TIDMCSN
RNS Number : 2038Z
Chesnara PLC
30 August 2018
Chesnara plc
Strength in numbers: Strong cash generation in UK, supported by
positive contributions from Sweden and the Netherlands
During the first half of 2018, a period in which equity markets
remained broadly unchanged, we continued to generate more than
sufficient cash to fund the dividend strategy, though we saw a fall
in our Economic Value following the payment of the final 2017
dividend and foreign exchange losses as a result of a weakening of
the Swedish krona.
Financial Highlights
-- 3.00% increase in interim dividend compared with 2017
The results in the period support the continued growth of the
dividend to 7.21p per share (2017 interim: 7.00p per share).
-- Group cash generation of GBP48.6m (six months ended 30 June 2017: GBP(2.7)m (Note 1) )
It is useful to note that both the 2018 figure and the prior
year comparison were impacted by particularly material items. The
2018 result benefits from a GBP26.8m release of surplus previously
constrained in the UK with-profits funds. The 2017 comparison
includes a GBP55.3m adverse effect of completing the acquisition of
L&G Netherland.
-- Divisional cash generation of GBP53.1m (six months ended 30 June 2017: GBP54.8m) (Note 2)
All divisions have made positive contributions, with the
exception of Scildon, where operational gains were offset by the
impact of losses on Italian bond holdings. The 2018 UK divisional
result benefits from a GBP26.8m release of surplus previously
constrained in the with profit fund.
-- Group solvency ratio of 157% (31 December 2017: 146%)
We continue to be well capitalised at both group and subsidiary
level.
-- Economic Value (EcV) of GBP700.8m (31 December 2017: GBP723.1m) (Note 3)
The movement is stated after recognising GBP19.6m of dividend
payments and a foreign exchange loss of GBP16.4m during the
period.
-- EcV earnings net of tax of GBP13.6m (six months ended 30 June 2017: GBP105.8m)
The 2017 result includes a non-recurring GBP65.4m gain arising
from the L&G Netherland acquisition.
-- EcV new business contribution of GBP5.3m (six months ended 30 June 2017: GBP7.1m)
Solid new business profits have emerged from Movestic. Scildon's
new business operation is not generating sufficient profit although
positive volume trends and the recent launch of a new mortgage term
product should begin to address this issue.
-- IFRS profit before tax of GBP26.5m (six months ended 30 June 2017: GBP51.6m)
The 2017 result includes a GBP20.7m gain on the acquisition of
L&G Netherland. The underlying core operating profit improved
to GBP27.3m (2017 interims: GBP16.6m). Economic loss of GBP0.8m
compared to a corresponding profit of GBP14.3m in the first half of
2017.
-- IFRS Total Comprehensive Income of GBP14.9m (six months ended 30 June 2017: GBP53.8m)
This includes a foreign exchange loss of GBP6.9m (2017: GBP7.1m
gain). The 2017 result includes the aforementioned GBP20.7m gain on
the acquisition of L&G Netherland.
Strategic delivery highlights
-- Good progress with Scildon development programme
We have made good progress with the post-acquisition development
programme.
John Deane, Chief Executive said:
"I am pleased to report that during the first half of 2018, a
period in which equity markets remained broadly unchanged, we
continued to generate more than sufficient cash to fund the
dividend strategy, though we saw a fall in our Economic Value
following the payment of the final 2017 dividend and foreign
exchange losses as a result of a weakening of the Swedish
krona.
The strong 2017 results were most welcome as they reflected the
benefits that can arise from successful acquisitions and from
positive market conditions, but it is equally important that the
business, as in the first half of this year, can generate
sufficient cash in the absence of acquisitions and without the
assistance of economic tailwinds.
We have made good progress with the Scildon development
programme and I am pleased to report a 29% increase in the sales of
Term contracts compared to the first half of 2017. There is more to
do and time is required but I am encouraged by the improvements
during the year."
Note 1 A GBP48.9m one-off positive impact in respect of equity
raised ahead of completion of the acquisition of L&G
Netherland, was included in the 2016 result. We highlighted this as
a temporary impact in our 2016 accounts. As expected, on
completion, the 2017 result included a consequential negative
impact of GBP55.3m. The end to end impact of the acquisition of
L&G Netherland resulted in a day 1 surplus cash reduction of
GBP6.4m. Our reported group cash generation of GBP46.2m for the six
months to 30 June 2017 was reported on an adjusted basis. The 2017
comparative has subsequently been re-stated to reflect the reversal
of the GBP48.9m positive equity raise impact and aligns the
half-year result with the basis presented in our 2017 Annual Report
and Accounts.
Note 2 Cash generation represents the movement in distributable
surplus during the period. Distributable surplus is defined as
being the excess of Solvency II own funds over and above the
group's internal capital management policies, which have been
prepared in the context of the solvency capital requirements
imposed by our regulators.
Note 3 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 with-profit 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 rules, in our view, overstate the cost of capital.
The Board approved this statement on 29 August 2018.
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'
and Scildon NV ('Scildon').
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 GBP63.5m. 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 Protection Life 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.
Scildon (previously L&G Netherland) is a leading provider in
the Dutch market of risk and investment-linked products, sold
through brokers to high net worth customers. It also offers a
defined contribution group pension platform focussing on Dutch
SMEs. The company was acquired in April 2017 from Legal and
General.
Further details are available on the Company's website
(www.chesnara.co.uk).
CAUTIONARY STATEMENT
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.
HIGHLIGHTS
FINANCIAL
IFRS PRE-TAX PROFIT GBP26.5M SIX MONTHSED 30 JUNE 2017
GBP51.6M
The 2017 result includes a GBP20.7m gain on acquisition of Legal
& General Nederland.
IFRS TOTAL COMPREHENSIVE INCOME GBP14.9M SIX MONTHSED 30 JUNE
2017 GBP53.8M
The 2018 result includes a foreign exchange loss of GBP6.9m
(2017: gain of GBP7.1m). The 2017 result includes a GBP20.7m gain
on acquisition of Legal & General Nederland.
GROUP SOLVENCY 157% 31 DECEMBER 2017 146%
We are well capitalised at both group and subsidiary level and
under Solvency II have not used any elements of the long term
guarantee package, including transitional arrangements.
ECONOMIC VALUE GBP700.8M 31 DECEMBER 2017 GBP723.1M
Movement in the period is stated after dividend distributions of
GBP19.6m and includes a foreign exchange loss of GBP16.4m.
ECONOMIC VALUE EARNINGS GBP13.6M SIX MONTHSED 30 JUNE 2017
GBP105.8M
The 2017 result includes a non-recurring GBP65.4m gain arising
on the acquisition of Legal & General Nederland.
NEW BUSINESS PROFIT GBP5.3M SIX MONTHSED 30 JUNE 2017
GBP7.1M
GROUP CASH GENERATION GBP48.6M SIX MONTHSED 30 JUNE 2017
GBP(2.7)M*
The cash generation figures can be impacted by one-off items.
The 2018 result benefits from a GBP26.8m release of surplus
previously constrained in the UK with-profit fund. The 2017
comparison includes a GBP55.3m adverse effect of completing the
acquisition of Legal & General Nederland.
* restated - see "Cash generation" section below for further
detail.
DIVISIONAL CASH GENERATION GBP53.1M SIX MONTHSED 30 JUNE 2017
GBP54.8M
The 2018 group cash result benefits from a GBP26.8m release of
previously constrained surplus within the UK with-profit fund.
OPERATIONAL AND STRATEGIC
INTERIM DIVID INCREASE
Interim dividend increased by 3.00% to 7.21p per share (2017:
7.00p interim and 13.07p final).
LIMITED EQUITY GROWTH AND WEAKENING SWEDISH KRONA
A more subdued equity market performance in the period compared
with the same period in 2017. Falling Italian bond values have
adversely impacted Scildon investment performance. Swedish krona
has weakened against Sterling by 6% since the start of the
year.
GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN
The 'impact assessment' phase of the group and divisional IFRS
17 programme is in progress and will complete in Q3. The multi-year
design and implementation phase will begin later in 2018.
MEASURING OUR PERFORMANCE
HOW WE MEASURE PERFORMANCE WITHIN THIS HALF YEAR REPORT
Throughout this Half Year Report, we use measures to assess and
report how well we have performed. The range of measures is broad
and includes many measures that are not based on IFRS. The
financial analysis of a life and pensions business also needs to
recognise the importance of Solvency II figures, the basis of
regulatory solvency. In addition the measures aim to assess
performance from the perspective of all stakeholders.
FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS
Whilst the IFRS results form the core of the Half Year Report
and hence retain prominence as a key financial performance metric,
there is a general acceptance that the IFRS results in isolation do
not adequately recognise the wider financial performance of a
typical life and pensions business.
In light of the limitations of IFRS reporting, this Half Year
Report adopts several Alternative Performance Measures (APMs) to
present a more meaningful view of the financial position and
performance. The non-IFRS APMs have at their heart the Solvency II
valuation known as Own Funds and as such, all major financial APMs
are derived from a defined rules-based regime. The list below shows
the core financial metrics that sit alongside the IFRS results,
together with their associated KPIs and interested parties.
FINANCIAL STATEMENT KPIS:
- IFRS profits
- IFRS net assets
ADDITIONAL METRICS:
- Solvency
-- Own funds
-- Solvency capital requirement (SCR)
-- SCR plus management buffer
-- Solvency position (absolute value)
-- Solvency position ratio
- Cash generation
-- Group cash generation
-- Divisional cash generation
- Economic Value
-- Balance sheet
-- Earnings
SOLVENCY
Solvency is a fundamental financial measure which is of
paramount importance to investors and policyholders. It represents
the relationship between the value of the business as measured on a
Solvency II basis and the capital the business is required to hold
- the Solvency Capital Requirement (SCR). Solvency can be reported
as an absolute surplus value or as a ratio.
Solvency gives policyholders comfort regarding the security of
their provider. This is also the case for investors together with
giving them a sense of the level of potential surplus available to
invest in the business or distribute as dividends (subject to other
considerations and approvals).
ECONOMIC VALUE
Economic Value (EcV) is deemed to be a more meaningful measure
of the long term value of the group and it generally approximates
to Embedded Value reporting, which was used before the introduction
of SII. In essence, the IFRS balance sheet is not generally deemed
to represent a fair commercial value of our business as it does not
fully recognise the impact of future profit expectations of long
term policies.
EcV is derived from Solvency II Own Funds and recognises the
impact of future profit expectations from existing business.
CASH GENERATION
Cash generation is a measure of how much distributable surplus
has been generated in the period, which supports the ability of the
group to pay its dividends. It is driven by the change in solvency
surplus, taking into account board-approved capital management
policies.
OPERATIONAL AND OTHER PERFORMANCE MEASURES
In addition to the financial performance measures, the Half Year
Report includes measures that consider and assess performance all
of our key stakeholder groups. The table below summarises the
performance measures adopted throughout this report.
MEASURE WHAT IS IT AND WHY IS IT IMPORTANT?
Customer How well we service our customers is of paramount importance
service levels and so through various means we aim to assess customer service
levels. The business reviews within the Half Year Report
refer to a number of indicators of customer service levels.
====================================================================
Broker satisfaction Broker satisfaction is important because they sell new policies,
provide ongoing service to their customers and influence
book persistency. We include several measures within the
Half Year Report, including direct broker assessment ratings
for Movestic and general assessment of how our brands fair
in industry performance awards in the Netherlands.
====================================================================
Policy investment This is a measure of how the assets are performing that
performance underpin policyholder returns. It is important as it indicates
to the customer the returns that their contributions are
generating.
====================================================================
Industry This is a comparative measure of how well our investments
performance are performing against the rest of the industry, which provides
assessments valuable context to our performance.
====================================================================
Funds under This shows the value of the investments that the business
management manages. This is important because scale influences operational
sustainability in run-off books and operational efficiency
in growing books. Funds under management are also a strong
indicator of fee income.
====================================================================
Policy count Policy count is the number of policies that the group manages
on behalf of customers. This is important to show the scale
of the business, particularly to provide context to the
rate at which the closed book business is maturing. In our
open businesses, the policy count shows the net impact of
new business versus policy attrition.
====================================================================
Total shareholder This includes dividend growth and yield and shows the return
returns that an investor is generating on the shares that they hold.
It is highly important as it shows the success of the business
in translating its operations into a return for shareholders.
====================================================================
New business This shows our ability to write profitable new business
profitability which increases the value of the group. This is an important
indicator given one of our core objectives is to "enhance
value through profitable new business".
====================================================================
New business This shows our success at writing new business relative
market share to the rest of the market and is important context for considering
our success at writing new business against our target market
shares.
====================================================================
Gearing ratio The gearing is a ratio of debt to IFRS net assets and shows
the extent to which the business is funded by external debt
versus internal resources. The appropriate use of debt is
an efficient source of funding but in general Chesnara seeks
to avoid becoming overly dependent on permanent debt on
the balance sheet.
====================================================================
Knowledge, This is a key measure given our view that the quality, balance
skills and and effectiveness of the Board of Directors has a direct
experience bearing on delivering positive outcomes to all stakeholders.
of the Board
of Directors
====================================================================
CHAIRMAN'S STATEMENT
I am pleased to report that during the first half of 2018, a
period in which equity markets remained broadly unchanged, we
continued to generate more than sufficient cash to fund the
dividend strategy, though we saw a fall in our Economic Value
following the payment of the final 2017 dividend and foreign
exchange losses as a result of a weakening of the Swedish
krona.
The strong 2017 results were most welcome as they reflected the
benefits that can arise from successful acquisitions and from
positive market conditions, but it is equally important that the
business, as in the first half of this year, can generate
sufficient cash in the absence of acquisitions and without the
assistance of economic tailwinds.
We have made good progress with the Scildon development
programme and I am pleased to report a 29% increase in the sales of
term contracts compared to the first half of 2017. There is more to
do and time is required but I am encouraged by the improvements
during the year.
Against a backdrop of continuing political uncertainty, economic
volatility and during a period of significant operational
development, the Chesnara business model has held up well.
At the heart of Chesnara's position as a reliable income stock,
the UK book has continued to generate sufficient cash to fund the
Chesnara dividend and the recent trend of Movestic making
meaningful positive cash contributions continues. Movestic's new
business profits have remained within their target range.
As we have previously reported, Scildon remains in transition
and this is reflected in its short term financial results. The
successful launch of a new mortgage term assurance product was too
late during the period to have a meaningful impact on the results.
Although a slight increase in new business volumes was reassuring,
the fact that the new business operation only made modest profits
serves to highlight the importance of successfully implementing the
Scildon improvement initiatives.
The resilience of the established business units creates a
strong foundation to support the continued improvement programme in
Scildon.
The headline results for the first half of 2018 generally suffer
by comparison to the first half of 2017. The 2017 results were
unusually strong due to a combination of non-recurring items
(including the completion of the acquisition of Legal & General
Nederland) and highly beneficial economic conditions. However,
total cash generated exceeds the cost of the full annual 2017
dividend.
In addition to funding an attractive dividend strategy, we have
a long-term objective to at least protect the post dividend
Economic Value of the group. This means that over time we aim to
create value at least to the level of the annual dividend. Due to
the sensitivity of the Economic Value to key investment market
variables, it can be particularly difficult to meet this Economic
Value protection objective in periods where conditions are adverse.
Also, the dividend outflow strain is concentrated to the first half
of the year. Economic Value profits during the period were
insufficient to cover the payment of the final 2017 dividend,
largely due to the adverse impact of a Swedish Krona weakening
against Sterling. This does not give rise to any particular undue
concern, with management's focus primarily being on managing the
core operating results of the group.
MAXIMISE VALUE FROM EXISTING BUSINESS
=========================================
Divisional cash generation of GBP53.1m.
When assessed in terms of levels of cash generated in the period
we have, with the exception of Scildon, delivered broadly in line
with expectations. GBP16.1m of cash emerged from the UK division
during the period which, together with GBP26.8m of previously
constrained surplus released from the with-profits fund, resulted
in total cash significantly in excess of recent dividend payments.
Movestic has increased its level of surplus resulting in a further
GBP7.3m of cash generation. Scildon has reported negative cash
generation of GBP2.3m. This is primarily due to the impact of
valuation pressures on its fixed interest investments. The result
in the period does not in itself impact our view regarding the
future cash generation of the business.
Value growth in the period has been more muted. EcV earnings of
GBP13.6m have been delivered, which includes a loss of GBP6.5m
arising in Scildon due to the aforementioned investment value
movements. Foreign exchange losses of GBP16.4m have also emerged in
the period, largely as a result of a weakening of Swedish krona.
These factors, coupled with the payment of the year end dividend of
GBP19.6m have resulted in a reduction in EcV since the start of the
year of 3%.
ACQUIRE LIFE AND PENSIONS BUSINESSES
=============================================================================================
Our post acquisition plans with Scildon are continuing to be delivered and remain on track.
THE OUTLOOK REMAINS POSITIVE. ACQUISITION ACTIVITY CONTINUES TO
TAKE PLACE IN OUR TARGET MARKETS, WITH OPPORTUNITIES CONTINUING TO
EMERGE.
During the period we finalised arrangements to form a broader
debt syndicate and this, together with increases in solvency
surplus, means we are in a strong position to fund future
acquisitions where they meet our assessment criteria.
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
=========================================================================
New business profits from Movestic of GBP4.7m and GBP0.6m from Scildon.
Chesnara writes new business in both Sweden and the Netherlands.
The ultimate aim is to create sufficient annual profits, either
through returns on the existing business, or through writing new
business, to replace the proportion of Economic Value lost by way
of dividend payments. Movestic continues to deliver within its
target profit range with a profit for the six months to 30 June
2018 of GBP4.7m. This represents a slight reduction compared to
2017 mainly due to adopting a more prudent assessment of the
profitability of increments to existing policies. Profits from new
contracts remain broadly consistent with 2017.
Scildon are not currently generating sufficient new business
profits. This is very much in line with our expectation at this
stage and the need to drive profitability improvements over the
coming years was factored into our acquisition price and has been
clearly reported to shareholders. The expected cost of the
improvement programme has been fully provided for.
I will take this opportunity to provide a little more detail
about Scildon's recent performance and importantly the status of
transition plans. Whilst new business volumes have actually
increased slightly compared to the same period of 2017, the
associated modest new business result has yet to reflect the
expected positive impact of the improvement programme. Scildon
successfully launched a new mortgage term assurance product towards
the back end of the half year period.
SOLID NEW BUSINESS PROFITS HAVE EMERGED FROM MOVESTIC IN A
CHALLENGING MARKET. SCILDON'S NEW BUSINESS OPERATION IS NOT
GENERATING SUFFICIENT PROFIT AND THE FOCUS OVER THE COMING YEARS IS
TO ADDRESS THIS ISSUE.
The successful launch of a new mortgage term assurance product
is a first positive step on our Scildon improvement plan.
Solvency
The group continues to show a robust solvency position, with a
solvency ratio of 157% at 30 June 2018 (31 December 2017: 146%). A
large contributing factor to this increase is a GBP26.8m release of
capital from the UK's with profit funds, which positively
benefitted own funds in the period. The closing solvency position
is stated after recognising the GBP10.8m cost of the interim
dividend, which will be paid in October 2018.
Regulation and governance
IFRS 17
I have previously commented on the scale of the task, to both
Chesnara and the wider industry, associated with delivering the new
insurance accounting standard, IFRS 17. Our programme has
progressed well in the period, with our immediate focus being on
delivering an impact assessment. This deals with an initial early
view on the technical application of the standard to the group and
its associated financial and operational impacts. This initial work
is expected to conclude during Q3 this year, and then transition to
the implementation phase. We have previously provided for the cost
of delivering the programme within our actuarial expense reserves,
and these estimates have remained unchanged.
We continue to be of the view that IFRS 17 should not have any
significant bearing on the commercial assessment of Chesnara, with
our expectation that capital management decision making will
continue to be driven by regulatory solvency and Economic Value as
opposed to our IFRS results and position.
Regulatory compliance
Compliance with regulation remains a priority for the group. We
have continued to maintain a positive and constructive relationship
with regulatory bodies across the group. During the period we have
delivered our GDPR readiness programmes, with the new rules coming
into force on 25 May 2018.
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.
Discussions continue and given the narrow scope of the
investigation we retain our opinion that the outcome from the
investigation will not have a material impact on the company.
Governance framework
We continue to place great importance on ensuring our risk and
governance system is fit for purpose. Work has continued to
progress on ensuring that Scildon's risk and governance monitoring
and reporting routines are in line with the wider group's.
AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE
WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL
REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS.
Corporate purpose
We assess our corporate purpose by considering eight aspects of
our business and by looking at the business from the perspective of
all stakeholders.
Business model
- Our acquisition strategy is built upon long term commitments
to any markets we operate in. Our consolidation model therefore
offers a genuine solution to the challenges certain insurance
markets face.
The products and services we provide
- We help protect people and their dependants through the
provision of life, health and disability cover or by providing
savings and pensions which help customers with their financial
needs in the future. We seek to provide customers and their
advisers with helpful and reliable support.
Sustainability
- Driven in part by consumer demand, especially in our Dutch and
Swedish operations, there is a continued positive shift towards an
increased focus of sustainable fund investments.
- The nature of our business is such that in general we have a relatively low carbon footprint.
Shareholder proposition
- Investors, especially in a low interest rate environment do
have a genuine need for income and hence our investor proposition,
track record and responsible approach provides an investment
opportunity for individuals seeking sustainable equity based
income.
I AM PLEASED TO REPORT A 3% INCREASE IN THE INTERIM DIVID
Taxation
- As detailed in our tax strategy, we adopt a responsible and
open approach to taxation and, as a consequence, pay the
appropriate taxes throughout the group.
Staff
- We provide high quality jobs with competitive remuneration and
good working conditions both directly and through outsourced
arrangements.
Suppliers and partners
- We seek mutually respectful and sustainable relationships with
our suppliers. We believe that supplier relationships only work in
the long term if the terms and conditions are mutually beneficial.
Our instinct and natural preference is to maintain established long
term supplier relationships where they remain commercially
competitive and operationally viable.
Local community
- In the UK our investment and continued commitment to the North
West and Preston in particular creates high quality financial
services roles outside of London.
- All divisions support local community initiatives to the
extent deemed appropriate given our financial responsibilities as a
PLC.
OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE
PURPOSE.
Outlook and Brexit
I remain optimistic that Chesnara can continue to deliver
against its strategic objectives, which in turn fund our well
established dividend strategy. The ability to generate cash in less
economically beneficial conditions, as has been the case during the
first half of 2018, further supports my optimism.
In particular, the UK business remains a robust source of cash,
with additional potential to take management actions to enhance the
core cash if required. Movestic now has the scale to continue
contributing to the cash position. Scildon has significant surplus
capital and despite the negative cash emerging during the period,
is also expected to be cash generative on an ongoing basis.
We now have sufficient scale and presence in both the UK and the
Netherlands to continue our focus on acquisition activity in those
territories in a disciplined manner. We also remain open minded
about new territories but the benefits would need to outweigh the
inherent challenge of adding another regulatory environment into
our business model. Our balance sheet has further capacity for debt
and having completed a debt syndication process, we are in a strong
position to take advantage of the balance sheet capacity. We have
significant levels of surplus capital and recent experience
suggests we retain shareholder support for further equity for the
right deal. This together with operational capacity means we remain
well positioned to act should an opportunity arise that meets our
stringent price and risk profile criteria.
Movestic has become an established profitable new business
operation. We recognise that current new business profits from
Scildon are not sufficient. However, the fact that we have recorded
a modest profit calculated on a suitably stringent basis of
assessment, together with the expected positive impact of the newly
launched mortgage term protection contract does create an improved
platform upon which we aim to deliver further profit growth over
the coming years.
The structure of the group, with established regulated entities
in several European countries, together with the fact we do not
trade or share resource across territories, means I remain of the
view that whatever the outcome from the Brexit negotiations, we
expect it to have little direct impact on our business model.
In light of the above I remain confident that Chesnara is well
positioned to continue to provide value to policyholders and
shareholders.
Peter Mason
Chairman
29 August 2018
BUSINESS REVIEW
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to policyholders and
shareholders. The strategy is delivered through a proven business
model underpinned by a robust risk management and governance
framework and our established culture & values.
MAXIMISE VALUE FROM EXISTING ACQUIRE LIFE AND PENSION ENHANCE VALUE THROUGH PROFITABLE
BUSINESS BUSINESSES 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 c287,000 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.
The UK has continued to progress its objectives in line with
plans - the customer strategy implementation plan continues to be
delivered and the division remains focused on good governance of
the business. The results for the period show strong cash
generation and underlying Economic Value growth. Management will
continue to focus on these areas, coupled with identifying and
delivering capital management initiatives and supporting the group
in relation to any UK-based acquisitions.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
- As a closed book, the division creates value through managing
the following key value drivers: costs; policy attrition;
investment return; and reinsurance strategy.
- In general, surplus regulatory capital emerges as the book
runs off. The level of required capital is closely linked to the
level of risk to which the division is exposed. 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 maintaining value is ensuring that the
division is governed well from a regulatory and customer
perspective.
INITIATIVES AND PROGRESS IN 2018
- EcV earnings of GBP8.4m in the period.
- Cash of GBP42.9m has been generated. This includes an
exceptional cash generation of GBP26.8m arising from releasing
trapped capital from the division's two ring-fenced with profit
funds. Full consideration was given to the protection of the
company's with-profit customers prior to this capital release,
which was approved by the Financial Conduct Authority.
- IFRS profit of GBP27.6m. This includes the positive impact of
GBP8.6m arising from a refinement to the way policyholder tax
obligations are reserved for.
- The results have benefitted from improvements in the
look-through of our asset holdings, resulting in a reduction in
required capital in the period.
FUTURE PRIORITIES
- Continue to focus on initiatives to optimise the balance
between value growth and surplus capital availability.
KPIs
Continued underlying growth in economic value after removing the
impact of dividends
GBPm 2014 2015 2016 2017 Jun 2018
====================== ====== ====== ====== ====== =========
Reported EEV / EcV 271.8 232.2 239.6 255.5 231.9
Cumulative dividends 65.0 95.5 125.5 157.5
====================== ====== ====== ====== ====== =========
Total 271.8 297.2 335.1 381.0 389.4
====================== ====== ====== ====== ====== =========
Cash generation of GBP42.9m, which includes a one-off surplus
transfer from WP funds, continues to support the group's dividend
strategy.
GBPm 2014 2015 2016 2017 Jun 2018
================= ===== ===== ===== ===== =========
Cash generation 50.9 42.5 21.3 34.5 42.9
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
- Treating customers fairly is one of our primary
responsibilities. 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 customer expectations.
INITIATIVES AND PROGRESS IN 2018
- The division's customer strategy implementation programme has
progressed well and is on track. The programme focuses on
developing our business as usual processes to ensure they remain up
to date with the expectations of policyholders and regulators.
Specific activity has included developing enhanced policyholder
communications, such as pension annual statements, ready for
implementation later this year. The refreshed communications have
drawn from a combination of customer research and expert
guidance.
- A refreshed Countrywide Assured website was launched during
the period. A second phase update is expected later this year.
- Our Vulnerable Customer Strategy has been implemented,
providing additional support and reasonable adjustments to policy
and processes in order to ensure fair customer outcomes.
- As part of our customer engagement programme we have been
progressing our 'goneaways' programme to help re-connect with our
customers.
- Our main managed funds have out-performed benchmarks.
FUTURE PRIORITIES
- Implement and deliver updated customer communications.
- Deliver identified improvements to customer claims processes.
- Continue with customer 'goneaways' work.
- Implement the second phase of the CA website development,
enhancing both engagement with customers and also their access to
information.
KPIs
Policyholder fund performance
12 months ended 30 Jun 2018 12 months ended 30 Jun 2017
CA Pension Managed 6.4% 9.8%
CWA Balanced Managed Pension 6.3% 9.5%
S&P Managed Pension 8.4% 13.6%
Benchmark - ABI Mixed Inv 40%-85% shares 4.5% 9.5%
Our main managed funds continue to out-perform their
benchmark.
GOVERNANCE
BACKGROUND INFORMATION
- Maintaining effective governance and a constructive
relationship with regulators underpins the delivery of the
division's strategic plans.
- Having 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 2018
- The General Data Protection Regulation (GDPR) project was
completed prior to the rules coming into force on 25 May 2018.
- The division's IFRS 17 project is underway, with the initial
impact assessment expected to conclude in Q3.
- The FCA's investigation into the level of disclosure of exit
charges to customers, which was announced in March 2016, remains
open. Full ongoing support has been provided to the FCA. We have
completed nine separate information requests to date and understand
that the FCA is reviewing these. We believe that our disclosures to
customers were consistent with that of the industry and met the
regulatory requirements for the period covered by the
investigation.
FUTURE PRIORITIES
- Ensure we continue to stay on top of the regulatory change
agenda. For example, there remains ongoing regulatory focus on the
pensions and retirement income sectors, and the team is monitoring
developments to ensure that we respond to any future consultation
papers and/or policy statements as appropriate. The new Senior
Managers & Certification Regime, designed to strengthen
individual accountability in insurance, will apply to the business
from December 2018.
- Delivery of the IFRS 17 programme will continue and will require significant resource.
KPIs
SOLVENCY RATIO: 168%
Solvency remains robust. The surplus generated in the period
increases the solvency position from 130% to 168%.
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2017 surplus 38.6 130%
Surplus generation 40.6
30 Jun 2018 surplus 79.2 168%
======================== ===== =========
BUSINESS REVIEW | SWEDEN
Movestic is a life and pensions business based in Sweden, and is
open to 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
brokers and is well-rated within the broker community.
Movestic has delivered a positive set of results across key
financial metrics. Its new business operation continues to add
value to the group and assets under management growth continues to
support the division in achieving its ambitions on scale. The
division will continue to focus on it's IT streamlining plans,
which are anticipated to bring cost efficiencies and improvements
in broker and policyholder experience.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
- Movestic creates value predominantly by generating growth in
the unit linked assets under management (AuM) and by optimising the
income that the assets generate, whilst assuring a high quality
customer proposition. 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.
INITIATIVES AND PROGRESS IN 2018
- EcV earnings of GBP10.6m in the period.
- Cash of GBP10.6m has been generated, on constant exchange
rates (GBP7.3m post foreign exchange retranslation).
- IFRS profit of GBP4.7m.
- Assets under management have grown by 6.7% in the period, on constant exchange rates.
- The transfer market remains intense. Policy transfers in and
out being higher than expected with transfers in 20% higher than
transfers out.
- The division has embarked on an operational 'right-sizing'
programme, designed to improve efficiencies within the business and
hence combat the impact of price pressure. This has progressed
according to plan and is expected to deliver future expense savings
which are not as yet recognised in the financial results.
- The Swedish Krona has weakened by 6.2% during the period,
resulting in retranslation losses being reported in EcV and cash
generation. During 2017 the Swedish Krona strengthened by 0.6%.
- While equity markets closed in line with the start of the
year, they have been relatively volatile during the period.
FUTURE PRIORITIES
- Continue the journey of digitising and automating processes,
with a view to improving both efficiency and control.
- Continue with the re-launch of risk and health business,
including a new claims system being launched later in the year.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Growth in assets under management
GBPbn 2014 2015 2016 2017 Jun 2018
=============================== ===== ===== ===== ===== =========
Total assets under management 1.9 2.1 2.4 2.7 2.9
=============================== ===== ===== ===== ===== =========
GBPbn
===================== ======
31 December 2017 2.7
New client cashflow 0.08
Investment growth 0.10
30 June 2018 2.9
========================= ======
IFRS profit
GBPm 2014 2015 2016 2017 Jun 2018
============= ===== ===== ===== ===== =========
IFRS profit 3.7 7.5 9.2 9.4 4.7
Underlying value growth
GBPm 2014 2015 2016 2017 Jun 2018
====================== ====== ====== ====== ====== =========
Reported EEV / EcV 140.6 177.9 213.3 232.5 241.7
Cumulative dividends - - - 2.7 5.5
Total 140.6 177.9 213.3 235.2 247.2
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
- Movestic places great importance on providing quality service
to both customers and brokers, with simple, clear unit linked
products, supported by an attractive and broad investment fund
range. The aim of Movestic is to offer policyholders a range of the
best funds and management services on the market.
INITIATIVES AND PROGRESS IN 2018
- Policyholder average investment return of 3.5% in the year to
date (H1 2017: 4.8%), ahead of the market average return of
2.6%.
- Fees have been lowered in Movestic's funds from 1 May to
strengthen its customer proposition.
- The division introduced three new funds during the period,
thus improving the choice available to its customers.
FUTURE PRIORITIES
- Introduce a new fund switching process, expected to be
delivered during the second half of the year.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Broker assessment rating (out of 5)
2014 2015 2016 2017
======== ===== ===== ===== =====
Rating 3.6 3.7 3.8 3.7
POLICYHOLDER AVERAGE INVESTMENT RETURN:
3.5%
(SWEDISH STOCK MARKET 2.6%)
GOVERNANCE
BACKGROUND INFORMATION
- Movestic operates to exacting regulatory standards and adopts
a robust approach to risk management.
- Maintaining strong governance is a critical platform to
delivering the various value-enhancing initiatives planned by the
division.
INITIATIVES AND PROGRESS IN 2018
- The General Data Protection Regulation (GDPR) project was
completed prior to the rules coming into force on 25 May 2018.
- Significant progress has been made on ensuring that the
business is ready for the Insurance Distribution Directive, which
applies from 1 October 2018.
- The IFRS 17 project has progressed well, with the initial
impact assessment study expected to be completed during Q3.
FUTURE PRIORITIES
- Deliver on plans to outsource IT operations with a view to increasing efficiency.
- Deliver compliance with the new Insurance Distribution
Directive (IDD). The IDD seeks to strengthen consumer protection
and transparency within the distribution of insurance-based
products.
- Deliver IFRS 17 implementation plans.
KPIs (all comparatives have been presented using 2018 exchange
rates)
SOLVENCY RATIO: 160%
Solvency remains strong at 160%. Solvency surplus of GBP10.8m
has been generated in the period.
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2017 surplus 73.9 153%
Surplus generation 10.8
30 Jun 2018 surplus 84.7 160%
======================== ===== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
- As an "open" business, Movestic not only adds value from sales
but as it gains scale, it 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 2018
- Movestic continues to operate within its target market share range of between 10% and 15%.
- Volumes of new contracts sold have decreased compared with the
same period in 2017, although gross margin rates have improved.
- Overall new business profits have reduced compared with the
prior year. This is largely as a result of lower regular premium
increments being received compared with the same period in
2017.
FUTURE PRIORITIES
- Continue to focus on writing new business within our target range.
- Ongoing digitalisation of processes to improve broker experience.
- Focus on increasing brand awareness.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Occupational pension market share %
% 2014 2015 2016 2017
============== ===== ===== ===== =====
Market share 12.6 11.7 13.2 11.6
New business profit
GBPm 2014 2015 2016 2017 Jun 2018
===================== ===== ===== ===== ===== =========
New business profit 8.7 6.4 11.7 11.3 4.7
BUSINESS REVIEW | NETHERLANDS
Our Dutch division consists of two separate businesses; Scildon
and Waard. Scildon, acquired in 2017, is an open business, writing
new policies focusing on three product markets via a broker
network. Scildon is a well-established player in the term assurance
market, the current market leader in unit-linked savings insurance
and is a challenger brand in the Dutch defined contribution pension
insurance market. Waard manages c108,000 policies and is in
run-off, focusing on the efficient administration of its existing
book of business.
2018 has seen positives for the Dutch division, including
dividends payments to Chesnara from both Scildon and Waard. The
integration of Scildon into the group has continued in line with
its improvement plan, with key steps taken including key
organisational changes and the launch of its new mortgage term
product. Due to timing, the steps have had minimal impact on the
results thus far and in line with our expectations on acquisition,
there remains further work to do. Economic conditions in 2018 have
impacted results; however, these results do not have any bearing on
the ongoing view of the cash and profit potential from the Scildon
business.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
- Both Waard and Scildon have a common aim to make capital
available to the Chesnara group to fund further acquisitions or to
contribute to the dividend funding. Whilst their aims are common,
the dynamics by which the businesses add value differ:
o Waard is in run-off and has the benefit that the capital
requirements reduce over time in-line with the attrition of the
book.
o As an "open business" Scildon's capital position does not
benefit from book run-off. It therefore adds value and creates
surplus capital through writing new business and by efficient
operational management and capital optimisation.
INITIATIVES AND PROGRESS IN 2018
- Waard and Scildon paid dividends to Chesnara, in respect of
2017, of GBP12.9m and GBP21.7m and ended the period with healthy
solvency ratios of 602% and 228%.
- Scildon has reported an EcV loss of GBP6.5m with Waard
delivering a profit of GBP1.8m. The loss in Scildon is driven by
adverse asset valuation movements from widening credit spreads on
Italian government bonds.
- Cash generation of GBP2.9m, with GBP5.2m from Waard due to SCR
reductions, offset by a cash loss of GBP2.3m from Scildon due to
adverse market movements.
- IFRS loss of GBP1.1m largely caused by a GBP2.8m loss in
Scildon due to asset value movements.
- Developed a focused plan for Scildon to drive the improvements
in new business development, cost management and organisational
structure.
- Aligned some functions between the two Dutch businesses to
provide operational efficiencies.
FUTURE PRIORITIES
- Continue dividends from both divisions to support the group dividend.
- Continuation of the Scildon improvement plan which will
strengthen future cash generation and value growth. The two year
plans include:
o Process and value for money improvements, such as increased
levels of "straight through" processing;
o Continuation of existing IT infrastructure developments to facilitate efficient processes;
o Continual assessment of the business model to ensure an
optimal balance between returns generated versus solvency capital
requirements.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Scildon has a track record of delivering value growth enabling
dividend distribution to the parent company and paid its first
dividend to Chesnara plc in April 2018.
Scildon value growth
GBPm 2014 2015 2016 2017 Jun 2018
====================== ====== ====== ====== ====== =========
Reported EEV / EcV 268.4 240.6 223.4 220.4 191.8
Cumulative dividends - 36.3 73.4 73.4 95.5
====================== ====== ====== ====== ====== =========
Total 268.4 276.9 296.8 293.8 287.3
====================== ====== ====== ====== ====== =========
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
- Updated the Scildon service desk to enhance the 'customer journey' for IFAs and consumers.
- Great importance is placed on providing customers with high
quality service and positive outcomes.
- Whilst the ultimate priority is the end customer, in Scildon
we also see the brokers who distribute our products as being
customers and hence developing processes to best support their
needs is a key focus.
INITIATIVES AND PROGRESS IN 2018
- Scildon received awards for "Best occupational pension
insurer" and "Best annuity insurer" for 2017, according to the
broker organisation (Adfiz).
- The annual performance research for consumers shows high scores.
- Scildon updated the group pension offering to maximise value transfers and premium levels.
FUTURE PRIORITIES
- Continuing to enhance and develop existing processes, customer
experiences and the underlying infrastructure.
- Engage with brokers to support the development of our
processes in conjunction with their requirements.
- Regular customer assessment, with the outcome used to improve service quality.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Scildon client satisfaction rating (out of 10)
2014 2015 2016 2017
======== ===== ===== ===== =====
Rating 7.3 7.5 7.4 7.6
GOVERNANCE
BACKGROUND
- Waard and Scildon operate in a regulated environment and
comply with rules and regulations both from a prudential and from a
financial conduct point of view.
INITIATIVES AND PROGRESS IN 2018
- Scildon has aligned its governance and risk management framework to Chesnara practices.
- The business strengthened the governance framework during the
first half of 2018 through changes in structure and personnel.
- The IFRS 17 project is underway for both companies, with the
initial impact assessment expected to conclude in Q3.
- Implemented GDPR in both companies.
FUTURE PRIORITIES
- The focus during the second half of the year and into 2019 is
to further embed the governance and risk management framework.
KPIs (all comparatives have been presented using 2018 exchange
rates)
SOLVENCY RATIO: SCILDON 228%; WAARD 602%
Solvency is strong in both businesses. Scildon has reported a
reduction in surplus of GBP3.8m, largely due to increasing spreads
reducing asset values. Waard has generated surplus capital of
GBP3.7m.
Scildon
GBPm Solvency
Ratio
===================== ====== =========
31 Dec 2017 surplus 106.0 231%
Surplus generation (3.8)
30 Jun 2018 surplus 102.2 228%
======================== ====== =========
Waard
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2017 surplus 38.1 483%
Surplus generation 3.7
30 Jun 2018 surplus 41.8 602%
======================== ===== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
- Scildon brings a "New business" dimension to the Dutch
division. Scildon sell protection, individual savings and group
pensions contracts via a broker-led distribution model. The aim is
to deliver meaningful value growth from realistic market share.
Having realistic aspirations regarding volumes means we are able to
adopt a profitable pricing strategy. New business also helps the
business maintain scale and hence contributes to unit cost
management.
INITIATIVES AND PROGRESS IN 2018
- Scildon generated new business profits of GBP0.6m. This is in
line with expectations and was factored into our acquisition
pricing but it is not currently generating sufficient new business
profits and this is therefore a focus of our two year improvement
plans.
- As part of those plans, Scildon successfully launched a new
mortgage term product towards the end of the period. The product
has been well received by the market.
- Market share for the core protection business is at the top
end of the 5-10% target range but we have further work to do to
strengthen the proposition and reduce costs.
- Scildon updated the group pension offering to maximise value transfers and premium levels.
FUTURE PRIORITIES
- Management actions are planned as part of the two year
improvement plans to generate a more commercially meaningful level
of new business profit.
- An objective of the improvement programme is to deliver cost
reductions whilst strengthening the proposition and maintaining
market share.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Scildon - term assurance market share %
% 2014 2015 2016 2017 Jun 2018
============== ===== ===== ===== ===== ==========
Market share 5.0 6.6 5.9 7.3 10.4
Scildon - new business profit
GBPm 2014 2015 2016 2017 Jun 2018
============================ ====== ===== ===== ===== ==========
New business profit/(loss) (3.5) 0.1 2.0 1.9 0.6
BUSINESS REVIEW | acquire life and pension businesses
Well considered and appropriately priced acquisitions maintain
the effectiveness of the operating model, create a source of value
enhancement and sustain the cash generation potential of the
group.
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of
advisers and industry associates, utilising both group and
divisional management expertise as appropriate.
- We primarily focus on acquisitions in the UK and Netherlands,
although will consider other territories should the opportunity
arise.
- We assess deals applying well established criteria which
consider the impact on cash generation and Economic Value under
best estimate and stressed scenarios.
- We work cooperatively with regulators.
- The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group's risk profile.
- Transaction risk is minimised through stringent risk-based due
diligence procedures and the senior management team's acquisition
experience and positive track record.
- We fund deals with a combination of debt, equity or cash
depending on the size and cash flows of each opportunity.
HOW WE ASSESS DEALS
Cash generation
- Collectively our future acquisitions must be suitably cash
generative to continue to fund the Chesnara dividend strategy.
Value enhancement
- Acquisitions are required to have a positive impact on the
Economic Value per share under best estimate and certain more
adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance, customer interests.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite
the financial returns must be suitably compelling.
RISKS
- There is the risk that if a lack of suitable acquisition
opportunities come to market at a realistic valuation, the
investment case for Chesnara diminishes over time.
- There is the risk that we make an inappropriate acquisition
that adversely impacts the financial strength of the group.
- Our acquisition strategy includes both UK and non-UK markets.
WHAT WE CAN DO ABOUT THIS
- Operating in three territories increases our options thereby
reducing the risk that no further value adding deals are done.
- A broader target market also increases the potential for deals
that meet our strategic objectives.
- Flexibility over the timing of subsequent capital extractions
and dividend flows provide an element of management control over
the sterling value of cash inflows.
- Each acquisition is supported by a financial deal assessment
model which includes high quality financial analysis. This is
reviewed and challenged by management and the board, mitigating the
risk of a bad deal being pursued.
ACQUISITION OUTLOOK
- In the UK, we have seen a continued gradual increase in closed
book market activity which, in our view, is driven in part at a
global level by regulatory developments and, at a company level,
strategic developments. We expect these drivers to continue to be
relevant going forward.
- Regarding the Netherlands, we have also seen a gradual
increase in market activity which we are well positioned to take
advantage of, given our scale and presence. Again, regulatory and
strategic developments are the drivers, and we expect these themes
to continue into the future.
- We continue to assess opportunities within Western Europe that
are outside of Chesnara's current territories. All opportunities
and territories considered are assessed on the basis that these do
not compromise the well-established Chesnara's acquisition
assessment model, as well as ensuring that these fit within
Chesnara's governance framework and that they are able to support
Chesnara's strategy and business model. There has been a reasonable
level of market activity in Western Europe.
- The environment in which European life insurance companies
operate continues to increase in complexity. For example, "IFRS 17
Insurance Contracts" was issued in 2017, which is a fundamental
overhaul of the way in which insurance contracts are accounted for.
We believe this additional complexity will potentially drive
further consolidation as institutions seek to remove operational
complexity and potentially release capital or generate funds from
capital intensive life and pension businesses.
- Chesnara is a well-established life and pensions consolidator
with a proven track record. Our financial foundations are strong,
we have an established and stringent acquisition assessment model,
and we continue to have strong support from shareholders and
lending institutions to progress our acquisition strategy. We
believe our operating model has the flexibility to accommodate a
wide range of potential target books. Our good network of contacts
in the adviser community, who understand the Chesnara acquisition
model, ensures we are aware of most viable opportunities in the UK
and Western Europe. With this in mind, we are confident that we are
well positioned to continue the successful acquisition track record
in the future.
- In April 2018 we converted our existing debt arrangement with
RBS into a syndicated facility. This will provide access to higher
levels of debt financing from a wider panel of lenders, which in
turn will enable us to fulfill our appetite of financing future
deals up to the maximum levels of gearing set out in our debt and
leverage policy, without being restricted by the lending capacity
of one individual institution. This facility enables Chesnara to
access an increased level of funds efficiently, which in turn
supports our acquisition strategy.
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 items 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.
- Restricted with profit surpluses: Surpluses in the group's
with-profit funds are not recognised in Solvency II Own Funds
despite their commercial value.
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, introduced as part of the long-term
guarantee package when Solvency II was introduced, are available to
temporarily increase Own Funds. 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 adopts 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:
GBP 30 Jun 2018
=================================== ============
Total market risk 309,488,468
Counterparty default risk 19,691,841
Total life underwriting risk 205,472,441
Total health underwriting risk 18,266,697
Capital requirement for other sub 294,780
Operational risk 13,734,918
=================================== ============
SCR 566,949,145
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 means a more prudent level is 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 three 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 this will be partially offset
by an increase as a result of new business.
CHESNARA GROUP SOLVENCY METRICS
GBPm 30 Jun 2018 31 Dec 2017 30 Jun 2017
================== ============ ============ ============
Own funds 628 615 607
SCR 399 422 425
Solvency surplus 229 193 182
Solvency ratio % 157% 146% 143%
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
SOLVENCY POSITION
GBPm 30 Jun 2018 31 Dec 2017
=========================== ============ ============
Own funds (post dividend) 628 615
SCR 399 422
Buffer 40 42
Surplus above buffer 189 151
Solvency ratio % 157% 146%
SOLVENCY SURPLUS MOVEMENT
GBPm
============================ =======
Group solvency 31 Dec 2017 193.4
CA 40.6
Movestic 11.1
Waard 3.7
Scildon (3.8)
Chesnara / consol adj 0.4
Exchange rates (5.6)
Dividends (10.8)
Total surplus 30 Jun 2018 228.9
============================ =======
THE COMMENTARY BELOW HIGHLIGHTS KEY POINTS IN THE YEAR TO
DATE.
Surplus: The solvency position of the group has improved
considerably from 146% to 157%. The group now has GBP189m of
surplus over and above the internal capital management policy,
compared to GBP151m at the end of 2017. The growth in surplus has
arisen from a growth in Own Funds, coupled with a reduction in
capital requirements.
Dividends: The closing solvency position is stated after
deducting the GBP10.8m proposed interim dividend (31 December 2017:
GBP19.6m).
Own funds: Own Funds have increased by GBP23.6m, before the
impact of the interim dividend. A large contributor to this growth
is a GBP26.8m capital extraction from the with-profit funds within
the UK division. Additional Own Funds growth has been curbed by
rising spreads which affected Scildon and the depreciating Swedish
krona, which has caused a reduction in the Sterling value of the
Swedish business.
SCR: The SCR has fallen by GBP22.7m so far this year. The key
movements underlying this are reductions in equity risk, spread
risk, currency risk and lapse risk.
The numbers that follow present a divisional view of the
solvency position which may differ to the position of the
individual insurance company(ies) within that division. Note that
prior year figures have been restated using 30 June 2018 exchange
rates.
UK
SOLVENCY POSITION
GBPm 30 Jun 2018 31 Dec 2017
=========================== ============ ============
Own funds (post dividend) 196 167
SCR 117 128
Buffer 23 26
Surplus above buffer 56 13
Solvency ratio % 168% 130%
Surplus: GBP56m above board's capital management policy.
Dividends: Dividend of GBP32.0m paid to Chesnara in May
2018.
Own Funds: Positive growth of GBP29.2m, driven largely by
extraction of GBP26.8m capital from WP funds.
SCR: Reduced by GBP11.4m. Market risk has fallen due to improved
quality of asset data and slightly reduced exposure to equities and
corporate bonds, whilst insurance risk capital has reduced in line
with book run off.
SWEDEN
GBPm 30 Jun 2018 31 Dec 2017
=========================== ============ ============
Own funds (post dividend) 227 214
SCR 142 140
Buffer 28 28
Surplus above buffer 56 46
Solvency ratio % 160% 153%
Surplus: GBP56m above board's capital management policy.
Dividends: Dividend of GBP2.7m was paid to Chesnara in May
2018.
Own Funds: Growth has been positive due to moderate investment
growth and new business profits.
SCR: Capital requirements have risen due to growth in assets
under management.
NETHERLANDS - WAARD
GBPm 30 Jun 2018 31 Dec 2017
=========================== ============ ============
Own funds (post dividend) 50 48
SCR 8 10
Buffer 8 10
Surplus above buffer 33 28
Solvency ratio % 602% 483%
Surplus: GBP33m above board's capital management policy.
Dividends: Dividend of GBP12.9m was paid to Chesnara in March
2018.
Own Funds: Positive growth of GBP1.9m, driven by a change in
assumptions, most notably a reduction in assumed mortality
rates.
SCR: Reduced by GBP1.7m, due to reduced underwriting risk
following change in demographic assumptions, and reduced equity
exposure to fund payment of dividend to Chesnara.
NETHERLANDS - SCILDON
GBPm 30 Jun 2018 31 Dec 2017
=========================== ============ ============
Own funds (post dividend) 182 187
SCR 80 81
Buffer 80 81
Surplus above buffer 22 25
Solvency ratio % 228% 231%
Surplus: GBP23m above board's capital management policy.
Dividends: Dividend of GBP21.7m was paid to Chesnara in April
2018.
Own Funds: Reduction of GBP5.4m, principally due to rising
spreads, although favourable interest rate movements have offset
some of this.
SCR: Decreased by GBP1.4m. Spread risk has fallen due to a fall
in corporate bond values (caused by rising spreads) and lapse risk
has fallen due to rising interest rates, however currency risk has
risen due to an increase in foreign currency exposure in
look-through data.
CAPITAL MANAGEMENT - Sensitivities
The group's solvency position can be affected by a number of
factors over time. As a consequence, the group's EcV and cash
generation, both of which are derived from the group's solvency
calculations, are also sensitive to these factors.
The table below provides some insight into the immediate and
longer term impact of certain sensitivities that the group is
exposed to, covering solvency, cash generation and Economic Value.
As can be seen, EcV tends to take the 'full force' of adverse
conditions whereas cash generation is often protected in the short
term and, to a certain extent, in the longer term due to
compensating impacts on our required capital.
Sensitivity Solvency surplus Cash generation EcV
Impact 5 year impact Impact
====================================== ============================ =========================== ==================
20% Sterling appreciation (2) (4) (5)
25% equity fall (1) (4) (5)
25% equity rise (2) 4 5
10% equity fall 1 (2) (3)
10% equity rise (1) 2 3
1% interest rate rise 2 3 2
50bps credit spread rise (2) (2) (2)
25bps swap rate fall (2) (2) (2)
10% mass lapse (1) (1) (3)
10% expense rise
+ 1% inflation rise (3) (4) (4)
Key:
Category Range
1 / (1) GBP0m to GBP15m / (GBP0m to GBP15m)
===================================================
2 / (2) GBP15m to GBP30m / (GBP15m to GBP30m)
===================================================
3 / (3) GBP30m to GBP50m / (GBP30m to GBP50m)
===================================================
4 / (4) GBP50m to GBP90m / (GBP50m to GBP90m)
===================================================
5 / (5) GBP90m to GBP140m / (GBP90m to GBP140m)
===================================================
INSIGHT*
20% Sterling appreciation: A material Sterling appreciation
reduces the value of surplus in our overseas divisions, and hence
has an immediate day 1 impact on group cash generation. It also
reduces the value of projected Own Funds growth in our overseas
divisions and also reduces the value of overseas investments in
CA.
Equity sensitivities: The impact of an equity fall causes the
Own Funds to fall and the SCR also falls as the value of the funds
exposed to risk is lower. Since the two movements largely offset
each other, the net impact on surplus is small. In an equity rise,
the Own Funds and SCR both rise and, again, the impact on balance
sheet surplus is small. The impacts are not symmetrical due to the
use of management actions and differences in the application of tax
depending on the direction of the stress. The EcV impacts are more
intuitive as they are more directly linked to the Own Funds impact.
The impact on future growth builds on the immediate impact as
future returns are directly impacted by the rise/fall in fund
values.
1 % interest rate rise: An interest rate rise is generally
positive across the group. CA, Movestic and Scildon all contribute
significantly towards the total group cash generation impact.
50bps credit spread rise: A credit spread rise has a notable
adverse impact on day 1 cash surplus and future cash generation in
Scildon, largely as a result of the extent of corporate bond
holdings that form part of the asset portfolios backing non-linked
insurance liabilities. The impact on the other divisions is far
less severe.
25bps swap rate fall: This sensitivity measures the impact of a
fall in the swap discount curve with no change in the value of
assets. The result is that liability values increase in isolation.
The most material impacts are on CA and Scildon due to the size of
the non-linked book.
10% mass lapse: For this sensitivity, there is only a small
immediate impact on surplus as any the reduction in Own Funds is
negated by a reduction in the SCR. However, with fewer policies on
the books there is less potential for future profits. The division
most affected is Movestic, largely because as a unit-linked
business the loss in future AMCs following a mass lapse hits Own
Funds by more than the associated reduction in SCR.
10% expense rise + 1% inflation rise: The expense sensitivity
hits the solvency position immediately as the increase in future
expenses and inflation is capitalised into the balance sheet.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that
the sensitivities modelled are deemed to be broadly similar (with
the exception that the 10% equity movements are naturally more
likely to arise) in terms of likelihood. Whilst the sensitivities
provide a useful guide, in practice, how our results react to
changing conditions is complex and the exact level of impact can
vary due to the interactions of events and starting position.
FINANCIAL REVIEW
The key performance indicators are a reflection of how we have
performed in delivering our three strategic objectives and our core
culture and values. The first half of 2018 has seen solid results
across all metrics, despite pressure from a weakening Swedish
Krona, volatile equity markets and a widening of spreads on fixed
income assets held by our Dutch business.
Summary of each KPI:
IFRS
PRE-TAX PROFIT: GBP26.5M (30 JUN 2017: GBP51.6M)
TOTAL COMPREHENSIVE INCOME: GBP14.9M (30 JUN 2017: GBP53.8M)
What is it?
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 a statutory 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'. Whilst the IFRS results form the
core of reporting and hence retain prominence as a key financial
performance metric, there is a general acceptance that the IFRS
results in isolation do not adequately recognise the wider
financial performance of a typical life and pensions business.
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. The IFRS results of Scildon are potentially
relatively volatile, in part, due to the different approach used by
the division for valuing assets and liabilities, as permitted under
IFRS 4.
GBPm Jun 2018 Jun 2017
======================= ========= =========
CA 27.6 23.1
Movestic 4.7 7.1
Waard 2.0 2.3
Scildon (2.8) 7.0
Group & consol adj. (4.9) (8.6)
Profit on acquisition - 20.7
Taxation (4.7) (4.9)
Forex impact* (6.9) 7.1
======================= ========= =========
Total 14.9 53.8
*includes other comprehensive income
- Strong pre-tax performance in the UK drives results.
- IFRS pre-tax profit of GBP26.5m is lower than in the same
period in prior year, owing to profit on acquisition in 2017 and
economic losses suffered in Scildon.
- Operating profits of GBP27.3m are the foundation of the
result, demonstrating the strength and stability of the underlying
business, offsetting the small economic loss, driven by markets
conditions.
- Total comprehensive income includes a foreign exchange loss of GBP6.9m (2017: GBP7.1m gain) predominantly relating to sterling's appreciation against the Swedish Krona.
CASH GENERATION
GROUP CASH GENERATION GBP48.6M (30 JUN 2017: GBP(2.7)M)
DIVISIONAL CASH GENERATION GBP53.1M (30 JUN 2017: GBP54.8M)
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.
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.
GBPm 30 Jun 2018
============================= ============
UK 42.9
Sweden 7.3
Netherlands - Waard 5.2
Netherlands - Scildon (2.3)
============================= ============
Divisional cash generation 53.1
Other group activities (4.5)
Total group cash generation 48.6
============================= ============
Divisional cash generation
- Significant cash generation from the UK, with positive
contributions from Movestic and Waard. Volatility in European
market conditions resulted in an economic loss in Scildon, more
than offsetting the division's operational gains.
- The result includes the non-recurring benefit of a GBP26.8m
capital extraction from restricted with profit funds in the UK.
Total cash generation
- Total group cash generation includes the impact of other group
activities, primarily the impact of group expenses on own funds and
changes to capital requirements upon consolidation of
divisions.
- Total cash generation in 2017 included the negative impact of
the completion of the LGN acquisition (GBP55.3m).
- Excluding the aforementioned non-recurring items, the
underlying group cash generation is GBP21.8m compared to
GBP52.6m.
ECONOMIC VALUE (EcV)
GBP700.8M (31 DEC 2017: GBP723.1M)
What is it?
Economic value (EcV) was 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 and
Dutch businesses) and the value of the company's ability to acquire
further businesses.
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, the EcV position of the group can be
materially affected by exchange rate fluctuations. For example a
20.0% weakening of the Swedish krona and euro against sterling
would reduce the EcV of the group by 6.8%, based on the composition
of the group's EcV at 30 June 2018.
GBPm
================ =======
2017 Group EcV 723.1
EcV earnings 13.6
Dividends (19.6)
Forex (16.3)
================ =======
2018 Group EcV 700.8
================ =======
- Economic value at the end of the June of GBP700.8m.
- Underlying earnings of GBP13.6m have been generated in the first half year.
- The movement in EcV since the start of the year includes the
impact of the payment of the year end 2017 dividend.
- Foreign exchange losses arising on re-translating of the Dutch
and Swedish divisions have contributed to the overall reduction,
primarily representing the strengthening of sterling against the
Swedish krona since the start of the year.
ECV EARNINGS NET OF TAX
GBP13.6M (30 JUN 2017: GBP108.5M includes GBP65.4 gain on
acquisition)
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; and
- 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.
Risks
The EcV earnings of the group can be affected by a number of
factors, including those highlighted within our principal risks and
uncertainties and sensitivities analysis. 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.
GBPm 2018
==================== ======
Operating earnings 9.6
Economic earnings 6.6
Other (2.6)
==================== ======
Total EcV earnings 13.6
==================== ======
- EcV earnings of GBP13.6m have been generated in the first half of the year.
- Underlying operating earnings have continued to emerge across all divisions.
- Economic earnings are more muted than the same period in 2017
(GBP36.6m) largely as a result of comparably lower growth in equity
markets.
- EcV earnings in the prior period benefitted from a one off
gain of GBP65.4m arising as a result of the completion of the
acquisition of Scildon.
IFRS
IFRS PRE-TAX PROFIT
GBP26.5M (30 JUN 2017: GBP51.6M)
IFRS TOTAL COMPREHENSIVE INCOME
GBP14.9M (30 JUN 2017: GBP53.8M)
Executive summary
The group IFRS results reflect the natural dynamics of the
segments of the group, which can be characterised in three major
components:
(1) Stable core: At the heart of surplus, and hence cash
generation, are the core 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.
(2) Variable element: Included within the CA segment is the Save
& Prosper book. This can bring an element of short-term
earnings volatility to the group, with the results being
particularly sensitive to investment market movements due to
product guarantees. The IFRS results of Scildon are potentially
relatively volatile although this is, in part, due to reserving
methodology rather than 'real world' value movements.
(3) Growth operation: The long-term financial models of Movestic
and Scildon are 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:
UNAUDITED 6 months ended 30 Jun 2018 6 months ended 30 Jun 2017 Year ended 31 Dec 2017
GBPm GBPm GBPm Note
================================ ========================== ========================== ====================== ====
CA 27.6 23.1 50.6 1
Movestic 4.6 7.1 9.8 2
Waard Group 2.0 2.3 5.2 3
Scildon (2.8) 7.0 18.4 4
Chesnara (2.0) (6.6) (12.1) 5
Consolidation adjustments (2.9) (2.0) (2.6) 6
================================ ========================== ========================== ====================== ====
Profit before tax and profit on
acquisition 26.5 30.9 69.3
Profit on acquisition of Scildon - 20.7 20.3
================================ ========================== ========================== ====================== ====
Profit before tax 26.5 51.6 89.6
6 months ended 30 Jun 2018 6 months ended 30 Jun 2017 Year ended 31 Dec 2017
GBPm GBPm GBPm Note
================================ ========================== ========================== ====================== ====
Operating profit 27.3 16.6 38.4 8
Economic profit (0.8) 14.3 30.9 9
Profit before tax and profit on
acquisition 26.5 30.9 69.3
Profit on acquisition of LGN - 20.7 20.3
================================ ========================== ========================== ====================== ====
Profit before tax 26.5 51.6 89.6
Tax (4.7) (4.9) (11.2)
================================ ========================== ========================== ====================== ====
Profit after tax 21.8 46.7 78.4
Foreign exchange translation
differences (6.9) 7.1 8.3 7
Other comprehensive income - - 0.2
================================ ========================== ========================== ====================== ====
Total comprehensive income 14.9 53.8 86.9
================================ ========================== ========================== ====================== ====
Note 1: The CA segment has reported strong results for the
half-year, in excess of those for the same period in 2017. Positive
economic conditions contributed GBP8.0m to the result, of which
GBP4.6m related to a reduction in the cost of guarantees within the
S&P book. This was mainly driven by favourable valuation
interest rate movements in the period. Operating profits at
GBP19.6m were also strong in the period, reflecting the positive
impact arising from a change to annuitant mortality rate
assumptions and a one-off gain resulting from the refinement of a
reserving approach in respect of tax charges arising on unrealised
gains.
Note 2: Movestic continues to contribute positively to the
overall group IFRS result despite a reduction in profits when
compared to the same period in 2017. Lower fund performance fees
and a fall in the profits generated by its associate, Modernac,
were the main drivers.
Note 3: The Waard Group result is in line with expectations,
with profits emerging in line with the run-off book profile.
Note 4: Although Scildon has delivered a strong operating
profit, the division has posted an overall loss due to adverse
market movements. This arises from the fact that Scildon measures
the majority of its insurance contract liabilities using historical
rates of interest, as is customary in the Netherlands. This can
lead to increased volatility in IFRS profits by virtue of the
assets that back the liabilities being reported and measured on a
fair value basis. In addition, new business volumes have been below
expectations, resulting in weaker than expected new business
contribution.
Note 5: The Chesnara result represents holding company expenses.
It includes a foreign exchange gain in the period of GBP0.6m,
compared to a loss of GBP2.6m in the prior year, in respect of the
euro denominated loan taken out to part-fund the Scildon
acquisition.
Note 6: Consolidation adjustments relate to items such as the
amortisation of intangible assets. These are higher than previous
periods, due to the impact of the Scildon acquisition.
Note 7: Sterling strengthened against both the euro and Swedish
krona in the period, reversing most of the exchange gains in
2017.
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 in the UK, were offset slightly by the marginal
strengthening of expense reserves to support future developments.
Strong premium growth and higher fund rebates, offset by
unfavourable claims experience in the period supported the Movestic
operating result. Whilst the Waard operating results were in line
with expectation, the Scildon operating result was better than
expected.
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 2018, the economic result is mainly
driven by the impact on Scildon of widening credit spreads, whereas
2017 benefitted from positive equity market growth which has not
been witnessed in the same period in 2018.
CASH GENERATION
GROUP CASH GENERATION
GBP48.6M (30 JUN 2017: GBP(2.7)M)
DIVISIONAL CASH GENERATION
GBP53.1M (30 JUN 2017: GBP54.8M)
Strong cash generation in the UK has driven a total divisional
cash result of GBP48.6m in the period, with supporting
contributions from the overseas territories. 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 reflected in the capital management
policies across the group. These are based on regulatory capital
requirements, with the inclusion of additional "management
buffers".
GROUP
- Sufficient group cash has been generated in the year to date
to cover the cost of last year's dividend.
- 2017 group cash generation included the impact of the
completion of the Legal & General Nederland (Scildon)
acquisition. In line with expectations, this was a GBP55.3m
negative impact on cash generation.
- Other group activities reflect group expenses and the impact
of consolidation routines, specifically movements in capital
requirements determined at a group level. From a capital
requirement 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,
additional capital is principally required to be held for the
currency risk associated with the Movestic, Scildon and Waard Group
surplus assets.
UK
- The UK has continued to deliver significant cash generation.
- Own Funds growth is the main driver of cash generation in the
UK. The result includes the benefit of a GBP26.8m release of
restricted surplus form the with-profit funds.
- At 30 June 2018 a further GBP6.6m of surplus capital exists
within the with profit funds that has not been recognised in the
results.
- Investment return and yield curve movements in Q2 have also
contributed to increase in Own Funds.
- There has also been a reduction in required capital, with
reduced equity risk and spread risk, following the capital
extraction.
SWEDEN
- Sweden generated GBP7.3m of cash in the first half of the year, due to growth in Own Funds.
- Own Funds have benefitted from growth in assets under
management, particularly in equity markets and unit linked
contracts where positive returns have driven higher SEK fund
values.
- Conversely, growth in assets also had the consequential impact
of having to hold a higher level of capital within the business
- SEK depreciation against sterling saw an exchange loss of GBP3.3m.
NETHERLANDS - WAARD
- The Waard Group has continued to supply stable cash
generation, with positive underlying movements in both Own Funds
and capital requirements.
- Positive movement in Own Funds was driven primarily by
reductions in assumed mortality and lapse rates.
- Falls in counterparty default risk and market risk underpins
the reduction in the capital requirement.
NETHERLANDS - SCILDON
- Scildon has reported a loss in the period, largely due to a reduction in Own Funds.
- Positive operating performance has been offset by economic
losses in the second quarter of the year, owing to volatility in
European markets.
- Capital requirements moved favourably in the period, with the
market conditions driving a reduction in spread risk.
GBPm Jun 2018 Jun 2017
======================== ============ ============================================================ ==============
Movement Movement in Forex Cash generated Cash generated
in management's impact
own funds capital
Requirement
======================== ============ ========== ======================= ======= ============== ==============
UK 29.2 13.7 - 42.9 30.4
Sweden 13.8 (3.2) (3.3) 7.3 13.8
Netherlands Waard Group 2.0 3.3 (0.1) 5.2 7.4
Scildon (5.4) 3.2 (0.1) (2.3) 3.2
===================================== ========== ======================= ======= ============== ==============
Divisional cash 39.6 16.9 (3.4) 53.1 54.8
Other group activities (0.7) (3.8) - (4.5) (2.2)
====================================== ========== ======================= ======= ============== ==============
Group cash pre-Scildon
acquisition 38.9 13.1 (3.4) 48.6 52.6
Impact of Scildon acquisition - - - (55.3)
====================================== ========== ======================= ======= ============== ==============
Total group cash 38.9 13.1 (3.4) 48.6 (2.7)
A GBP48.9m one-off positive impact in respect of equity raised
ahead of completion of the acquisition of Legal and General
Nederland, was included in the 2016 result. We highlighted this as
a temporary impact in our 2016 accounts. As expected, on
completion, the 2017 result included a consequential negative
impact of GBP55.3m. The end to end impact of the acquisition of LGN
resulted in a day 1 surplus cash reduction of GBP6.4m. Our reported
group cash generation of GBP46.2m for the six months to 30 June
2017 was reported on an adjusted basis. The 2017 comparative has
subsequently been re-stated to reflect the reversal of the GBP48.9m
positive equity raise impact and aligns the half-year result with
the basis presented in our 2017 Annual Report and Accounts.
EcV EARNINGS
GBP13.6M (30 JUN 2017: GBP105.8M includes GBP65.4m gain on
acquisition)
The group's EcV earnings in the period are largely driven by
operating profits. Economic earnings have contributed less than in
the prior period as a consequence of more muted equity market
performance.
Analysis of the EcV result in the period by earnings source:
30 Jun 30 Jun 31 Dec Note
2018 2017 2017
GBPm GBPm GBPm
==================================== ====== ====== ====== ====
Expected movement in period 3.8 5.0 12.0
New business 5.3 7.1 12.4
Operating variances (7.0) 4.4 1.2
Operating assumption changes 8.9 (6.4) (3.6)
Other operating variances (1.3) - 0.5
==================================== ====== ====== ====== ====
Total underlying operating earnings 9.6 10.1 22.5
Exceptional operating variances - (11.4) (19.2) 2
==================================== ====== ====== ====== ====
Total operating earnings 9.6 (1.4) 3.3
Economic experience variances 0.6 35.7 74.6 1
Economic assumption changes 5.9 7.6 2.2
==================================== ====== ====== ====== ====
Total economic earnings 6.6 43.3 76.8
Other non-operating variances (0.3) 5.0 1.2
Risk margin movement (0.5) 4.0
Gain on acquisition - 65.4 65.4 3
Tax (1.8) (6.5) (11.1)
Total EcV earnings 13.6 105.8 139.5
==================================== ====== ====== ====== ====
Analysis of the EcV result in the year by business segment:
30 Jun 30 Jun 31 Dec Note
2018 2017 2017
GBPm GBPm GBPm
============================ ====== ====== ====== ====
UK 10.9 26.2 54.5 4
Sweden 10.6 15.8 24.0 5
Netherlands (5.8) 14.8 21.8 6
Gain on acquisition - 65.4 65.4
Group and group adjustments (0.3) (9.9) (15.1) 7
============================ ====== ====== ====== ====
EcV earnings before tax 15.4 112.3 150.6
Tax (1.8) (6.5) (11.1) 8
============================ ====== ====== ====== ====
EcV earnings after tax 13.6 105.8 139.5
============================ ====== ====== ====== ====
Note 1 - Economic conditions: 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 decreased by 0.5% (6 months to 30
June 2017: increased by 3.3%);
- The Swedish OMX all share index has increased by 0.9% (6
months to 30 June 2017: increased by 7.2%); and
- 10 year UK gilt yields have increased from 1.26% at the start
of the year to 1.39% (2017: 1.28% at the start and end of the
period).
Note 2 - 2017 Exceptional operating items: The Movestic result
included an GBP11.4m impact relating to changes in future charge
assumptions if, as expected, commercial pressures were to drive fee
changes in the future. Also included was a GBP7.8m provision to
cover the future Scildon development programme.
Note 3 - Gain on acquisition of LGN: The acquisition of LGN in
April 2017 resulted in a 'day 1' gain of GBP65.4m, representing the
difference between the purchase price of GBP137.6m and the EcV of
LGN at the point of acquisition of GBP203.0m.
Note 4 - UK: The UK delivered pre-tax earnings of GBP10.9m in
the first half of the year. Solid operating earnings of GBP2.8m
were driven by favourable movements in both mortality and lapse
assumptions. This was supported by lower than expected rates of
attrition across the books of business, resulting in higher assumed
future fee income. Economic profits of GBP7.7m underpin the result,
supported by market conditions. Key items driving the economic
result include investment return movements and subsequent impact on
future reserves; returns driven by the higher unit prices versus
static guarantees on claims and fee income; and the impact of the
rise in yield curve.
Note 5 - Sweden: The Swedish division has continued to deliver
stable EcV growth into 2018. New business profits of GBP4.6m were
the consequence of a combination of increased sales volumes (both
transfers and single premiums) in Q2, and a higher margin rates
throughout the period. This was partially offset by adverse
movement in future fund management fee and fund rebate assumptions,
resulting in a total operating earnings of GBP1.0m. An economic
profit of GBP10.7m was reported, driven by equity market
performance in the second quarter and strong returns on the unit
linked investment portfolio. The weakening of the Swedish krona
during the period also contributed, with foreign currency
investments having higher SEK fund values.
Note 6 - Netherlands: The Dutch division has reported a pre-tax
loss of GBP5.8m in the period. Waard delivered earnings of GBP2.4m,
largely due to the impact of a reduction in assumed mortality and
lapse rates. This was offset by a pre-tax loss of GBP8.2m in
Scildon. Underlying operating earnings of GBP4.5m were offset by
economic performance. Volatility in European market conditions saw
significant adverse movement in spreads, driving the economic
loss.
Note 7 - Group: In line with expectations, a loss has been
reported in the group component. This includes costs incurred at
group level, dividend payments and the impact of consolidation
activities.
Note 8 - Tax: The business is reporting a tax expense of GBP1.8m
in the year. This is driven by a combination of current tax on the
profit in the period and movements in deferred tax relating to
group level activities.
EcV position
GBP700.8M (31 DEC 2017: GBP723.1M)
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 2018 to 30 Jun 2018:
GBPm
================ =======
2017 Group EcV 723.1
EcV earnings 13.6
Dividends (19.6)
Forex gain (16.3)
================ =======
2018 Group EcV 700.8
================ =======
EcV earnings: EcV earnings of GBP13.6m have been reported in the
first half of the year.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of GBP19.6m were paid during the
period, being the final dividend from 2017.
Foreign exchange: The EcV of the group suffered a foreign
exchange loss in the period, largely driven by the strengthening of
sterling against the Swedish krona.
EcV by segment at 30 Jun 2018:
GBPm
======================== =======
UK 231.9
Sweden 241.7
Netherlands 243.2
Other group activities (16.0)
The above table shows that the EcV of the group is diversified
across its different markets, demonstrating that we are
well-balanced and not over-exposed to one particular geographic
market.
EcV to Solvency II:
GBPm
======================== =======
2018 Group EcV 700.8
Risk margin (46.6)
Contract boundaries (8.7)
Own funds restrictions (6.7)
Dividends (10.8)
======================== =======
2018 SII own funds 628.0
======================== =======
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 table 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
3.25% 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 interim dividend of GBP10.8m is
recognised for SII regulatory reporting purposes. It is not
recognised within EcV until it is actually paid.
RISK MANAGEMENT
Managing risk is a key part of our business model. We achieve
this by understanding the current and emerging risks to the
business, mitigating them where appropriate and ensuring they are
appropriately monitored and managed at all times.
HOW WE MANAGE RISK
RISK MANAGEMENT SYSTEM
The risk management system supports the identification,
assessment, and reporting of risks along with coordinated and
economical application of resources to monitor and control the
probability and/ or impact of adverse outcomes within the board's
risk appetite or to maximise realisation of opportunities
Strategy: The risk management strategy contains the objectives
and principles of risk management, the risk appetite, risk
preferences and risk tolerance limits.
Policies: The risk management policies implement the risk
management strategy and provide a set of principles (and mandated
activities) for control mechanisms that take into account the
materiality of risks.
Processes: The risk management processes ensure that risks are
identified, measured/ assessed, monitored and reported to support
decision making.
Reporting: The risk management reports deliver information on
the material risks faced by the business and evidence that
principal risks are actively monitored and analysed and managed
against risk appetite.
RISK PROCESSES
Risk management processes are applied at a group, divisional and
business unit level and are documented within a set of board
approved risk policies, for each category of risk.
Chesnara adopts the "three lines of defence" model across the
group taking into account size, nature and complexity, with a
single set of risk and governance principles applied consistently
across the business.
In all Divisions we maintain processes for identifying,
evaluating and managing all material risks faced by the group,
which are regularly reviewed by the divisional and group Audit
& Risk Committees. Our risk assessment processes have regard to
the significance of risks, the likelihood of their occurrence and
take account of the controls in place to manage them. The processes
are designed to manage the risk profile within the board's approved
risk appetite.
Group and divisional risk management processes are enhanced by
stress and scenario testing, which evaluates the impact on the
group of certain adverse events occurring separately or in
combination. The results, conclusions and any recommended actions
are included within Divisional and group ORSA Reports to the
relevant boards. There is a strong correlation between these
adverse events and the risks identified in 'Principal risks and
uncertainties'. The outcome of this testing provides context
against which the group can assess whether any changes to its risk
appetite or to its management processes are required.
CHESNARA RISK PREFERENCES
The Chesnara Board has approved a set of risk preferences which
articulate, in simple terms, the desire to increase, maintain, or
reduce the level of risk taking for each main category of risk. The
risk position of the business is monitored against these
preferences using risk tolerance limits, where appropriate, and
they are taken into account by the management teams across the
group when taking strategic or operational decisions that affect
the risk profile.
PRINCIPAL RISKS AND UNCERTAINTIES
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 group, including those that would
threaten its business model, future performance, solvency or
liquidity.
The impacts are not quantified in the table. However, by virtue
of the risks being defined as principal, the impacts are
potentially significant. Although this is a matter of judgement,
the risks described in the table have been ordered based on
probabilities and impacts, putting the risk with the biggest
potential impact first.
RISK IMPACT
============================= ==============================================================
Exposure to financial Market risk results from fluctuations in asset values,
losses or value foreign exchange rates and interest rates and has
reduction arising the potential to affect the group's ability to fund
from adverse movements its commitments to customers and other creditors,
in investment markets, as well as pay a return to shareholders.
counterparty defaults, Chesnara and each of its subsidiaries have obligations
or through inadequate to make future payments, which are not always known
asset liability with certainty in terms of timing or amounts, prior
matching to the payment date. This includes primarily the
payment of policyholder claims, reinsurance premiums,
debt repayments and dividends. The uncertainty of
timing and amounts to be paid gives rise to potential
liquidity risk, should the funds not be available
to make payment.
Other liquidity issues could arise from counterparty
failures/credit defaults, a large spike in the level
of claims or other significant unexpected expenses.
============================= ==============================================================
Adverse changes Chesnara currently operates in four regulatory domains
in industry practice/ and is therefore exposed to inconsistent application
regulation, or inconsistent of regulatory standards across divisions, such as
application of regulation the imposition of higher capital buffers over and
across territories above regulatory minimum requirements. Potential
consequences of this risk for Chesnara would include
the constraining of efficient and fluid use of capital
within the group, or creating a non-level playing
field with respect to future new business/acquisitions.
The jurisdictions which Chesnara operates in are
currently subject to significant change arising from
political, regulatory and legal change. These may
either be localised or may apply more widely, following
from EU-based regulation and law, or the potential
unwinding of this following the UK's decision to
leave the EU.
The group is therefore exposed to the risk of:
* incurring one-off costs of addressing regulatory
change as well as any permanent increases in the cost
base in order to meet enhanced standards;
* erosion in value arising from pressure or enforcement
to reduce future policy charges;
* erosion in value arising from pressure or enforcement
to financially compensate for past practice; and
* regulatory fines or censure in the event that it is
considered to have breached standards, or fails to
deliver changes to the required regulatory standards
on a timely basis.
============================= ==============================================================
Failure to source A key element of Chesnara's inorganic growth strategy
acquisitions that is to grow the business through acquisitions. Clearly,
meet Chesnara's this is dependent on the availability of attractive
criteria or the future acquisition opportunities. Hence, the business
execution of acquisitions model is exposed to the risk of a reduction in the
with subsequent availability of suitable acquisition opportunities
unexpected financial within Chesnara's current target markets, for example
loses or value reduction arising as a result of a change in competition in
the consolidation market or from regulatory change
influencing the extent of life company strategic
restructuring.
Through the execution of acquisitions, Chesnara is
also exposed to the risk of erosion of value or financial
losses arising from risks inherent within businesses
or funds acquired which are not adequately priced
for or mitigated as part of the transaction.
============================= ==============================================================
Adverse demographic In the event that demographic experience (rates of
experience compared mortality, morbidity, persistency etc.) varies from
with assumptions the assumptions underlying product pricing and subsequent
reserving, more or less profit will accrue to the
group.
If mortality or morbidity experience is higher than
that assumed in pricing contracts (I.e. more death
and sickness claims are made than expected), this
will typically result in less profit accruing to
the group.
If persistency is significantly lower than that assumed
in product pricing and subsequent reserving, this
will typically lead to reduced group profitability
in the medium to long-term, as a result of a reduction
in future income arising from charges on those products.
The effects of this could be more severe in the case
of a one-off event resulting in multiple withdrawals
over a short period of time (a "mass lapse" event).
============================= ==============================================================
Significant operational The group and its subsidiaries are exposed to operational
failure / business risks which arise through daily activities and running
continuity event of the business. Operational risks may, for example,
arise due to technical or human errors, failed internal
processes, insufficient personnel resources or fraud
caused by internal or external persons. As a result,
the group may suffer financial losses, poor customer
outcomes, reputational damage, regulatory intervention
or business plan failure.
Part of the group's operating model is to outsource
support activities to specialist service providers.
Consequently, a material element of the operational
risk arises within its outsourced providers.
============================= ==============================================================
Expense overruns The group is exposed to expenses being higher than
and unsustainable expected as a result of one-off increases in the
unit cost growth underlying cost of performing key functions, or through
higher inflation of variable expenses.
For the closed funds, the group is exposed to the
impact on profitability of fixed and semi-fixed expenses,
in conjunction with a diminishing policy base.
For the companies open to new businesses, the group
is exposed to the impact of expense levels varying
adversely from those assumed in product pricing.
============================= ==============================================================
IT/data security Cyber risk is a growing risk affecting all companies,
failures or cyber particularly those who are custodians of customer
crime data. The most pertinent risk exposure relates to
information security (i.e. protecting business sensitive
and personal data) and can arise from failure of
internal processes and standards, but increasingly
companies are becoming exposed to potential malicious
cyber attacks, organisation specific malware designed
to exploit vulnerabilities, phishing attacks etc.
The extent of Chesnara's exposure to such threats
also includes third party service providers.
The potential impact of this risk includes financial
losses, inability to perform critical functions,
disruption to policyholder services, loss of sensitive
data and corresponding reputational damage or fines.
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 12 months from which this
half year report has 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 most
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 positions.
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 under the capital management section
indicates a strong Solvency II position as at 30 June 2018 as
measured at both the individual regulated life company levels and
at the group level. 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 this information, the board has concluded that the
group and company has adequate resources to continue in operational
existence for at least 12 months from the date of approval of this
half year report, and as a result the IFRS Financial Statements
have been prepared on a going concern basis.
DIRECTORS' RESPONSIBILITIES STATEMENT
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in
accordance with IAS 34 'Interim Financial Reporting';
- the management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
during the first six months and description of principal risks and
uncertainties for the remaining six months of the year); and
- the management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related parties'
transactions and changes therein).
By order of the Board
Peter Mason John Deane
Chairman Chief Executive Officer
29 August 2018 29 August 2018
INDEPENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA
PLC
We have been engaged by the company to review the condensed set
of consolidated financial statements in the half-yearly financial
report for the six months ended 30 June 2018 which comprises the
condensed consolidated statement of comprehensive income, the
condensed consolidated balance sheet, the condensed consolidated
statement of cash flows, the condensed consolidated statement of
changes in equity and related notes 1 to 8. We have read the other
information contained in the half-yearly financial report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Auditing Practices
Board. Our work has been undertaken so that we might state to the
company those matters we are required to state to it in an
independent review 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, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Auditing Practices Board for use in the
United Kingdom. A review of interim financial information consists
of making inquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK) and consequently does not enable us to obtain assurance that
we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2018 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
Deloitte LLP
Statutory Auditor
Edinburgh
United Kingdom
29 August 2018
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017 2017
GBP000 GBP000 GBP000
------------------------------------------------------------------------ --------- --------- ----------------------
Insurance premium revenue 144,422 91,643 231,515
Insurance premium ceded to reinsurers (28,372) (25,274) (54,191)
------------------------------------------------------------------------ --------- --------- ----------------------
Net insurance premium revenue 116,050 66,369 177,324
Fee and commission income 62,353 51,833 113,848
Net investment return 139,185 245,734 531,817
------------------------------------------------------------------------ --------- --------- ----------------------
Total revenue net of reinsurance payable 317,588 363,936 822,989
Other operating income 9,524 9,377 17,242
------------------------------------------------------------------------ --------- --------- ----------------------
Total income net of investment return 327,112 373,313 840,231
------------------------------------------------------------------------ --------- --------- ----------------------
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (246,130) (204,085) (465,729)
Net increase in insurance contract provisions 91,276 47,368 51,033
Reinsurers' share of claims and benefits 26,137 22,640 49,449
--------- --------- ----------------------
Net insurance contract claims and benefits (128,717) (134,077) (365,247)
--------- ----------------------
Change in investment contract liabilities (114,931) (156,783) (293,603)
Reinsurers' share of investment contract liabilities 1,016 1,762 3,681
--------- --------- ----------------------
Net change in investment contract liabilities (113,915) (155,021) (289,922)
--------- ----------------------
Fees, commission and other acquisition costs (12,396) (10,600) (24,405)
Administrative expenses (33,584) (33,229) (70,269)
Other operating expenses
Charge for amortisation of acquired value of in-force business (6,298) (5,225) (13,271)
Charge for amortisation of acquired value of customer relationships (42) (50) (101)
Other (3,366) (2,894) (4,239)
------------------------------------------------------------------------ --------- --------- ----------------------
Total expenses net of change in insurance contract provisions and
investment contract liabilities (298,318) (341,096) (767,454)
------------------------------------------------------------------------ --------- --------- ----------------------
Total income less expenses 28,794 32,217 72,777
Share of (loss)/profit of associate (13) 682 949
Profit recognised on business combination - 20,742 20,319
Financing costs (2,269) (2,011) (4,443)
------------------------------------------------------------------------ --------- --------- ----------------------
Profit before income taxes 26,512 51,630 89,602
Income tax expense (4,718) (4,878) (11,168)
Profit for the period 21,794 46,752 78,434
Foreign exchange translation differences arising on the revaluation of
foreign operations (6,920) 7,084 8,274
Revaluation of pension obligations 47 (71) 124
Revaluation of investment property - - 90
------------------------------------------------------------------------ --------- --------- ----------------------
Total comprehensive income for the period 14,921 53,765 86,922
------------------------------------------------------------------------ --------- --------- ----------------------
Basic earnings per share (based on profit for the period) 14.55p 31.22p 52.38p
------------------------------------------------------------------------ --------- --------- ----------------------
Diluted earnings per share (based on profit for the period) 14.46p 31.04p 52.13p
------------------------------------------------------------------------ --------- --------- ----------------------
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017 2017
GBP000 GBP000 GBP000
------------------------------------------------------------------------ --------- --------- ----------------------
Assets
Intangible assets
Deferred acquisition costs 63,115 55,281 61,858
Acquired value of in-force business 110,493 126,659 119,039
Acquired value of customer relationships 561 698 641
Goodwill 756 - 806
Software assets 6,080 7,123 6,358
Property and equipment 4,102 4,684 4,327
Investment in associates 6,247 6,221 6,407
Investment properties 1,196 1,255 1,199
Reinsurers' share of insurance contract provisions 221,223 244,459 233,154
Amounts deposited with reinsurers 38,185 38,147 38,776
Financial assets
Equity securities at fair value through income 506,221 497,569 512,724
Holdings in collective investment schemes at fair value through
income 5,158,002 5,043,537 5,202,772
Debt securities at fair value through income 1,533,256 1,611,176 1,628,817
Policyholders' funds held by the group 271,461 245,687 265,729
Mortgage loan portfolio 43,754 52,624 48,106
Insurance and other receivables 74,185 86,383 59,448
Prepayments 5,891 21,143 7,325
Derivative financial instruments 897 2,414 1,682
--------- --------- ----------------------
Total financial assets 7,593,667 7,560,533 7,726,603
--------- ----------------------
Defined benefit pension scheme funding prepayment 1,019 416 -
Reinsurers' share of accrued policyholder claims 29,937 18,026 25,888
Income taxes 9,931 3,497 7,681
Cash and cash equivalents 200,031 244,760 210,647
------------------------------------------------------------------------ --------- --------- ----------------------
Total assets 8,286,543 8,311,759 8,443,384
------------------------------------------------------------------------ --------- --------- ----------------------
Liabilities
Insurance contract provisions 3,831,118 3,971,521 3,962,279
Other provisions 1,463 1,857 1,098
Financial liabilities
Investment contracts at fair value through income 3,404,364 3,281,368 3,420,273
Liabilities relating to policyholders' funds held by the group 271,461 245,687 265,729
Borrowings 114,482 139,622 129,202
Derivative financial instruments 22,598 23,188 22,494
--------- --------- ----------------------
Total financial liabilities 3,812,905 3,689,865 3,837,698
--------- ----------------------
Deferred tax liabilities 21,552 22,688 22,794
Reinsurance payables 13,845 5,461 11,406
Payables related to direct insurance and investment contracts 90,046 97,187 97,163
Deferred income 4,336 5,071 4,701
Income taxes 8,640 3,445 8,514
Other payables 53,076 84,511 44,984
Bank overdrafts 2,194 1,469 1,091
------------------------------------------------------------------------ --------- --------- ----------------------
Total liabilities 7,839,175 7,883,075 7,991,728
------------------------------------------------------------------------ --------- --------- ----------------------
Net assets 447,368 428,684 451,656
------------------------------------------------------------------------ --------- --------- ----------------------
Shareholders' equity
Share capital 43,766 43,766 43,766
Share premium 141,993 142,064 141,983
Treasury shares (92) (157) (98)
Other reserves 20,744 26,384 27,664
Retained earnings 240,957 216,627 238,341
------------------------------------------------------------------------ --------- --------- ----------------------
Total shareholders' equity 447,368 428,684 451,656
------------------------------------------------------------------------ --------- --------- ----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017 2017
GBP000 GBP000 GBP000
---------------------------------------------------------------------- --------- --------- ----------------------
Profit for the period 21,794 46,752 78,434
Adjustments for:
Depreciation of property and equipment 366 203 698
Amortisation of deferred acquisition costs 7,806 5,228 14,506
Amortisation of acquired value of in-force business 6,298 5,225 13,271
Amortisation of acquired value of customer relationships 42 50 101
Amortisation of software assets 738 1,032 2,218
Share based payment 354 350 (159)
Tax paid 4,842 4,488 11,209
Interest receivable (392) (4,400) (4,785)
Dividends receivable (3,606) (15,458) (4,619)
Interest expense 2,269 2,011 4,443
Fair value gains on financial assets (205,869) (209,345) (210,706)
Profit arising on business combination - (20,742) (20,319)
Share of loss /(profit) of associate 13 (682) (949)
Interest received 899 3,788 4,560
Dividends received 3,468 14,695 4,336
Increase in intangible assets related to insurance and investment
contracts (12,814) (10,903) (28,634)
Changes in operating assets and liabilities (excluding the effect of
acquisitions) 47 - 124
Changes in operating assets and liabilities:
Decrease/(increase) in financial assets 153,160 78,496 (145,613)
Decrease in reinsurers share of insurance contract provisions 4,405 14,111 17,074
Decrease/(increase) in amounts deposited with reinsurers 591 (710) (1,339)
(Increase)/decrease in insurance and other receivables (11,450) (27,031) 11,317
Decrease/(increase) in prepayments 1,172 (2,851) 12,722
Decrease in defined benefit pension scheme surplus - 765 -
(Decrease)/increase in insurance contract provisions (119,257) (61,584) (91,110)
Increase in investment contract liabilities 173,664 220,932 414,014
Increase in provisions 442 1,020 272
Increase/(decrease) in reinsurance payables 2,778 (1,515) 4,424
(Decrease)/increase in payables related to direct insurance and
investment contracts (6,590) 2,738 2,432
Increase/(decrease) in other payables 8,573 46,069 (935)
---------------------------------------------------------------------- --------- --------- ----------------------
Cash generated from operations 33,743 92,732 86,987
Income tax paid (7,602) (22,287) (27,480)
---------------------------------------------------------------------- --------- --------- ----------------------
Net cash generated from operating activities 26,141 70,445 59,507
---------------------------------------------------------------------- --------- --------- ----------------------
Cash flows from investing activities
Business combination - (117,993) (117,993)
Development of software (807) (462) (928)
Purchases of property and equipment (168) (220) (314)
Net cash utilised by investing activities (975) (118,675) (119,235)
---------------------------------------------------------------------- --------- --------- ----------------------
Cash flows from financing activities
Proceeds from issue of share premium 10 6 (75)
Proceeds from borrowings - 100,591 100,591
Repayment of borrowings (12,240) (48,633) (58,569)
Sales of treasury shares 6 4 63
Dividends paid (19,579) (19,002) (29,484)
Interest paid (2,269) (1,834) (4,266)
---------------------------------------------------------------------- --------- --------- ----------------------
Net cash (utilised by)/generated from financing activities (34,072) 31,132 8,260
---------------------------------------------------------------------- --------- --------- ----------------------
Net decrease in net cash and cash equivalents (8,906) (17,098) (51,468)
Cash and cash equivalents at beginning of period 209,556 258,731 258,731
Effect of exchange rate changes on net cash and cash equivalents (2,813) 1,658 2,293
---------------------------------------------------------------------- --------- --------- ----------------------
Net cash and cash equivalents at end of the period 197,837 243,291 209,556
---------------------------------------------------------------------- --------- --------- ----------------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited six months ended
30 June 2018
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 1 January 2018 43,766 141,983 27,664 (98) 238,341 451,656
Profit for the period - - - - 21,794 21,794
Dividends paid - - - - (19,579) (19,579)
Foreign exchange
translation differences - - (6,920) - - (6,920)
Revaluation of pension
obligations - - - - 47 47
Sale of treasury shares - 10 - 6 - 16
Share based payment - - - - 354 354
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 30 June 2018 43,766 141,993 20,744 (92) 240,957 447,368
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Unaudited six months ended
30 June 2017
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 1 January 2017 43,766 142,058 19,300 (161) 188,598 393,561
Profit for the period - - - - 46,752 46,752
Dividends paid - - - - (19,002) (19,002)
Foreign exchange
translation differences - - 7,084 - - 7,084
Revaluation of pension
obligations - - - - (71) (71)
Sale of treasury shares - 6 - 4 - 10
Share based payment - - - - 350 350
Equity shareholders' funds
at 30 June 2017 43,766 142,064 26,384 (157) 216,627 428,684
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Year ended 31 December
2017
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 1 January 2017 43,766 142,058 19,300 (161) 188,598 393,561
Profit for the year - - - - 78,434 78,434
Dividends paid - - - - (29,484) (29,484)
Foreign exchange
translation differences - - 8,274 - - 8,274
Revaluation of pension
obligations - - - - 124 124
Revaluation of investment
property - - 90 - - 90
Share based payment - - - - 669 669
Sale of treasury shares - (75) - 63 - (12)
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 31 December 2017 43,766 141,983 27,664 (98) 238,341 451,656
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS
1. Basis of presentation
This condensed set of consolidated financial statements has been
prepared in accordance with IAS 34 'Interim Financial Reporting' as
adopted by the EU. As required by the Disclosure and Transparency
Rules of the Financial Conduct Authority, the condensed set of
consolidated financial statements has been prepared applying the
accounting policies and presentation which were applied in the
preparation of the Group's published consolidated financial
statements for the year ended 31 December 2017, with the following
exceptions.
Within the consolidated financial statements for the year ended
31 December 2017, financial instruments were valued in line with
the mandatory requirements of IAS 39 - Financial Instruments. With
effect from 1 January 2018, IAS 39 was superseded by IFRS 9 -
Financial Instruments (2018 - Deferred to 2021). IFRS 9 introduces
new classification and measurement requirements for financial
assets and liabilities. It also requires the use of an expected
credit loss model, as opposed to the incurred credit loss model
required under IAS 39. The expected credit loss model will require
the group to account for expected credit losses and changes in
those expected credit losses at each reporting date to reflect
changes in credit risk since initial recognition. The standard also
requires enhanced disclosures in the financial statements.
The group has taken advantage of the temporary exemption granted
to insurers in IFRS 4 Insurance Contracts from applying IFRS 9
until 1 January 2021 as a result of meeting the exemption criteria
as at 31 December 2017. As at this date, the group's activities
were considered to be predominantly connected with insurance as the
percentage of the total carrying amount of its liabilities in
relation to insurance relative to the total carrying amount of all
its liabilities was greater than 90%. There have been no changes to
the activities of the group that require this assessment to be
re-performed. IFRS 9 will instead be implemented at the same time
as the new insurance contracts standard (IFRS 17 Insurance
Contracts). The group expects to continue to value the majority of
its financial assets as at fair value through profit or loss on
initial recognition, so as to eliminate or reduce any potential
accounting mismatch. When applying the exemption, IFRS 4 requires
that a number of disclosures be made in 2018 to provide information
to allow comparison with entities adopting the standard in
2018.
IFRS 15 Revenue from Contracts with Customers became effective
with effect from 1 January 2018. The standard establishes a single
comprehensive framework for determining how and when revenue is
recognised. IFRS 15 does not apply to insurance contracts or
financial instruments within the scope of IAS 39 Financial
Instruments. As such, the introduction of the standard has not had
a significant impact on the financial position or financial
performance of the group.
The group's published consolidated financial statements for the
year ended 31 December 2017 were prepared in accordance with IFRS
as adopted by the EU. Any judgements and estimates applied in the
condensed set of financial statements are consistent with those
applied in the preparation of the group's published consolidated
financial statements for the year ended 31 December 2017.
The financial information shown in these interim financial
statements is unaudited and does not constitute statutory accounts
within the meaning of section 434 of the Companies Act 2006.
The comparative figures for the financial year ended 31 December
2017 are not the company's statutory accounts for that financial
year. Those accounts have been reported on by the company's auditor
and delivered to the Registrar of Companies. The report of the
auditor was (i) unqualified, (ii) did not include a reference to
any matters to which the auditor drew attention by way of emphasis
without qualifying their report and (iii) did not contain a
statements under section 498(2) or (3) of the Companies Act
2006.
Scildon reports under IFRS and its accounting policies have been
assessed as being in compliance with those of the group. As part of
this assessment, it has been identified that the basis for
measuring insurance contract liabilities differs to other parts of
the group. In particular, Scildon measures the majority of its
insurance contract liabilities using historical market rates of
interest, as is customary in the Netherlands. This approach can
lead to increased volatility in IFRS profits by virtue of the
assets that back the insurance contract provisions being reported
on a fair value basis (i.e. incorporating current market rates of
interest) but with the liabilities using historical rates. In light
of the introduction of the new insurance standard IFRS17, which
will align the measurement of insurance contracts across the group
from 1 January 2021, the group has taken the decision to accept the
current measurement basis adopted by Scildon in the short term.
Critical accounting judgements and key sources of estimation and
uncertainty remain unchanged from those described in Note 3 of the
2017 Annual Report and Accounts.
2. Earnings per share
Earnings per share are based on the following:
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017 2017
GBP000 GBP000 GBP000
------------------------------------------------------------ ----------- ----------- ------------------------
Profit for the period attributable to shareholders (GBP000) 21,794 46,752 78,434
Weighted average number of ordinary shares 149,820,942 149,741,550 149,749,517
Basic earnings per share 14.55p 31.22p 52.38p
Diluted earnings per share 14.46p 31.04p 52.13p
The weighted average number of ordinary shares in respect of the
six months ended 30 June 2018 is based upon 149,885,761 shares in
issue, less 24,980 own shares held in treasury.
The six months ended 30 June 2017 is based upon 149,885,761
shares in issue, less 144,211 own shares held in treasury at the
beginning of the period, and 149,885,761 shares in issue less
144,211 own shares held in treasury at the end of the period.
The weighted average number of ordinary shares in respect of the
year ended 31 December 2017 is based upon 149,885,761 shares in
issue less 86,040 own shares held in treasury.
There were 948,003 share options outstanding at 30 June 2018 (30
June 2017: 876,926). Accordingly, there is dilution of the average
number of ordinary shares in issue in respect of 2018. There were
877,000 share options outstanding as at 31 December 2017.
3. Retained earnings
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017 2017
GBP000 GBP000 GBP000
----------------------------------------------------------------------- --------- -------- ------------------------
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January 238,341 188,598 188,598
Profit for the period 21,794 46,752 78,434
Revaluation obligations 47 (71) 124
Share based payment 354 350 669
Dividends
Final approved and paid for 2016 - (19,002) (19,002)
Interim approved and paid for 2017 - - (10,482)
Final approved and paid for 2017 (19,579) - -
----------------------------------------------------------------------- --------- -------- ------------------------
Balance at period end 240,957 216,627 238,341
----------------------------------------------------------------------- --------- -------- ------------------------
The interim dividend in respect of 2017, approved and paid in
2017 was paid at the rate of 7.00 per share.
The final dividend in respect of 2017, approved and paid in
2018, was paid at the rate of 13.07p per share so that the total
dividend paid to the equity shareholders of the company in respect
of the year ended 31 December 2017 was made at the rate of 20.07p
per share.
An interim dividend of 7.21p per share in respect of the year
ending 31 December 2018 payable on 12 October 2018 to equity
shareholders of the company registered at the close of business on
07 September 2018, the dividend record date, was approved by the
Directors after the balance sheet date. The resulting dividend of
GBP10.8m has not been provided for in these financial statements
and there are no income tax consequences.
The following table summarises dividends per share in respect of
the six month period ended 30 June 2018 and the year ended 31
December 2017:
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017
Pence Pence
------------------------ ----------------- ----------------------
Interim - approved/paid 7.21 7.00
Final - proposed/paid - 13.07
------------------------ ----------------- ----------------------
Total 7.21 20.07
------------------------ ----------------- ----------------------
4. 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 30 June 2018 comprise:
CA: This segment represents 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 Save & Prosper Insurance Limited which was
acquired on 20 December 2010 and its then subsidiary Save &
Prosper Pensions Limited. The S&P business was transferred to
CA during 2011. This segment also contains the business of
Protection Life, which was purchased on 28 November 2013 and the
business of which was transferred to CA effective from 1 January
2015. CA is responsible for conducting unit-linked and non-linked
business, including a with-profits portfolio, which carries
significant additional market risk, as described in note 6
'Management of financial risk' of the 2017 Annual Report and
Accounts.
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
non-linked business.
Waard Group: This segment represents the Group's first 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, Waard Verzekeringen B.V.. 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. This segment is
closed to new business.
Scildon: This segment represents the Group's latest Dutch life
insurance business, which was acquired on 5 April 2017. Scildon's
policy base is predominantly made up of individual protection and
savings contracts. It is open to new business and sells protection,
individual savings and group pension contracts via a broker-led
distribution model.
Other Group Activities: The functions performed by the ultimate
holding company within the group, 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 six months ended 30 June 2018.
(i) Segmental income statement for the six months ended 30 June 2018
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- -------- ---------- ------------- --------- ---------------------- ---------
Net insurance premium revenue 17,753 6,711 756 90,830 - 116,050
Fee and commission income 13,981 24,834 10 23,528 - 62,353
Net investment return 34,673 101,124 1,870 1,440 78 139,185
----------------------------------- -------- ---------- ------------- --------- ---------------------- ---------
Total revenue (net of reinsurance
payable) 66,407 132,669 2,636 115,798 78 317,588
Other operating income 6,536 2,988 - - - 9,524
----------------------------------- -------- ---------- ------------- --------- ---------------------- ---------
Segmental income 72,943 135,657 2,636 115,798 78 327,112
----------------------------------- -------- ---------- ------------- --------- ---------------------- ---------
Net insurance contract claims and
benefits incurred (20,428) (4,299) 964 (104,954) - (128,717)
Net change in investment contract
liabilities (12,538) (101,377) - - - (113,915)
Fees, commission and other
acquisition costs (649) (14,064) (150) (880) - (15,743)
Administrative expenses:
Amortisation charge on software
assets - (1,955) - (124) - (2,079)
Depreciation charge on property
and equipment - (278) (52) (230) - (560)
Other (11,313) (5,228) (1,426) (12,382) (596) (30,945)
Operating (expenses)/income (422) (2,938) - 1 (7) (3,366)
Financing costs (2) (851) - - (1,416) (2,269)
Share of loss from associates - (13) - - - (13)
----------------------------------- -------- ---------- ------------- --------- ---------------------- ---------
Profit/(loss) before tax and
consolidation adjustments 27,591 4,654 1,972 (2,771) (1,941) 29,505
----------------------------------- -------- ---------- ------------- --------- ---------------------- ---------
Other operating expenses:
Charge for amortisation of
acquired value of in-force
business (2,507) (1,560) (332) (1,899) - (6,298)
Charge for amortisation of
acquired value of customer
relationships - (42) - - - (42)
Fees, commission and other
acquisition costs - 1,609 - 1,738 - 3,347
Segmental income less expenses 25,084 4,661 1,640 (2,932) (1,941) 26,512
Profit arising on business
combination - - - - - -
Profit/(loss) before tax 25,084 4,661 1,640 (2,932) (1,941) 26,512
Income tax (expense)/credit (4,890) (436) (401) 707 302 (4,718)
Profit/(loss) after tax 20,194 4,225 1,239 (2,225) (1,639) 21,794
-------- ---------- ------------- --------- ---------------------- ---------
(ii) Segmental balance sheet as at 30 June 2018
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Total assets 2,907,606 3,138,624 143,041 2,016,417 80,855 8,286,543
Total liabilities (2,748,480) (3,052,314) (97,609) (1,862,051) (78,721) (7,839,175)
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Net assets 159,126 86,310 45,432 154,366 2,134 447,368
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Investment in associates - 6,247 - - - 6,247
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Additions to non-current
assets - 10,233 - 3,287 - 13,520
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
(iii) Segmental income statement for the six months ended 30
June 2017
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------ -------- ---------- ------------- -------- ---------------------- ---------
Net insurance premium revenue 20,359 7,681 1,303 37,026 - 66,369
Fee and commission income 14,733 24,032 10 13,058 - 51,833
Net investment return 115,520 125,026 3,309 1,831 48 245,734
------------------------------------ -------- ---------- ------------- -------- ---------------------- ---------
Total revenue (net of reinsurance
payable) 150,612 156,739 4,622 51,915 48 363,936
Other operating income 7,114 2,393 36 (166) - 9,377
------------------------------------ -------- ---------- ------------- -------- ---------------------- ---------
Segmental income 157,726 159,132 4,658 51,749 48 373,313
------------------------------------ -------- ---------- ------------- -------- ---------------------- ---------
Net insurance contract claims and
benefits incurred (92,203) (3,154) (674) (38,046) - (134,077)
Net change in investment contract
liabilities (30,282) (124,739) - - - (155,021)
Fees, commission and other
acquisition costs (721) (13,634) (168) 686 - (13,837)
Administrative expenses:
Amortisation charge on software
assets - (1,032) - (54) - (1,086)
Depreciation charge on property
and equipment - (84) (21) (118) - (223)
Other (10,980) (6,358) (1,479) (7,254) (5,849) (31,920)
Operating expenses (472) (2,434) - - 12 (2,894)
Financing costs (2) (1,238) - - (771) (2,011)
Share of profit from associates - 682 - - - 682
------------------------------------ -------- ---------- ------------- -------- ---------------------- ---------
Profit/(loss) before tax and
consolidation adjustments 23,066 7,141 2,316 6,963 (6,560) 32,926
------------------------------------ -------- ---------- ------------- -------- ---------------------- ---------
Other operating expenses:
Charge for amortisation of
acquired value of in-force
business (3,112) (1,739) (325) (49) - (5,225)
Charge for amortisation of
acquired value of customer
relationships - (50) - - - (50)
Fees, commission and other
acquisition costs - 1,681 1,556 - - 3,237
Segmental income less expenses 19,954 7,033 3,547 6,914 (6,560) 30,888
Profit arising on business
combination - - - - 20,742 20,742
Profit/(loss) before tax 19,954 7,033 3,547 6,914 14,182 51,630
Income tax (expense)/credit (3,235) (311) (838) (1,757) 1,263 (4,878)
Profit/(loss) after tax 16,719 6,722 2,709 5,157 15,445 46,752
-------- ---------- ------------- -------- ---------------------- ---------
(iv) Segmental balance sheet as at 30 June 2017
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Total assets 3,000,392 2,991,394 170,234 2,077,154 72,585 8,311,759
Total liabilities (2,849,925) (2,906,248) (115,367) (1,907,710) (103,825) (7,883,075)
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Net assets 150,467 85,146 54,867 169,444 (31,240) 428,684
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Investment in associates - 6,221 - - - 6,221
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Additions to non-current
assets - 11,525 134 1,360 - 13,019
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
(v) Segmental income statement for the year ended 31 December
2017
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Net insurance premium revenue 39,036 15,438 2,227 120,623 - 177,324
Fee and commission income 29,009 49,155 20 35,664 - 113,848
Net investment return 251,041 223,310 7,349 50,016 101 531,817
---------------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Total revenue (net of reinsurance
payable) 319,086 287,903 9,596 206,303 101 822,989
Other operating income 13,985 3,215 42 - - 17,242
---------------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Segmental income 333,071 291,118 9,638 206,303 101 840,231
---------------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Net insurance contract claims and
benefits incurred (191,524) (5,447) (1,051) (167,225) - (365,247)
Net change in investment contract
liabilities (66,969) (222,953) - - - (289,922)
Fees, commission and other
acquisition costs (1,368) (31,959) (331) (1,494) - (35,152)
Administrative expenses:
Amortisation charge on software
assets - (2,052) - (124) - (2,176)
Depreciation charge on property
and equipment - (292) (52) (229) - (573)
Other (21,678) (13,485) (3,015) (18,813) (10,528) (67,520)
Operating expenses (952) (3,302) - 1 14 (4,239)
Financing costs (4) (2,756) - - (1,683) (4,443)
Share of profit from associates - 949 - - - 949
---------------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Profit/(loss) before tax and
consolidation adjustments 50,576 9,821 5,189 18,419 (12,096) 71,908
---------------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Other operating expenses:
Charge for amortisation of
acquired value of in-force
business (6,224) (3,527) (662) (2,858) - (13,271)
Charge for amortisation of
acquired value of customer
relationships - (101) - - - (101)
Fees, commission and other
acquisition costs - 6,601 - 4,146 - 10,747
Segmental income less expenses 44,352 12,794 4,527 19,707 (12,096) 69,283
Profit arising on business
combination - - - - 20,319 20,319
Profit before tax 44,352 12,794 4,527 19,707 8,223 89,602
Income tax (expense)/credit (7,085) 71 (1,068) (4,946) 1,860 (11,168)
Profit after tax 37,267 12,865 3,459 14,761 10,083 78,434
--------- ---------- ------------- --------- ---------------------- ---------
(vi) Segmental balance sheet as at 31 December 2017
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Total assets 3,020,489 3,148,135 166,803 2,060,569 47,388 8,443,384
Total liabilities (2,849,557) (3,057,934) (109,421) (1,881,301) (93,515) (7,991,728)
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Net assets 170,932 90,201 57,382 179,268 (46,127) 451,656
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Investment in associates - 6,407 - - - 6,407
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Additions to non-current
assets - 23,836 313 3,719 - 27,868
--------------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
5. Borrowings
Unaudited
Six months ended
30 June Year ended 31 December
2018 2017 2017
GBP000 GBP000 GBP000
------------------------------------------------ --------- -------- ----------------------
Bank loan 76,491 101,665 89,457
Amount due in relation to financial reinsurance 37,991 37,957 39,745
------------------------------------------------ --------- -------- ----------------------
Total 114,482 139,622 129,202
------------------------------------------------ --------- -------- ----------------------
The bank loan subsisting at 30 June 2018 comprises the
following:
- on 3 April 2017 tranche one of a new facility was drawn down,
amounting to GBP40.0m. This facility is unsecured and is repayable
in ten six-monthly instalments on the anniversary of the draw down
date. The outstanding principal on the loan bears interest at a
rate of 2.00 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. The proceeds of this loan
facility were utilised, together with existing group cash, to repay
in full, the pre-existing loan facilities totalling GBP52.8m. On 5
April 2018, GBP5.0m was repaid, taking total repayments made on
this facility to GBP10.0m.
- on 3 April 2017 tranche two of the new loan facility was drawn
down, amounting to EUR71.0m. As with tranche one, this facility is
unsecured and is repayable in ten six-monthly instalments on the
anniversary of the draw down date. The outstanding principal on the
loan bears interest at a rate of 2.00 percentage points above the
European Inter-Bank Offer Rate and is repayable over a period which
varies between one and six months at the option of the borrower. On
5 April 2018, EUR9.0m was repaid, taking total repayments made on
this facility to EUR18.0m.
The fair value of the sterling bank loan at 30 June 2018 was
GBP30.0m (31 December 2017: GBP35.0m).
The fair value of the euro denominated bank loan at 30 June 2018
was GBP46.9m (31 December 2017: GBP55.0m).
The fair value of amounts due in relation to financial
reinsurance was GBP40.2m (31 December 2017: GBP42.2m).
Bank loans are presented net of unamortised arrangement fees.
Arrangement fees are recognised in profit or loss using the
effective interest rate method.
6. Financial instruments fair value disclosures
The table below shows the determination of the fair value of
financial assets and financial liabilities according to a
three-level valuation hierarchy. Fair values are generally
determined at prices quoted in active markets (Level 1). However,
where such information is not available, the Group applies
valuation techniques to measure such instruments. These valuation
techniques make use of market-observable data for all significant
inputs where possible (Level 2), but, in some cases it may be
necessary to estimate other than market-observable data within a
valuation model for significant inputs (Level 3).
The Group held the following financial instruments at fair value
at 30 June 2018. There have not been any transfers of assets or
liabilities between levels of the fair value hierarchy. There are
no non-recurring fair value measurements.
Fair value measurement at 30 June 2018 using
Level 1 Level 2 Level 3 Total
Financial assets GBP000 GBP000 GBP000 GBP000
---------------------------------------------------------------- --------- --------- ------- ---------
Equities
Listed 506,221 - - 506,221
Holdings in collective investment schemes 5,158,002 - - 5,158,002
Debt securities - fixed rate
Government Bonds 908,126 - - 908,126
Corporate Bonds 619,125 - - 619,125
Debt securities - floating rate
Listed 6,005 - - 6,005
--------- --------- ------- ---------
Total debt securities 1,533,256 - - 1,533,256
--------- --------- ------- ---------
Policyholders' funds held by the group 271,461 - - 271,461
Derivative financial instruments - 897 - 897
---------------------------------------------------------------- --------- --------- ------- ---------
Total 7,468,940 897 - 7,469,837
---------------------------------------------------------------- --------- --------- ------- ---------
Current 2,834,054
Non-current 4,635,783
---------------------------------------------------------------- --------- --------- ------- ---------
Total 7,469,837
---------------------------------------------------------------- --------- --------- ------- ---------
Financial liabilities
Investment contracts at fair value through income - 3,404,364 - 3,404,364
Liabilities related to policyholders' funds held by the group 271,461 - - 271,461
Derivative financial instruments - 22,598 - 22,598
---------------------------------------------------------------- --------- --------- ------- ---------
Total 271,461 3,426,962 - 3,698,423
---------------------------------------------------------------- --------- --------- ------- ---------
Derivative financial instruments
Within derivative financial instruments is a financial
reinsurance embedded derivative related to our Movestic operation.
The Group has entered into a reinsurance contract with a third
party that has a section that is deemed to transfer significant
insurance risk and a section that is deemed not to transfer
significant insurance risk. The element of the contract that does
not transfer significant insurance risk has two components and has
been accounted for as a financial liability at amortised cost and
an embedded derivative asset at fair value.
The embedded derivative represents an option to repay the
amounts due under the contract early at a discount to the amortised
cost, with its fair value being determined by reference to market
interest rate at the balance sheet date. It is, accordingly,
determined at Level 2 in the three-level fair value determination
hierarchy set out above.
The derivative balance classified as a Level 2 liability,
predominantly relates to interest rate swaps held within our
Scildon operation, to hedge some of the risk of changes in the
value of its obligations under insurance contract liabilities. The
valuation of these derivatives is modelled using market observable
variables and are hence classified as Level 2.
Investment contract liabilities
The Investment contract liabilities in Level 2 of the valuation
hierarchy represent the fair value of non-linked and guaranteed
income and growth bonds liabilities valued using established
actuarial techniques utilising market observable data for all
significant inputs, such as investment yields.
Except as detailed in the following table, the Directors
consider that the carrying value amounts of financial assets and
financial liabilities recorded at amortised cost in the financial
statements are approximately equal to their fair values:
Carrying amount Fair value
30 June 30 June 31 December 30 June 30 June 31 December
2018 2017 2017 2018 2017 2017
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
======================= ======= ======= =========== ======= ======= =============
Financial liabilities:
Borrowings 114,482 139,622 129,202 117,072 140,233 132,204
Borrowings consist of bank loans and an amount due in relation
to financial reinsurance.
The fair value of the bank loans are taken as the principal
outstanding at the balance sheet date.
The amount due in relation to financial reinsurance is fair
valued with reference to market interest rates at the balance sheet
date.
There were no transfers between levels 1, 2 and 3 during the
period.
The group holds no Level 3 liabilities as at the balance sheet
date.
7. Defined benefit pension scheme obligations
Scildon has a defined benefit plan, the costs of which are
calculated using the projected unit credit method. This means that
the cost of providing pensions charged to the profit and loss
account are placed over the service lives of employees, according
to actuarial calculations. The obligations are calculated as the
difference between the present value of pension obligations, net of
the fair value of the existing plan assets. The present value of
pension liabilities is determined by discounting the expected
future retirement benefits at the rate of return on high quality
corporate bonds in euros, which have a similar remaining period to
when the pension payments are expected to be incurred. Any
deficiency is recognised as a liability in the consolidated balance
sheet, and any surplus is recognised as an asset. Actuarial gains
and losses arising from deviations from expected outcomes are
recognised as revaluations through other comprehensive income and
are recognised directly in equity.
Scildon is required to contribute a cost covering premium. This
cost covering premium contains the actuarial cost of newly arising
unconditional benefits (using the pension fund's assumptions), the
related administration cost and related buffer requirements. The
pension fund does not guarantee the nominal benefits. In case of
underfunding the nominal benefits can be reduced. Scildon is not
obliged to pay for:
-- Past service benefit increases due to wage increases;
-- Past service benefit increases due to (full) indexation of
past service benefits to active participants;
-- Past service benefit increases due to (full) indexation of
past service benefits to deferred participants and participants
receiving benefits;
-- Catch up contributions (e.g. for a transitory plan); and
-- Fund deficits.
Vested benefits have been funded with the pension fund which
manages the assets. Newly arising benefits are funded through
contributions to the pension fund. The agreement between Scildon
and the pension fund contains provisions that the pension fund may
grant discounts and/or restitutions to Scildon, if the funding
position of the pension fund exceeds a certain level and outlooks
are positive.
The assets and liabilities of the defined benefit scheme are
shown below.
Unaudited
30 June 30 June 31 December
2017 2017 2017
GBP000 GBP000 GBP000
================================================= ======== ======== ===========
Total fair value of assets 50,096 46,217 48,354
Present value of scheme liabilities (48,125) (45,802) (47,459)
================================================= ======== ======== ===========
Surplus of scheme assets over scheme liabilities 1,971 415 895
Effect of asset ceiling test (952) - (895)
================================================= ======== ======== ===========
Net surplus in the scheme 1,019 415 -
================================================= ======== ======== ===========
The amount shown above as net surplus in the scheme represents
the prepayment of scheme funding as at each respective balance
sheet date.
8. Approval of consolidated report for the six months ended 30 June 2018
This condensed consolidated report was approved by the Board of
Directors on 29 August 2018. A copy of the report will be available
to the public at the Company's registered office, 2nd Floor,
Building 4, West Strand Business Park, West Strand Road, Preston,
PR1 8UY and at www.chesnara.co.uk.
FINANCIAL CALAR
30 August 2018
Half year results for the 6 months ending 30 June 2018
announced.
06 September 2018
Interim ex-dividend date.
07 September 2018
Interim dividend record date.
21 September 2018
Final date for Dividend ReInvestment Plan (DRIP) Elections
12 October 2018
Interim dividend payment date.
KEY CONTACTS
Registered and Head Office
2(nd) Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
Tel: 01772 972050
www.chesnara.co.uk
Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
One St Peter's Square
Manchester
M2 3DE
Auditor
Deloitte LLP
Statutory Auditor
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2DB
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Joint Stockbrokers
Panmure Gordon
One New Change
London
EC4M 9AF
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8(th) Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3(rd) Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
145 Leadenhall Street
London
EC3V 4QT
Corporate Advisors
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
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.
BAU Cash Generation This represents divisional cash generation plus the impact of non-exceptional group
activity.
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. Cash
generation
is reported at a group level and also at an underlying divisional level reflective of
the
collective performance of each of the divisions prior to any group level activity.
Divisional Cash Generation This represents the cash generated by the three operating divisions of Chesnara (UK,
Sweden
and the Netherlands), exclusive of group level activity.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the regulator of our
Dutch
subsidiaries.
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 Scildon and the Waard Group, consisting of Waard Leven N.V., Hollands Welvaren Leven
N.V.,
Waard Schade N.V. and Waard Verzekeringen B.V.
EcV Economic Value is a financial metric that is derived from Solvency II own funds that is
broadly
similar in concept to European Embedded Value. It provides a market consistent
assessment
of the value of existing insurance businesses, plus adjusted net asset value of the
non-insurance
business within the group.
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 The company and its existing subsidiary undertakings.
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.
Group Solvency Group solvency is a measure of how much the value of the company exceeds the level of
capital
it is required to hold in accordance with Solvency II regulations.
HCL HCL Insurance BPO Services Limited.
IFRS International Financial Reporting Standards.
IFA Independent Financial Adviser.
KPI Key performance indicator.
LGN LGN or Legal & General Nederland refers to the legal entity Legal & General Nederland
Levensverzekering
Maatschappij N.V acquired by Chesnara in April 2017.
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.
New business The present value of the expected future cash inflows arising from business written in
the
reporting period.
Official List The Official List of the Financial Conduct Authority.
Ordinary Shares Ordinary shares of five pence each in the capital of the company.
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.
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.
Scildon Scildon
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.
SICAV A type of open-ended investment fund in which the amount of capital in the fund varies
according
to the number of investors. Shares in the fund are bought and sold based on the fund's
current
net asset value.
STI Short-Term Incentive Scheme - A reward system designed to incentivise executive
directors'
short-term performance.
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.
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.
Total Cash Generation This represents the absolute cash generation for the period at total group level,
comprising
divisional cash generation as well as both exceptional and non-exceptional group
activity.
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 and S&P
NOTE ON TERMINOLOGY
As explained in Note 8 to the IFRS financial statements, 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; 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; 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;
====================== ==============================================================================================
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
====================== ==============================================================================================
Scildon which was acquired on 5 April 2017; and
====================== ==============================================================================================
Other group Activities which represents the functions performed by the parent company, Chesnara plc. Also included
in this segment are consolidation adjustments.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR PGUGWRUPRPGB
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