TIDMCSN
RNS Number : 3950U
Chesnara PLC
29 March 2019
Chesnara plc
Dividend increased by 3% supported by solid cash generation.
Chesnara has continued to deliver significant cash generation,
funding the dividend strategy as well as strengthening the group
solvency ratio, despite the challenging economic backdrop in 2018.
Economic Value was however impacted by the adverse economic
conditions, though this was in line with sensitivities.
FINANCIAL HIGHLIGHTS
-- GROUP CASH GENERATION OF GBP47.8M (2017: GBP28.6M) (Note 1)
The 2018 result benefits from a GBP26.8m release of surplus from
the UK with-profits funds. The 2017 comparative includes a one-off
GBP55.3m negative arising on the acquisition of Legal & General
Nederland.
-- DIVISIONAL CASH GENERATION OF GBP63.9M (2017: GBP86.7M)
This includes the benefit of a GBP26.8m release of surplus from
the UK's with-profits funds.
-- GROUP SOLVENCY RATIO OF 158% (31 DECEMBER 2017: 146%)
We are well capitalised after allowing for the final dividend,
at both a group and subsidiary level, and have not used any
elements of the long term guarantee package, including transitional
arrangements.
-- 3.00% INCREASE IN FINAL DIVID COMPARED WITH 2017
The results support the continued growth of the final dividend
to 13.46p per share (2017 final: 13.07p per share), the fourteenth
annual consecutive increase.
-- ECONOMIC VALUE (ECV) OF GBP626.1M (31 DECEMBER 2017: GBP723.1M) (Note 2)
The movement includes the earnings for the year, and is stated
after recognising GBP30.4m of dividend payments and a foreign
exchange loss of GBP5.8m during the year.
-- ECV EARNINGS NET OF TAX OF GBP(60.9)M (2017: GBP139.5M)
The loss includes GBP49.7m relating directly to economic market
conditions. The 2017 result included a non-
recurring GBP65.4m gain arising on the acquisition of Legal
& General Nederland.
-- ECV NEW BUSINESS CONTRIBUTION OF GBP10.6M (2017: GBP12.4M)
Solid new business profits have emerged from Movestic. Scildon's
new business operation saw positive volume trends, while we
continue to work on initiatives to further enhance margins.
-- IFRS PROFIT BEFORE TAX OF GBP27.0M (2017: GBP89.6M)
The underlying core operating profit improved to GBP42.5m (2017:
GBP38.4m). Economic losses of GBP15.5m compare to a corresponding
profit of GBP30.9m in 2017. The 2017 result included a GBP20.3m
gain arising on the acquisition of Legal & General
Nederland.
-- IFRS TOTAL COMPREHENSIVE INCOME OF GBP23.7M (2017: GBP86.9M)
The 2018 result includes a foreign exchange loss of GBP0.8m
(2017: gain of GBP8.3m). The 2017 result included a GBP20.3m gain
on acquisition of Legal & General Nederland.
STRATEGIC DELIVERY HIGHLIGHTS
-- FULL YEAR DIVID INCREASE
Total dividends for the year increased by 3% to 20.67p per share
(7.21p interim and 13.46p proposed final). This compares with
20.07p in 2017 (7.00p interim and 13.07p final).
-- GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN
The group's IFRS 17 programme has progressed well during the
year. The initial impact assessment phase has been completed and an
implementation plan has been drawn up which is now being
progressed.
-- FCA INVESTIGATION CLOSURE
The FCA investigation into the fair treatment of long standing
customers in the UK was closed without further action.
John Deane, Chief Executive said:
"It is pleasing to report that in 2018 we continued to generate
cash in excess of our dividend costs and we ended the year with a
strong solvency ratio of 158% (2017: 146%). This was achieved
against a backdrop of adverse economic conditions, especially
during the last quarter of the year. Economic Value has been
impacted by the market conditions in line with our
sensitivities.
The adverse economic conditions, primarily reduced equity and
bond values and the strengthening of sterling against the Swedish
krona, contributed to a reduction in total Economic Value from
GBP723.1m at the start of the year to a closing value of GBP626.1m.
The closing value recognises the payment of GBP30.4m of dividends
during the year.
Good progress on operational performance developments during the
year has resulted in improvements in business resilience and higher
new business volumes compared to 2017.
The FCA investigation into the fair treatment of longstanding
customers in the UK was closed without further action.
In the early part of 2019, markets have recovered somewhat but
uncertainty remains as a result of political, economic and business
conditions. For Chesnara, with our structure of separate subsidiary
companies in each European territory, debt capacity and management
capability, we remain open to the opportunities this uncertainty
could bring to us as a disciplined buyer with a focus on cash
generation and long term value."
Note 1 Cash generation is used by the group as a measure of
assessing how much dividend potential has been generated, subject
to ensuring other constraints are managed.
Group cash generation is calculated as the movement in the
group's surplus own funds above the group's internally required
capital, as determined by applying the group's capital management
policy, which has Solvency II rules at its heart.
Divisional cash generation represents the movement in surplus
own funds above local capital management policies within the three
operating divisions of Chesnara. Divisional cash generation is used
as a measure of how much dividend potential a division has
generated, subject to ensuring other constraints are managed.
Note 2 Economic Value is based on the Solvency II "Own funds"
valuation with adjustments for contract boundaries, risk margin and
adding back the impact of restrictions placed on the value of
certain ring-fenced with-profit funds. We consider the Solvency II
rules understate the commercial value of these items. Contract
boundary rules require Solvency II Own Funds to assume no future
regular premiums on certain contracts and the Solvency II risk
margin rules, in our view, overstate the cost of capital.
The Board approved this statement on 28 March 2019.
Enquiries
John Deane, Chief Executive, Chesnara plc - 01772 972079
Roddy Watt, FWD Consulting - 0207 623 2368 / 07714 770493
Notes to Editors
Chesnara plc ('Chesnara'), which listed on the London Stock
Exchange in May 2004, is the owner of Countrywide Assured plc ('CA
plc'), Movestic Livförsäkringar AB ('Movestic') and Chesnara
Holdings BV, the intermediate holding company of the 'Waard Group'
and Scildon NV ('Scildon').
CA plc is a UK life assurance subsidiary that is closed to new
business. In June 2005 Chesnara acquired a further closed life
insurance company - City of Westminster Assurance - for GBP47.8m.
With effect from 30 June 2006, CWA's policies and assets were
transferred into CA plc. Save & Prosper Insurance Limited and
its subsidiary, Save & Prosper Pensions Limited, were acquired
on 20 December 2010 for GBP63.5m. With effect from 31 December
2011, the business of Save & Prosper was transferred into CA
plc. On 28 November 2013 Chesnara acquired Direct Line Life
Insurance Company Limited (subsequently renamed Protection Life
Company Limited) from Direct Line Group plc for GBP39.3m. On 31
December 2014 the Protection Life business transferred into CA plc.
CA plc operates an outsourced business model.
Movestic, a Swedish life assurance company which originally
focused on pensions and savings, was acquired on 23 July 2009 for
GBP20 million. The company is open to new business and seeks to
grow its position in the Swedish unit-linked market. Its
proposition was strengthened in February 2010 with the acquisition
of the operations of Aspis Försäkringar Liv AB which has a risk and
health product bias.
The Waard Group, a Netherlands-based group comprising three
closed book insurance companies and a servicing company, was
acquired on 19 May 2015 for EUR69.9m. The Waard Group, comprising
Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V.
and Tadas Verzekeringen B.V. was previously owned by DSB Beheer
B.V., a Dutch financial services group. The policy base of the
Waard Group is predominantly term life policies, with some unit
linked policies and some non-life policies.
Scildon (previously Legal & 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 on 5 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.
2018 HIGHLIGHTS
FINANCIAL
IFRS PRE-TAX PROFIT GBP27.0M 2017 GBP89.6M
The 2017 result includes GBP20.3m gain on acquisition of Legal
& General Nederland.
IFRS TOTAL COMPREHENSIVE INCOME GBP23.7M 2017 GBP86.9M
The 2018 result includes a foreign exchange loss of GBP0.8m
(2017: gain of GBP8.3m). The 2017 result includes a GBP20.3m gain
on acquisition of Legal & General Nederland.
GROUP SOLVENCY 158% 2017 146%
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.
ECONOMIC VALUE GBP626.1M 2017 GBP723.1M
Movement in the year is stated after dividend distributions of
GBP30.4m and includes a foreign exchange retranslation loss of
GBP5.8m.
ECONOMIC VALUE EARNINGS GBP(60.9)M 2017 GBP139.5M
The loss includes GBP49.7m relating directly to economic market
conditions. The 2017 result includes a non-recurring GBP65.4m gain
arising on the acquisition of Legal & General Nederland.
NEW BUSINESS PROFIT GBP10.6M 2017 GBP12.4M
GROUP CASH GENERATION GBP47.8M 2017 GBP28.6M
The 2018 result benefits from a GBP26.8m release of surplus
previously constrained within the UK with-profit funds. The 2017
comparative includes a GBP55.3m adverse effect of completing the
acquisition of Legal & General Nederland.
DIVISIONAL CASH GENERATION GBP63.9M 2017 GBP86.7M
The 2018 cash result benefits from a GBP26.8m release of
previously constrained surplus within the UK with-profit funds.
OPERATIONAL AND STRATEGIC
FULL YEAR DIVID INCREASE
Total dividends for the year increased by 3% to 20.67p per share
(7.21p interim and 13.46p proposed final). This compares with
20.07p in 2017 (7.00p interim and 13.07p final).
BREXIT UNCERTAINTY, FALLING EQUITY MARKETS AND WIDENING BOND
SPREADS
The uncertainty over Brexit was an unwelcome background to the
economic backdrop for the year. 2018 saw volatility in equity
markets, with many leading equity indices closing more than 10%
lower than at the start of the year. In addition to this we have
seen pricing pressures in corporate and some government bonds.
GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN
The group's IFRS 17 programme has progressed well during the
year. The initial impact assessment phase has been completed and an
implementation plan has been drawn up which is now being
progressed.
MEASURING OUR PERFORMANCE
HOW WE MEASURE PERFORMANCE WITHIN THIS PRELIMINARY
ANNOUNCEMENT
Throughout the preliminary announcement, 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 preliminary
announcement 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, the preliminary
announcement adopts several Alternative Performance Measures (APMs)
to present a more meaningful view of the financial position and
performance. The non-IFRS APMs have at their heart the Solvency II
valuation known as Own Funds and as such, all major financial APMs
are derived from a defined rules-based regime. The list below shows
the core financial metrics that sit alongside the IFRS results,
together with their associated KPIs and interested parties.
FINANCIAL STATEMENT KPIS:
- IFRS profits
- IFRS net assets
ADDITIONAL METRICS:
- Solvency
-- Own funds
-- Solvency capital requirement (SCR)
-- SCR plus management buffer
-- Solvency position (absolute value)
-- Solvency position ratio
- Cash generation
-- Group cash generation
-- Divisional cash generation
- Economic Value
-- Balance sheet
-- Earnings
SOLVENCY
Solvency is a fundamental financial measure which is of
paramount importance to investors and policyholders. It represents
the relationship between the value of the business as measured on a
Solvency II basis and the capital the business is required to hold
- the Solvency Capital Requirement (SCR). Solvency can be reported
as an absolute surplus value or as a ratio.
Solvency gives policyholders comfort regarding the security of
their provider. This is also the case for investors, together with
giving them a sense of the level of potential surplus available to
invest in the business or distribute as dividends (subject to other
considerations and approvals).
ECONOMIC VALUE
Economic Value (EcV) is deemed to be a more meaningful measure
of the long term value of the group and it generally approximates
to Embedded Value reporting, which was used before the introduction
of SII. In essence, the IFRS balance sheet is not generally deemed
to represent a fair commercial value of our business as it does not
fully recognise the impact of future profit expectations of long
term policies.
EcV is derived from Solvency II Own Funds and recognises the
impact of future profit expectations from existing business.
CASH GENERATION
Cash generation is used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring
other constraints are managed.
Group cash generation is calculated as the movement in the
group's surplus own funds above the group's internally required
capital, as determined by applying the group's capital management
policy, which has Solvency II rules at its heart.
Divisional cash generation represents the movement in surplus
own funds above local capital management policies within the three
operating divisions of Chesnara. Divisional cash generation is used
as a measure of how much dividend potential a division has
generated, subject to ensuring other constraints are managed
OPERATIONAL AND OTHER PERFORMANCE MEASURES
In addition to the financial performance measures, our
preliminary announcement includes measures that consider and assess
the performance of 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 importance
service levels and so through various means we aim to assess customer service
levels. The business reviews within the preliminary announcement
refer to a number of indicators of customer service levels.
====================================================================
Broker satisfaction Broker satisfaction is important because they sell new policies,
provide ongoing service to their customers and influence
book persistency. We include several measures within the
preliminary announcement, including direct broker assessment
ratings for Movestic and general assessment of how our brands
fare in industry performance awards in the Netherlands.
====================================================================
Policy investment This is a measure of how the assets are performing that
performance underpin policyholder returns. It is important as it indicates
to the customer the returns that their contributions are
generating.
====================================================================
Industry This is a comparative measure of how well our investments
performance are performing against the rest of the industry, which provides
assessments valuable context to our performance.
====================================================================
Funds under This shows the value of the investments that the business
management manages. This is important because scale influences operational
sustainability in run-off books and operational efficiency
in growing books. Funds under management are also a strong
indicator of fee income.
====================================================================
Policy count Policy count is the number of policies that the group manages
on behalf of customers. This is important to show the scale
of the business, particularly to provide context to the
rate at which the closed book business is maturing. In our
open businesses, the policy count shows the net impact of
new business versus policy attrition.
====================================================================
Total shareholder This includes dividend growth and yield and shows the return
returns that an investor is generating on the shares that they hold.
It is highly important as it shows the success of the business
in translating its operations into a return for shareholders.
====================================================================
New business This shows our ability to write profitable new business
profitability which increases the value of the group. This is an important
indicator given one of our core objectives is to "enhance
value through profitable new business".
====================================================================
New business This shows our success at writing new business relative
market share to the rest of the market and is important context for considering
our success at writing new business against our target market
shares.
====================================================================
Gearing ratio The gearing is a ratio of debt to IFRS net assets and shows
the extent to which the business is funded by external debt
versus internal resources. The appropriate use of debt is
an efficient source of funding but in general Chesnara seeks
to avoid becoming overly dependent on permanent debt on
the balance sheet.
====================================================================
Knowledge, This is a key measure given our view that the quality, balance
skills and and effectiveness of the Board of Directors has a direct
experience bearing on delivering positive outcomes to all stakeholders.
of the Board
of Directors
====================================================================
CHAIRMAN'S STATEMENT
It is pleasing to report that in 2018 we continued to generate
cash in excess of our dividend costs and we ended the year with a
strong solvency ratio of 158% (2017: 146%). This was achieved
against a backdrop of adverse economic conditions, especially
during the last quarter of the year. Economic Value has been
impacted by the market conditions in line with our
sensitivities.
The adverse economic conditions, primarily reduced equity and
bond values and the strengthening of sterling against the Swedish
krona, contributed to a reduction in total Economic Value from
GBP723.1m at the start of the year to a closing value of GBP626.1m.
The closing value recognises the payment of GBP30.4m of dividends
during the year.
Good progress on operational performance developments during the
year has resulted in improvements in business resilience and higher
new business volumes compared to 2017.
The FCA investigation into the fair treatment of longstanding
customers in the UK was closed without further action.
In the early part of 2019 markets have recovered somewhat but
uncertainty remains as a result of political, economic and business
conditions. For Chesnara with our structure of separate subsidiary
companies in each European territory, debt capacity and management
capability we remain open to the opportunities this uncertainty
could bring to us as a disciplined buyer with a focus on cash
generation and long term value.
PETER MASON,
CHAIRMAN
Against a backdrop of continuing political uncertainty, economic
volatility with a net adverse outcome, and during a period of
significant operational development, the Chesnara business model
has held up well.
Adverse economic conditions have an immediate, but potentially
temporary impact, on Economic Value. Solvency and cash generation
are less affected in the short term and hence our ability to
continue our dividend track record has not been impacted.
At the heart of Chesnara's proposition as a reliable income
stock, the UK business has continued to generate sufficient cash to
fund the Chesnara dividend and the recent trend of Movestic and
Waard making meaningful positive cash contributions continues. In
contrast Scildon has generated a negative cash result of GBP17.8m,
primarily as a result of investment valuation losses on various
corporate and government bonds. This does not impact our view
regarding the future cash generation potential of the business. The
group cash generation provides 157% coverage of the total annual
dividend.
As we have previously reported, Scildon remains in transition
and this is reflected in its short term financial results. The
successful launch of a new mortgage term assurance product during
May has contributed to a modest improvement in new business
volumes. Although the increase in new business volumes was
reassuring, the fact that the new business operation only made
modest profits serves to highlight the importance of successfully
completing the Scildon improvement initiatives.
The financial resilience of the established business units
creates a strong foundation to support the continued improvement
programme in Scildon.
The headline results for 2018 are generally lower by comparison
to 2017. The 2017 results were unusually strong due to a
combination of non-recurring items (including the completion of the
acquisition of Legal & General Nederland) and highly beneficial
economic conditions. The 2018 IFRS result of GBP27.0m includes a
loss of GBP15.5m from economic conditions compared to a
corresponding economic profit of GBP30.9m in 2017. In addition, the
2017 result included a GBP20.3m gain on the acquisition of Legal
and General Nederland. Excluding the investment market driven
impacts and the one off acquisition gain, the underlying IFRS
results are more consistent year on year. Whilst the IFRS results
are worthy of note in my statement, it is my view that they are not
the most meaningful measure for the purpose of assessing the
performance of the company and hence my focus within the Chairman's
statement is on solvency, cash generation and economic value. The
IFRS results are analysed in more detail below.
In addition to funding an attractive dividend strategy, we have
a long-term objective to protect the post dividend Economic Value
of the group. This means that over time we aim to create value at
least to the level of the annual dividend. Due to the sensitivity
of the Economic Value to key investment market variables (see our
sensitivity analysis in the Annual Report & Accounts), it can
be particularly difficult to meet this Economic Value protection
objective in periods where conditions are adverse as has been the
case during 2018. The combination of a GBP49.7m economic loss,
GBP22.8m of operating losses and the payment of GBP30.4m of
dividends are the primary drivers in a reduction in total Economic
Value from GBP723.1m at the beginning of the year to a closing
value of GBP626.1m.
I will now report on how we have delivered against our three
strategic objectives in a little more detail:
01. MAXIMISE VALUE FROM EXISTING BUSINESS
===========================================
Divisional cash generation of GBP63.9m.
When assessed in terms of levels of cash generated in the year
we have, with the exception of Scildon, delivered broadly in line
with expectations. GBP29.0m of cash emerged from the UK division
(excluding GBP6.2m which is currently restricted within the
with-profit fund) during the period which, together with GBP26.8m
of previously constrained surplus released from the with-profits
fund, resulted in total cash significantly in excess of total
annual dividends. Movestic has increased its level of surplus
resulting in a further GBP18.1m of cash generation. Scildon has
reported negative cash generation of GBP17.8m. This is primarily
due to the impact of a downward valuation on its fixed interest
investments. The Scildon result in the year does not impact our
view regarding the future cash generation potential of the
business.
Economic Value in the period has been more affected by economic
conditions with total value falling by GBP97.0m. The majority of
the loss is directly due to economic conditions. Operating losses
of GBP22.8m including the impact of the strengthening of Scildon
mortality assumptions, have also contributed to the reduction.
Foreign exchange losses of GBP5.8m have emerged in the period,
largely as a result of a weakening of Swedish krona. These factors,
coupled with the payment of GBP30.4m of dividends have resulted in
a 13.4% reduction in EcV since the start of the year.
Operational resilience is a vital factor with regards to our
ability to protect and service our customers. We have therefore
invested heavily on improving operational resilience across all
aspects of the business and our assessment is that the operational
resilience and security of the business has improved significantly
during the year.
02. ACQUIRE LIFE AND PENSIONS BUSINESSES
================================================================================================
We continue to see activity in our preferred markets and are well positioned to take advantage
of any future opportunities.
THE OUTLOOK REMAINS POSITIVE. ACQUISITION ACTIVITY CONTINUES TO
TAKE PLACE IN OUR TARGET MARKETS, WITH OPPORTUNITIES CONTINUING TO
EMERGE.
During the year we finalised arrangements to form a broader debt
syndicate and this, together with increases in solvency surplus,
means we are in a strong position to fund future acquisitions where
they meet our assessment criteria.
03. ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
================================================================================
Increase in business volumes result in total new business profits of GBP10.6m.
Chesnara writes new business in both Sweden and the Netherlands.
The ultimate aim is to create sufficient annual profits, either
through returns on the existing business, or through writing new
business, to replace the proportion of Economic Value lost by way
of dividend payments. Movestic continues to deliver within its
target profit range with a profit for the year of GBP8.9m. This
represents a reduction compared to 2017 mainly due to adopting a
more prudent assessment of the profitability of increments to
existing policies. Profits from new contracts remain broadly
consistent with 2017.
Despite improved new business volumes, Scildon are not currently
generating sufficient new business profits with a total profit of
GBP1.7m. This is in line with our expectation at this stage and the
need to drive profitability improvements over the coming years was
factored into our acquisition price. A provision for the
improvement programme has been made. During 2018 the focus has been
on setting strong foundations and ensuring a clarity of direction.
Whilst certain early operational enhancements have been delivered,
the scale of the change to date has not been sufficient to have a
marked impact on new business profits. During 2019 we intend to
deliver sufficient organisational and process change to have a
material impact on the cost base and to deliver a step change in
how we interact with advisors.
SOLID NEW BUSINESS PROFITS HAVE EMERGED FROM MOVESTIC IN A
CHALLENGING MARKET. SCILDON'S NEW BUSINESS OPERATION IS NOT
GENERATING SUFFICIENT PROFIT AND THE FOCUS OVER 2019 IS TO ADDRESS
THIS ISSUE.
The successful launch of a new mortgage term assurance product
is a first positive step on our Scildon improvement plan although
we recognise that we will only see the full potential from products
when they are supported by highly efficient processes and a lower
cost organisation.
Solvency
The group continues to show a robust solvency position, with a
solvency ratio of 158% at 31 December 2018 (31 December 2017:
146%). A large contributing factor to this increase is a GBP26.8m
release of capital from the UK's with profit funds, which
positively benefitted own funds in the period. This was subject to
FCA approval. The closing solvency position is stated after
recognising the GBP20.2m cost of the proposed final dividend.
Regulation and governance
IFRS 17
Our programme has progressed well in the year, with our
immediate focus being on delivering an impact assessment. This
deals with an initial early view on the technical application of
the standard to the group and its associated financial and
operational impacts. We completed our initial impact assessment in
Q3 and have now transitioned to the delivery phase. We have
previously provided for the cost of delivering the programme within
our actuarial expense reserves. From an operational and risk
management perspective, the proposed one year implementation delay
is helpful but it is expected that there will be additional costs.
These too have been provided for in the 2018 results.
We continue to be of the view that IFRS 17 should not have any
significant bearing on the commercial assessment of Chesnara, with
our expectation that capital management decision making will
continue to be driven by regulatory solvency and Economic Value as
opposed to our IFRS results and position.
Regulatory compliance
Compliance with regulation remains a priority for the group. We
have continued to maintain a positive and constructive relationship
with regulatory bodies across the three territories. During the
period we have delivered our GDPR readiness programmes, for the new
rules which were effective from 25 May 2018.
On 19 September 2018 the FCA announced that it had closed its
investigation, into whether CA had failed to meet the standards
expected of it regarding the fair treatment of long-standing
customers. As expected, no further action has resulted from the
investigation.
Governance framework
We continue to place great importance on ensuring our risk and
governance system is fit for purpose. Work has continued to
progress on ensuring that Scildon's risk and governance monitoring
and reporting routines are in line with the wider group's.
AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE
WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL
REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS.
Corporate purpose
We 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.
WE HELP PROTECT PEOPLE AND THEIR DEPANTS 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.
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 detailed in our tax strategy, we adopt a responsible and
open approach to taxation and, as a consequence, pay the
appropriate taxes throughout the group.
Staff
- We provide high quality jobs with 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.
OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE PURPOSE
FOR ALL KEY STAKEHOLDERS.
Outlook and Brexit
Chesnara is in a good position to continue its delivery against
its strategic objectives, which in turn fund our well established
dividend strategy. The ability to generate cash in less
economically beneficial conditions, as has been the case during
2018, clearly demonstrates this.
In particular, the UK business remains a robust source of cash,
with additional potential to take management actions to enhance the
core cash if required. Movestic now has the scale to continue
contributing to the cash position. Scildon has surplus capital and
despite the negative cash emerging during the period, is also
expected to be cash generative, in the absence of adverse economic
conditions.
We now have sufficient scale and presence in both the UK and the
Netherlands to continue our focus on acquisition activity in those
territories in a disciplined manner. We also remain open to
opportunities in Sweden particularly where they provide scale
benefits. We would consider 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 having completed a debt syndication
process during the year, and we have significant levels of surplus
capital. 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. They have made meaningful steps in improving the
organisational effectiveness and efficiency of the business
including some major automation initiatives, which have resulted in
a notable reduction in the cost base. They are in a good position
to deliver further digitalisation plans. We recognise that current
new business profits from Scildon are not sufficient. However, the
fact that we have recorded a modest profit calculated on a suitably
stringent basis of assessment, means we retain our view that
Scildon has the potential to create meaningful new business
profits. 2019 will be a critical year regarding the delivery of
material change to improve profits.
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.
From an investment markets perspective equity markets have
generally risen since the end of the year, and spreads on bonds
have narrowed. Both of these factors are positive drivers of
Economic Value for the group.
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 2019
BUSINESS REVIEW
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to policyholders and
shareholders. The strategy is delivered through a proven business
model underpinned by a robust risk management and governance
framework and our established culture & values.
01. MAXIMISE VALUE FROM 02. ACQUIRE LIFE AND PENSION 03. ENHANCE VALUE THROUGH
EXISTING BUSINESS BUSINESSES PROFITABLE NEW BUSINESS
Maintain adequate Fair treatment Provide a competitive Robust regulatory
financial resources of customers return to shareholders compliance
====================== ========================== ========================
Responsible risk based management
Business Model
BUSINESS REVIEW n UK
The UK division is principally made up of Countrywide Assured
plc, a life insurance company that is in run off. The company has
277,000 policies and its operations are predominantly outsourced,
and overseen by a central governance team.
The division has continued to focus on delivering its core
strategic objectives of managing the capital and value of the
business effectively, focusing on customer outcomes and ensuring
that the business is governed well.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
- As a closed book, the division creates value through managing
the following key value drivers: costs; policy attrition;
investment return; and reinsurance strategy.
- In general, surplus regulatory capital emerges as the book
runs off. The level of required capital is closely linked to the
level of risk to which the division is exposed. Management's
risk-based decision-making process seeks to continually manage and
monitor the balance of making value enhancing decisions whilst
maintaining a risk profile in line with the board's risk
appetite.
- At the heart of maintaining value is ensuring that the
division is governed well from a regulatory and customer
perspective.
INITIATIVES AND PROGRESS IN 2018
- Cash generation of GBP55.8m emerged during the year despite
volatile equity markets, including GBP26.8m arising from a transfer
of surplus capital from the company's with-profit funds following
approval by the Financial Conduct Authority.
- Proposed final dividend to Chesnara of GBP59.0m.
- Looking through the impact of dividends, the EcV of the
division reduced by GBP8m since the start of the year, largely as a
result of the fall in equity markets in 2018.
- IFRS pre-tax profits of GBP28.2m have been made in the period.
FUTURE PRIORITIES
- As a closed book operation, a key priority for the division is
to continue to monitor expenses closely, especially in light of the
ever-demanding regulatory environment in which the company
operates.
- Continue to consider investment strategy of the division,
including the mix of assets we invest in and also the operating
model used to deliver investment management.
- The division will continue to support the group in delivering
its acquisition strategy in the UK.
KPIs
2018 value reduced as a result of investment market conditions
towards the end of the year.
GBPm 2014 2015 2016 2017 2018
====================== ====== ====== ====== ====== ======
EEV / EcV reported
value 271.8 232.2 239.6 255.5 215.5
Cumulative dividends - 65.0 95.5 125.5 157.5
====================== ====== ====== ====== ====== ======
Total 271.8 297.2 335.1 381.0 373.0
====================== ====== ====== ====== ====== ======
Cash generation of GBP55.8m, which includes a one-off surplus
transfer from with profit funds, continues to support the group's
dividend strategy.
GBPm 2014 2015 2016 2017 2018
----------------- ----- ----- ----- ----- -----
Cash generation 50.9 42.5 21.3 34.5 55.8
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
- Treating customers fairly is one of our primary
responsibilities. We seek to do this by having effective customer
service operations together with competitive fund performance
whilst giving full regard to all regulatory matters. This supports
our aim to ensure policyholders receive good returns, appropriate
communication, and service in line with customer expectations.
INITIATIVES AND PROGRESS IN 2018
- On 19 September 2018 the FCA announced that, it had closed its
investigation, without further action, into whether CA had failed
to meet the standards expected of it regarding the fair treatment
of long-standing customers.
- The division's customer strategy implementation plan has
continued to be progressed during the year. Key items of delivery
have included:
o Reviewing key event communications with customers and making
sure they meet the expected standards. This work will continue into
2019.
o Updating the CA website to improve the accessibility of
information that customers may wish to refer to. A second phase
roll-out to provide more information on fund unit prices and
performance, as well as enhanced information on savings and
protection products, was progressed during 2018 and went live in
2019.
- The business has continued its programme to stay in touch with
customers through its "goneaways" programme.
- Good customer services standards have been maintained throughout the year.
FUTURE PRIORITIES
- The division's customer strategy implementation programme is
expected to come to a close in early 2020, with the programme
transferring the updated processes into a business as usual
environment. Key items that are planned to be delivered in 2019
include:
o Implementing the vast majority of the updated customer
communications, most notably annual statements, retirement
communications, and the remaining transfers and surrender
letters.
o Continue the cycle of seeking to make contact with customers
who have not provided us with their most recent contact
information. This will include writing to all customers who we
believe we have traced to new addresses.
KPIs
Policyholder fund performance
2018 2017
CA Pension Managed (5.5)% 9.8%
CWA Balanced Managed Pension (4.9)% 9.5%
S&P Managed Pension (7.8)% 13.6%
Benchmark - ABI Mixed Inv 40%-85% shares (6.2)% 9.5%
Our main managed funds continue to generally perform well
against their benchmarks although the S&P managed pension fund
experienced a disappointing end to the year as a result of its
higher relative exposure to equities, which fell during the year.
The S&P performance over a longer term period compares
favourably to benchmark.
GOVERNANCE
BACKGROUND INFORMATION
- Maintaining effective governance and a constructive
relationship with regulators underpins the delivery of the
division's strategic plans.
- Having robust governance processes provides management with a
platform to deliver the other aspects of the business strategy. As
a result, a significant proportion of management's time and
attention continues to be focused on ensuring that both the
existing governance processes, coupled with future developments,
are delivered.
INITIATIVES AND PROGRESS IN 2018
- The division has started a programme to enhance its
operational resilience following the Bank of England's paper
entitled "Building the UK financial sector's operational
resilience" which was issued in July 2018.
- The division's IFRS 17 programme commenced, with the first
phase involving an impact assessment. This work has been utilised
to scope the delivery phase of the plan, which has now
commenced.
- Positive engagement with all regulators has continued during the year.
- The General Data Protection Regulation (GDPR) project was
completed prior to the rules coming into force on 25 May 2018.
FUTURE PRIORITIES
- 2019 will focus on delivering the division's operational
resilience plans following the Bank of England's discussion paper
that was issued in 2018.
- The division will continue with its IFRS 17 implementation
plan, noting that the standard is subject to further review by the
IASB. At this stage these plans include producing a balance sheet
valuation under IFRS 17 valuation rules.
KPIs
SOLVENCY RATIO: 191%
Solvency remains robust. The surplus generated in the period
increases the solvency position from 130% to 191%. After the
dividend, due to be paid during 2019, the ratio is 130%.
GBPm Solvency
Ratio
======================== ======= =========
31 Dec 2017 surplus 38.6 130%
Surplus generation
in 2018 49.5
31 Dec 2018 surplus
(pre-dividend) 88.1 191%
2018 proposed dividend (59.0)
=========================== ======= =========
31 Dec 2018 surplus 29.1 130%
=========================== ======= =========
BUSINESS REVIEW = SWEDEN
Movestic is a life and pensions business based in Sweden, and is
open to new business. From its Stockholm base, Movestic operates as
a challenger brand in the Swedish life insurance market. It offers
transparent unit linked pension and savings solutions through
brokers and is well-rated within the broker community.
Movestic has delivered a stable set of results across key
financial metrics and shows resilience in a negative investment
market environment. Its new business operation continues to add
value to the group and assets under management growth as a result
of positive net client cash flow continues to support the division
in achieving its ambitions on scale. The division will continue to
focus on its IT streamlining plans, which are anticipated to bring
cost efficiencies and improvements in broker and policyholder
experience.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
- Movestic creates value predominantly by generating growth in
the unit linked assets under management (AuM). AuM growth is
dependent upon positive client cash flows and positive investment
performance. Capital surplus is a factor of both the value and
capital requirements and hence surplus can also be optimised by
effective management of capital.
INITIATIVES AND PROGRESS IN 2018
- Cash of GBP19.4m has been generated, on constant exchange
rates (GBP18.1m post foreign exchange retranslation).
- IFRS profit of GBP9.3m.
- Assets under management resilient despite investment market
drop in the period, on constant exchange rates.
- The transfer market remains intense. Movestic reflects the
market trend with transfers in at a similar level to outgoing
transfers.
- The division has implemented an operational change programme,
designed to improve efficiencies and reduce costs within the
business and hence combat the impact of price pressure.
- The Swedish Krona has weakened against sterling by 3.2% during
the year, resulting in retranslation losses being reported in EcV
and cash generation. During 2017 the Swedish Krona strengthened by
0.6%.
- Equity markets developed negatively during the fourth quarter
resulting in a negative investment return for the full year.
FUTURE PRIORITIES
- Continue the journey of digitising and automating processes,
with a view to improving both efficiency and control.
- Continue to develop more digitised and individualised customer proposition and experience.
- Provide a predictable and sustainable dividend to Chesnara.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Growth in assets under management
GBPbn 2014 2015 2016 2017 Jun 2018
=============================== ===== ===== ===== ===== =========
Total assets under management 1.9 2.1 2.4 2.8 2.8
=============================== ===== ===== ===== ===== =========
GBPbn
===================== ======
31 December 2017 2.8
New client cashflow 0.2
Investment growth (0.2)
31 December 2018 2.8
========================= ======
IFRS profit
GBPm 2014 2015 2016 2017 2018
============= ===== ===== ===== ===== =====
IFRS profit 3.7 7.5 9.1 9.3 9.3
Value growth
GBPm 2014 2015 2016 2017 2018
====================== ====== ====== ====== ====== ======
EEV / EcV reported
vlaue 145.3 183.8 220.4 240.3 227.4
Cumulative dividends - - - 2.7 5.4
====================== ====== ====== ====== ====== ======
Total 145.3 183.8 220.4 243.0 232.8
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
- Movestic provides personalised long-term savings, insurance
policies and occupational pensions for individuals and business
owners. We believe that recurring independent financial advice
increases the likelihood of a solid and well-planned financial
status, hence we are offering our products and services through
advisors, licenced brokers or digitally.
INITIATIVES AND PROGRESS IN 2018
- Policyholder average investment return of -6.0 % in the year
to date (2017: +8.2%), ahead of the Swedish stock market return of
-7.7%.
- Fees have been lowered in Movestic's funds to strengthen its customer proposition.
- Movestic was elected as one of the unit linked providers in
the procurement of the collective agreement ITP, where 2 million
clients have their occupational pension solution. The offering was
made available on 1 October and was combined with our digital
investment advisory tool MAIA. This is the first time that kind of
solution was made available for this group of clients. It should be
noted that this represents low margin business.
FUTURE PRIORITIES
- Continue to develop new solutions and tools to support the
brokers' value-enhancing customer proposition.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Broker assessment rating (out of 5)
2014 2015 2016 2017 2018
======== ===== ===== ===== ===== =====
Rating 3.6 3.7 3.8 3.7 3.8
POLICYHOLDER AVERAGE INVESTMENT RETURN:
(6.0)%
(SWEDISH STOCK MARKET (7.7)%)
GOVERNANCE
BACKGROUND INFORMATION
- Movestic operates to exacting regulatory standards and adopts
a robust approach to risk management.
- Maintaining strong governance is a critical platform to
delivering the various value-enhancing initiatives planned by the
division.
INITIATIVES AND PROGRESS IN 2018
- The General Data Protection Regulation (GDPR) project was
completed prior to the rules coming into force on 25 May 2018.
- Movestic has successfully implemented the first phase of the
Insurance Distribution Directive (IDD), which applied from 1
October 2018.
- The IFRS 17 project has progressed well, with the initial
impact assessment study delivered during Q4.
FUTURE PRIORITIES
- Continue to deliver compliance with the new Insurance
Distribution Directive (IDD). The IDD seeks to improve consumer
protection and transparency within the distribution of
insurance-based products.
- Deliver IFRS 17 implementation plans.
KPIs
SOLVENCY RATIO: 176%
Solvency remains strong at 176%. Solvency surplus of GBP12.1m
has been generated in the period. After the dividend, due to be
paid during 2019, the ratio is 174%.
GBPm Solvency
Ratio
======================== ====== =========
31 Dec 2017 surplus 78.8 153%
Surplus generation
in 2018 12.1
31 Dec 2018 surplus
(pre-dividend) 90.9 176%
2018 proposed dividend (2.9)
=========================== ====== =========
31 Dec 2018 surplus 88.0 174%
=========================== ====== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
- As an "open" business, Movestic not only adds value from sales
but as it gains scale, it will become increasingly cash generative
which will fund further growth or contribute towards the group's
dividend strategy. Movestic has a clear sales focus and targets a
market share of 6.5% - 10.0% of the advised occupational pension
market. This focus ensures we are able to adopt a profitable
pricing strategy.
INITIATIVES AND PROGRESS IN 2018
- Movestic continues to operate within its target market range.
- Annual premium equivalent of new contracts sold increased by
3% compared with 2017, although gross margin rates have
deteriorated slightly, reflecting the pricing pressures that exist
in the market.
- Overall profits from new contracts have remained consistent
with 2017 despite price pressure. A reassessment of the
profitability of increments to existing policies has however driven
a reduction in overall new business profit.
- Movestic are redesigning their organisation for a digital
world to increase business efficiency and reduce cost. As part of
this process outsourcing of some IT operations capability was
completed in the year.
FUTURE PRIORITIES
- Continue to focus on writing new business within the target range.
- Ongoing digitalisation of processes to improve customer and broker experience.
- Focus on increasing brand awareness.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Occupational pension market share %
% 2016 2017 2018
============== ===== ===== =====
Market share 8.3 7.6 6.6
Market shares have been restated to better reflect the market
excluding increments. On the restated base our target range becomes
6.5% to 10.0%.
New business profit
GBPm 2014 2015 2016 2017 2018
===================== ===== ===== ===== ===== =====
New business profit 6.3 8.7 6.3 11.7 8.9
BUSINESS REVIEW = NETHERLANDS
Our Dutch division consists of two separate businesses; Scildon
and Waard. Scildon, acquired in 2017, is an open business, writing
new policies focusing on three product markets via a broker
network. Scildon is a well-established player in the term assurance
market, the current market leader in unit-linked savings insurance
and is a challenger brand in the Dutch defined contribution pension
insurance market. Waard manages c100,000 policies and is in
run-off, focusing on the efficient administration of its existing
book of business.
2018 has seen positive developments for the Dutch division,
including dividend payments to Chesnara from both Scildon and Waard
with further dividends to be received during 2019. Waard continues
to deliver in line with expectations and the integration of Scildon
into the group has continued in line with its improvement plan,
with key steps taken including key organisational changes and the
launch of its new mortgage term product. A senior management team
is now in place which is more strategically aligned with the group.
The benefits from the actions taken during 2018 have not been
realised in the results thus far and as previously highlighted,
there remains further work to do, which is our focus for 2019.
Economic conditions in 2018 have impacted results; however, these
results do not have any bearing on the ongoing view of the cash and
profit potential from the Scildon business.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
- Both Waard and Scildon have a common aim to make capital
available to the Chesnara group to fund further acquisitions or to
contribute to the dividend funding. Whilst their aims are common,
the dynamics by which the businesses add value differ:
o Waard is in run-off and has the benefit that the capital
requirements reduce in-line with the attrition of the book.
o As an open business, Scildon's capital position does not
benefit from book run-off. It therefore adds value and creates
surplus capital through writing new business and by efficient
operational management and capital optimisation.
INITIATIVES AND PROGRESS IN 2018
- During 2018, Waard and Scildon paid dividends to Chesnara of
GBP12.9m and GBP21.7m respectively and ended the period with
healthy solvency ratios of 643% and 203%. Further combined
distributions of GBP8.4m are due in 2019 in respect of 2018.
- Including the impact of foreign exchange, Scildon has reported
an EcV loss of GBP30.0m with Waard delivering a profit of GBP2.3m.
The loss in Scildon is primarily driven by adverse asset valuation
movements from widening credit spreads on corporate and certain
government bonds together with updated mortality assumptions to
reflect the latest industry data.
- Cash utilisation of GBP10.0m, representing a GBP7.8m gain from
Waard primarily due to SCR reductions, offset by a cash loss of
GBP17.8m from Scildon.
- IFRS profit of GBP1.7m reflects a GBP2.8m profit in Waard
offset by a GBP1.1m loss in Scildon.
- Progressed a focused plan for Scildon to drive improvements in
new business development, cost management and organisational
structure.
- Aligned some functions between the two Dutch businesses to
provide operational efficiencies.
FUTURE PRIORITIES
- Continue dividends from both businesses to support the group dividend.
- Continuation of the Scildon improvement plan which will
strengthen future cash generation and value growth. The plans
include:
o Process and value for money improvements, such as increased
levels of "straight through" processing;
o Assessment of IT infrastructure to ensure it is able to
facilitate efficient processes through a simplified approach with
reduced delivery risk; and
o Continual assessment of the business model to ensure an
optimal balance between returns generated versus solvency capital
requirements.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Scildon's EcV has been impacted in the year as a result of
adverse market conditions, in particular the widening of spreads.
The business has a track record of delivering surplus growth which
has enabled dividend distributions to its parent company and paid
its first dividend to Chesnara in 2018
Scildon value growth
GBPm 2014 2015 2016 2017 2018
====================== ====== ====== ====== ====== ======
EEV / EcV reported
value 272.2 244.0 226.6 223.5 171.1
Cumulative dividends - 36.8 74.4 74.4 96.6
====================== ====== ====== ====== ====== ======
Total 272.2 280.8 301.0 297.9 267.7
====================== ====== ====== ====== ====== ======
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
- Great importance is placed on providing customers with high
quality service and positive outcomes.
- Whilst the ultimate priority is the end customer, Scildon also
see the brokers who distribute their products as being customers
and hence developing processes to best support their needs is a key
focus.
INITIATIVES AND PROGRESS IN 2018
- Updated the Scildon service desk to enhance the 'customer journey' for IFAs and consumers.
- Scildon has again received an award from Afdiz, the Dutch
broker organisation. In 2018, the business was awarded "Best
occupational pension insurer" and was rated second for term
insurance.
- The annual performance research for consumers shows high scores.
FUTURE PRIORITIES
- Continuing to enhance and develop Scildon's existing
processes, customer experiences and the underlying
infrastructure.
- Engage with brokers to support the development of our
processes in conjunction with their requirements.
- Regular customer assessment, with the outcome used to improve Scildon's service quality.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Scildon client satisfaction rating (out of 10)
2014 2015 2016 2017 2018
======== ===== ===== ===== ===== =====
Rating 7.3 7.5 7.4 7.6 7.7
GOVERNANCE
BACKGROUND INFORMATION
- Waard and Scildon operate in a regulated environment and
comply with rules and regulations from both a prudential and
financial conduct point of view.
INITIATIVES AND PROGRESS IN 2018
- Scildon has aligned its governance and risk management framework to Chesnara practices.
- Scildon strengthened its governance framework during 2018
through changes in structure and personnel.
- The IFRS 17 project is underway for both companies.
- Implemented GDPR, in line with regulatory requirements, in both companies.
FUTURE PRIORITIES
- The focus during 2019 is to further embed the governance and risk management framework.
- Deliver IFRS 17 implementation plans.
KPIs
SOLVENCY RATIO: SCILDON 210%; WAARD 665%
Solvency is strong in both businesses. Scildon has reported a
reduction in surplus during 2018, largely due to increasing spreads
reducing asset values. Waard has generated surplus capital of
GBP5.9m. After the dividend, due to be paid during 2019, solvency
ratios are 203% and 624% for Scildon and Waard respectively.
Scildon
GBPm Solvency
Ratio
======================== ======= =========
31 Dec 2017 surplus 106.0 231%
Surplus generation
in 2018 (19.2)
31 Dec 2018 surplus
(pre-dividend) 86.8 210%
2018 proposed dividend (5.2)
=========================== ======= =========
31 Dec 2018 surplus 81.6 203%
=========================== ======= =========
Waard
GBPm Solvency
Ratio
======================== ====== =========
31 Dec 2017 surplus 38.1 483%
Surplus generation
in 2018 5.9
31 Dec 2018 surplus
(pre-dividend) 43.9 665%
2018 proposed dividend (3.2)
=========================== ====== =========
31 Dec 2018 surplus 40.7 624%
=========================== ====== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
- Scildon primarily sells protection and individual savings
contracts via a broker-led distribution model. The aim is to
deliver meaningful value growth from a realistic market share.
Having realistic aspirations regarding volumes means we are able to
adopt a profitable pricing strategy. New business also helps the
business maintain scale and hence contributes to unit cost
management.
INITIATIVES AND PROGRESS IN 2018
- Scildon generated new business profits of GBP1.7m. This is in
line with expectations and shows marginal increases since
acquisition but it is not currently generating sufficient new
business profits and this is therefore a focus of our improvement
plans.
- As part of those plans, Scildon successfully launched a new
mortgage term product in 2018, which was well received by the
market.
- A Scildon management team is in place which is strategically
aligned with the group, including the appointment of a new Finance
Director and interim Chief Operating Officer.
- Market share for the core protection business is within the
5.0%-10.0% target range but we have further work to do to
strengthen the proposition and reduce costs.
- The number of policies increased by 4% over the year.
- Scildon updated the group pension offering to maximise value transfers and premium levels.
FUTURE PRIORITIES
- Management actions are planned as part of the improvement
plans to generate a more commercially meaningful level of new
business profit.
- An objective of the improvement programme is to deliver cost
reductions whilst strengthening the proposition and maintaining
market share.
KPIs (all comparatives have been presented using 2018 exchange
rates)
Scildon - term assurance market share %
% 2014 2015 2016 2017 2017
============== ===== ===== ===== ===== =====
Market share 5.0 6.6 5.9 7.3 7.6
Scildon - new business profit
GBPm 2014 2015 2016 2017 2017
============================ ====== ===== ===== ===== =====
New business profit/(loss) (3.6) 0.1 2.0 1.9 1.7
BUSINESS REVIEW = acquire life and pension businesses
Well considered and appropriately priced acquisitions maintain
the effectiveness of the operating model, create a source of value
enhancement and sustain the cash generation potential of the
group.
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of
advisers and industry associates, utilising both group and
divisional management expertise as appropriate.
- We primarily focus on acquisitions in the UK and Netherlands,
although will consider other territories should the opportunity
arise.
- We assess deals applying well established criteria which
consider the impact on cash generation and Economic Value under
best estimate and stressed scenarios.
- We work cooperatively with regulators.
- The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group's risk profile.
- Transaction risk is minimised through stringent risk-based due
diligence procedures and the senior management team's acquisition
experience and positive track record.
- We fund deals with a combination of debt, equity or cash
depending on the size and cash flows of each opportunity.
HOW WE ASSESS DEALS
Cash generation
- Collectively our future acquisitions must be suitably cash
generative to continue to fund the Chesnara dividend strategy.
Value enhancement
- Acquisitions are required to have a positive impact on the
Economic Value per share under best estimate and certain more
adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance, customer interests.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite
the financial returns must be suitably compelling.
RISKS
- There is the risk that if a lack of suitable acquisition
opportunities come to market at a realistic valuation, the
investment case for Chesnara diminishes over time.
- There is the risk that we make an inappropriate acquisition
that adversely impacts the financial strength of the group.
- Our acquisition strategy includes both UK and non-UK markets.
WHAT WE CAN DO ABOUT THIS
- Operating in three territories increases our options thereby
reducing the risk that no further value adding deals are done.
- A broader target market also increases the potential for deals
that meet our strategic objectives.
- Flexibility over the timing of subsequent divisional dividend
flows provide an element of management control over the sterling
value of cash inflows.
- Each acquisition is supported by a financial deal assessment
model which includes high quality financial analysis. This is
reviewed and challenged by management and the board, mitigating the
risk of a bad deal being pursued.
ACQUISITION OUTLOOK
- In the UK, in recent times we have seen a gradual increase in
closed book market activity which, in our view, is driven in part
at a global level by regulatory developments and, at a company
level, strategic developments. We expect these drivers to continue
to be relevant going forward.
- Regarding the Netherlands, we have also seen a gradual
increase in market activity which we are well positioned to take
advantage of, given our scale and presence. Again, regulatory and
strategic developments are the drivers, and we expect these themes
to continue into the future.
- We continue to assess opportunities within Western Europe that
are outside of Chesnara's current territories. All opportunities
and territories considered are assessed on the basis that these do
not compromise the well-established Chesnara acquisition assessment
model, as well as ensuring that these fit within Chesnara's
governance framework and that they are able to support our strategy
and business model. There has been a reasonable level of market
activity in Western Europe.
- The environment in which European life insurance companies
operate continues to increase in complexity. For example, "IFRS 17
Insurance Contracts" was issued in 2017, which is a fundamental
overhaul of the way in which insurance contracts are accounted for.
We believe this additional complexity will potentially drive
further consolidation as institutions seek to remove operational
complexity and potentially release capital or generate funds from
capital intensive life and pension businesses.
- Chesnara is a well-established life and pensions consolidator
with a proven track record. Our financial foundations are strong,
we have an established and stringent acquisition assessment model,
and we continue to have strong support from shareholders and
lending institutions to progress our acquisition strategy. We
believe our operating model has the flexibility to accommodate a
wide range of potential target books. Our good network of contacts
in the adviser community, who understand the Chesnara acquisition
model, ensures we are aware of most viable opportunities in the UK
and Western Europe. With this in mind, we are confident that we are
well positioned to continue the successful acquisition track record
in the future.
- In April 2018 we converted our existing debt arrangement with
RBS into a syndicated facility. This will provide access to higher
levels of debt financing from a wider panel of lenders, which in
turn will enable us to fulfil our appetite of financing future
deals up to the maximum levels of gearing set out in our debt and
leverage policy, without being restricted by the lending capacity
of one individual institution. This facility enables Chesnara to
access an increased level of funds efficiently, which in turn
supports our acquisition strategy.
CAPITAL MANAGEMENT = Solvency II
WHAT IS SOLVENCY AND CAPITAL SURPLUS?
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds"
(OF) and this is measured in accordance with the rules of the
Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital
Requirement (SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF less SCR
SOLVENCY SURPLUS TO CASH GENERATION
Subject to ensuring other constraints are managed, surplus
capital is a useful proxy measure for liquid resources available to
fund items such as dividends, acquisitions or business investment.
As such, Chesnara defines cash generation as the movement in
surplus, above management buffers, during the period.
MORE ABOUT OWN FUNDS
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and
includes a value for future profits expected to arise from in-force
policies.
The own fund valuation is deemed to represent a commercially
meaningful figure with the exception of:
- Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain policies despite a high
probability of receipt.
- Risk margin: The Solvency II rules require a "risk margin"
liability which is deemed to be above the realistic cost.
- Restricted with profit surpluses: Surpluses in the group's
with-profit funds are not recognised in Solvency II Own Funds
despite their commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted
for the items above. As such our Own Funds and EcV have many common
characteristics and tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term
guarantee package when Solvency II was introduced, are available to
temporarily increase Own Funds. Chesnara does not take advantage of
such measures.
HOW DO OWN FUNDS CHANGE?
Own Funds (and Economic Value) are sensitive to economic
conditions. In general, positive equity markets and increasing
yields lead to OF growth and vice versa. Other factors that improve
Own Funds include writing profitable new business, reducing the
expense base and improvements to lapse rates.
MORE ABOUT THE CAPITAL REQUIREMENT
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a
"Standard formula" or "internal model". Chesnara adopts the
"Standard formula".
The standard formula requires capital to be held against a range
of risk categories. The following chart shows the categories and
their relative weighting for Chesnara:
GBP 2018
=================================== ==============
Total market risk 259,385,389
Counterparty default risk 16,466,845
Total life underwriting risk 185,641,586
Total health underwriting risk 15,851,780
Diversification risk (109,247,134)
Capital requirement for other sub 304,643
Operational risk 13,862,924
=================================== ==============
SCR 382,286,033
Note: The table above does not include the impact of the loss
absorbing capacity of deferred tax.
There are three levels of capital requirement:
Minimum dividend paying requirement: The board sets a minimum
solvency level above the SCR which creates a more prudent level is
applied when making dividend decisions.
Solvency capital requirement: Amount of capital required to
withstand a 1 in 200 event. The SCR acts as an intervention point
for supervisory action including cancellation or the deferral of
distributions to investors.
Minimum capital requirement: The MCR is between 45% and 25% of
the SCR. At this point Chesnara would need to submit a recovery
plan which if not effective within three months may result in
authorisation being withdrawn.
HOW DOES THE SCR CHANGE?
Given the largest component of Chesnara's SCR is market risk,
changes in investment mix or changes in the overall value of our
assets has the greatest impact on the SCR. For example, equity
assets require more capital than low risk bonds. Also, positive
investment growth in general creates an increase in SCR. Book
run-off will tend to reduce SCR but this will be partially offset
by an increase as a result of new business.
CHESNARA GROUP SOLVENCY METRICS
GBPm 2018 2017
================== ===== =====
Own funds 553 615
SCR 350 422
Solvency surplus 203 193
Solvency ratio % 158% 146%
WE ARE WELL CAPITALISED AT BOTH A GROUP AND SUBSIDIARY LEVEL,
AND WE HAVE NOT USED ANY ELEMENTS OF THE LONG TERM GUARANTEE
PACKAGE.
CHESNARA GROUP
SOLVENCY POSITION
GBPm 2018 2017
============================== ===== =====
Own funds (post dividend) 553 615
SCR 350 422
Buffer 35 42
Surplus above SCR and buffer 168 151
Solvency ratio % 158% 146%
SOLVENCY SURPLUS MOVEMENT
GBPm
=========================== =======
Group surplus 31 Dec 2017 193.4
CA 49.5
Movestic 14.3
Waard 5.2
Scildon (20.4)
Chesnara / consol adj (7.9)
Exchange rates (0.8)
Dividends (31.0)
=========================== =======
Group surplus 31 Dec 2018 202.4
=========================== =======
Surplus: The solvency position of the group has improved, from
146% to 158%. The group now has GBP168.0m of surplus over and above
the internal capital management policy, compared to GBP151.2m at
the end of 2017. The growth in surplus has arisen from a reduction
in capital requirements, which have fallen more than the reduction
in Own Funds.
Dividends: The closing solvency position is stated after
deducting the GBP20.2m proposed dividend (31 December 2017:
GBP19.6m), and also reflects the payment of an interim dividend of
GBP10.8m
Own Funds: Own Funds have fallen by GBP62.6m. This is driven by
falls in equity markets during the year, in particular during Q418,
which had a significant impact on Movestic and CA. In addition,
rising spreads have reduced the value of the bond holdings, which
particularly affects Scildon. The depreciation of the Swedish krona
has also caused a reduction in the sterling value of the Swedish
business.
SCR: The SCR has fallen by GBP72.2m this year. The key movements
underlying this are reductions in equity risk, spread risk,
currency risk and lapse risk.
The numbers that follow present a divisional view of the
solvency position which may differ to the position of the
individual insurance company(ies) within that division. Please note
that prior year figures have been restated using 31 December 2018
exchange rates.
UK
SOLVENCY POSITION
GBPm 2018 2017
=========================== ===== =====
Own funds (post dividend) 126 167
SCR 97 128
Buffer 19 26
Surplus 10 13
Solvency ratio % 130% 130%
Surplus: GBP9.8m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP59.0m proposed dividend (2017: GBP32.0m).
Own Funds: Increased by GBP18.0m (pre-dividend) due to the
transfer of GBP26.8m capital from WP funds, partially offset by
negative economic variances.
SCR: Reduced by GBP31.5m, driven by market risk falls. Equity
risk has reduced, due to equity market falls (which also has
knock-on impacts on currency and lapse risk). Spread risk also
reduced due to falls in corporate bond exposure and improvements in
asset data.
SWEDEN
GBPm 2018 2017
=========================== ===== =====
Own funds (post dividend) 207 221
SCR 119 144
Buffer 24 29
Surplus 64 47
Solvency ratio % 174% 153%
Surplus: GBP64.2m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP2.9m proposed dividend (2017: GBP2.8m).
Own Funds: Reduced by GBP17.8m (pre-dividend). Driven by falls
in investment returns (in particular equities during Q4),
strengthening of assumptions (operating expense and transfer rates)
and the loss in GBP caused by the relative depreciation of the
Swedish krona against sterling.
SCR: Capital requirements have fallen by GBP25.0m. Market risk
has fallen, driven by the equity market falls during the year.
NETHERLANDS - WAARD
GBPm 2018 2017
=========================== ===== =====
Own funds (post dividend) 48 49
SCR 8 10
Buffer 8 10
Surplus 33 29
Solvency ratio % 624% 483%
Surplus: GBP32.9m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP3.2m proposed dividend (2017: GBP13.0m).
Own Funds: Positive growth of GBP3.5m (pre-dividend), due to
expected returns and changes in assumed mortality rates.
SCR: Reduced by GBP2.2m, due to a reduction in counterparty
default risk following Chesnara dividend payment, which reduced
cash holdings, and reduced underwriting risk following change in
demographic assumptions.
NETHERLANDS - SCILDON
GBPm 2018 2017
=========================== ===== =====
Own funds (post dividend) 161 190
SCR 79 82
Buffer 79 82
Surplus 2 25
Solvency ratio % 203% 231%
Surplus: GBP2.5m above board's capital management policy.
Dividends: The solvency position is stated after deducting
GBP5.2m proposed dividend (2017: GBP22.2m).
Own Funds: Reduction of GBP21.8m (pre-dividend), principally due
to rising spreads and strengthening of the mortality
assumptions.
SCR: Decreased by GBP2.3m. Spread risk has fallen (due to rising
spreads reducing corporate bond values) and lapse risk has reduced
(due to higher mortality assumptions reducing profits).This is
offset to some extent by increases in currency risk and mortality
risk, in addition to changing tax rates having an adverse impact on
capital requirements.
CAPITAL MANAGEMENT = Sensitivities
The group's solvency position can be affected by a number of
factors over time. As a consequence, the group's EcV and cash
generation, both of which are derived from the group's solvency
calculations, are also sensitive to these factors.
The table below provides some insight into the immediate and
longer term impact of certain sensitivities that the group is
exposed to, covering solvency, cash generation and Economic Value.
As can be seen, EcV tends to take the 'full force' of adverse
conditions whereas cash generation is often protected in the short
term and, to a certain extent, in the longer term due to
compensating impacts on our required capital
Solvency surplus Cash generation EcV
Impact 5 year impact Impact
====================================== ============================ =========================== ==================
20% Sterling appreciation (2) (4) (5)
25% equity fall (2) (4) (4)
25% equity rise (1) 4 5
10% equity fall (1) (2) (3)
10% equity rise 1 2 3
1% interest rate rise 2 3 2
50bps credit spread rise (1) (1) (1)
25bps swap rate fall (2) (2) (2)
10% mass lapse (1) (1) (3)
10% expense rise
+ 1% inflation rise (4) (4) (4)
10% mortality increase (2) (3) (2)
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 translated value of surplus in our overseas divisions,
and hence has an immediate impact on the group's solvency surplus
and available cash. It also reduces the value of projected Own
Funds growth in our overseas divisions and also reduces the value
of overseas investments in CA.
Equity sensitivities: The equity fall sensitivities cause both
the Own Funds and SCR to fall, as the value of the funds exposed to
risk is lower. The reduction in SCR is smaller than Own Funds,
resulting in an immediate impact on surplus. Conversely, in an
equity rise, the Own Funds and SCR both rise. The extent to which
the SCR increase offsets the Own Funds movement depends on the
stress applied. 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.
CA and Movestic contribute the most due to their large amounts of
unit-linked business.
1% interest rate rise: An interest rate rise is generally
positive across the group. CA, Movestic and Scildon all contribute
towards the total group cash generation impact.
50bps credit spread rise: A credit spread rise has an adverse
impact on surplus and future cash generation, particularly in
Scildon due to the corporate bond holdings that form part of the
asset portfolios backing non-linked insurance liabilities. The
impact on the other divisions is less severe.
25bps swap rate fall: This sensitivity measures the impact of a
fall in the swap discount curve with no change in the value of
assets. The result is that liability values increase in isolation.
The most material impacts are on CA and Scildon due to the size of
the non-linked book.
10% mass lapse: This sensitivity has a small impact on surplus
as the reduction in Own Funds is largely offset by the SCR fall.
However, with fewer policies on the books there is less potential
for future profits. The division most affected is Movestic; the
loss in future fee income 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.
10% mortality increase: This sensitivity has an adverse impact
on surplus and cash generation, particularly for Scildon due to
their term products.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that
the sensitivities modelled are deemed to be broadly similar (with
the exception that the 10% equity movements are naturally more
likely to arise) in terms of likelihood. Whilst the sensitivities
provide a useful guide, in practice, how our results react to
changing conditions is complex and the exact level of impact can
vary due to the interactions of events and starting position.
FINANCIAL REVIEW
The key performance indicators are a reflection of how the
business has performed in delivering its three strategic
objectives. The 2018 results reflect the impact of equity falls and
bond price pressure that was witnessed during the year.
Summary of each KPI:
IFRS
PRE-TAX PROFIT: GBP27.0M (2017: GBP89.6M)
TOTAL COMPREHENSIVE INCOME: GBP23.7M (2017: GBP86.9M)
What is it?
Presentation of the results in accordance with International
Financial Reporting Standards (IFRS) aims to recognise the profit
arising from the longer-term insurance and investment contracts
over the life of the policy.
Why is it important?
IFRS profit is a statutory measure used both internally and by
our external stakeholders in assessing the performance of the
business. IFRS profit is an indicator of how we are performing
against our stated strategic objective of 'maximising value from
the existing business' and can also be impacted by one-off gains
arising from delivering against our stated objective of 'acquiring
life and pensions businesses'. Whilst the IFRS results form the
core of reporting and hence retain prominence as a key financial
performance metric, there is a general acceptance that the IFRS
results in isolation do not adequately recognise the wider
financial performance of a typical life and pensions business.
Risks
The IFRS profit can be affected by a number of our principal
risks and uncertainties. In particular, volatility in equity
markets and bond yields can result in volatility in the IFRS
pre-tax profit, and foreign currency fluctuations can affect total
comprehensive income. The IFRS results of Scildon are potentially
relatively volatile, in part, due to the different approach used by
the division for valuing assets and liabilities, as permitted under
IFRS 4.
GBPm 2018 2017
====================================== ======= =======
CA 28.2 50.6
Movestic 9.3 9.8
Waard 3.5 5.2
Scildon (1.1) 18.4
Group & consolidation adjustments (12.9) (14.7)
Profit on acquisition - 20.3
====================================== ======= =======
Pre-tax profit 27.0 89.6
Taxation (2.9) (11.2)
Forex and other comprehensive income (0.5) 8.5
====================================== ======= =======
Total 23.7 86.9
- IFRS pre-tax profit of GBP27.0m is significantly lower than in
the prior year, owing largely to economic losses in the closing
months of 2018 and the profit on the acquisition of Scildon that
was reported in 2017.
- The performance in CA is the major contributor to the group result.
- Operating profits of GBP42.5m are the foundation of the
result, demonstrating the resilience and stability of the
underlying business, offset in part by economic losses, driven by
markets conditions.
- Total comprehensive income includes a small foreign exchange
loss of GBP0.8m (2017: GBP8.3m gain) predominantly relating to
sterling's appreciation against the Swedish Krona.
CASH GENERATION
GROUP CASH GENERATION GBP47.8M (2017: GBP28.6M)
DIVISIONAL CASH GENERATION GBP63.9M (2017: GBP86.7M)
What is it?
Cash generation is calculated as being the movement in surplus
own funds over the internally required capital. The internally
required capital is determined with reference to the group's
capital management policies, which have Solvency II rules at their
heart. Cash generation is used by the group as a measure of
assessing how much dividend potential has been generated, subject
to ensuring other constraints are managed.
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 2018
============================= =======
UK 55.8
Sweden 18.1
Netherlands - Waard 7.8
Netherlands - Scildon (17.8)
============================= =======
Divisional cash generation 63.9
Other group activities (16.1)
Total group cash generation 47.8
============================= =======
Divisional cash generation
- Significant cash generation from the UK, with strong
contributions again from Movestic and Waard. Adverse economic
conditions were the primary basis for the reduction in Scildon's
Own Funds and subsequent negative cash result.
- The result includes the non-recurring benefit of a GBP26.8m
capital transfer from restricted with profit funds in the UK.
Group cash generation
- Total group cash generation includes the impact of other group
activities, primarily the impact of group expenses on own funds and
changes to capital requirements upon consolidation of
divisions.
- Total cash generation in 2017 included the negative impact of
the completion of the Legal & General Nederland acquisition
(GBP55.3m).
ECONOMIC VALUE (EcV)
GBP626.1M (2017: GBP723.1M)
What is it?
Economic value (EcV) was introduced following the introduction
of Solvency II at the start of 2016, with EcV being derived from
Solvency II Own Funds. Conceptually, EcV is broadly similar to EEV
in that both reflect a market-consistent assessment of the value of
existing insurance business, plus adjusted net asset value of the
non-insurance business within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force
business and net assets of the non-insurance business and hence is
an important reference point by which to assess Chesnara's 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 14.7%, based on the
composition of the group's EcV at 31 December 2018.
GBPm
========================== =======
Group EcV at 31 Dec 2017 723.1
EcV earnings (60.9)
Dividends (30.4)
Forex loss (5.8)
========================== =======
Group EcV at 31 Dec 2018 626.1
========================== =======
- Economic value fell by 13.4% to GBP626.1m during the year.
- Of this reduction, GBP60.9m was attributable to an earnings
loss, primarily a consequence of adverse economic conditions with
falling equity values and widening bond spreads. However, an
adverse operating result has also contributed to the loss.
- The movement in EcV since the start of the year includes the
impact of the payment of the final 2017 and interim 2018
dividends.
- Foreign exchange losses arising on re-translating of the Dutch
and Swedish divisions have contributed to the overall reduction,
primarily representing the strengthening of sterling against the
Swedish krona since the start of the year
ECV EARNINGS NET OF TAX
GBP(60.9)M (2017: GBP139.5M includes GBP65.4 gain on
acquisition)
What is it?
In recognition of the longer-term nature of the group's
insurance and investment contracts, supplementary information is
presented that provides information on the Economic Value of our
business.
The principal underlying components of the Economic Value result
are:
- The expected return from existing business (being the effect
of the unwind of the rates used to discount the value
in-force);
- Value added by the writing of new business;
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the
determination of expected cash flows; and
- The impact of acquisitions.
Why is it important?
By recognising the market-related value of in-force business
(in-force value), a different perspective is provided in the
performance of the group and on the valuation of the business.
Economic Value earnings are an important KPI as they provide a
longer-term measure of the value generated during a period. The
Economic Value earnings of the group can be a strong indicator of
how we have delivered against all three of our core strategic
objectives. This includes new business profits generated from
writing profitable new business, Economic Value profit emergence
from our existing businesses, and the Economic Value impact of
acquisitions.
Risks
The EcV earnings of the group can be affected by a number of
factors, including those highlighted within our principal risks and
uncertainties and sensitivities analysis. In addition to the
factors that affect the IFRS pre-tax profit and cash generation of
the group, the EcV earnings can be more sensitive to other factors
such as the expense base and persistency assumptions. This is
primarily due to the fact that assumption changes in EcV affect our
long-term view of the future cash flows arising from our books of
business.
GBPm 2018
================================ =======
Underlying operating earnings (0.0)
Material other operating items (22.8)
Economic earnings (49.7)
Other 11.7
================================ =======
Total EcV earnings (60.9)
================================ =======
- An EcV loss of GBP60.9m was incurred during the year.
- The underlying operating performance was nil, with positive
mortality experience, offset by adverse expense and lapse
results.
- Material other operating items primarily relates to the
strengthening of mortality assumptions in Scildon.
- Economic losses represent the largest component of the EcV
loss, driven by equity falls and rising spreads.
- EcV earnings in the prior year benefitted from a one off gain
of GBP65.4m arising as a result of the completion of the
acquisition of Legal & General Nederland.
IFRS
IFRS PRE-TAX PROFIT
GBP27.0M (2017: GBP89.6M)
IFRS TOTAL COMPREHENSIVE INCOME
GBP23.7M (2017: GBP86.9M)
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 (excluding the S&P book) and Waard
Group segments. The requirements of these books are to provide a
predictable and stable platform for the financial model and
dividend strategy. As closed books, the key is to sustain this
income source as effectively as possible. The IFRS results below
show that the stable core continues to deliver against these
requirements.
(2) Variable element: Included within the CA segment is the Save
& Prosper book. This can bring an element of short-term
earnings volatility to the group, with the results being
particularly sensitive to investment market movements due to
product guarantees. The IFRS results of Scildon are potentially
relatively volatile although this is, in part, due to reserving
methodology rather than 'real world' value movements.
(3) Growth operation: The long-term financial models of Movestic
and Scildon are based on growth, with levels of new business and
premiums from existing business being targeted to more than offset
the impact of policy attrition, leading to a general increase in
assets under management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are
reflected in the following IFRS results:
2018 2017
GBPm GBPm Note
============================================ ===== ====== ====
CA 28.2 50.6 1
Movestic 9.3 9.8 2
Waard Group 3.5 5.2 3
Scildon (1.1) 18.4 4
Chesnara (5.5) (12.1) 5
Consolidation adjustments (7.4) (2.6) 6
============================================ ===== ====== ====
Profit before tax and profit on acquisition 27.0 69.3
Profit on acquisition of LGN - 20.3 6
============================================ ===== ====== ====
Profit before tax 27.0 89.6
Tax (2.9) (11.2)
============================================ ===== ====== ====
Profit after tax 24.1 78.4
Foreign exchange translation differences (0.8) 8.3 7
Other comprehensive income 0.3 0.2
============================================ ===== ====== ====
Total comprehensive income 23.7 86.9
============================================ ===== ====== ====
2018 2017
GBPm GBPm Note
============================================ ====== ====== ====
Operating profit 42.5 38.4 8
Economic profit (15.5) 30.9 9
Profit before tax and profit on acquisition 27.0 69.3
Profit on acquisition of LGN - 20.3 6
============================================ ====== ====== ====
Profit before tax 27.0 89.6
Tax (2.9) (11.2)
============================================ ====== ====== ====
Profit after tax 24.1 78.4
Foreign exchange translation differences (0.8) 8.3 7
Other comprehensive income 0.3 0.2
============================================ ====== ====== ====
Total comprehensive income 23.7 86.9
============================================ ====== ====== ====
Note 1: The CA segment result remains strong but is lower than
2017. The year on year movement emerges within the more variable
S&P book. This is mainly reflective of the positive economic
factors in 2017 which have not been repeated in the current period,
resulting in overall economic profits being circa GBP23m lower year
on year. Operating profits of GBP27.1m are in line with the prior
year. Within the operating profit total there is a GBP4.3m profit
as a result of a general improvement in UK mortality tables.
Note 2: Movestic continues to contribute positively to the
overall group IFRS result despite a small reduction in profits when
compared to the same period in 2017. Lower investment returns due
to adverse market factors, together with a fall in the profits
generated by its associate, Modernac, were the main drivers.
Note 3: The Waard Group result is in line with expectations,
with profits emerging in line with the run-off book profile.
Note 4: Scildon's IFRS loss for the year of GBP1.1m compares
with a profit of GBP18.4m in the prior year. Scildon has delivered
a strong operating profit driven mainly by positive mortality
experience. Within the Netherlands new mortality tables suggest
less positive future mortality improvements, this however, because
of our reserving policy (see note 31) has no impact on the IFRS
results. The operating profit is more than offset by economic
losses of GBP16.5m, largely driven by the widening of credit
spreads which have caused valuation losses in its bond
portfolio.
Note 5: The Chesnara result largely represents holding company
expenses. The current year loss is significantly lower than last
year largely due to 2017 including larger one off items such as
foreign exchange loss of GBP2.6m coupled with the impact of
providing for the group's IFRS 17 programme.
Note 6: Consolidation adjustments relate to items such as the
amortisation of intangible assets. These are higher than last year
largely due to the full year impact of the Scildon acquisition and
an adjustment to the impairment of acquisition costs within
Movestic. The prior year results also reported a one off gain of
GBP20.3m arising on the acquisition of LGN.
Note 7: Sterling strengthened against the Swedish krona in the
period, resulting in a small exchange loss in 2018.
Note 8: The IFRS operating result demonstrates the stability of
the underlying business. Product based income and favourable
movements in operating experience in the UK, were offset slightly
by the marginal strengthening of expense reserves to support future
developments. Strong premium growth and higher fund rebates, offset
by unfavourable claims experience in the year supported the
Movestic operating result. Both the Waard Group and Scildon have
reported solid operating results.
Note 9: Economic profit represents the components of the
earnings that are directly driven by movements in economic
variables. During 2018, the economic result is mainly driven by the
impact on Scildon of widening credit spreads, whereas 2017
benefitted from positive equity market growth which has not been
witnessed in the same period in 2018.
CASH GENERATION
GROUP CASH GENERATION
GBP47.8M (2017: GBP28.6M)
DIVISIONAL CASH GENERATION
GBP63.9M (2017: GBP86.7M)
Significant cash generation in the UK has driven a total
divisional cash result of GBP63.9m for the year, with supporting
contributions from Movestic and Waard. Cash is generated from
increases in the group's solvency surplus, which is represented by
the excess of assets held over management's internal capital needs.
These are based on regulatory capital requirements, with the
inclusion of additional "management buffers".
GROUP
- Sufficient group cash has been generated in the year to cover
the cost of last year's dividend.
- The overall increase in group cash year on year is a factor of
several material items. The 2017 result includes the impact of the
completion of the Legal and General Nederland (Scildon) acquisition
which, in line with expectations, resulted in a GBP55.3m negative
impact on cash generation. A GBP26.8m release from the with-profit
funds has driven a sizeable increase in UK cash in 2018. In the
opposite direction there has been a GBP34m adverse year on year
movement in Scildon's cash generation. Much of the movement is due
to the fact that economic conditions had a positive impact on Own
Funds in 2017 whereas in 2018 falling bond values resulted in Own
Fund losses of over GBP20m. A strengthening of mortality
assumptions also had an adverse impact in 2018.
- Other group activities reflect group expenses and the impact
of consolidation routines, specifically movements in capital
requirements determined at a group level. From a capital
requirement perspective, this is driven by movements in required
capital at a Chesnara holding company level coupled with
consolidation adjustments. At a Chesnara holding company level,
additional capital is principally required to be held for the
currency risk associated with the Movestic, Scildon and Waard Group
surplus assets.
UK
- The UK has continued to deliver substantial cash generation in
2018, following significant reductions in capital requirements.
- Own Funds growth includes the benefit of a GBP26.8m release of
restricted surplus from the with-profit funds. A further GBP5.7m of
surplus capital exists within the with-profit funds that has not
been recognised in the results.
- Underlying Own Funds performance was hampered by investment
markets in the later stages of the year, with widening spreads
having a negative impact on Own Funds.
- The fall in equity markets also had a positive effect on cash
generation due to the subsequent reduction in required capital
through lower equity and mass lapse risk.
- This was supported by further reductions in equity risk and
spread risk, following the capital transfer.
SWEDEN
- Sweden generated GBP18.1m of cash for the year, due to a fall
in the level of required capital.
- Own Funds suffered from the decline in equity markets in the
second half of 2018, with lower fund values and investment returns
resulting in a reduction of GBP10.7m at the year end.
- Conversely, the fall in investment markets also created a
significant positive cash impact. With equity values decreasing,
the level of capital the business was required to hold also fell
substantially, primarily through lower equity risk exposure and
diminished lapse risk.
- SEK depreciation against sterling resulted in an exchange loss of GBP1.3m.
NETHERLANDS - WAARD
- The Waard Group has continued to supply stable cash
generation, with positive movements in both Own Funds and capital
requirements.
- The growth in Own Funds was primarily a consequence of lower
mortality experience and subsequent reductions in assumed mortality
lapse rates.
- Falls in lapse risk and counterparty default risk underpin the
reduction in the capital requirement.
NETHERLANDS - SCILDON
- Scildon has reported a cash loss in the year, owing to a reduction in Own Funds.
- The steep widening of spreads in the second half of the year
compounded the valuation losses on Italian bonds reported earlier
in 2018, driving down the value of Own Funds.
- Own Funds also include the impact of strengthening mortality assumptions in the year.
- Capital requirements moved favourably to partially offset the
reduction in Own Funds. Investment market conditions had a positive
impact with exposure to spread risk and equity risk shrinking
materially in the second half of the year. This also drove
significant favourable movements in lapse risk.
GBPm 2018 2017
=========================== ============ ===================================================== ================
Movement Movement Forex Cash generated Cash generated
in in management's impact
Own Funds capital
requirement
=========================== ============ ========== ================ ======= ============== ==============
UK 18.0 37.8 - 55.8 34.5
Sweden (10.7) 30.1 (1.3) 18.1 24.9
Netherlands Waard Group 3.0 4.6 0.2 7.8 11.1
Scildon (23.5) 6.2 (0.4) (17.8) 16.2
======================================== ========== ================ ======= ============== ==============
Divisional cash generation (13.2) 78.6 (1.4) 63.9 86.7
Other group activities (13.6) (3.6) 1.0 (16.1) (2.7)
Impact of LGN acquisition - - - - (55.3)
========================================= ========== ================ ======= ============== ==============
Group cash generation (26.8) 75.0 (0.4) 47.8 28.6
========================================= ========== ================ ======= ============== ==============
EcV EARNINGS
GBP(60.9)M (2017: GBP139.5M includes GBP65.4m gain on
acquisition)
The group's EcV earnings reflect the challenging investment
market conditions that have been witnessed, including the general
fall in equity prices during Q4.
Analysis of the EcV result in the period by earnings source:
Note
31 Dec 2018 31 Dec 2017
GBPm GBPm
==================================== =========== ============= ====
Expected movement in period (0.8) 0.2
New business 10.6 12.4
Operating variances (9.0) 1.2 2
Operating assumption changes - (3.6)
Other operating variances (0.8) 0.7
==================================== =========== ============= ====
Total underlying operating earnings - 10.8
Material other operating items (22.8) (19.2) 3
==================================== =========== ============= ====
Total operating earnings (22.8) (8.4)
Economic experience variances (50.3) 86.4 1
Economic assumption changes 0.6 2.2
==================================== =========== ============= ====
Total economic earnings (49.7) 88.6
Other non-operating variances 1.5 1.0
Risk margin movement (1.9) 4.0
Gain on acquisition of LGN - 65.4 4
Tax 12.0 (11.1)
Total EcV earnings (60.9) 139.5
==================================== =========== ============= ====
Analysis of the EcV result in the year by business segment:
Note
31 Dec 2018 31 Dec 2017
GBPm GBPm
============================ =========== ============= ====
UK (11.0) 54.5 5
Sweden (11.6) 24.0 6
Netherlands (35.6) 21.8 7
Gain on acquisition of LGN - 65.4
Group and group adjustments (14.8) (15.1) 8
============================ =========== ============= ====
EcV earnings before tax (72.9) 150.6
Tax 12.0 (11.1) 9
============================ =========== ============= ====
EcV earnings after tax (60.9) 139.5
============================ =========== ============= ====
Note 1 - Economic conditions: The EcV result is sensitive to
investment market conditions. Some of the key investment market
conditions in the year are as follows:
- The FTSE All share index has decreased by 13.0% (12 months to
31 Dec 2017: increased by 9.0%);
- The Swedish OMX all share index has decreased by 7.7% (12
months to 31 Dec 2017: increased by 5.7%);
- The Netherland AEX all share index has decreased by 11.6% (12
months to 31 Dec 2017: increased by 11.7%); and
- 10 year UK gilt yields have increased from 1.26% to 1.32%.
Note 2 - Operating experience variances: These reflect where the
results have emerged differently to what was assumed. The reported
experience loss of GBP9.0m for 2018 is made up of a number of
smaller positive and adverse variances, including less fee income
for Movestic, some adverse lapse experience in Scildon coupled with
some adverse expense experience across the group.
Note 3 - Material other operating items: This includes operating
items in the year that are individually material and have therefore
been separately analysed to aid an understanding of the operating
result. In accordance with local practice Scildon adopt centrally
defined mortality tables. Whilst there is no reason to believe this
creates prudence, it is worthy to note that the resultant
strengthening of reserves (with an adverse profit impact of
GBP13.2m) is at odds with recent experience of mortality profits on
the Scildon book. The remainder of the total relates to model
enhancements regarding quantifying risk margins in Scildon
(GBP3.8m) and how we recognise certain future central recurring
costs (GBP5.8m).
Note 4 - Gain on acquisition of LGN: The acquisition of LGN in
April 2017 resulted in a 'day 1' gain of GBP65.4m, representing the
difference between the purchase price of GBP137.6m and the EcV of
LGN at the point of acquisition of GBP203.0m.
Note 5 - UK: The UK sustained a pre-tax loss of GBP11.0m in the
year. Economic losses suffered in the second half of 2018 shape the
result, with a full year economic loss of GBP15.0m. Falling equity
markets in the later stages of the year were the key factor behind
the reported loss. Solid operating earnings of GBP4.8m were driven
by favourable movements in both future expense and mortality
assumptions. This was supported by lower than expected rates of
attrition across the books of business, resulting in higher assumed
future fee income.
Note 6 - Sweden: Movestic reported an GBP11.6m loss for the
year, with the result significantly hampered by investment market
conditions in the tail end of 2018. Economic losses of GBP12.8m,
predominantly arising in Q4, were the consequence of falling
equities and offset operational gains through new business. This
was reflected by the closing policyholder average investment return
of (6.0)% (2017: +8.2%), though this remains ahead of the average
Swedish stock market return of (7.7)%. New business profits of
GBP8.9m reflect the combination of increased sales volumes (both
transfers and single premiums) but lower average margin rates
versus prior year. This was partially offset by adverse movement in
future fund management fee and fund rebate assumptions in line with
industry expectations.
Note 7 - Netherlands: Our Dutch division has reported a pre-tax
loss of GBP35.6m for 2018. Investment market volatility, primarily
a significant widening of bond spreads, underpin economic losses of
GBP21.6m in Scildon. The total pre-tax loss of GBP38.8m also
includes GBP17.0m of exceptional items, relating to one-off
mortality assumption and modelling changes. Waard delivered
earnings of GBP3.2m owing, for the most part, to favourable
mortality experience and subsequent impact of a reduction in
assumed mortality rates.
Note 8 - Group: This component includes costs incurred at group
level, dividend payments and the impact of consolidation
activities, with a loss reported for the year.
Note 9 - Tax: The business is reporting a tax credit of GBP12.0m
in the year. This is driven by a combination of current tax on the
loss for the period and movements in deferred tax relating to group
level activities.
EcV
GBP626.1M (31 DEC 2017: GBP723.1M)
The Economic Value of Chesnara represents the present value of
future profits of the existing insurance business, plus the
adjusted net asset value of the non-insurance business within the
group. EcV is an important reference point by which to assess
Chesnara's intrinsic value.
Value movement: 1 Jan 2018 to 31 Dec 2018:
GBPm
========================== =======
Group EcV at 31 Dec 2017 723.1
EcV earnings (60.9)
Dividends (30.4)
Forex gain (5.8)
========================== =======
Group EcV at 31 Dec 2018 626.1
========================== =======
EcV earnings: A loss of GBP60.9m has been reported for the year.
The primary driver of this are the significant economic losses
arising from economic conditions in the second half of the year.
This was compounded by a small number of individually material
adverse operating items incurred in the year.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of GBP30.4m were paid during the
period, being the final dividend from 2017 and the 2018 interim
dividend.
Foreign exchange: The EcV of the group suffered a foreign
exchange loss in the period, a consequence of the sterling
appreciation against the Swedish krona.
EcV by segment at 31 Dec 2018:
GBPm
======================== =======
UK 215.5
Sweden 227.4
Netherlands 221.1
Other group activities (39.7)
======================== =======
Group EcV 626.1
======================== =======
The above table shows that the EcV of the group is diversified
across its different markets, demonstrating that we are
well-balanced and not over-exposed to one particular geographic
market.
EcV to Solvency II:
GBPm
======================== =======
2018 Group EcV 626.1
Risk margin (37.9)
Contract boundaries (9.8)
Own funds restrictions (5.7)
Dividends (20.2)
======================== =======
2018 SII own funds 552.6
======================== =======
Our reported EcV is based on a Solvency II assessment of the
value of the business, but adjusted for certain items where it is
deemed that Solvency II does not reflect the commercial value of
the business. The above waterfall shows the key difference between
EcV and SII, with explanations for each item below.
Risk margin: Solvency II rules require a significant 'risk
margin' which is held on the Solvency II balance sheet as a
liability, and this is considered to be materially above a
realistic cost. We therefore reduce this margin for risk for EcV
valuation purposes from being based on a 6% cost of capital to a
3.25% cost of capital.
Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain in-force contracts,
despite the high probability of receipt. We therefore make an
adjustment to reflect the realistic value of the cash flows under
EcV.
Ring-fenced fund restrictions: Solvency II rules require a
restriction to be placed on the value of certain ring-fenced funds.
These restrictions are reversed for EcV valuation purposes as they
are deemed to be temporary in nature.
Dividends: The proposed final dividend of GBP20.2m 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.
Summary:
OBJECTIVES
The group's financial management framework is designed to
provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators.
Accordingly we aim to:
- Maintain solvency targets
- Meet the dividend expectations of shareholders
- Optimise the gearing ratio to ensure an efficient capital base
- Ensure there is sufficient liquidity to meet obligations to
policyholders, debt financiers and creditors
- Maintain the group as a going concern
HOW WE DELIVER TO OUR OBJECTIVES
In order to meet our obligations we employ and undertake a
number of methods. These are centred on:
1. Monitor and control risk & solvency
2. Longer-term projections
3. Responsible investment management
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: 158%
2. SHAREHOLDER RETURNS
- 2016-2018 TSR 18.41%
- 2018 dividend yield 5.4%
- Based on average 2018 share price and full year 2018 dividend of 20.67p.
3. CAPITAL STRUCTURE
- Gearing ratio of 15.6%
- 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 15.6% at 31 December 2018
(19.8% at 31 December 2017).
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 2018 as measured at both the divisional and group levels.
As well as being well-capitalised the group also has a healthy
level of cash reserves to be able to meet its debt obligations as
they fall due, and does not rely on the renewal or extension of
bank facilities to continue trading. The group's subsidiaries do,
however, rely on cash flows from the maturity or sale of fixed
interest securities which match certain obligations to
policyholders, which brings with it the risk of bond default. In
order to manage this risk we ensure that our bond portfolio is
actively monitored and well diversified. Other significant
counterparty default risk relates to our principal reinsurers. We
monitor their financial position and are satisfied that any
associated credit default risk is low.
In light of the above information, the board has concluded that
the group and company has a reasonable expectation that the group
and company have adequate resources to continue in operational
existence for the foreseeable future, and, as stated in the
Directors Report, the Financial Statements have continued to be
prepared on a going concern basis.
3. Assessment of prospects
An understanding of the group's strategy and business model is
central to assessing its prospects.
Core books within our overall portfolio provide a level of more
stable earnings, hence making the overall business and financial
model more resilient to potential adverse movements on the books
with more volatile earnings. In addition, in the short term,
solvency and cash are less affected by economic conditions which
has a positive impact regarding confidence levels in our dividend
paying capacity.
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 2016 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:
- Equity market declines;
- Reduction in yield curves;
- Credit spread rise;
- Swap rate fall;
- Adverse mortality and lapse experience;
- Adverse expense experiences;
- Reduced new business volumes; and
- Adverse exchange rate experience.
Other than the fact that Brexit could impact the investment
markets to which our results are sensitive we consider that our
operating model is relatively unaffected by Brexit. We do not trade
across borders nor do we share resource between our European
businesses. Each division operates to autonomous local regulatory
frameworks and we believe we have the flexibility to change our
regulatory structure if Brexit results in an inefficient regulatory
structure of the organisation.
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.
HOW WE MANAGE RISK
RISK MANAGEMENT SYSTEM
The risk management system supports the identification,
assessment, and reporting of risks along with coordinated and
economical application of resources to monitor and control the
probability and/or impact of adverse outcomes within the board's
risk appetite or to maximise realisation of opportunities.
Strategy: The risk management strategy contains the objectives
and principles of risk management, the risk appetite, risk
preferences and risk tolerance limits.
Policies: The risk management policies implement the risk
management strategy and provide a set of principles (and mandated
activities) for control mechanisms that take into account the
materiality of risks.
Processes: The risk management processes ensure that risks are
identified, measured/assessed, monitored and reported to support
decision making.
Reporting: The risk management reports deliver information on
the material risks faced by the business and evidence that
principal risks are actively monitored and analysed and managed
against risk appetite.
RISK PROCESSES
Risk management processes are applied at a group, divisional and
business unit level and are documented within a set of Board
approved risk policies, for each category of risk.
Chesnara adopts the "three lines of defence" model across the
group taking into account size, nature and complexity, with a
single set of risk and governance principles applied consistently
across the business.
In all divisions we maintain processes for identifying,
evaluating and managing all material risks faced by the group,
which are regularly reviewed by the divisional and group Audit
& Risk Committees. Our risk assessment processes have regard to
the significance of risks, the likelihood of their occurrence and
take account of the controls in place to manage them. The processes
are designed to manage the risk profile within the board's approved
risk appetite.
Group and divisional risk management processes are enhanced by
stress and scenario testing, which evaluates the impact on the
group of certain adverse events occurring separately or in
combination. The results, conclusions and any recommended actions
are included within divisional and group ORSA Reports to the
relevant boards. There is a strong correlation between these
adverse events and the risks identified in 'Principal risks and
uncertainties'. The outcome of this testing provides context
against which the group can assess whether any changes to its risk
appetite or to its management processes are required.
CHESNARA RISK PREFERENCES
The Chesnara board has approved a set of risk preferences which
articulate, in simple terms, the desire to increase, maintain, or
reduce the level of risk taking for each main category of risk. The
risk position of the business is monitored against these
preferences using risk tolerance limits, where appropriate, and
they are taken into account by the management teams across the
group when taking strategic or operational decisions that affect
the risk profile.
PRINCIPAL RISKS AND UNCERTAINTIES
The following table outlines the principal risks and
uncertainties of the group and the controls in place to mitigate or
manage their impact. It has been drawn together following regular
assessment performed by the Audit and Risk Committee of the
principal risks facing the group, including those that would
threaten its business model, future performance, solvency or
liquidity.
The impacts are not quantified in the table. However, by virtue
of the risks being defined as principal, the impacts are
potentially significant.
RISK IMPACT CONTROL
============== ============================================================ ============================================================
Exposure Market risk results from Chesnara performs regular monitoring
to financial fluctuations in asset values, of movements in the market and maintains
losses or foreign exchange rates and matching programmes to ensure that
value interest rates and has the exposure to any mismatching is at
reduction potential to affect the an acceptable level, forecasting
arising group's ability to fund cash requirements and adjusting investment
from adverse its commitments to customers management strategies to meet those
movements and other creditors, as requirements.
in investment well as pay a return to Chesnara seeks to limit the impacts
markets, shareholders. of exposure to market risks by:
counterparty Chesnara and each of its * Maintaining a well-diversified asset portfolio;
defaults, subsidiaries have obligations
or through to make future payments,
inadequate which are not always known * Holding a significant amount of surplus in highly
asset with certainty in terms liquid "Tier 1" assets such as cash and gilts;
liability of timing or amounts, prior
matching to the payment date. This
includes primarily the payment * Utilising a range of investment funds and managers to
of policyholder claims, avoid significant concentrations of risk;
reinsurance premiums, debt
repayments and dividends.
The uncertainty of timing * Having an established investment governance framework
and amounts to be paid gives to provide review and oversight of external fund
rise to potential liquidity managers;
risk, should the funds not
be available to make payment.
Other liquidity issues could * Carrying out regular liquidity forecasts and asset
arise from counterparty and liability modelling; and
failures/credit defaults,
a large spike in the level
of claims or other significant * Monitoring exchange rate movements. The group would
unexpected expenses. consider the cost/benefit of hedging the currency
risk on cash flows when appropriate.
In respect of a significant 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 operates Through the Risk Management Framework,
changes in four regulatory domains regulatory risk is monitored and
in industry (including Movestic's asset scenario tests are performed to understand
practice/ management company in Luxembourg) the potential impacts of adverse
regulation, and is therefore exposed political, regulatory or legal changes,
or to inconsistent application along with consideration of actions
inconsistent of regulatory standards that may be taken to minimise the
application across divisions, such as impact, should they arise.
of regulation the imposition of higher Chesnara seeks to limit any potential
across capital buffers over and impacts of regulatory change on the
territories above regulatory minimum business by:
requirements. Potential * Having processes in place for monitoring changes, to
consequences of this risk enable timely actions to be taken, as appropriate;
for Chesnara is the constraining
of efficient and fluid use
of capital within the group, * Maintaining strong open relationships with all
or creating a non-level regulators
playing field with respect
to future new business/acquisitions.
The jurisdictions which * Being a member of the ABI and utilising other means
Chesnara operates in are of joint industry representation;
currently subject to significant
change arising from political,
regulatory and legal change. * Performing internal reviews of compliance with
These may either be localised regulations; and
or may apply more widely,
following from EU-based
regulation and law, or the * Utilising external specialist advice and assurance,
potential unwinding of this when appropriate.
following the UK's decision
to leave the EU.
The group is therefore exposed Chesnara will continue to monitor
to the risk of: the outcome of Brexit including any
* incurring one-off costs of addressing regulatory restructuring required to align to
change as well as any permanent increases in the cost changes in the requirements of cross
base in order to meet enhanced standards; border regulatory supervision. In
extremis, Chesnara could consider
the re-domiciling of subsidiaries
* erosion in value arising from pressure or enforcement or legal restructure of the business,
to reduce future policy charges; should this result in a more commercially
acceptable business model in a changed
operating environment.
* erosion in value arising from pressure or enforcement
to financially compensate for past practice; and
* regulatory fines or censure in the event that it is
considered to have breached standards, or fails to
deliver changes to the required regulatory standards
on a timely basis.
============== ============================================================ ============================================================
Failure The acquisition element Chesnara's financial strength, strong
to source of Chesnara's growth strategy relationships and reputation as a
acquisitions is dependent on the availability "safe hands acquirer" via regular
that meet of attractive future acquisition contact with regulators, banks and
Chesnara's opportunities. Hence, the target companies enables the company
criteria business is exposed to the to adopt a patient and risk-based
or the risk of a reduction in the approach to assessing acquisition
execution availability of suitable opportunities. Operating in multi-territories
of acquisition opportunities provides some diversification against
acquisitions within Chesnara's current the risk of changing market circumstances
with target markets, for example in one of the territories.
subsequent arising as a result of a Chesnara seeks to limit any potential
unexpected change in competition in unexpected impacts of acquisitions
financial the consolidation market by:
losses or or from regulatory change * Applying a structured Board approved risk-based
value influencing the extent of acquisition process including CRO involvement in the
reduction life company strategic restructuring. due diligence process and deal refinement processes;
Through the execution of
acquisitions, Chesnara is
also exposed to the risk * Having a management team with significant and proven
of erosion of value or financial experience in mergers and acquisitions; and
losses arising from risks
inherent within businesses
or funds acquired which * Adopting a cautious risk appetite and pricing
are not adequately priced approach.
for or mitigated as part
of the transaction.
============== ============================================================ ============================================================
Adverse In the event that demographic Chesnara ensures close monitoring
demographic experience (rates of mortality, of persistency levels across all
experience morbidity, persistency etc.) groups of business to support best
compared varies from the assumptions estimate assumptions and identify
with underlying product pricing trends. There is also partial risk
assumptions and subsequent reserving, diversification in that the group
more or less profit will has a portfolio of annuity contracts
accrue to the group. where the benefits cease on death.
If mortality or morbidity Chesnara seeks to limit the impacts
experience is higher than of adverse demographic experience
that assumed in pricing by:
contracts (I.e. more death * Aiming to deliver good customer service and fair
and sickness claims are customer outcomes;
made than expected), this
will typically result in
less profit accruing to * Having effective underwriting techniques and
the group. reinsurance programmes, including the application of
If persistency is significantly "Mass Lapse reinsurance", where appropriate;
lower than that assumed
in product pricing and subsequent
reserving, this will typically * Carrying out regular investigations, and industry
lead to reduced group profitability analysis, to support best estimate assumptions and
in the medium to long-term, identify trends;
as a result of a reduction
in future income arising
from charges on those products. * Active investment management to ensure competitive
The effects of this could policyholder investment funds; and
be more severe in the case
of a one-off event resulting
in multiple withdrawals * Maintaining good relationships with Brokers which is
over a short period of time independently measured via yearly external surveys
(a "mass lapse" event). that considers Brokers attitude towards different
insurers.
============== ============================================================ ============================================================
Significant The group and its subsidiaries The group perceives operational risk
Operational are exposed to operational as an inherent part of the day-to-day
failure risks which arise through running of the business and understands
/ Business daily activities and running that it can't be completely eliminated.
continuity of the business. Operational However, the Company's objective
event risks may, for example, is to always control or mitigate
arise due to technical or operational risks, and to minimise
human errors, failed internal the exposure when it's possible to
processes, insufficient do so in a convenient and cost effective
personnel resources or fraud way.
caused by internal or external Chesnara seeks to reduce the impact
persons. As a result the and likelihood of operational risk
group may suffer financial by:
losses, poor customer outcomes, * Monitoring of key performance indicators and
reputational damage, regulatory comprehensive management information flows;
intervention or business
plan failure.
Part of the group's operating * Effective governance of outsourced service providers
model is to outsource support including a regular financial assessment. Under the
activities to specialist terms of the contractual arrangements the group may
service providers. Consequently, impose penalties and/or exercise step-in rights in
a significant element of the event of specified adverse circumstances;
the operational risk arises
within its outsourced providers.
* Regular testing of business continuity plans;
* Promoting the sharing of knowledge and expertise; and
* Complementing internal expertise with established
relationships with external specialist partners.
All parts of the business have documented
robust plans for operational resilience
covering:
* Alternate physical working locations;
* Data back-ups (with suitable network isolation);
* Alternate systems/applications;
* Crisis Management Team Terms of Reference; and
* Crisis communication strategies.
============== ============================================================ ============================================================
Expense The Company is exposed to For all subsidiaries, the group maintains
overruns expenses being higher than a regime of budgetary control.
and expected as a result of * Movestic and Scildon assume growth through new
unsustainable one-off increases in the business such that the general unit cost trend is
unit cost underlying cost of performing positive;
growth key functions, or through
higher inflation of variable
expenses. * The Waard Group pursues a low cost-base strategy
For the closed funds, the using a designated service company. The cost base is
group is exposed to the supported by service income from third party
impact on profitability customers;
of fixed and semi-fixed
expenses, in conjunction
with a diminishing policy * Countrywide Assured pursues a strategy of outsourcing
base. functions with charging structures such that the
For the companies open to policy administration cost is more aligned to the
new businesses, the group book' s run off profile; and
is exposed to the impact
of expense levels varying
adversely from those assumed * The group has an ongoing expense management programme
in product pricing. in place to monitor and manage the overall expense
base.
============== ============================================================ ============================================================
IT/data Cyber risk is a growing Chesnara seeks to limit the exposure
security risk affecting all companies, and potential impacts from IT/data
failures particularly those who are security failures or cyber crime
or cyber custodians of customer data. by:
crime The most pertinent risk * Embedding the Information Security Policy in all key
exposure relates to information operations and development processes;
security (i.e. protecting
business sensitive and personal
data) and can arise from * Seeking ongoing specialist external advice,
failure of internal processes modifications to IT infrastructure and updates as
and standards, but increasingly appropriate;
companies are becoming exposed
to potential malicious cyber
attacks, organisation specific * Delivering regular staff training and attestation to
malware designed to exploit the information security policy;
vulnerabilities, phishing
attacks etc. The extent
of Chesnara's exposure to * Conducting penetration and vulnerability testing,
such threats also includes including third party service providers; and
third party service providers.
The potential impact of
this risk includes financial * Having established Chesnara and supplier business
losses, inability to perform continuity plans which are regularly monitored and
critical functions, disruption tested.
to policyholder services,
loss of sensitive data and
corresponding reputational All entities within the Chesnara
damage or fines. Group have invested in improving
their operational resilience during
2018. The nature of the developments
vary across the group, dependent
on the existing processes and infrastructure
of the entity. Activities include:
* enhancements to preventative measures against
external threats, and monitoring of such threats
arising;
* education and training of employees on information
security;
* improvement to the documentation of our incident
response and crisis management protocol; and
* testing our resilience to external threats and the
effectiveness of our response/ recovery in the event
of incidents occurring.
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 2019 28 March 2019
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
plc's preliminary announcement statement of annual results for the
period ended 31 December 2018.
The preliminary statement of annual results for the period ended
31 December 2018 includes disclosures required by the Listing Rules
and any additional content such as highlights/overview, 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:
Valuation of insurance liabilities
Key audit matter description
Across the Group, there are two matters relating to insurance
liabilities which we have identified as key audit matters:
a) Accuracy of Save & Prosper Cost of Guarantees
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 GBP23.1m at 31 December
2018 (31 December 2017: GBP19.3m). This movement is mainly due to
lower asset returns over 2018, which decreased policyholder asset
shares, and increased 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.
b) Scildon Liability Adequacy Test
Scildon measures the majority of its 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.
There is also a risk of management override over the setting of the
parameters used to calculate the reserves at inception.
We therefore view the liability adequacy test and initial
parameter setting process as key audit matters, specifically in
relation to the mortality, lapse and expense assumptions which feed
into the test, given that the insurance liabilities are most
sensitive to these factors.
How the scope of our audit responded to the key audit matter
In respect of the Accuracy of Save & Prosper Cost of
Guarantees:
- 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; and
- We developed an independent expectation of how the assumptions
impact the model and challenged management's explanation and
analysis to support any variations.
In respect of the Scildon Liability Adequacy Test we performed
the following procedures:
- Evaluation of the design and implementation of the key
controls over the setting of the assumptions feeding in to the
LAT;
- Performed checks on the initial parameters used in setting the book cost reserves;
- Performed 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 whether the calculations within management's model
are accurate; and
- Assessed the results of the experience investigations carried
out by management in comparison to industry studies and other
sources of evidence to determine whether they provide support for
the assumptions.
Key observations
Based on the audit procedures performed, we consider that the
S&P Cost of Guarantees reserve is not materially misstated and
we found that the initial parameter setting process and Liability
Adequacy Test performed by management were reasonable, supporting
the adequacy of Scildon's insurance contract liabilities.
Valuation of the Scildon AVIF ("Acquired Value In-Force)
intangible asset
Key audit matter description
Following the acquisition of Scildon, Chesnara recorded an AVIF
intangible asset of GBP66m on the Group balance sheet, reflecting
the capitalised future profit in the Scildon business.
Our key audit matter in the prior year related to the valuation
of the intangible; this risk has then evolved in the current
period, based on our ongoing assessment, to focus on the discount
rate used by Management to discount the future policyholder cash
flows underpinning the VIF.
Management is required to assess the impairment of the Scildon
AVIF intangible balance at least annually, in line with IAS 36
Impairment of assets for investment contracts or, for insurance
contracts, under the IFRS 4 Insurance Contracts liability adequacy
test, which involves significant judgement.
Due to the highly judgemental nature of this balance, we
identified manipulation of this assessment as an area of potential
fraud.
How the scope of our audit responded to the key audit matter
We assessed the design and implementation of the internal
controls in place to monitor and mitigate the risk of inappropriate
management adjustments to the key assumptions.
We constructed an independent discount rate, comparing this to
the discount rate used by management and performing sensitivity
analysis.
We 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.
Valuation of specific Level 2 financial instruments
Key audit matter description
There are a number of complex financial instruments held on the
group's balance sheet, with a fair value modelled using Level 2
inputs, per IFRS 13. Due to the significance of the balance, a
small difference in input sources could result in a material
variation. The instruments of focus are the financial reinsurance
contract, within Movestic (GBP39.1m), and the interest rate swap,
within Scildon (GBP21.2m).
The financial reinsurance contract within Movestic is deemed to
have one component that transfers significant insurance risk, and a
component that is deemed not to transfer significant insurance
risk. The component of the contract that does not transfer
significant insurance risk has two components and has been
accounted for as a financial liability at amortised cost, and an
embedded derivative asset at fair value.
The interest rate swap held within Scildon has been entered into
to hedge some of the risk of changes in the value of its
obligations under insurance contract liabilities.
Due to the judgement involved in the valuation of these complex
financial instruments, namely the margin applied to the embedded
derivative, we identified manipulation of these as an area of
potential fraud.
How the scope of our audit responded to the key audit matter
We assessed the design and implementation of the internal
controls in place to understand and challenge the valuation methods
used.
We used financial instrument specialists within our audit team
to challenge the appropriateness of assumptions input into the
model and benchmark against external actuarial data.
We developed an independent expectation of the valuations and
challenged management's explanation and analysis to support any
variations.
Key observations
Based on the audit procedures performed, we conclude that the
valuation of the embedded derivative and the interest rate swap,
and the associated judgements used, namely the margin used for the
embedded derivative, to be reasonable.
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 2019
IFRS FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2018 2017
GBP000 GBP000
------------------------------------------------------------------------------------- --------- ----------
Insurance premium revenue 274,916 231,515
Insurance premium ceded to reinsurers (55,536) (54,191)
-------------------------------------------------------------------------------------- --------- ----------
Net insurance premium revenue 219,380 177,324
Fee and commission income 101,783 90,301
Net investment return (335,035) 531,817
-------------------------------------------------------------------------------------- --------- ----------
Total revenue net of reinsurance payable (13,872) 799,442
Other operating income 41,236 40,789
-------------------------------------------------------------------------------------- --------- ----------
Total income net of investment return 27,364 840,231
-------------------------------------------------------------------------------------- --------- ----------
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (471,205) (465,729)
Net decrease in insurance contract provisions 351,812 51,033
Reinsurers' share of claims and benefits 43,648 49,449
--------- ----------
Net insurance contract claims and benefits (75,745) (365,247)
--------- ----------
Change in investment contract liabilities 196,940 (293,603)
Reinsurers' share of investment contract liabilities (1,611) 3,681
--------- ----------
Net change in investment contract liabilities 195,329 (289,922)
--------- ----------
Fees, commission and other acquisition costs (28,158) (24,405)
Administrative expenses (69,795) (70,269)
Other operating expenses
Charge for amortisation of acquired value of in-force business (12,093) (13,271)
Charge for amortisation of acquired value of customer relationships (83) (101)
Other (4,840) (4,239)
-------------------------------------------------------------------------------------- --------- ----------
Total income/(expenses) net of change in insurance contract provisions and investment
contract
liabilities 4,615 (767,454)
-------------------------------------------------------------------------------------- --------- ----------
Total income less expenses 31,979 72,777
Share of profit of associate (616) 949
Profit recognised on business combination - 20,319
Financing costs (4,351) (4,443)
-------------------------------------------------------------------------------------- --------- ----------
Profit before income taxes 27,012 89,602
Income tax expense (2,888) (11,168)
Profit for the year 24,124 78,434
Items that will not be reclassified to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign
operations (783) 8,274
Revaluation of pension obligations 56 124
Revaluation of investment property 277 90
-------------------------------------------------------------------------------------- --------- ----------
Total comprehensive income for the year 23,674 86,922
-------------------------------------------------------------------------------------- --------- ----------
Basic earnings per share (based on profit for the year) 16.10p 52.38p
-------------------------------------------------------------------------------------- --------- ----------
Diluted earnings per share (based on profit for the year) 16.01p 52.13p
-------------------------------------------------------------------------------------- --------- ----------
CONSOLIDATED BALANCE SHEET
31 December 2018 2017
GBP000 GBP000
-------------------------------------------------------------------------- --------- ---------
Assets
Intangible assets
Deferred acquisition costs 65,039 61,858
Acquired value of in-force business 106,609 119,039
Acquired value of customer relationships 537 641
Goodwill 781 806
Software assets 5,711 6,358
Property and equipment 4,293 4,327
Investment in associates 5,840 6,407
Investment properties 1,299 1,199
Reinsurers' share of insurance contract provisions 213,369 233,154
Amounts deposited with reinsurers 34,349 38,776
Financial assets
Equity securities at fair value through income 413,851 512,724
Holdings in collective investment schemes at fair value through income 4,835,621 5,202,772
Debt securities at fair value through income 1,521,616 1,628,817
Policyholders' funds held by the group 259,836 265,729
Mortgage loan portfolio 41,191 48,106
Insurance and other receivables 55,849 59,448
Prepayments 7,309 7,325
Derivative financial instruments 446 1,682
--------- ---------
Total financial assets 7,135,719 7,726,603
--------- ---------
Reinsurers' share of accrued policyholder claims 17,640 25,888
Income taxes 10,702 7,681
Cash and cash equivalents 215,212 210,647
--------------------------------------------------------------------------- --------- ---------
Total assets 7,817,100 8,443,384
--------------------------------------------------------------------------- --------- ---------
Liabilities
Insurance contract provisions 3,569,014 3,962,279
Other provisions 882 1,098
Financial liabilities
Investment contracts at fair value through income 3,235,519 3,420,273
Liabilities relating to policyholders' funds held by the group 259,836 265,729
Borrowings 109,202 129,202
Derivative financial instruments 22,714 22,494
--------- ---------
Total financial liabilities 3,627,271 3,837,698
--------- ---------
Deferred tax liabilities 19,463 22,794
Reinsurance payables 10,535 11,406
Payables related to direct insurance and investment contracts 91,229 97,163
Deferred income 3,948 4,701
Income taxes 3,428 8,514
Other payables 44,756 44,984
Bank overdrafts 958 1,091
--------------------------------------------------------------------------- --------- ---------
Total liabilities 7,371,484 7,991,728
--------------------------------------------------------------------------- --------- ---------
Net assets 445,616 451,656
--------------------------------------------------------------------------- --------- ---------
Shareholders' equity
Share capital 43,767 43,766
Share premium 142,053 141,983
Treasury shares - (98)
Other reserves 27,158 27,664
Retained earnings 232,638 238,341
--------------------------------------------------------------------------- --------- ---------
Total shareholders' equity 445,616 451,656
--------------------------------------------------------------------------- --------- ---------
. Approved by the board of directors and authorised for issue on
28 March 2019 and signed on its behalf by:
Peter Mason John Deane
Chairman Chief Executive Officer
Company Number: 04947166
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2018 2017
GBP000 GBP000
-------------------------------------------------------------------------------------- --------- ---------
Profit for the year 24,124 78,434
Adjustments for:
Depreciation of property and equipment 647 698
Amortisation of deferred acquisition costs 13,629 14,506
Amortisation of acquired value of in-force business 12,093 13,271
Amortisation of acquired value of customer relationships 83 101
Amortisation of software assets 1,671 2,218
Share based payment 501 (159)
Tax paid 2,888 11,209
Interest receivable (4,796) (4,785)
Dividends receivable (2,939) (4,619)
Interest expense 4,351 4,443
Fair value gains on financial assets (205,410) (210,706)
Profit arising on business combination - (20,319)
Share of loss/(profit) of associate 616 (949)
Increase in intangible assets related to insurance and investment contracts (18,457) (28,634)
Interest received 5,360 4,560
Dividends received 1,579 4,336
Changes in operating assets and liabilities (excluding the effect of acquisitions) 56 124
Changes in operating assets and liabilities:
Decrease/(increase) in financial assets 715,390 (145,613)
Decrease in reinsurers' share of insurance contract provisions 26,462 17,074
Decrease/(increase) in amounts deposited with reinsurers 4,427 (1,339)
Decrease in insurance and other receivables 11,937 11,317
(Increase)/decrease in prepayments (86) 12,722
Decrease in insurance contract provisions (409,405) (91,110)
(Decrease)/increase in investment contract liabilities (102,577) 414,014
(Decrease)/increase in provisions (180) 272
(Decrease)/increase in reinsurance payables (792) 4,424
(Decrease)/increase in payables related to direct insurance and investment contracts (5,947) 2,432
Decrease in other payables (2,549) (935)
--------------------------------------------------------------------------------------- --------- ---------
Net cash generated from operations 72,676 86,987
Income tax paid (12,104) (27,480)
--------------------------------------------------------------------------------------- --------- ---------
Net cash generated from operating activities 60,572 59,507
--------------------------------------------------------------------------------------- --------- ---------
Cash flows from investing activities
Business combinations - (117,993)
Development of software (1,839) (928)
Disposal/(purchases) of property and equipment 71 (314)
Net cash utilised by investing activities (1,768) (119,235)
--------------------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities
Proceeds/(loss) from issue of share capital 1 (75)
Proceeds from the issue of share premium 70 -
Net (loss)/proceeds from borrowings (18,974) 42,022
Sale of treasury shares 98 63
Dividends paid (30,384) (29,484)
Interest paid (4,174) (4,266)
--------------------------------------------------------------------------------------- --------- ---------
Net cash (utilised by)/generated from financing activities (53,363) 8,260
--------------------------------------------------------------------------------------- --------- ---------
Net increase/(decrease) in net cash and cash equivalents 5,441 (51,468)
Net cash and cash equivalents at beginning of year 209,556 258,731
Effect of exchange rate changes on net cash and cash equivalents (743) 2,293
--------------------------------------------------------------------------------------- --------- ---------
Net cash and cash equivalents at end of the year (note 28) 214,254 209,556
--------------------------------------------------------------------------------------- --------- ---------
Note: Net cash and cash equivalents includes overdrafts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31
December 2018
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- ------------- ------------- -------------- --------------- ----------------- --------
Equity shareholders'
funds at 1 January
2018 43,766 141,983 27,664 (98) 238,341 451,656
Profit for the year - - - - 24,124 24,124
Dividends paid - - - - (30,384) (30,384)
Foreign exchange
translation
differences (note 4) - - (783) - - (783)
Revaluation of
pension obligations - - - - 56 56
Revaluation of
investment property - - 277 - - 277
Share based payment - - - - 501 501
Issue of share
capital 1 - - - - 1
Issue of share
premium - 70 - - - 70
Sale of treasury
shares - - - 98 - 98
Equity shareholders'
funds at 31 December
2018 43,767 142,053 27,158 - 232,638 445,616
--------------------- ------------- ------------- -------------- --------------- ----------------- --------
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 (note 4) - - 8,274 - - 8,274
Revaluation of
pension obligations - - - - 124 124
Revaluation of
investment property - - 90 - - 90
Share based payment - - - - 669 669
Sale of treasury
shares - (75) - 63 - (12)
Equity shareholders'
funds at 31 December
2017 43,766 141,983 27,664 (98) 238,341 451,656
--------------------- ------------- ------------- -------------- --------------- ----------------- --------
NOTES TO THE CONSOLIDATED IFRS FINANCIAL STATEMENTS
1. Basis of presentation
The preliminary announcement is based on the Group's financial
statements for the year ended 31 December 2018, which are prepared
in accordance with International Financial Reporting Standards
('IFRSs') as adopted by the European Union ('Adopted IFRSs') as
adopted by the EU.
2. Significant accounting policies
The accounting policies applied by the Group in determining the
IFRS basis results in this report are the same as those previously
applied in the Group's consolidated financial statements.
3. Operating segments
The group considers that it has no product or distribution-based
business segments. It reports segmental information on the same
basis as reported internally to the chief operating decision maker,
which is the board of directors of Chesnara plc.
The segments of the group as at 31 December 2018 comprise:
CA: This segment represents the group's UK life insurance and
pensions run-off portfolio and comprises the original business of
Countrywide Assured plc, the group's principal UK operating
subsidiary, and of City of Westminster Assurance Company Limited
which was acquired in 2005 and the long-term business of which was
transferred to Countrywide Assured plc during 2006. This segment
also contains Save & Prosper Insurance Limited which was
acquired on 20 December 2010 and its then subsidiary Save &
Prosper Pensions Limited. The S&P business was transferred to
CA during 2011. This segment also contains the business of
Protection Life, which was purchased on 28 November 2013 and the
business of which was transferred to CA effective from 1 January
2015. CA is responsible for conducting unit-linked and non-linked
business, including a with-profits portfolio, which carries
significant additional market risk, as described in note 6
'Management of financial risk'.
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
comprised 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 2017, the book of policies held within
Hollands Welvaren Leven N.V. was successfully integrated into Waard
Leven and consequently Hollands Welvaren Leven N.V. was
deregistered on 19 December 2018. 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 2018.
(i) Segmental income statement for the year ended 31 December 2018
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Net insurance premium revenue 34,028 13,663 1,698 169,991 - 219,380
Fee and commission income 28,143 23,567 19 50,054 - 101,783
Net investment return (112,960) (165,091) 629 (57,870) 257 (335,035)
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Total revenue (net of
reinsurance payable) (50,879) (127,861) 2,346 162,175 257 (13,872)
Other operating income 12,792 28,444 - - - 41,236
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Segmental (expense)/income (37,997) (99,417) 2,346 162,175 257 27,364
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Net insurance contract claims
and benefits incurred 59,945 (5,018) 4,419 (135,091) - (75,745)
Net change in investment
contract liabilities 30,321 165,008 - - - 195,329
Fees, commission and other
acquisition costs (1,215) (29,563) (293) (1,907) - (32,978)
Administrative expenses:
Amortisation charge on
software assets - (1,463) - (208) - (1,671)
Depreciation charge on
property and equipment - (126) (52) (468) - (646)
Other (22,034) (13,578) (2,903) (25,607) (3,356) (67,478)
Operating expenses (838) (3,991) - - (11) (4,840)
Financing costs (4) (1,953) - - (2,394) (4,351)
Share of loss from associates - (616) - - - (616)
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Profit before tax and
consolidation adjustments 28,178 9,283 3,517 (1,106) (5,504) 34,368
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Other operating expenses:
Charge for amortisation of
acquired value of in-force
business (4,497) (3,106) (669) (3,821) - (12,093)
Charge for amortisation of
acquired value of customer
relationships - (83) - - - (83)
Fees, commission and other
acquisition costs - 1,137 - 3,683 - 4,820
Segmental income less
expenses 23,681 7,231 2,848 (1,244) (5,504) 27,012
Profit before tax 23,681 7,231 2,848 (1,244) (5,504) 27,012
Income tax (expense)/credit (3,125) (944) (642) 779 1,044 (2,888)
---------
Profit/(loss) after tax 20,556 6,287 2,206 (465) (4,460) 24,124
---------- ------------- --------- ---------------------- ---------
(ii) Segmental balance sheet as at 31 December 2018
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Total assets 2,636,499 3,033,654 137,640 1,948,490 60,817 7,817,100
Total liabilities (2,476,949) (2,942,300) (90,585) (1,789,841) (71,809) (7,371,484)
---------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Net assets 159,550 91,354 47,055 158,649 (10,992) 445,616
---------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Investment in
associates - 5,840 - - - 5,840
---------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
Additions to
non-current assets - 14,480 21 6,140 - 20,641
---------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
(iii) 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 25,608 20 35,664 - 90,301
Net investment return 251,041 223,310 7,349 50,016 101 531,817
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
Total revenue (net of
reinsurance payable) 319,086 264,356 9,596 206,303 101 799,442
Other operating income 13,985 26,762 42 - - 40,789
----------------------------- --------- ---------- ------------- --------- ---------------------- ---------
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
----------------------------- ---------- ------------- --------- ---------------------- ---------
(iv) 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
---------------------- ----------- ----------- ------------- ----------- ---------------------- -----------
4. Borrowings
Group
31 December
2018 2017
GBP000 GBP000
------------------------------------------------ ------- -------
Bank loan 69,580 89,457
Amount due in relation to financial reinsurance 39,622 39,745
------------------------------------------------ ------- -------
Total 109,202 129,202
------------------------------------------------ ------- -------
Current 25,785 32,379
Non-current 83,417 96,823
------------------------------------------------ ------- -------
Total 109,202 129,202
------------------------------------------------ ------- -------
The bank loan as at 31 December 2018 comprises the
following:
- on 3 April 2017 tranche one of a new facility was drawn down,
amounting to GBP40.0m. This facility is unsecured and is repayable
in ten six-monthly instalments on the anniversary of the draw down
date. The outstanding principal on the loan bears interest at a
rate of 2.00 percentage points above the London Inter-Bank Offer
Rate and is repayable over a period which varies between one and
six months at the option of the borrower. The proceeds of this loan
facility were utilised, together with existing Group cash, to repay
in full, the pre-existing loan facilities totalling GBP52.8m.
- on 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.
- In April 2018 we converted our existing debt arrangement with
RBS into a syndicated facility. This will provide access to higher
levels of debt financing from a wider panel of lenders, which in
turn will enable us to fulfill our appetite of financing future
deals up to the maximum levels of gearing set out in our debt and
leverage policy, without being restricted by the lending capacity
of one individual institution. This facility enables Chesnara to
access an increased level of funds efficiently, which in turn
supports our acquisition strategy.
The fair value of the sterling denominated bank loan at 31
December 2018 was GBP27.0m (31 December 2017: GBP35.0m).
The fair value of the euro denominated bank loan at 31 December
2018 was GBP42.8m (31 December 2017: GBP55.0m).
The fair value of amounts due in relation to financial
reinsurance was GBP41.6 (31 December 2017: GBP42.2m).
Bank loans are presented net of unamortised arrangement fees.
Arrangement fees are recognised in profit or loss using the
effective interest rate method.
5. Earnings per share
Earnings per share are based on the following:
Year ended 31 December 2018 2017
Profit for the year attributable to shareholders (GBP000) 24,124 78,434
Weighted average number of ordinary shares 149,847,736 149,749,517
Basic earnings per share 16.10 52.38p
Diluted earnings per share 16.01 52.13p
The weighted average number of ordinary shares in respect of the
year ended 31 December 2018 is based upon 149,908,956 shares. The
weighted average number of ordinary shares in respect of the year
ended 31 December 2018 was based upon 149,908,956 shares in issue.
No shares were held in treasury.
There were 845,346 share options outstanding at 31 December 2018
(2017: 877,000). Accordingly, there is dilution of the average
number of ordinary shares in issue in respect of 2017.
6. Retained earnings
Group
Year ended 31 December
2018 2017
GBP000 GBP000
--------------------------------------------------------------------------------- -------- --------
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January 238,341 188,598
Profit for the year 24,124 78,434
Revaluation of pension obligations 56 124
Share based payment 501 669
Dividends
Final approved and paid for 2016 - (19,002)
Interim approved and paid for 2017 - (10,482)
Final approved and paid for 2017 (19,578) -
Interim approved and paid for 2018 (10,806) -
--------------------------------------------------------------------------------- -------- --------
Balance at 31 December 232,638 238,341
--------------------------------------------------------------------------------- -------- --------
The interim dividend in respect of 2016, approved and paid in
2017 was paid at the rate of 7.00p per share. The final dividend in
respect of 2017, approved and paid in 2018, was paid at the rate of
13.07p per share so that the total dividend paid to the equity
shareholders of the parent company in respect of the year ended 31
December 2017 was made at the rate of 20.07p per share.
A final dividend of 13.46p per share in respect of the year
ended 31 December 2018 payable on 24 May 2019 to equity
shareholders of the parent company registered at the close of
business on 12 April 2019, the dividend record date, was approved
by the directors after the balance sheet date. The resulting total
final dividend of GBP20.2m has not been provided for in these
financial statements and there are no income tax consequences.
The interim dividend in respect of 2018, approved and paid in
2018, was paid at the rate of 7.21p per share to equity
shareholders of the parent company registered at the close of
business on 5 September 2018, the dividend record date.
The following summarises dividends per share in respect of the
year ended 31 December 2017 and 31 December 2018:
Year ended 31 December
2018 2017
P p
---------------------------- ----- -----
Interim - approved and paid 7.21 7.00
Final - proposed/paid 13.46 13.07
---------------------------- ----- -----
Total 20.67 20.07
---------------------------- ----- -----
7. Related parties
(a) Identity of related parties
The shares of the company were widely held and no single
shareholder exercised significant influence or control over the
company.
The company has related party relationships with:
(i) key management personnel who comprise only the directors of the company;
(ii) its subsidiary companies;
(iii) its associated company;
(iv) other companies over which the directors have significant
influence; and
(v) transactions with persons related to key management
personnel.
(b) Related party transactions
(i) Transactions with key management personnel.
Key management personnel comprise of the directors of the
company. There are no executive officers other than certain of the
directors. Key management compensation is as follows:
2018 2017
GBP000 GBP000
----------------------------- ------- -------
Short-term employee benefits 988 1,324
Post-employment benefits 68 66
Total 1,056 1,390
----------------------------- ------- -------
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:
2018 2017
GBP000 GBP000
------------------------------------------------------------------------- ------- -------
Annual bonus scheme (included in the short-term employee benefits above) 216 588
------------------------------------------------------------------------- ------- -------
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
2018 2017
GBP000 GBP000
----------------------- ------- -------
Recovery of expenses 3,976 3,272
----------------------- ------- -------
(iii) Transactions with associate
Movestic Livförsäkring AB and its associate Modernac SA
Year ended 31 December
2018 2017
GBP000 GBP000
--------------------------------------------- ------- -------
Reinsurance premiums paid (8,253) (9,667)
Reinsurance recoveries received 5,460 5,820
Reinsurance commission received (1,561) (2,843)
--------------------------------------------- ------- -------
(4,354) (6,690)
--------------------------------------------- ------- -------
Amounts outstanding as at balance sheet date (2,700) (2,442)
--------------------------------------------- ------- -------
Movestic Livförsäkring AB had the following amounts outstanding
at the balance sheet date:
2018 2017
Amounts owed by Amounts owed to Amounts owed by Amounts owed to
associate associate associate associate
GBP000 GBP000 GBP000 GBP000
-------------- ---------------------- ----------------------- ----------------------- -----------------------
Modernac S.A. - 2,700 - 2,442
-------------- ---------------------- ----------------------- ----------------------- -----------------------
These amounts have been included in other payables.
(iv) Transactions with persons related to key management
personnel
During the year, there were no transactions with persons related
to key management personnel.
FINANCIAL CALAR
29 March 2019
Results for the year ended 31 December 2018 announced
11 April 2019
Ex-dividend date
12 April 2019
Dividend record date
17 April 2019
Published Report & Accounts issued to shareholders
01 May 2019
Last date for dividend reinvestment plan elections
14 May 2019
Annual General Meeting
24 May 2019
Dividend payment date
29 August 2019
Half year results for the 6 months ending 30 June 2018
announced
KEY CONTACTS
Registered and Head Office
2(nd) Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
Tel: 01772 972050
www.chesnara.co.uk
Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
One St Peter's Square
Manchester
M2 3DE
Auditor
Deloitte LLP
Statutory Auditor
Saltire Court
2 Hardman Street
Manchester
M3 3HF
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Joint Stockbrokers
Panmure Gordon
One New Change
London
EC4M 9AF
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8(th) Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3(rd) Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
145 Leadenhall Street
London
EC3V 4QT
Corporate Advisors
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
GLOSSARY
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches between
assets
and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for measuring the
annual
equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
BAU Cash Generation This represents divisional cash generation plus the impact of non-exceptional group
activity.
Cash Generation This represents the operational cash that has been generated in the period. The cash
generating
capacity of the group is largely a function of the movement in the solvency position of
the
insurance subsidiaries within the group, and takes account of the buffers that
management
has set to hold over and above the solvency requirements imposed by our regulators. Cash
generation
is reported at a group level and also at an underlying divisional level reflective of
the
collective performance of each of the divisions prior to any group level activity.
Divisional Cash Generation This represents the cash generated by the three operating divisions of Chesnara (UK,
Sweden
and the Netherlands), exclusive of group level activity.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the regulator of our
Dutch
subsidiaries.
DPF Discretionary Participation Feature - A contractual right under an insurance contract to
receive,
as a supplement to guaranteed benefits, additional benefits whose amount or timing is
contractually
at the discretion of the issuer.
Dutch Business Scildon and the Waard Group, consisting of Waard Leven N.V., Hollands Welvaren Leven
N.V.,
Waard Schade N.V. and Waard Verzekeringen B.V.
Economic Profit A measure of pre-tax profit earned from investment market conditions in the period and
any
economic assumption changes in the future (alternative performance metrice - APM)
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 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.
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.
Operating Profit A measure of the pre-tax profit earned from a company's ongoing core business
operations,
excluding any profit earned from investment market conditions in the period and any
economic
assumption changes in the future (alternative performance metric - APM).
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 UKs 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.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK Business CA and S&P.
NOTE ON TERMINOLOGY
The principal reporting segments of the group are:
======================================================================================================================
CA which comprises the original business of Countrywide Assured plc, the group's original UK
operating subsidiary; City of Westminster Assurance Company Limited, which was acquired by
the group in 2005, the long-term business of which was transferred to Countrywide Assured
plc during 2006; S&P which was acquired on 20 December 2010. This business was transferred
from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide
Assured
plc on 31 December; and Protection Life Company Limited which was acquired by the group in
2013, the long-term business of which was transferred into Countrywide Assured plc in 2014;
====================== ==============================================================================================
Movestic which was purchased on 23 July 2009 and comprises the group's Swedish business, Movestic
Livförsäkring
AB and its subsidiary and associated companies;
====================== ==============================================================================================
The Waard Group which was acquired on 19 May 2015 and comprises three insurance companies; Waard Leven N.V.,
Hollands Welvaren Leven N.V. and Waard Schade N.V.; and a service company, Tadas Verzekering;
and
====================== ==============================================================================================
Scildon which was acquired on 5 April 2017; and
====================== ==============================================================================================
Other group activities which represents the functions performed by the parent company, Chesnara plc. Also included
in this segment are consolidation adjustments.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR DVLFLKXFXBBE
(END) Dow Jones Newswires
March 29, 2019 03:00 ET (07:00 GMT)
Chesnara (LSE:CSN)
Historical Stock Chart
From Apr 2024 to May 2024
Chesnara (LSE:CSN)
Historical Stock Chart
From May 2023 to May 2024