume no future regular premiums on certain contracts and the
Solvency II risk margin is significantly higher than under Embedded
Value.
Note 2 During 2016 we announced the acquisition of Legal and
General Nederland which will complete in 2017. In respect of this
we raised GBP70m of equity in the year. The full positive impact of
the acquisition will be recognised on completion in the 2017
results.
Note 3 Cash generation represents the movement in the surplus
assets that exists within the group over and above the level of
capital that is required to be held. The level of capital required
to be held takes account of the buffers that management has set to
hold over and above the solvency requirements imposed by our
regulators. From 1 January 2016 cash generation has been determined
with reference to the Solvency II prudential regime. Previously
cash generation was determined with reference to Solvency I.
The Board approved this statement on 30 March 2017.
Enquiries
John Deane, Chief Executive, Chesnara plc - 01772 972079
Roddy Watt, FWD Consulting - 0207 623 2368 / 07714 770493
Notes to Editors
Chesnara plc ('Chesnara'), which listed on the London Stock
Exchange in May 2004, is the owner of Countrywide Assured plc ('CA
plc'), Movestic Livförsäkringar AB ('Movestic') and Chesnara
Holdings BV, the intermediate holding company of the 'Waard
Group'.
CA plc is a UK life assurance subsidiary that is closed to new
business. In June 2005 Chesnara acquired a further closed life
insurance company - City of Westminster Assurance - for GBP47.8m.
With effect from 30 June 2006, CWA's policies and assets were
transferred into CA plc. Save & Prosper Insurance Limited and
its subsidiary, Save & Prosper Pensions Limited, were acquired
on 20 December 2010 for GBP63.5 million. With effect from 31
December 2011, the business of Save & Prosper was transferred
into CA plc. On 28 November 2013 Chesnara acquired Direct Line Life
Insurance Company Limited (subsequently renamed Protection Life
Company Limited) from Direct Line Group plc for GBP39.3m. On 31
December 2014 the PL business transferred into CA plc. CA plc
operates an outsourced business model.
Movestic, a Swedish life assurance company which originally
focused on pensions and savings, was acquired on 23 July 2009 for
GBP20 million. The company is open to new business and seeks to
grow its position in the Swedish unit-linked market. Its
proposition was strengthened in February 2010 with the acquisition
of the operations of Aspis Försäkringar Liv AB which has a risk and
health product bias.
The Waard Group, a Netherlands-based Group comprising three
closed book insurance companies and a servicing company, was
acquired on 19 May 2015 for EUR69.9m. The Waard Group, comprising
Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V.
and Tadas Verzekeringen B.V. was previously owned by DSB Beheer
B.V., a Dutch financial services Group. The policy base of the
Waard Group is predominantly term life policies, with some unit
linked policies and some non-life policies. Further details are
available on the Company's website (www.chesnara.co.uk).
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements
with respect to certain of the plans and current
expectations relating to the future financial
condition, business performance and results of
Chesnara plc. By their nature, all forward-looking
statements involve risk and uncertainty because
they relate to future events and circumstances
that are beyond the control of Chesnara plc including,
amongst other things, UK domestic, Swedish domestic,
Dutch domestic and global economic and business
conditions, market-related risks such as fluctuations
in interest rates, currency exchange rates, inflation,
deflation, the impact of competition, changes
in customer preferences, delays in implementing
proposals, the timing, impact and other uncertainties
of future acquisitions or other combinations
within relevant industries, the policies and
actions of regulatory authorities, the impact
of tax or other legislation and other regulations
in the jurisdictions in which Chesnara plc and
its subsidiaries operate. As a result, Chesnara
plc's actual future condition, business performance
and results may differ materially from the plans,
goals and expectations expressed or implied in
these forward-looking statements.
--------------------------------------------------------
NOTE ON TERMINOLOGY
The principal reporting segments of the group
are:
CA, which comprises the original business of
Countrywide Assured plc, the group's original
UK operating subsidiary; City of Westminster
Assurance Company Limited, which was acquired
by the group in 2005, the long-term business
of which was transferred to Countrywide Assured
plc during 2006; and Protection Life Company
Limited which was acquired by the group in 2013,
the long-term business of which was transferred
into Countrywide Assured plc in 2014;
S&P, which was acquired on 20 December 2010.
This business was transferred from Save & Prosper
Insurance Limited and Save & Prosper Pensions
Limited to Countrywide Assured plc on 31 December;
Movestic, which was purchased on 23 July 2009
and comprises the group's Swedish business, Movestic
Livförsäkring AB and its subsidiary
and associated companies;
The Waard Group, which was acquired on 19 May
2015 and comprises three insurance companies;
Waard Leven N.V., Hollands Welvaren Leven N.V.
and Waard Schade N.V.; and a service company,
Tadas Verzekering; and
Other group activities; which represents the
functions performed by the parent company, Chesnara
plc. Also included in this segment are consolidation
adjustments.
In this preliminary announcement:
(i) The CA & S&P segments may also be collectively
referred to as the 'UK Business';
(ii) The Movestic segment may also be referred
to as the 'Swedish Business';
(iii) The Waard Group segment may also be referred
to as the 'Dutch Buisness';
(iv) 'CA plc' refers to the legal entity Countrywide
Assured plc, which includes the long term business
of CA, CWA, S&P and PL;
(v) 'CWA' refers to the long-term of City of
Westminster Assurance Company Limited, subsidies
to Countrywide Assured plc;
(vi) 'S&P' refers collectively to Save & Prosper
Insurance Limited and Save & Prosper Pensions
Limited, which subsidies to Countrywide Assurance
plc;
(vii) 'PL' refers to the long term business that
was, prior to Part VII transfer into CA plc on
31 December 2015, reported in Protection Life
Company Limited and was reported as a separate
segment for IFRS reporting purposes;
(viii) 'PL Ltd' refers to the legal entity Protection
Life Company Limited;
(ix) 'Movestic' may also refer to Movestic Livförsäkring
AB, as the context implies;
(x) 'Acquisition of Waard Group' refers to the
purchase of the Waard Group, based in the Netherlands
on 19 May 2015; and
(xi) 'LGN' or 'Legal and General Nederland' refers
to the legal entity Legal & General Nederland
Levensverzekering Maatschappij N.V, which Chesnara
announced its intention to acquire in November
2016.
--------------------------------------------------------------------
2016 HIGHLIGHTS
FINANCIAL
IFRS
IFRS PRE-TAX PROFIT GBP40.7M 2015 GBP42.8M*
*includes gain on acquisition of Waard Group of GBP16.6m.
IFRS TOTAL COMPREHENSIVE INCOME GBP55.4M 2015 GBP39.6M
Includes foreign exchange gain of GBP20.1m (GBP0.2m foreign
exchange loss for year ended 31 December 2015).
SOLVENCY
GROUP SOLVENCY 158% 2015 146%
We are well capitalised at both group and subsidiary level and
have not used any elements of the long term guarantee package,
including transitional arrangements.
GROUP SOLVENCY EXCLUDING THE IMPACT OF EQUITY RAISED DURING THE
YEAR Note 1 144% 2015 146%
ECONOMIC VALUE
ECONOMIC VALUE Note 1 GBP602.6M 2015 GBP453.4M
Movement in the year is stated after dividend distributions of
GBP24.2m in the year and includes the impact of LGN equity
raise.
ECONOMIC VALUE EARNINGS GBP72.5M 2015 GBP57.5M
Excludes impact of LGN equity raise (year ended 31 December 2015
GBP57.5m is on an EEV basis).
MOVESTIC NEW BUSINESS PROFIT GBP11.7M 2015 GBP5.7M
CASH GENERATION
TOTAL GROUP CASH GENERATION GBP85.4M* 2015 GBP82.4M**
* includes impact of LGN equity raise
** includes cash on acquisition of Waard Group
DIVISIONAL CASH GENERATION GBP34.3M 2015 GBP50.9M
GROUP CASH GENERATION EXCLUDING THE IMPACT OF EQUITY RAISED
DURING THE YEAR Note 1 GBP36.5M
Note 1: ACQUISITION OF LEGAL AND GENERAL NEDERLAND
During 2016 we announced the acquisition of Legal and General
Nederland which will complete in 2017. We raised GBP70m of equity
in the year. In the interest of balance, we have included
additional Solvency and Cash Generation metrics which show the
results excluding the impact of equity raised. The full positive
impact of the acquisition will be recognised on completion in the
2017 results.
OPERATIONAL AND STRATEGIC
DIVID
FULL YEAR DIVID INCREASE
Total dividends for the year increased by 2.9% to 19.49p per
share (6.80p interim and 12.69p proposed final). This compares with
18.94p in 2015 (6.61p interim and 12.33p final).
ACQUISITIONS
ANNOUNCEMENT OF LEGAL AND GENERAL NEDERLAND ACQUISITION
Announcement of purchase of Dutch business for agreed price of
EUR160m, expected to complete in 2017.
ECONOMIC BACKDROP
EQUITY GROWTH, FALLING BOND YIELDS, WEAKENING STERLING
Despite the low interest environment, interest rates have fallen
further during the year from their opening position. Equity markets
in all territories have performed well.
MOVESTIC DIVID
FIRST DIVID PAID TO CHESNARA
Several years of growth have generated sufficient Solvency II
surplus for Movestic to declare its maiden dividend of GBP2.7m
(30mSEK).
SOLVENCY
SOLVENCY II DELIVERED
New reporting requirements embedded with successful quarterly
submissions to the regulator.
Notes
1. Cash generation represents the movement in the surplus assets
that exists within the group over and above the level of capital
that is required to be held. The level of capital required to be
held takes account of the buffers that the board has set to hold
over and above the solvency requirements imposed by our regulators.
From 1 January 2016 cash generation has been determined with
reference to the Solvency II prudential regime. Previously cash
generation was determined with reference to Solvency I.
CHAIRMAN'S STATEMENT
"2016 has been a year of positive development for the Chesnara
group and we have delivered strongly against all of our strategic
objectives.
The value of our existing businesses has grown across all
territories, with cash emergence sufficient to fund a further
increase in the annual dividend, the twelfth successive year of
dividend growth.
The increase in value includes an increasingly material
contribution from new business profits in Sweden where we have
delivered our best ever results.
Finally, the acquisition of Legal and General Nederland,
announced in November 2016, represents a continuation of Chesnara's
successful acquisition strategy. The acquisition will create
significant scale in the Netherlands making Chesnara a well
balanced three territory group. Legal and General Nederland is
expected to have a significant positive impact on the Economic
Value of the group and will further enhance ongoing cash generation
thereby supporting the continuation of our dividend strategy."
2016 has been one of the busiest and most successful years in
Chesnara's history. We have delivered against each of our core
strategic objectives and continued to embed Solvency II. This has
been achieved whilst remaining true to our well established culture
and values of treating customers fairly and adopting a robust
approach to regulatory compliance. Importantly the business growth
has been achieved without compromising our risk appetite which is
important given our position as a predictable and low risk
investment.
MAXIMISE VALUE FROM EXISTING ACQUIRE LIFE AND PENSIONS BUSINESSES ENHANCE VALUE THROUGH PROFITABLE NEW
BUSINESS BUSINESS
18.2% growth in group Economic Value Acquisition of Legal and General Record new business profits from
Note 1. Nederland at an expected 33% discount Movestic of GBP11.7m.
to Economic Value,
Note 1 - Excludes the impact of creating an expected positive
equity raised and costs incurred for Economic Value impact of cGBP56m on
the acquisition of L&G completion in 2017.
Nederland.
Maximise value from existing business
The existing books, particularly in the UK, remain the primary
source of cash to fund our dividend strategy. As such, the increase
in Economic Value, which implies an increase in future positive
cash flows, is a positive outcome.
During the year our operating divisions have generated GBP34.3m
of cash.
DESPITE THE LOW INTEREST RATE ENVIRONMENT, WE HAVE CONTINUED TO
GENERATE CASH AT LEVELS IN EXCESS OF THE COST OF THE FULL YEAR
DIVID
The UK's cash generation, given the turbulent political backdrop
and in a period of low and declining yields, is reassuring. Also,
the declaration of an inaugural dividend from Movestic of GBP2.7m
and a positive cash contribution from the Waard Group are
encouraging developments with regards to supporting the Chesnara
dividend strategy.
Acquire life and pensions businesses
EXCLUDING THE IMPACT OF EQUITY RAISED FOR THE IMMINENT
ACQUISITION OF LEGAL AND GENERAL NEDERLAND, THE ECONOMIC VALUE OF
THE GROUP HAS INCREASED BY 18.2%. WE EXPECT TO CREATE A FURTHER
C9.5% OF VALUE GROWTH WHEN THE DEAL COMPLETES.
In November 2016 we announced our intended acquisition of Legal
and General's Dutch Life subsidiary. The acquisition scored highly
against our established assessment criteria and at a 33% discount
to Economic Value is expected to add approximately GBP56m of value
on completion in 2017. The deal is funded by a mix of new equity,
additional debt and investment of some of our existing own funds.
The support from existing and new investors for the GBP70m of new
equity is testament to the attractiveness of the acquisition. The
business is generally recognised as being a high quality operation
as illustrated by the fact LGN have been awarded prestigious best
insurers award in 2016. As a profitable and well capitalised
business, we expect that as we integrate the business into the
group it will contribute to ongoing cash generation and value
growth through efficient management of the existing book and from
writing profitable new business.
Enhance value through profitable new business
The record level of new business profit delivered by Movestic is
encouraging. Not only is the impact on Economic Value most welcome
but importantly it demonstrates that meaningful levels of new
business profit can be delivered from realistic market shares, if
the focus on product offering, pricing, service and expenses is
clear and the right management is in place. This creates a proven
"blueprint" that supports the intention to continue to run the
newly acquired LGN business as an "open to new business" operation
and gives comfort that resultant increase in new business focus can
be delivered without compromising Chesnara's primary specialism of
acquiring and managing in-force books.
RECORD LEVELS OF NEW BUSINESS PROFIT FROM MOVESTIC OF
GBP11.7M.
The imminent completion of the acquisition of Legal and General
Nederland will continue Chesnara's evolution from a UK operation to
becoming a balanced three territory European group. This enhances
the outlook in terms of cash generation potential, acquisition
opportunities and creates options to optimise our governance
model.
Solvency II
Solvency II has continued to have a significant two fold impact
on the business during the year. Firstly, I am pleased to report
that we have complied with all the requirements of the regime,
including the production of the Pillar 3 reports and the
development of the first narrative reports due in 2017. Our risk
management framework has continued to be enhanced to ensure we
deliver a best practice Solvency II governance framework.
Secondly, 2016 has been the first year of managing the business
in a Solvency II world. As expected, deepening analysis of the
Solvency II capital requirements has given an improved
understanding of how economic conditions and general business
decisions impact the Solvency Capital Requirements. Based on this
ever increasing understanding of the dynamics of solvency post
Solvency II, it is clear there is an opportunity to develop
management actions to optimise capital efficiencies across the
group. The evolution from "understanding and reporting solvency" to
"a more proactive management of solvency" is a core objective and
opportunity for 2017 and beyond.
AN INCREASED UNDERSTANDING OF THE DYNAMICS OF SOLVENCY II IS
EXPECTED TO CREATE AN OPPORTUNITY TO BENEFIT FROM CAPITAL
OPTIMISATION IN THE FUTURE
Regulation
Compliance with regulation, not least Solvency II, remains a
priority for the group. We have continued to maintain a positive
and constructive relationship with regulatory bodies across the
group.
I am pleased to report that the FCA's review "Fair treatment of
long standing customers in the life industry sector" that was
initially announced on 3 March 2016 has now, following a period of
consultation, been issued as final guidance. The guidance is in
line with our expectations and we are fully supportive of this
industry wide enhancement programme. With the clarity of the final
guidance, CA will progress with its improvement plan which includes
an enhanced customer strategy. Our 2016 results include our best
estimate of the financial impact of delivering to the revised best
practice standards.
The investigation into how Countrywide Assured disclosed exit
fees to customers, initially announced on 3 March 2016, is ongoing.
We have provided the FCA with all information requested during the
year. Discussions are ongoing and we have recently received a
request for further information. Given the narrow scope of the
investigation we retain our opinion that the outcome from the
investigation should not have a material impact on the company.
Investment proposition
Given Chesnara shares are primarily held by those requiring
predictable and attractive income, I am pleased to report a 2.9%
increase in our full year dividend, which represents a yield of
6.1% based on the average share price for the year.
2.9% INCREASE IN FULL YEAR DIVID
People
2016 has been one of the busiest years of Chesnara's history
during which we have delivered record new business in Sweden,
announced a major acquisition in the Netherlands and managed the
Legacy Review in the UK.
The board is extremely aware of the demands this has placed on
management and staff across the group. I would like to take this
opportunity to thank my colleagues for their dedication, expertise
and commitment to making 2016 a successful year.
At the end of 2016 Peter Wright retired from the board and Jane
Dale, who we welcomed on to the board in May 2016, took over as the
Chair of the Audit and Risk Committee. Frank Hughes stepped down
from the board and will leave the company at the end of April
following the restructure of our UK operations. Ken Hogg was
appointed CEO of the UK operations in October 2016. Lars Nordstrand
the CEO of Movestic will hand over to Linnea Ecorcheville in April
this year. I would like to thank Peter, Frank and Lars for all
their hard work over the years and wish Ken, Jane and Linnea every
success for the future.
With all our acquisitions, forming a view of the quality,
commitment and cultural fit of the management and staff of the
target organisation is a key consideration. During the extensive
due diligence process for the acquisition of Legal and General
Nederland, it became clear that Chesnara will be inheriting a
dedicated and capable team and I very much look forward to
welcoming new colleagues into the group during 2017.
Governance and risk management
Following the enhancements to our risk and governance systems in
2015, much of the activity in 2016 was focused on refinement,
embedding and consistency of approach across the group, where
appropriate. This was informed by a full group-wide attestation of
our governance maps and risk and control policies. The results of
the attestation exercise demonstrated significant progress with
embedding the recently enhanced standards, but also recognised that
further work is needed to achieve the desired level of consistency
of approach.
Enhanced risk reporting in 2016, such as Own Risk and Solvency
Assessment and the Quarterly CRO Report have provided greater
insight and assurance to the board that risk is being controlled
within the group's risk appetite. For example, "continuous solvency
monitoring and recovery planning protocol" was improved and
introduced into regular reporting routines during the year,
providing greater comfort that timely actions can be taken, as
appropriate, in the event of a decline in solvency resulting from
changes in financial conditions.
The Legal and General Nederland acquisition demonstrated the
strength and effectiveness of our risk based acquisition process,
which includes a risk driven due diligence process, along with risk
function oversight throughout. This will be refined further in
2017, based on learnings from the LGN acquisition.
We continue to place great importance on the continuous
enhancement of our risk and governance system, and have a number of
developments underway. Embedding activity continues with
significant focus in 2017 on continuing to increase consistency of
approach across the group, and particularly with the integration of
LGN.
Outlook and Brexit
In my 2015 statement I mentioned that we did not believe a vote
to "leave" the EU would materially affect Chesnara's business.
After the result of the referendum we retain the view that leaving
the union will have minimal impact other than any knock on effect
on general economic conditions. Should the decision to leave the
European Union result in unexpected changes to regulatory
requirements, then our operating model is suitably flexible for
Chesnara to potentially adopt an alternative regulatory model where
there are benefits for stakeholders.
Over recent years management has invested significant time and
effort in ensuring we comply with Solvency II. As we move on from
the development phase, I see increasing potential opportunities for
the business from optimising our use of Solvency II capital.
Finally the outlook is greatly enhanced by the acquisition of
LGN directly, in terms of future cash generation and value growth,
and indirectly, in terms of strengthening the foundations for
further acquisitions in the Netherlands. I also remain optimistic
that as the uncertainty created by matters such as Solvency II and
the FCA Legacy Review reduces, the UK acquisition market will
become more active. I am confident that with our tried and tested
acquisition track record and flexible funding strategy Chesnara is
well positioned to take advantage of future opportunities that meet
our stringent assessment criteria.
I remain optimistic that Chesnara can continue to deliver
against its strategic objectives and provide value to policyholders
and shareholders.
Peter Mason
Chairman
30 March 2017
BUSINESS REVIEW
|
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to shareholders and
policyholders. The strategy is delivered through a proven business
model underpinned by a robust risk management and governance
framework and our established culture and values.
MAXIMISE VALUE FROM ACQUIRE LIFE AND
EXISTING BUSINESS PENSION BUSINESSES ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
------------------------ ---------------------- --------------------------------------------
BUSINESS MODEL
----------------------------------------------------------------------------------------------
MAINTAIN ADEQUATE FAIR TREATMENT PROVIDE A COMPETITIVE ROBUST REGULATORY
FINANCIAL RESOURCES OF CUSTOMERS RETURN TO SHAREHOLDERS COMPLIANCE
---------------------- ---------------------- -------------------------- ------------------
RESPONSIBLE RISK BASED MANAGEMENT
----------------------------------------------------------------------------------------------
BUSINESS REVIEW | UK
The UK division manages 323,000 policies and is in run-off. The
division follows an outsourcer-based operating model, with
functions such as customer services, investment management and
accounting and actuarial services being outsourced. A central
governance team is responsible for managing all outsourced
operations.
During the year the UK division has focused on designing and
implementing its customer strategy to reflect recent regulatory
requirements, something that will continue into 2017. From a
results perspective, cash has been generated broadly in line with
plans and value continues to emerge, despite falling bond yields in
the year.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
GENERAL
- As a closed book the division creates value through managing
the following key value drivers: costs, policy attrition,
investment growth and reinsurance strategy.
- In general surplus regulatory capital emerges as the book runs
off. Following the implementation of Solvency II, the surplus
capital available is more closely linked with the level of risk
that the division is exposed to. Management's risk-based decision
making process seeks to continually manage and monitor the balance
of making value enhancing decisions whilst maintaining a risk
profile in line with the board's risk appetite.
- At the heart of delivering our strategy is ensuring that the
division is governed well from a regulatory and customer
perspective.
- The valuation and capital position of the division is strongly
influenced by investment market factors, particularly equity
markets and longer term bond yields.
INITIATIVES AND PROGRESS IN 2016
- Positive performance in equity markets contributes to growth in value of the UK division.
- Falling bond yields have put downward pressure on value in the year.
- During 2016 we implemented the recommendations from our
strategic asset review of the assets backing the S&P with
profit funds, improving the position of the funds.
- Our outsourcers and investment managers have delivered in line with plans and budgets.
- Cash of GBP21.3m has been generated by the division.
- The overall economic value of the division, before the impact
of dividend distributions, has increased by GBP38m during the
year.
- Positive mortality and morbidity experience.
PRIORITIES IN 2017
- Gain deeper understanding of the Solvency II balance sheet to
ensure that the financial consequences of strategic decisions are
appropriately considered. This will be delivered through
establishing and embedding a Capital Optimisation Advisory Group, a
sub committee of the division's executive committee, which will be
tasked with identifying and prioritising the management actions to
be delivered.
- Continued focus on managing the cost base.
KPIs UP TO 2016
EEV / EcV (2012-15: EEV - 2016: EcV)
GBPm 2012 2013 2014 2015 2016
---------------------- ------ ------ ------ ------ ------
EEV / EcV 311.1 297.3 271.8 232.2 239.6
Cumulative dividends - 40.0 88.0 153.0 183.5
---------------------- ------ ------ ------ ------ ------
Total 311.1 337.3 359.8 385.2 423.1
---------------------- ------ ------ ------ ------ ------
A steady growth in value, before the impact of dividends.
CASH GENERATION:
GBPm 2012 2013 2014 2015 2016
----------------- ----- ----- ----- ----- -----
Cash generation 34.7 54.1 50.9 42.5 21.3
Cash generation for 2016 is below that of prior years. Cash
generation is a function of movements in both own funds and
required capital. Under Solvency II, in rising equity markets the
capital requirement tends to increase, thereby reducing short term
cash. The opposite dynamic exists in falling equity markets. See
pages 28 and 29 for further insights on Solvency II.
CUSTOMER OUTCOMES
GENERAL
- Treating customers fairly is our primary responsibility. We
seek to do this by having effective customer service operations
together with competitive fund performance whilst giving full
regard to all regulatory matters. This supports our aim to ensure
policyholders receive good returns, appropriate communication, and
service in line with policy expectations.
- In December 2016 the FCA issued final guidelines entitled "FG
16/8 Fair treatment of long-standing customers in the life
insurance sector". The guidance provides more detail supporting how
firms should treat customers to ensure fair outcomes.
INITIATIVES AND PROGRESS IN 2016
- During March 2016 the FCA announced an investigation into the
level of disclosure of exit charges to customers. Full support has
been provided to the FCA during the year. The investigation is
ongoing.
- An action plan has been created to ensure compliance with the
draft and final guidelines of FG 16/8 that were issued by the FCA
during the year. Good progress made to date.
- Establishment of customer committee to further embed customer focus.
- Enhancements to our product review framework to support
ongoing assessment that products remain fit for purpose.
- Preparations for implementation of the 1% exit fee cap on all
pension products where the policyholder is over 55. The financial
impact of this fee cap amounts to approximately GBP3.5m and has
been fully reflected in the 2016 financial results.
- Delivered policyholder returns in three main managed funds in
excess of benchmark, representing a significant proportion of the
assets under management.
PRIORITIES IN 2017
- Deliver the division's new customer strategy framework. This includes:
o Delivery of our action plan as communicated to the FCA.
o Embedding our newly created customer committee.
o Delivery of enhanced product review framework.
- Continue to support the FCA's investigation work into how exit
and surrender charges have been disclosed to customers.
- Implement 1% exit fee cap on all pension products where the policyholder is over 55.
KPIs UP TO 2016
POLICYHOLDER FUND PERFORMANCE (ANNUAL RETURN)
2016 2015
CA Pension Managed 17.2% 1.9%
CWA Balanced Managed Pension 15.8% 1.7%
S&P Managed Pension 14.2% 4.7%
Benchmark - ABI Mixed Inv 40%-85% shares 13.4% 2.4%
GOVERNANCE
GENERAL
- Maintaining effective governance and a constructive
relationship with regulators underpins the delivery of the
divisions' strategic plans.
- Ensuring that appropriate time and resources are dedicated to
delivering robust governance processes provides management with a
platform to deliver the other aspects of the business strategy. As
a result a significant proportion of management's time and
attention continues to be focused on ensuring that both the
existing governance processes, coupled with future developments,
are delivered.
INITIATIVES AND PROGRESS IN 2016
- A number of new appointments have been made to strengthen the
CA board during the year as part of delivering a more
divisionalised group structure, including the appointment of a new
CEO and a new non-executive director, independent of the Chesnara
board.
- Successful transition to new Solvency II capital management and reporting regime.
- Continued embedding of risk management framework, including
full implementation of governance.
- Solid delivery of outsourced services.
PRIORITIES IN 2017
- Continue to embed and develop the risk management framework.
- Ensure compliance with SII regime, notably the inaugural
publication of the Solvency and Financial Condition Report and the
submission of the Regular Supervisory Report to our regulator.
- Remain abreast of financial reporting developments,
particularly the new accounting standard for insurance contracts,
"IFRS 17 "insurance contracts".
KPIs UP TO 2016
DIVISIONAL SOLVENCY RATIO:
2016: 151%*
2015: 135%
* stated before the impact of the proposed year end 2016
dividend of GBP30.0m, the fulfilment of which remains subject to
completion of a 'no objection' process with the PRA. After this
proposed dividend our closing 2016 solvency ratio is 128%.
BUSINESS REVIEW | SWEDEN
Movestic is currently the only part of the Chesnara group which
delivers against the core objective "Enhance value through
profitable new business". From its Stockholm base, Movestic
operates as a challenger brand in the Swedish life insurance
market. It offers transparent unit linked pension and savings
solutions through Independent Financial Advisors. Movestic is
currently one of the most selected providers of advised
occupational pension plans within the fund insurance segment in
Sweden.
2016 has been a positive year for Movestic. Improved fund ranges
and investment performance, quality servicing and a smart pricing
strategy for new transfer business have resulted in record levels
of new business profit. This new business profit together with a
marked reduction in lapse rates and a positive investment return
has created a significant increase in AuM with a corresponding 20%
increase in Economic Value. The growth in value has contributed to
an increase in capital requirements and hence the absolute capital
surplus remains broadly unchanged during the year.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
GENERAL
- Movestic creates value predominantly by generating growth in
the unit linked assets under management and by optimising the
income that the assets generate, without compromising the fees
incurred by policyholders. AuM growth is dependent upon positive
client cash flows and positive investment performance. Capital
surplus is a factor of both the value and capital requirements and
hence surplus can also be optimised by effective management of
capital requirements.
INITIATIVES AND PROGRESS IN 2016
- Favourable equity market performance predominantly drives AuM
growth (14.5%) and EcV growth (20%).
- Significant improvements in policyholder flows as a result of
reductions in lapse levels and an increase in new business.
- Increase to the solvency capital requirement (SCR), largely
due to the impact of the positive growth in value, has resulted in
Solvency II surplus remaining broadly unchanged during the
year.
- Optimising fee income by developing SICAV, white label funds and, Movestic funds.
- Inaugural dividend declared of 30mSEK.
PRIORITIES IN 2017
- Continue to generate positive client cash flows by:
o maintaining lapse levels at 2016 levels.
o strategic pricing to maintain transfers-in to 2016 levels or
above.
- Identify management actions to optimise the capital requirement.
- Provide a sustainable and predictable dividend to Chesnara plc.
KPIs UP TO 2016
GROWTH IN ASSETS UNDER MANAGEMENT
GBPbn 2012 2013 2014 2015 2016
-------------------- ----- ----- ----- ----- -----
Total assets under
management 1.3 1.6 2.0 2.2 2.5
IFRS PROFIT
GBPm 2012 2013 2014 2015 2016
------------- ----- ----- ----- ----- -----
IFRS profit 0.8 2.0 3.7 7.5 9.2
VALUE GROWTH (2012-15: EEV - 2016: ECV)
GBPm 2012 2013 2014 2015 2016
----------- ------ ------ ------ ------ ------
EEV / EcV 100.5 120.0 149.0 188.5 226.0
CUSTOMER OUTCOMES
GENERAL
- Movestic places great importance on providing quality service
to both customers and IFAs, with simple, clear unit linked
products, supported by an attractive and broad investment fund
range. The aim of Movestic is to offer policyholders the best funds
and management services on the market. Year after year, customers
have enjoyed good returns on their savings. This means that they
can offer a real chance of a better future when the time comes for
their customers' retirement.
INITIATIVES AND PROGRESS IN 2016
- Fund range development including improved sustainability rating.
- Competitive unit linked fund returns.
- Reduced lapse rates.
- Operational and fund performance improvements result in improved IFA assessment ratings.
PRIORITIES IN 2017
- Fund range development in line with customer and market requirements.
- Deliver competitive unit linked fund returns.
- Consolidate the recent operational and fund performance
improvements to maintain IFA assessment ratings.
KPIs UP TO 2016
BROKER ASSESSMENT RATING (OUT OF 5)
2012 2013 2014 2015 2016
-------- ----- ----- ----- ----- -----
Rating 3.1 3.6 3.6 3.7 3.8
2016 POLICYHOLDER AVERAGE INVESTMENT RETURN:
7.5%
(Swedish stock market 5.8%)
GOVERNANCE
GENERAL
- Movestic operates to exacting regulatory standards and adopts
a robust approach to risk management.
INITIATIVES AND PROGRESS IN 2016
- Full compliance with Solvency II reporting requirements.
- Deepened understanding and analysis of Solvency II dynamics.
- Enhancement of Governance and Risk Management framework, including ORSA and risk reporting.
- CEO announced his intention to retire during 2017 and replacement appointed.
PRIORITIES IN 2017
- Manage a smooth transition to the new CEO.
- Produce Solvency II annual and narrative reports.
KPIs UP TO 2016
DIVISIONAL SOLVENCY RATIO:
2016: 142%*
2015: 155%
* stated before the impact of the proposed year end 2016
dividend of GBP2.7m. After this proposed dividend the closing 2016
solvency ratio is 140%.
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
PROFITABLE NEW BUSINESS
GENERAL
- As an "open" business, Movestic not only adds value from sales
but as it gains scale, will become increasingly cash generative
which will fund further growth or contribute towards the group's
dividend strategy. Movestic has a clear sales focus and targets a
market share of 10 -15% of the advised occupational pension market.
This focus ensures we are able to adopt a profitable pricing
strategy.
INITIATIVES AND PROGRESS IN 2016
- Record new business profits of GBP11.7m.
- Successful pricing strategy attracts increased levels of high
value and higher margin transfer business.
- Market shares within target range.
- Increases in average gross margins.
PRIORITIES IN 2017
- Continue to write new business with a market share around 15%
without any reductions in gross margins thereby delivering total
profits at a similar level to 2016.
- Continue to target higher margin transfer business.
KPIs UP TO 2016
OCCUPATIONAL PENSION MARKET SHARE %
% 2012 2013 2014 2015 2016
-------------- ----- ----- ----- ----- -----
Market share 8.1 13.7 12.6 11.7 13.2
NEW BUSINESS PROFIT
GBPm 2012 2013 2014 2015 2016
--------------------- ----- ----- ----- ----- -----
New business profit 2.4 6.3 8.7 6.3 11.7
BUSINESS REVIEW | NETHERLANDS
The Waard group was acquired by Chesnara in May 2015. The group
manages life and income protection run-off portfolios and serves as
a hub to implement Chesnara's acquisition strategy for the
Netherlands.
2016 was a year in which the businesses developed rapidly on
many fronts, both externally, through targeting the acquisition
market, and internally through the embedding in to the Chesnara
group, and implementing Solvency II.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
GENERAL
- Waard Group's capital and value management aims to make
capital available for the Chesnara group for it to successfully
pursue its acquisition strategy in the Netherlands and to provide a
predictable dividend stream.
- The businesses of Waard are in run-off and cash is released as
the capital requirements of the business reduce in line with the
attrition of the book. By aiming for capital efficient
transactions, such as in asset allocation and reinsurance
programmes, capital releases can be accelerated for the benefit of
the parent company, without impairing the solvency position of the
businesses.
2016 UPDATE
- Obtained further reductions in capital requirements, by
implementing revised reinsurances and restructuring the asset
portfolio (diversification, reduced concentration).
- Accelerated growth of surplus by investment in a portfolio of
mortgage loans, generating higher returns with lower risk as
compared with the assets held previously.
2017 PRIORITIES
- Continue to generate cash flows and release capital by:
o integrating the business of Waard Leven and Hollands Welvaren
Leven (merge into one risk carrier).
o fine-tune asset allocation to improve the balance of returns
generated from capital held versus solvency capital requirements
(SCR).
o insource certain activities to reduce cost.
o cooperating with our new sister business in the
Netherlands.
- During 2017 the business will continue to seek opportunities
to acquire portfolios or entities in the life insurance arena.
CUSTOMER OUTCOMES
GENERAL
- Waard Group places great importance on providing high quality
service to its existing customers, whilst also maintaining a
platform that exceeds the needs of its current portfolio, in
anticipation of further acquisitions in the Netherlands.
2016 UPDATE
- Completed the AFM's (national conduct regulator) programme to
pro-actively communicate with all unit linked policyholders on the
appropriateness of the insurance product that they originally
purchased.
- Continued investment in customer friendly tools, such as the
re-design of the website and the roll out of the digital policy and
transaction platform to a wider customer base, whilst also
expanding it to provide further information and services.
2017 PRIORITIES
- Review potential additions to the existing platform
infrastructure in respect of supplementary products for life
insurance portfolios.
GOVERNANCE
GENERAL
- Waard Group operates in a regulated environment and aims to
comply with rules and regulations both from a prudential and from a
financial conduct point of view.
2016 UPDATE
- During 2016 Solvency II reporting has been embedded and
successfully delivered, both for quantitative and qualitative
requirements.
- Aligning the Governance and Risk Management framework to
Chesnara practices, including ORSA, RSR, SFCR and risk
reporting.
- Year end 2016 divisional solvency ratio of 712% (31 December 2015: 597%).
2017 PRIORITIES
- Successfully complete first full cycle of Solvency II related reporting.
BUSINESS REVIEW | acquire life and pensions businesses
We announced the acquisition of Legal and General Nederland for
cash consideration of EUR160m in November, which at the time of
writing, is nearing completion. The acquisition is very much in
line with our strategy and confirms our belief that the acquisition
of the Waard Group in the Netherlands in 2015 would bring further
market consolidation opportunities. The deal not only provides
immediate financial benefits (which, other than the equity raise,
are not included in our 2016 results) but creates sufficient scale
and presence to progress further value adding deals in the Dutch
market.
HIGHLIGHTS OF LGN ACQUISITION
- Purchase price of EUR160m
- 33% discount to economic value
- Potential for phased, orderly extraction of excess capital
- Attractive risk profile well aligned to our existing risk appetite
ACQUISITION OF LEGAL AND GENERAL NEDERLAND
On 24 November 2016 we announced the acquisition of Legal and
General Nederland, which was subject regulatory approval. We expect
to complete the transaction shortly.
OVERVIEW OF LEGAL AND GENERAL NEDERLAND
Legal and General Nederland is a long established, award winning
specialist insurer in the Netherlands. It has approximately 170,000
policies, predominantly individual protection and savings contracts
and operates on a stand alone basis with few direct links to its
existing parent company. It is open to new business and sells
protection, individual savings and group pensions contracts via an
IFA led distribution model.
- EUR239.3m EcV
- 219% solvency ratio
- 170,600 policies
- EUR2.2bn AUM
- 147 employees
Figures stated as at 30 June 2016
THE INVESTMENT CASE
CASH GENERATION
- Significant cash generation is expected from the business
- Material excess capital above the SCR despite conservative
capital requirement model based on the standard formula and with no
transitional measures.
VALUE ENHANCEMENT
- 33% discount to Economic Value
- cGBP56m increase in Economic Value (excluding equity raise) expected on completion.
CUSTOMER OUTCOMES
- Chesnara's focus on good business governance means we
represent a "safe hands to safe hands" transfer.
- Continuity of the investment and operating model will ensure
existing high quality customer outcomes are not compromised.
RISK APPETITE
- A thorough due diligence process identified that the risks
associated with the Legal and General Nederland business align with
the appetite of the Chesnara group.
DEAL STRUCTURE AND FUNDING
The deal is financed through an efficient funding model which
includes GBP70m of equity, cGBP52m of incremental debt and cGBP23m
of Chesnara's own cash.
ACQUISITION OUTLOOK
Chesnara is an established life and pensions consolidator with a
proven track record. This, together with a good network of contacts
in the adviser community, who understand the Chesnara acquisition
model and are mindful of our track record and good reputation with
our regulators, ensures we are aware of most viable opportunities
in the UK and Western Europe.
There has recently been a gradual increase in closed book market
activity in the UK, driven in part by reduced uncertainty regarding
Solvency II and regulatory developments. We believe the factors
which will drive further consolidation persist, namely larger
financial organisations wishing to re-focus on core activities and
the desire to release capital or generate funds from potentially
capital intensive life and pension businesses.
The acquisition of Legal and General Nederland creates scale and
presence in the Dutch market and we are well positioned to take
advantage of any value adding opportunities that may arise.
Our financial foundations are strong and we continue to have
strong support from shareholders and lending institutions to
progress our acquisition strategy. In addition our operating model
which consists of well established outsource arrangements plus
efficient, modern in house solutions, means we have the flexibility
to accommodate a wide range of potential target books. With all the
above in mind, we are confident that we are well positioned to
continue the successful acquisition track record in the future.
CAPITAL MANAGEMENT - Solvency II
WHAT IS SOLVENCY AND CAPITAL SURPLUS?
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "own funds"
(OF) and this is measured in accordance with the rules of the newly
adopted Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital
Requirement (SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF less SCR
SOLVENCY SURPLUS TO CASH GENERATION
Subject to ensuring other constraints are managed, surplus
capital is a useful proxy measure for liquid resources available to
fund matters such as dividends, acquisitions or business
investment. As such Chesnara defines cash generation as the
movement in surplus, above management buffers, during the
period.
MORE ABOUT OWN FUNDS
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and
includes a value for future profits expected to arise from in-force
policies.
The own fund valuation is deemed to represent a commercially
meaningful figure with the exception of:
- Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain policies despite a high
probability of receipt.
- Risk margin: The Solvency II rules require a "risk margin"
liability which is deemed to be above the realistic cost.
We define Economic Value (EcV) as being the own funds adjusted
for the items above. As such our "own funds" and "EcV" have many
common characteristics and tend to be impacted by the same
factors.
Transitional measures are available to temporarily increase own
funds. To ensure clarity of the ultimate solvency position Chesnara
does not take advantage of such measures.
HOW DO OWN FUNDS CHANGE?
Own funds (and Economic Value) are sensitive to economic
conditions. In general positive equity markets and increasing
yields lead to OF growth and vice versa. Other factors that improve
own funds include writing profitable new business, reducing the
expense base and improvements to lapse rates.
MORE ABOUT THE CAPITAL REQUIREMENT
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a
"standard formula" or "internal model". Chesnara adopt the
"standard formula".
The standard formula requires capital to be held against a range
of risk categories. The following chart shows the categories and
their relative weighting for Chesnara:
GBPm 2016
------------------------------------------ ------
Total market risk 245.8
Counterparty default risk 35.0
Total life underwriting risk 140.4
Total health underwriting risk 19.9
Capital requirement for other subsidiary 0.4
Operational risk 8.0
SCR 449.5
Note: The table above does not include the impact of
diversification and the loss absorbing capacity of deferred
tax.
There are three levels of capital requirement:
Min dividend paying requirement: The board sets a solvency level
above the SCR which creates a more prudent level applied when
making dividend decisions.
Solvency capital requirement: Amount of capital required to
withstand a 1 in 200 event. The SCR acts as an intervention point
for supervisory action including cancellation or the deferral of
distributions to investors.
Min capital requirement: The MCR is between 45% and 25% of the
SCR. At this point Chesnara would need to submit a recovery plan
which if not effective within 3 months may result in authorisation
being withdrawn.
HOW DOES THE SCR CHANGE?
Given the largest component of Chesnara's SCR is market risk,
changes in investment mix or changes in the overall value of our
assets has the greatest impact on the SCR. For example, equity
assets require more capital than low risk bonds. Also, positive
investment growth in general creates an increase in SCR. Book
run-off will tend to reduce SCR but new business will result in an
increase.
CHESNARA GROUP SOLVENCY METRICS
GBPm 2016 2016 2015
(excl. LGN
impact*)
------------------ ----- ------------ -----
Own funds 505 443 381
SCR 321 309 260
Solvency surplus 185 135 121
Solvency ratio % 158% 144% 146%
*Excluding impact of equity raised for LGN acquisition and
associated costs
Managing the group and subsidiaries' capital positions
appropriately is a critical part of ensuring we remain true to the
group's culture and values.
We are well capitalised at both a group and subsidiary level,
and we have not used any elements of the long term guarantee
package.
CHESNARA GROUP
ANALYSIS
- Surplus: The solvency position of the group remains strong, at
158%. On a like for like basis, after removing the impact of the
capital raise and associated costs for the acquisition of LGN, the
ratio is 144%.
- Dividends: The solvency position is stated after deducting
GBP19.0m proposed dividend (31 December 2015: GBP15.6m).
- Own funds: The increase in own funds is principally driven by
the impact of the equity raise to fund the LGN acquisition and the
own funds generation in the group's divisions.
- SCR: The SCR has increased by GBP61.0m in the year. This is
largely due to increases in the division's SCRs, depreciation of
sterling against the Euro and SEK and additional market risk SCR
being held for the equity capital raise.
SOLVENCY POSITION
GBPm 2016 2016 2015
(excl. LGN
impact*)
--------------------------- ----- ------------ -----
Own funds (post dividend) 505 443 381
SCR 321 309 260
Buffer 32 31 26
Surplus 153 104 95
Solvency ratio % 158% 144% 146%
SENSITIVITIES
Impact (GBPm) 1% fall in 10% fall
yields in equity
values
--------------- ----------- -----------
Own funds (12.8) (27.5)
SCR 1.7 (22.5)
Surplus (14.5) (5.0)
UK
ANALYSIS
- Surplus: GBP11m above board's capital management policy.
- Dividends: The solvency position is stated after deducting
GBP30.0m proposed dividend (31 December 2015: GBP30.5m). The
dividend remains subject to completion of a 'no objection' process
with the PRA.
- Own funds: Positive growth before dividends of GBP28m, driven
by positive equity markets and positive experience variance,
predominantly mortality and morbidity.
- SCR: Slight increase in year driven largely by higher market
risk capital being held largely due to equity growth and spread
risk due to investment portfolio changes.
SOLVENCY POSITION
GBPm 2016 2015
--------------------------- ----- -----
Own funds (post dividend) 166 168
SCR 130 124
Buffer 26 25
Surplus 11 19
Solvency ratio % 128% 135%
SENSITIVITIES
Impact (GBPm) 1% fall in 10% fall
yields in equity
values
--------------- ----------- -----------
Own funds (7.2) (8.5)
SCR 0.8 (11.1)
Surplus (8.0) 2.6
SWEDEN
ANALYSIS
- Surplus: GBP27m above the board's capital management policy.
- Dividends: The solvency position is stated after deducting
GBP2.7m proposed dividend (31 December 2015: GBPnil).
- Own funds: Growth largely driven by positive economic
experience due to positive equity markets coupled with positive
operating experience on in force policies.
- SCR: Increase is largely due to increased market risk capital
being held due to equity growth in year and higher currency stress.
In addition, refined modelling for capital required for mass lapse
risk has resulted in a cGBP5.0m increase in the SCR/
SOLVENCY POSITION
GBPm 2016 2015*
--------------------------- ----- ------
Own funds (post dividend) 190 168
SCR 136 109
Buffer 27 22
Surplus 27 37
Solvency ratio % 140% 154%
*Restated using 31 Dec 2016 exchange rates
The table above presents a divisional view of the solvency
position, which is different to the reported position of the
individual insurance company(ies) within the division.
SENSITIVITIES
Impact (GBPm) 1% fall in 10% fall
yields in equity
values
--------------- ----------- -----------
Own funds (3.9) (15.2)
SCR 0.2 (8.2)
Surplus (4.2) (7.0)
NETHERLANDS
ANALYSIS
- Surplus: GBP62m above the board's capital management policy.
- Dividends: No dividends are planned to be paid out of the
Dutch division (31 December 2015: GBPnil). However, a dividend of
cGBP31m is planned to be paid by the insurance companies within the
division to the Dutch holding company to part-fund the acquisition
of LGN.
- Own funds: Increase driven by positive impact of lapse
assumption changes and economic experience due to yield curve
reductions, off-set by the negative impact of updating expense
modelling assumptions.
- SCR: Overall reduction over the year. Movement includes an
increase in SCR due to the investment in a mortgage portfolio,
offset by SCR reductions arising from the sale of two CDO assets
and a "life insurance risk" SCR reduction as a result of a new
reinsurance treaty.
SOLVENCY POSITION
GBPm 2016 2015*
--------------------------- ----- ------
Own funds (post dividend) 87 82
SCR 12 14
Buffer 12 14
Surplus 62 54
Solvency ratio % 712% 597%
*Restated using 31 Dec 2016 exchange rates
The table above presents a divisional view of the solvency
position, which is different to the reported position of the
individual insurance company(ies) within the division.
SENSITIVITIES
Impact (GBPm) 1% fall in 10% fall
yields in equity
values
--------------- ----------- -----------
Own funds (0.2) (0.5)
SCR 0.4 (0.2)
Surplus (0.6) (0.3)
FINANCIAL REVIEW
The key performance indicators below are a reflection of how we
have performed in delivering our three strategic objectives and our
core culture and values. 2016 has seen cash generation, before the
impact of the LGN acquisition, which exceeds the full year
dividend, IFRS profits in line with last year and robust EcV
earnings, resulting in a closing EcV of GBP602.6m.
SUMMARY OF EACH KPI:
IFRS
PRE-TAX PROFIT: GBP40.7M (2015: GBP42.8M)
TOTAL COMPREHENSIVE INCOME: GBP55.4M (2015: GBP39.6M)
What is it?
The presentation of the results in accordance with International
Financial Reporting Standards (IFRS) aims to recognise the profit
arising from the longer term insurance and investment contracts
over the life of the policy.
Why is it important?
IFRS profit is an indicator of the value that has been generated
within the long-term insurance funds of the divisions within the
group, and is a key measure used both internally and by our
external stakeholders in assessing the performance of the business.
IFRS profit is an indicator of how we are performing against our
stated strategic objective of "maximising value from the existing
business" and can also be impacted by one-off gains arising from
delivering against our stated objective of "acquiring life and
pensions businesses".
Highlights
GBPm 2016 2015
----------------------- ------- -------
CA 28.4 23.9
S&P 14.3 10.6
Movestic 8.7 6.7
Waard 6.2 0.9
Group & consol adj. (16.9) (15.9)
Profit on acquisition - 16.6
Taxation (5.4) (3.0)
Forex impact 20.1 (0.2)
----------------------- ------- -------
Total 55.4 39.6
- Strong pre-tax results across all segments.
- IFRS pre-tax profit of GBP40.7m broadly in line with prior
year. The prior year result included a one off gain of GBP16.6m
relating to the acquisition of the Waard group and therefore the
underlying result has improved by 53%.
- All segments have delivered results ahead of 2015, supported
by positive equity markets during the year.
- Total comprehensive income includes a large foreign exchange
gain of GBP20.1m (2015: GBP0.2m loss) relating to sterling's
depreciation against both the euro and Swedish krona.
Risks
The IFRS profit can be affected by a number of our principal
risks and uncertainties. In particular, volatility in equity
markets and bond yields can result in volatility in the IFRS
pre-tax profit, and foreign currency fluctuations can affect total
comprehensive income.
CASH GENERATION
GROUP CASH GENERATION GBP85.4M (2015: GBP82.4M*)
DIVISIONAL CASH GENERATION GBP34.3M (2015: GBP50.9M*)
What is it?
Cash generation is a measure of how much distributable cash has
been generated in the period. Cash generation is driven by the
change in solvency surplus in the period, taking into account
board-approved capital management policies.
Why is it important?
Cash generation is a key measure, because it is the net cash
flows to Chesnara from its life and pensions businesses which
support Chesnara's dividend-paying capacity and acquisition
strategy. Cash generation can be a strong indicator of how we are
performing against our stated objective of "maximising value from
the existing business". However, our cash generation is always
managed in the context of our stated value of maintaining strong
solvency positions within the regulated entities of the group.
Highlights
GBPm 2016
------------------------------------------ ------
UK 21.3
Sweden (2.7)
Netherlands 15.7
------------------------------------------ ------
Divisional cash generation 34.3
Other group activities 2.2
------------------------------------------ ------
Total cash generation (excl. LGN impact) 36.5
Impact of LGN 48.9
------------------------------------------ ------
Total group cash generation 85.4
------------------------------------------ ------
Divisional cash
- Positive cash contributions from UK and Netherlands, with
Netherlands cash generation being a function of exchange rate
gains.
- Overall divisional cash generation is lower than last year
largely due to a reduction in the UK.
- This is off-set by small negative generation in Sweden as we
continue to invest in our new business operations.
Total cash generation
- At a group level this includes the positive impact of the new
equity capital that was raised to part-fund the LGN acquisition,
due to complete in 2017. This has had a significant temporary
positive benefit on our cash generation in the period. The
temporary impact includes a positive GBP70m from the equity raise
offset by GBP7.9m of one-off costs and GBP13.2m associated increase
in capital requirement.
* includes one-off cash generation of GBP39.9m arising on the
acquisition of the Waard group.
Risks
The ability of the underlying regulated subsidiaries within the
group to generate cash is affected by a number of our principal
risks and uncertainties. Whilst cash generation is a function of
the regulatory surplus, as opposed to the IFRS surplus, they are
impacted by similar drivers, and therefore factors such as yields
on fixed interest securities and equity and property performance
contribute significantly to the level of cash generation within the
group.
ECONOMIC VALUE (EcV)
GBP602.6M (2015: GBP453.4M)
What is it?
Economic value (EcV) has been introduced in the year by Chesnara
as a replacement metric for European Embedded Value. This has been
introduced following the introduction of Solvency II at the start
of 2016, with EcV being derived from Solvency II own funds.
Conceptually EcV is broadly similar to EEV in that both reflect a
market-consistent assessment of the value of existing insurance
business, plus adjusted net asset value of the non-insurance
business within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force
business and net assets of the non-insurance business and hence is
an important reference point by which to assess Chesnara's
intrinsic value. A life and pensions group may typically be
characterised as trading at a discount or premium to its economic
value. Analysis of EcV provides additional insight into the
development of the business over time.
The EcV development of the Chesnara group over time can be a
strong indicator of how we have delivered to our strategic
objectives, in particular the value created from acquiring life and
pensions businesses and enhancing our value through writing
profitable new business. It ignores the potential of new business
to be written in the future (the franchise value of our Swedish
business) and the value of the company's ability to acquire further
businesses.
Highlights
GBPm
---------------- -------
2015 Group EcV 453.4
EcV earnings 72.5
Equity raise 66.9
Dividends (24.2)
Forex gain 34.0
2016 Group EcV 602.6
---------------- -------
- Economic value at the end of the year exceeds GBP600m for the
first time, having increased by GBP149m since the start of the
year.
- Growth includes impact of equity raise and associated costs to
fund the LGN acquisition in 2016, expected to complete in 2017. A
further EcV gain is expected to arise on acquisition.
- Strong earnings and large foreign exchange gains contribute to
the overall growth in the year.
Risks
The economic value of the group is affected by economic factors
such as equity and property markets and yields on fixed interest
securities. In addition to this, whilst the other KPIs (which are
all "performance measures") remain relatively insensitive to
exchange rate movements, the EcV position of the group can be
materially affected by exchange rate fluctuations. For example a
10.0% weakening of the Swedish krona and euro against sterling
would reduce the EcV of the group by 3.4% and 1.3% respectively,
based on the composition of the group's EcV at 31 December
2016.
ECV EARNINGS NET OF TAX
GBP72.5M (2015: GBP57.5M*)
* comparative is measured on an EEV basis
What is it?
In recognition of the longer-term nature of the group's
insurance and investment contracts, supplementary information is
presented that provides information on the economic value of our
business.
The principal underlying components of the economic value result
are:
- The expected return from existing business (being the effect
of the unwind of the rates used to discount the value
in-force).
- Value added by the writing of new business.
- Variations in actual experience from that assumed in the opening valuation.
- The impact of restating assumptions underlying the determination of expected cash flows.
- The impact of acquisitions.
Why is it important?
By recognising the market-related value of in-force business
(in-force value), a different perspective is provided in the
performance of the group and on the valuation of the business.
Economic value earnings are an important KPI as they provide a
longer-term measure of the value generated during a period. The
economic value earnings of the group can be a strong indicator of
how we have delivered against all three of our core strategic
objectives. This includes new business profits generated from
writing profitable new business, economic value profit emergence
from our existing businesses, and the economic value impact of
acquisitions.
Highlights
GBPm 2016
-------------------- ------
Operating earnings 33.8
Economic earnings 39.6
Other (1.1)
Total EcV earnings 72.5
-------------------- ------
- EcV earnings of GBP72.5m in the year, driven by a combination
of strong operating and economic earnings.
- Strong operating earnings driven by new business profits in
Sweden and positive operating experience items on in force
polices.
- Economic earnings primarily driven by strong equity performance across Europe.
Risks
The EcV earnings of the group can be affected by a number of
factors, including those highlighted within our principal risks and
uncertainties as set out on pages 39 to 41. In addition to the
factors that affect the IFRS pre-tax profit and cash generation of
the group, the EcV earnings can be more sensitive to other factors
such as the expense base and persistency assumptions. This is
primarily due to the fact that assumption changes in EcV affect our
long-term view of the future cash flows arising from our books of
business.
IFRS PRE-TAX PROFIT
GBP40.7M (2015: GBP42.8M)
IFRS TOTAL COMPREHENSIVE INCOME
GBP55.4M (2015: GBP39.6M)
Executive summary
The group IFRS results reflect the natural dynamics of the
segments of the group, which can be characterised in three major
components:
Stable core: At the heart of surplus, and hence cash generation,
are the CA and Waard group segments. The requirements of these
books are to provide a predictable and stable platform for the
financial model and dividend strategy. As closed books, the key is
to sustain this income source as effectively as possible. The IFRS
results below show that the stable core continues to deliver
against these requirements.
Variable element: The S&P component can bring an element of
short-term earnings volatility to the group, with the results being
particularly sensitive to investment market movements.
Growth operation: The long-term financial model of Movestic is
based on growth, with levels of new business and premiums from
existing business being targeted to more than offset the impact of
policy attrition, leading to a general increase in assets under
management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are
reflected in the following IFRS results:
2016 2015
GBPm GBPm Note
============================================ ===== ===== ====
CA 28.4 23.9 1
S&P 14.3 10.6 2
Movestic 8.7 6.7 3
Waard Group 6.2 0.9 4
Chesnara (9.7) (9.5) 5
Consolidation adjustments (7.2) (6.4) 6
============================================ ===== ===== ====
Profit before tax and profit on acquisition 40.7 26.2
Profit on acquisition of the Waard Group - 16.6 4
============================================ ===== ===== ====
Profit before tax 40.7 42.8
Tax (5.4) (3.0)
============================================ ===== ===== ====
Profit after tax 35.3 39.8
Foreign exchange translation differences 20.1 (0.2) 7
============================================ ===== ===== ====
Total comprehensive income 55.4 39.6
============================================ ===== ===== ====
2016 2015
GBPm GBPm Note
============================================ ===== ===== ====
Operating profit 34.9 16.6 8
Economic profit 5.8 9.6 9
Profit before tax and profit on acquisition 40.7 26.2
Profit on acquisition of the Waard Group - 16.6 4
============================================ ===== ===== ====
Profit before tax 40.7 42.8
Tax (5.4) (3.0)
============================================ ===== ===== ====
Profit after tax 35.3 39.8
Foreign exchange translation differences 20.1 (0.2) 7
============================================ ===== ===== ====
Total comprehensive income 55.4 39.6
============================================ ===== ===== ====
Note 1: The CA segment has reported results for the period in
excess of those in 2015. Positive mortality experience has resulted
in a positive change in mortality assumptions being reflected in
the results. Modest economic profits of cGBP2m have been reported,
reflecting the impact of positive equity markets, offset by a fall
in yields in the year.
Note 2: The S&P segment has reported an increase in profits
on the prior year. Positive economic profits of cGBP4m arise from
the net impact of positive equity markets offset by falling bond
yields. Positive assumption changes of cGBP5m include the positive
impact of lapse assumption changes and a change in annuity pricing
assumptions, offset by a GBP3.5m charge in relation to the 1% exit
fee cap on all policies where the policyholder is over 55.
Note 3: Movestic has reported its most successful result since
its acquisition in 2009. This is principally driven by strong
growth in assets under management and increased premium volumes,
coupled with positive performance fees in the investment management
side of the business.
Note 4: The Waard Group has reported a significant growth in
profit compared with the prior year. In part this is because the
prior year results are only for the short post-acquisition period.
In addition the 2016 result has benefitted from the investment in a
mortgage portfolio and the sale of other investments during the
year. The group was purchased on 19 May 2015 and a one-off gain on
acquisition of GBP16.6m was recognised in 2015.
Note 5: The Chesnara result represents holding company expenses,
with 2016 costs being broadly in line with 2015. The current year
includes one off expenses of GBP3.8m relating to the acquisition of
LGN. The prior year includes a one off foreign currency
re-translation loss of GBP3.5m arising from holding euros prior to
the completion of the Waard Group purchase.
Note 6: Consolidation adjustments relate to items such as the
amortisation of intangible assets and remain in line with prior
year.
Note 7: As a result of sterling weakening against both the euro
and Swedish krona in the period the IFRS result includes a large
foreign exchange gain.
Note 8: The operating result demonstrates the strength and
stability of the underlying business, driving the generation of
profit. Product based income and favourable movements in operating
experience and assumption changes, specifically mortality, have
supported performance in the UK. Strong premium growth and
favourable movement in transfers contribute to the Movestic
operating result, whilst the Waard result benefitted from the
investment in a mortgage portfolio.
Note 9: Economic profit represents the components of the
earnings that are directly driven by movements in economic
variables, e.g. the impact of yield movements on the cost of
guarantees reserves. During 2016 the economic profit is generally
driven by the net impact of positive equity markets, offset by
falling bond yields in the year.
Note: Movestic and Waard Group economic surplus is not readily
determinable. While there is an element of movement due to economic
conditions, they are immaterial in comparison to non-economic
items, therefore all surplus is treated as derived from operating
activities.
TOTAL GROUP CASH GENERATION
GBP85.4M (2015: GBP82.4M)
DIVISIONAL CASH GENERATION
GBP34.3M (2015: GBP50.9M)
Cash in the business is generated from increases in the group's
surplus funds. Surplus funds represent the excess of assets held
over management's internal capital needs, as in the capital
management policies across the group. These are based on regulatory
capital requirements, with the inclusion of additional "management
buffers". This year is the first period that our cash generation
metric has been calculated with reference to capital management
policies based on Solvency II. Comparatives as reported applied our
previous Solvency I based capital policies.
Highlights
31 Dec 2016 Movement Movement Forex Cash generated
in in management's
capital
(GBPm) own funds requirement impact
------------------------ ----------- ----------------- -------- ---------------
UK 28.7 (7.4) - 21.3
Sweden 23.5 (29.9) 3.7 (2.7)
Netherlands 5.0 2.1 8.5 15.7
------------------------ ----------- ----------------- -------- ---------------
Divisional cash 57.2 (35.1) 12.2 34.3
Other group activities 1.5 0.7 - 2.2
------------------------ ----------- ----------------- -------- ---------------
Group cash pre LGN
equity raise 58.8 (34.4) 12.2 36.5
Impact of LGN equity
raise 62.1 (13.2) - 48.9
------------------------ ----------- ----------------- -------- ---------------
Total group cash 120.9 (47.6) 12.2 85.4
------------------------ ----------- ----------------- -------- ---------------
UK
- The UK continues to generate levels of cash in line with plans
despite being hampered by falling bond yields in the year.
- Own funds growth is the main driver of cash generation in the
UK, which has benefitted from favourable equity markets and
positive mortality and morbidity experience.
- Off-setting this is an increase in required capital,
principally due to additional market risk capital being held due to
higher equity growth and a change in investment mix in the
year.
SWEDEN
- Sweden has a negative cash generation in 2016 despite positive
Swedish krona exchange gains against sterling.
- Own funds have benefited from equity returns driving growth in
assets under management, whilst premium volume growth has also
contributed to the increase in surplus.
- Under Solvency II regulations the movement in the equity
market has also had an adverse impact of the level of capital the
business is required to hold, driving the increase in management
capital requirement. In addition the increase in required capital
includes a one off capital increase for "mass lapse" risk due to a
modelling change during the year.
NETHERLANDS
- The Netherlands continued the solid cash generation witnessed
throughout the year with positive underlying movements in both own
funds and capital requirements.
- Growth in own funds has benefited from returns generated from
the mortgage portfolio investment and also the sale of other
investments.
- Euro exchange gains against sterling however remain fundamental to the final result.
GROUP
- Cash has continued to be generated across the group, with
total cash generation in the period of GBP85.4m. This includes the
impact of the equity raise and associated costs for the LGN
acquisition.
- Adjusting for this the group has generated GBP36.5m of cash
which continues to be of a magnitude that would support our levels
of dividend.
- Cash generation in the prior period benefitted from a one-off
positive contribution of GBP39.9m, arising on the acquisition of
the Waard group.
- Other group activities also reflected the residual group
expenses and the impact of consolidation routines, specifically
movements in capital requirements determined at a group level.
OTHER GROUP ACTIVITIES
- Other group activities include Chesnara holding company
activities coupled with consolidation adjustments.
- Movement in own funds of GBP1.5m is largely as a result of
group level expenses being offset by a tax credit in the year.
- From a capital requirements perspective, this is driven by
movements in required capital at a Chesnara holding company level
coupled with consolidation adjustments. At a Chesnara holding
company level capital is principally required to be held for the
market risk associated with the Movestic and Waard Group equity
holdings.
EcV EARNINGS
GBP72.5M (2015: GBP57.5M)
Despite the level of variability in investment markets over the
year, with falling bond yields, significant sterling depreciation
and volatile yet growing equity markets, the group has reported
significant EcV earnings in the period reflecting the resilience
and diversity of the business.
Analysis of the EcV result in the period by earnings source:
31 Dec 2016
GBPm
============================== =============
Expected movement in period 6.0
New business 11.9
Operating variances 22.7
Operating assumption changes 0.6
Other operating variances (7.3)
============================== =============
Total operating earnings 33.9
Economic experience variances 77.9
Economic assumption changes (38.3)
============================== =============
Total economic earnings 39.6
Other non-operating variances 0.8
Risk margin movement (3.8)
Tax 2.0
Total EcV earnings 72.5
============================== =============
Analysis of the EcV result in the year by business segment:
Note
31 Dec 2016
GBPm
============================ ============= ====
UK 42.2 1
Sweden 30.8 2
Netherlands 5.9 3
Group and group adjustments (8.4) 4
============================ ============= ====
EcV earnings before tax 70.5
Tax 2.0 5
============================ ============= ====
EcV earnings after tax 72.5
============================ ============= ====
* This is the first period that EcV earnings have been reported.
Consequently comparative information has not been presented.
Economic conditions: As with our previously reported EEV metric,
the EcV result is sensitive to investment market conditions. Key
investment market conditions in the period are as follows:
- The FTSE All share index has increased by 12.5%;
- The Swedish OMX all share index has increased by 6.6%; and
- 10 year UK gilt yields have fallen from 2.01% to 1.28%.
Note 1 - UK: The UK reported significant pre tax earnings of
GBP42.2m for the period. Operating earnings of GBP25.2m demonstrate
the strength and robustness of the underlying business. The result
was supported by favourable movements in relation to assumptions on
mortality and guaranteed policies. Economic profits of GBP20.5m
were driven by positive equity market growth. This was partially
offset by the negative impact of yield curve reductions across the
year and resultant increase in risk margin.
Note 2 - Sweden: The Swedish division has reported a large EcV
movement in the year. Operating earnings of GBP16.6m were
underpinned by strong new business performance, owing to transfer
volumes and increased average policy premiums. Substantial
operating earnings on the in force business are offset by a
negative movement in operating assumptions, predominantly relating
to lower than expected fund rebates. An economic profit of GBP13.9m
was also reported, driven by the recovery of equity markets in the
latter stages of 2016. Following challenging conditions experienced
in the first six months of the year, 2016 closed with a
considerable total annual return of 7.6% achieved for the
portfolio.
Note 3 - Netherlands: The Dutch division has reported earnings
of GBP5.9m in the period. This is primarily all economic earnings
supported by the disposal of CDO investments and returns generated
on the property portfolio investment, following a decline in yield
curve rates witnessed in the year.
Note 4 - Group: A loss has been reported in the group component.
This is includes the impact of costs incurred in relation to LGN
and also underlying group level expenses and consolidation
activities.
Note 5 - Tax: The business is reporting a tax credit of GBP2.0m
in the period. This is driven by a combination of deferred tax on
the loss in the period relating to group level activities, coupled
with a modelling adjustment for deferred tax when compared with the
opening period.
EcV
GBP602.6M (2015: GBP453.4M)
The economic value of Chesnara represents the present value of
future profits of the existing insurance business, plus the
adjusted net asset value of the non-insurance business within the
group. EcV is an important reference point by which to assess
Chesnara's intrinsic value.
Value movement: 1 Jan 2016 to 31 Dec 2016:
GBPm
---------------- -------
2015 Group EcV 453.4
EcV earnings 72.5
Equity raise 66.9
Dividends (24.2)
Forex gain 34.0
2016 Group EcV 602.6
---------------- -------
EcV earnings: Positive EcV earnings have been reported in the
year, a result of strong operating profits and positive economic
profits, driven by the net impact of equity market growth in the
year offset by falling bond yields.
Equity raise: In December 2016 the group announced that new
equity had been raised with the intention to purchase LGN, which is
expected to complete during 2017. Consequently the growth in EcV
reflects the proceeds of the equity raise.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of GBP24.2m were paid during the
2016, being the final dividend from 2015 and interim 2016
dividend.
FX gain: The EcV of the group benefited from large foreign
exchange gains that were reported in the period as a result of
sterling deprecation against both the euro and Swedish krona.
EcV by segment at 31 Dec 2016:
GBPm
------------------------ ------
UK 239.6
Sweden 225.4
Netherlands 88.4
Other group activities 49.3
======================== ======
2016 Group EcV 602.6
The above graph shows that the EcV of the group is diversified
across its different markets. In particular, the EcV of the UK and
Swedish operations are of similar sizes, showing that we are
well-balanced and not over-exposed to one particular geographic
market.
EcV to Solvency II:
GBPm
------------------------ -------
2016 Group EcV 602.6
Risk margin (40.6)
Contract boundaries (27.0)
Own funds restrictions (10.6)
Dividends (19.0)
2016 SII own funds 505.4
------------------------ -------
Our reported EcV is based on a Solvency II assessment of the
value of the business, but adjusted for certain items where it is
deemed that Solvency II does not reflect the commercial value of
the business. The above waterfall shows the key difference between
EcV and SII, with explanations for each item below.
Risk margin: Solvency II rules require a significant 'risk
margin' which is held on the Solvency II balance sheet as a
liability, and this is considered to be materially above a
realistic cost. We therefore reduce this margin for risk for EcV
valuation purposes from being based on a 6% cost of capital to a 3%
cost of capital.
Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain in-force contracts,
despite the high probability of receipt. We therefore make an
adjustment to reflect the realistic value of the cash flows under
EcV.
Ring-fenced fund restrictions: Solvency II rules require a
restriction to be placed on the value of certain ring-fenced funds.
These restrictions are reversed for EcV valuation purposes as they
are deemed to be temporary in nature.
Dividends: The proposed final dividend of GBP19.0m is recognised
for SII regulatory reporting purposes. It is not recognised within
EcV until it is actually paid.
Replacement of EEV:
During the period we have replaced the previous group valuation
metric, European Embedded Value, with a new metric, economic value
(EcV). This has been introduced to align our valuation metric with
Solvency II, with EcV being derived from the Solvency II balance
sheet.
As expected, the new valuation metric gives a broadly similar
value of the Chesnara plc group. At 31 December 2015 our previously
reported EEV was GBP455.2m, compared with an opening EcV of
GBP453.4m.
Our Embedded Value figures have historically been subject to an
external audit opinion addressed to the directors of Chesnara plc.
This reflected the significance of the Embedded Value figures and
was consistent with industry best practice.
The Economic Value figures are at this stage not subject to
audit opinion other than to the extent the general audit opinion of
the Financial Statements considers their consistency with the
Financial Statements.
External audit requirements cover Solvency II disclosures and as
such given the Economic Value figures are derived from the Solvency
II balance sheet the Economic Value figures benefit from a degree
of external audit comfort.
FINANCIAL management
The group's financial management framework is designed to
provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators.
SUMMARY:
OBJECTIVES
The group's financial management framework is designed to
provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators.
Accordingly we aim to:
- Maintain solvency targets
- Meet the dividend expectations of shareholders
- Optimise the gearing ratio to ensure an efficient capital base
- Ensure there is sufficient liquidity to meet obligations to
policyholders, debt financiers and creditors
- Maintain the group as a going concern
HOW WE DELIVER TO OUR OBJECTIVES
In order to meet our obligations we employ and undertake a
number of methods. These are centred on:
1. Monitor and control risk & solvency
2. Longer-term projections
3. Responsible investment management
OUTCOMES
Key outcomes from our financial management process, in terms of
meeting our objectives, are set out below:
1. SOLVENCY:
Group solvency ratio: 158%
2. SHAREHOLDER RETURNS
2016 TSR 15.7%
2016 dividend yield 6.1%
Based on average 2016 share price and full year 2016 dividend of
19.49p.
3. CAPITAL STRUCTURE
Gearing ratio of 13.4%
This does not include the financial reinsurance within the
Swedish business.
4. LIQUIDITY AND POLICYHOLDER RETURNS
Policyholders' reasonable expectations maintained.
Asset liability matching framework operated effectively in the
year.
Sufficient liquidity in the Chesnara holding company.
5. MAINTAIN THE GROUP AS A GOING CONCERN
Group remains a going concern
OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT
OBJECTIVES
1. Capital structure
The group is funded by a combination of share capital, retained
earnings and debt finance, with the debt gearing (excluding
financial reinsurance in Sweden) being 13.4% at 31 December 2016
(17.8% at 31 December 2015).
The level of debt that the board is prepared to take on is
driven by the group's "Debt and leverage policy" which incorporates
the board's risk appetite in this area.
Over time, the level of gearing within the group will change,
and is a function of:
- funding requirements for future acquisitions (i.e. debt,
equity and internal financial resources); and
- repayment of existing debt that was used to fund previous acquisitions.
As referred to above, acquisitions are funded through a
combination of debt, equity and internal cash resources. The ratios
of these three funding methods vary on a deal-by-deal basis and are
driven by a number of factors including, but not limited to:
- size of the acquisition;
- current cash resources of the group;
- current gearing ratio and the board's risk tolerance limits for additional debt;
- expected cash generation profile and funding requirements of
the existing subsidiaries and potential acquisition;
- future financial commitments; and
- regulatory rules.
In addition to the above, Movestic uses a financial reinsurance
arrangement to fund its new business operation.
2. Maintain the group as a going concern
The directors have considered the ability of the group to
continue on a going concern basis. As such the board has performed
an assessment as to whether the group can meet its liabilities as
they fall due for a period of at least twelve months from which the
Report & Accounts have been signed.
In performing this work, the board has considered the current
cash position of the group and company, coupled with the group's
and company's expected cash generation as highlighted in its recent
business plan, which covers a three year period. The business plan
considers the financial projections of the group and its
subsidiaries on both a base case and a range of stressed scenarios,
covering projected IFRS, EcV and solvency. These projections also
focus on the cash generation of the life insurance divisions and
how these flow up into the Chesnara parent company balance sheet,
with these cash flows being used to fund debt repayments,
shareholder dividends and the head office function of the parent
company.
The information set out above indicates a strong solvency
position as at 31 December 2016 as measured at both the divisional
and group levels. As well as being well-capitalised the group also
has a healthy level of cash reserves to be able to meet its debt
obligations as they fall due, and does not rely on the renewal or
extension of bank facilities to continue trading. The group's
subsidiaries do, however, rely on cash flows from the maturity or
sale of fixed interest securities which match certain obligations
to policyholders, which brings with it the risk of bond default. In
order to manage this risk we ensure that our bond portfolio is
actively monitored and well diversified. Other significant
counterparty default risk relates to our principal reinsurers. We
monitor their financial position and are satisfied that any
associated credit default risk is low.
In light of the above information, the board has concluded that
the group and company has a reasonable expectation that the group
and company have adequate resources to continue in operational
existence for the foreseeable future, and, as stated in the
Directors Report on page 82, the Financial Statements have
continued to be prepared on a going concern basis.
3. Longer term viability statement
In accordance with provision C.2.2 of the 2014 revision of the
UK Corporate Governance Code, the directors have assessed the
prospect of the company over a longer period than the twelve months
required by the going concern provision. The board conducted this
review for a period of three years because the group's business
plan covers a three year period and includes an assessment of group
cash generation and group solvency margins over that time
period.
The group business plan considers the group's cash flows, the
group's ability to remain above target solvency levels and other
key financial measures over the period, assuming continuation of
the group's established dividend payment strategy. These metrics
are subject to scenario analysis representing the principal risks
to which the group is most sensitive, both individually and in
unison. Where appropriate this analysis is carried out to evaluate
the potential impact of adverse economic and other experience
effects, including, but not limited to:
i. Equity market declines
ii. Reduction in yield curves
iii. Adverse mortality and lapse experience
iv. Adverse expense experiences
v. Reduced new business volumes
vi. Adverse exchange rate experience
Based on the results of this analysis, the directors have a
reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the three
year period of their assessment.
RISK MANAGEMENT
PRINCIPAL RISKS AND UNCERTAINTIES
Risks and uncertainties are assessed by reference to the extent
to which they threaten, or potentially threaten, the ability of the
group to meet its core strategic objectives. These currently centre
on the intention of the group to maintain an attractive dividend
profile whilst delivering good service and fair outcomes for our
customers.
The group Audit and Risk Committee reviews (A&RC),
challenges and approves the group Executive Committee's assessment
of the group's Principal Risks and the adequacy of the controls in
place to manage those risks on a quarterly basis. The assessment is
based on pre-defined criteria for what constitutes a Principal
Risk, and corresponding materiality levels, which is subject to
annual review and approval by the group A&RC.
The specific principal risks and uncertainties are determined
taking into account of the following:
i) the group's core operations centre on the run-off of closed
life and pensions businesses in the UK and the Netherlands;
ii) notwithstanding this, the group has a material segment,
which comprises an open life and pensions business; and
iii) these businesses are subject to local regulation, which
significantly influences the amount of capital which they are
required to retain and which may otherwise constrain the conduct of
business.
The following table outlines the Principal Risks and
Uncertainties of the group and the controls in place to mitigate or
manage their impact. It has been drawn together following regular
assessment performed by the Audit and Risk Committee of the
Principal Risks facing the company, including those that would
threaten its business model, future performance, solvency or
liquidity. These have remained largely unchanged from those
reported in the 2015 Annual Report & Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
Risk Impact Control
===================== ============================================= ==============================================================
Adverse mortality / In the event that actual mortality or
morbidity / longevity morbidity rates vary from the assumptions * Effective underwriting techniques and reinsurance
experience underlying programmes.
product pricing and subsequent reserving,
more or less profit will accrue to the group.
* Regular investigations, and industry analysis, to
support best estimate assumptions and identify
trends.
* The option on certain contracts to vary premium rates
in the light of actual experience, subject to fair
treatment of customers.
* Partial risk diversification in that the group has a
portfolio of annuity contracts where the benefits
cease on death.
===================== ============================================= ==============================================================
Adverse persistency If persistency is significantly lower than
experience that assumed in product pricing and * Active investment management to ensure competitive
subsequent policyholder investment funds.
reserving, this will lead to reduced group
profitability in the medium to long-term.
Further, * Stringent management of customer service delivery and
for parts of the business such as Movestic, adherence to principles of treating customers fairly.
where retention is too a degree dependent on
Broker
relationships, the business is exposed to * Product distributor relationship management
losses arising from "mass lapse" events. processes.
* Close monitoring of persistency levels across all
groups of business to support best estimate
assumptions and identify trends.
* Movestic seeks to maintain good relationships with
Brokers. This is independently measured via yearly
external surveys that considers Broker's attitude
towards different insurers.
* Movestic has clawback arrangements with Brokers.
===================== ============================================= ==============================================================
Expense overruns and For the closed UK and Dutch businesses, the
unsustainable unit group is exposed to the impact on * For the UK business the group pursues a strategy of
cost growth profitability outsourcing functions with charging structures such
of fixed and semi-fixed expenses, in that the policy administration cost is more aligned
conjunction with a diminishing policy base. to the book's run off profile.
For the Swedish
open life and pensions business, the group is
exposed to the impact of expense levels * The Swedish operations assume growth through new
varying business such that the general unit cost trend is
adversely from those assumed in product positive.
pricing.
* The Dutch business pursues a low cost-base strategy
using a designated service company. The cost base is
supported by service income from third party
customers.
* For all three divisions, the group maintains a strict
regime of budgetary control.
* In the mid/longer term inorganic growth through
acquisitions is expected to result in cost synergies
and sharing of fixed overheads.
===================== ============================================= ==============================================================
Significant and A significant part of the company's income
prolonged reduction and, therefore, overall profitability derives * Wide range of investment funds and managers to avoid
in the market value from significant concentrations of risk
of asset holdings fees received in respect of the
management of policyholder and investor
funds. Fee levels are generally proportional * Individual fund mandates are intended to give rise to
to the a degree of diversification of risk.
value of funds under management and any
material fall in their value will impact on
future * Established investment governance framework to
income. In addition, for with profits provide review and oversight of external fund
products with guarantees, a sustained fall in managers, and monitor adherence to investment policy
the market
value of assets can increase the cost of
meeting the guaranteed benefits. * Operation of controls which limit the level of
The most material risk is equity risk, as exposure to any single counterparty and impose limits
overall investment funds comprise a on exposure by credit rating.
significant
equity content. However, material market
risks also exist if there is a sustained fall * Certain investment management costs are also
in proportional to fund values thereby reduce in the
the value of fixed interest holdings, a fall event of market falls and hence some cost savings
in the value of property holdings and arise partially offsetting the impact on income.
exchange
rate risk in respect of overseas investments
held by policyholders.
Income levels may also reduce if
policyholders switch from equity based funds
to lower margin,
fixed interest funds, as a consequence of a
material fall in the market value of
equities.
===================== ============================================= ==============================================================
Adverse exchange rate Exposure to adverse sterling:swedish krona
movements against and sterling:euro exchange rate movements * The group monitors exchange rate movements and would
Sterling (sterling consider the cost/benefit of hedging the currency
appreciating) arises from cash flows between risk on cash flows when appropriate.
Chesnara and its overseas subsidiaries and
from
the impact on reported IFRS and EcV results * The impact of any adverse currency movements can be
which are expressed in Sterling. reduced by timely movement of cash flows from
subsidiaries to group, if appropriate given various
other applicable criteria for transfers.
===================== ============================================= ==============================================================
Counterparty The group carries significant inherent risk of
failure counterparty failure in respect of: * Operation of guidelines which limit the level of
* its fixed interest security portfolio; exposure to any single counterparty and which impose
limits on exposure to credit ratings.
* cash deposits; and
* In respect of a significant exposure to one major
reinsurer, Reassure (formerly known as Guardian), the
* payments due from reinsurers. group has a floating charge over the reinsurer's
related investment assets, which ranks the group
equally with Reassure 's policyholders.
=================== =============================================== ==============================================================
Adverse movements The group maintains portfolios of fixed
in yields on fixed interest securities (i) in order to match its * The group maintains rigorous matching programmes to
interest securities insurance ensure that exposure to mismatching is minimised.
contract liabilities, in terms of yield and
cash flow characteristics, and (ii) as an
integral * Active investment management such that, where
part of the investment funds it manages on appropriate, asset mixes will be changed to mitigate
behalf of policyholders and investors. It is the potential adverse impact of a decline in bond
exposed yields.
to mismatch losses arising from a failure to
match its insurance contract liabilities or
from
the fact that sharp and discrete fixed interest
yield movements may not be associated fully
and immediately with corresponding changes in
liability valuation interest rates.
=================== =============================================== ==============================================================
Failure of The group's UK life and pensions businesses are
outsourced service heavily dependent on outsourced service * Rigorous service level measures and management
providers to fulfil providers information flows under its contractual arrangements.
contractual to fulfil a significant number of their core
obligations functions. In the event of failure by any of
the service providers to fulfil their * Continuing and close oversight of the performance of
contractual obligations, in whole or in part, all service providers.
to the
requisite standards specified in the contracts,
the group may suffer losses, poor customer * The supplier relationship management approach is
outcomes, or reputational damage as its conducive to ensuring the outsource arrangements
functions degrade. deliver to their obligations.
* Ongoing monitoring and testing of business continuity
plans and financial assessments of outsourced service
providers.
* Under the terms of the contractual arrangements the
group may impose penalties and/or exercise step-in
rights in the event of specified adverse
circumstances.
=================== =============================================== ==============================================================
Key man dependency The nature of the group is such that it relies
on a number of key individuals who have * The group promotes the sharing of knowledge and
particular expertise to the fullest extent possible.
knowledge, experience and know how. The group
is, accordingly, exposed to the sudden loss
of the services of these individuals. * It periodically reviews and assesses staffing levels,
and, where the circumstances of the group justify and
permit, will enhance resource to ensure that know how
and expertise is more widely embedded.
* The group maintains succession plans and remuneration
structures which comprise a retention element.
* The group complements its internal expertise with
established relationships with external specialist
partners.
=================== =============================================== ==============================================================
Adverse regulatory The group operates in jurisdictions which are Strong project management disciplines are applied when
and legal changes currently subject to significant change arising delivering regulatory change programmes.
from regulatory and legal requirements. These
may either be of a local nature, or of a wider Chesnara seeks to limit any potential impacts of regulatory
nature, following from EU-based regulation and change on the business by:
law. During 2016 this risk has been compounded * Having processes in place for monitoring changes, to
by the increased political uncertainties enable timely actions to be taken, as appropriate;
following the UK referendum to leave the EU and
US
Presidential elections, which may lead to * Being a member of the ABI and utilising other means
further change. Significant issues which have of joint industry representation;
arisen
and where there is continuing uncertainty as to
their full impact on the group include: * Performing internal reviews of compliance with
i) the FCA's review of legacy business and regulations; and
other reviews such as the Asset Management
market
study; * Utilising external specialist advice and assurance,
ii) the introduction of a cap on exit charges when appropriate .
on UK pensions business;
iii) consultations regarding commission and
rebate income changes in Sweden.
iv) the embedding of Solvency II requirements, Chesnara maintains strong relationships with all key
including Pillar 3 Disclosure implementation; regulators including regular and open
and dialogue about areas of potential change that could affect any
v) the changes in pensions legislation in April of the Chesnara businesses.
2015.
The group is therefore exposed to the one-off Through the Risk Management Framework, regulatory risk is
costs of addressing regulatory change as well monitored and scenario tests are
as any permanent increases in the cost base in performed to understand the potential impacts of adverse
order to meet enhanced standards. Further, regulatory or legal changes, along
the group is exposed to the risk of fines or with consideration of actions that may be taken to minimise
censure in the event that it fails to deliver the impact, should they arise.
changes to the required regulatory standards on
a timely basis.
=================== =============================================== ==============================================================
Inconsistent Chesnara currently operates in three regulatory
regulation across domains and is therefore exposed to * Strong and open relationships are maintained with all
territories inconsistent regulators. Evidence is provided to regulators that
application of regulatory standards across demonstrates consistent stability and control across
divisions, such as the imposition of higher divisions, achieved through strong risk management
Capital and governance standards.
Buffers over and above regulatory minimums.
Potential consequences of this risk for
Chesnara constraining the efficient and fluid * In extremis, Chesnara could consider the
use re-domiciling of subsidiaries or legal restructure of
of capital within the group, or creating a the business.
non-level playing field with respect to future
deal assessments.
===================== =============================================== ==============================================================
Availability of Chesnara's inorganic growth strategy is
future acquisitions dependent on the availability of attractive * Chesnara's financial strength and market reputation
future for successful execution of transactions enables the
acquisition opportunities. Hence, the business company to adopt a patient and risk-based approach to
is exposed to the risk of a reduction in the assessing acquisition opportunities.
availability of suitable acquisition
opportunities in Chesnara's current target
markets, for * Operating in multi-territories provides some
example arising as a result of a change in diversification against the risk of changing market
competition in the consolidation market or from circumstances in one of the territories.
regulatory change influencing the extent of
life company strategic restructuring.
* Maintaining strong relationships and reputation as a
"safe hands acquirer" via regular contact with
regulators, banks and target companies.
===================== =============================================== ==============================================================
Defective acquisition Through the execution of acquisitions, Chesnara
due diligence is exposed to the risk of erosion of value * Structured board approved risk-based acquisition
or financial losses arising from risks inherent process including group CRO involvement in due
within businesses or funds acquired which diligence process.
are not adequately priced for or mitigated
within the transaction.
* Management team with significant and proven mergers
and acquisitions experience.
* Cautious risk appetite and pricing approach.
===================== =============================================== ==============================================================
Cyber risk Cyber risk is a growing risk affecting all
companies, particularly those who are * Information security policy embedded in all key
custodians operations and development processes.
of customer data. The most pertinent risk
exposure relates to information security (i.e.
protecting * Ongoing specialist external advice, modifications t
business sensitive and personal data) and can o
arise from failure of internal processes and IT infrastructure and updates as appropriate.
standards, but increasingly companies are
becoming exposed to potential malicious cyber
attacks, * Regular staff training and attestation of the
organisation specific malware designed to information security policy
exploit vulnerabilities, phishing attacks etc.
The
extent of Chesnara's exposure to such threats * Penetration and vulnerability testing, including
also includes third party service providers. third party service providers.
The main potential impacts of this risk include
financial losses, inability to perform critical
functions, disruption to Policyholder services, * Chesnara and supplier Business continuity plans
loss of sensitive data and corresponding regularly monitored and tested.
reputational
damage or fines.
===================== =============================================== ==============================================================
Liquidity risk Chesnara and each of its subsidiaries have
obligations to make future payments, which are * Chesnara has a liquidity policy in place which
not always known with certainty in terms of includes various controls to manage liquidity risk
timing or amounts, prior to the payment date. such as:
This includes primarily the payment of
policyholder claims, reinsurance premiums, debt
repayments * Asset / Liability modelling;
and dividends. The uncertainty of timing and
amounts to be paid gives rise to potential
liquidity * Regular liquidity forecasts; and
risk, should the funds not be available to make
payment.
* Cash projections to support strategic initiatives
such as acquisitions.
* Chesnara holds a significant amount of surplus in
highly liquid tier 1 assets such as cash and gilts.
===================== =============================================== ==============================================================
DIRECTORS' REsponsibilities STATEMENT
With regards to this preliminary announcement, the Directors
confirm to the best of their knowledge that:
- The financial statements have been prepared in accordance with
International Reporting Financial Standards as adopted by the EU
and give a true and fair view of the assets, liabilities, financial
position and profit for the Company and the undertakings included
in the consolidation as a whole;
- Pursuant to Disclosure and Transparency Rules Chapter 4, the
Chairman's Statement and Management Report include a fair review of
the development and performance of the business and the position of
the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties faced by the business.
On behalf of the Board
Peter Mason John Deane
Chairman Chief Executive Officer
30 March 2017 30 March 2017
INDEPENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON
THE PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC
We confirm that we have issued an unqualified opinion on the
full financial statements of Chesnara plc.
Our audit report on the full financial statements sets out the
following risks of material misstatement which had the greatest
effect on our audit strategy; the allocation of resources in our
audit; and directing the efforts of the engagement team, together
with how our audit responded to those risks and the key
observations arising from our work:
Accuracy of Save & Prosper Cost of Guarantees
The risk
The assessment of the cost of guarantee reserves for policies
written by Save and Prosper is complex and material, including the
use of a stochastic model based on a variety of possible economic
scenarios. Historically, the residual cost to shareholders arising
from the cost of guarantees has fluctuated significantly as a
result of movements in bond yields and equity markets with a value
of GBP35.7m at 31 December 2016 (31 December 2015: GBP37.2m). The
value is determined by a third party actuarial consultant and the
directors compare this valuation against an in-house derived
estimate using an approximation model to validate its
reasonableness.
How the scope of our audit responded to this risk
We assessed the competence of the actuarial consultant. Such an
assessment includes a direct challenge of the actuarial
consultant's working papers and a challenge of the historical
accuracy of modelling when compared with actual experience. We used
actuarial specialists within our audit team to challenge the
appropriateness of assumptions input into the model and benchmark
against external actuarial data. Sensitivity analysis was also
performed to assess potential management bias. We developed an
independent expectation of how the assumptions impact the model and
challenged management's explanation and analysis to support any
variations.
We assessed the design and implementation of the internal
controls in place to monitor and manage the risks associated with
the cost of guarantee reserve.
Key observations
Based on the audit procedures performed, we found that the
assumptions underpinning the stochastic modelling were reasonable
and had been applied appropriately.been made following our
reassessment of what matters require communicating. We also report
to the Audit & Risk Committee on disclosure matters that we
identified when assessing the overall presentation of the financial
statements.
Valuation of the Protection Life acquired value in-force ('PtL
AVIF') business intangible
The risk
At 31 December 2016 the Group carried an intangible asset for
the PtL AVIF of GBP11.6m (31 December 2015: GBP15.0m).
Following a review of the PtL AVIF business intangible in the
prior year, we continued to focus on the valuation of this asset as
it is the AVIF intangible which is most sensitive to changes in key
assumptions used.
Assessing the recoverable value of the acquired in-force
business intangible asset requires significant judgment in the
estimation of the net present value of cash flows expected to arise
from the pre-acquisition policies acquired in past business
combinations. The key assumptions are persistency rates, discount
rates and economic assumptions.
How the scope of our audit responded to this risk
We evaluated the carrying value of the PtL AVIF intangible asset
by reviewing and challenging:
- the mechanical accuracy of the net present value calculation;
- the future cash flows within the model to assess whether these
were the latest available and were those used consistently
throughout the business;
- the level of headroom this calculation generated by reference
to the post amortisation carrying value of the asset; and
- the appropriateness of the key assumptions used within the
model by reference to actual experience and performance of
sensitivity analysis where appropriate.
We assessed the design and implementation of the controls over
the impairment test performed by management to evaluate the
suitability of the carrying value of the intangible asset.
Key observations
We found that the assumptions underpinning the impairment test
were appropriate and applied consistently. We found that the
carrying value of the intangible asset remains appropriate.
Valuation of the Protection Life acquired value in-force ('PtL
AVIF') business intangible
The risk
Actuarial liabilities are calculated using an appropriate
discount rate to take account of the time value of future expected
payments. The discount rate used to determine the UK actuarial
liabilities includes an adjustment to reflect the credit risk of
those future cash flows. The determination of the credit risk
adjustment which is applied to non-government bond yields is a
source of significant judgment and is material to the Balance
Sheet.
How the scope of our audit responded to this risk
We evaluated the appropriateness of the principal assumptions
relating to the credit risk element of the valuation interest rates
assumption for discounting the technical provisions. This involved
benchmarking the credit risk assumptions used against those
obtained from external data, including a comparison with those
adopted by industry peers, where available.
We substantively agreed a sample of non-government bonds used
within the calculation of the valuation rate of interest to the
value of those bonds on the balance sheet to check whether they
were consistent.
We evaluated the design and implementation of the internal
controls around the determination and application of the credit
element of the valuation rate of interest applied in discounting
actuarial liabilities.
Key observations
We found that the methodology for credit risk adjustments
applied to the valuation interest rate is appropriate and applied
consistently.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we did not provide a separate opinion on these
matters.
Our liability for this report, and for our full audit report on
the financial statements is to the company's members as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for our audit report or this report, or for the
opinions we have formed.
Deloitte LLP
Chartered Accountants and Statutory Auditor
CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2016 2015
GBP000 GBP000
---------------------------------------------------------------------------------------------- --------- ---------
Insurance premium revenue 109,450 114,749
Insurance premium ceded to reinsurers (44,900) (46,811)
---------------------------------------------------------------------------------------------- --------- ---------
Net insurance premium revenue 64,550 67,938
Fee and commission income 72,932 66,249
Net investment return 515,681 148,514
---------------------------------------------------------------------------------------------- --------- ---------
Total revenue net of reinsurance payable 653,163 282,701
Other operating income 17,614 18,586
---------------------------------------------------------------------------------------------- --------- ---------
Total income net of investment return 670,777 301,287
---------------------------------------------------------------------------------------------- --------- ---------
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (346,117) (318,721)
Net increase in insurance contract provisions 11,392 191,850
Reinsurers' share of claims and benefits 62,364 32,004
--------- ---------
Net insurance contract claims and benefits (272,361) (94,867)
--------- ---------
Change in investment contract liabilities (274,724) (100,469)
Reinsurers' share of investment contract liabilities 5,617 733
--------- ---------
Net change in investment contract liabilities (269,107) (99,736)
--------- ---------
Fees, commission and other acquisition costs (23,838) (20,875)
Administrative expenses (46,615) (41,301)
Other operating expenses
Charge for amortisation of acquired value of in-force business (10,419) (9,274)
Charge for amortisation of acquired value of customer relationships (236) (222)
Other (4,394) (5,866)
---------------------------------------------------------------------------------------------- --------- ---------
Total expenses net of change in insurance contract provisions and investment contract
liabilities (626,970) (272,141)
---------------------------------------------------------------------------------------------- --------- ---------
Total income less expenses 43,807 29,146
Share of profit of associate 150 455
Profit recognised on business combination - 16,644
Financing costs (3,272) (3,457)
---------------------------------------------------------------------------------------------- --------- ---------
Profit before income taxes 40,685 42,788
Income tax expense (5,405) (3,000)
Profit for the year 35,280 39,788
Foreign exchange translation differences arising on the revaluation of foreign operations 20,114 (173)
---------------------------------------------------------------------------------------------- --------- ---------
Total comprehensive income for the year 55,394 39,615
---------------------------------------------------------------------------------------------- --------- ---------
Basic earnings per share (based on profit for the year) 27.67p 31.48p
---------------------------------------------------------------------------------------------- --------- ---------
Diluted earnings per share (based on profit for the year) 27.56p 31.41p
---------------------------------------------------------------------------------------------- --------- ---------
CONSOLIDATED BALANCE SHEET
31 December 2016 2015
GBP000 GBP000
-------------------------------------------------------------------------- --------- ---------
Assets
Intangible assets
Deferred acquisition costs 48,318 36,061
Acquired value of in-force business 62,943 68,341
Acquired value of customer relationships 736 875
Software assets 6,560 4,720
Property and equipment 519 537
Investment in associates 5,433 4,707
Investment properties 245 245
Reinsurers' share of insurance contract provisions 254,859 282,628
Amounts deposited with reinsurers 37,437 33,941
Financial assets
Equity securities at fair value through income 485,165 486,243
Holdings in collective investment schemes at fair value through income 4,104,602 3,499,355
Debt securities at fair value through income 474,091 423,754
Policyholders' funds held by the Group 229,397 189,919
Mortgage loan portfolio 54,756
Insurance and other receivables 39,646 43,674
Prepayments 5,271 6,565
Derivative financial instruments 2,773 2,721
--------- ---------
Total financial assets 5,395,701 4,652,231
--------- ---------
Reinsurers' share of accrued policyholder claims 19,307 19,042
Income taxes 3,352 3,611
Cash and cash equivalents 260,353 260,863
-------------------------------------------------------------------------- --------- ---------
Total assets 6,095,763 5,367,802
-------------------------------------------------------------------------- --------- ---------
Liabilities
Insurance contract provisions 2,242,446 2,232,083
Other provisions 823 1,905
Financial liabilities
Investment contracts at fair value through income 3,028,269 2,457,521
Liabilities relating to policyholders' funds held by the Group 229,397 189,919
Borrowings 86,843 79,025
Derivative financial instruments 1,348 444
--------- ---------
Total financial liabilities 3,345,857 2,726,909
--------- ---------
Deferred tax liabilities 5,420 7,906
Reinsurance payables 6,899 9,660
Payables related to direct insurance and investment contracts 61,416 62,284
Deferred income 5,438 6,212
Income taxes 8,624 6,328
Other payables 23,657 18,401
Bank overdrafts 1,622 952
-------------------------------------------------------------------------- --------- ---------
Total liabilities 5,702,202 5,072,640
-------------------------------------------------------------------------- --------- ---------
Net assets 393,561 295,162
-------------------------------------------------------------------------- --------- ---------
Shareholders' equity
Share capital 43,766 42,600
Share premium 142,058 76,516
Treasury shares (161) (161)
Other reserves 19,300 (814)
Retained earnings 188,598 177,021
-------------------------------------------------------------------------- --------- ---------
Total shareholders' equity 393,561 295,162
-------------------------------------------------------------------------- --------- ---------
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2016 2015
GBP000 GBP000
------------------------------------------------------------------------------ --------- ---------
Profit for the year 35,280 39,788
Adjustments for:
Depreciation of property and equipment 173 203
Amortisation of deferred acquisition costs 12,162 9,251
Amortisation of acquired value of in-force business 6,797 9,274
Amortisation of acquired value of customer relationships 172 222
Amortisation of software assets 794 1,346
Share based payment 623 212
Tax paid 5,405 2,999
Interest receivable (20,882) (24,693)
Dividends receivable (30,209) (31,501)
Interest expense 3,272 3,457
Change in fair value of investment properties - (4,277)
Fair value gains on financial assets (205,870) (87,934)
Profit arising on business combination - (16,644)
Share of profit of associate (150) (455)
Increase in intangible assets related to insurance and investment contracts (16,448) (14,759)
Interest received 20,281 24,458
Dividends received 29,446 31,532
Changes in operating assets and liabilities:
Decrease in financial assets (280,333) 62,365
Decrease in reinsurers share of insurance contract provisions 34,177 54,253
Increase/(decrease) in amounts deposited with reinsurers (3,496) 1,557
Increase/(decrease) in insurance and other receivables 10,294 1,754
Increase in prepayments 1,795 (1,710)
Decrease in insurance contract provisions (16,530) (201,453)
Increase in investment contract liabilities 362,641 149,011
Decrease in provisions (1,306) (1,893)
(Decrease)/increase in reinsurance payables (3,660) (578)
Increase in payables related to direct insurance and investment contracts (2,114) 1,708
Decrease in other payables 2,808 (1,630)
------------------------------------------------------------------------------ --------- ---------
Net cash generated from operations (54,878) 5,863
Income tax paid (4,709) (4,248)
------------------------------------------------------------------------------ --------- ---------
Net cash generated from operating activities (59,587) 1,615
------------------------------------------------------------------------------ --------- ---------
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired - 54,258
Development of software (3,502) (2,418)
Purchases of property and equipment 948 (265)
Net cash generated from/( utilised by) investing activities (2,554) 51,575
------------------------------------------------------------------------------ --------- ---------
Cash flows from financing activities 66,708
Proceeds from issue of share capital 4,268 -
Proceeds from borrowings - -
Repayment of borrowings (7,815)
Dividends paid (24,181) (23,498)
Interest paid (3,095) (3,382)
------------------------------------------------------------------------------ --------- ---------
Net cash (utilised by)/generated from financing activities 43,700 (34,695)
------------------------------------------------------------------------------ --------- ---------
Net increase in net cash and cash equivalents (18,441) 18,495
Net cash and cash equivalents at beginning of year 259,911 240,510
Effect of exchange rate changes on net cash and cash equivalents 17,261 906
------------------------------------------------------------------------------ --------- ---------
Net cash and cash equivalents at end of the year 258,731 259,911
------------------------------------------------------------------------------ --------- ---------
Note: Net cash and cash equivalents includes overdrafts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December
2016
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 1 January 2016 42,600 76,516 (814) (161) 177,021 295,162
Profit for the year - - - - 35,280 35,280
Dividends paid - - - - (24,181) (24,181)
Foreign exchange
translation differences - - 20,114 - - 20,114
Share based payment - - - - 478 478
Issue of new shares 1,166 65,542 - - - 66,708
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 31 December 2016 43,766 142,058 19,300 (161) 188,598 393,561
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Year ended 31 December
2015
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 1 January 2015 42,600 76,523 (641) (168) 160,519 278,833
Profit for the year - - - - 39,788 39,788
Dividends paid - - - - (23,498) (23,498)
Foreign exchange
translation differences - - (173) - - (173)
Share based payment - - - - 212 212
Sale of treasury shares - (7) - 7 - -
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 31 December 2015 42,600 76,516 (814) (161) 177,021 295,162
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS
1. Basis of presentation
The preliminary announcement is based on the Group's financial
statements for the year ended 31 December 2016, which are prepared
in accordance with International Financial Reporting Standards
('IFRSs') as adopted by the European Union ('Adopted IFRSs') as
adopted by the EU.
2. Significant accounting policies
The accounting policies applied by the group in determining the
IFRS basis results in this report are the same as those previously
applied in the Group's consolidated financial statements.
3. Operating segments
The Group considers that it has no product or distribution-based
business segments. It reports segmental information on the same
basis as reported internally to the Chief Operating Decision Maker,
which is the Board of Directors of Chesnara plc.
The segments of the Group as at 31 December 2016 comprise:
CA: This segment is part of the Group's UK life insurance and
pensions run-off portfolio and comprises the original business of
Countrywide Assured plc, the Group's principal UK operating
subsidiary, and of City of Westminster Assurance Company Limited
which was acquired in 2005 and the long-term business of which was
transferred to Countrywide Assured plc during 2006. This segment
also contains the business of Protection Life, which was purchased
on 28 November 2013. Following the Part VII transfer on 31 December
2014 of the long-term business of Protection Life Company Limited
into Countrywide Assured plc, the business of Protection Life (PL)
is now reported within the CA segment, effective from 1 January
2015. Previously PL was reported as a separate segment. Comparative
information has been restated to reflect this change. CA is
responsible for conducting unit-linked and non-linked business.
S&P: This segment, which was acquired on 20 December 2010,
comprises the historical business of Save & Prosper Insurance
Limited and its then subsidiary Save & Prosper Pensions
Limited. It is responsible for conducting both unit-linked and
non-linked business, including a with-profits portfolio, which
carries significant additional market risk. On 31 December 2011 the
whole of the business of this segment was transferred to
Countrywide Assured plc under the provisions of Part VII of the
Financial Services and Markets Act 2000.
Movestic: This segment comprises the Group's Swedish life and
pensions business, Movestic Livförsäkring AB ('Movestic') and its
subsidiary and associated companies, which are open to new business
and which are responsible for conducting both unit-linked and
pensions and savings business and providing some life and health
product offerings.
Waard Group: This segment represents the Group's Dutch life and
general insurance business, which was acquired on 19 May 2015 and
comprises the three insurance companies Waard Leven N.V., Hollands
Welvaren Leven N.V. and Waard Schade N.V., and a servicing company,
Tadas Verzekering. The Waard Group's policy base is predominantly
made up of term life policies, although also includes unit-linked
policies and some non-life policies, covering risks such as
occupational disability and unemployment.
Other Group Activities: The functions performed by the parent
company, Chesnara plc, are defined under the operating segment
analysis as Other Group Activities. Also included therein are
consolidation and elimination adjustments.
The accounting policies of the segments are the same as those
for the Group as a whole. Any transactions between the business
segments are on normal commercial terms in normal market
conditions. The Group evaluates performance of operating segments
on the basis of the profit before tax attributable to shareholders
and on the total assets and liabilities of the reporting segments
and the Group. There were no changes to the measurement basis for
segment profit during the year ended 31 December 2016.
(i) Segmental income statement for the year ended 31 December 2016
CA S&P UK Total Movestic Waard Group Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------- --------- --------- ---------- ---------- ------------- ---------------------- ---------
Net insurance premium
revenue 42,103 4,886 46,989 14,903 2,658 - 64,550
Fee and commission
income 29,000 2,610 31,610 41,296 26 - 72,932
Net investment return 206,748 131,155 337,903 169,130 8,464 184 515,681
---------------------- --------- --------- ---------- ---------- ------------- ---------------------- ---------
Total revenue (net of
reinsurance payable) 277,851 138,651 416,502 225,329 11,148 184 653,163
Other operating income 2,568 10,792 13,360 3,751 503 - 17,614
---------------------- --------- --------- ---------- ---------- ------------- ---------------------- ---------
Segmental
income/(expenses) 280,419 149,443 429,862 229,080 11,651 184 670,777
---------------------- --------- --------- ---------- ---------- ------------- ---------------------- ---------
Net insurance contract
claims and benefits
incurred (139,748) (123,454) (263,202) (7,695) (1,464) - (272,361)
Net change in
investment contract
liabilities (98,393) (2,206) (100,599) (168,508) - - (269,107)
Fees, commission and
other acquisition
costs (1,641) (23) (1,664) (25,089) (330) - (27,083)
Administrative
expenses:
Amortisation charge
on software assets - - - (1,243) - - (1,243)
Depreciation charge
on property and
equipment - - - (197) - - (197)
Other (11,017) (9,443) (20,460) (12,800) (3,664) (8,251) (45,175)
Operating expenses (1,203) (1) (1,204) (3,209) - 19 (4,394)
Financing costs - (2) (2) (1,629) - (1,641) (3,272)
Share of profit from
associates - - - 150 - - 150
---------------------- --------- --------- ---------- ---------- ------------- ---------------------- ---------
Profit before tax and
consolidation
adjustments 28,417 14,314 42,731 8,860 6,193 (9,689) 48,095
---------------------- --------- --------- ---------- ---------- ------------- ---------------------- ---------
Other operating
expenses:
Charge for
amortisation of
acquired value of
in-force business (5,643) (604) (6,247) (3,554) (618) - (10,419)
Charge for
amortisation of
acquired value of
customer
relationships - - - (236) - - (236)
Fees, commission and
other acquisition
costs - - - 3,245 - - 3,245
Segmental income less
expenses 22,774 13,710 36,484 8,315 5,575 (9,689) 40,685
Profit before tax 22,774 13,710 36,484 8,315 5,575 (9,689) 40,685
--------- ---------
Income tax
(expense)/credit (6,663) (7) (1,721) 2,986 (5,405)
Profit after tax 29,821 8,308 3,854 (6,703) 35,280
---------- ---------- ------------- ---------------------- ---------
(ii) Segmental balance sheet as at 31 December 2016
CA S&P Movestic Waard Group Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Total assets 1,829,944 1,217,546 2,718,156 207,160 122,957 6,095,763
Total liabilities (1,728,019) (1,155,556) (2,638,490) (122,655) (57,482) (5,702,202)
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Net assets 101,925 61,990 79,666 84,505 65,475 393,561
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Investment in associates - - 5,433 - - 5,433
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Additions to non-current
assets - - 11,894 - - 11,894
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
(iii) Segmental income statement for the year ended 31 December
2015
CA S&P UK Total Movestic Waard Group Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------- -------- -------- ---------- ---------- ------------- ---------------------- --------
Net insurance premium
revenue 47,880 5,413 53,293 13,515 1,130 - 67,938
Fee and commission income 30,216 2,513 32,729 33,502 18 - 66,249
Net investment return 24,539 37,605 62,144 87,163 (1,238) 445 148,514
------------------------- -------- -------- ---------- ---------- ------------- ---------------------- --------
Total revenue (net of
reinsurance payable) 102,635 45,531 148,166 134,180 (90) 445 282,701
Other operating income 2,854 11,331 14,185 4,399 2 - 18,586
------------------------- -------- -------- ---------- ---------- ------------- ---------------------- --------
Segmental
income/(expenses) 105,489 56,862 162,351 138,579 (88) 445 301,287
------------------------- -------- -------- ---------- ---------- ------------- ---------------------- --------
Net insurance contract
claims and benefits
incurred (54,093) (37,282) (91,375) (6,079) 2,587 - (94,867)
Net change in investment
contract liabilities (13,240) 641 (12,599) (87,137) - - (99,736)
Fees, commission and
other acquisition costs (1,986) (21) (2,007) (21,864) 83 - (23,788)
Administrative expenses:
Amortisation charge on
software assets - - - (1,340) - - (1,340)
Depreciation charge on
property and equipment (22) - (22) (180) - - (202)
Other (10,691) (9,628) (20,319) (9,884) (1,715) (7,841) (39,759)
Operating expenses (1,501) - (1,501) (4,481) - - (5,982)
Financing costs - - - (1,340) - (2,116) (3,456)
Share of profit from
associates - - - 455 - - 455
------------------------- -------- -------- ---------- ---------- ------------- ---------------------- --------
Profit before tax and
consolidation
adjustments 23,956 10,572 34,528 6,729 867 (9,512) 32,612
------------------------- -------- -------- ---------- ---------- ------------- ---------------------- --------
Other operating expenses:
Charge for amortisation
of acquired value of
in-force business (4,975) (661) (5,636) (3,282) (356) - (9,274)
Charge for amortisation
of acquired value of
customer relationships - - - (107) - - (107)
Fees, commission and
other acquisition
costs - - - 2,913 - - 2,913
Segmental income less
expenses 18,981 9,911 28,892 6,253 511 (9,512) 26,144
Profit arising on
business combinations - - - - - 16,644 16,644
Profit before tax 18,981 9,911 28,892 6,253 511 7,132 42,788
-------- --------
Income tax
(expense)/credit (4,139) (14) (124) 1,277 (3,000)
Profit after tax 24,753 6,239 387 8,409 39,788
---------- ---------- ------------- ---------------------- --------
(iv) Segmental balance sheet as at 31 December 2015
CA S&P Movestic Waard Group Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Total assets 1,809,494 1,181,272 2,134,143 188,993 53,900 5,367,802
Total liabilities (1,702,363) (1,125,113) (2,070,860) (120,216) (54,088) (5,072,640)
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Net assets 107,131 56,159 63,283 68,777 (188) 295,162
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Investment in associates - - 4,707 - - 4,707
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
Additions to non-current
assets - 26 17,368 73 - 17,467
--------------------------- ----------- ----------- ----------- ------------- ---------------------- -----------
4. Borrowings
31 December
2016 2015
GBP000 GBP000
------- -------
Bank loan 52,697 52,522
Amount due in relation to financial reinsurance 34,146 26,503
------- -------
Total 86,843 79,025
------- -------
Current 61,471 18,448
Non-current 25,372 60,577
------- -------
Total 86,843 79,025
------- -------
The bank loan subsisting at 31 December 2016, comprises the
following:
- on 7 October 2013 tranche one of a loan facility was drawn
down, amounting to GBP30.0m. This facility is unsecured and is
repayable in five increasing annual instalments on the anniversary
of the draw down date. The outstanding principal on the loan bears
interest at a rate of 2.25 percentage points above the London
Inter-Bank Offer Rate and is repayable over a period which varies
between one and six months at the option of the borrower. During
the year, GBP6.05.m was repayable, but the amount was deferred due
pending arrangement of the new loan facility to part fund the LGN
acquisitions.
- on 27 November 2013 tranche two of the loan facility was drawn
down, amounting to GBP31.0m. As with tranche one, this facility is
unsecured and is repayable in five increasing annual instalments on
the anniversary of the draw down date. The outstanding principal on
the loan bears interest at a rate of 2.25 percentage points above
the London Inter-Bank Offer Rate and is repayable over a period
which varies between one and six months at the option of the
borrower. During the year, GBP6.05.m was repayable, but the amount
was deferred due pending arrangement of the new loan facility to
part fund the LGN acquisitions.
- on 27 November 2013 a short-term loan of GBP12.8m was drawn
down. This was originally repayable in full on 27 May 2015. During
2014, the repayment date of this loan has been extended to December
2018. The outstanding principal on the loan bears interest at a
rate of 2.75 percentage points above the London Inter-Bank Offer
Rate.
The fair value of the bank loan at 31 December 2016 was
GBP52,800,000 (31 December 2015: GBP52,800,000).
Bank loans are presented net of unamortised arrangement fees.
Arrangement fees are recognised in profit or loss using the
effective interest rate method.
The fair value of amounts due in relation to financial
reinsurance was GBP34,396,000 (31 December 2015: GBP26,879,000).
The fair value of other borrowings is not materially different from
their carrying value.
The bank loan has been classified as current as at the balance
sheet date due to the timing of the LGN acquisition, which is
anticipated to complete in the first half of 2017. At this point in
time, the existing facility will be re-paid in full and replaced
with a new facility.
5. Earnings per share
Year ended 31 December 2016 2015
Profit for the year attributable to shareholders (GBP000) 35,280 39,788
Weighted average number of ordinary shares 127,488,681 126,401,635
Basic earnings per share 27.67p 31.48p
Diluted earnings per share 27.56p 31.41p
The weighted average number of ordinary shares in respect of the
years ended 31 December 2016 is based upon 149,885,761 shares in
issue less 147,535 own shares held in treasury. The weighted
average number of ordinary shares in respect of the years ended 31
December 2015 was based upon 126,552,427 shares in issue less
147,535 own shares held in treasury.
There were 526,000 share options outstanding at 31 December 2016
(2015: 271,000). Accordingly, there is dilution of the average
number of ordinary shares in issue in respect of 2016.
6. Retained earnings
Year ended 31 December
2016 2015
GBP000 GBP000
-------- --------
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January 177,021 160,519
Profit for the year 35,280 39,788
Share based payment 478 212
Dividends
Final approved and paid for 2013 - -
Interim approved and paid for 2014 - -
Final approved and paid for 2014 (15,586) (15,143)
Interim approved and paid for 2015 (8,595) (8,355)
-------- --------
Balance at 31 December 188,598 177,021
-------- --------
The interim dividend in respect of 2015, approved and paid in
2015 was paid at the rate of 6.61p per share. The final dividend in
respect of 2015, approved and paid in 2016, was paid at the rate of
12.33p per share so that the total dividend paid to the equity
shareholders of the parent company in respect of the year ended 31
December 2015 was made at the rate of 18.94p per share.
The interim dividend in respect of 2016, approved and paid in
2016, was paid at the rate of 6.80p per share to equity
shareholders of the parent company registered at the close of
business on 8 September 2016, the dividend record date.
A final dividend of 12.69p per share in respect of the year
ended 31 December 2016 payable on 24 May 2017 to equity
shareholders of the parent company registered at the close of
business on 18 April 2017, the dividend record date, was approved
by the directors after the balance sheet date. The resulting total
final dividend of GBP19.0m has not been provided for in these
financial statements and there are no income tax consequences.
The following summarises dividends per share in respect of the
year ended 31 December 2016 and 31 December 2015:
Year ended 31 December
2016 2015
p p
----- -----
Interim - approved and paid 6.80 6.61
Final - proposed/paid 12.69 12.33
----- -----
Total 19.49 18.94
----- -----
7. Related parties
(a) Identity of related parties
The shares of the company were widely held and no single
shareholder exercised significant influence or control over the
company.
The company has related party relationships with:
(i) key management personnel who comprise only the directors of the company;
(ii) its subsidiary companies;
(iii) its associated company;
(iv) other companies over which the directors have significant
influence; and
(v) transactions with persons related to key management
personnel.
(b) Related party transactions
(i) Transactions with key management personnel.
Key management personnel comprise of the directors of the
company. There are no executive officers other than certain of the
directors. Key management compensation is as follows:
2016 2015
GBP000 GBP000
----------------------------- ------- -------
Short-term employee benefits 1,849 1,713
Post-employment benefits 84 71
Total 1,933 1,784
----------------------------- ------- -------
In addition to their salaries the company also provides non-cash
benefits to directors, and contributes to a post employment defined
contribution pension plan on their behalf, or where regulatory
contribution limits are reached, pay an equivalent amount as an
addition to base salary.
The following amounts were payable to directors in respect of
bonuses and incentives:
2016 2015
GBP000 GBP000
------------------------------------------------------------------------- ------- -------
Annual bonus scheme (included in the short-term employee benefits above) 521 495
------------------------------------------------------------------------- ------- -------
These amounts have been included in Accrued Expenses.
The amounts payable under the annual bonus scheme were payable
within one year.
(ii) Transactions with subsidiaries
The company undertakes centralised administration functions, the
costs of which it charges back to its operating subsidiaries. The
following amounts which effectively comprised a recovery of
expenses at no mark up were credited to the Consolidated Statement
of Comprehensive Income of the company for the respective
periods:
Year ended 31 December
2016 2015
GBP000 GBP000
----------------------- ------- -------
Recovery of expenses 3,470 3,054
----------------------- ------- -------
(iii) Transactions with associate
Movestic Livförsäkring AB and its associate Modernac SA
Year ended 31 December
2016 2015
GBP000 GBP000
--------------------------------------------- ------- -------
Reinsurance premiums paid (9,245) (8,456)
Reinsurance recoveries received 4,983 4,200
Reinsurance commission received 1,761 1,570
--------------------------------------------- ------- -------
(2,501) (2,686)
--------------------------------------------- ------- -------
Amounts outstanding as at balance sheet date (3,570) (5,321)
--------------------------------------------- ------- -------
Movestic Livförsäkring AB had the following amounts outstanding
at the balance sheet date:
2016 2015
Amounts owed by Amounts owed to Amounts owed by Amounts owed to
associate associate associate associate
GBP000 GBP000 GBP000 GBP000
-------------- ------------------------ ------------------------ ------------------------ ------------------------
Modernac S.A. - 3,570 - 5,321
-------------- ------------------------ ------------------------ ------------------------ ------------------------
These amounts have been included in other payables.
(iv) Transactions with persons related to key management
personnel
During the year, the company engaged the professional services
of Clare Rimmington and Trisha Hughes, who are related to David
Rimmington and Frank Hughes respectively.
Clare Rimmington is an on-line marketing expert with many years
of experience developing and managing web based solutions in the
Financial Services sector. Trisha Hughes has many years of project
management experience including managing projects in the Financial
Services sector. Their engagements are deemed to have been on terms
that are more beneficial to Chesnara than would need to have been
offered in an open consultancy market.
In the year an amount of GBP11,830 was paid by the company to
Clare Rimmington for web-site related consultancy services. In
addition, an amount of GBP65,610 was paid to Trisha Hughes for
business consultancy services. These amounts have been included in
administration expenses.
8. Post balance sheet event
On 24 November 2016 the company announced its proposed
acquisition of Legal & General Nederland Levensverzekering
Maatschappij N.V. At the time of the announcement the completion of
the acquisition was subject to certain conditions being met. These
included obtaining a declaration of no objection from the Dutch
regulator, De Nederlandsche Bank (DNB), and completing the Works
Council consultation process in the Netherlands. A declaration of
no objection was received by DNB on 30 March 2017 and the
consultation process with the Works Council of Legal & General
Nederland has now been completed. The acquisition is expected to be
completed by 6 April 2017 and therefore at the time of signing
these financial statements the acquisition has not yet completed.
As such full disclosures in accordance with IFRS 3 "Business
combinations" will be reported in the next set of financial
statements following completion.
The Prospectus and Notice of EGM that was issued on 24 November
2016 reported the following key financial metrics in relation to
the proposed acquisition:
Consideration:
The headline consideration for the Acquisition is EUR160
million, to be paid in cash. The Acquisition consideration is
proposed to be financed by a combination of a Firm Placing and
Placing and Open Offer to raise in aggregate approximately GBP70
million (before expenses), New Debt Facilities totalling GBP100.2
million (GBP40 million and EUR71 million), which replace an
existing debt facility of GBP52.8 million and raises GBP47.4
million of incremental debt and the balance from Chesnara's
existing cash resources. In addition to the headline consideration,
deferred capital related consideration will accrue from 1 October
2016 to the date of completion of the Acquisition, which is
expected to occur during the first quarter of 2017. The company has
calculated the maximum interest payable to be EUR2.3 million.
Key metrics:
Key Legal & General Nederland financial metrics at 30 June
2016 were as follows:
- EUR219.8 million of Solvency II own funds;
- EUR2.2 billion of funds under management;
- Approximately 170,600 policies;
- Solvency ratio of 219 per cent; and
- IFRS net assets of EUR138.6 million.
GLOSSARY
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches between assets
and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for measuring the annual
equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
Own Funds Own Funds - in accordance with the UK's regulatory regime for insurers it is the sum of the
individual capital resources for each of the regulated related undertakings less the
book-value
of investments by the company in those capital resources.
SCR In accordance with the UK's regulatory regime for insurers it is the sum of individual
capital
resource requirements for the insurer and each of its regulated undertakings
Directors or Board The directors of the company as at the date of this document whose names are set out above.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the regulator of our
Dutch
subsidiary,
DPF Discretionary Participation Feature - A contractual right under an insurance contract to
receive,
as a supplement to guaranteed benefits, additional benefits whose amount or timing is
contractually
at the discretion of the issuer.
Dutch Business Waard Group, consisting of Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V.
and Tadas Verzekeringen B.V.
EcV Economic Value.
FCA Financial Conduct Authority.
FI Finansinspektionen, being the Swedish Financial Supervisory Authority.
Form of Proxy The form of proxy relating to the General Meeting being sent to Shareholders with this
document.
FSMA The Financial Services and Markets Act 2000 of England and Wales, as amended.
Group Own Funds In accordance with the UK's regulatory regime for insurers it is the sum of the individual
capital resources for each of the regulated related undertakings less the book-value of
investments
by the group in those capital resources.
Group SCR In accordance with the UK's regulatory regime for insurers it is the sum of individual
capital
resource requirements for the insurer and each of its regulated undertakings.
Cash Generation This represents the operational cash that has been generated in the period. The cash
generating
capacity of the group is largely a function of the movement in the solvency position of the
insurance subsidiaries within the group, and takes account of the buffers that management
has set to hold over and above the solvency requirements imposed by our regulators.
Group The company and its existing subsidiary undertakings.
HCL HCL Insurance BPO Services Limited.
IFRS International Financial Reporting Standards.
IFA Independent Financial Adviser.
KPI Key performance indicator.
LGN LGN or Legal and General Nederland refers to the legal entity Legal & General Nederland
Levensverzekering
Maatschappij N.V, which Chesnara announced its intention to acquire in November 2016.
London Stock Exchange London Stock Exchange plc.
LTI Long-Term Incentive Scheme - A reward system designed to incentivise executive directors'
long-term performance.
Movestic Movestic Livförsäkring AB.
Modernac Modernac SA, an associated company which is 49% owned by Movestic.
Official List The Official List of the Financial Conduct Authority.
Ordinary Shares Ordinary shares of five pence each in the capital of the company.
ORSA Own Risk and Solvency Assessment.
PRA Prudential Regulation Authority.
QRT Quantitative Reporting Template.
ReAssure ReAssure Limited.
Resolution The resolution set out in the notice of General Meeting set out in this document.
RMF Risk Management Framework.
Shareholder(s) Holder(s) of Ordinary Shares.
Solvency II A fundamental review of the capital adequacy regime for the European insurance industry.
Solvency
II aims to establish a set of EU-wide capital requirements and risk management standards and
has replaced the Solvency I requirements.
STI Short-Term Incentive Scheme - A reward system designed to incentivise executive directors'
short-term performance.
Swedish Business Movestic and its subsidiaries and associated companies.
S&P Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
TCF Treating Customers Fairly - a central PRA principle that aims to ensure an efficient and
effective
market and thereby help policyholders achieve fair outcomes.
TSR Total Shareholder Return, measured with reference to both dividends and capital growth.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK Business CA, S&P and CALH.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR DBLFXDXFFBBV
(END) Dow Jones Newswires
March 31, 2017 02:00 ET (06:00 GMT)
Chesnara (LSE:CSN)
Historical Stock Chart
From Mar 2024 to Apr 2024
Chesnara (LSE:CSN)
Historical Stock Chart
From Apr 2023 to Apr 2024