TIDMCSN
RNS Number : 3259J
Chesnara PLC
29 March 2018
Chesnara plc
Record divisional cash pays dividends
During 2017 we have delivered against each of our core strategic
objectives thanks to economic tailwinds, good operational delivery
and a number of one-off items including the successful completion
of the acquisition of Legal & General Nederland.
Financial Highlights
-- Economic Value (EcV) of GBP723.1m (31 December 2016: GBP602.6m) (Note 1)
We completed the acquisition of Legal and General Nederland
(which we have since rebranded "Scildon") which created GBP65.4m of
incremental EcV. The movement is stated after recognising GBP29.5m
of dividend payments during the year.
-- EcV earnings net of tax of GBP139.5m (2016: GBP72.5m)
Includes the aforementioned GBP65.4m gain arising from the Legal
and General Nederland acquisition. Favourable investment market
conditions have contributed positively to the result.
-- EcV new business contribution of GBP12.4m (2016: GBP11.7m)
Movestic continues to contribute the vast majority of new
business profits. Scildon introduces a second open business to the
group and is anticipated to deliver more meaningful contributions
following delivery of a two year change programme.
-- Group cash generation, excluding the impact of the LGN
acquisition, of GBP83.9m (2016: GBP36.5m) (Note 2)
The 2017 result includes GBP16.2m of post acquisition cash
generation from Scildon.
-- Divisional cash generation of GBP86.7m (2016: GBP34.3m) (Note 3)
All divisions have made positive contributions, with the results
benefitting from economic conditions and a number of non-recurring
management actions.
-- IFRS profit before tax of GBP89.6m (2016: GBP40.7m)
The 2017 result includes a GBP20.3m gain on the acquisition of
Legal and General Nederland. Economic profits of GBP30.9m compare
to a corresponding profit of GBP5.8m in 2016. The underlying core
operating profit remains relatively stable at GBP38.4m (2016:
GBP34.9m).
-- IFRS Total Comprehensive Income of GBP86.9m (2016: GBP55.4m)
This includes a foreign exchange gain of GBP8.3m (2016: GBP20.1m
gain) arising on a strengthening of the euro and Swedish krona
against sterling.
-- Group solvency ratio of 146% (31 December 2016: 144%(Note 4) )
We are well capitalised at both group and subsidiary level under
Solvency II, and have not used any elements of the long term
guarantee package, including transitional arrangements.
-- 2.98% increase in full year dividend compared with 2016
Total dividend of 20.07p per share (2016: 19.49p per share).
This increase represents the thirteenth successive rise in annual
dividends.
Strategic delivery highlights
-- Completion of the Legal and General Nederland acquisition
With a purchase price of EUR161m, this acquisition was
successfully completed on 5 April 2017 and the company was renamed
Scildon. Good progress has been made on integrating the business
with the Chesnara group with benefits delivered slightly ahead of
expectations.
-- GBP70m of divisional dividends
The results during the year, combined with associated solvency
positions, have enabled the divisions to propose total dividends to
Chesnara of GBP70.0m. As expected, the UK's dividend of GBP32.0m
continues to be the largest contributor but it is equally
encouraging to see the Dutch businesses of Scildon and Waard
propose dividends of GBP22.2m and GBP13.0m respectively. The fact
that a growth business such as Movestic has proposed a dividend of
GBP2.8m is also very positive.
John Deane, Chief Executive said:
"2017 has been another good year for Chesnara during which we
completed the acquisition of Legal and General Nederland, now
successfully rebranded Scildon, and made good progress on
integrating it into our business. The acquisition has contributed
to an impressive set of results on all financial metrics, including
IFRS, Economic Value and Solvency II. In particular I am pleased to
report an Economic Value growth, excluding the acquisition gain, of
9.1%.
All divisions have made significant contributions to cash and
value generation. The UK business had again generated cash ahead of
expectations and Movestic continues to deliver significant growth,
which has resulted in further cash generation.
During the post acquisition period, Scildon has delivered
Economic Value growth and solvency surplus broadly in line with our
initial expectations. That said, we retain our view that the
business would benefit from some focussed improvements and have
initiated a development programme to improve the profitability of
new business.
As a result of the positive performance in the year, Chesnara
expects total dividends from its divisions of GBP70.0m, including
an inaugural Scildon dividend of GBP22.2m."
Note 1 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.
Note 2 The unadjusted group cash generation metric in 2016 was
GBP85.4m, and included a GBP48.9m one-off positive impact in
respect of equity raised ahead of completion of the acquisition of
Legal and General Nederland. We highlighted this as a temporary
impact in our 2016 accounts. The unadjusted group cash generation
in 2017 of GBP28.6m includes, as expected, a consequential negative
impact of GBP55.3m which arose on completion of the LGN
acquisition. The end to end impact of the acquisition of LGN
resulted in a day 1 surplus cash reduction of GBP6.4m.
Note 3 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 4 The 2016 closing solvency ratio of 144% is an adjusted
ratio, and removes the positive impact of the equity raised ahead
of the purchase of Legal and General Nederland. This is deemed to
provide a more meaningful comparison to the solvency ratio at 31
December 2017. The unadjusted position at 31 December 2016 was
158%.
The Board approved this statement on 28 March 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 PL business transferred into CA plc. CA plc
operates an outsourced business model.
Movestic, a Swedish life assurance company which originally
focused on pensions and savings, was acquired on 23 July 2009 for
GBP20 million. The company is open to new business and seeks to
grow its position in the Swedish unit-linked market. Its
proposition was strengthened in February 2010 with the acquisition
of the operations of Aspis Försäkringar Liv AB which has a risk and
health product bias.
The Waard Group, a Netherlands-based group comprising three
closed book insurance companies and a servicing company, was
acquired on 19 May 2015 for EUR69.9m. The Waard Group, comprising
Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V.
and Tadas Verzekeringen B.V. was previously owned by DSB Beheer
B.V., a Dutch financial services group. The policy base of the
Waard Group is predominantly term life policies, with some unit
linked policies and some non-life policies.
Scildon (previously Legal and General Nederland) 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.
========================================================
2017 HIGHLIGHTS
FINANCIAL
IFRS PRE-TAX PROFIT GBP89.6M 2016 GBP40.7M
The 2017 result includes GBP20.3m gain on acquisition of Legal
& General Nederland.
IFRS TOTAL COMPREHENSIVE INCOME GBP86.9M 2016 GBP55.4M
Includes foreign exchange gain of GBP8.3m (2016: GBP20.1m).
GROUP SOLVENCY 146% 2016 158% (144% excluding equity raise
impact)*
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.
* The 2016 closing ratio of 158% was enhanced by equity raised
ahead of the purchase of Legal & General Nederland. The
adjusted position at 31 December 2016, excluding this impact, was
144%. This figure represents a more logical comparison for
assessing movements during 2017.
ECONOMIC VALUE GBP723.1M 2016 GBP602.6M
Movement in the period is stated after dividend distributions of
GBP29.5m. Includes gain on acquisition of Legal & General
Nederland of GBP65.4m.
ECONOMIC VALUE EARNINGS GBP139.5M 2016 GBP72.5M
NEW BUSINESS PROFIT GBP12.4M 2016 GBP11.7M
GROUP CASH GENERATION GBP28.6M 2016 GBP85.4M
A GBP48.9m one-off positive impact, in respect of equity raised
ahead of completion of the acquisition of Legal & 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 includes a consequential negative
impact of GBP55.3m. This explains the large year on year swing on
the headline group cash generation metric. The end to end impact of
the Legal & General Nederland acquisition is to reduce cash
generation by GBP6.4m.
DIVISIONAL CASH GENERATION GBP86.7M 2016 GBP34.3M
Includes the cash generated post acquisition by Scildon of
GBP16.2m.
OPERATIONAL AND STRATEGIC
FULL YEAR DIVID INCREASE
Total dividends for the year increased by 2.98% to 20.07p per
share (7.00p interim and 13.07p proposed final). This compares with
19.49p in 2016 (6.80p interim and 12.69p final).
COMPLETION OF LEGAL & GENERAL NEDERLAND ACQUISITION
With a purchase price of EUR161m, this acquisition was
successfully completed on 5 April 2017 and the company renamed
Scildon. Good progress has been made on integrating the business
with the Chesnara group with benefits delivered slightly ahead of
expectations.
EQUITY GROWTH, WEAKENING STERLING
Equity markets in all territories have performed positively
during the year. The Swedish Krona and Euro have both strengthened
against Sterling, resulting in positive exchange gains being
reported in the period.
GBP70.0M OF TOTAL PROPOSED DIVISIONAL DIVIDS
The results during the year, combined with associated solvency
positions, have enabled the divisions to propose total dividends to
Chesnara of GBP70.0m. As expected, the UK business dividend of
GBP32m continues to be the largest contributor but it is equally
encouraging to see the Dutch businesses of Scildon and Waard
propose dividends of GBP22.2m and GBP13.0m respectively. The fact
that a growth business such as Movestic has proposed a dividend of
GBP2.8m is also very positive.
SOLVENCY II IN ACTION
As planned, we have continued to enhance our understanding of
the Solvency II figures during the year. This has resulted in a
number of changes to the SCR. These changes consist of positive
capital management actions such as de-risking Scildon's shareholder
assets, improved asset analysis in Movestic and model enhancements
which ensure the SCR better aligns to our business.
MEASURING OUR PERFORMANCE
HOW WE MEASURE PERFORMANCE WITHIN THESE REPORT &
ACCOUNTS
Throughout our Report & Accounts, 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 Report &
Accounts 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, these Report
& Accounts adopt 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.
FINANCIAL STATEMENT KPIS:
-- IFRS profits
-- IFRS net assets
ADDITIONAL METRICS:
-- Solvency
o Own funds
o Solvency capital requirement (SCR)
o SCR plus management buffer
o Solvency position (absolute value)
o Solvency position ratio
-- Cash generation
o Group cash generation
o Divisional cash generation
-- Economic Value
o Balance sheet position
o 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 Report
& Accounts include measures that consider and assess
performance all of our key stakeholder groups. The table below
summarises the performance measures adopted throughout the Report
& Accounts.
MEASURE WHAT IS IT AND WHY IS IT IMPORTANT?
================ ======================================================
Customer How well we service our customers is of paramount
service importance and so through various means we
levels aim to assess customer service levels. The
business reviews within the Report & Accounts
refer to a number of indicators of customer
service levels.
================ ======================================================
Broker Broker satisfaction is important because they
satisfaction sell new policies, provide ongoing service
to their customers and influence book persistency.
We include several measures within the Report
& Accounts, including direct broker assessment
ratings for Movestic and general assessment
of how our brands fair in industry performance
awards in the Netherlands.
================ ======================================================
Policy This is a measure of how the assets are performing
investment that underpin policyholder returns. It is
performance important as it indicates to the customer
the returns that their contributions are generating.
================ ======================================================
Industry This is a comparative measure of how well
performance our investments are performing against the
assessments rest of the industry, which provides valuable
context to our performance.
================ ======================================================
Funds This shows the value of the investments that
under the business manages. This is important because
management 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 Policy count is the number of policies that
count 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 This includes dividend growth and yield and
shareholder shows the return that an investor is generating
returns 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
profitability new business 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
market relative to the rest of the market and is
share important context for considering our success
at writing new business against our target
market shares.
================ ======================================================
Gearing The gearing is a ratio of debt to IFRS net
ratio 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 seek to avoid becoming overly dependent
on permanent debt on the balance sheet.
================ ======================================================
Knowledge, This is a key measure given our view that
skills the quality, balance and effectiveness of
and experience the Board of Directors has a direct bearing
of the on delivering positive outcomes to all stakeholders.
Board
of Directors
================ ======================================================
CHAIRMAN'S STATEMENT
2017 has been another good year for Chesnara during which we
completed the acquisition of Legal and General Nederland, now
successfully rebranded Scildon, and made good progress on
integrating it into our business. The acquisition has contributed
to an impressive set of results on all financial metrics, including
IFRS, Economic Value and Solvency II.
In particular I am pleased to report an Economic Value growth,
excluding the acquisition gain, of 9.1%.
All divisions have made significant contributions to cash and
value generation. The UK business had again generated cash ahead of
expectations and Movestic continues to deliver significant growth,
which has resulted in further cash generation.
During the post acquisition period, Scildon has delivered
Economic Value growth and solvency surplus broadly in line with our
initial expectations. That said, we retain our view that the
business would benefit from some focussed improvements and have
initiated a development programme to improve the profitability of
new business.
As a result of the positive performance in the year, Chesnara
expects total dividends from its divisions of GBP70.0m, including
an inaugural Scildon dividend of GBP22.2m.
During 2017 we have delivered against each of our core strategic
objectives thanks to economic tailwinds, good operational delivery
and the successful completion of the acquisition of Legal &
General Nederland. This has resulted in financial results which
support the continuation of our dividend strategy and show
continued Economic Value growth. This has been achieved whilst
remaining true to our well established culture and values of
treating customers fairly and adopting a robust approach to
regulatory compliance. Importantly, the business growth has been
achieved without compromising our risk appetite.
MAXIMISE VALUE FROM EXISTING ACQUIRE LIFE AND PENSIONS ENHANCE VALUE THROUGH PROFITABLE NEW
BUSINESS BUSINESSES BUSINESS
GBP86.7m of divisional cash Acquisition of Legal & General New business profits from Movestic of
generation representing 288% dividend Nederland (now Scildon) created a GBP11.8m plus a modest full year new
cover. positive Economic Value impact business profit
of GBP65.4m. of GBP1.9m from Scildon.
Maximise value from existing business
The profitability of our existing business remains at the heart
of our business model. IFRS pre-tax profits, which predominantly
flow from the in-force business, of GBP89.6m (2016: GBP40.7m)
compare favourably to prior year and base case expectations.
In addition, all of our divisions, including Scildon, have made
significant positive cash contributions totalling GBP86.7m.
A 7.1% growth in the Economic Value of the existing business,
excluding the impact of new business and acquisitions, is also
dominated by the impact of positive economic conditions. The group
has reported a modest economic value operating profit of GBP3.3m.
This consists of an underlying operating profit of GBP22.5m, offset
by the negative impact of making provision to adopt a slightly more
attractive pricing strategy on certain white label funds in
Movestic and to cover the one-off costs of developing the Scildon
business.
THE ECONOMIC VALUE OF THE GROUP HAS INCREASED BY 20.0% IN THE
YEAR, OF WHICH 10.9% RELATES TO THE GAIN ON COMPLETION OF THE
ACQUISITION OF LEGAL AND GENERAL NEDERLAND.
Acquire life and pensions businesses
The completion of the acquisition of Legal & General
Nederland has delivered "Day 1" financial benefits slightly ahead
of expectations. Since completion, management has spent time
working with our new colleagues in the Netherlands. Initial
assessment confirms that the business is well managed and soundly
governed. As expected we have also identified opportunities to make
some process improvements over the next two years which we expect
to increase the future financial returns from the business. We have
completed a successful rebrand to the new company name, "Scildon",
and have made significant progress in integrating the business into
the Chesnara group. The successful integration of Scildon means the
group remain well positioned for any new opportunity that
arises.
Enhance value through new profitable new business
Movestic has continued to operate within its market share target
range and has generated GBP11.8m of new business profit
representing a 5.2% growth on Movestic's opening Economic
Value.
We acquired Scildon with an expectation that it was breaking
even on writing new business. The fact that Scildon have reported a
modest new business profit for the full year of GBP1.9m is
encouraging but this level of profit is not deemed commercially
acceptable. We have initiated changes, to be delivered over a two
year timeframe, which we believe will improve market shares towards
the upper end of our target 5% - 10% protection market share range
and which would create more commercially meaningful levels of new
business profit.
NEW BUSINESS PROFIT FROM MOVESTIC OF GBP11.8M AND AS EXPECTED
SCILDON IS ONLY MARGINALLY PROFITABLE. A DEVELOPMENT PROGRAMME HAS
BEEN INITIATED TO IMPROVE SCILDON'S PROFITABILITY OVER THE NEXT TWO
YEARS.
Solvency
At the end of 2016, the group solvency ratio, which includes no
transitional adjustments, was 158% which translated to an absolute
level of surplus of GBP185m. This position had the temporary
benefit of holding GBP50m of surplus due to the equity raised in
advance of funding the acquisition of Legal & General
Nederland. The underlying solvency ratio of 144% equated to GBP135m
of absolute surplus.
During 2017, the absolute level of surplus, over and above the
SCR increased by GBP58m after accounting for the impact of
dividends. Of this increase, GBP4.7m was the direct consequence of
the acquisition of Legal & General Nederland. This relatively
modest impact is in line with expectations and is consistent with
the equity raise prospectus. The acquisition impact as reported
includes the benefits of having reinvested shareholder assets
shortly after completion from equities to fixed income investments,
with lower capital requirements. This is consistent with Chesnara's
investment policy and risk appetite regarding the investment of
shareholder assets. The remainder of the surplus emerging is due to
surpluses arising in all of our businesses. The UK provided the
majority of the increase although Movestic and Waard continued to
make meaningful positive contributions. Whilst it is still
relatively early in the post acquisition period for Scildon, it was
encouraging to see a surplus of GBP16.2m emerge during this time.
On an annualised basis, this is broadly in line with
expectations.
When expressed as a ratio, the closing solvency ratio as at 31
December 2017 of 146% is marginally improved compared to the end of
2016 (adjusted to exclude the temporary equity raise benefit).
Solvency II and IFRS 17
After many years and much hard work, I am pleased to report the
implementation stage of the transition to the Solvency II regime is
now fully complete. During the year, we successfully produced our
inaugural Solvency II narrative reports with the Solvency and
Financial Condition Report being made available on our website. We
believe Solvency II creates an improved focus on capital
requirements and risk. This means we can better assess the impact
of management decisions and also creates the potential for value
adding management actions.
As Solvency II becomes embedded into day to day operations, the
industry now faces the challenge of applying new accounting rules
for insurance contracts, known as IFRS 17. It is not expected to
have any direct bearing on the commercial assessment of Chesnara.
That is, it is not expected to have an impact on Economic Value or
cash generation, other than the direct impact of the cost of
implementing the change.
AN INCREASED UNDERSTANDING OF THE DYNAMICS OF SOLVENCY II HAS,
AS EXPECTED, CREATED CAPITAL OPTIMISATION BENEFITS IN THE YEAR. WE
WILL CONTINUE TO IDENTIFY FURTHER CAPITAL OPTIMISATION BENEFITS
OVER THE COMING YEARS.
Regulation
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.
Following the final guidance from the FCA's review of the "Fair
treatment of long standing customers in the life insurance sector",
we have been able to progress with the delivery of our Customer
Strategy in the UK. The programme is now established and board
approved budgets are recognised within our provisions. The work
undertaken to date continues to support the level of provision
made. The project does include enhancements to meet new regulatory
standards.
The investigation into how Countrywide Assured disclosed exit
fees to customers, initially announced on 3 March 2016, is ongoing.
We have provided the FCA with all information requested.
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.
No significant regulatory issues have arisen in the Netherlands
or Sweden during the year.
Investment proposition
Given Chesnara shares are primarily held by those requiring
attractive income, I am pleased to report a 2.98% increase in our
full year dividend.
2.98% INCREASE IN FULL YEAR DIVID
Governance and risk management
We continue to place great importance on the ongoing enhancement
of our risk and governance system, and have a number of
developments underway. Embedding activity progresses, with
significant focus in 2017 on continuing to increase the consistency
of our approach across the group, including the newly acquired
Scildon business.
In line with our implementation of a strong governance
framework, we have carried out a tender process for our external
audit during the second half of 2017. As a result of this, we
recommend the reappointment of Deloitte.
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. DURING THE
YEAR, WE HAVE TAKEN THE OPPORTUNITY TO STEP BACK TO REFLECT UPON
OUR CORPORATE PURPOSE.
Corporate purpose
We have assessed 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.
TAXATION
- As per our tax strategy, we adopt a responsible and open
approach to taxation and, as a consequence, pay the appropriate
taxes.
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
- 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.
In summary based on the above, our view is that Chesnara fulfils
a positive corporate purpose.
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.
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 and provisions made during the
year create the required capacity to react to any market driven fee
pressures without adverse profit impact. Scildon has significant
surplus capital and 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. 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 we are nearing
completion of a debt syndication process that will ensure 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 and I see potential for Scildon to make improvements to
their new business value in the medium term. We have provided for
the expected cost of the improvement plan. I believe this will
result in a meaningful level of recurring value growth from new
business without a material shift from our core specialism of
acquiring and managing in-force businesses.
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
28 March 2018
BUSINESS REVIEW
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to shareholders and
policyholders. The strategy is delivered through a proven business
model underpinned by a robust risk management and governance
framework and our established culture and values.
MAXIMISE VALUE ACQUIRE LIFE AND ENHANCE VALUE THROUGH
FROM EXISTING BUSINESS PENSION BUSINESSES PROFITABLE NEW BUSINESS
========================== ====================== ============================================
Business Model
================================================================================================
Maintain adequate Fair treatment Provide a competitive Robust regulatory
financial resources of customers return to shareholders compliance
======================== ====================== ========================== ==================
Responsible risk based management
================================================================================================
BUSINESS REVIEW | UK
The UK division manages c300,000 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 division has delivered against its objectives. The customer
strategy plan is on track and delivering tangible benefits to our
customers and the division has continued to deliver strong
financial results.
MAXIMISE VALUE FROM EXISTING BUSINESS
Capital and value management
Background
- 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 2017
- Economic Value growth of GBP45.9m (21.9%) in the year (before
the impact of the dividend paid in the year), driven by the
positive investment market experience gains in the year.
.
- Cash of GBP34.5m has been generated by the division. This
includes the positive benefit of GBP9.0m being transferred out of
the S&P with profit funds, while still ensuring suitable
protection for with profits customers.
- Successful embedding of our Capital Optimisation Advisory
Group, a sub-set of executive team members who focus on the
division's solvency and value management initiatives.
- Implemented a change to our assets backing the with-profit
funds, focusing on seeking the appropriate balance from a customer
and shareholder perspective.
Future priorities
- Continue to identify, assess and subsequently deliver any
appropriate actions associated with managing the solvency capital
and valuation balance sheet of the division.
KPIs
Continued underlying growth in economic value after removing the
impact of dividends.
GBPm 2013 2014 2015 2016 2017
====================== ====== ====== ====== ====== ======
EEV / EcV 297.3 271.8 232.2 239.6 255.5
Cumulative dividends 48.0 113.0 143.5 173.5
====================== ====== ====== ====== ====== ======
Total 297.3 319.8 345.2 383.1 429.0
====================== ====== ====== ====== ====== ======
Cash generation of GBP34.5m continues to support the group's
dividend strategy.
GBPm 2013 2014 2015 2016 2017
----------------- ----- ----- ----- ----- -----
Cash generation 54.1 50.9 42.5 21.3 34.5
Customer outcomes
Background
- 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.
- During December 2016 the FCA issued a publication "FG 16/8
Fair treatment of long-standing customers in the life insurance
sector". Our customer strategy incorporates plans to ensure the
guidelines within this publication are fully complied with.
Initiatives and progress in 2017
- A key focus has been the delivery of a three-year customer
strategy plan, which is overseen by the customer committee. During
2017 the following has been delivered:
o Designed a refreshed Countrywide Assured website ready for
roll out in 2018.
o Reviewed our key customer communications in the context of new
guidelines issued by the FCA, ready for going live in 2018.
o Developed a refreshed product governance framework, ready for
the delivery of product reviews during 2018.
o Continued to perform work seeking to get back in touch with
customers that we no longer have contact with.
- 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
had seven separate information requests to date.
- The 1% exit fee cap on all pension products where the
policyholder is over 55 was successfully implemented during the
period.
Future priorities
- Continuation of the customer strategy implementation plan. Key
projects delivery in 2018 are:
o Roll out of a new Countrywide Assured website.
o Roll-out first wave of refreshed key customer communications
to ensure ongoing compliance with the most recent FCA
guidelines.
o Deliver our updated approach to performing product
reviews.
- Continue to deliver competitive fund performance.
KPIs
Policyholder fund performance
2017 2016
CA Pension Managed 9.8% 17.2%
CWA Balanced Managed Pension 9.5% 15.8%
S&P Managed Pension 13.6% 14.2%
Benchmark - ABI Mixed Inv 40%-85% shares 9.5% 13.4%
Our main managed funds continue to be in line with or exceed
relevant benchmarks.
Governance
Background
- 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 2017
- Strong solvency position has been maintained throughout the year.
- Solid delivery of outsourced services.
- Continued to develop our General Data Protection Regulation
(GDPR) readiness programme in advance of the legislation being
implemented in 2018.
- Delivered our inaugural Solvency and Financial Condition
Report (SFCR) and Regular Supervisory Report (RSR), reports
required by Solvency II rules.
- Planning commenced regarding the implementation of IFRS 17
"Insurance Contracts", a new insurance accounting standard which
was issued in May 2017 and has an effective date of 1 January
2021.
Future priorities
- Ensure we deliver our plans to meet the General Data
Protection Regulation (GDPR) well within the timeframes of the
regulatory deadline of 25 May 2018.
- Continue to support the FCA in its investigation.
- Continue to develop and start to deliver against
implementation plans for "IFRS 17 Insurance Contracts". This will
be a significant, multi-year project for both the UK division and
the wider group.
KPIs
Solvency ratio: 155%
Solvency remains robust. The surplus generated in year increases
the solvency position from 128% to 155%. After the dividend, due to
be paid during 2018, the ratio is 130%.
GBPm Solvency
Ratio
========================= ======= =========
31 Dec 2016 surplus 36.5 128%
2017 Surplus generation 34.1
31 Dec 2017 surplus
(pre-dividend) 70.6 155%
2017 dividend (32.0)
============================ ======= =========
31 Dec 2017 surplus 38.6 130%
============================ ======= =========
BUSINESS REVIEW | SWEDEN
Movestic is a life and pension 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. That
said, the division is not complacent. MiFID II and the Insurance
Distribution Directive (IDD) are causing uncertainty in the broker
community, the market remains price competitive, and the management
team has a busy period ahead in delivering its ongoing
digitalisation programme.
MAXIMISE VALUE FROM EXISTING BUSINESS
Capital and value management
Background
- 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 2017
- Economic value growth of GBP24.8m. This includes a GBP11.4m
loss relating to changes in future charge assumptions. This change
creates capacity to react, if commercial pressures were to drive
fee changes in the future, without there being an adverse profit
impact at the point of change.
- Cash generation, on constant exchange rates, of GBP22.1m.
- Growth in assets under management of 15.7% (GBP395m), driven
by new business and strong investment market returns.
- A new fund management company operating out of Luxembourg,
Movestic Fund Management S.A., was established, and funds were
migrated in June.
- Optimised cost efficiency through the new management company
by taking responsibility for additional parts of the value
chain.
- The life and health business has reported favourable claims development in the year.
- Embedded a mass lapse reassurance arrangement
Future priorities
- Deliver against plans to continue to modernise and automate
processes. This is designed to give better broker experience and
deliver cost efficiencies.
- Provide a sustainable and predictable dividend to Chesnara.
- Continue to focus on generating positive client cash flows by:
o maintaining lapse levels within valuation assumptions; and
o strategic pricing to maintain transfers-in to 2016 levels or
above.
- Optimise the pricing model to changing market conditions.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Growth in assets under management
GBPbn 2013 2014 2015 2016 2017
=================== ===== ===== ===== ===== =====
2017 Total assets
under management 1.6 2.0 2.2 2.5 2.9
=================== ===== ===== ===== ===== =====
GBPbn GBPbn
===================== ======
31 December 2016 2.5
New client cashflow 0.17
Investment growth 0.22
31 December 2017 2.9
========================= ======
IFRS profit
GBPm 2013 2014 2015 2016 2017
============= ===== ===== ===== ===== =====
IFRS profit 2.1 3.9 7.9 9.6 9.8
Value growth (2012-15: EEV - 2016-17: EcV)
GBPm 2013 2014 2015 2016 2017
====================== ====== ====== ====== ====== ======
Cumulative dividends 2.7
Reported value 120.7 149.9 189.6 227.4 249.5
====================== ====== ====== ====== ====== ======
Total 120.7 149.9 189.6 227.4 252.2
Customer outcomes
Background
- 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 2017
- During the year Movestic has improved its digital/web
interfaces with its end-customers and brokers. The focus on further
digitalisation will continue into 2018.
- Movestic has continued to develop its in-house advisory
service to take care of existing customers.
- Average fund performance has exceeded the Swedish stock market.
- Movestic has continued to focus on its sustainable investments
proposition, and issued the industry's first sustainability guide
to savers.
Future priorities
- Fund range development in line with customer and market requirements.
- Deliver competitive unit linked fund returns.
- Improve digital business and the relationship with the end user.
- Relaunch Life & Health business.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Broker assessment rating (out of 5)
2013 2014 2015 2016 2017
======== ===== ===== ===== ===== =====
Rating 3.6 3.6 3.7 3.8 3.7
2018 Policyholder average investment return:
8.2% (Swedish stock market 6.4%)
Governance
Background
- 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 2017
- As part of its succession planning Movestic appointed a new
CEO, Linnéa Ecorcheville, replacing Lars Nordstrand.
- During the year Movestic delivered its inaugural Solvency II narrative reports.
- Movestic has continued to deepen its understanding and
analysis of the Solvency II capital position. In particular
Movestic has refined its solvency capital requirement calculation
models through improved investment data and more refined mass lapse
modelling, resulting in a positive SCR benefit of cGBP10m.
Future priorities
- Continue to deepen the understanding of the Solvency II dynamics.
- Improve efficiency of regulatory reporting routines.
- Commence and deliver IFRS 17 "Insurance contracts" implementation programme.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Solvency ratio: 155%
Solvency remains strong. Surplus of GBP27.6m in the year
increases the solvency ratio from 140% to 155%. After the 2017
dividend, to be paid in 2018, the ratio is 153%.
GBPm Solvency
Ratio
========================= ====== =========
31 Dec 2016 surplus 54.0 140%
2016 surplus generation 27.6
31 Dec 2017 surplus
(pre-dividend) 81.6 155%
2017 dividend (2.8)
============================ ====== =========
31 Dec 2017 surplus 78.8 153%
============================ ====== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
Profitable new business
Background
- 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 2017
- New business profits of GBP11.8m have been generated in the year.
- Market shares continue to be within the target range.
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 2017 exchange
rates)
Occupational pension market share %
% 2013 2014 2015 2016 2017
============== ===== ===== ===== ===== =====
Market share 13.7 12.6 11.7 13.2 11.6
New business profit
GBPm 2013 2014 2015 2016 2017
===================== ===== ===== ===== ===== =====
New business profit 6.7 9.1 6.7 12.3 11.8
BUSINESS REVIEW | NETHERLANDS
The Netherlands division includes the businesses of both Waard
and Scildon, with Scildon being acquired during the year. Since
acquisition the priority has been to integrate Scildon into the
wider group, with significant progress in aligning the risk and
governance frameworks, financial reporting processes and investment
strategy. Scildon sold a number of indirect investments in equity
holdings as part of aligning its investment strategy, resulting in
a reduction in solvency capital requirements. Scildon has produced
a solid set of results, including a modest new business profit, and
Waard has continued to deliver in line with expectations. Both
businesses have strong solvency ratios, supporting the payment of
dividends to Chesnara.
2018 will see further development of the Scildon business, with
the business planning process helping to identify key strategic
priorities to achieve this. These priorities include enhancing the
profitable and scalable new business operations and refining the
product offering to meet the needs and demands of the market.
Underpinning this, system and process developments will be
implemented to enhance the customer and broker experience thus
developing an organisation with a structure and culture that
supports value generation.
MAXIMISE VALUE FROM EXISTING BUSINESS
Capital and value management
Background
- Both Waard and Scildon have a common aim to make capital
available to Chesnara to fund further acquisitions or to contribute
to the dividend funding. Whilst their aims are common, the dynamics
by which the businesses add value do 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 2017
- Post acquisition equity de-risk aligns the investment of
shareholder funds with group policy and risk appetite. Consequence
was a reduction in Scildon capital requirements.
- Guarantees have been removed from new business.
- Successful transfer of Hollands Welvaren Leven into Waard Leven, thereby releasing capital.
- Waard and Scildon ended the period with healthy pre-dividend
solvency ratios of 613% and 258% respectively before deducting the
proposed 2017 year end dividends.
- EcV growth of GBP17.1m, consisting of GBP5.1m for Waard and
GBP12.0m for Scildon since acquisition.
- Cash of GBP25.3m has been generated, with GBP10.5m from Waard and GBP14.8m from Scildon.
- IFRS profits of GBP23.6m, including GBP18.4m earned by Scildon
since acquisition, largely due to favourable investment conditions
which have not been offset by reserve movements.
Future priorities
- Both businesses will pay a dividend to Chesnara in spring 2018
in respect of the 2017 year end.
- In line with our integration plan, areas of Scildon requiring
investment have been identified. This investment will strengthen
future cash generation and value growth and one-off costs for these
developments have been provided for. 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 Enhancing new business profitability and launching appropriate
products to market in a timely fashion; and
o Continual assessment of the business model to ensure an
optimal balance between returns generated versus the solvency
capital requirements.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Scildon has a track record of delivering value growth enabling
dividend distribution to the parent company and will pay its first
dividend to Chesnara plc in April 2018.
Scildon value growth
GBPm 2013 2014 2015 2016 2017
====================== ====== ====== ====== ====== ======
EEV / EcV 293.6 269.3 241.4 224.1 221.1
Cumulative dividends 46.1 82.5 119.8 119.8
====================== ====== ====== ====== ====== ======
Total 293.6 315.4 323.9 343.9 340.9
====================== ====== ====== ====== ====== ======
Customer outcomes
Background
- Great importance is placed on providing customers with high
quality service and positive outcomes.
- Whilst our ultimate priority is the end customer, in Scildon
we also see the brokers who distribute our products as customers
and developing processes to best support them is a key focus.
Initiatives and progress in 2017
- Scildon received awards for "Best occupational pension
insurer" and "Best annuity insurer". Scildon was rated in 2nd place
for term insurance according to the broker organisation
(Adfiz).
- The annual performance research for consumers shows high scores.
- Scildon replaced some non-performing funds.
Future priorities
- Enhancing and developing existing processes and customer
experiences and the underlying infrastructure.
- Organise discussions with brokers to support the development
of our processes in conjunction with their requirements.
- Perform a customer assessment and use the outcome to improve quality of service
- Introduce chat-function on new website, improve navigation to
documents and disclose more relevant information on-line.
- Continue to improve Scildon's brand recognition.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Scildon client satisfaction rating (out of 10)
2014 2015 2016 2017
======== ===== ===== ===== =====
Rating 7.3 7.5 7.4 7.6
Governance
Background
- The Waard Group 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 2017
- Both companies have successfully delivered their inaugural Solvency II reporting.
- Progressed the alignment of the Scildon governance and risk
management framework to Chesnara practices.
- Scildon appointed Gert Jan Fritzsche as CEO and Rene Tuitert
as CFO, who started in March 2018.
- Waard appointed Lorens Kirchner and Andy Schaut as CEO and CFO respectively in 2017.
Future priorities
- The continued focus is to fully align and integrate the
governance routines such as the Risk Management Framework, Business
Planning, MI production and ensuring local processes conform to the
Chesnara governance map where appropriate.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Solvency ratio: Scildon 258%; Waard 613%
Solvency is strong in both businesses. GBP30.6m and GBP8.1m of
surplus have been generated by Scildon and Waard respectively.
After the 2017 dividend, including the interim dividend paid by
Waard to fund the LGN acquisition, solvency ratios are 231% and
483%.
Scildon
GBPm Solvency
Ratio
========================= ======= =========
31 Dec 2016 surplus 98.0 204%
2017 surplus generation 30.6
31 Dec 2017 surplus
(pre-dividend) 128.6 258%
2017 dividend (22.2)
============================ ======= =========
31 Dec 2017 surplus 106.4 231%
============================ ======= =========
Waard
GBPm Solvency
Ratio
========================= ======= =========
31 Dec 2016 surplus 74.4 710%
2017 surplus generation 8.1
31 Dec 2017 surplus
(pre-dividend) 82.5 613%
2017 dividend (44.3)
============================ ======= =========
31 Dec 2017 surplus 38.2 483%
============================ ======= =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
Profitable new business
Background
- The acquisition of Scildon has added a "New business"
dimension to the Dutch business model. Scildon sells 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 pursue a profitable pricing strategy.
New business also helps the business maintain scale and hence
contributes to unit cost management.
Initiatives and progress in 2017
- LGN has been successfully rebranded to Scildon with no
apparent adverse impact on new business levels or broker support,
as shown by levels of Annual Premium Equivalent remaining
consistent between 2016 and 2017.
- There have been modest new business profits of GBP1.9m in the year.
- Market share for the core protection business is towards the middle of our 5 - 10% range.
- New business processes have been reviewed with improvement
opportunities identified which will be mutually beneficial to
brokers, customers and profits. These smart process changes aim to
create more commercially meaningful levels of new business
profit.
Future priorities
- With solid new business foundations, management actions are
planned over the next two years to generate a more commercially
meaningful level of new business profit.
- One of the objectives of the actions is to move the market
share for protection business towards the top end of the 5-10%
target range.
- Whilst maintaining the focus on protection, Scildon plan to
increase the assets under management for pension business and
remain market leader in the growing unit linked market.
KPIs (all comparatives have been presented using 2017 exchange
rates)
Scildon - term assurance market share %
% 2013 2014 2015 2016 2017
============== ===== ===== ===== ===== =====
Market share 10.9 5.0 6.6 5.9 7.3
Scildon - new business profit
GBPm 2013 2014 2015 2016 2017
============================ ===== ====== ===== ===== =====
New business profit/(loss) 0.9 (3.6) 0.1 2.0 1.9
BUSINESS REVIEW | acquire life and pension businesses
On 5 April 2017 we completed the acquisition of Legal &
General Nederland (subsequently renamed Scildon).
The completion of Scildon, which had an economic value of
EUR237.5m at the point of acquisition, results in the group having
39% of its Economic Value in the Netherlands.
This acquisition continues our acquisition strategy in the
Netherlands. We believe this deal leaves us with sufficient scale
and presence to progress further value adding deals in the Dutch
market.
Highlights of LGN acquisition
- Completion purchase price of EUR161.2m
- Economic value of EUR237.5m at acquisition, representing a purchase price discount of 32%
- The impact of the acquisition, after taking account of the
equity de-risk programme, is to increase the solvency surplus of
the group by GBP4.7m
- Integration plans progressing well, with equity de-risk programme completed
Acquisition of Scildon
About Scildon
- A long established, award winning specialist insurer in the Netherlands.
- Policy base predominantly individual protection and savings contracts.
- Writes new business and sells protection, individual savings
and group pensions contracts via a broker-led distribution
model.
- Well-capitalised, with a solvency ratio of 204% at
acquisition. It applies the standard formula with no transitional
measures.
At the point of acquisition:
- EUR237.5m EcV
- 204% solvency ratio
- 174,000 policies
- EUR2.2bn AUM
- 149 employees
Impact on the group
CASH GENERATION
* Post acquisition cash generation expected to emerge
at levels which would more than cover incremental
funding costs, thereby creating a net positive impact
on group cash.
================ =============================================================
VALUE
* Scildon was purchased at a 32% discount to its
economic value, resulting in a day 1 gain of
GBP65.4m.
* The Netherlands now makes up 39% of group EcV.
================ =============================================================
CUSTOMER
OUTCOMES * Continuity of Scildon's operating model will ensure
existing high quality customer outcomes are not
compromised.
================ =============================================================
RISK APPETITE
* The risks associated with Scildon align with the
appetite of the Chesnara group following the equity
de-risk activity.
* Our integration plans include bringing Scildon within
the group's risk management framework.
================ =============================================================
POLICY
NUMBERS * Scildon's 177,000 policies at 31 December 2017 result
in the group now managing a policy base of over 1.1m,
of which 27% are in the Netherlands.
================ =============================================================
SOLVENCY
* The acquisition gives rise to an increase in the
absolute level of group capital above its capital
requirements, after taking account of the planned
equity de-risk programme.
================ =============================================================
FUNDING
AND CAPITAL * Deal financed through GBP66.7m of equity after costs,
GBP49.0m of incremental debt and GBP21.9m of
Chesnara's own cash.
* Our group gearing ratio, now 19.8%, remains well
within our risk appetite.
* Further equity raising capacity is expected to be
available for future deals.
================ =============================================================
OUR POST ACQUISITION INTEGRATION WORK IS PROGRESSING VERY WELL.
FOR MORE INFORMATION SEE THE NETHERLANDS BUSINESS REVIEW.
Acquisition outlook
- Scildon contributes positively to the acquisition outlook due
to increased scale and presence in the Netherlands. We believe we
are well-positioned to take advantage of any future acquisition
opportunities.
- Regarding the UK we have seen a gradual increase in closed
book market activity which, in our view, is driven in part by
reduced uncertainty regarding Solvency II and regulatory
developments.
- The environment in which European life insurance companies
operate continues to increase in complexity. For example, "IFRS 17
Insurance Contracts" was issued this year, 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 a proven 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.
- To prepare for future deals, we have been working closely with
our current debt provider, RBS, to convert our existing debt
arrangement 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 new syndicated
facility is expected to be operational during April 2018.
CAPITAL MANAGEMENT - Solvency II
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
The commentary below highlights key points in the year, starting
with the pre-LGN starting position.
Surplus: The solvency position of the group remains strong, at
146%. The group has GBP151m of distributable surplus over and above
the internal capital management policy. Each division has
contributed positively to group surplus. The graph shows that the
Scildon acquisition has reduced the solvency surplus available at a
group level by GBP8.0m. This was expected and does not include the
impact of the equity de-risking, which was delivered post
acquisition. Adjusting for this, the "day 1" impact of the Scildon
acquisition has resulted a small positive contribution to the
overall group solvency position of GBP4.7m.
Dividends: The closing solvency position is stated after
deducting the GBP19.6m proposed dividend (31 December 2016:
GBP19.0m), and also reflects the payment of an interim dividend of
GBP10.5m.
Own funds: A large contributor to the own funds growth of
GBP172m is a GBP54m "day 1" gain arising on the acquisition of
Scildon, coupled with the equity raise to support this acquisition
of GBP62m. The operating companies have collectively generated
GBP88m of additional own funds. The own funds movement recognises
the full year dividend burden of GBP30.1m.
SCR: The SCR has increased by GBP111m in the year. GBP109m of
this arose from the day 1 acquisition impact of Scildon
Solvency position
GBPm 2017 2016 2016
(excl. LGN
impact*)
=========================== ===== ===== ============
Own funds (post dividend) 615 505 443
SCR 422 321 309
Surplus own funds above
SCR 193 184 134
Capital buffer 42 32 31
Surplus own funds above
capital buffer 151 153 104
Solvency ratio % 146% 158% 144%
Solvency surplus
GBPm
========================================= =======
Group solvency 31 Dec 2016 - pre equity
raise impact 134.6
CA 34.1
Movestic 27.5
Waard 8.1
Scildon 25.9
Chesnara / consol adj (3.8)
Scildon acquisition impact (8.0)
Exchange rates 5.0
Dividends (30.1)
========================================= =======
Total surplus 31 Dec 2017 193.4
========================================= =======
The tables 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. Please note that prior
year figures have been restated using 31 December 2017 exchange
rates.
UK
Surplus: GBP13m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP32.0m proposed dividend (31 December 2016: GBP30.0m).
Own funds: Positive growth before dividends of GBP32.4m, driven
largely by positive equity markets in the year.
SCR: Broadly flat for the year. Insurance risk capital has
reduced in line with book run off, off-set by increases in market
risk capital driven by equity growth.
GBPm 2017 2016
================================= ===== =====
Own funds (post dividend) 167 166
SCR 128 130
Surplus own funds above SCR 39 36
Capital buffer 26 26
Surplus own funds above capital
buffer 13 11
Solvency ratio % 130% 128%
Sweden
Surplus: GBP49m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP2.8m proposed dividend (31 December 2016: GBP2.7m).
Own funds: Positive growth before dividends of GBP39.9m, driven
largely by positive investment returns in the year, offset by the
negative impact of changing assumptions regarding future fee
income.
SCR: Increased by GBP13m, largely due to growth in assets under
management.
GBPm 2017 2016
================================= ===== =====
Own funds (post dividend) 228 191
SCR 149 136
Surplus own funds above SCR 79 55
Capital buffer 30 27
Surplus own funds above capital
buffer 49 27
Solvency ratio % 153% 140%
Netherlands - Waard
Surplus: GBP28m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP13.0m proposed year end dividend and GBP32.1m paid in the year
(31 December 2016: GBPnil).
Own funds: Positive growth before dividends of GBP6.8m, driven
by sold investment returns in the year and refined assumptions.
SCR: SCR has reduced slightly, largely due to decreased
counterparty exposure through reduced cash holdings.
GBPm 2017 2016
================================= ===== =====
Own funds (post dividend) 48 89
SCR 10 13
Surplus own funds above SCR 38 76
Capital buffer 10 13
Surplus own funds above capital
buffer 28 64
Solvency ratio % 483% 712%
Netherlands - Scildon
Surplus: GBP25m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP22.2m proposed dividend (31 December 2016: GBPnil).
Own funds: Positive post acquisition growth before dividends of
GBP10.0m. Underlying growth owing to favourable returns from fixed
interest assets, offset by some one-off post acquisition expense
strengthening.
SCR: Fall largely driven by reduction in equity holdings.
GBPm 2017 2016
================================= ===== =====
Own funds (post dividend) 188 200
SCR 81 98
Surplus own funds above SCR 107 102
Capital buffer 81 98
Surplus own funds above capital
buffer 25 4
Solvency ratio % 231% 204%
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 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) (3) (5)
25% equity fall (1) (4) (5)
25% equity rise (1) 4 5
10% equity fall 1 (2) (3)
10% equity rise (1) 2 3
1% interest rate rise 2 3 1
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
material 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 CA holds in its linked funds.
* 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 under the sensitivity. The divisions that
most contribute to equity sensitivities are CA and
Movestic due to their large amounts of unit-linked
business.
* 1 % interest rate rise: An interest rate rise is
generally positive across the group. The total cash
generation impact across the group of GBP42.1m is
broadly equal across CA, Movestic and Scildon.
* 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 books.
* 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. CA is affected
more than the other divisions owing to the governance
structure of the business.
*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 the 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. 2017 has delivered strong results across all
metrics, with cash generation, pre-tax EcV earnings and IFRS
profits all in excess of prior year and plan, with a closing EcV of
GBP723.1m.
Summary of each KPI:
IFRS
PRE-TAX PROFIT: GBP89.6M (2016: GBP40.7M)
TOTAL COMPREHENSIVE INCOME: GBP86.9M (2016: GBP55.4M)
What is it?
The presentation of the results in accordance with International
Financial Reporting Standards (IFRS) aims to recognise the profit
arising from the longer-term insurance and investment contracts
over the life of the policy.
Why is it important?
IFRS profit is an indicator of the value that has been generated
within the long-term insurance funds of the divisions within the
group, and is a 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".
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.
GBPm 2017 2016
======================= ======= =======
CA 50.6 42.7
Movestic 9.8 8.7
Waard 5.2 6.2
Scildon 18.4 -
Group & consol adj. (14.7) (16.9)
Profit on acquisition 20.3 -
Taxation (11.2) (5.4)
Forex impact* 8.5 20.1
======================= ======= =======
Total 86.9 55.4
*includes other comprehensive income
- Strong pre-tax results across all segments.
- IFRS pre-tax profit of GBP89.6m significantly ahead of prior
year and plan. Pre-tax profit, excluding the profit on acquisition
of LGN, was GBP69.3m and still represents a 70% uplift on prior
year.
- Operating profits of GBP38.4m are the foundation of the
result, supported by economic earnings of GBP30.9m driven largely
by equity markets.
- Total comprehensive income includes a foreign exchange gain of
GBP8.3m (2016: GBP20.1m gain) relating to sterling's depreciation
against both the euro and Swedish krona.
CASH GENERATION
GROUP CASH GENERATION GBP28.6M (2016: GBP85.4M)
DIVISIONAL CASH GENERATION GBP86.7M (2016: GBP34.3M)
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 2017
=============================== =======
UK 34.5
Sweden 24.9
Netherlands - Waard 11.1
Netherlands - Scildon 16.2
=============================== =======
Divisional cash generation 86.7
Other group activities (2.7)
Impact of Scildon acquisition (55.3)
=============================== =======
Total group cash generation 28.6
=============================== =======
Divisional cash
- Significant cash contributions from all businesses in the year.
- Overall divisional cash generation is in excess of prior year
and plan, underpinned by performance in the UK and Sweden.
Total cash generation
- The completion of the Scildon deal in isolation had a GBP55.3m
negative cash impact, because consideration exceeded the surplus
acquired. This is largely offset by the equity raised to fund the
acquisition recognised as a positive in the 2016 cash figures,
resulting in an adverse end to end impact of GBP6.4m.
ECONOMIC VALUE (EcV)
GBP723.1M (2016: GBP602.6M)
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 18.5%, based on the
composition of the group's EcV at 31 December 2017.
GBPm
================ =======
2016 Group EcV 602.6
EcV earnings 74.1
Acquisition 65.4
Dividends (29.4)
Forex gain 10.4
================ =======
2017 Group EcV 723.1
================ =======
- Economic value at the end of the year in excess GBP723m,
having increased by GBP120.5m during the period.
- Strong underlying earnings of GBP74.1m generated in the year.
- Overall growth includes a gain of GBP65.4m realised on the acquisition of LGN in April.
- Foreign exchange gains also contribute to the overall growth, offset by dividend payments.
- EcV earnings were underpinned by significant economic results
and the gain delivered on the acquisition of LGN
ECV EARNINGS NET OF TAX
GBP139.5M (2016: GBP72.5M)
What is it?
In recognition of the longer-term nature of the group's
insurance and investment contracts, supplementary information is
presented that provides information on the economic value of our
business.
The principal underlying components of the Economic Value result
are:
- The expected return from existing business (being the effect
of the unwind of the rates used to discount the value
in-force).
- Value added by the writing of new business.
- Variations in actual experience from that assumed in the opening valuation.
- The impact of restating assumptions underlying the determination of expected cash flows.
- The impact of acquisitions.
Why is it important?
By recognising the market-related value of in-force business
(in-force value), a different perspective is provided in the
performance of the group and on the valuation of the business.
Economic Value earnings are an important KPI as they provide a
longer-term measure of the value generated during a period. The
Economic Value earnings of the group can be a strong indicator of
how we have delivered against all three of our core strategic
objectives. This includes new business profits generated from
writing profitable new business, Economic Value profit emergence
from our existing businesses, and the Economic Value impact of
acquisitions.
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 2017
=============================== =======
Underlying operating earnings 22.5
Exceptional operating items (19.2)
Economic earnings 76.7
Gain on acquisition 65.4
Other (5.9)
=============================== =======
Total EcV earnings 139.5
=============================== =======
- EcV earnings of GBP139.5m in the year, driven by a combination
of strong underlying economic earnings supported by the substantial
gain realised on the acquisition of LGN in April.
- Strong underlying operating profits were adversely affected by
two non-recurring items. The Movestic result includes an GBP11.4m
impact relating to changes in future charge assumptions if, as
expected, commercial pressures were to drive fee changes in the
future. In addition, we have provided GBP7.8m to cover the Scildon
development programme.
- Economic earnings primarily driven by strong equity market
performance and returns on assets across Europe in the period.
IFRS PRE-TAX PROFIT
GBP89.6M (2016: GBP40.7M)
IFRS TOTAL COMPREHENSIVE INCOME
GBP86.9M (2016: GBP55.4M)
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 primarily due to reserving
methodology rather than 'real world' value movements.
(3) Growth operation: The long-term financial model of Movestic
and Scildon is based on growth, with levels of new business and
premiums from existing business being targeted to more than offset
the impact of policy attrition, leading to a general increase in
assets under management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are
reflected in the following IFRS results:
2017 2016
GBPm GBPm Note
============================================ ====== ===== ====
CA 50.6 42.7 1
Movestic 9.8 8.7 2
Waard Group 5.2 6.2 3
Scildon 18.4 - 4
Chesnara (12.1) (9.7) 5
Consolidation adjustments (2.6) (7.2) 6
============================================ ====== ===== ====
Profit before tax and profit on acquisition 69.3 40.7
Profit on acquisition of Scildon 20.3 - 4
============================================ ====== ===== ====
Profit before tax 89.6 40.7
Tax (11.2) (5.4)
============================================ ====== ===== ====
Profit after tax 78.4 35.3
Foreign exchange translation differences 8.3 20.1 7
Other comprehensive income 0.2 - 8
============================================ ====== ===== ====
Total comprehensive income 86.9 55.4
============================================ ====== ===== ====
2017 2016
GBPm GBPm Note
============================================ ====== ===== ====
Operating profit 38.4 34.9 9
Economic profit 30.9 5.8 10
Profit before tax and profit on acquisition 69.3 40.7
Profit on acquisition of LGN 20.3 - 4
============================================ ====== ===== ====
Profit before tax 89.6 40.7
Tax (11.2) (5.4)
============================================ ====== ===== ====
Profit after tax 78.4 35.3
Foreign exchange translation differences 8.3 20.1 7
Other comprehensive income 0.2 - 7
============================================ ====== ===== ====
Total comprehensive income 86.9 55.4
============================================ ====== ===== ====
Note 1: The CA segment has reported results for the year in excess of those in 2016. Positive
economic conditions contributed GBP22.2m to the result, of which GBP11.9m related to a reduction
in the cost of guarantees within the S&P book. This was mainly driven by favourable equity
returns in the year and to a lesser extent valuation interest rate movements.
Note 2: Movestic has reported a strong trading result, improving on the previous year. This
was principally driven by strong growth in assets under management which in turn generated
increased fund rebates and investment related fee income within the Pensions and Savings division.
This was further boosted by higher premium volumes and favourable claims experience within
the Life and Health division, offset slightly by an expense overrun, due to the higher than
expected use of consultant resource in the year.
Note 3: The Waard Group result is in line with expectation. The reduction in profit year on
year is primarily due to the fact that the 2016 result benefited from a one-off profit arising
on the sale of an investment asset. After taking this into consideration, the profit emergence
is in line with the run-off book profile.
Note 4: The Scildon division has posted a strong result for the nine months since acquisition.
Favourable economic factors have driven strong investment related returns. This arises from
the fact that the Scildon division 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 to the strong trading result, the Scildon
purchase also generated a profit on acquisition of GBP20.3m in the year.
Note 5: The Chesnara result represents holding company expenses. The 2017 result reflects
the adverse impact of creating a GBP2m provision in respect of the expected costs of delivering
the implementation of IFRS 17 at group level. It also reflects a foreign exchange loss of
GBP2.6m 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 lower than previously reported, due to an increase in the write-back of deferred
acquisition costs arising from the Scildon acquisition and a one-off impairment of acquisition
costs within Movestic.
Note 7: As a result of sterling weakening against both the euro and Swedish krona in the period
the IFRS result includes a large foreign exchange gain, albeit smaller sizeable than the prior
period.
Note 8: Other comprehensive income includes movements relating to the revaluation of a defined
benefit pension scheme and an investment property, both of which are held within the Scildon
division.
Note 9: 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 strengthening of expense reserves to support
future developments. Strong premium growth and favourable claims experience supported the
Movestic operating result, whilst Waard and Scildon produced operating results broadly in
line with expectation.
Note 10: 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 2017 the economic profit is mainly driven by the impact of positive equity
markets.
TOTAL GROUP CASH GENERATION
GBP28.6M (2016: GBP85.4M*)
*The LGN acquisition had an adverse total end to end impact of
GBP6.4m. A GBP48.9m one-off impact in respect of the equity raise
was included in the 2016 result, with a subsequent negative impact
of GBP55.3m on completion in 2017.
DIVISIONAL CASH GENERATION
GBP86.7M (2016: GBP34.3M)
The three territories have generated GBP86.7m cash in the
period, with all four businesses making significant contributions
to the cash generation.
Cash in the business is generated from increases in the group's
surplus funds. Surplus funds represent the excess of assets held
over management's internal capital needs, as in the capital
management policies across the group. These are based on regulatory
capital requirements, with the inclusion of additional "management
buffers".
GROUP
- Before taking into account the "day 1" impact of the
acquisition of LGN, cash of GBP83.9m has been generated across the
group, partly due to favourable economic conditions and the
positive impact of some non-recurring management actions.
- Other group activities reflect the residual 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,
capital is principally required to be held for the currency risk
associated with the Movestic, Scildon and Waard Group surplus
assets.
- In line with expectations, the end to end impact of the
acquisition of Legal & General Nederland is to reduce surplus
cash by GBP6.4m. The GBP6.4m cash impact consists of an increase in
own funds of GBP116.2m (GBP62.1m of equity raised net of deal
costs; GBP191.6m of own funds acquired; less purchase price of
GBP137.6m) offset by an increase in capital requirement of
GBP122.6m (GBP88.4m of capital required in Scildon itself,
including management group buffer, plus additional capital at group
level of GBP34.3m). The GBP88.4m of capital required for Scildon
includes the reduction due to the equity de-risk post acquisition,
which amounted to GBP12.7m. Of the total impact, cash reduced by
GBP55.3m in 2017, consisting of the own funds acquired less the
capital required and the purchase price. The 2016 positive impact
of GBP48.9m represents the element of the equity raised before the
2016 year end.
UK
- The UK continues to generate significant levels of cash, ahead
of plan, supporting the dividend payment.
- Own funds growth is the main driver of cash generation in the
UK, which has benefitted from a reduction in the cost of guarantees
and increased investment return.
- Cash generation includes the benefit of a GBP9.0m release of
restricted surplus from the with profit funds.
- There has also been a reduction in required capital due to
changes in investment portfolio and reduced counterparty default
risk.
SWEDEN
- Sweden had a positive cash generation of GBP24.9m due to strong own funds growth.
- Own funds have benefitted from growth in assets under
management, particularly in equity markets.
- Conversely, growth in assets has also had an adverse impact on
the level of capital the business is required to hold, driving the
increase in management capital requirement.
- Cash generation includes a one-off benefit of enhancing our
modelling for commission clawbacks amounting to GBP7.0m.
- 2016 included a one-off capital increase from a modelling change for mass lapse risk.
NETHERLANDS - WAARD
- The Waard Group has continued the solid cash generation
witnessed in the prior year with positive underlying movements in
both own funds and capital requirements.
- Movement in own funds was driven by mortality experience and assumption changes.
- A fall in counterparty default risk underpins the reduction in the capital requirement.
- 2016 cash generation benefitted from an exchange rate gain of GBP8.5m.
NETHERLANDS - SCILDON
- Scildon has reported positive cash generation of GBP16.2m since acquisition.
- Positive economic experience, including euro exchange gains
against sterling, support the increase in own funds.
- The movement in capital requirement has benefitted from the
continuing capital management programme that has been initiated
post acquisition.
GBPm 2017 2016
=========================== ============ ============================================================= ==========
Movement Movement in management's Forex Cash generated Cash
in capital impact generated
own funds Requirement
=========================== ============ ========== ======================== ======= ============== ==========
UK 32.4 2.1 - 34.5 21.3
Sweden 37.3 (15.3) 2.8 24.9 (2.7)
Netherlands Waard Group 5.4 5.1 0.6 11.1 15.7
Scildon 10.5 4.3 1.4 16.2 -
======================================== ========== ======================== ======= ============== ==========
Divisional cash 85.6 (3.8) 4.9 86.7 34.3
Other group activities (12.7) 10.0 - (2.7) 2.2
========================================= ========== ======================== ======= ============== ==========
Group cash pre-Scildon
acquisition 72.9 6.2 4.9 83.9 36.5
Impact of Scildon acquisition 54.1 (109.4) - (55.3) 48.9
========================================= ========== ======================== ======= ============== ==========
Total group cash 127.0 (103.2) 4.9 28.6 85.4
EcV EARNINGS
GBP139.5M (2016: GBP72.5M)
Driven by generally beneficial investment markets throughout the
year, with sterling depreciation and volatile yet growing equity
markets, the group has reported significant underlying EcV
earnings, reflecting the resilience and diversity of the business.
In addition there has been a one off gain and post acquisition
gains from Scildon.
Analysis of the EcV result in the period by earnings source:
Note
31 Dec 2017 31 Dec 2016
GBPm GBPm
==================================== =========== ============= ====
Expected movement in period 12.0 6.0
New business 12.4 11.9
Operating variances 1.2 22.7
Operating assumption changes (3.6) 0.6
Other operating variances 0.5 (7.3)
==================================== =========== ============= ====
Total underlying operating earnings 22.5 33.9
Exceptional operating variances (19.2) - 2
==================================== =========== ============= ====
Total operating earnings 3.3 33.9
Economic experience variances 74.6 77.9 1
Economic assumption changes 2.2 (38.3)
==================================== =========== ============= ====
Total economic earnings 76.8 39.6
Other non-operating variances 1.2 0.8
Risk margin movement 4.0 (3.8)
Gain on acquisition 65.4 - 3
Tax (11.1) 2.0
Total EcV earnings 139.5 72.5
==================================== =========== ============= ====
Analysis of the EcV result in the year by business segment:
Note
31 Dec 2017 31 Dec 2016
GBPm GBPm
============================ =========== ============= ====
UK 54.5 42.2 4
Sweden 24.0 30.8 5
Netherlands 21.8 5.9 6
Gain on acquisition 65.4 -
Group and group adjustments (15.1) (8.4) 7
============================ =========== ============= ====
EcV earnings before tax 150.6 70.5
Tax (11.1) 2.0 8
============================ =========== ============= ====
EcV earnings after tax 139.5 72.5
============================ =========== ============= ====
Note 1 - Economic conditions: As with our previously reported
EEV metric, the EcV result is sensitive to investment market
conditions. Key investment market conditions in the period are as
follows:
- The FTSE All share index has increased by 9.0%;
- The Swedish OMX all share index has increased by 5.7%; and
- 10 year UK gilt yields have fallen from 1.28% to 1.26%.
Note 2 - Exceptional operating items: The Movestic result
includes 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
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 reported significant pre tax earnings of
GBP54.5m for the year. Solid operating earnings were supported by
lower attrition rates and lower payments in respect of with profit
contracts with guarantees. This offset the adverse impact of the
strengthening of assumptions in relation to the expense base during
the year. Economic profits of GBP41.1m underpin the result,
supported by market conditions. Key items driving the economic
result include the investment return on shareholder and non linked
assets and returns driven by the impact of the higher unit prices
versus static guarantees on claims and AMCs. The interaction of
changing yields and inflation also contributed to this. The result
also benefited from a GBP9.0m release of previously trapped surplus
from the with profit funds.
Note 5 - Sweden: The Swedish division has reported another solid
EcV return in the year. Underlying operating earnings of GBP15.3m
were underpinned by strong new business performance, owing to
transfer volumes and increased average policy premiums. This was
partially offset by a non-recurring adverse movement in future
charge assumptions (see note 2). An economic profit of GBP20.0m was
reported, driven by equity market performance and strong returns on
the unit linked investment portfolio, closing on a considerable
total annual return of 8.7% for 2017.
Note 6 - Netherlands: The Dutch division has reported earnings
of GBP21.8m in the period. Underlying operating earnings of GBP9.0m
are offset by an exceptional non-recurring item in respect of
Scildon expense assumptions (see note 2). Strong economic earnings
underpin the result.
Note 7 - Group: In line with expectations, a loss has been
reported in the group component. This is includes the impact of
costs incurred in relation to the LGN acquisition, dividend
payments and also underlying group level expenses and consolidation
activities.
Note 8 - Tax: The business is reporting a tax expense of
GBP11.1m 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
GBP723.1M (2016: GBP602.6M)
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 2017 to 31 Dec 2017:
GBPm
================ =======
2016 Group EcV 602.6
EcV earnings 74.1
Acquisition 65.4
Dividends (29.5)
Forex gain 10.4
================ =======
2017 Group EcV 723.1
================ =======
EcV earnings: Positive EcV earnings have been reported in the
year, a result of solid underlying operating profits and
significant economic profits, driven by the net impact of equity
market growth and return on assets.
Acquisition: In April 2017, the group successfully completed the
purchase of LGN, delivering a "day 1" acquisition gain of GBP65.4m.
This is reflected in the group closing EcV.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of GBP29.5m were paid during the
2017, being the final dividend from 2016 and interim 2017
dividend.
FX gain: The EcV of the group benefited from foreign exchange
gains that were reported in the period as a result of sterling
deprecation against both the euro and Swedish krona.
EcV by segment at 31 Dec 2017:
GBPm
======================== =======
UK 255.5
Sweden 249.5
Netherlands 283.9
Other group activities (65.8)
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
======================== =======
2017 Group EcV 723.1
Risk margin (47.4)
Contract boundaries (14.4)
Own funds restrictions (26.5)
Dividends (19.6)
======================== =======
2017 SII own funds 615.2
======================== =======
Our reported EcV is based on a Solvency II assessment of the
value of the business, but adjusted for certain items where it is
deemed that Solvency II does not reflect the commercial value of
the business. The above waterfall shows the key difference between
EcV and SII, with explanations for each item below.
Risk margin: Solvency II rules require a significant 'risk
margin' which is held on the Solvency II balance sheet as a
liability, and this is considered to be materially above a
realistic cost. We therefore reduce this margin for risk for EcV
valuation purposes from being based on a 6% cost of capital to a
2.75% cost of capital (2016: 3.00%) .
Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain in-force contracts,
despite the high probability of receipt. We therefore make an
adjustment to reflect the realistic value of the cash flows under
EcV.
Ring-fenced fund restrictions: Solvency II rules require a
restriction to be placed on the value of certain ring-fenced funds.
These restrictions are reversed for EcV valuation purposes as they
are deemed to be temporary in nature.
Dividends: The proposed final dividend of GBP19.6m is recognised
for SII regulatory reporting purposes. It is not recognised within
EcV until it is actually paid.
FINANCIAL management
The group's financial management framework is designed to
provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators.
OBJECTIVES
The group's financial management framework is designed to
provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators.
Accordingly we aim to:
- Maintain solvency targets
- Meet the dividend expectations of shareholders
- Optimise the gearing ratio to ensure an efficient capital base
- Ensure there is sufficient liquidity to meet obligations to
policyholders, debt financiers and creditors
- Maintain the group as a going concern
HOW WE DELIVER TO OUR OBJECTIVES
In order to meet our obligations we employ and undertake a
number of methods. These are centred on:
1. Monitor and control risk & solvency
2. Longer-term projections
3. Responsible investment management
4. Management actions
OUTCOMES
Key outcomes from our financial management process, in terms of
meeting our objectives, are set out below:
1. SOLVENCY:
Group Solvency Ratio: 146%
2. SHAREHOLDER RETURNS
2015-2017 TSR 33.6%
2017 dividend yield 5.3%
Based on closing 2017 share price and full year 2017 dividend of
20.07p.
3. CAPITAL STRUCTURE
Gearing ratio of 19.8%
This does not include the financial reinsurance within the
Swedish business.
4. LIQUIDITY AND POLICYHOLDER RETURNS
Policyholders' reasonable expectations maintained.
Asset liability matching framework operated effectively in the
year.
Sufficient liquidity in the Chesnara holding company.
5. MAINTAIN THE GROUP AS A GOING CONCERN
Group remains a going concern
OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT
OBJECTIVES
1. Capital structure
The group is funded by a combination of share capital, retained
earnings and debt finance, with the debt gearing (excluding
financial reinsurance in Sweden) being 19.8% at 31 December 2017
(13.4% at 31 December 2016).
The level of debt that the board is prepared to take on is
driven by the group's "Debt and leverage policy" which incorporates
the board's risk appetite in this area.
Over time, the level of gearing within the group will change,
and is a function of:
- funding requirements for future acquisitions (i.e. debt,
equity and internal financial resources); and
- repayment of existing debt that was used to fund previous acquisitions.
As referred to above, acquisitions are funded through a
combination of debt, equity and internal cash resources. The ratios
of these three funding methods vary on a deal-by-deal basis and are
driven by a number of factors including, but not limited to:
- size of the acquisition;
- current cash resources of the group;
- current gearing ratio and the board's risk tolerance limits for additional debt;
- expected cash generation profile and funding requirements of
the existing subsidiaries and potential acquisition;
- future financial commitments; and
- regulatory rules.
In addition to the above, Movestic uses a financial reinsurance
arrangement to fund its new business operation.
2. Maintain the group as a going concern
The directors have considered the ability of the group to
continue on a going concern basis. As such the board has performed
an assessment as to whether the group can meet its liabilities as
they fall due for a period of at least twelve months from which the
Report & Accounts have been signed.
In performing this work, the board has considered the current
cash position of the group and company, coupled with the group's
and company's expected cash generation as highlighted in its recent
business plan, which covers a three-year period. The business plan
considers the financial projections of the group and its
subsidiaries on both a base case and a range of stressed scenarios,
covering projected IFRS, EcV and solvency. These projections also
focus on the cash generation of the life insurance divisions and
how these flow up into the Chesnara parent company balance sheet,
with these cash flows being used to fund debt repayments,
shareholder dividends and the head office function of the parent
company.
The group results indicate a strong solvency position as at 31
December 2017 as measured at both the divisional and group levels.
As well as being well-capitalised the group also has a healthy
level of cash reserves to be able to meet its debt obligations as
they fall due, and does not rely on the renewal or extension of
bank facilities to continue trading. The group's subsidiaries do,
however, rely on cash flows from the maturity or sale of fixed
interest securities which match certain obligations to
policyholders, which brings with it the risk of bond default. In
order to manage this risk we ensure that our bond portfolio is
actively monitored and well diversified. Other significant
counterparty default risk relates to our principal reinsurers. We
monitor their financial position and are satisfied that any
associated credit default risk is low.
In light of the above information, the board has concluded that
the group and company has a reasonable expectation that the group
and company have adequate resources to continue in operational
existence for the foreseeable future, and the Financial Statements
have continued to be prepared on a going concern basis.
3. Assessment of prospects
Our business model provides resilience that is relevant to any
consideration of our prospects and viability. In CA in the UK and
in both Waard and Scildon in the Netherlands, we benefit from a
largely predictable and well understood source of cash generation.
In addition, Movestic and Scildon, provide a source of new business
growth.
Our strategy of maximising value from our existing business,
acquiring life and pensions businesses and enhancing value through
profitable new business, is designed to support long-term and
sustainable cash generation.
We assess our prospects on a regular basis through our financial
planning process. Our three year medium term group business plan
forecasts the group's profitability, cash generation, economic
value and solvency position and is reviewed by the Board during the
year. The business plan is built from the bottom up forecasts of
each of our business segments, supplemented by items managed at
group level and assumptions to be used in the basis of preparation.
The performance of the group and our business segments against
these forecasts is monitored quarterly through a series of
quarterly business reviews performed by the group executive and
internal management information which is reviewed by the Board.
The group also makes investments, such as life and pensions
business acquisitions and longer term business development
programmes that have a business case beyond our core three year
planning horizon. Significant expenditure of this nature is subject
to a detailed business case being prepared and approved by the
board.
4. Longer term viability statement
In accordance with provision C.2.2 of the 2014 revision of the
UK Corporate Governance Code, the directors have assessed the
prospect of the company over a longer period than the twelve months
required by the going concern provision. The board conducted this
review for a period of three years because the group's business
plan covers a three year period and includes an assessment of group
cash generation and group solvency margins over that time
period.
The group business plan considers the group's cash flows, the
group's ability to remain above target solvency levels and other
key financial measures over the period, assuming continuation of
the group's established dividend payment strategy. These metrics
are subject to scenario analysis representing the principal risks
to which the group is most sensitive, both individually and in
unison. Where appropriate this analysis is carried out to evaluate
the potential impact of adverse economic and other experience
effects, including, but not limited to:
i. Equity market declines
ii. Reduction in yield curves
iii. Credit spread rise
iv. Swap rate fall
v. Adverse mortality and lapse experience
vi. Adverse expense experiences
vii. Reduced new business volumes
viii. Adverse exchange rate experience
Based on the results of this analysis, the directors have a
reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the three
year period of their assessment.
RISK MANAGEMENT
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 company, including those that would
threaten its business model, future performance, solvency or
liquidity. Given that the Scildon business risk profile is similar
to that of the Chesnara businesses prior to acquisition of Scildon,
the description of the group's risk profile at this level is
unchanged as a result of the integration of Scildon.
The impacts have not been quantified however by virtue of the
risks being defined as principal, the impacts are potentially
large. Although this is a matter of judgement the risks and impacts
are ordered based on probabilities and impacts, putting the largest
first.
RISK IMPACT CONTROL
============== ============================================================= =============================================================
Exposure Market risk results Chesnara performs regular
to financial from fluctuations monitoring of movements in
losses in asset values, foreign the market and maintains
or value exchange rates and matching programmes to ensure
reduction interest rates and that exposure to any mismatching
arising has the potential is at an acceptable level,
from adverse to affect the Company's forecasting cash requirements
movements ability to fund its and adjusting investment
in investment commitments to customers management strategies to
markets, and other creditors, meet those requirements.
counterparty as well as pay a return Chesnara seeks to limit the
defaults, to shareholders. impacts of exposure to Market
or through Chesnara and each risks by:
inadequate of its subsidiaries * Maintaining a well-diversified asset portfolio;
asset have obligations to
liability make future payments,
matching which are not always * Holding a significant amount of surplus in highly
known with certainty liquid "Tier 1" assets such as cash and gilts;
in terms of timing
or amounts, prior
to the payment date. * Utilising a range of investment funds and managers to
This includes primarily avoid significant concentrations of risk;
the payment of policyholder
claims, reinsurance
premiums, debt repayments * Having an established investment governance framework
and dividends. The to provide review and oversight of external fund
uncertainty of timing managers;
and amounts to be
paid gives rise to
potential liquidity * Carrying out regular liquidity forecasts and asset
risk, should the funds and liability modelling; and
not be available to
make payment.
Other liquidity issues * Monitoring exchange rate movements. The group would
could arise from counterparty consider the cost/benefit of hedging the currency
failures/credit defaults, risk on cash flows when appropriate.
a large spike in the
level of claims or
other significant In respect of a significant
unexpected expenses. exposure to one major reinsurer,
ReAssure (formerly known
as Guardian), the group has
a floating charge over the
reinsurer's related investment
assets, which ranks the group
equally with ReAssure's policyholders.
============== ============================================================= =============================================================
Adverse Chesnara currently Through the Risk Management
changes operates in four regulatory Framework, regulatory risk
in industry domains and is therefore is monitored and scenario
practice/ exposed to inconsistent tests are performed to understand
regulation, application of regulatory the potential impacts of
or standards across divisions, adverse political, regulatory
inconsistent such as the imposition or legal changes, along with
application of higher capital consideration of actions
of regulation buffers over and above that may be taken to minimise
across regulatory minimum the impact, should they arise.
territories requirements. Potential Chesnara seeks to limit any
consequences of this potential impacts of regulatory
risk for Chesnara change on the business by:
is the constraining * Having processes in place for monitoring changes, to
of efficient and fluid enable timely actions to be taken, as appropriate;
use of capital within
the group, or creating
a non-level playing * Maintaining strong open relationships with all
field with respect regulators
to future new business/acquisitions.
The jurisdictions
which Chesnara operates * Being a member of the ABI and utilising other means
in are currently subject of joint industry representation;
to significant change
arising from political,
regulatory and legal * Performing internal reviews of compliance with
change. These may regulations; and
either be localised
or may apply more
widely, following * Utilising external specialist advice and assurance,
from EU-based regulation when appropriate.
and law, or the potential
unwinding of this
following the UK's In extremis, Chesnara could
decision to leave consider the re-domiciling
the EU. of subsidiaries or legal
The group is therefore restructure of the business,
exposed to the risk should this result in a more
of: commercially acceptable business
* incurring one-off costs of addressing regulatory model in a changed operating
change as well as any permanent increases in the cost environment.
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 breeched standards, or fails to
deliver changes to the required regulatory standards
on a timely basis.
============== ============================================================= =============================================================
Failure Chesnara's inorganic Chesnara's financial strength,
to source growth strategy is strong relationships and
acquisitions dependent on the availability reputation as a "safe hands
that meet of attractive future acquirer" via regular contact
Chesnara's acquisition opportunities. with regulators, banks and
criteria Hence, the business target companies enables
or the is exposed to the the company to adopt a patient
execution risk of a reduction and risk-based approach to
of in the availability assessing acquisition opportunities.
acquisitions of suitable acquisition Operating in multi-territories
with opportunities within provides some diversification
subsequent Chesnara's current against the risk of changing
unexpected target markets, for market circumstances in one
financial example arising as of the territories.
loses a result of a change
or value in competition in Chesnara seeks to limit any
reduction the consolidation potential unexpected impacts
market or from regulatory of acquisitions by:
change influencing * Applying a structured Board approved risk-based
the extent of life acquisition process including CRO involvement in the
company strategic due diligence process and deal refinement processes;
restructuring.
Through the execution
of acquisitions, Chesnara * Having a management team with significant and proven
is also exposed to experience in mergers and acquisitions; and
the risk of erosion
of value or financial
losses arising from * Adopting a cautious risk appetite and pricing
risks inherent within approach
businesses or funds
acquired which are
not adequately priced
for or mitigated as
part of the transaction.
============== ============================================================= =============================================================
Adverse In the event that Chesnara ensures close monitoring
demographic demographic experience of persistency levels across
experience (rates of mortality, all groups of business to
compared morbidity, persistency support best estimate assumptions
with etc.) varies from and identify trends. There
assumptions the assumptions underlying is also partial risk diversification
product pricing and in that the group has a portfolio
subsequent reserving, of annuity contracts where
more or less profit the benefits cease on death.
will accrue to the Chesnara seeks to limit the
group. impacts of adverse demographic
If mortality or morbidity experience by:
experience is higher * Aiming to deliver good customer service and fair
than that assumed customer outcomes;
in pricing contracts
(I.e. more death and
sickness claims are * Having effective underwriting techniques and
made than expected), reinsurance programmes, including the application of
this will typically "Mass Lapse reinsurance",, where appropriate;
result in less profit
accruing to the group.
If persistency is * Carrying out regular investigations, and industry
significantly lower analysis, to support best estimate assumptions and
than that assumed identify trends;
in product pricing
and subsequent reserving,
this will typically * Active investment management to ensure competitive
lead to reduced group policyholder investment funds; and
profitability in the
medium to long-term,
as a result of a reduction * Maintaining good relationships with Brokers which is
in future income arising independently measured via yearly external surveys
from charges on those that considers Brokers attitude towards different
products. The effects insurers.
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 The group and its The group perceives operational
Operational subsidiaries are exposed risk as an inherent part
failure to operational risks of the day-to-day running
/ Business which arise through of the business and understands
continuity daily activities and that it can't be completely
event running of the business. eliminated. However, the
Operational risks Company's objective is to
may, for example, always control or mitigate
arise due to technical operational risks, and to
or human errors, failed minimise the exposure when
internal processes, it's possible to do so in
insufficient personnel a convenient and cost effective
resources or fraud way.
caused by internal Chesnara seeks to reduce
or external persons. the impact and likelihood
As a result the group of operational risk by:
may suffer financial * Monitoring of key performance indicators and
losses, poor customer comprehensive management information flows;
outcomes, reputational
damage, regulatory
intervention or business * Effective governance of outsourced service providers
plan failure. including a regular financial assessment. Under the
Part of the group's terms of the contractual arrangements the group may
operating model is impose penalties and/or exercise step-in rights in
to outsource support the event of specified adverse circumstances;
activities to specialist
service providers.
Consequently, a significant * Regular testing of business continuity plans;
element of the operational
risk arises within
its outsourced providers. * Promoting the sharing of knowledge and expertise; and
* Complementing internal expertise with established
relationships with external specialist partners.
============== ============================================================= =============================================================
Expense The Company is exposed For all subsidiaries, the
overruns to expenses being group maintains a regime
and higher than expected of budgetary control.
unsustainable as a result of one-off * Movestic and Scildon assume growth through new
unit cost increases in the underlying business such that the general unit cost trend is
growth cost of performing positive;
key functions, or
through higher inflation
of variable expenses. * The Waard Group pursues a low cost-base strategy
For the closed funds, using a designated service company. The cost base is
the group is exposed supported by service income from third party
to the impact on profitability customers;
of fixed and semi-fixed
expenses, in conjunction
with a diminishing * Countrywide Assured pursues a strategy of outsourcing
policy base. functions with charging structures such that the
For the companies policy administration cost is more aligned to the
open to new businesses, book' s run off profile; and
the group is exposed
to the impact of expense
levels varying adversely * The group has an ongoing expense management programme
from those assumed in place to monitor and manage the overall expense
in product pricing. base.
============== ============================================================= =============================================================
IT/data Cyber risk is a growing Chesnara seeks to limit the
security risk affecting all exposure and potential impacts
failures companies, particularly from IT/data security failures
or cyber those who are custodians or cyber crime by:
crime of customer data. * Embedding the Information Security Policy in all key
The most pertinent operations and development processes;
risk exposure relates
to information security
(i.e. protecting business * Seeking ongoing specialist external advice,
sensitive and personal modifications to IT infrastructure and updates as
data) and can arise appropriate;
from failure of internal
processes and standards,
but increasingly companies * Delivering regular staff training and attestation to
are becoming exposed the information security policy;
to potential malicious
cyber attacks, organisation
specific malware designed * Conducting penetration and vulnerability testing,
to exploit vulnerabilities, including third party service providers; and
phishing attacks etc.
The extent of Chesnara's
exposure to such threats * Having established Chesnara and supplier business
also includes third continuity plans which are regularly monitored and
party service providers. tested.
The potential impact
of this risk includes
financial losses, Chesnara has undertaken further
inability to perform work during 2017 to deliver
critical functions, an enhanced information security
disruption to policyholder environment commensurate
services, loss of with the increase in risk
sensitive data and exposure and in preparation
corresponding reputational for the new General Data
damage or fines. Protection Regulation that
applies from May 2018.
============== ============================================================= =============================================================
DIRECTORS' REsponsibilities STATEMENT
With regards to this preliminary announcement, the Directors
confirm to the best of their knowledge that:
- The financial statements have been prepared in accordance with
International Reporting Financial Standards as adopted by the EU
and give a true and fair view of the assets, liabilities, financial
position and profit for the Company and the undertakings included
in the consolidation as a whole;
- Pursuant to Disclosure and Transparency Rules Chapter 4, the
Chairman's Statement and Management Report include a fair review of
the development and performance of the business and the position of
the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties faced by the business.
On behalf of the Board
Peter Mason John Deane
Chairman Chief Executive Officer
28 March 2018 28 March 2018
INDEPENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON
THE PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC
As the independent auditor of Chesnara plc we are required by UK
Listing Rule LR 9.7A.1(2)R to agree to the publication of
Chesnara's preliminary announcement statement of annual results for
the period ended 31 December 2017.
The preliminary statement of annual results for the period ended
31 December 2017 includes disclosures required by the Listing Rules
and additional content such as highlights, Chairman's Statement,
solvency update, component business review, and a consolidated
statement of comprehensive income, balance sheet, and cash
flows.
The directors of Chesnara plc are responsible for the
preparation, presentation and publication of the preliminary
statement of annual results in accordance with the UK Listing
Rules.
We are responsible for agreeing to the publication of the
preliminary statement of annual results, having regard to the
Financial Reporting Council's Bulletin "The Auditor's Association
with Preliminary Announcements made in accordance with UK Listing
Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Chesnara plc is
complete and we signed our auditor's report on 28 March 2018. Our
auditor's report is not modified and contains no emphasis of matter
paragraph.
Our audit report on the full financial statements sets out the
following key audit matters which had the greatest effect on our
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team, together with how
our audit responded to those key audit matters and the key
observations arising from our work:
Accuracy of Save & Prosper Cost of Guarantees
The risk
The assessment of the Cost of Guarantee reserves for policies
written by Save and Prosper is complex and material, including the
use of a stochastic model based on a variety of possible economic
scenarios.
Historically, the residual cost to shareholders arising from the
cost of guarantees has fluctuated as a result of movements in bond
yields and equity markets with a value of GBP19.3m at 31 December
2017 (31 December 2016: GBP35.7m). This movement is mainly due to
high asset returns over 2017, which increased policyholder asset
shares, and reduce the residual cost to shareholders. The value is
determined by a third party actuarial consultant, and the directors
compare this valuation against an in-house derived estimate using
an approximation model to validate its reasonableness.
Due to the highly judgemental nature of this balance, we
identified manipulation of this estimate as an area of potential
fraud.
How the scope of our audit responded to this risk
We assessed the design and implementation of the internal
controls in place to monitor and manage the risks associated with
the cost of guarantee reserve.
We assessed the competence of the actuarial consultant. Such an
assessment includes a direct challenge of the actuarial
consultant's working papers and a challenge of the historical
accuracy of modelling when compared with actual experience.
We used actuarial specialists within our audit team to challenge
the appropriateness of assumptions input into the model and
benchmark against external actuarial data. Sensitivity analysis was
also performed to assess potential Management bias.
We developed an independent expectation of how the assumptions
impact the model and challenged Management's explanation and
analysis to support any variations.
Key observations
Based on the audit procedures performed, we consider that the
S&P residual Cost of Guarantees is not materially
misstated.
Valuation of the Scildon acquired value in-force ('Scildon
AVIF') business intangible
The risk
Following the acquisition of Scildon in 2017, the Group have
recorded an AVIF intangible asset on the Group balance sheet,
reflecting the capitalised future profit in the Scildon life
insurance business. There is significant judgement involved in the
initial valuation of the AVIF, as well as in the discount rate used
in the calculation.
Management is required to assess the impairment of the Scildon
AVIF intangible balance at least annually, which also involves
significant judgement.
How the scope of our audit responded to this risk
We assessed the design and implementation of the internal
controls in place to monitor and manage the risks associated with
the capitalisation of the AVIF intangible.
We constructed an independent discount rate and compared this to
the discount rate used by Management.
We interrogated the policy cash flows which form the basis of
the AVIF calculation through a combination of data analytics and
tests of controls, to gain assurance over their completeness and
accuracy.
We have also assessed the reasonableness of the valuation
adjustments made to the base VIF.
We have challenged the amortisation profile produced by
Management for the future run off of the Scildon book.
Key observations
Based on the audit procedures performed, we consider the
assumptions in the base VIF, and the calculation and magnitude of
the adjustments thereof, and the resultant AVIF to be reasonable.
We conclude that the discount rate used and amortisation profile
are appropriate.
Scildon Liability Adequacy Test
The risk
Scildon measures the majority of its life insurance contract
liabilities using historical market rates of interest, along with a
number of other parameters and assumptions.
IFRS 4 requires an insurer, at the end of each reporting period,
to assess whether its recognised insurance liabilities are
adequate, using current estimates of future cash flows (the
"Liability adequacy test" or "LAT").
Given Scildon's accounting policy makes use of historical market
interest rates, there is a heightened risk that its insurance
liabilities are not adequate. We therefore considered the liability
adequacy test to be a key audit matter, specifically in relation to
the mortality, lapse and expense assumptions which feed into this
test, given that the insurance liabilities are most sensitive to
these factors.
How the scope of our audit responded to this risk
The following specific procedures have been performed:
- Evaluation of the design and implementation of the key
controls over the setting of the assumptions feeding in to the
LAT;
- Performing analytical checks on policy cash flows to identify
outliers and movements compared to the prior period, which were
then investigated;
- For a sample of policies, ran the policy cash flows through a
model to test that the calculations within Management's model are
accurate; and
- Assessed the results of the experience investigations carried
out by Management to determine whether they provide support for the
assumptions.
Key observations
Adequacy Test performed by management was reasonable, supporting
the adequacy of Scildon's insurance contract liabilities.
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement of annual results of Chesnara plc we carried out the
following procedures:
(a) checked that the figures in the preliminary announcement
covering the full year have been accurately extracted from the
audited or draft financial statements and reflect the presentation
to be adopted in the audited financial statements;
(b) considered whether the information (including the management
commentary) is consistent with other expected contents of the
annual report;
(c) considered whether the financial information in the
preliminary announcement is misstated;
(d) considered whether the preliminary announcement includes a
statement by directors as required by section 435 of CA 2006 and
whether the preliminary announcement includes the minimum
information required by UKLA Listing Rule 9.7A.1;
(e) where the preliminary announcement includes alternative
performance measures ("APMs"), considered whether appropriate
prominence is given to statutory financial information and
whether:
- the use, relevance and reliability of APMs has been
explained;
- the APMs used have been clearly defined, and have been given
meaningful labels reflecting their content and basis of
calculation;
- the APMs have been reconciled to the most directly
reconcilable line item, subtotal or total presented in the
financial statements of the corresponding period; and
- comparatives have been included, and where the basis of
calculation has changed over time this is explained.
(f) read the management commentary, any other narrative
disclosures and any final interim period figures and considered
whether they are fair, balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on
the financial statements is to the company's members as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for our audit report or this report, or for the
opinions we have formed.
Stephen Williams ACA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
28 March 2018
CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2017 2016
GBP000 GBP000
---------------------------------------------------------------------------------------------- --------- ---------
Insurance premium revenue 231,515 109,450
Insurance premium ceded to reinsurers (54,191) (44,900)
---------------------------------------------------------------------------------------------- --------- ---------
Net insurance premium revenue 177,324 64,550
Fee and commission income 113,848 72,932
Net investment return 531,817 515,681
---------------------------------------------------------------------------------------------- --------- ---------
Total revenue net of reinsurance payable 822,989 653,163
Other operating income 17,242 17,614
---------------------------------------------------------------------------------------------- --------- ---------
Total income net of investment return 840,231 670,777
---------------------------------------------------------------------------------------------- --------- ---------
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (465,729) (346,117)
Net increase in insurance contract provisions 51,033 11,392
Reinsurers' share of claims and benefits 49,449 62,364
--------- ---------
Net insurance contract claims and benefits (365,247) (272,361)
--------- ---------
Change in investment contract liabilities (293,603) (274,724)
Reinsurers' share of investment contract liabilities 3,681 5,617
--------- ---------
Net change in investment contract liabilities (289,922) (269,107)
--------- ---------
Fees, commission and other acquisition costs (24,405) (23,838)
Administrative expenses (70,269) (46,615)
Other operating expenses
Charge for amortisation of acquired value of in-force business (13,271) (10,419)
Charge for amortisation of acquired value of customer relationships (101) (236)
Other (4,239) (4,394)
---------------------------------------------------------------------------------------------- --------- ---------
Total expenses net of change in insurance contract provisions and investment contract
liabilities (767,454) (626,970)
---------------------------------------------------------------------------------------------- --------- ---------
Total income less expenses 72,777 43,807
Share of profit of associate 949 150
Profit recognised on business combination 20,319 -
Financing costs (4,443) (3,272)
---------------------------------------------------------------------------------------------- --------- ---------
Profit before income taxes 89,602 40,685
Income tax expense (11,168) (5,405)
Profit for the year 78,434 35,280
Items that will not be reclassified to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign operations 8,274 20,114
Revaluation of pension obligations 124 -
Revaluation of investment property 90 -
Total comprehensive income for the year 86,922 55,394
---------------------------------------------------------------------------------------------- --------- ---------
Basic earnings per share (based on profit for the year) 52.38p 27.67p
---------------------------------------------------------------------------------------------- --------- ---------
Diluted earnings per share (based on profit for the year) 52.13p 27.56p
---------------------------------------------------------------------------------------------- --------- ---------
CONSOLIDATED BALANCE SHEET
31 December 2017 2016
GBP000 GBP000
-------------------------------------------------------------------------- --------- ---------
Assets
Intangible assets
Deferred acquisition costs 61,858 48,318
Acquired value of in-force business 119,039 62,943
Acquired value of customer relationships 641 736
Goodwill 806 -
Software assets 6,358 6,560
Property and equipment 4,327 519
Investment in associates 6,407 5,433
Investment properties 1,199 245
Reinsurers' share of insurance contract provisions 233,154 254,859
Amounts deposited with reinsurers 38,776 37,437
Financial assets
Equity securities at fair value through income 512,724 485,165
Holdings in collective investment schemes at fair value through income 5,202,772 4,104,602
Debt securities at fair value through income 1,628,817 474,091
Policyholders' funds held by the Group 265,729 229,397
Mortgage loan portfolio 48,106 54,756
Insurance and other receivables 59,448 39,646
Prepayments 7,325 5,271
Derivative financial instruments 1,682 2,773
--------- ---------
Total financial assets 7,726,603 5,395,701
--------- ---------
Reinsurers' share of accrued policyholder claims 25,888 19,307
Income taxes 7,681 3,352
Cash and cash equivalents 210,647 260,353
-------------------------------------------------------------------------- --------- ---------
Total assets 8,443,384 6,095,763
-------------------------------------------------------------------------- --------- ---------
Liabilities
Insurance contract provisions 3,962,279 2,242,446
Other provisions 1,098 823
Financial liabilities
Investment contracts at fair value through income 3,420,273 3,028,269
Liabilities relating to policyholders' funds held by the Group 265,729 229,397
Borrowings 129,202 86,843
Derivative financial instruments 22,494 1,348
--------- ---------
Total financial liabilities 3,837,698 3,345,857
--------- ---------
Deferred tax liabilities 22,794 5,420
Reinsurance payables 11,406 6,899
Payables related to direct insurance and investment contracts 97,163 61,416
Deferred income 4,701 5,438
Income taxes 8,514 8,624
Other payables 44,984 23,657
Bank overdrafts 1,091 1,622
-------------------------------------------------------------------------- --------- ---------
Total liabilities 7,991,728 5,702,202
-------------------------------------------------------------------------- --------- ---------
Net assets 451,656 393,561
-------------------------------------------------------------------------- --------- ---------
Shareholders' equity
Share capital 43,766 43,766
Share premium 141,983 142,058
Treasury shares (98) (161)
Other reserves 27,664 19,300
Retained earnings 238,341 188,598
-------------------------------------------------------------------------- --------- ---------
Total shareholders' equity 451,656 393,561
-------------------------------------------------------------------------- --------- ---------
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2017 2016
GBP000 GBP000
-------------------------------------------------------------------------------------- --------- ---------
Profit for the year 78,434 35,280
Adjustments for:
Depreciation of property and equipment 698 173
Amortisation of deferred acquisition costs 14,506 12,162
Amortisation of acquired value of in-force business 13,271 10,408
Amortisation of acquired value of customer relationships 101 172
Amortisation of software assets 2,218 794
Share based payment (159) 623
Tax paid 11,209 5,405
Interest receivable (4,785) (20,882)
Dividends receivable (4,619) (30,209)
Interest expense 4,443 3,272
Fair value gains on financial assets (210,706) (205,870)
Profit arising on business combination (20,319) -
Share of profit of associate (949) (150)
Increase in intangible assets related to insurance and investment contracts (28,634) (16,448)
Interest received 4,560 20,281
Dividends received 4,336 29,446
Changes in operating assets and liabilities (excluding the effect of acquisitions) 124 -
Changes in operating assets and liabilities:
Increase in financial assets (145,613) (283,944)
Decrease in reinsurers' share of insurance contract provisions 17,074 34,177
Increase in amounts deposited with reinsurers (1,339) (3,496)
Decrease in insurance and other receivables 11,317 10,294
Decrease in prepayments 12,722 1,795
Decrease in insurance contract provisions (91,110) (16,530)
Decrease /(increase) in investment contract liabilities 414,014 362,641
(Increase)/decrease in provisions 272 (1,306)
Increase/(decrease) in reinsurance payables 4,424 (3,660)
Increase/(decrease) in payables related to direct insurance and investment contracts 2,432 (2,114)
(Decrease)/increase in other payables (935) 2,808
-------------------------------------------------------------------------------------- --------- ---------
Net cash generated from/(utilised by) operations 86,987 (54,878)
Income tax paid (27,480) (4,709)
-------------------------------------------------------------------------------------- --------- ---------
Net cash generated from /(utilised by) operating activities 59,507 (59,587)
-------------------------------------------------------------------------------------- --------- ---------
Cash flows from investing activities
Business combinations (117,993) -
Development of software (928) (3,502)
Disposal/(purchases) of property and equipment (314) 948
Net cash utilised by investing activities (119,235) (2,554)
-------------------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities
(Loss)/Proceeds from issue of share capital (75) 66,708
Net proceeds from borrowings 42,022 4,268
Sale of treasury shares 63 -
Dividends paid (29,484) (24,181)
Interest paid (4,266) (3,095)
-------------------------------------------------------------------------------------- --------- ---------
Net cash generated from financing activities 8,260 43,700
-------------------------------------------------------------------------------------- --------- ---------
Net decrease in net cash and cash equivalents (51,468) (18,441)
Net cash and cash equivalents at beginning of year 258,731 259,911
Effect of exchange rate changes on net cash and cash equivalents 2,293 17,261
-------------------------------------------------------------------------------------- --------- ---------
Net cash and cash equivalents at end of the year 209,556 258,731
-------------------------------------------------------------------------------------- --------- ---------
Note: Net cash and cash equivalents includes overdrafts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
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
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Year ended 31 December
2016
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 1 January 2016 42,600 76,516 (814) (161) 177,021 295,162
Profit for the year - - - - 35,280 35,280
Dividends paid - - - - (24,181) (24,181)
Foreign exchange
translation differences - - 20,114 - - 20,114
Share based payment - - - - 478 478
Issue of new shares 1,166 65,542 - - - 66,708
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders' funds
at 31 December 2016 43,766 142,058 19,300 (161) 188,598 393,561
-------------------------- ------------- ------------- -------------- --------------- ----------------- --------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS
1. Basis of presentation
The preliminary announcement is based on the Group's financial
statements for the year ended 31 December 2017, which are prepared
in accordance with International Financial Reporting Standards
('IFRSs') as adopted by the European Union ('Adopted IFRSs') as
adopted by the EU.
2. Significant accounting policies
The accounting policies applied by the Group in determining the
IFRS basis results in this report are the same as those previously
applied in the Group's consolidated financial statements.
3. Business combination
On 5 April 2017, Chesnara plc acquired the entire issued share
capital (100%) of Legal & General Nederland Levensverzekering
Maatschappij N.V. (Legal & General Nederland) an open book life
assurance company based in the Netherlands, from Legal &
General Group plc, a UK based financial services group for a total
consideration of EUR161.2m (approximately GBP137.5m), comprising
EUR160.0m base consideration plus interest for the period to
completion of EUR1.2m. On 11 April 2017, it was announced that the
newly acquired company was to be re-branded as Scildon. 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. The acquisition creates scale and presence in
the Dutch market and leaves us well positioned to take advantage of
any further value adding opportunities that may arise.
The acquisition of this shareholding has given rise to a profit
on acquisition of GBP20.3m calculated as follows:
Book value Provisional fair value adjustments Fair value
GBP000 GBP000 GBP000
---------------------------------------------------------- ---------- ---------------------------------- ----------
Assets
Intangible assets
Deferred acquisition costs 11,763 (11,763) -
Acquired value of in-force business - 66,296 66,296
Software assets 1,002 - 1,002
Property and equipment 4,022 - 4,022
Investment properties 981 - 981
Reinsurers' share of insurance contract provisions 1,314 - 1,314
Financial assets:
Holdings in collective investment schemes at fair value
through income 811,715 - 811,715
Debt securities at fair value through income 1,058,393 - 1,058,393
Insurance and other receivables 15,567 - 15,567
Prepayments 12,647 - 12,647
---------- ---------------------------------- ----------
Total financial assets 1,898,322 - 1,898,322
---------- ---------------------------------- ----------
Deferred tax asset 8,168 - 8,168
Defined benefit pension scheme surplus 1,056 - 1,056
Income taxes 127 - 127
Cash and cash equivalents 19,533 - 19,533
Total assets 1,946,288 54,533 2,000,821
---------------------------------------------------------- ---------- ---------------------------------- ----------
Liabilities
Insurance contract provisions 1,736,953 - 1,736,953
Derivatives 23,725 - 23,725
Deferred tax liabilities 10,919 13,634 24,553
Payables related to direct insurance contracts 31,967 - 31,967
Income taxes 10,183 - 10,183
15,595 - 15,595
Total liabilities 1,829,342 13,634 1,842,976
---------------------------------------------------------- ---------- ---------------------------------- ----------
Net assets 116,946 40,899 157,845
---------------------------------------------------------- ---------- ---------------------------------- ----------
Net assets acquired 157,845
Total consideration, paid in cash (137,526)
Profit arising on business combination 20,319
---------------------------------------------------------- ---------- ---------------------------------- ----------
The assets and liabilities at the acquisition date in the table
above are stated at their provisional fair values and may be
amended for 12 months after the date of acquisition in accordance
with IFRS 3, Business Combinations. We stated in our interim
financial statements that we planned to consider the alignment of
the IFRS reserving methodology within Scildon with that of the
wider Chesnara group. After considering this further in the context
of the introduction of the new insurance contract liability
standard, IFRS 17, we have decided to defer this proposed alignment
until the new standard becomes effective in 2021.
Acquired receivables: Within the net assets acquired are
reinsurance related and other receivable balances totalling
GBP16.9m, which are held at fair value. For all receivables other
than reinsurers' share of insurance contract provisions the gross
contractual amounts receivable are equal to fair value. The
reinsurers' share of insurance contract provisions receivable
balance of GBP1.3m is discounted as a result of the long-term
nature of this asset.
Acquired value of in-force business: The acquisition has
resulted in the recognition of net of tax intangible asset
amounting to GBP49.8m, which represents the present value of the
future post-tax cash flows expected to arise from policies that
were in force at the point of acquisition. The asset has been
valued using a discounted cash flow model that projects the future
surpluses that are expected to arise from the business. The model
factors in a number of variables, of which the most influential
are; the policyholders' ages, mortality rates, expected policy
lapses, expenses that are expected to be incurred to manage the
policies and future investment growth, as well as the discount rate
that has been applied. This asset will be amortised over its
expected useful life.
Gain on acquisition: As shown on the previous page, a gain of
GBP20.3m has been recognised on acquisition. Under IFRS 3, a gain
on acquisition is defined as being a "bargain purchase". At the
point of price negotiation and subsequent deal completion, Legal
& General was following a strategic plan to dispose of non-core
businesses, which included its Dutch operation. In the opinion of
the Directors, this resulted in a disposal pricing strategy for
Legal & General Nederland that sought to offer an attractive
investment opportunity for potential buyers.
Acquisition-related costs: The costs in respect of the
transaction amounted to GBP8.1m. GBP4.1m of these costs have been
included in Administration Expenses, of which GBP3.8m was
recognised within the Consolidated Statement of Comprehensive
Income in 2016, with the remainder recognised in the current
period. Transaction costs of GBP3.3m were incurred in respect of
the equity fund-raising and were deducted from equity in 2016. Debt
fund-raising costs amounted to GBP0.8m and will be amortised over
the life of the loan using the effective interest rate method of
amortisation.
Results of Scildon: The results of Scildon have been included in
the consolidated financial statements of the Group with effect from
5 April 2017. Net insurance premium revenue for the period was
GBP119.8m, with contribution to overall consolidated profit before
tax of GBP18.4m, before the amortisation of the AVIF and deferred
acquisition cost intangible assets. Had Scildon been consolidated
from 1 January 2017, the Consolidated Statement of Comprehensive
Income would have included net insurance premium revenue of
GBP178.0m, and would have contributed GBP16.6m to the overall
consolidated profit before tax.
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 31 December 2017 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.
Movestic: This segment comprises the group's Swedish life and
pensions business, Movestic Livförsäkring AB ('Movestic') and its
subsidiary and associated companies, which are open to new business
and which are responsible for conducting both unit-linked and
pensions and savings business and providing some life and health
product offerings.
Waard Group: This segment represents the group's Dutch life and
general insurance business, which was acquired on 19 May 2015 and
comprises the three insurance companies Waard Leven N.V., Hollands
Welvaren Leven N.V. and Waard Schade N.V., and a servicing company,
Tadas Verzekering. During the year, the book of policies held
within Hollands Welvaren Leven N.V. was successfully integrated
into Waard Leven via a Part VII transfer. 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.
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 parent
company, Chesnara plc, are defined under the operating segment
analysis as Other group activities. Also included therein are
consolidation and elimination adjustments.
The accounting policies of the segments are the same as those
for the group as a whole. Any transactions between the business
segments are on normal commercial terms in normal market
conditions. The group evaluates performance of operating segments
on the basis of the profit before tax attributable to shareholders
and on the total assets and liabilities of the reporting segments
and the group. There were no changes to the measurement basis for
segment profit during the year ended 31 December 2017.
(i) 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 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
--------- ---------- ------------- --------- ---------------------- ---------
(ii) 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
----------- ----------- ------------- ----------- ---------------------- -----------
(iii) Segmental income statement for the year ended 31 December
2016
CA Movestic Waard Group Other Group Activities Total
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
Net insurance premium revenue 46,989 14,903 2,658 - 64,550
Fee and commission income 31,610 41,296 26 - 72,932
337,903 169,130 8,464 184 515,681
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
Total revenue (net of reinsurance payable) 416,502 225,329 11,148 184 653,163
Other operating income 13,360 3,751 503 - 17,614
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
Segmental income 429,862 229,080 11,651 184 670,777
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
Net insurance contract claims and benefits
incurred (263,202) (7,695) (1,464) - (272,361)
Net change in investment contract liabilities (100,599) (168,508) - - (269,107)
(1,664) (25,089) (330) - (27,083)
Administrative expenses:
Amortisation charge on software assets - (1,243) - - (1,243)
Depreciation charge on property and
equipment - (197) - - (197)
Other (20,460) (12,800) (3,664) (8,251) (45,175)
Operating expenses (1,204) (3,209) - 19 (4,394)
Financing costs (2) (1,629) - (1,641) (3,272)
Share of profit from associates - 150 - - 150
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
Profit before tax and consolidation
adjustments 42,731 8,860 6,193 (9,689) 48,095
--------------------------------------------- --------- ---------- ------------- ---------------------- ---------
Other operating expenses:
Charge for amortisation of acquired value
of in-force business (6,247) (3,554) (618) - (10,419)
Charge for amortisation of acquired value
of customer relationships - (236) - - (236)
Fees, commission and other acquisition
costs - 3,245 - - 3,245
Segmental income less expenses 36,484 8,315 5,575 (9,689) 40,685
36,484 8,315 5,575 (9,689) 40,685
Income tax (expense)/credit (6,663) (7) (1,721) 2,986 (5,405)
Profit after tax 29,821 8,308 3,854 (6,703) 35,280
--------- ---------- ------------- ---------------------- ---------
(iv) Segmental balance sheet as at 31 December 2016
CA Movestic Waard Group Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- ----------- ----------- ------------- ---------------------- -----------
Total assets 3,047,490 2,718,156 207,160 122,957 6,095,763
Total liabilities (2,883,575) (2,638,490) (122,655) (57,482) (5,702,202)
-------------------------------- ----------- ----------- ------------- ---------------------- -----------
Net assets 163,915 79,666 84,505 65,475 393,561
-------------------------------- ----------- ----------- ------------- ---------------------- -----------
Investment in associates - 5,433 - - 5,433
-------------------------------- ----------- ----------- ------------- ---------------------- -----------
Additions to non-current assets - 11,894 - - 11,894
5. Borrowings
Group
31 December
2017 2016
GBP000 GBP000
------------------------------------------------ ------- -------
Bank loan 89,457 52,697
Amount due in relation to financial reinsurance 39,745 34,146
------------------------------------------------ ------- -------
129,202 86,843
------------------------------------------------ ------- -------
Current 32,379 61,471
Non-current 96,823 25,372
------------------------------------------------ ------- -------
Total 129,202 86,843
------------------------------------------------ ------- -------
The bank loan as at 31 December 2017 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 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.
The fair value of the sterling denominated bank loan at 31
December 2017 was GBP35.0m (31 December 2016: GBP52.8m).
The fair value of the euro denominated bank loan at 31 December
2017 was GBP55.0m (31 December 2016: nil).
The fair value of amounts due in relation to financial
reinsurance was GBP42.2 (31 December 2016: GBP34.4m).
Bank loans are presented net of unamortised arrangement fees.
Arrangement fees are recognised in profit or loss using the
effective interest rate method.
6. Earnings per share
Year ended 31 December 2017 2016
Profit for the year attributable to shareholders (GBP000) 78,434 35,280
Weighted average number of ordinary shares 149,749,517 127,488,681
Basic earnings per share 52.38p 27.67p
Diluted earnings per share 52.13p 27.56p
The weighted average number of ordinary shares in respect of the
years ended 31 December 2017 is based upon 149,885,761 shares in
issue less 86,040 own shares held in treasury. The weighted average
number of ordinary shares in respect of the years ended 31 December
2017 was based upon 149,885,761 shares in issue less 147,535 own
shares held in treasury.
There were 877,000 share options outstanding at 31 December 2017
(2016: 526,000). Accordingly, there is dilution of the average
number of ordinary shares in issue in respect of 2016.
7. Retained earnings
Year ended 31 December
2017 2016
GBP000 GBP000
--------------------------------------------------------------------------------- -------- --------
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January 188,598 177,021
Profit for the year 78,434 35,280
Revaluation of pension obligations 124 -
Share based payment 669 478
Dividends
Final approved and paid for 2015 - (15,586)
Interim approved and paid for 2016 - (8,595)
Final approved and paid for 2016 (19,002) -
Interim approved and paid for 2017 (10,482) -
--------------------------------------------------------------------------------- -------- --------
Balance at 31 December 238,341 188,598
--------------------------------------------------------------------------------- -------- --------
The interim dividend in respect of 2015, approved and paid in
2016 was paid at the rate of 6.80p per share. The final dividend in
respect of 2016, approved and paid in 2017, was paid at the rate of
12.69p per share so that the total dividend paid to the equity
shareholders of the parent company in respect of the year ended 31
December 2016 was made at the rate of 19.49p per share.
A final dividend of 13.07p per share in respect of the year
ended 31 December 2017 payable on 23 May 2018 to equity
shareholders of the parent company registered at the close of
business on 13 April 2018, the dividend record date, was approved
by the directors after the balance sheet date. The resulting total
final dividend of GBP19.6m has not been provided for in these
financial statements and there are no income tax consequences.
The interim dividend in respect of 2017, approved and paid in
2017, was paid at the rate of 7.00p per share to equity
shareholders of the parent company registered at the close of
business on 8 September 2017, the dividend record date.
The following summarises dividends per share in respect of the
year ended 31 December 2017 and 31 December 2016:
Year ended 31 December
2017 2016
P p
---------------------------- ----- -----
Interim - approved and paid 7.00 6.80
Final - proposed/paid 13.07 12.69
---------------------------- ----- -----
Total 20.07 19.49
---------------------------- ----- -----
8. Related parties
a) Identity of related parties
The shares of the company were widely held and no single
shareholder exercised significant influence or control over the
company.
The company has related party relationships with:
(i) key management personnel who comprise only the directors of the company;
(ii) its subsidiary companies;
(iii) its associated company;
(iv) other companies over which the directors have significant
influence; and
(v) transactions with persons related to key management
personnel
b) Related party transactions
(i) Transactions with key management personnel.
Key management personnel comprise of the directors of the
company. There are no executive officers other than certain of the
directors. Key management compensation is as follows:
2017 2016
GBP000 GBP000
----------------------------- ------- -------
Short-term employee benefits 1,324 1,849
Post-employment benefits 66 84
Total 1,390 1,933
----------------------------- ------- -------
In addition, to their salaries the company also provides
non-cash benefits to directors, and contributes to a post
employment defined contribution pension plan on their behalf, or
where regulatory contribution limits are reached, pay an equivalent
amount as an addition to base salary.
The following amounts were payable to directors in respect of
bonuses and incentives:
2017 2016
GBP000 GBP000
------------------------------------------------------------------------- ------- -------
Annual bonus scheme (included in the short-term employee benefits above) 588 521
------------------------------------------------------------------------- ------- -------
These amounts have been included in Accrued Expenses.
The amounts payable under the annual bonus scheme were payable
within one year.
(ii) Transactions with subsidiaries
The company undertakes centralised administration functions, the
costs of which it charges back to its operating subsidiaries. The
following amounts which effectively comprised a recovery of
expenses at no mark up were credited to the Consolidated Statement
of Comprehensive Income of the company for the respective
periods:
Year ended 31 December
2017 2016
GBP000 GBP000
----------------------- ------- -------
Recovery of expenses 3,272 3,470
----------------------- ------- -------
(iii) Transactions with associate
Movestic Livförsäkring AB and its associate Modernac SA
Year ended 31 December
2017 2016
GBP000 GBP000
--------------------------------------------- ------- -------
Reinsurance premiums paid (9,667) (9,245)
Reinsurance recoveries received 5,820 4,983
Reinsurance commission received (2,843) 1,761
--------------------------------------------- ------- -------
(6,690) (2,501)
--------------------------------------------- ------- -------
Amounts outstanding as at balance sheet date (2,442) (3,570)
--------------------------------------------- ------- -------
Movestic Livförsäkring AB had the following amounts outstanding
at the balance sheet date:
2017 2016
Amounts owed by Amounts owed to Amounts owed by Amounts owed to
associate associate associate associate
GBP000 GBP000 GBP000 GBP000
-------------- ------------------------ ------------------------ ------------------------ ------------------------
Modernac S.A. - 2,442 - 3,570
-------------- ------------------------ ------------------------ ------------------------ ------------------------
These amounts have been included in other payables.
(iv) Transactions with persons related to key management
personnel
During the year, the company engaged the professional services
of Clare Rimmington, who is related to David Rimmington. Clare
Rimmington is an on-line marketing expert with many years of
experience developing and managing web based solutions in the
Financial Services sector.
In the year an amount of GBP20,708 was paid by the company to
Clare Rimmington for web-site related consultancy services. These
amounts have been included in administration expenses.
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
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR KVLFLVXFEBBB
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