TIDMCSN
RNS Number : 8122J
Chesnara PLC
26 August 2021
CHESNARA plc
("Chesnara" or "the Company")
26 August 2021
LEI Number: 213800VFRMBRTSZ3SJ06
FINAL RESULTS
Chesnara plc Half Year Results announcement
Cash generation and Economic Value growth support a 3% interim
dividend increase
-- 3% increase in the interim dividend to 7.88p - the 17(th)
consecutive annual dividend increase
-- Economic Value pre dividend increased to GBP651M
-- The group continues to be well capitalised with group solvency ratio at 153%
-- Actively looking for acquisition opportunities that provide value for shareholders
2021 HALF YEAR FINANCIAL HIGHLIGHTS
-- 3% INCREASE IN INTERIM DIVID
The board have approved an interim dividend of 7.88p per share
(2020 interim: 7.65p per share) - an increase of 3%. This
constitutes the 17th consecutive annual dividend increase for
shareholders.
(--) GROUP CASH GENERATION OF GBP5.4 M (six months ended 30 June
2020: GBP12.9M) (Note 1)
Cash generation in the period has been suppressed in the short
term by a GBP29.0m adverse impact of equity investment growth on
Solvency II capital requirements and a GBP9.4m negative foreign
exchange impact. The positive equity growth in the period is value
creativ e and enhances longer-term cash generation
expectations.
-- DIVISIONAL CASH GENERATION OF GBP11.5M (six months ended 30 June 2020: GBP9.6M) (Note 1)
Divisional cash generation, excluding the short-term Solvency II
capital impact of equity growth, was strong at GBP40.5m which
reflects our UK and Netherlands closed books continued resilience
as a core source of cash and a strong contribution from Scildon. A
GBP23.6m cash utilisation in Movestic, largely due to an equity
growth capital requirement impact, will increase future cash
generation.
-- GROUP SOLVENCY RATIO OF 153% ( 31 December 2020 : 156%)
The group continues to be well capitalised at both group and
subsidiary level under Solvency II.
-- ECONOMIC VALUE (EcV) OF GBP 629.6 M ( 31 December 2020 : GBP636.8 M ) (Note 2)
Pre-dividend Economic Value has increased by GBP14.2m since the
start of the year before the 2020 final dividend distribution of
GBP21.4m. Closing Economic Value represents GBP4.19 per share.
-- COMMERCIAL NEW BUSINESS PROFIT OF GBP6.6M (six months ended
30 June 2020: GBP6.7 M ) (Note 3)
Commercial new business profits of GBP6.6m remain stable but at
a lower level than pre COVID-19. New business in the period has
created GBP12.7m of incremental future cash flows and replaces 40%
of the reduction in EcV caused by the dividend payments in the year
on an annualised basis.
-- ACQUISITIONS
The completion of the acquisition of 'Brand New Day' in the
Netherlands adds GBP3.4m of incremental value and takes the
cumulative incremental value growth from acquisitions over the past
two years to cGBP15m. We continue to be active in our core markets
for acquisitions that provide value for our shareholders and are
increasingly optimistic that good opportunities are available for
us.
-- IFRS PRE-TAX PROFIT OF GBP20.8M (six months ended 30 June 2020: pre-tax loss of GBP9.1 M )
This includes profits arising from operating activities of
GBP28.3m (6 months to 30 June 2020: GBP27.5m). The same period in
2020 included an intangible asset impairment charge of GBP11.6m and
losses due to economic conditions of GBP25.0m. (Note 4)
-- IFRS TOTAL COMPREHENSIVE INCOME OF GBP1.9M (six months ended 30 June 2020: GBP15.1 M )
The 2021 result includes a foreign exchange loss of GBP15.9m (6
months to 30 June 2020: gain of GBP21.9m).
John Deane, Group Chief Executive commented
"The interim dividend increase of 3% to 7.88p we have announced
today is our 17(th) annual increase which is an enviable track
record.
"I have been pleased with our continued financial stability
during the period combined with further asset value growth being
delivered. The clear expectation of future divisional dividend
remittances means I am pleased to report our dividend growth
strategy remains unchanged.
"We completed another acquisition in the Netherlands and have
successfully transferred the policies onto the systems of Waard. We
continue to actively seek out and engage on opportunities in our
core markets and other appropriate territories and are increasingly
optimistic that there are good opportunities for us.
"Our closed books continue to provide a strong and reliable
source of cash generation and dividend. I am also encouraged by the
material recovery in Scildon's surplus levels which creates
significant future dividend potential.
"I welcome the strong equity market growth we have seen during
the first half of the year, despite the short-term impact it has
had on Solvency II capital requirements, particularly in Movestic,
as continued growth in Funds under Management will create future
value and cash flows for our shareholders.
"I am delighted that Steve Murray has joined Chesnara on 2
August, as CEO Designate, allowing us to implement a comprehensive
on-boarding process which will support a smooth transition later
this year. Steve will take over from me once regulatory approvals
in the UK have been received."
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 cash generated by the
three operating divisions of Chesnara (UK, Sweden and the
Netherlands), exclusive of group level activity.
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.
Note 3 Commercial new business is a more commercially relevant
measure of new business profit than that recognised directly under
the Solvency II regime, allowing for a modest level of return, over
and above risk-free, and exclusion of the incremental risk margin
Solvency II assigns to new business. This provides a fair
commercial reflection of the value added by new business operations
and is more comparable with how new business is reported by our
peers, improving market consistency.
Note 4 This is largely in relation to Scildon. During 2020, the
Scildon AVIF intangible asset was written down by GBP26.6m
(GBP11.6m as at 30 June 2020) as a result of a reduction in the
assessed value of the future cash flows of policies that were in
force at the point of acquisition. The impairment is in part driven
by the low yield environment we are currently operating in.
The Board approved this statement on 25 August 2021.
A presentation for analysts who have registered will take place
via telephone and video conference at 9:30am.
A copy of this announcement, the presentation slides [and
transcript] will be available on the Company's website.
Enquiries
John Deane, Chief Executive, Chesnara plc - 01772 972079
David Rimmington, Chief Financial Officer - 01772 972079
Roddy Watt, FWD Consulting - 0207 280 0651 / 07714 770493
Notes to Editors
Chesnara is a life and pensions company listed on the London
Stock Exchange. It administers approximately one million policies
with the assets under management spread broadly equally across
businesses in the UK, the Netherlands and Sweden. Chesnara operates
as Countrywide Assured in the UK, as The Waard Group and Scildon in
the Netherlands, and as Movestic in Sweden.
Following a three pillar strategy, Chesnara's primary
responsibility is the efficient administration of its customers'
life and savings policies, ensuring good customer outcomes and
providing a secure and compliant environment to protect
policyholder interests. It also adds value by writing profitable
new business in Sweden and the Netherlands and by undertaking
value-adding acquisitions of either companies or portfolios.
Consistent delivery of the Company strategy has enabled Chesnara
to increase its dividend for 17 years in succession.
Further details are available on the Company's website (
www.chesnara.co.uk ).
HIGHLIGHTS
FINANCIAL HIGHLIGHTS
GROUP CASH GENERATION GBP5.4 M SIX MONTHSED 30 JUNE 2020 GBP12.9M
DIVISIONAL CASH GENERATION GBP11.5 M SIX MONTHSED 30 JUNE 2020
GBP9.6M
Divisional cash generation, excluding the solvency capital
impact of equity growth, was GBP40.5m. The closed books continue to
provide a resilient source of cash and there has been a strong
contribution from Scildon. The group cash result includes a foreign
exchange loss of GBP9.4m (6 months to 30 June 2020: GBP13.3m
gain).
GROUP SOLVENCY 153% 31 DECEMBER 2020 156%
We are well capitalised at both group and subsidiary level under
Solvency II.
FUNDS UNDER MANAGEMENT GBP8.7 BN 31 DECEMBER 2020: GBP8.5BN
2021 has so far seen strong performance in investment
markets.
ECONOMIC VALUE GBP629.6 M 31 DECEMBER 2020 GBP636.8M
Movement in the period is stated after dividend distributions of
GBP21.4m and includes a foreign exchange loss of GBP24.2m (2020
full year: gain of GBP36.7m).
ECONOMIC VALUE EARNINGS GBP38.5 M SIX MONTHSED 30 JUNE 2020 GBP(74.1)M
The result includes GBP73.0m of economic earnings (6 months to
30 June 2020: economic loss of GBP53.6m).
COMMERCIAL NEW BUSINESS PROFIT GBP6.6 M SIX MONTHSED 30 JUNE 2020 GBP6.7M
Profits of GBP6.6m replace 40% of the reduction in EcV caused by
the dividend payments in the year on an annualised basis, as a
result of new business written during the period. New business in
the opening half of the year, which remains depressed by COVID-19
conditions, has created GBP12.7m of incremental future cash flows
(6 months to 30 June 2020: GBP12.6m).
IFRS PRE-TAX PROFIT GBP20.8 M SIX MONTHSED 30 JUNE 2020 PRE-TAX LOSS GBP9.1M
This includes profits arising from operating activities of
GBP28.3m (6 months to 30 June 2020: GBP27.5m). The same period in
2020 also included an intangible asset impairment charge of
GBP11.6m.
IFRS TOTAL COMPREHENSIVE INCOME GBP1.9 M SIX MONTHSED 30 JUNE 2020 GBP15.1M
The 2021 result includes a foreign exchange loss of GBP15.9m (6
months to 30 June 2020: gain of GBP21.9m).
OPERATIONAL AND STRATEGIC HIGHLIGHTS
DIVID
INTERIM DIVID INCREASE
Interim dividend increased by 3% to 7.88p per share (2020: 7.65p
interim and 14.29p final).
ECONOMIC BACKDROP
RECOVERY CONTINUES WITH INVESTMENT MARKET GROWTH DURING THE
OPENING HALF OF THE YEAR, OFFSET BY NEGATIVE IMPACT OF STERLING
STRENGTHENING
The first half of 2021 has seen favourable economic conditions
as the COVID-19 recovery continues with solid growth across most
indices. Rising interest rates and bond yields, coupled with equity
market gains, have supported economic returns in each division.
Sterling appreciation against the euro and Swedish krona has led to
material foreign exchange translation losses.
DUTCH ACQUISITION
FURTHER CONSOLIDATION IN THE NETHERLANDS IN 2021
The completion of another portfolio acquisition (Brand New Day)
in the first half of 2021, continues our expansion in the Dutch
market.
OPERATIONALLY RESILIENT DURING PANDEMIC
THE GROUP HAS REMAINED OPERATIONALLY RESILIENT DURING THE
COVID-19 PANDEMIC
Changes in working practices were required in order to
accommodate appropriate safety measures, such as staff working from
home. The group has remained operationally resilient despite these
changes in working practices, with an ongoing focus on ensuring key
business services relating to customers continue to be delivered.
Where necessary we introduced changes to processes to help
customers who may be in a vulnerable position due to COVID-19 and
have ensured that any COVID-19 death claims have been dealt with
compassionately. Employees have been paid in full throughout the
pandemic, without the use of the UK government's support schemes
(such as furlough), or its equivalent in the other territories in
which we operate.
These financial highlights include the use of Alternative
Performance Measures (APMs) that are not required to be reported
under International Financial Reporting Standards.
1 - Economic profit is a measure of pre-tax profit earned from
investment market conditions in the period and any economic
assumption changes in the future.
2 - Operating profit is 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.
3 - Funds Under Management (FuM) represents the sum of all
financial assets on the IFRS balance sheet.
4 - Economic Value (EcV) is a financial metric derived from
Solvency II. 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.
5 - Economic Value earnings are a measure of the value generated
in the period, recognising the longer-term nature of the group's
insurance and investment contracts.
6 - Commercial new business represents the best estimate of
discounted cash flows expected to emerge from new business written
in the period. It is deemed to be a more commercially relevant and
market consistent measurement of the value generated through the
writing of new business, in comparison to the restrictions imposed
under the Solvency II regime.
7 - Group cash generation represents the surplus cash that the
group has generated in the period. Cash generation is largely a
function of the movement in the solvency position, used by the
group as a measure of assessing how much dividend potential has
been generated, subject to ensuring other constraints are
managed.
8 - Divisional cash generation represents the cash generated by
the three operating divisions of Chesnara (UK, Sweden and the
Netherlands), exclusive of group level activity.
CHAIRMAN'S STATEMENT
During the period, as is often the case, financial performance
was dominated by the impact of economic conditions.
We saw good equity growth give a welcome boost to the Economic
Value and wider commercial value of the group, offset by the
strengthening of sterling against the euro and Swedish krona. This
equity growth also supported the continued increase in our total
Funds under Management during the first half of 2021.
The net impact from economic conditions was positive,
contributing to an increase in pre-dividend economic value during
the period.
The economic conditions were not however beneficial for cash
generation, with both equity and currency exchange impacts being
negative. Despite this, I'm pleased to say all divisions, except
for Movestic, have made positive cash contributions. For Movestic,
the dynamics of Solvency II mean the strong equity value recovery
drove higher capital requirements, suppressing the cash outcome in
the short term.
In the longer term, the continued resilience of cash emergence
from the closed books, combined with a good recovery in Scildon's
result, and the enhanced outlook for Movestic cash means that
despite the low result in the period, the outlook for future cash
generation, as we recover from COVID-19, is positive.
The solvency of the group remains stable with a closing solvency
ratio of 153% (31 December 2020: 156%)
The continued financial stability during the period combined
with further asset value growth and a clear expectation of future
divisional dividends means I am pleased to report our dividend
strategy remains unchanged, with a 3% increase in the proposed
interim dividend.
LUKE SAVAGE,
CHAIRMAN
In looking at the results for the period, as is often the case,
they are influenced largely by the impact of economic conditions
which, at a consolidated level, have had a materially positive
impact on long term value but a negative impact on the short-term
cash generation results during the period.
Economic Value
I am pleased to report a GBP14.2m growth in pre-dividend
Economic Value demonstrating the ability of the business to
generate value even during difficult new business conditions and in
the absence of a major acquisition. On an annualised basis this
level of EcV growth is broadly in line with dividends.
Cash generation
Group cash generation, excluding the solvency capital impact of
equity market growth and foreign exchanges losses in the period, of
GBP31.9m reflects the continued strong flow of cash from the closed
businesses and includes a significant Scildon gain from yield
improvements and management actions. Whilst equity growth is
ultimately good for long term cash potential it has created a large
increase in capital requirements thereby suppressing the headline
cash result in the period. The group cash result also includes a
GBP9.4m foreign exchange loss owing to sterling appreciation (6
months to 30 June 2020: GBP13.3m gain). The resultant group cash
generation of GBP5.4m (6 months to 30 June 2020: GBP12.9m) is lower
than historical average levels or steady state expectations.
Divisional dividends and Chesnara cash
During the 6 months to 30 June 2021 Chesnara received divisional
dividends broadly in line with year-end expectations which means we
closed the period with GBP59.2m in cash and instant access
liquidity funds at the Chesnara company level (31 December 2020:
GBP59.9m).
IFRS
From an IFRS perspective, we are reporting a good recovery in
profitability. Pre-tax profits for the six months to 30 June 2021
were GBP20.8m compared with a loss of GBP9.1m for the same period
in 2020. All divisional results are either broadly consistent or
improved compared to last year. From an IFRS balance sheet
perspective it is pleasing to report that Funds Under Management
have grown c3% since the start of the year.
It is only appropriate that I also provide an update on how the
continued COVID-19 pandemic has impacted the business and how we
have worked hard to ensure that our stakeholders have been well
protected during the continuing difficult conditions. Although
operating within COVID-19 conditions is becoming more of a new
normal, we have maintained our enhanced focus on staff welfare,
customers and regulators, shareholder dividends and maximising the
potential for post-COVID-19 recovery. Taking each in turn:
Employee welfare
From very early in the pandemic, our initial priority was to
ensure that staff could work safely from home. This has continued
during 2021 and in the main homeworking has been the most common
model evident across our divisions. At the same time, we have
invested to make sure our premises are as safe as possible so that
on the occasions any staff do need to work from the office and when
government guidelines allow, they could do so with minimal risk.
From an economic welfare perspective, all employees have been paid
in full throughout, without the use of the UK government's furlough
scheme, or its equivalent in the other territories in which we
operate. Ultimately, we expect to adopt a hybrid working model when
COVID-19 restrictions lift. Details are not finalised, and our
policy will recognise the importance of the benefits of a
meaningful proportion of office-based working. We will engage with
the workforce in developing any hybrid working arrangements, as we
have done throughout the pandemic.
Business continuity - customers and regulators
The emergence of COVID-19 gave rise to significant changes in
the way we work, largely as a result of the group having to respond
to governmental rules that were put in force in the jurisdictions
within which we (and our outsourcers) operate. It is pleasing to
report that remote working conditions, which have remained largely
in force during 2021, have continued to be effective with no
significant disruption to key customer related business
service.
Maintaining the shareholder dividend strategy
A feature of Chesnara's financial model is the general
resilience to adverse conditions. This enabled us to maintain our
dividend strategy throughout 2020 and into 2021 without
compromising the financial stability of the group. The post
dividend group solvency ratio has fallen slightly to 153% compared
to a pre-pandemic level of 155% and the closing Chesnara cash and
instant access liquidity funds balance remains healthy.
Protecting the business
Despite the pandemic we believe the business fundamentals offer
a good foundation for the future. Total Funds under Management
closed the first half of 2021, 13% higher than the pre pandemic
position. In short, to date we have weathered the pandemic storm
well and remain in good shape.
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
=============================================================================================
Robust levels of cash generation from the closed books and Scildon were largely offset by
the short-term capital impact of good equity growth in Movestic and currency losses.
Cash generation
Cash generation was lower than historical levels largely due to
a cash loss of GBP23.6m in Movestic and GBP9.4m of FX losses. The
other businesses have continued to generate sufficient cash to
support Chesnara's dividend strategy. In particular, I am pleased
to report that, as sign-posted in the year end Chairman's
Statement, Scildon has returned a strong cash generation result,
with a cash generation of GBP19.1m broadly reversing the 2020 cash
utilisation of GBP22.3m, supported primarily by rising yields and
entering into a new catastrophe reinsurance arrangement.
It is reassuring to see the closed books continuing to act as
the stable core to the Chesnara cash proposition. Waard has
generated GBP3.7m of cash and, excluding the impact of the
symmetric adjustment (GBP6.5m), the UK has delivered GBP18.7m,
resulting in a closed book total of GBP22.4m. On an annualised
basis, the cash generation represents 132% dividend coverage for
the closed books, having adjusted for the symmetric adjustment.
Economic Value
Overall, we have been able to grow the pre-dividend value of the
existing businesses, demonstrating that even in the absence of a
gain from a material acquisition, we have been able to protect the
overall EcV of the group whilst maintaining our dividend
strategy.
There have however been specific areas where conditions, in part
driven by COVID-19, have resulted in value losses. Conditions
during the pandemic in Sweden continue to drive an increase in
transfer activity, leading to a further loss in value from policies
transferring out. Despite this the overall Funds under Management
have increased by c13% and to the extent the current spike in
outward transfers is considered to be partially due to COVID-19
conditions including temporary competitor pricing, we would expect
the Swedish transfer activity to stabilise towards the end of 2021,
albeit at a higher level. We have recognised this new long-term
transfer assumption increase in our half year numbers and will
reassess at the year end, taking the experience in the second half
of the year into account.
ECONOMIC CONDITIONS HAVE HAD A POSITIVE IMPACT IN TERMS OF
LONG-TERM VALUE BUT A NEGATIVE IMPACT ON THE SHORT-TERM CASH
GENERATION IN THE PERIOD
02. ACQUIRE LIFE AND PENSIONS BUSINESSES
=================================================================================================
The acquisition of 'Brand New Day' adds GBP3.4m of incremental value and takes the cumulative
incremental value growth from acquisition over the last 2 years to cGBP15m.
COMPLETION OF A THIRD DUTCH ACQUISITION IN THE LAST 2 YEARS
Over the past 2 years, Waard has completed three acquisitions
(including the latest deal completed during the first half of
2021). Whilst none are large, we are developing a reputation as a
reliable acquirer of portfolios no longer seen as core by vendors.
We remain optimistic that more substantial opportunities exist, but
the merits of focusing on simple, well priced, smaller transactions
should not be underestimated. The recent deals have collectively
contributed to growth in excess of 40% in the Waard closed business
policy count, leading to associated cost efficiency gains.
The latest acquisition, 'Brand New Day', has created GBP3.4m of
incremental value and will have a small positive impact on future
recurring cash generation.
Small deals, along with other actions, mean we can deliver
gradual EcV growth whilst continuing the dividend payment strategy.
Similarly, in the UK we remain optimistic about more significant
opportunities but likewise are mindful of the cumulative merits of
smaller, well priced transactions. In order to ensure we can offer
funding certainty and swift deal completion especially at the small
deal size end of the market we have established a GBP100m revolving
credit facility with our banking syndicate. Our balance sheet and
existing debt arrangements which create a 6.1% leverage ratio,
provide sufficient funding capacity for numerous small deals or a
larger deal of up to approximately GBP120m (which is broadly within
the capacity of the new revolving credit facility arrangement)
without the need for additional funding sources such as Tier 2 debt
or equity.
03. ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
=================================================================================================
Commercial new business profit of GBP6.6m (6 months to 30 June 2020: GBP6.7m)
Positive signs of recovery as markets either adapt to COVID-19 conditions or partially emerge
from certain constraints.
COMMERCIAL NEW BUSINESS PROFITS OF GBP6.6m REPLACE 40% OF THE
REDUCTION IN ECV CAUSED BY THE DIVID PAYMENTS IN THE YEAR ON AN
ANNUALISED BASIS
Chesnara writes new business in both Sweden and the Netherlands.
The ultimate aim is to create sufficient annual profits, either
through returns on existing business, or through writing new
business, to replace a significant proportion of the EcV paid out
by way of shareholder dividends.
In the Netherlands continued COVID-19 related pressures have
resulted in more challenging markets than in the first half of
2020. On a more positive note, market shares have stabilised at the
increased levels we achieved towards the end of 2020, illustrating
the attractiveness of the Scildon Term Life proposition. This
strong market position has resulted in Scildon recently receiving
IFA service and innovation awards. During the 6 months to 30 June
2021, we reported new business profits of GBP3.9m (6 months to 30
June 2020: GBP5.0m - restated at 2021 exchange rates).
Pension new business broker markets in Sweden continue to be
heavily impacted by pandemic restrictions. However, unlike in 2020,
companies have resumed premium increments into existing schemes
which has created a welcome level of new business profit. This has
resulted in an increase in Movestic's new business profitability
with a total profit for the 6 months to 30 June of GBP2.8m (6
months to 30 June 2020: GBP1.7m). Although these levels of new
business profit are significantly lower than pre-pandemic levels,
we retain our view that ultimately a recovery in volumes closer to
pre-pandemic levels is realistic, but the recovery is likely to be
slower than previously thought with partial recovery in 2022
leading to fuller recovery in 2023.
COVID-19 has undoubtedly accelerated the move towards people
transacting remotely using digital solutions. Therefore, whilst we
do not believe the pandemic will have any permanent impact on the
demand for the core products we sell and administer we do recognise
that the impact of sales and service methods and preferences will
be permanent. We have continued to deliver solutions to remain
competitive in the digital world.
In Movestic we are nearing completion of our digitalisation
programme and in Scildon we are coming to the final stages of
modernising our pensions processes. This is expected to have a
positive impact on both costs and pension new business levels in
Scildon, with the business well positioned to take advantage of the
anticipated growth in the defined contribution market.
The programme will then move to the term product migration,
delivering expected efficiencies and strengthening the business's
market and operating position. The expected costs and benefits are
included within the 30 June 2021 closing position.
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
Solvency
The group continues to show a robust solvency ratio of 153% at
30 June 2021 (31 December 2020: 156%). The closing solvency
position is stated after recognising the GBP11.8m cost of the
proposed interim dividend, which is expected to be paid in October
2021.
Regulation and governance
IFRS 17
Our programme continues to progress well. So far, 2021 has been
focused on the operational implementation of the calculation engine
and associated processes. We continue to work with our
implementation partner, Willis Towers Watson, and will be fully
testing the solution through our dry run exercise planned for the
second half of the year. Engagement with our auditors has increased
and we are finalising the technical decisions and assumptions that
will underpin the IFRS 17 calculations.
We remain 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 positive and constructive relationships
with regulatory bodies across the group.
Governance framework
We continue to maintain a strong risk and governance culture
across the group. Our focus this year has been on ensuring that we
continue to adhere to these core principles whilst dealing with the
challenges of the global pandemic, and it is extremely pleasing to
report that investment in operational resilience across the group
over recent years has made operating in these conditions
significantly easier, with all important business services having
been delivered.
Outlook
Sustainability of the business model
Our assessment is that the impacts of the pandemic have had
minimal permanent adverse impact on the business model. In fact,
three out of our four businesses have actually grown in terms of
scale through 2020 and during the first half of 2021 and hence the
risk that loss of scale compromises the business model is not
apparent. The UK division, which is closed to new business, has
experienced continued reduction in policy volumes, however Funds
under Management remain relatively stable and even in the absence
of acquisitions the cost base is deemed sufficiently variable to
absorb the impact of run off for many years.
As at the half year we had GBP30.4m debt outstanding having
repaid GBP7.5m principal in the first half of 2021. We have
established a GBP100m revolving credit facility (with GBP50m
accordion option) to provide for additional acquisitions and
working capital flexibility.
We believe one consequence of the pandemic will be an
acceleration towards remote, digital customer engagement. As noted
above, I am pleased to report that Movestic's digitalisation
programme is nearing completion and Scildon has completed the first
stage of its migration to a new pension platform with enhanced end
to end processes. Both of these successful developments leave us
well positioned to react to shifting customer service demands in
those territories.
Brexit
We have consistently reported that we expected minimal impact
from Brexit. Having now exited the EU we have indeed experienced
very limited disruption. The only area where we have seen an impact
is with regards to a modest divergence of the Solvency II
regulatory rules from the PRA compared to those from EIOPA. The
changes have had no financial impact at this stage.
We continue to expect the regulatory reporting regimes to remain
but are mindful of the possibility of an increased level of
divergence as the PRA is enabled to move to UK specific terms. We
see no reason to expect the PRA to use their enhanced freedoms to
take a route that systemically makes it harder to do business in
the UK., or would undermine our ability to carry on business as
usual in our European entities.
Sustainability of the dividend
We do not provide specific forward-looking financial projections
or guidance however there are several financial metrics and factors
that provide a level of comfort regarding dividend
sustainability:
- Ongoing cash generation expectations from the existing
portfolios - The cash generation model continues to show a good
level of resilience to difficult conditions notwithstanding the
short term negative Movestic result. The factors that have had a
negative impact on the cash result in the period, including equity
growth and the symmetric adjustment, have a positive impact on
future cash generation potential. Higher equities ultimately create
higher fees and growth and the symmetric adjustment charge of
GBP17.1m is expected to reverse in due course. Longer term the EcV
offers a useful proxy to the total level of future cash. The
closing EcV (which conservatively assumes risk free asset returns)
represents c19 years coverage of the current full year
dividend.
- New business has a minimal positive impact on short term cash
generation due to the associated acquisition costs and capital
strain. New business does however create future positive cash
flows. Incremental future cash flows as a result of new business in
the 6 months to 30 June 2021 are GBP12.7m (6 months to 30 June
2020: GBP12.6m).
- Strong and stable solvency - to further improve capital
efficiency, we have also chosen to apply the volatility adjustment
in the UK in 2021. This will be applied in conjunction with
implementing some enhancements to the asset mix backing the
in-scope liabilities, which is planned for the second half of the
year
- Management actions and acquisitions - there remains the
potential for capital management actions and acquisitions to create
material future capital releases and cash generation.
- Chesnara plc cash reserves - in the medium term the existence
of GBP59.2m of cash and instant access liquidity funds on the
parent company balance sheet, combined with a 6.1% gearing ratio
provide comfort over the ability to support future dividend
payments.
Sustainability in ESG terms
Our focus on ESG matters, and environmental sustainability in
particular, continues to increase. We have again ensured we are
operationally carbon neutral and commit to this as a permanent
objective. The focus moving forward will shift towards improving
the sustainability characteristics of the investment
portfolios.
Finally, I would like to note that John Deane will be leaving
the organisation when he retires during the second half of the
year,
once our incoming CEO, Steve Murray, has obtained regulatory
approval. I would like to take this opportunity to thank John for
his leadership of the group during a particularly challenging
period and the fact that he hands over the business in good shape
is testament to John's dedication and commitment to protecting all
of our stakeholders' interests. I am confident that Steve inherits
a group that is well positioned to continue to provide value to
policyholders and shareholders.
Luke Savage, Chairman
25 August 2021
MANAGEMENT REPORT
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.
STRATEGIC OBJECTIVES
01. 02. 03.
MAXIMISE THE VALUE ACQUIRE LIFE AND PENSIONS ENHANCE VALUE THROUGH
FROM EXISTING BUSINESS BUSINESSES PROFITABLE NEW BUSINESS
Managing our existing Acquiring and integrating Writing profitable new
customers fairly and companies into our business business supports the
efficiently is core model is key to continuing growth of our group
to delivering our overall our growth journey. and helps mitigate the
strategic aims. natural run-off of our
book.
============================== =================================================
KPIs KPIs KPIs
Cash generation Cash generation EcV growth
EcV earnings EcV growth Commercial new business
Customer outcomes Customer outcomes profit
Risk appetite Customer outcomes
============================== =================================================
OUR CULTURE AND VALUES -
RESPONSIBLE RISK BASED MANAGEMENT
FAIR TREATMENT MAINTAIN ADEQUATE PROVIDE A COMPETITIVE ROBUST REGULATORY
OF CUSTOMERS FINANCIAL RESOURCES RETURN TO OUR SHAREHOLDERS COMPLIANCE
BUSINESS REVIEW | UK
The UK division principally consists of the insurance company
Countrywide Assured plc. The company manages c230,000 policies and
is in run-off. Countrywide Assured uses outsourcing partners to
support a large part of its operating model, with functions such as
customer services, investment management and accounting and
actuarial services being outsourced. A central governance team is
responsible for managing all outsourced operations.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
AREA OF FOCUS
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 2021
- The PRA provided approval for the use of the Volatility
Adjustment ("VA") for certain liabilities during the first half of
the year following the application that was made during December
2020. The VA will be applied in conjunction with implementing some
enhancements to the asset mix backing the in-scope liabilities,
which is planned for the second half of the year.
- During the period GBP8.3m of capital was transferred from one
of the division's with-profit funds following notification to the
FCA.
- The 2020 year end proposed dividend of GBP33.5m was paid to Chesnara during the period.
- The division has continued to generate Economic Value earnings
of GBP13.7m and solvency has improved from 130% to 142%, over the
first half of the year.
FUTURE PRIORITIES
- Implement planned changes to investments backing certain
non-linked liabilities and apply the VA when calculating
solvency.
- Manage the transition from using a risk-free curve based on
LIBOR (London Interbank Offering Rate) for discounting insurance
liabilities under Solvency II to using SONIA (Sterling Overnight
Index Average) as required by the PRA. This is expected to have an
adverse impact of cGBP5.9m on solvency surplus.
- Continue to focus on maintaining an efficient and cost-effective operating model.
- Continue to support Chesnara in identifying and delivering UK acquisitions.
KPIs
Economic Value
GBPm 2017 2018 2019 2020 Jun 2021
====================== ====== ====== ====== ====== =========
Reported value 255.0 214.7 204.6 187.4 167.7
Cumulative dividends 32.0 91.0 120.0 153.5
====================== ====== ====== ====== ====== =========
Total 255.0 246.7 295.6 307.4 321.2
====================== ====== ====== ====== ====== =========
Cash generation
GBPm 2017 2018 2019 2020 Jun 2021
----------------- ----- ----- ----- ----- ---------
Cash generation 34.5 55.8 33.6 29.5 12.2
CUSTOMER OUTCOMES
AREA OF FOCUS
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 2021
- A key priority over the first six months of the year has been
to continue to ensure we are meeting the needs of our customers
during the ongoing pandemic.
- In February 2021 the FCA issued guidance for firms on the fair
treatment of vulnerable customers. We have assessed our existing
plans against the guidance and made some minor changes in order to
ensure we meet the FCA's expectations.
- The division's work on ensuring we are doing what is
reasonably expected of us to stay in contact with customers (known
as "goneaways") has continued.
- In March 2021, the FCA and PRA released their finalised policy
statements on operational resilience. The division has identified
the important business services and set impact tolerances. Journey
mapping of the important business services is progressing with a
view to identifying vulnerabilities and remedying these as
appropriate.
FUTURE PRIORITIES
- Implement the remaining aspects of our business as usual
routine for our "goneaways" programme.
- Deliver the actions in our vulnerable customers work programme.
- Implement strategies, processes, and systems that enable the
division to address risks to the ability to remain within impact
tolerance for each important business service in the event of a
severe but plausible disruption.
- Continuing to complete product reviews which are designed to
support our ongoing assessment of providing fair outcomes to our
customers. Deliver any resultant remediation activity as
required.
KPIs
Policyholder fund performance
30 Jun 2021 30 Jun 2020
CA Pension Managed 17.9% (1.8)%
CWA Balanced Managed Pension 17.2% (1.9)%
S&P Managed Pension 18.8% (4.6)%
Benchmark - ABI Mixed Inv 40%-85% shares 16.7% (0.4)%
The division's main managed funds outperformed benchmark for the
12 months to 30 June 2021.
GOVERNANCE
AREA OF FOCUS
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 2021
- The governance oversight team and a large portion of the
outsourced staff have continued to work remotely during the
pandemic. The division has continued to engage with staff as part
of its plans to return to the office in some capacity during the
second half of the year.
- The division's IFRS 17 development programme has continued
over the course of the year to date. The calculation engine went
live for user acceptance testing during the period and will be used
within the division's dry run during the second half of the year.
We have continued to work with our auditors on the technical
decisions underpinning the implementation.
FUTURE PRIORITIES
- Complete the IFRS 17 dry run during the second half of the
year, utilising the calculation engine software. We will also
continue with the operational implementation aspects of IFRS 17,
building new routines at both the outsourcer and governance
oversight level.
KPIs
SOLVENCY RATIO: 142%
Surplus generated in the period increases solvency ratio from
130% to 142%.
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2020 surplus 30.9 130%
Surplus generation 12.7
30 Jun 2021 surplus 43.6 142%
======================== ===== =========
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
an innovative brand in the Swedish life insurance market. It offers
personalised unit-linked pension and savings solutions through
brokers and is well-rated within the broker community.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
AREA OF FOCUS
Movestic creates value predominantly by generating growth in
unit-linked Funds Under Management (FuM), whilst assuring a
high-quality customer proposition and maintaining an efficient
operating model. FuM 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 2021
- Global equities have shown growth over the first half of the
year, supported by COVID-19 vaccine rollouts. As confidence has
improved we have seen our fund managers holding higher proportions
of equities to support improved returns to customers. This supports
the long term value growth of the business, although comes at a
short term Solvency capital cost due to higher capital charges on
equity holdings, especially in rising markets.
- Positive net client cash flow of GBP51m in the period.
- The competitive environment in Sweden continues to be intense,
with policy transfers continuing to exceed historical levels. This
has resulted in a need to strengthen the assumptions within the
division's Solvency II and Economic Value calculations regarding
policy transfers.
- In light of this, management's focus has been on ensuring
appropriate retention activities are in place, alongside ensuring
that the Movestic product proposition continues to be attractive to
customers.
- Favourable claims development in the risk and health part of the business.
- Funds under management have grown by 15%, or GBP515m, to GBP3.9bn.
- Work has continued on diversifying the channels used to
distribute the division's products, with Movestic entering into a
new partnership agreement during the period for distributing
custody accounts in the private insurance savings market.
FUTURE PRIORITIES
- Continue the journey of digitalising and automating processes,
with a view to improving both efficiency and control.
- Continue to develop more digitalised and individualised
customer propositions and experience.
- Strengthen distribution capacity with the direct business
area, as a complement to the broker channel.
- Provide a predictable and sustainable dividend to Chesnara.
- Increased focus on retention.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
Economic Value
GBPm 2017 2018 2019 2020 Jun 2021
====================== ====== ====== ====== ====== =========
Cumulative dividends 2.6 5.5 11.9 11.9
Reported value 232.5 220.0 261.9 232.6 246.4
====================== ====== ====== ====== ====== =========
Total 232.5 222.6 267.4 244.5 258.3
CUSTOMER OUTCOMES
AREA OF FOCUS
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 continue to offer the majority of our products and
services through advisors and licenced brokers.
INITIATIVES AND PROGRESS IN 2021
- Policyholder average investment yield of 11.3% in the year to date
- During 2020 we saw a shift in the allocation of funds away
from equities as uncertainty continued in relation to the pandemic.
An element of confidence in equity markets has returned, which has
resulted in funds that our policyholders invest in starting to
increase their equity holdings again.
FUTURE PRIORITIES
- Continue to develop new solutions and tools to support the
brokers' value enhancing customer proposition.
- Strengthen the relationship with brokers further and continue
to develop improved functionality and digital administration
self-services for brokers.
- Continue to build distribution capacity in the direct business area.
- Broaden product and service offering for other customer segments.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
Broker assessment rating (out of 5)
2016 2017 2018 2019 2020
======== ===== ===== ===== ===== =====
Rating 3.8 3.7 3.8 3.5 3.3
Following the broker assessment review we have conducted our own
satisfaction surveys. These surveys gave a more positive result,
and the feedback, both positive and negative helped identify
further actions as we continue to work on improving broker
satisfaction.
POLICYHOLDER AVERAGE INVESTMENT RETURN:
11.3%
GOVERNANCE
AREA OF FOCUS
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 2021
- COVID-19 has resulted in employees being largely based at
home, although the spread is reducing in Sweden, with plans to
return to the office in the second half of the year.
- Work has continued during the period with regards to the
multi-year efficiency and automation programme covering Enterprise
Resource Planning, financial management and financial reporting
routines (including IFRS 17).
- From an IFRS 17 perspective, work has continued on the
implementation programme, most notably in completing technical
specification work for the setup of the calculation engine.
FUTURE PRIORITIES
- The COVID-19 situation will continue to be monitored closely,
with returning to the office options under continuous review.
- Continue delivering the IFRS 17 implementation programme,
including the planned dry run during the second half of the
year.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
SOLVENCY RATIO: 139%
Solvency remains strong at 30 June, although has dipped compared
with the year end.
GBPm Solvency
Ratio
===================== ======= =========
31 Dec 2020 surplus 77.4 158%
Surplus utilisation (14.5)
30 Jun 2021 surplus 62.9 139%
======================== ======= =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
AREA OF FOCUS
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% -10% of the advised occupational pension market.
This focus ensures we are able to adopt a profitable pricing
strategy.
INITIATIVES AND PROGRESS IN 2021
- Movestic reported commercial new business profit of GBP2.8m
(HY 2020: GBP1.7m). The growth compared with the prior year has
been driven by positive experience in one-off increments during the
period.
- Sales volumes have developed positively over the year to date,
growing by 55% compared with the same period in the prior year, to
GBP34.6m, with the main driver being in the custody account
insurance areas.
- From a market share perspective, intense competition continues
in the advised occupational pension market, resulting in Movestic's
market share of new business being below the long-term target. In
this context, margins in the advised occupational pension market
have suffered over the year to date.
FUTURE PRIORITIES
- Continued focus on sales activities and competitive offerings
in the broker channel as well as increasing distribution capacity
in the direct business area.
- Ongoing development of the customer offering and delivery of
new functionality on web platforms to improve customer and broker
experience.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
Occupational pension market share %
% 2016 2017 2018 2019 2020
============== ===== ===== ===== ===== =====
Market share 8.3 7.6 6.6 6.5 4.5
New business profit*
GBPm 2017 2018 2019 2020 Jun 2021
===================== ===== ===== ===== ===== =========
New business profit 11.1 11.3 7.1 1.7 2.8
*New business figures from 2018 onwards have been calculated
using the commercially realistic metric. Values prior to this are
retained as they were previously reported.
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through
their dual closed and open book approach and through the group
acquisition strategy will integrate portfolios and businesses into
their operations.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
AREA OF FOCUS
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:
- Waard is in run-off and has the benefit that the capital
requirements reduce in-line with the attrition of the book.
- 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 2021
- Waard completed the acquisition of a portfolio of primarily
term life and savings products from Dutch insurance provider Brand
New Day. This portfolio acquisition further strengthens Waard's
position as an acquirer of small portfolios that are not core to
vendors, and represents the third deal of this nature in the last
two years.
- Despite the continued market uncertainty caused by the
COVID-19 pandemic, both businesses continue to have strong solvency
positions, inclusive of the use of the volatility adjustment.
Scildon remains strong at 204%. Waard continued to maintain
significant solvency levels, the ratio ending the period at
457%.
- During the period, Scildon has implemented a new catastrophe
reinsurance treaty which has contributed to the solvency increasing
over the period.
FUTURE PRIORITIES
- Integrate the new portfolio acquisition into the Waard
business and continue to support Chesnara in identifying and
delivering Dutch acquisitions.
- Progress capital management and cash generation initiatives,
with the aim of creating future dividend potential.
- Effective management of the closed book run-off in Waard to
enable ongoing dividend payments to Chesnara.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
Scildon Economic Value
GBPm 2017 2018 2019 2020 Jun 2021
====================== ====== ====== ====== ====== =========
Reported value 213.9 163.7 170.5 157.5 163.1
Cumulative dividends 21.5 26.6 26.6 26.6
====================== ====== ====== ====== ====== =========
Total 213.9 185.2 197.1 184.1 189.7
====================== ====== ====== ====== ====== =========
CUSTOMER OUTCOMES
AREA OF FOCUS
Great importance is placed on providing customers with high
quality service and positive outcomes.
Whilst the ultimate priority is the end customer, in Scildon we
also see the brokers who distribute our products as being customers
and hence developing processes to best support their needs is a key
focus.
INITIATIVES AND PROGRESS IN 2021
- A key focus continues to be ensuring that we meet the changing
needs of our customers during the ongoing COVID-19 pandemic.
- Scildon continues work on the migration and digitalisation of
its policy administration system. Work has focussed on development
of the pension proposition with key portals having gone live in
2021. We expect to complete the development in the second half of
the year, positioning the business well to take advantage of
expected growth in the defined contribution market.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality
and to enhance and develop existing processes, infrastructure and
customer experiences.
- Continue with the migration and digitalisation of the Scildon IT platform.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
Scildon client satisfaction rating (out of 10)
2016 2017 2018 2019 2020
======== ===== ===== ===== ===== =====
Rating 7.4 7.6 7.7 7.8 8.1
GOVERNANCE
AREA OF FOCUS
Waard and Scildon operate in a regulated environment and comply
with rules and regulations both from a prudential and from a
financial conduct point of view.
INITIATIVES AND PROGRESS IN 2021
- We have engaged with the regulator throughout the period to
ensure that we are appropriately addressing their requirements and
those of our customers.
- The division has continued to deliver on its business as usual
governance responsibilities throughout the COVID-19 pandemic. The
organisation continues to successfully operate a predominantly
remote working model.
- The IFRS 17 programme has continued to progress in line with
plans. Our work continues with Willis Towers Watson as the group's
provider of the contractual service margin (CSM) tool and we have
been making appropriate operational and process changes.
FUTURE PRIORITIES
- We plan to consider options to offset or reduce current levels
of capital tied up within Scildon in relation to lapse
stresses.
- Our IFRS 17 programme will see the completion of our
operational changes and commencement of our schedule of dry
runs.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
SOLVENCY RATIO: SCILDON 204%; WAARD 457%
Solvency is robust in both businesses with solvency ratios of
204% and 457% for Scildon and Waard respectively. The Waard Group
solvency reported above includes that of its immediate holding
company. The reported year-end dividend of GBP4.0m was paid from
Waard Leven to its immediate holding company during the first half
of the year, but was not remitted up to Chesnara plc as it is being
retained to support future corporate activity such as future
acquisitions and IFRS 17 programme costs.
Scildon
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2020 surplus 63.7 178%
Surplus generation 14.4
30 Jun 2021 surplus 78.1 204%
======================== ===== =========
Waard
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2020 surplus 35.1 438%
Surplus generation 8.0
30 Jun 2021 surplus 43.1 457%
======================== ===== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
AREA OF FOCUS
Scildon brings a "New business" dimension to the Dutch division.
Scildon sells protection, individual savings and group pensions
contracts via a broker-led distribution model. The aim is to
deliver meaningful value growth from realistic market share. Having
realistic aspirations regarding volumes means we are able to adopt
a profitable pricing strategy. New business also helps the business
maintain scale and hence contributes to unit cost management.
INITIATIVES AND PROGRESS IN 2021
- Despite a tough and uncertain market, we continue to see new
business profits, with GBP3.9m earned in the period on our
commercial metric.
- Underpinning this, Scildon policy count continues to increase,
now with in excess of 210,000 policies.
FUTURE PRIORITIES
- Continue to deliver product innovation and cost management
actions to ensure we meet our full potential in terms of new
business value.
- Consider alternative routes to market that do not compromise
our existing broker relationships, such as further product white
labelling.
KPIs ( all comparatives have been presented using 2021 exchange
rates)
Scildon - term assurance market share %
% 2016 2017 2018 2019 2020
============== ===== ===== ===== ===== =====
Market share 5.9 7.3 7.6 11.6 14.2
Scildon - new business profit*
GBPm 2017 2018 2019 2020 Jun 2021
===================== ===== ===== ===== ===== =========
New business profit 1.9 4.8 7.9 8.6 3.8
*New business figures from 2018 onwards have been calculated
using the commercially realistic metric. Values prior to this are
retained as they were previously reported .
BUSINESS REVIEW | acquire life and pension businesses
Well considered acquisitions 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.
INITIATIVES AND PROGRESS IN 2021
During 2021, the group completed one transaction:
Brand New Day transaction
On 15 April 2021, Chesnara announced the completion of an
acquisition of a portfolio of life insurance business in run-off
from the Dutch business Brand New Day Levenverzekeringen N.V.
('Brand New Day'). The transaction, which involved the transfer of
the policies into Waard Leven, was both earnings and EcV accretive
on completion and is expected to have a positive cumulative cash
generation profile over its remaining life.
The transaction involved the transfer of a portfolio of in
excess of 8,800 mainly term policies, for a consideration of EUR1.
The transaction is estimated to deliver incremental value1 of
cGBP3.4m to Chesnara.
The transaction continues the recent trend of acquisitions by
Waard which has resulted in a material growth in the business.
ACQUISITION OUTLOOK
Whilst the UK and Dutch markets are fairly mature in terms of
consolidation and despite the continued COVID-19 restrictions, we
have seen a healthy flow of acquisition activity in the year to
date.
- The environment in which European life insurance companies
operate continues to become more challenging. The long-term
economic implications resulting from COVID-19, in particular the
further reduction in both short and long-term interest rates is
likely to increase the challenges of businesses who own non-core
back-books. We believe this will potentially drive further
consolidation as institutions seek to remove operational
complexity, reassess what is core to the business and potentially
release capital or generate funds from capital intensive life and
pension businesses.
- The maturity of the consolidation markets in the UK and Dutch
markets is not seen as headwind to potential opportunities, but as
a change in the market. In particular we see increasing complexity
and size of transactions. We are well placed for these challenges
and we believe that our operating model has the flexibility to
accommodate a wide range of potential target books.
- Given the increasing complexity of transactions we reiterate
Chesnara's stringent acquisition assessment model which takes into
account; (a) the price compared to the EcV; (b) the cash generation
capability; (c) the strategic fit; and (d) the risks within the
target. We are committed to maintaining our discipline when
assessing potential acquisitions.
- We continue to assess our financing options and, effective
from 6 July, entered into a GBP100m Revolving Credit Facility
arrangement, with a GBP50m accordion option, a portion of which has
been utilised to replace the existing term debt. We are also
exploring opportunities to increasing our funding capability
further, including how this can be done in a commercially viable
manner.
- Our good network of contacts in the adviser community, who
understand the Chesnara acquisition model, ensures that 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.
CAPITAL MANAGEMENT | Solvency II
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.
What is solvency and capital surplus?
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds"
(OF) and this is measured in accordance with the rules of the newly
adopted Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital
Requirement (SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF less SCR
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)1 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, however we do apply the volatility adjustment within
Scildon and this will also be implemented within the UK during the
second half of 2021 .
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.
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a
"Standard formula" or "internal model". Chesnara adopts the
"Standard formula".
The standard formula requires capital to be held against a range
of risk categories. The following chart shows the categories and
their relative weighting for Chesnara:
GBP 30 Jun 2021
========================================== ==============
Total Market Risk 292,118,292
Counterparty Default Risk 14,502,630
Total Life Underwriting Risk 189,707,765
Total Health Underwriting Risk 15,101,149
Diversification (113,084,398)
Capital requirement for other subsidiary 333,614
Operational Risk 13,224,596
ALAC DT (36,742,064)
========================================== ==============
SCR 375,161,584
There are three levels of capital requirement:
Minimum dividend paying requirement/risk appetite
requirement
The board sets a minimum solvency level above the SCR which
means a more prudent level is applied when making dividend
decisions.
Solvency Capital Requirement
Amount of capital required to withstand a 1 in 200 event. The
SCR acts as an intervention point for supervisory action including
cancellation or the deferral of distributions to investors.
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 30 Jun 2021 31 Dec 2021
================== ============ ============
Own funds 574 568
SCR 375 364
Solvency surplus 199 204
Solvency ratio % 153% 156%
We are well capitalised at both a group and subsidiary level. We
have applied the volatility adjustment in Scildon, and will be
implemented in the UK later in 2021, but have not used any other
elements of the long-term guarantee package within the group. The
Volatility Adjustment is an optional measure that can be used in
solvency calculations to reduce volatility arising from large
movements in bond spreads.
CHESNARA GROUP
SOLVENCY POSITION
GBPm 30 Jun 2021 31 Dec 2020
============================== ============ ============
Own funds (post dividend) 574 568
SCR 375 364
Buffer 38 36
Surplus above SCR and buffer 161 168
Solvency ratio % 153% 156%
SOLVENCY SURPLUS
GBPm
=========================== =======
Group surplus 31 Dec 2020 204.0
CA 12.7
Movestic (14.7)
Waard 4.2
Scildon 14.6
Chesnara / consol adj 0.4
Exchange rates (10.6)
Dividends (11.8)
=========================== =======
Group surplus 30 Jun 2021 198.7
=========================== =======
Surplus: The group has GBP161.1m of surplus over and above the
group's internal capital management policy requirements, compared
to GBP167.6m at the end of 2020. The group solvency ratio has
decreased from 156% to 153%. Solvency surplus has fallen as a
result of own funds rising slightly less than the capital
requirements, after the proposed interim dividend is taken into
account.
Dividends: The closing solvency position is stated after
deducting the GBP11.8m proposed interim dividend (31 December 2020:
GBP21.4m).
Own Funds: Own Funds have risen by GBP6.1m (pre-dividends).
Drivers of growth include a rise in interest rates, equity growth
and a UK with-profit transfer of GBP8.3m. These are offset by a
strengthening of operating assumptions.
SCR: The SCR has risen by GBP11.4m, mainly due to a material
increase in equity risk (due to rising equity markets) and spread
risk; partially offset by a decrease in expense and catastrophe
risk.
UK
GBPm 30 Jun 2021 31 Dec 2020
============================== ============ ============
Own funds (post dividend) 148 133
SCR 105 102
Buffer 21 20
Surplus above SCR and buffer 23 10
Solvency ratio % 142% 130%
Surplus: GBP22.7m above board's capital management policy.
Dividends: Dividend of GBP33.5m was paid to Chesnara in Q2 2021.
Own Funds: Increased by GBP15.2m mainly due to the material rise
in the yield curve and moderate equity growth.
SCR: Increased by GBP2.5m, driven by rise in equity risk
capital, interest rate risk, currency risk and lapse risk.
SWEDEN
GBPm 30 Jun 2021 31 Dec 2020
============================== ============ ============
Own funds (post dividend) 224 212
SCR 161 134
Buffer 32 27
Surplus above SCR and buffer 31 51
Solvency ratio % 139% 158%
Surplus: GBP30.6m above board's capital management policy.
Dividends: Solvency position stated after GBP9.6m foreseeable
dividend, due to be paid later in 2021
Own Funds: Increased by GBP12.5m due to positive economic growth
being offset by an increase in assumed transfer rates.
SCR: Increased by GBP27.1m, driven by material rise in equity and spread risk.
NETHERLANDS - WAARD
GBPm 30 Jun 2021 31 Dec 2020
============================== ============ ============
Own funds (post dividend) 55 45
SCR 12 10
Buffer 8 8
Surplus above SCR and buffer 35 27
Solvency ratio % 457% 438%
Surplus: GBP35.3m above board's capital management policy.
Dividends: No foreseeable dividend is proposed.
Own Funds: Increased by GBP10.0m. This is largely driven by the
Brand New Day acquisition and the benefit arising from a change in
mortality assumptions.
SCR: Risen by GBP1.7m, mainly due to an increase in lapse risk
and spread risk following an increase in corporate bond
holdings.
NETHERLANDS - SCILDON
GBPm 30 Jun 2021 31 Dec 2020
============================== ============ ============
Own funds (post dividend) 153 145
SCR 75 82
Buffer 56 61
Surplus above SCR and buffer 22 3
Solvency ratio % 204% 178%
Surplus: GBP21.8m above board's capital management policy.
Dividends: No foreseeable dividend is proposed.
Own Funds: Own funds have increased by GBP8.0m driven by the
positive interest rate movements and fall in unrealised spread on
mortgages, offset by one-off expenses relating to the
digitalisation programme and new catastrophe risk cover.
SCR: Decreased by GBP6.5m, largely due to catastrophe risk cover
and fall in spread risk on mortgages. Offset by risk in equity and
interest rate risk.
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 impact
of certain sensitivities that the group is exposed to, covering
solvency surplus and Economic Value. As can be seen, EcV tends to
take the 'full force' of adverse conditions whereas solvency is
often protected in the short term and, to a certain extent, the
longer term due to compensating impacts on required capital. Whilst
cash generation has not been shown in the diagrams below, the
impact of these sensitivities on the group's solvency surplus has a
direct read across to the immediate impact on cash generation.
Solvency surplus EcV
Impact range GBPm Impact range GBPm
======================================================= ============================= =============================
20% sterling appreciation (31.5) to (26.5) (102.0) to (92.0)
20% sterling depreciation 26.5 to 31.5 92.0 to 102.0
25% equity fall (2.5) to 12.5 (103.5) to (88.5)
25% equity rise 26.5 to 41.5 93.5 to 108.5
10% equity fall (7.0) to 3.0 (43.0) to (33.0)
10% equity rise 1.0 to 11.0 34.0 to 44.0
1% interest rate rise 11.0 to 21.0 0.0 to 10.0
1% interest rate fall (51.5) to (36.5) (41.5) to (26.5)
50bps credit spread rise (11.5) to (6.5) (16.5) to (11.5)
25 bps swap rate fall (20.5) to (20.5) (22.0) to (12.0)
10% mass lapse (10.5) to (5.5) (47.0) to (37.0)
10% expense increase plus 1% inflation rise (60.0) to (50.0) (61.0) to (51.0)
10% mortality increase (24.5) to (19.5) (22.5) to (17.5)
INSIGHT*
20% sterling appreciation: A material sterling appreciation
reduces the value of surplus in our overseas divisions and hence
has an immediate impact on group solvency surplus and EcV. It also
reduces the value of overseas investments in CA.
Equity sensitivities: The equity rise sensitivities cause both
Own Funds and SCR to rise, as the value of the funds exposed to
risk is higher. The increase in SCR can be larger than Own Funds,
resulting in an immediate reduction in surplus, depending on the
starting point of the symmetric adjustment. Conversely, in an
equity fall, Own Funds and SCR both fall, to the extent to which
the SCR reduction offsets the Own Funds depends on the stress
applied. The impacts are not fully symmetrical due to management
actions and tax. The change in symmetric adjustment has a
significant impact (25% equity fall: -GBP35m to the SCR, 25% equity
rise: +GBP16m to SCR). The EcV impacts are more intuitive as they
are more directly linked to Own Funds impact. CA and Movestic
contribute the most due to their large amounts of unit-linked
business, much of which is invested in equities.
Interest rate sensitivities: An interest rate rise is generally
positive across the group. An interest rate fall results in a
larger impact on Own Funds than an interest rate rise, given the
current low interest rate environment. CA, Movestic and Scildon all
contribute towards the total solvency surplus impact.
50bps credit spread rise: A credit spread rise has an adverse
impact on surplus and future cash generation, particularly in
Scildon due to corporate and non-local government 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 mass lapse hits Own Funds by
more than the SCR reduction.
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 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. These two pages provide a "snapshot" of our key
financial measures and some insight into what is driving the
results for the first half of 2021.
Summary of each KPI:
CASH GENERATION
GROUP CASH GENERATION GBP5.4M (30 JUNE 2020: GBP12.9M)
DIVISIONAL CASH GENERATION GBP11.5M (30 JUNE 2020: GBP9.6M)
What is it?
Cash generation is calculated as being the movement in Solvency
II 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
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, it is
impacted by similar drivers, and therefore factors such as yields
on fixed interest securities and equity and property performance
contribute significantly to the level of cash generation within the
group.
GBPm 30 Jun 2021
============================= ============
UK 12.2
Sweden (23.6)
Netherlands - Waard 3.7
Netherlands - Scildon 19.1
============================= ============
Divisional cash generation 11.5
Other group activities (6.1)
Total group cash generation 5.4
============================= ============
Divisional cash generation
- Each operating division delivered a strong cash result for the
period with the exception of Movestic, which incurred material cash
utilisation.
- The UK contribution was delivered through solid value growth,
offsetting a smaller rise in capital requirements. Cash returns in
Waard benefit from operational gains (largely relating to
mortality).
- Scildon reported significant cash generation after delivering
value growth and a reduction capital requirements. Economic
earnings supported growth in Own Funds, while new reinsurance drove
a material decrease in SCR due to lower catastrophe risk
exposure.
- Own Funds growth in Movestic includes the benefit of equity
growth over the period, off-set by operating losses relating to
strengthening future transfer assumptions. The division also
reported a corresponding increase in SCR, primarily due to the
aforementioned equity market growth and an associated symmetric
adjustment strain.
Group cash generation
- Total group cash generation includes the impact of other group
activities, primarily the impacts of group expenses on Own Funds
and that of foreign exchange movements upon consolidation of the
group capital requirements.
IFRS
PRE-TAX PROFIT: GBP20.8M ( 30 JUNE 2020: PRE-TAX LOSS
GBP9.1M)
TOTAL COMPREHENSIVE INCOME: GBP1.9M ( 30 JUNE 2020:
GBP15.1M)
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?
The IFRS results form the core of reporting and hence retain
prominence as a key financial performance metric. There is however
a general acceptance that the IFRS results in isolation do not
recognise the wider financial performance of a typical life and
pensions business, hence the use of supplementary Alternative
Performance Measures to enhance understanding of financial
performance.
Risks
The IFRS profit can be affected by a number of our principal
risks and uncertainties. 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 30 Jun 2021
======================================== ============
Operating profit 28.3
Economic profit (7.4)
Profit/(loss) on portfolio acquisition (0.1)
Profit before tax 20.8
Taxation (3.0)
Forex impact (15.9)
======================================== ============
Total 1.9
- Divisional pre-tax profits were ahead of expectations for the
period, with a particularly strong contribution from the UK
business.
- Operating profits of GBP28.3m underpin the result and reflect
a material uplift on prior year result, though a large element of
this was a release of reserves (cGBP10m) in Scildon during the
opening half of 2021.
- A small loss on economic activities was reported, whereby
returns in the UK (due to rising interest rates and yields) and
Movestic (equity growth) have been off-set by the adverse impact of
interest rate movements in the Dutch divisions.
- Total comprehensive income includes foreign exchange losses on
translation of the Dutch and Swedish divisional results, owing to
sterling appreciation against the euro and Swedish krona.
ECONOMIC VALUE (EcV)
GBP629.6M (31 DECEMBER 2020: GBP636.8M)
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. EcV reflects a market-consistent assessment
of the value of the existing insurance business, plus the adjusted
net asset value of the non-insurance businesses 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, yields on fixed interest
securities and bond spreads. 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 within a range of
GBP90m-GBP100m, based on the composition of the group's EcV at 30
June 2021.
GBPm
================== =======
EcV 31 Dec 2020 636.8
EcV earnings 38.5
Forex (24.2)
================== =======
Pre-dividend EcV 651.0
Dividends (21.4)
================== =======
EcV 30 Jun 2021 629.6
================== =======
- Prior to any dividend payment impact the Economic Value
increased by GBP14.2m since the start of the year.
- The closing position reflects earnings of GBP38.5m, driven by
positive investment market conditions, off-set by some operating
losses in both Scildon and Movestic.
- The change in EcV during the period includes the impact of the
payment of the final 2020 dividend.
- Material forex losses arose on translation of the Dutch and
Swedish divisional results, representing the weakening of both the
euro and Swedish krona against sterling.
ECV EARNINGS
GBP38.5M ( 30 JUNE 2020: GBP(74.1)M)
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?
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 30 Jun 2021
========================== ============
Total operating earnings (32.4)
Economic earnings 73.0
Other (2.1)
========================== ============
Total EcV earnings 38.5
========================== ============
- EcV earnings of GBP38.5m were reported in the period.
- The total operating earnings1 loss includes material operating
assumption changes and other items, amounting to GBP22.3m. This
relates to adverse changes in transfer out assumptions in Movestic,
as well as the gain on completion of a portfolio acquisition in the
Waard Group.
- Other operating components include losses in Scildon and a
group level expense strain, offsetting the positive results in
other divisions.
- Economic conditions during the period, with rising interest
rates and bond yields, coupled with equity growth, resulted in
substantial economic gains of GBP73.0m (6 months to 30 Jun 2020:
loss of GBP53.6m).
CASH GENERATION
GROUP CASH GENERATION
GBP5.4M (30 JUNE 2020: GBP12.9M)
DIVISIONAL CASH GENERATION
GBP11.5M (30 JUNE 2020: GBP9.6M)
Strong cash contributions from the UK and Dutch businesses
support the divisional cash generation of GBP11.5m for the period.
Cash is generated from increases in the group's solvency surplus,
which is represented by the excess of own funds held over
management's internal capital needs. These are based on regulatory
capital requirements, with the inclusion of additional 'management
buffers'.
Definition: Defining cash generation in a life and pensions
business is complex and there is no reporting framework defined by
the regulators. This can lead to inconsistency across the sector.
We define cash generation as being the movement in Solvency II
surplus own funds over and above the group's internally required
capital, which is based on Solvency II rules.
Implications of our cash definition:
Positives
- Creates a strong and transparent alignment to a regulated framework.
- Positive cash results can be approximated to increased dividend potential.
- Cash is a factor of both value and capital and hence
management are focused on capital efficiency in addition to value
growth and indeed the interplay between the two.
Challenges and limitations
- In certain circumstances the cash reported may not be
immediately distributable by a division to group or from group to
shareholders.
- Brings the technical complexities of the SII framework into
the cash results e.g. symmetric adjustment, with-profit fund
restrictions, model changes etc, and hence the headline results do
not always reflect the underlying commercial or operational
performance.
Jun 2020
Jun 2021 GBPm GBPm
Movement in Movement in Forex Cash generated Cash generated
Own Funds management's impact / (utilised) / (utilised)
capital requirement
============================= =========== ==================== ======= ============== ==============
UK 15.2 (3.0) - 12.2 4.7
Sweden 12.7 (32.9) (3.4) (23.6) 21.7
Netherlands - Waard
Group 5.9 (0.7) (1.5) 3.7 2.8
Netherlands - Scildon 8.1 11.3 (0.3) 19.1 (19.5)
============================= =========== ==================== ======= ============== ==============
Divisional cash generation
/ (utilisation) 41.9 (25.2) (5.2) 11.5 9.6
Other group activities (1.0) (0.8) (4.2) (6.1) 3.3
============================= =========== ==================== ======= ============== ==============
Group cash generation
/ (utilisation) 40.9 (26.1) (9.4) 5.4 12.9
============================= =========== ==================== ======= ============== ==============
GROUP
- Group cash generation of GBP5.4m is lower than the prior year,
however it is supported by solid divisional results, with the
exception of Movestic. The cash utilisation in the Swedish business
has driven the overall year on year reduction in the group
result.
- The cash result includes the negative impact of a foreign
exchange loss (GBP9.4m), arising on the translation of the Swedish
and Dutch divisional results, reflective of sterling appreciation
against both the Swedish krona and euro in the opening half of
2021.
UK
- Another solid period of cash generation has been delivered by
the division, with value growth exceeding a smaller rise in capital
requirements.
- The key component behind both elements were economic market
conditions, while the impact of operating activities was
marginal.
- Own Funds benefited from rising yield curves and equity
markets. This economic benefit is partly offset by a corresponding
increase in SCR, largely due to greater equity risk SCR, including
the impact of the symmetric adjustment.
SWEDEN
- The division has reported a challenging cash result for the period.
- Whilst Own Funds increased as a result of positive economic
conditions and strong investment returns (particularly equity
driven), the movement also reflects non-recurring operating losses
relating to strengthening future transfer assumptions.
- From a capital requirements perspective, the equity
market-driven growth in own funds gives rise to an increase in
market-risk related capital requirements, including the impact of
the symmetric adjustment.
NETHERLANDS - WAARD
- Waard has again reported a solid cash result, with Own Funds
growth surpassing a rise in capital requirements and a foreign
exchange loss.
- Some of the value growth can be attributed to the acquisition
of Brand New Day, however the result was also supported by other
operational gains, primarily relating to mortality experience and
resultant changes to future assumptions.
- Positive economic conditions have also benefitted the cash result for the period.
NETHERLANDS - SCILDON
- Scildon delivered strong cash generation for the first half of
2021, supported by both value growth and a reduction in capital
requirements, marking a significant year on year improvement.
- The growth in Own Funds stems from economic profits,
predominantly through the narrowing of bond spreads and positive
interest rate movements. This offset operational strains, largely
driven by changes in assumptions relating to one-off expenses.
- A substantial fall in the SCR was underpinned by a material
decrease in catastrophe risk (due to management action on
reinsurance) and lower exposure to spread risk on the mortgage
portfolio.
EcV EARNINGS
GBP38.5M (30 JUNE 2020: GBP74.1M)
EcV earnings were aided by economic conditions in the first half
of the year, with rising interest rates and bond yields, coupled
with equity market growth, delivering strong investment returns
across the operating divisions.
Analysis of the EcV result in the period by earnings source:
30 Jun 30 Jun 2020 31 Dec
2021 GBPm 2020
GBPm GBPm
====================================================== ========= =========== =========
Expected movement in period (0.8) 0.1 0.3
New business 4.0 3.1 3.7
Operating experience variances (7.8) (5.9) (22.0)
Other operating assumption changes (4.6) (2.6) (35.8)
Other operating variances (0.9) (1.2) 3.9
====================================================== ========= =========== =========
Material operating assumption changes and other items (22.3) (16.6) (16.2)
====================================================== ========= =========== =========
Total operating earnings (32.4) (23.1) (66.1)
Economic experience variances 45.6 (27.7) 45.7
Economic assumption changes 27.3 (25.9) (22.8)
====================================================== ========= =========== =========
Total economic earnings 73.0 (53.6) 22.9
Other non-operating variances 0.8 (6.1) (2.8)
Risk margin movement 5.1 1.5 4.7
Tax (8.0) 7.1 3.7
====================================================== ========= =========== =========
EcV earnings 38.5 (74.1) (37.6)
====================================================== ========= =========== =========
Analysis of the EcV result in the year to date by business
segment:
30 Jun 30 Jun 31 Dec 2020
2021 2020 GBPm
GBPm GBPm
============================ ======== ========= ===========
UK 13.7 (14.5) 11.8
Sweden 14.0 (41.6) (22.9)
Netherlands 11.8 (12.7) (8.5)
Group and group adjustments (1.0) (5.4) (18.0)
============================ ======== ========= ===========
EcV earnings 38.5 (74.1) (37.6)
============================ ======== ========= ===========
Economic conditions: The EcV result is sensitive to investment
market conditions. Key movements in investment market conditions
during the period are as follows:
- FTSE All Share index increased by 9.3% (6 months to 30 June 2020: decreased by 18.7%);
- Swedish OMX All Share index increased by 19.3% (6 months to 30
June 2020: decreased by 5.0%);
- The Netherlands AEX All Share index increased by 15.0% (6
months to 30 June 2020: decreased by 7.4%); and
- 10-year UK gilt yields have increased from 0.24% to 0.82% during the period.
Total operating earnings: In addition to the material operating
assumption changes, the loss consists of losses in Scildon, coupled
with some group expense strain, offsetting positive earnings in
both Movestic and Waard. Scildon has reported positive lapse
experience, but in the current economic environment this results in
EcV losses due to guarantees within certain policies. Scildon also
reported an expense assumption strain arising from its
digitalisation programme. Earnings in Movestic stemmed from new
business and fund rebate income. Growth in Waard was largely due to
favourable mortality experience and resultant changes in mortality
assumptions.
Material operating assumption changes and other items: This
includes operating items that are individually material and have
therefore been analysed separately. This main component of this
relates to Movestic, where assumption strengthening had a
significantly negative impact (GBP24.8m) on earnings in the opening
half of the year. Following changes surrounding transfer
regulations in the Swedish market during the prior year, transfer
experience in the first half of 2021 has led to a need for a
further strengthening of future transfer assumptions. The other
element within this category is a GBP2.5m gain on the completion of
Waard's acquisition of the Brand New Day portfolio during the
second quarter.
UK: The UK reported a solid start to 2021 with earnings already
in excess of the prior year total, aided by positive investment
market conditions. Economic profits of GBP18.1m have arisen from
the positive impact of rising yields and growing equity markets.
Operational performance contributed a marginal loss, with key items
including a strengthening of mortality assumption and an expense
strain (owing to higher policy counts). This offset positive
outcomes on fee income (also due to higher retained policy counts)
and changes in assumptions relating to future guarantees.
Sweden: Movestic recorded earnings of GBP14.0m for the period,
with strong economic gains off-set by a material non-recurring
operational strain. As described above, this was a result of
assumption changes in relation to dynamics around policy transfers,
with the underlying operational result delivering a GBP5.0m gain.
New business profits of GBP1.9m were reported, representing an
improvement compared to the GBP1.0m reported in 2020, in line with
management expectations for 'post-pandemic' recovery. Volume and
margin pressures remain in a challenging Swedish market, though
good progress has been made in the period, particularly on single
premium and custodian business. Further gains were delivered by an
improvement to fund rebates arrangement and corresponding future
income. Economic earnings of GBP34.6m underpin the result,
substantially higher than gains of GBP9.2m in 2020.
Netherlands: The Dutch businesses posted combined gains of
GBP11.8m for the period. Waard delivered solid profits (GBP6.1m)
while Scildon contributed a further GBP5.7m, which included new
business profits of GBP2.1m (FY 2020: GBP2.7m). As indicated
earlier, Scildon has reported operating losses, largely as a result
of incurring guarantee related costs as a consequence of better
than expected policy retention, and also the impact of higher
mortality driven outgoings than anticipated. A strengthening of
expense assumptions attributable to its digitalisation programme is
another key contributor to the operating result.
Waard has reported solid EcV earnings of GBP6.1m, with mortality
experience (and subsequent changes to assumptions) supporting the
gains. The result also includes smaller economic profits arising
from investment conditions and the benefit delivered by the Brand
New Day portfolio acquisition.
Group: T his component includes various group-related costs and
includes: non-maintenance related costs (such as acquisition
costs); the costs of the group's IFRS 17 programme; and some
economic-related items such as a foreign exchange gains on our euro
debt, the positive impact of rising interest rates and interest on
bank debt.
EcV
GBP629.6M (31 DECEMBER 2020: GBP636.8M)
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 2021 to 30 Jun 2021:
GBPm
================== =======
EcV 31 Dec 2020 636.8
EcV earnings 38.5
Forex (24.2)
================== =======
Pre-dividend EcV 651.0
Dividends (21.4)
================== =======
EcV 30 Jun 2021 629.6
================== =======
EcV earnings: Earnings of GBP38.5m have been reported for the
opening half of 2021. Economic profits arising from favourable
market conditions, with equity growth, rising yields and narrowing
spreads, driving the result.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of GBP21.4m were paid during the
first half of the year, being the final dividend from 2020.
Foreign exchange: The closing EcV of the group reflects a
foreign exchange loss in the period, a consequence of the sterling
appreciation against the euro and Swedish krona.
EcV by segment at 30 Jun 2021:
GBPm
======================== ======
UK 167.7
Sweden 246.4
Netherlands 220.8
Other group activities (5.2)
The above table shows that the EcV of the group remains
diversified across its different markets.
EcV to Solvency II:
GBPm
=========================== =======
EcV 30 Jun 2021 629.6
Risk margin (40.9)
Contract boundaries (1.2)
Own funds restrictions (1.8)
Dividends (11.8)
=========================== =======
SII Own Funds 30 Jun 2021 573.9
=========================== =======
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 surpluses that exist
within certain ring-fenced funds. These restrictions are reversed
for EcV valuation purposes as they are deemed to be temporary in
nature.
Dividends: The proposed interim dividend of GBP11.8m is
recognised for SII regulatory reporting purposes. It is not
recognised within EcV until it is actually paid.
IFRS
IFRS PRE-TAX LOSS
GBP20.8M (30 JUNE 2020: PRE-TAX LOSS GBP9.1M)
IFRS TOTAL COMPREHENSIVE INCOME
GBP1.9M (30 JUNE 2020: GBP15.1M)
The group IFRS results reflect the natural dynamics of the
segments of the group, which can be characterised in three major
components: stable core, variable element and growth operation.
Executive summary
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.
Variable element: Included within the CA segment is the S&P
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.
Growth operation: The long-term financial models of Movestic and
Scildon are based on growth, with levels of new business and
premiums from existing business being targeted to more than offset
the impact of policy attrition, leading to a general increase in
assets under management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are
reflected in the following IFRS results:
Unaudited Year
6 months ended Ended
30 Jun 21 30 Jun 20 31 Dec 20
GBPm GBPm GBPm Note
====================================================== ========== ========== ========== =====
CA 15.0 0.4 35.7 1
Movestic 6.7 4.0 12.9 2
Waard Group 1.3 (0.2) 4.1 3
Scildon 6.0 7.2 14.6 4
Chesnara (5.1) (5.8) (9.4) 5
Consolidation adjustments (2.9) (14.7) (6.1) 6
====================================================== ========== ========== ========== =====
Profit before tax, AVIF impairment
and profit on acquisition 20.9 2.5 51.8
====================================================== ========== ========== ========== =====
AVIF impairment - (11.6) (27.6)
====================================================== ========== ========== ========== =====
Post completion (loss)/gain on portfolio acquisition (0.1) - 0.4 3
====================================================== ========== ========== ========== =====
Profit/(loss) before tax 20.8 (9.1) 24.6
Tax (3.0) 2.3 (3.4)
====================================================== ========== ========== ========== =====
Profit/(loss) after tax 17.8 (6.8) 21.2
Foreign exchange (15.9) 21.9 22.6 8
Other comprehensive income - - (0.5)
====================================================== ========== ========== ========== =====
Total comprehensive income 1.9 15.1 43.3
====================================================== ========== ========== ========== =====
Unaudited Year
6 months ended Ended
30 Jun 21 30 Jun 20 31 Dec 20
GBPm GBPm GBPm Note
============================================================== ========== ========== ========== =====
Operating profit, excluding AVIF impairment 28.3 27.5 30.6 9
Economic profit, excluding AVIF impairment (7.4) (25.0) 21.2 10
============================================================== ========== ========== ========== =====
Profit before tax, AVIF impairment and profit on acquisition 20.9 2.5 51.8
AVIF impairment - (11.6) (27.6) 7
============================================================== ========== ========== ========== =====
Post completion (loss)/gain on portfolio acquisition (0.1) - 0.4
============================================================== ========== ========== ========== =====
Profit/(loss) before tax 20.8 (9.1) 24.6
============================================================== ========== ========== ========== =====
Tax (3.0) 2.3 (3.4)
============================================================== ========== ========== ========== =====
Profit/(loss) after tax 17.8 (6.8) 21.2
Foreign exchange (15.9) 21.9 22.6 8
Other comprehensive income - - (0.5)
============================================================== ========== ========== ========== =====
Total comprehensive income 1.9 15.1 43.3
============================================================== ========== ========== ========== =====
Note 1: CA has reported a strong result for the period,
underpinned by both investment market related profits and operating
profits in the period.
Note 2: Movestic continues to contribute positively to the
overall group IFRS result, with profits slightly ahead of the same
period in the prior year. Positive investment returns, strong
claims development and reduced operational expenses produced a
favourable result year to date.
Note 3: The Waard Group result, although improved on prior
period, reflects economic losses arising from rising yields in the
period. Whilst rising yields are generally good for the business,
under IFRS 4 reserving methods in the Netherlands, liabilities do
not generally reduce in a rising yield environment, but the
associated backing assets tend to fall. The division also incurred
slightly higher than expected acquisition related expenditure,
which includes costs in relation to the purchase of the life
insurance portfolio from Brand New Day.
Note 4: Scildon has delivered a relatively strong IFRS result,
which includes the reversal of the additional reserves of circa
GBP10m, which were required in 2020 and arose from the liability
adequacy test biting. This positive return has been offset by
negative investment value growth arising from increases in interest
rates.
Note 5: The Chesnara result largely represents holding company
expenses. The current year loss is lower than last year largely due
to a foreign exchange gain in respect of the euro denominated loan
that it holds.
Note 6: Consolidation adjustments relate to items such as the
amortisation and impairment of intangible assets.
Note 7: During 2020 a write down of the Scildon AVIF intangible
asset was performed amounting to GBP26.6m (GBP11.6m of this was
recognised in the first half of the year). The impairment was as a
result of a reduction in the assessed value of the future cash
flows of policies that were in force at the point of acquisition.
The AVIF held in respect of the Protection Life book within CA was
also impaired by GBP1.0m, following a year end assessment. The
impairments are driven by a combination of economic and operating
factors, with the exact allocation between the two being
impracticable to determine. As a result, this has been reported
outside of both operating and economic profits. No such impairments
were required during 2021.
Note 8: Sterling appreciated against both the euro and Swedish
krona in the period, having a material impact on the 2021 result,
creating a sizeable exchange loss at the end of the half-year.
Note 9: The current year operating profit, excluding AVIF
impairment, includes the positive impact of releasing additional
reserves created in 2020, a result of the liability adequacy test
biting in Scildon, amounting to GBP10.0m.
Note 10: Economic profit, excluding AVIF impairment, represents
the components of the earnings that are directly driven by
movements in economic variables. These are much improved on the
prior year comparative, which reflected a turbulent year for global
investment markets.
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.
Chesnara adopts the "three lines of defence" model adjusted as
appropriate 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.
ROLE OF THE BOARD
The Chesnara board is responsible for the adequacy of the design
and implementation of the group's risk management and internal
control system and its consistent application across divisions. All
significant decisions for the development of the group's risk
management system are the group board's responsibility.
Risk and Control Policies
Chesnara has a set of Risk and Control Policies that set out the
key policies, processes and controls to be applied. The Chesnara
board approves the review, updates and attestation of these
policies at least annually.
Strategy and Risk Appetite
Chesnara group and its divisions have a defined risk strategy
and supporting risk appetite framework to embed an effective risk
management framework, culture and processes at its heart and to
create a holistic, transparent and focused approach to risk
identification, assessment, management, monitoring and
reporting.
The Chesnara board approves 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.
Risk Identification
The group maintains a register of risks which are specific to
its activity and scans the horizon to identify potential risk
events (e.g., political; economic; technological; environmental,
legislative & social).
On an annual basis the board approves the materiality criteria
to be applied in the risk scoring and in the determination of what
is considered to be a principal risk. At least quarterly the
principal and emerging risks are reported to the board, assessing
their proximity, probability and potential impact.
Own Risk and Solvency Assessment (ORSA)
On an annual basis, or more frequently if required, the group
produces a group ORSA Report which aggregates the divisional ORSA
findings and supplements these with an assessment specific to group
activities. The group and divisional ORSA policies outline the key
processes and contents of these reports.
The Chesnara board is responsible for approving the ORSA,
including steering in advance how the assessment is performed and
challenging the results.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of
and attestation to the effectiveness of the risk management system.
The assessment considers the extent to which the risk management
system is embedded.
The Chesnara board is responsible for monitoring the Risk
Management System and its effectiveness across the group. The
outcome of the annual review is reported to the group board which
make decisions regarding its further development.
COVID-19
During 2020 the COVID-19 pandemic had a global impact on
demographic, social and economic factors. Recognising that, through
2021, there is potential risk of related operational disruption and
economic volatility, the information in the following pages has
been updated to reflect the ongoing COVID-19 pandemic.
principal risks and uncertainties
The following tables outline 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 & 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 tables. However,
by virtue of the risks being defined as principal, the impacts are
potentially significant. Those risks with potential for a material
financial impact are covered within the sensitivities.
PR1 INVESTMENT AND LIQUIDITY RISK
DESCRIPTION Exposure to financial losses or value reduction arising from
adverse movements in currency, investment markets, counterparty
defaults, or through inadequate asset liability matching.
======================================================================
RISK APPETITE The group accepts this risk but has controls in place to prevent
any increase or decrease in the risk exposure beyond set levels.
These controls will result in early intervention if the amount
of risk approaches those limits.
======================================================================
POTENTIAL Market risk results from fluctuations in asset values, foreign
IMPACT exchange rates and interest rates and has the potential to affect
the group's ability to fund its commitments to customers and
other creditors, as well as pay a return to shareholders.
Chesnara and each of its subsidiaries have obligations to make
future payments, which are not always known with certainty in
terms of timing or amounts, prior to the payment date. This
includes primarily the payment of policyholder claims, reinsurance
premiums, debt repayments and dividends. The uncertainty of
timing and amounts to be paid gives rise to potential liquidity
risk, should the funds not be available to make payment.
Other liquidity issues could arise from counterparty failures/credit
defaults, a large spike in the level of claims or other significant
unexpected expenses.
Worldwide developments in Environmental, Social, and Governance
(ESG) responsibilities and reporting have the potential to influence
market risk in particular, for example the risks arising from
transition to a carbon neutral industry, with corresponding
changes in consumer preferences and behaviour.
======================================================================
COVID-19 COVID-19 has arguably introduced greater uncertainty into investment
markets, given that the longer-term effects of government enforced
social and economic restrictions remains unclear, as does the
extent to which those restrictions may need to continue or be
repeated in future as the virus continues to affect different
parts of the world.
======================================================================
PR2 REGULATORY CHANGE RISK (INCLUDING BREXIT)
DESCRIPTION The risk of adverse changes in industry practice/regulation,
or inconsistent application of regulation across territories.
========================================================================
RISK APPETITE The group aims to minimise any exposure to this risk, to the
extent possible, but acknowledges that it may need to accept
some risk as a result of carrying out business.
========================================================================
POTENTIAL Chesnara currently operates in three regulatory domains and
IMPACT is therefore exposed to potential for inconsistent application
of regulatory standards across divisions, such as the imposition
of higher capital buffers over and above regulatory minimum
requirements. Potential consequences of this risk for Chesnara
include the constraining of efficient and fluid use of capital
within the group, or creating a non-level playing field with
respect to future new business/acquisitions. Chesnara will monitor
the consultation and discussions arising under EIOPA's Solvency
II Review as well as the equivalent review taking place in the
UK by the PRA, and in the context of Brexit and the UK's ultimate
position regarding SII equivalence.
Regulatory developments continue to drive a high level of change
activity across the group, with items such as operational resilience,
climate change and IFRS17 being particularly high profile. Such
regulatory initiatives carry the risk of expense overruns should
it not be possible to adhere to them in a manner that is proportionate
to the nature and scale of Chesnara's businesses. The group
is therefore exposed to the risk of:
* incurring one-off costs of addressing regulatory
change as well as any permanent increases in the cost
base in order to meet enhanced standards;
* erosion in value arising from pressure or enforcement
to reduce future policy charges;
* erosion in value arising from pressure or enforcement
to financially compensate for past practice; and
* regulatory fines or censure in the event that it is
considered to have breached standards or fails to
deliver changes to the required regulatory standards
on a timely basis.
========================================================================
COVID-19 We have assessed that COVID-19 does not materially increase
the level by which Chesnara is exposed to this risk.
========================================================================
PR3 ACQUISITION RISK
DESCRIPTION The risk of failure to source acquisitions that meet Chesnara's
criteria or the execution of acquisitions with subsequent
unexpected financial losses or value reduction.
===================================================================
RISK APPETITE Chesnara has a patient approach to acquisition and generally
expects acquisitions to enhance EcV and expected cash generation
in the medium term (net of external financing), though
each opportunity will be assessed on its own merits.
===================================================================
POTENTIAL The acquisition element of Chesnara's growth strategy is
IMPACT dependent on the availability of attractive future acquisition
opportunities. Hence, the business is exposed to the risk
of a reduction in the availability of suitable acquisition
opportunities within Chesnara's current target markets,
for example arising as a result of a change in competition
in the consolidation market or from regulatory change influencing
the extent of life company strategic restructuring.
Through the execution of acquisitions, Chesnara is also
exposed to the risk of erosion of value or financial losses
arising from risks inherent within businesses or funds
acquired which are not adequately priced for or mitigated
as part of the transaction.
===================================================================
COVID-19 We have assessed that COVID-19 does not materially increase
the level by which Chesnara is exposed to this risk.
===================================================================
PR4 DEMOGRAPHIC EXPERIENCE RISK
DESCRIPTION Risk of adverse demographic experience compared with assumptions.
======================================================================
RISK APPETITE The group accepts this risk but restricts its exposure, to the
extent possible, through the use of reinsurance and other controls.
Early warning trigger monitoring is in place to track any increase
or decrease in the risk exposure beyond a set level, with action
taken to address any impact as necessary.
======================================================================
POTENTIAL In the event that demographic experience (rates of mortality,
IMPACT morbidity, persistency etc.) varies from the assumptions underlying
product pricing and subsequent reserving, more or less profit
will accrue to the group.
If mortality or morbidity experience is higher than that assumed
in pricing contracts (I.e. more death and sickness claims are
made than expected), this will typically result in less profit
accruing to the group.
Persistency risk arises if policyholders choose to terminate
their policy earlier than is expected, via a policy surrender,
lapse or via transfers out. If persistency is significantly
lower than that assumed in product pricing and subsequent reserving,
this will typically lead to reduced group profitability in the
medium to long-term, as a result of a reduction in future income
arising from charges on those products. The effects of this
could be more severe in the case of a one-off event resulting
in multiple withdrawals over a short period of time (a "mass
lapse" event). The effect of recognising any changes in future
demographic assumptions at a point in time would be to crystallise
any expected future gain or loss on the balance sheet.
======================================================================
COVID-19 COVID-19 increased the number of deaths arising in 2020 and
this will continue into 2021 and potentially beyond. The effect
of this is expected to be more pronounced in older lives rather
than in the typical ages of the assured lives in the Chesnara
books. Chesnara does not expect the pandemic to have a material
impact on mortality experience and costs in the long-term.
======================================================================
PR5 EXPENSE RISK
DESCRIPTION Risk of expense overruns and unsustainable unit cost growth.
=======================================================================
RISK APPETITE The group aims to minimise its exposure to this risk, to the
extent possible, but acknowledges that it may need to accept
some risk as a result of carrying out business.
=======================================================================
POTENTIAL The group is exposed to expenses being higher than expected
IMPACT as a result of one-off increases in the underlying cost of performing
key functions, or through higher inflation of variable expenses.
A key underlying source of potential increases in regular expense
is the additional regulatory expectations on the sector.
For the closed funds, the group is exposed to the impact on
profitability of fixed and semi-fixed expenses, in conjunction
with a diminishing policy base.
For the companies open to new businesses, the group is exposed
to the impact of expense levels varying adversely from those
assumed in product pricing. Similarly, for acquisitions, there
is a risk that the assumed costs of running the acquired business
allowed for in pricing are not achieved in practice, or any
assumed cost synergies with existing businesses are not achieved.
Chesnara has an ongoing expense management programme and various
strategic projects aimed at controlling expenses. Recent examples
include the Fund Manager Rationalisation project in the UK and
the IT transformation project within Scildon.
=======================================================================
COVID-19 As governments intervene to stabilise their economies in response
to COVID-19, there is potential to shift towards higher inflation,
once social distancing measures are relaxed and the economy
recovers. Higher inflation would increase Chesnara's expected
longer-term cost base.
=======================================================================
PR6 OPERATIONAL RISK
DESCRIPTION Significant operational failure/business continuity event.
========================================================================
RISK APPETITE The group aims to minimise its exposure to this risk, to the
extent possible, but acknowledges that it may need to accept
some risk as a result of carrying out business.
========================================================================
POTENTIAL The group and its subsidiaries are exposed to operational risks
IMPACT which arise through daily activities and running of the business.
Operational risks may, for example, arise due to technical or
human errors, failed internal processes, insufficient personnel
resources or fraud caused by internal or external persons. As
a result, the group may suffer financial losses, poor customer
outcomes, reputational damage, regulatory intervention or business
plan failure.
Part of the group's operating model is to outsource support
activities to specialist service providers. Consequently, a
significant element of the operational risk arises within its
outsourced providers.
========================================================================
COVID-19 Chesnara, its subsidiaries and outsourced service providers
have all adapted to remote working conditions, utilising communication
technology as required and implementation of additional controls.
There is potential for COVID-19 to influence the operating environment
on a long-term basis and drive changes in competitor, regulator
or counterparty (e.g. broker) behaviours
========================================================================
PR7 IT / DATA SECURITY & CYBER RISK
DESCRIPTION Risk of IT/ data security failures or impacts of
malicious cyber-crime (including ransomware) on continued
operational stability.
===============================================================
RISK APPETITE The group aims to minimise its exposure to this risk,
to the extent possible, but acknowledges that it
may need to accept some risk as a result of carrying
out business.
===============================================================
POTENTIAL IMPACT Cyber risk is a growing risk affecting all companies,
particularly those who are custodians of customer
data. The most pertinent risk exposure relates to
information security (i.e. protecting business sensitive
and personal data) and can arise from failure of
internal processes and standards, but increasingly
companies are becoming exposed to potential malicious
cyber-attacks, organisation specific malware designed
to exploit vulnerabilities, phishing attacks etc.
The extent of Chesnara's exposure to such threats
also includes third party service providers.
The potential impact of this risk includes financial
losses, inability to perform critical functions,
disruption to policyholder services, loss of sensitive
data and corresponding reputational damage or fines.
Chesnara continues to invest in the incremental strengthening
of its operational resilience and has introduced
additional automated controls to protect our data
and infrastructure with regular monitoring to detect
and prevent a successful cyber-attack.
===============================================================
COVID-19 The move to remote working has the potential to increase
cyber risk and therefore various steps have been
taken to enhance security, processes and controls
to help protect against this.
===============================================================
PR8 NEW BUSINESS RISK
DESCRIPTION Adverse new business performance compared with projected value.
====================================================================
RISK APPETITE Chesnara does not wish to write new business that does not generate
positive new business value (on a commercial basis) over the
business planning horizon.
====================================================================
POTENTIAL If new business performance is significantly lower than the
IMPACT projected value, this will typically lead to reduced value growth
in the medium to long-term. A sustained low-level performance
may lead to insufficient new business profits to justify remaining
open to new business.
====================================================================
COVID-19 COVID-19 caused some volatility in new business volumes across
markets as well as in individual business' volumes during 2021
as a result of restrictions on face-to-face sales meetings and
customer demand. There is potential for the economic impacts
of COVID-19, such as lower interest rates, to adversely affect
new business profitability and this is being closely monitored.
====================================================================
going concern
After making appropriate enquiries, including consideration of
the impact of COVID-19 on the group's operations and financial
position and prospects, the directors confirm that they are
satisfied that the company and the group have adequate resources to
continue in business for the foreseeable future. Accordingly, they
continue to adopt the going concern basis in the preparation of the
financial statements.
In performing this work, the board has considered the current
solvency and cash position of the group and company, coupled with
the group's and company's projected solvency and cash position as
highlighted in its most recent business plan and Own Risk and
Solvency Assessment (ORSA) process. These processes consider the
financial projections of the group and its subsidiaries on both a
base case and a range of stressed scenarios, covering projected
solvency, liquidity, EcV and IFRS positions. In particular these
projections assess the cash generation of the life insurance
divisions and how these flow 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. Further insight into the immediate and
longer-term impact of certain scenarios, covering solvency, cash
generation and Economic Value, can be found on page 23 under the
section headed 'Capital Management Sensitivities'. The directors
believe these scenarios will encompass any potential future impact
of COVID-19 on the group as Chesnara's most material ongoing
exposure to COVID-19 is any associated future investment market
impacts. Underpinning the projections process outlined above are a
number of assumptions. The key ones include:
- We do not assume that a future acquisition needs to take place to make this assessment.
- We make long term investment return assumptions on equities and fixed income securities.
- The base case scenario assumes exchange rates remain stable,
and the impact of adverse rate changes are assessed through
scenario analysis.
- Levels of new business volumes and margins are assumed.
- The projections apply the most recent actuarial assumptions,
such as mortality and morbidity, lapses and expenses.
Due to the group's strong capital position and the group's
business model, although the COVID-19 outbreak caused significant
global economic disruption, the group and the company remain well
capitalised and has sufficient liquidity. No significant
strengthening of mortality assumptions has been required as a
result of COVID-19 at this stage. As such we can continue to remain
confident that the group will continue to be in existence in the
foreseeable future. The information set out on pages 21 and 22
indicates a strong Solvency II position as at 30 June 2021 as
measured at both the individual regulated life company levels and
at the group level. As well as being well-capitalised the group
also has a healthy level of cash reserves to be able to meet its
debt obligations as they fall due and does not rely on the renewal
or extension of bank facilities to continue trading.
The group's subsidiaries 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.
Whilst there was some short-term operational disruption from
dealing with the restricted operating environment in light of
COVID-19, our assessment has shown that both our internal functions
and those operated by our key outsourcers and suppliers adapted to
these restrictions and do not cause any issues as to our going
concern.
DIRECTORS' RESPONSIBILITIES STATEMENT
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in
accordance with United Kingdom adopted IAS 34 'Interim Financial
Reporting';
- the management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
during the first six months and description of principal risks and
uncertainties for the remaining six months of the year); and
- the management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related parties'
transactions and changes therein).
By order of the Board
Luke Savage John Deane
Chairman Chief Executive Officer
25 August 2021 25 August 2021
INDEPENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA
PLC
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2021 which comprises the condensed
consolidated statement of comprehensive income, the condensed
consolidated balance sheet, the condensed consolidated statement of
changes in equity, the condensed consolidated statement of cash
flows and related notes 1 to 8. We have read the other information
contained in the half-yearly financial report and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of
financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
group will be prepared in accordance with United Kingdom adopted
International Financial Reporting Standards. The condensed set of
financial statements included in this half-yearly financial report
has been prepared in accordance with United Kingdom adopted
International Accounting Standard 34, "Interim Financial
Reporting".
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2021 is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard 34
and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it
in an independent review report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.
Deloitte LLP
Manchester
United Kingdom
25 August 2021
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Year ended 31 December
Six months ended
30 June
2021 2020 2020
GBP000 GBP000 GBP000
======================================================= ========== ========= ======================
Insurance premium revenue 152,291 139,424 293,365
Insurance premium ceded to reinsurers (20,610) (20,274) (42,907)
======================================================== ========== ========= ======================
Net insurance premium revenue 131,681 119,150 250,458
Fee and commission income 45,732 45,373 92,698
Net investment return 621,272 (369,955) 254,568
Other operating income 23,491 19,656 40,181
======================================================== ========== ========= ======================
Total income net of investment return 822,176 (185,776) 637,905
======================================================== ========== ========= ======================
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (255,462) (196,703) (420,031)
Net (decrease)/increase in insurance contract
provisions (38,308) 148,092 6,869
Reinsurers' share of claims and benefits 14,149 20,027 48,178
========== ========= ======================
Net insurance contract claims and benefits (279,621) (28,584) (364,984)
========== ========= ======================
Change in investment contract liabilities (470,272) 275,376 (110,878)
Reinsurers' share of investment contract liabilities 2,635 (2,136) 1,340
========== ========= ======================
Net change in investment contract liabilities (467,637) 273,240 (109,538)
========== ========= ======================
Fees, commission and other acquisition costs (11,848) (11,215) (23,625)
Administrative expenses (33,316) (35,301) (70,952)
Other operating expenses
Charge for impairment acquired value of in-force
business - (11,608) (27,623)
Charge for amortisation of acquired value of in-force
business (4,107) (4,666) (9,562)
Charge for amortisation of acquired value of customer
relationships (28) (30) (63)
Other (3,698) (3,726) (5,062)
======================================================== ========== ========= ======================
Total expenses net of change in insurance contract
provisions and investment contract liabilities (800,255) 178,110 (611,409)
======================================================== ========== ========= ======================
Total income less expenses 21,921 (7,666) 26,496
Share of loss of associate - (128) -
(Loss)/profit recognised on portfolio acquisition (94) - 388
Financing costs (990) (1,279) (2,299)
======================================================== ========== ========= ======================
Profit/(loss) before income taxes 20,837 (9,073) 24,585
Income tax (expense)/credit (2,982) 2,319 (3,394)
======================================================== ========== ========= ======================
Profit/(loss) for the period 17,855 (6,754) 21,191
Foreign exchange translation differences arising on the
revaluation of foreign operations (15,948) 21,865 22,618
Revaluation of pension obligations - -
Revaluation of investment property (3) 36 (464)
======================================================== ========== ========= ======================
Other comprehensive income for the year, net of tax (15,951) 21,901 22,154
======================================================== ========== ========= ======================
Total comprehensive income for the period 1,904 15,147 43,345
======================================================== ========== ========= ======================
Basic earnings per share (based on profit for the
period) 11.90p (4.50)p 14.12p
======================================================== ========== ========= ======================
Diluted earnings per share (based on profit for the
period) 11.81p (4.47)p 14.03p
======================================================== ========== ========= ======================
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited Year ended
as at 31 December
30 June
2021 2020 2020
GBP000 GBP000 GBP000
====================================================================== ========= ========= ============
Assets
Intangible assets
Deferred acquisition costs 65,417 68,494 69,051
Acquired value of in-force business 54,701 77,597 61,655
Acquired value of customer relationships 358 428 409
Goodwill - - -
Software assets 8,486 7,419 8,508
Property and equipment 7,635 9,562 8,718
Investment in associates - - -
Investment properties 1,073 1,091 1,124
Reinsurers' share of insurance contract provisions 190,737 193,837 197,068
Amounts deposited with reinsurers 38,014 34,436 37,026
Financial assets
Equity securities at fair value through income 5,562 389,237 10,180
Holdings in collective investment schemes at fair value through
income 6,871,529 5,501,076 6,714,303
Debt securities at fair value through income 1,002,546 1,322,343 1,098,559
Policyholders' funds held by the group 502,051 285,285 332,117
Mortgage loan portfolio 319,652 30,948 344,918
Derivative financial instruments 137 449 830
========= ========= ============
Total financial assets 8,701,477 7,529,338 8,500,907
========= ========= ============
Insurance and other receivables 44,135 47,332 45,048
Prepayments 12,431 11,220 13,349
Reinsurers' share of accrued policyholder claims 18,096 14,284 12,716
Income taxes 5,978 6,535 4,566
Cash and cash equivalents 72,595 203,111 105,351
======================================================================= ========= ========= ============
Total assets 9,221,133 8,204,684 9,065,496
======================================================================= ========= ========= ============
Liabilities
Insurance contract provisions 3,874,578 3,562,853 3,958,037
Other provisions 681 583 613
Financial liabilities
Investment contracts at fair value through income 4,135,734 3,636,513 4,035,040
Liabilities relating to policyholders' funds held by the group 502,051 285,285 332,117
Lease contract liabilities 2,361 3,028 2,844
Borrowings 51,574 79,513 66,955
Derivative financial instruments 126 681 3
========= ========= ============
Total financial liabilities 4,691,846 4,005,020 4,436,959
========= ========= ============
Deferred tax liabilities 16,450 18,361 19,086
Reinsurance payables 4,403 4,787 2,863
Payables related to direct insurance and investment contracts 101,988 90,889 96,337
Deferred income 3,061 3,610 3,355
Income taxes 6,002 4,834 9,427
Other payables 52,312 41,547 50,107
Bank overdrafts 1,918 2,101 1,645
======================================================================= ========= ========= ============
Total liabilities 8,753,239 7,734,585 8,578,429
======================================================================= ========= ========= ============
Net assets 467,894 470,099 487,067
======================================================================= ========= ========= ============
Shareholders' equity
Share capital 43,768 43,768 43,768
Share premium 142,172 142,085 142,085
Other reserves 14,821 30,519 30,772
Retained earnings 267,133 253,727 270,442
======================================================================= ========= ========= ============
Total shareholders' equity 467,894 470,099 487,067
======================================================================= ========= ========= ============
Approved by the Board of Directors and authorised for issue on
25 August 2021 and signed on its behalf by:
Luke Savage John Deane
Chairman Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Year ended 31 December
Six months ended
30 June
2021 2020 2020
GBP000 GBP000 GBP000
---------------------------------------------------------------- ---------- --------- ----------------------
Profit/(loss) for the period 17,855 (6,754) 21,191
Adjustments for:
Depreciation of property and equipment 351 267 637
Amortisation of deferred acquisition costs 6,818 6,166 12,845
Impairment of acquired value of in-force business - - 27,623
Amortisation of acquired value of in-force business 3,684 16,274 9,562
Amortisation of acquired value of customer relationships 28 30 63
Amortisation of software assets 36 741 1,292
Depreciation on right of use assets 320 350 757
Interest on lease liabilities 23 23 55
Share based payment 282 242 492
Tax paid 2,961 (2,327) 3,128
Interest receivable (1,268) 139 (2,987)
Dividends receivable (1,529) (3,363) (1,929)
Interest expense 967 1,290 2,244
Impairment losses - - 1,019
Fair value gains on financial assets (597,225) (89,568) (138,119)
Share of loss/(profit) of associate - 128 -
Increase in intangible assets related to insurance and
investment contracts (6,484) (6,504) (15,316)
Interest received 2,395 1,890 5,335
Dividends received 2,401 2,336 3,241
Changes in operating assets and liabilities:
Decrease /(increase) in financial assets 68,929 650,198 (150,789)
Decrease/(increase) in reinsurers share of insurance contract
provisions 2,857 (2,637) (6,981)
(Increase)/decrease in amounts deposited with reinsurers (988) 2,894 304
(Increase)/decrease in insurance and other receivables (2,172) 9,705 6,763
Decrease/(increase) in prepayments 275 (2,249) (4,227)
Increase/(decrease) in insurance contract provisions 21,089 (174,638) 233,055
Increase/(decrease) in investment contract liabilities 482,409 (277,660) 36,539
Increase/(decrease) in provisions 102 27 39
Increase/(decrease) in reinsurance payables 1,674 1,326 (523)
Increase/(decrease) in payables related to direct insurance and
investment contracts 7,128 2,005 7,451
Increase/(decrease) in other payables 2,708 6,943 6,188
---------------------------------------------------------------- ---------- --------- ----------------------
Cash generated from operations 15,626 137,274 58,952
Income tax paid (9,440) (5,969) (6,456)
---------------------------------------------------------------- ---------- --------- ----------------------
Net cash generated from operating activities 6,186 131,305 52,496
---------------------------------------------------------------- ---------- --------- ----------------------
Cash flows from investing activities
Development of software (1,209) (1,706) 2,734
Purchases of property and equipment 741 (1,892) (857)
Net cash (utilised)/generated by investing activities (468) (3,598) 1,877
---------------------------------------------------------------- ---------- --------- ----------------------
Cash flows from financing activities
Proceeds from issue of share capital - 1 1
Proceeds from issue of share premium 87 32 32
Repayment of borrowings (12,777) (12,772) (26,094)
Repayment of principal under lease liabilities (404) (285) (695)
Dividends paid (21,445) (20,812) (32,294)
Interest paid (989) (1,278) (2,295)
---------------------------------------------------------------- ---------- --------- ----------------------
Net cash utilised by from financing activities (35,528) (35,114) (61,345)
---------------------------------------------------------------- ---------- --------- ----------------------
Net (decrease)/increase in cash and cash equivalents (29,810) 92,593 (6,972)
Cash and cash equivalents at beginning of period 103,706 106,782 106,782
Effect of exchange rate changes on cash and cash equivalents (3,219) 1,635 3,896
================================================================ ========== ========= ======================
Cash and cash equivalents at end of the period 70,677 201,010 103,706
---------------------------------------------------------------- ---------- --------- ----------------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited six months
ended 30 June 2021
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 1 January
2021 43,768 142,085 30,772 - 270,442 487,067
Profit for the period - - - - 17,855 17,855
Dividends paid - - - - (21,446) (21,446)
Foreign exchange
translation
differences - - (15,948) - - (15,948)
Revaluation of
pension obligations - - (3) - -- (3)
Issue of share
capital - - - - - -
Issue of share
premium - 87 - - - 87
Share based payment - - - - 282 282
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 30 June
2021 43,768 142,172 14,821 - 267,133 467,894
===================== ============= ============= ============== =============== ================= ========
Unaudited six months
ended 30 June 2020
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 1 January
2020 43,767 142,053 8,618 - 281,053 475,491
Loss for the period - - - - (6,754) (6,754)
Dividends paid - - - - (20,814) (20,814)
Foreign exchange
translation
differences - - 21,865 - - 21,865
Revaluation of
pension obligations - - 36 - -- 36
Issue of share
capital 1 - - - - 1
Issue of share
premium - 32 - - - 32
Share based payment - - - - 242 242
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 30 June
2020 43,768 142,085 30,519 - 253,727 470,099
===================== ============= ============= ============== =============== ================= ========
Year ended 31
December 2020
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 1 January
2020 43,767 142,053 8,618 - 281,053 475,491
Profit for the year - - - - 21,191 21,191
Issue of share
capital 1 - - - - 1
Issue of share
premium - 32 - - - 32
Dividends paid - - - - (32,294) (32,294)
Foreign exchange
translation
differences - - 22,618 - - 22,618
Revaluation of
investment property - - (464) - - (464)
Share based payment - - - - 492 492
Equity shareholders'
funds at 31 December
2020 43,768 142,085 30,772 - 270,442 487,067
===================== ============= ============= ============== =============== ================= ========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
This condensed set of consolidated financial statements has been
prepared in accordance with United Kingdom adopted International
Financial Reporting Standards. This condensed set of consolidated
financial statements has been prepared in accordance with United
Kingdom adopted IAS 34 'Interim Financial Reporting'. As required
by the Disclosure and Transparency Rules of the Financial Conduct
Authority, the condensed set of consolidated financial statements
has been prepared applying the accounting policies and presentation
which were applied in the preparation of the group's published
consolidated financial statements for the year ended 31 December
2020.
Any judgements and estimates applied in the condensed set of
financial statements are consistent with those applied in the
preparation of the group's published consolidated financial
statements for the year ended 31 December 2020.
The financial information shown in these interim financial
statements is unaudited and does not constitute statutory accounts
within the meaning of section 434 of the Companies Act 2006.
The comparative figures for the financial year ended 31 December
2020 are not the company's statutory accounts for that financial
year. Those accounts have been reported on by the company's auditor
and delivered to the Registrar of Companies. The report of the
auditor was (i) unqualified, (ii) did not include a reference to
any matters to which the auditor drew attention by way of emphasis
without qualifying their report and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
Going concern
After making appropriate enquiries, including detailed
consideration of the impact of Covid-19 on the group's operations
and financial position and prospects, the directors confirm that
they are satisfied that the company and the group have adequate
resources to continue in business for the foreseeable future, a
period of not less than 12 months from the date of this report.
Accordingly, they continue to adopt the going concern basis in the
preparation of these half year financial statements. Further detail
on the key considerations made by the directors in making this
assessment has been included in the 'Going Concern' section.
Judgements and estimates
Critical accounting judgements and key sources of estimation and
uncertainty remain largely unchanged from those described in Note 3
of the 2020 Annual Report and Accounts. The potential impact of
Covid-19 on the group has been considered in the preparation of
these half year condensed financial statements, including
management's evaluation of critical accounting judgements and
estimates, which has led to the following assessments being
undertaken: -
AVIF impairment assessment: A half-year assessment of the
carrying value of the AVIF intangible asset in respect of the
Scildon acquisition was undertaken to assess if an impairment
charge was necessary. This assessment concluded that no impairment
was necessary following the impairment that was recognised in the
year end 2020 financial statements.
IFRS assumption setting: The potential impact of Covid-19 was
considered as part of the half-year actuarial assumption setting,
which forms the basis of the IFRS reserving process. The
conclusions drawn, were that no longer-term adjustments were
required to the mortality and morbidity assumptions at this stage,
although mortality experience since the outbreak of the pandemic
remains under close scrutiny.
2. Earnings per share
Earnings per share are based on the following:
Unaudited Year ended 31 December
Six months ended
30 June
2021 2020 2020
=============================================================== =========== =========== ======================
Profit/(loss) for the period attributable to shareholders
(GBP000) 17,855 (6,754) 21,191
Weighted average number of ordinary shares 150,091,045 150,062,807 150,062,807
Basic earnings per share 11.90p (4.50)p 14.12p
Diluted earnings per share 11.81p (4.47)p 14.03p
The weighted average number of ordinary shares in respect of the
six months ended 30 June 2021 is based upon 150,065,457 shares in
issue at the beginning of the period and 150,145,602 at the end of
the period. No shares were held in treasury.
The six months ended 30 June 2020 is based upon 150,061,567
shares in issue at the beginning of the period, and 150,065,457
shares in issue at the end of the period. No shares were held in
treasury.
The weighted average number of ordinary shares in respect of the
year ended 31 December 2020 is based upon 150,061,567 shares in
issue at the beginning of the period and 150,065,457 shares in
issue at the end of the period. No shares were held in
treasury.
There were 1,092,286 share options outstanding at 30 June 2021
(30 June 2020: 1,018,475). Accordingly, there is dilution of the
average number of ordinary shares in issue. There were 1,026,664
share options outstanding as at 31 December 2020.
3. Retained earnings
Unaudited
Six months ended
30 June Year ended 31 December
2021 2020 2020
GBP000 GBP000 GBP000
================================================================ ========= ========== ======================
Retained earnings attributable to equity holders of the parent
company comprise:
Balance at 1 January 270,442 281,053 281,053
Profit/(loss) for the period 17,855 (6,754) 21,191
Share based payment 282 242 492
Dividends:
Final approved and paid for 2019 - (20,814) (20,814)
Interim approved and paid for 2020 - - (11,480)
Final approved and paid for 2020 (21,446) - -
================================================================ ========= ========== ======================
Balance at period end 267,133 253,727 270,442
================================================================ ========= ========== ======================
The interim dividend in respect of 2020, approved and paid in
2020 was paid at the rate of 7.65p per share.
The final dividend in respect of 2020, approved and paid in
2021, was paid at the rate of 14.29p per share so that the total
dividend paid to the equity shareholders of the company in respect
of the year ended 31 December 2020 was made at the rate of 21.94p
per share.
An interim dividend of 7.88p per share in respect of the year
ending 31 December 2021 payable on 22 October 2021 to equity
shareholders of the company registered at the close of business on
10 September 2021, the dividend record date, was approved by the
Directors after the balance sheet date. The resulting dividend of
GBP11.8m has not been provided for in these financial statements
and there are no income tax consequences.
The following table summarises dividends per share in respect of
the six-month period ended 30 June 2021 and the year ended 31
December 2020:
Six months ended Year ended 31
30 June 2021 December 2020
Pence Pence
======================== ================ =============
Interim - approved/paid 7.88 7.65
Final - proposed/paid -- 14.29
======================== ================ =============
Total 7.88 21.94
======================== ================ =============
4. Operating segments
The group considers that it has no product or distribution-based
business segments. It reports segmental information on the same
basis as reported internally to the Chief Operating Decision Maker,
which is the Board of Directors of Chesnara plc.
The segments of the group as at 30 June 2021 comprise:
CA: This segment represents the group's UK life insurance and
pensions run-off portfolio and comprises the original business of
Countrywide Assured plc, the group's principal UK operating
subsidiary, and of City of Westminster Assurance Company Limited
which was acquired in 2005 and the long-term business of which was
transferred to Countrywide Assured plc during 2006. This segment
also contains Save & Prosper Insurance Limited which was
acquired on 20 December 2010 and its then subsidiary Save &
Prosper Pensions Limited. The S&P business was transferred to
CA during 2011. This segment also contains the business of
Protection Life, which was purchased on 28 November 2013 and the
business of which was transferred to CA effective from 1 January
2015. CA is responsible for conducting unit-linked and non-linked
business, including a with-profits portfolio, which carries
significant additional market risk, as described in note 6
'Management of financial risk' of the 2020 Annual Report and
Accounts.
Movestic: This segment comprises the group's Swedish life and
pensions business, Movestic Livförsäkring AB (Movestic) and its
subsidiary and associated companies, which are open to new business
and which are responsible for conducting both unit-linked and
pensions and savings business and providing some life and health
product offerings.
Waard Group: This segment represents the group's first Dutch
life and general insurance business, which was acquired on 19 May
2015 and comprises the two insurance companies Waard Leven N.V. and
Waard Schade N.V., and a servicing company, Waard Verzekeringen
B.V.. The Waard Group's policy base is predominantly made up of
term life policies, although also includes unit-linked policies and
some non-life policies, covering risks such as occupational
disability and unemployment. This segment is closed to new
business.
Scildon: This segment represents the group's latest Dutch life
insurance business, which was acquired on 5 April 2017. Scildon's
policy base is predominantly made up of individual protection and
savings contracts. It is open to new business and sells protection,
individual savings and group pension contracts via a broker-led
distribution model.
Other group activities: The functions performed by the ultimate
holding company within the group, Chesnara plc, are defined under
the operating segment analysis as Other group activities. Also
included therein are consolidation and elimination adjustments.
The accounting policies of the segments are the same as those
for the group as a whole. Any transactions between the business
segments are on normal commercial terms in normal market
conditions. The group evaluates performance of operating segments
on the basis of the profit before tax attributable to shareholders
and on the total assets and liabilities of the reporting segments
and the group. There were no changes to the measurement basis for
segment profit during the six months ended 30 June 2021.
(i) Segmental income statement for the six months ended 30 June 2021
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Insurance premium revenue 18,674 7,200 13,822 112,595 - 152,291
Insurance premium ceded to
reinsurers (7,846) (2,880) (975) (8,909) - (20,610)
Net insurance premium revenue 10,828 4,320 12,847 103,686 - 131,681
Fee and commission income 11,081 8,856 39 25,756 - 45,732
Net investment return 106,481 419,302 5,208 90,278 3 621,272
Other operating income 6,740 16,751 - - - 23,491
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Segmental revenue, net of
investment return 135,130 449,229 18,094 219,720 3 822,176
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Net insurance contract claims
and benefits incurred (63,348) (656) (14,637) (200,980) - (279,621)
Net change in investment
contract liabilities (48,673) (418,964) - - - (467,637)
Fees, commission and other
acquisition costs (171) (11,729) (210) (933) - (13,043)
Administrative expenses:
Amortisation charge on
software assets - (1,453) - (204) - (1,657)
Depreciation charge on
property and equipment -- (125) (51) (459) - (635)
Other (7,923) (5,311) (1,895) (11,160) (4,735) (31,024)
Operating expenses (1) (3,698) - - 1 (3,698)
Financing costs -- (609) (1) - (380) (990)
Profit/(loss) before tax and
consolidation adjustments 15,014 6,684 1,300 5,984 (5,111) 23,871
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Other operating expenses:
Charge for amortisation of
acquired value of in-force
business (721) (1,247) (423) (1,716) - (4,107)
Charge for amortisation of
acquired value of customer
relationships (28) - - - (28)
Fees, commission and other
acquisition costs 901 - 294 - 1,195
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Segmental income less expenses 14,293 6,310 877 4,562 (5,111) 20,931
Post completion loss on
portfolio acquisition - - (94) - - (94)
Profit/(loss) before tax 14,293 6,310 783 4,562 (5,111) 20,837
Income tax (expense)/credit (2,603) (8) (228) (1,125) 982 (2,982)
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Profit/(loss) after tax 11,690 6,302 555 3,437 (4,129) 17,855
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
(ii) Segmental balance sheet as at 30 June 2021
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
====================== =========== =========== ============= =========== ====================== ===========
Total assets 2,523,294 4,114,246 420,281 2,098,354 64,958 9,221,133
Total liabilities (2,410,052) (4,004,127) (376,299) (1,929,613) (33,148) (8,753,239)
====================== =========== =========== ============= =========== ====================== ===========
Net assets 113,242 110,119 43,982 168,741 31,810 467,894
====================== =========== =========== ============= =========== ====================== ===========
Investment in
associates - - - - - -
====================== =========== =========== ============= =========== ====================== ===========
Additions to
non-current assets - 31 - 2,272 - 2,303
====================== =========== =========== ============= =========== ====================== ===========
(iii) Segmental income statement for the six months ended 30
June 2020
Other Group
CA Movestic Waard Group Scildon Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------- -------- ---------- ------------- -------- ------------------ ---------
Insurance premium
revenue 21,496 8,288 1,300 108,340 - 139,424
Insurance premium
ceded to
reinsurers (8,580) (2,879) (47) (8,768) - (20,274)
------------------- -------- ---------- ------------- -------- ------------------ ---------
Net insurance
premium revenue 12,916 5,409 1,253 99,572 - 119,150
Fee and commission
income 12,002 8,969 48 24,354 - 45,373
Net investment
return (89,552) (236,976) (1,875) (41,737) 185 (369,955)
Other operating
income 5,253 14,403 - - - 19,656
------------------- -------- ---------- ------------- -------- ------------------ ---------
Segmental revenue,
net of investment
return (59,381) (208,195) (574) 82,189 185 (185,776)
------------------- -------- ---------- ------------- -------- ------------------ ---------
Net insurance
contract claims
and benefits
incurred 31,798 (1,748) 2,269 (60,903) - (28,584)
Net change in
investment
contract
liabilities 38,158 235,082 - - - 273,240
Fees, commission
and other
acquisition costs (489) (10,596) (333) (1,435) - (12,853)
Administrative
expenses:
Amortisation
charge on
software assets - (1,391) - (205) - (1,596)
Depreciation
charge on
property and
equipment - (119) (52) (462) - (633)
Other (9,312) (4,968) (1,493) (11,977) (5,321) (33,071)
Operating expenses (417) (3,311) - - 2 (3,726)
Financing costs - (593) - - (687) (1,280)
Share of profit
from associates - (128) - - - (128)
------------------- -------- ---------- ------------- -------- ------------------ ---------
Profit/(loss)
before tax and
consolidation
adjustments 357 4,033 (183) 7,207 (5,821) 5,593
------------------- -------- ---------- ------------- -------- ------------------ ---------
Consolidation
adjustments:
Charge for
impairment of
acquired value
of in-force
business - - - (11,608) - (11,608)
Charge for
amortisation of
acquired value
of in-force
business (1,252) (1,277) (330) (1,807) - (4,666)
Charge for
amortisation of
acquired value
of customer
relationships - (30) - - - (30)
Fees, commission
and other
acquisition
costs - 1,061 - 577 - 1,638
------------------- -------- ---------- ------------- -------- ------------------ ---------
Profit/(loss)
before tax (895) 3,787 (513) (5,631) (5,821) (9,073)
Income tax
(expense)/credit 140 9 137 962 1,071 2,319
------------------- -------- ---------- ------------- -------- ------------------ ---------
Profit/(loss) after
tax (755) 3,796 (376) (4,669) (4,750) (6,754)
------------------- -------- ---------- ------------- -------- ------------------ ---------
(iv) Segmental balance sheet as at 30 June 2020
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
====================== =========== =========== ============= =========== ====================== ===========
Total assets 2,470,446 3,459,963 144,264 2,048,392 81,619 8,204,684
Total liabilities (2,362,513) (3,361,960) (96,519) (1,864,927) (48,666) (7,734,585)
====================== =========== =========== ============= =========== ====================== ===========
Net assets 107,933 98,003 47,745 183,465 32,953 470,099
====================== =========== =========== ============= =========== ====================== ===========
Investment in
associates - - - - - -
====================== =========== =========== ============= =========== ====================== ===========
Additions to
non-current assets - 9,208 - 2,072 - 11,280
====================== =========== =========== ============= =========== ====================== ===========
(v) Segmental income statement for the year ended 31 December
2020
CA Movestic Waard Group Scildon Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Insurance premium revenue 40,653 16,296 12,768 223,648 - 293,365
Insurance premium ceded to
reinsurers (16,650) (6,674) (577) (19,006) - (42,907)
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Net insurance premium revenue 24,003 9,622 12,191 204,642 - 250,458
Fee and commission income 23,336 20,229 88 49,045 - 92,698
Net investment return 85,717 89,539 5,735 73,367 210 254,568
Other operating
income/(expense) 11,703 28,037 441 - - 40,181
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Segmental revenue, net of
investment return 144,759 147,427 18,455 327,054 210 637,905
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Net insurance contract claims
and benefits incurred (72,311) (952) (10,362) (281,359) - (364,984)
Net change in investment
contract liabilities (18,515) (91,023) - - - (109,538)
Fees, commission and other
acquisition costs (350) (22,918) (684) (2,974) - (26,926)
Administrative expenses:
Amortisation charge on
software assets - (1,438) - (209) - (1,647)
Depreciation charge on
property and equipment - (124) (53) (470) - (647)
Other (17,388) (12,258) (3,131) (27,390) (8,491) (68,658)
Operating (expenses)/income (500) (4,565) - - 3 (5,062)
Financing costs (1) (1,209) (2) - (1,087) (2,299)
Profit/(loss) before tax and
consolidation adjustments 35,694 12,940 4,223 14,652 (9,365) 58,144
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Consolidation adjustments:
Charge for impairment of
acquired value of in-force
business (1,000) - - (26,623) - (27,623)
Charge for amortisation of
acquired value of in-force
business (2,423) (2,640) (720) (3,779) - (9,562)
Charge for amortisation of
acquired value of customer
relationships - (63) - - - (63)
Fees, commission and other
acquisition costs - 2,126 - 1,175 - 3,301
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Segmental income less expenses 32,271 12,363 3,503 (14,575) (9,365) 24,197
Post completion gain on
portfolio acquisition - - 388 - - 388
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Profit/(loss) before tax 32,271 12,363 3,891 (14,575) (9,365) 24,585
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Income tax (expense)/credit (6,081) (235) (883) 2,301 1,504 (3,394)
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
Profit/(loss) after tax 26,190 12,128 3,008 (12,274) (7,861) 21,191
------------------------------ -------- ---------- ------------- --------- ---------------------- ---------
(vi) Segmental balance sheet as at 31 December 2020
Other Group
CA Movestic Waard Group Scildon Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
================= =========== =========== ============= =========== ================= ===========
Total assets 2,564,764 3,874,967 437,099 2,124,020 64,646 9,065,496
Total liabilities (2,429,712) (3,764,907) (391,590) (1,950,768) (41,452) (8,578,429)
================= =========== =========== ============= =========== ================= ===========
Net assets 135,052 110,060 45,509 173,252 23,194 487,067
================= =========== =========== ============= =========== ================= ===========
Investment in - - - - - -
associates
================= =========== =========== ============= =========== ================= ===========
Additions to
non-current
assets - 13,028 2,396 3,929 - 19,353
================= =========== =========== ============= =========== ================= ===========
5. Borrowings
Unaudited
30 June 31 December
2021 2020 2020
GBP000 GBP000 GBP000
================================================ =========== ====== ===========
Bank loan 30,437 46,953 39,010
Amount due in relation to financial reinsurance 21,137 32,560 27,945
================================================ =========== ====== ===========
Total 51,574 79,513 66,955
================================================ =========== ====== ===========
The bank loan subsisting at 30 June 2021 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 provided access to higher
levels of debt financing from a wider panel of lenders, which in
turn enabled 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 enabled Chesnara to access an
increased level of funds efficiently, which in turn supports our
acquisition strategy.
- In early July 2021, the existing debt arrangements were
replaced with a Revolving Credit Facility (RCF). The RCF is
operated on a syndicated basis and provides an unsecured
multi-currency debt facility up to the value of GBP100m sterling
equivalent. The facility is initially for a term of 3 years,
extendable by up to two 12 month periods upon request. The RCF also
has an accordion option which can extend the loan capacity by up to
a further GBP50m upon request. This new facility 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, in a
timely and efficient manner.
The fair value of the sterling bank loan at 30 June 2021 was
GBP12.0m (31 December 2020: GBP15.0m).
The fair value of the euro denominated bank loan at 30 June 2021
was GBP18.5m (31 December 2020: GBP24.1m).
The fair value of amounts due in relation to financial
reinsurance was GBP22.0m (31 December 2020: GBP27.5m).
Bank loans are presented net of unamortised arrangement fees.
Arrangement fees are recognised in profit or loss using the
effective interest rate method .
6. Financial instruments fair value disclosures
The table below shows the determination of the fair value of
financial assets and financial liabilities according to a
three-level valuation hierarchy. Fair values are generally
determined at prices quoted in active markets (Level 1). However,
where such information is not available, the group applies
valuation techniques to measure such instruments. These valuation
techniques make use of market-observable data for all significant
inputs where possible (Level 2), but in some cases it may be
necessary to estimate other than market-observable data within a
valuation model for significant inputs (Level 3).
During the period, the level 2 assets which were included in the
category "Holdings in collective investment schemes" as at 31
December 2020, were sold. There are no non-recurring fair value
measurements.
The group held the following financial instruments at fair value
at 30 June 2021.
Fair value measurement at 30 June 2021
Level 1 Level 2 Level 3 Total
Financial assets GBP000 GBP000 GBP000 GBP000
================================================================ ========= ========= ======= =========
Equities
Listed 5,562 - - 5,562
Holdings in collective investment schemes 6,694,848 - 176,681 6,871,529
Debt securities - fixed rate
Government Bonds 553,678 - - 553,678
Corporate Bonds 444,966 94 - 445,060
Debt securities - floating rate
Listed 3,808 - - 3,808
========= ========= ======= =========
Total debt securities 1,002,452 94 - 1,002,546
========= ========= ======= =========
Policyholders' funds held by the group 502,051 - - 502,051
Derivative financial instruments - 137 - 137
================================================================ ========= ========= ======= =========
Total 8,204,913 231 176,681 8,381,825
================================================================ ========= ========= ======= =========
Current 1,200,454
Non-current 7,181,371
================================================================ ========= ========= ======= =========
Total 8,381,825
================================================================ ========= ========= ======= =========
Financial liabilities
================================================================ ========= ========= ======= =========
Investment contracts at fair value through income - 4,135,734 - 4,135,734
Liabilities related to policyholders' funds held by the group 502,051 - - 502,051
Derivative financial instruments - 126 - 126
================================================================ ========= ========= ======= =========
Total 502,051 4,135,860 - 4,637,911
================================================================ ========= ========= ======= =========
Fair value measurement at 31 December 2020
Level 1 Level 2 Level 3 Total
Financial assets GBP000 GBP000 GBP000 GBP000
================================================================ ========= ========= ======= =========
Equities
Listed 10,180 - - 10,180
Holdings in collective investment schemes 6,521,054 7,825 185,424 6,714,303
Debt securities - fixed rate
Government Bonds 627,464 - - 627,464
Corporate Bonds 466,822 393 - 467,215
Debt securities - floating rate
Listed 3,880 - - 3,880
========= ========= ======= =========
Total debt securities 1,098,166 393 - 1,098,559
========= ========= ======= =========
Policyholders' funds held by the group 332,117 - - 332,117
Derivative financial instruments - 830 - 830
================================================================ ========= ========= ======= =========
Total 7,961,517 9,048 185,424 8,155,989
================================================================ ========= ========= ======= =========
Current 2,320,635
Non-current 5,835,354
================================================================ ========= ========= ======= =========
Total 8,155,989
================================================================ ========= ========= ======= =========
Financial liabilities
================================================================ ========= ========= ======= =========
Investment contracts at fair value through income - 4,035,040 - 4,035,040
Liabilities related to policyholders' funds held by the group 332,117 - - 332,117
Derivative financial instruments - 3 - 3
================================================================ ========= ========= ======= =========
Total 332,117 4,035,043 - 4,367,160
================================================================ ========= ========= ======= =========
Holdings in collective investment schemes
The fair value of holdings in collective investment schemes
classified as Level 3 also relate to our Scildon operation, and
represent investments held in a mortgage fund. These are classified
as level 3 as the fair value is derived from valuation techniques
that include inputs that are not based on observable market
data.
Debt securities
The debt securities classified as Level 2 are traded in active
markets with less depth or wider-bid ask spreads. This does not
meet the classification as Level 1 inputs. The fair values of debt
securities not traded in active markets are determined using broker
quotes or valuation techniques with observable market inputs.
Financial instruments valued using broker quotes are classified at
Level 2, only where there is a sufficient range of available
quotes.
These assets were valued using counterparty or broker quotes and
were periodically validated against third-party models.
Derivative financial instruments
Within derivative financial instruments is a financial
reinsurance embedded derivative related to our Movestic operation.
The group has entered into a reinsurance contract with a third
party that has a section that is deemed to transfer significant
insurance risk and a section that is deemed not to transfer
significant insurance risk. The element of the contract that does
not transfer significant insurance risk has two components and has
been accounted for as a financial liability at amortised cost and
an embedded derivative asset at fair value.
The embedded derivative represents an option to repay the
amounts due under the contract early at a discount to the amortised
cost, with its fair value being determined by reference to market
interest rate at the balance sheet date. It is, accordingly,
determined at Level 2 in the three-level fair value determination
hierarchy set out above.
The derivative balance classified as a Level 2 liability,
predominantly relates to interest rate swaps held within our
Scildon operation, to hedge some of the risk of changes in the
value of its obligations under insurance contract liabilities. The
valuation of these derivatives is modelled using market observable
variables and are hence classified as Level 2.
Investment contract liabilities
The Investment contract liabilities in Level 2 of the valuation
hierarchy represent the fair value of non-linked and guaranteed
income and growth bonds liabilities valued using established
actuarial techniques utilising market observable data for all
significant inputs, such as investment yields.
Significant unobservable inputs in level 3 instrument
valuations
The level 3 instruments held in the group are in relation to
investments held in a fund that contains mortgage backed assets in
the Netherlands. The fair value of the mortgage fund is determined
by the fund manager on a monthly basis. The fair value of mortgage
receivables in the Fund is model-based, with a number of variables
in the valuation model, such as the discount rate and the assumed
constant prepayment rate.
Sensitivity of level 3 instruments measured at fair value on the
statement of financial position to changes in key assumptions
There is a risk that the value of the fund decreases or
increases over time. This can be as a consequence of a periodic
reassessment of the constant prepayment rate and the discount rate
used in the valuation model.
Reconciliation of Level 3 fair value measurements of financial
instruments
30 June 30 June 31 December
2021 2020 2020
GBP'000 GBP'000 GBP'000
At start of period 185,424 - -
Transfers into level 3 - 32,463 32,463
Total gains and losses recognised in the income statement (279) (1,189) 3,249
Purchases - 132,229 143,589
Settlements - - -
Exchange rate adjustment (8,464) 7,501 6,123
---------------------------------------------------------- ------------- ------------- -----------------
At the end of period 176,681 171,004 185,424
---------------------------------------------------------- ------------- ------------- -----------------
Except as detailed in the following table, the directors
consider that the carrying value amounts of financial assets and
financial liabilities recorded at amortised cost in the financial
statements are approximately equal to their fair values:
Carrying amount Fair value
30 June 30 June 31 December 30 June 30 June 31 December
2021 2020 2020 2021 2020 2020
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
======================= ======= ======= =========== ======== ======= ===========
Financial liabilities:
Borrowings 51,574 79,513 66,955 52,461 81,340 68,371
Borrowings consist of bank loans and an amount due in relation
to financial reinsurance.
The fair value of the bank loans are taken as the principal
outstanding at the balance sheet date.
The amount due in relation to financial reinsurance is fair
valued with reference to market interest rates at the balance sheet
date.
There were no transfers between levels 1, 2 and 3 during the
period.
The group holds no Level 3 liabilities as at the balance sheet
date.
7. Portfolio acquisition
On 31 December 2020, Waard entered into an agreement to acquire
a portfolio of term life insurance policies (TLI), Unit Linked
policies (UL) and funeral insurance policies (FUN) from Dutch
insurance provider Brand New Day Levensverzekeringen N.V. (BND).
The TLI and FUN portfolio was accompanied by cash assets of EUR
10,059,503 and the unit linked assets of EUR 3,488,343.42. The
portfolio was successfully migrated on 10 April 2021.
The transaction has given rise to a post completion loss on
acquisition of GBP0.1m calculated as follows:
Fair value
GBP'000
---------------------------------------------- ----------
Assets
Unit Linked Assets 2,994
Cash 8,634
Total assets 11,628
----------------------------------------------- ----------
Liabilities
Insurance contract provisions 11,722
Total liabilities 11,722
----------------------------------------------- ----------
Net assets (94)
----------------------------------------------- ----------
Net liabilities acquired 11,722
Total consideration received 11,628
Post completion loss on portfolio acquisition (94)
----------------------------------------------- ----------
Loss on acquisition: A loss of GBP0.1m has been recognised on
acquisition. This loss on acquisition has been recorded as a "post
completion loss on portfolio acquisition" on the face of the
statement of comprehensive income.
Acquisition-related costs: Waard concluded the deal and obtained
control as of 14 April 2021. The portfolio was acquired for
purchase price EUR 1 as of effective cut-off date 1 July 2020. For
the period between cut-off date until completion date 14 April 2021
a roll-forward period was agreed. No advisory expenses directly
related to the deal were accounted for by Waard. These expenses
were borne by affiliated companies Chesnara PLC and Chesnara
Holdings B.V. As a result, no addition to the consideration was
paid.
The assets and liabilities acquired are included within changes
in insurance provisions and financial assets within operating cash
flows on the face of the cash flow statement.
8. Approval of consolidated report for the six months ended 30 June 2021
This condensed consolidated report was approved by the Board of
Directors on 25 August 2021. A copy of the report will be available
to the public at the Company's registered office, 2nd Floor,
Building 4, West Strand Business Park, West Strand Road, Preston,
PR1 8UY and at www.chesnara.co.uk
FINANCIAL CALAR
26 August 2021
Results for the six months ended 30 June 2021 announced
09 September 2021
Interim Ex-dividend date
10 September 2021
Interim dividend record date
24 September 2021
Last date for dividend reinvestment plan elections
22 October 2021
Interim dividend payment date
31 December 2021
End of financial year
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
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
Investec Bank plc
30 Gresham Street
London
EC2V 7QP
Bankers
National Westminster Bank plc
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
ALTERNATIVE PERFORMANCE MEASURES
Throughout our Half Year Report we use Alternative Performance
Measures (APMs) to supplement the assessment and reporting of the
performance of the group. These measures are those that are not
defined by statutory reporting frameworks, such as IFRS or Solvency
II.
The APMs aim to assess performance from the perspective of all
stakeholders, providing additional insight into the financial
position and performance of the group and should be considered in
conjunction with the statutory reporting measures such as IFRS and
Solvency II.
The following table identifies the key APMs used in this report,
how each is defined and why we use them.
APM What is it? Why do we use it?
=================== ============================================================ ===================================
Economic EcV is a financial metric that EcV aims to reflect the
Value (EcV) is derived from Solvency II Own market-related
Funds It provides a market consistent value of in-force business
assessment of the value of existing and net assets of the
insurance businesses, plus adjusted non-insurance
net asset value of the non-insurance business and hence is an
business within the group. important reference point
We define EcV as being the Own by which to assess Chesnara's
Funds adjusted for contract boundaries, value. A life and pensions
risk margin and restricted with-profit group may typically be
surpluses. As such, EcV and Own characterised
Funds have many common characteristics as trading at a discount
and tend to be impacted by the or premium to its Economic
same factors. 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.
=================== ============================================================ ===================================
Economic The principal underlying components By recognising the market-related
Value (EcV) of the Economic Value earnings value of in-force business
earnings are: (in-force value), a different
* The expected return from existing business (being the perspective is provided in
effect of the unwind of the rates used to discount the performance of the group
the value in-force); and on the valuation of the
business. Economic Value
earnings are an important
* Value added by the writing of new business; KPI as they provide a longer-term
measure of the value generated
during a period. The Economic
* Variations in actual experience from that assumed in Value earnings of the group
the opening valuation; can be a strong indicator
of how we have delivered
against all three of our
* The impact of restating assumptions underlying the core strategic objectives.
determination of expected cash flows; and
* The impact of acquisitions.
=================== ============================================================ ===================================
EcV operating This is the element of EcV earnings EcV operating earnings are
earnings (see above) that are generated important as they provide
from the company's ongoing core an indication of the underlying
business operations, excluding value generated by the business.
any profit earned from investment It can help identify profitable
market conditions in the period activities and also inefficient
and any economic assumption changes processes and potential management
in the future. actions.
=================== ============================================================ ===================================
EcV economic This is the element of EcV earnings EcV economic earnings are
earnings (see above) that are derived from important in order to measure
investment market conditions in the additional value generated
the period and any economic assumption from investment market factors.
changes in the future.
=================== ============================================================ ===================================
Commercial A more commercially relevant measure This provides a fair commercial
new business of new business profit than that reflection of the value added
profit recognised directly under the Solvency by new business operations
II regime, allowing for a modest and is more comparable with
level of return, over and above how new business is reported
risk-free, and exclusion of the by our peers, improving market
incremental risk margin Solvency consistency.
II assigns to new business.
=================== ============================================================ ===================================
Group cash Cash generation is used by the group Cash generation is a key
generation as a measure of assessing how much measure, because it is the
dividend potential has been generated, net cash flows to Chesnara
subject to ensuring other constraints from its life and pensions
are managed. businesses which support
Group cash generation is calculated Chesnara's dividend-paying
as the movement in the group's surplus capacity and acquisition
own funds above the group's internally strategy. Cash generation
required capital, as determined can be a strong indicator
by applying the group's capital of how we are performing
management policy, which has Solvency against our stated objective
II rules at its heart. of 'maximising value from
existing business'.
=================== ============================================================== =================================
Divisional Cash generation is used by the group It is an important indicator
cash generation as a measure of assessing how much of the underlying operating
dividend potential has been generated, performance of the business
subject to ensuring other constraints before the impact of group
are managed. level operations and
Divisional cash generation represents consolidation
the movement in surplus own funds adjustments.
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.
=================== ============================================================== =================================
Commercial Cash generation is used by the group Commercial cash generation
cash generation as a measure of assessing how much aims to provide stakeholders
dividend potential has been generated, with enhanced insight into
subject to ensuring other constraints cash generation, drawing
are managed. out components of the result
Commercial cash generation excludes relating to technical
the impact of technical adjustments, complexities
modelling changes and exceptional or exceptional items. The
corporate activity; representing result is deemed to better
the underlying commercial cash generated reflect the underlying
by the business. commercial
performance, show key drivers
within that.
=================== ============================================================== =================================
Funds under FuM reflects the value of the financial FuM are important as it
management assets that the business manages, provides an indication of
(FuM) as reported in the IFRS Consolidated the scale of the business,
Balance Sheet. and the potential future
returns that can be generated
from the assets that are
being managed.
=================== ============================================================== =================================
Operating A measure of the pre-tax profit Operating earnings are important
profit, excluding earned from a company's ongoing as they provide an indication
AVIF impairment core business operations, excluding of the underlying profitability
any profit earned from investment of the business. It can
market conditions in the period help identify profitable
and any economic assumption changes activities and also inefficient
in the future. This also excludes processes and potential
any intangible asset adjustments management actions.
that are not practicable to ascribe
to either operating or economic
conditions.
=================== ============================================================== =================================
Economic A measure of pre-tax profit earned Economic earnings are important
profit, excluding from investment market conditions in order to measure the
AVIF impairment in the period and any economic assumption surplus generated from
changes in the future. This also investment
excludes any intangible asset adjustments market factors.
that are not practicable to ascribe
to either operating or economic
conditions.
=================== ============================================================== =================================
Acquisition Acquisition value gains reflect The EcV gain from acquisition
value gain the incremental Economic Value added will be net of any associated
(incremental by a transaction, exclusive of any increase in risk margin.
value) additional risk margin associated The risk margin is a temporary
with absorbing the additional business. Solvency II dynamic which
will run off over time.
=================== ============================================================== =================================
Leverage A financial measure that demonstrates It is an important measure
/ gearing the degree to which the company as it indicates the overall
is funded by debt financing versus level of indebtedness of
equity capital, usually presented Chesnara and it is also
as a ratio. It is defined as bank a key component of the bank
debt divided by bank debt plus equity, covenant arrangements held
as measured under IFRS. by Chesnara.
=================== ============================================================== =================================
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.
BLAGAB Basic life assurance and general annuity business
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.
Commercial Cash Generation Cash generation excluding the impact of technical adjustments, modelling changes and
exceptional
corporate activity; the underlying commercial cash generated by the business.
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., 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 measure - 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.
Leverage (gearing) A financial measure that demonstrates the degree to which the company is funded by debt
financing
versus equity capital, usually presented as a ratio.
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, a previously associated company 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.
ORSA Own Risk and Solvency Assessment.
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.
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 NV.
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.
Standard Formula The set of prescribed rules used to calculate the regulatory SCR where an internal model
is
not being used.
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.
TSR Total Shareholder Return, measured with reference to both dividends and capital growth.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK Business CA and S&P.
VA The volatility adjustment is a measure to ensure the appropriate treatment of insurance
products
with long-term guarantees under Solvency II. It represents an adjustment to the rate
used
to discount liabilities to mitigate the effect of short-term volatility bond returns.
Waard The Waard Group
NOTE ON TERMINOLOGY
As explained in the IFRS financial statements, the principal reporting segments of the group
are:
======================================================================================================================
CA which comprises the original business of Countrywide Assured plc, the group's original UK
operating subsidiary; City of Westminster Assurance Company Limited, which was acquired by
the group in 2005, the long-term business of which was transferred to Countrywide Assured
plc during 2006; S&P which was acquired on 20 December 2010. This business was transferred
from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide
Assured
plc on 31 December; and Protection Life Company Limited which was acquired by the group in
2013, the long-term business of which was transferred into Countrywide Assured plc in 2014;
====================== ==============================================================================================
Movestic which was purchased on 23 July 2009 and comprises the group's Swedish business, Movestic
Livförsäkring
AB and its subsidiary and associated companies;
====================== ==============================================================================================
The Waard Group which was acquired on 19 May 2015 and comprises two insurance companies; Waard Leven N.V.
and Waard Schade N.V.; and a service company, Waard 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.
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