Source - LSE Regulatory
RNS Number : 3461P
Chesnara PLC
31 August 2017
 

Chesnara plc

 

Chesnara delivers: the group moves forward on all fronts following completion of its latest acquisition.

 

"The first six months of 2017 have seen the business deliver against each of our core strategic objectives, with the successful completion of the acquisition of Legal and General Nederland, good operational delivery and economic tailwinds.  The financial results support the continuation of our dividend strategy and show continued Economic Value growth.  This has been achieved whilst remaining true to our well established culture and values of treating customers fairly, adopting a robust approach to regulatory compliance and ensuring we do not compromise on our risk appetite." 

 

Financial Highlights

 

·        Economic Value (EcV) of £700.4m Note 1 (31 December 2016: £602.6m). 

We completed the acquisition of Legal and General Nederland (which we have since rebranded "Scildon") which created £65.4m of incremental EcV. The closing value, which is after payment of the £19.0m 2016 full year dividend, includes a foreign exchange gain of £11.0m

 

·        Economic Value earnings net of tax of £105.8m (six months ended 30 June 2016: £(3.5)m).  

The earnings include the aforementioned £65.4m gain from completing the acquisition of Legal and General Nederland. Beneficial economic conditions account for the majority of the remaining profit with continued new business profits in Movestic contributing to modest operating gains.

 

·        Movestic EcV new business contribution of £6.5m (six months ended 30 June 2016: £4.0m). 

The continued successful focus on higher margin pension transfer business has resulted in a further increase in new business profits. Scildon also writes new business and whilst post acquisition profits were not material for the period and will remain so in the near future, their new business results will be incorporated in this metric going forward.

 

·        Group cash generation of £46.2m Note 2 (six months ended 30 June 2016: £13.6m). 

The total group cash generation includes a £6.4m negative short term impact on cash from the Legal and General Nederland acquisition. This is in line with expectations and as cash emerges from Scildon over coming years, the cumulative impact on group cash is expected to become positive in the medium term.

 

·        Divisional cash generation of £54.8m Note 2 (six months ended 30 June 2016: £9.8m). 

All divisions have made positive contributions, with the results benefitting from economic conditions and a number of non-recurring management actions.

 

·        IFRS profit before tax of £51.6m (six months ended 30 June 2016: £0.2m). 

This includes a £20.7m gain on the acquisition of Legal and General Nederland. Economic profits of £14.3m compare to a corresponding loss of £9.3m in the first half of 2016. The underlying core operating profit of £16.6m is higher than in the prior period (2016: £9.5m). 

 

·        Group solvency ratio of 143% (31 December 2016: 144% Note 3).  

We are well capitalised at both group and subsidiary level and have not used any elements of the long term guarantee package, including transitional arrangements.

 

·        2.9% increase in interim dividend compared with 2016. 

The results in the period support the continued growth of the dividend to 7.00p per share (2016 interim: 6.80p).

 

Strategic delivery highlights

 

·        Completion of the acquisition of Legal and General Nederland.

The acquisition of Legal and General Nederland completed in line with plan. The "day one" financial benefits are slightly ahead of expectation. Furthermore, our early assessment of the business confirms our expectation that Scildon, following a planned improvement programme, will provide future cash generation and value growth.

 

John Deane, Chief Executive said:

"Strong results during the first half of 2017, which include the gain on acquisition of Legal and General Nederland, are underpinned by the continuation of good value emergence from the UK business, as many operational and economic value drivers have aligned to give a better than expected positive cumulative impact.

 

I am also pleased to report that our overseas operations are making significant contributions to cash and value generation. Movestic continues to grow and this has resulted in further cash generation and dividend potential.

 

The completion of the acquisition of Legal and General Nederland, now successfully rebranded as "Scildon", has delivered "Day 1" benefits slightly ahead of expectations. Furthermore, our early assessment of the business confirms our expectation that Scildon, following a planned improvement programme, will provide future cash generation and value growth.

 

We have made great progress integrating Scildon into the Chesnara group and will continue with our focus of maximising the value from all our existing in-force books of business and our acquisition and new business objectives."

 

Note 1    Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced with-profit funds.  We consider the Solvency II rules understate the commercial value of these items. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin is significantly higher than under Embedded Value.

 

Note 2    Cash generation represents the movement in the surplus assets that exists within the group over and above the level of capital that is required to be held.  The level of capital required to be held takes account the buffers that management has set to hold over and above the solvency requirements imposed by our regulators. 

 

Note 3    The 2016 closing solvency ratio of 158% was enhanced by equity raised ahead of the purchase of Legal and General Nederland. The adjusted position at 31 December 2016, excluding this impact, was 144%. This lower ratio was a more meaningful figure and also represents a more logical comparison for assessing movements during 2017.

 

The Board approved this statement on 30 August 2017.

 

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

 

Roddy Watt, fwd Consulting - 0207 623 2368 / 07714 770493

 

Notes to Editors

Chesnara plc ('Chesnara'), which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ('CA plc'), Protection Life Company Limited ('PL'), Movestic Livförsäkringar AB ('Movestic') and Chesnara Holdings BV, the intermediate holding company of the 'Waard Group' and Scildon NV ('Scildon').

 

CA plc is a UK life assurance subsidiary that is closed to new business.  In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for £47.8m.  With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc.  Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited, were acquired on 20 December 2010 for £63.5m.  With effect from 31 December 2011, the business of Save & Prosper was transferred into CA plc.  On 28 November 2013 Chesnara acquired Direct Line Life Insurance Company Limited (subsequently renamed Protection Life Company Limited) from Direct Line Group plc for £39.3m.  On 31 December 2014 the PL business transferred into CA plc.  CA plc operates an outsourced business model.

 

Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009 for £20 million.  The company is open to new business and seeks to grow its position in the Swedish unit-linked market.  Its proposition was strengthened in February 2010 with the acquisition of the operations of Aspis Försäkringar Liv AB which has a risk and health product bias.

 

The Waard Group, a Netherlands-based Group comprising three closed book insurance companies and a servicing company, was acquired on 19 May 2015 for €69.9m.  The Waard Group, comprising Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V. and Tadas Verzekeringen B.V. was previously owned by DSB Beheer B.V., a Dutch financial services Group. The policy base of the Waard Group is predominantly term life policies, with some unit linked policies and some non-life policies.  Further details are available on the Company's website (www.chesnara.co.uk).

 

Scildon is a leading provider in the Dutch market of risk and investment-linked products, sold through brokers to high net worth customers. It also offers a defined contribution group pension platform focussing on Dutch SMEs.  The company was acquired in April 2017 from Legal and General, having previously been called Legal and General Nederland.

 

 

 

FORWARD-LOOKING STATEMENTS

This document may contain forward-looking statements with respect to certain of the plans and current expectations relating to the future financial condition, business performance and results of Chesnara plc.  By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Chesnara plc including, amongst other things, UK domestic, Swedish domestic, Dutch domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates, currency exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Chesnara plc and its subsidiaries operate.  As a result, Chesnara plc's actual future condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements.

 

NOTE ON TERMINOLOGY

The principal reporting segments of the Group are:

 

CA, which comprises the original business of Countrywide Assured plc, the group's original UK operating subsidiary; City of Westminster Assurance Company Limited, which was acquired by the group in 2005, the long-term business of which was transferred to Countrywide Assured plc during 2006; and Protection Life Company Limited which was acquired by the group in 2013, the long-term business of which was transferred into Countrywide Assured plc in 2014;

 

S&P, which was acquired on 20 December 2010.  This business was transferred from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide Assured plc on 31 December;

 

Movestic, which was purchased on 23 July 2009 and comprises the group's Swedish business, Movestic Livförsäkring AB and its subsidiary and associated companies;

 

The Waard Group, which was acquired on 19 May 2015 and comprises three insurance companies; Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V.; and a service company, Tadas Verzekering;

 

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.

 

 

In this preliminary announcement:

(i)     The CA & S&P segments may also be collectively referred to as the 'UK Business';

(ii)      The Movestic segment may also be referred to as the 'Swedish Business';

(iii)     The Waard Group segment may also be referred to as the 'Dutch Business';

(iv)     'CA plc' refers to the legal entity Countrywide Assured plc, which includes the long term business of CA, CWA, S&P and PL;

(v)      'CWA' refers to the long-term of City of Westminster Assurance Company Limited, subsidies to Countrywide Assured plc;

(vi)     'S&P' refers collectively to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, which subsidies to Countrywide Assurance plc;

(vii)    'PL' refers to the long term business that was, prior to Part VII transfer into CA plc on 31 December 2015, reported in Protection Life Company Limited and was reported as a separate segment for IFRS reporting purposes;

(viii)   'PL Ltd' refers to the legal entity Protection Life Company Limited;

(ix)     'Movestic' may also refer to Movestic Livförsäkring AB, as the context implies;

(x)      'Acquisition of Waard Group' refers to the purchase of the Waard Group, based in the Netherlands on 19 May 2015; and

(xi)   Scildon, 'LGN' or 'Legal and General Nederland' refers to the legal entity Scildon formerly known as Legal & General Nederland Levensverzekering Maatschappij N.V, which Chesnara acquired on 5 April 2017.

 

 

 

SECTION A:  OVERVIEW

 

HIGHLIGHTS

 

FINANCIAL

 

IFRS

IFRS PRE-TAX PROFIT Note 1 £51.6M 

Six months ended 30 June 2016 £0.2m

 

IFRS TOTAL COMPREHENSIVE INCOME Note 1 £53.8M

Six months ended 30 June 2016 £15.7m

 

Includes foreign exchange gain of £7.1m (£15.2m foreign exchange gain for six months ended 30 June 2016).

 

Note 1: includes £20.7m gain on acquisition of Legal & General Nederland.

 

 

SOLVENCY

GROUP SOLVENCY 143%

31 December 2016 158%*

 

We are well capitalised at both group and subsidiary level and have not used any elements of the long term guarantee package, including transitional arrangements.

* The 2016 closing ratio of 158% was enhanced by equity raised ahead of the purchase of Legal & General Nederland. The adjusted position at 31 December 2016, excluding this impact, was 144%. This lower ratio was a more meaningful figure and also represents a more logical comparison for assessing movements during 2017.

 

 

ECONOMIC VALUE

ECONOMIC VALUE Note 2 £700.4M

31 December 2016 £602.6M 

 

Movement in the period is stated after dividend distributions of £19.0m.

 

ECONOMIC VALUE EARNINGS Note 2 £105.8M

Six months ended 30 June 2016 £(3.5)m

 

Note 2: Includes £65.4m gain on acquisition of Legal & General Nederland.

 

MOVESTIC NEW BUSINESS PROFIT £6.5M

Six months ended 30 June 2016 £4.0m

 

 

CASH GENERATION

GROUP CASH GENERATION £46.2M

Six months ended 30 June 2016 £13.6m

 

Includes the end to end impact of the acquisition of Legal & General Nederland.

 

 

DIVISIONAL CASH GENERATION £54.8M

Six months ended 30 June 2016 £9.8m

 

 

 

OPERATIONAL AND STRATEGIC

 

DIVIDEND

INTERIM DIVIDEND INCREASE

Interim dividend increased by 2.94% to 7.00p per share

(2016: 6.80p interim and 12.69p final).

 

 

ACQUISITIONS

COMPLETION OF LEGAL & GENERAL NEDERLAND ACQUISITION

With a purchase price of €161m, this acquisition was successfully completed on 5 April 2017 and the company renamed Scildon. Good initial progress has been made on integration with the Chesnara group with benefits delivered slightly ahead of expectations.

 

 

ECONOMIC BACKDROP

POSITIVE EQUITY MARKETS, INCREASES IN DUTCH AND SWEDISH GOVERNMENT BOND YIELDS AND STRENGTHENING OF EURO AND SWEDISH KRONA AGAINST STERLING

Equity markets have continued to perform positively during the first six months of the year.  In addition, 10 year government bond yields have increased in both Sweden and the Netherlands, whilst UK 10 year gilts have closed in line with the start of the year.

The Swedish Krona and Euro have both strengthened against Sterling, resulting in positive exchange gains being reported in the period.

 

 

SOLVENCY

SOLVENCY II DELIVERED

New reporting requirements embedded with successful delivery of quarterly, annual and narrative reporting submissions to the regulators.

 

 

 

CHAIRMAN'S STATEMENT

 

"Strong results during the first half of 2017 are underpinned by the continuation of good value emergence from the UK business, as many operational and economic value drivers have aligned to give a better than expected positive cumulative impact.

I am also pleased to report that our overseas operations are making significant contributions to cash and value generation. Movestic continues to grow and this has resulted in further cash generation and dividend potential.

The completion of the acquisition of Legal & General Nederland, now successfully rebranded as "Scildon", has delivered "Day 1" benefits slightly ahead of expectations. Furthermore, our early assessment of the business confirms our expectation that Scildon, following a planned improvement programme, will provide future cash generation and value growth.

We have made great progress integrating Scildon into the Chesnara group and will continue with our focus of maximising the value from all our existing in-force books of business and our acquisition and new business objectives."

 

During the first half of 2017 we have delivered against each of our core strategic objectives with economic tailwinds, good operational delivery and the successful completion of the acquisition of Legal & General Nederland. This has resulted in financial results that support the continuation of our dividend strategy and show continued Economic Value growth. This has been achieved whilst remaining true to our well established culture and values of treating customers fairly and adopting a robust approach to regulatory compliance. Importantly, the business growth has been achieved without compromising our risk appetite.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

7.4% growth in group Economic Value Note 1.

 

Note 1 - Excluding the Economic Value gain on acquisition of Legal & General Nederland, new business profits and the impact of the dividend payment in the period.

 

ACQUIRE LIFE AND PENSIONS BUSINESSES

 

Acquisition of Legal and General Nederland (now Scildon) created a positive Economic Value impact of £65.4m.

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

New business profits from Movestic of £6.5m plus a modest post acquisition new business profit of £0.6m from Scildon

 

Maximise value from existing business

All of our divisions have made full positive cash contributions. This together with the impact of the acquisition of Legal & General Nederland, resulted in a total group cash generation of £46.2m.

A large proportion of the cash emergence is driven by positive economic conditions which of course may not continue in the future. The cash generation has also been positively impacted by several non recurring capital requirement reduction items including the reinvestment of Scildon's shareholder assets from equities to less capital intensive fixed interest investments.

 

The growth in the Economic Value of the existing business is also dominated by the impact of positive economic conditions. The group's economic operating profit is relatively modest as a result of a recurring increase in group governance overheads in support of the acquisition of Legal & General Nederland and we have made provision to adopt a slightly more attractive pricing strategy on certain white label funds in Movestic. The underlying operating profit is in line with expectations.

 

VALUE GROWTH, DRIVEN IN THE MAIN BY ECONOMIC CONDITIONS, TOGETHER WITH SEVERAL NON RECURRING CAPITAL REDUCTION ACTIONS, HAS RESULTED IN STRONG CASH GENERATION.

 

Acquire life and pensions businesses

The completion of the acquisition of Legal & General Nederland has delivered "Day 1" financial benefits slightly ahead of expectations. Since completion, management have spent time working with our new colleagues in the Netherlands. Initial assessment confirms that the business is well managed and soundly governed. We have also identified opportunities to make some relatively modest improvements over the next two years which we expect to increase the future financial returns from the business. We have completed a successful rebrand to the new company name, "Scildon" and have made significant progress in integrating the business into the Chesnara group.

 

THE ECONOMIC VALUE OF THE GROUP HAS INCREASED BY 16.2% IN THE PERIOD OF WHICH 10.9% RELATES TO THE GAIN ON COMPLETION OF THE ACQUISITION OF LEGAL AND GENERAL NEDERLAND.

 

Enhance value through new profitable new business

Movestic has continued to operate within its market share target range and has generated £6.5m of new business profit which on an annualised basis represents a 5.3% growth on Movestic's opening Economic Value.  We acquired Scildon with an expectation that it was breaking even on writing new business.  It is therefore pleasing to report that Scildon generated £1.7m of new business profit in the first half of 2017.  Through some modest but smart process changes we aim to move towards the upper end of our target 5% - 10% market share range which would create more commercially meaningful levels of new business profit.

 

FURTHER NEW BUSINESS PROFIT FROM MOVESTIC OF £6.5M.

 

 

The completion of the acquisition of Legal & General Nederland (since rebranded Scildon) continues Chesnara's evolution from a UK operation to becoming a balanced European group. This enhances the outlook in terms of diversification of the group and improved cash generation potential, value growth and acquisition opportunities. Initial assessment of the business confirms our valuation assumptions and gives comfort that we have acquired a high quality, well governed business. We have also identified improvement opportunities which will be delivered over the next two years.

 

Solvency II Implementation

After many years and lots of hard work I am pleased to report the implementation stage of the transition to the Solvency II regime is now fully complete.  During the period, we successfully produced our inaugural Solvency II narrative reports with the Solvency and Financial Condition Report being made available on our website.  We believe Solvency II creates an improved focus on capital requirements and risk.  This means we can better assess the impact of management decisions and also creates the potential for value adding management actions. 

 

As Solvency II becomes embedded into day to day operations, the industry now faces the challenge of applying new accounting rules for insurance contracts, known as IFRS 17.  It is not expected to have any direct bearing on the commercial assessment of Chesnara.  That is, it is not expected to have an impact on Economic Value or cash generation, other than the direct impact of the cost of implementing the change. The interim results incorporate an estimate of the future costs of further assessment and implementation of this accounting development.  For investors who do focus on the IFRS results, IFRS 17 should help make the income statements for Life & Pensions companies more meaningful and allow better direct comparison across the industry and to other sectors.

 

AN INCREASED UNDERSTANDING OF THE DYNAMICS OF SOLVENCY II IS EXPECTED TO CREATE AN OPPORTUNITY TO BENEFIT FROM CAPITAL OPTIMISATION IN THE FUTURE

 

Regulation

Compliance with regulation remains a priority for the group.  We have continued to maintain a positive and constructive relationship with regulatory bodies across the group.

 

Following the final guidance from the FCA's review of the "Fair treatment of long standing customers in the life insurance sector", we have been able to progress with the delivery of our Customer Strategy. The programme is now established and board approved budgets are recognised within our provisions. The work undertaken to date continues to support the level of provision made. The project does include an improvement plan which, when completed will ensure our customers continue to receive fair outcomes, a positive customer experience and communications in line with the FCA's new guidelines.

 

The investigation into how Countrywide Assured disclosed exit fees to customers, initially announced on 3 March 2016, is ongoing.  We have provided the FCA with all information requested.  Discussions are ongoing and given the narrow scope of the investigation we retain our opinion that the outcome from the investigation should not have a material impact on the company.

 

No significant regulatory issues have arisen in the Netherlands or Sweden during the period.

 

Solvency

At the end of 2016 the group solvency ratio, which includes no transitional adjustments, was 158% which translated to an absolute level of surplus of £185m. This position had the temporary benefit of holding £50m of surplus due to the equity raised in advance of funding the acquisition of Legal & General Nederland. The underlying solvency ratio of 144% equated to £135m of absolute surplus.

 

During the first half of 2017 the absolute level of surplus, over and above the SCR increased by £47m. Of this increase £4.7m was the direct consequence of the acquisition of Legal & General Nederland. This relatively modest impact is in line with expectations and is consistent with the equity raise prospectus. The acquisition impact as reported includes the benefits of having reinvested shareholder assets shortly after completion from equities to fixed income investments, with lower capital requirements. This is consistent with Chesnara's investment policy and risk appetite regarding the investment of shareholder assets. The remainder of the surplus emerging is due to surpluses arising in all of our businesses. The UK provided the majority of the increase although Movestic and Waard continued to make meaningful positive contributions. Whilst the post acquisition period for Scildon is too short to form any conclusions regarding future cash generation, it was encouraging to see a surplus of £3.3m emerge during the second quarter. On an annualised basis this is broadly inline with expectations.

 

When expressed as a ratio the closing solvency ratio as at 30 June 2017 of 143% is broadly the same as at the end of 2016 (adjusted to exclude the temporary equity raise benefit).

 

2.94% INCREASE IN INTERIM DIVIDEND

 

Investment proposition

Given Chesnara shares are primarily held by those requiring predictable and attractive income, I am pleased to report a 2.94% increase in our interim dividend.

 

Governance and risk management

We continue to place great importance on the continuous enhancement of our risk and governance system, and have a number of developments underway.  Embedding activity continues with significant focus in 2017 on continuing to increase the consistency of our approach across the group, including the newly acquired Scildon business.

 

In line with our implementation of a strong governance framework, we plan to put our external audit out to tender during the second half of 2017. The successful firm will assume responsibilities for the audit of the 2018 statements.

 

Outlook and Brexit

I remain optimistic that Chesnara can continue to deliver against its strategic objectives which in turn fund our well established dividend strategy.

 

In particular, the UK business remains a robust source of cash, with additional potential to take management actions to enhance the core cash if required. Movestic now has the scale to continue contributing to the cash position and Scildon has significant surplus capital and is also expected to be cash generative on an ongoing basis.

 

We now have sufficient scale and presence in both the UK and the Netherlands to continue our focus on acquisition activity in those territories. We also remain open minded about new territories but the benefits would need to outweigh the inherent challenge of adding another regulatory environment into our business model. Our balance sheet has further capacity for debt, we have significant levels of surplus capital and recent experience suggests we retain shareholder support for further equity for the right deal. This together with operational capacity means we remain well positioned to act should an opportunity arise that meets our stringent price and risk profile criteria.

 

Movestic has become an established profitable new business operation and I see potential for Scildon to make improvements to their new business value in the medium term. I believe this will result in a meaningful level of recurring value growth from new business being achieved without an inappropriate shift from our core specialism of acquiring and managing in-force businesses.

 

The structure of the group, having established regulated entities in several European countries together with the fact we do not trade or share resource across territories, means I remain of the view that whatever the outcome from the Brexit negotiations, we expect it to have little direct impact on our business model.

 

In light of the above I remain confident that Chesnara is well positioned to continue to provide value to policyholders and shareholders.

 

 

Peter Mason

Chairman

30 August 2017

 

 

SECTION B:  MANAGEMENT REPORT

 

BUSINESS REVIEW

INTRODUCTION

 

The business review is structured to report on how we have performed against each of our three stated strategic objectives and our culture and values.  Where relevant, the review reports separately for our UK, Swedish and Dutch operations.

 

This review focuses on:

-    How we have performed generally

-    Key developments and challenges

-    Key performance indicators

-    Risks associated with each objective

 

Our strategic objectives and culture and values are reassessed on an annual basis as part of the group business planning process.  Their continued relevance gives consideration to recent performance, emerging risks and future opportunity and they are assessed giving full regard to both internal and external influences e.g. changes to regulatory requirements.

 

The three core strategic objectives, which are underpinned by the group's culture and values, are consistent with those reported in the 2016 Annual Report & Accounts. 

 

The group's governance framework seeks to ensure that controls and procedures are in place to protect all stakeholders.  The control environment has remained effective and robust throughout the period.  Further details of the operation of the governance framework, and its future development, are included in Section C - Corporate Governance, of the 2016 Annual Report & Accounts.

 

Maximise value from existing business

Acquire Life and Pension businesses

Enhance value through profitable new business

Business Model

Maintain adequate financial resources

Fair treatment of customers

Provide a competitive return to shareholders

Robust regulatory compliance

Responsible risk based management

 

STRATEGIC OBJECTIVES, CULTURE & VALUES

OVERVIEW

CULTURE & VALUES

Our strong culture and values underpin everything we do.

- Responsible risk-based management for the benefit of all our stakeholders.

- Fair treatment of customers.

- Provide a competitive return to our shareholders.

- Robust regulatory compliance.

- Maintain adequate financial resources.

BUSINESS MODEL

Our strategic objectives and culture and values are delivered through the operation of our business model.

In the UK, Chesnara adopts an outsourced business model. Governance oversight and corporate management is provided by a highly experienced centralised governance team.  This governance team also ensures robust and consistent governance practice across the group, although operational autonomy is devolved to our divisions to ensure we benefit from our strong divisional management teams.  Core operations are not outsourced in Sweden or the Netherlands because it would not suit the open business model or inherited model in those territories. .

MAXIMISE VALUE FROM EXISTING BUSINESS

Managing our existing customers fairly and efficiently is core to delivering our overall strategic aims.

DIVISIONAL UPDATE:

UK

See 'Business Review UK'

SWEDEN

See 'Business Review Sweden'

NETHERLANDS

See 'Business Review Netherlands'

ACQUIRE LIFE AND PENSIONS BUSINESSES

Acquiring and integrating companies into our business model is key to continuing our growth journey.

An update on how we have delivered against this strategic objective has been provided in the 'Business Review: Acquire Life and Pensions Businesses' section.

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

Writing profitable new business in Sweden and the Netherlands supports the growth of our group and helps mitigate the natural run off of our closed books of business.

DIVISIONAL UPDATE:

SWEDEN

See 'Business Review Sweden'

NETHERLANDS

See 'Business Review Netherlands'

 

 

BUSINESS REVIEW | UK

 

The UK division manages 310,000 policies and is in run-off.  The division follows an outsourcer-based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced.  A central governance team is responsible for managing all outsourced operations.

 

The UK division has continued to deliver against its core business objectives, namely delivering its customer strategy implementation plan, continuing to focus on capital management initiatives, and ensuring the business is governed well.

 

The division has delivered a healthy set of financial results in the period.  Cash generation is strong, the solvency position remains robust and IFRS profits have continued to emerge ahead of plan.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

Capital and value management

Background

-    As a closed book, the division creates value through managing the following key value drivers:  costs, policy attrition, investment growth and reinsurance strategy.

-    In general surplus regulatory capital emerges as the book runs off.  Following the implementation of Solvency II, the surplus capital available is more closely linked with the level of risk that the division is exposed to.  Management's risk-based decision making process seeks to continually manage and monitor the balance of making value enhancing decisions whilst maintaining a risk profile in line with the board's risk appetite.

-    At the heart of maintaining value is ensuring that the division is governed well from a regulatory and customer perspective.

 

Initiatives and progress in 2017

-    Strong Economic Value growth of £21.9m in the period before impact of the dividend, driven by the positive impact of investment market conditions.

-    During the first half of the year £9.0m of previously trapped surplus capital was extracted from our two ring-fenced with-profit funds.

-    Cash of £30.4m has been generated by the division, including the aforementioned £9.0m from the ring-fenced funds.

-    IFRS profit before tax of £23.1m is ahead of plans.

-    Successful embedding of our Capital Optimisation Advisory Group, a sub-set of executive team members who focus on the division's solvency and value management initiatives.

 

Future priorities

-    Continue to identify, assess and subsequently deliver any appropriate actions associated with managing the solvency capital and valuation balance sheet of the division.

 

KPIs

 

Economic value

Healthy value growth, before the impact of dividends.

£m

2013

2014

2015

2016

30 Jun 2017







EEV / EcV

337.3

311.8

272.2

279.6

271.5

Cumulative dividends


48.0

113.0

143.5

173.5

Total

337.3

359.8

385.2

423.1

445.0







 

Cash generation

Cash generation of £30.4m exceeds prior year dividend Chesnara paid to shareholders.

£m

2013

2014

2015

2016

30 Jun 2017







Cash generation

54.1

50.9

42.5

21.3

30.4







 

Customer outcomes

Background

-    Treating customers fairly is our primary responsibility.  We seek to do this by having effective customer service operations together with competitive fund performance whilst giving full regard to all regulatory matters.  This supports our aim to ensure policyholders receive good returns, appropriate communication, and service in line with customer expectations.

-    During December 2016 the FCA issued a publication "FG 16/8 Fair treatment of long-standing customers in the life insurance sector".  Our customer strategy incorporates plans to ensure the guidelines within this publication are fully complied with.

 

Initiatives and progress in 2017

-    The division has successfully embedded its customer committee during the period.  One of its key immediate responsibilities is to deliver the oversight of the division's customer strategy implementation plan.  This is a three year programme which incorporates changes required to ensure compliance with the newly issued guidelines by the FCA.

-    The FCA's investigation into the level of disclosure of exit charges to customers, which was announced in March 2016, remains open.  Full ongoing support has been provided to the FCA to ensure all of its information requests are dealt with, of which there have been five separate requests to date.

-    The 1% exit fee cap on all pension products where the policyholder is over 55 was successfully implemented during the period.

 

Future priorities

-    Continue to deliver the customer strategy implementation plan.  This includes:

An initial focus on reviewing our key customer communications to ensure in line with the most recent guidelines.

Continued development and delivery of enhanced product review framework.

-    Continue to support the FCA's investigation work into how exit and surrender charges have been disclosed to customers.

-    Continue to deliver competitive fund performance.

 

KPIs

Policyholder fund performance 



12 months to 30 Jun 2017

12 months to 30 Jun 2016

CA Pension Managed


17.9%

2.9%

CWA Balanced Managed Pension


14.8%

5.4%

S&P Managed Pension


20.1%

1.6%

Benchmark - ABI Mixed Inv 40%-85% shares


16.4%

1.8%

 

Governance

Background

-    Maintaining effective governance and a constructive relationship with regulators underpins the delivery of the division's strategic plans.

-    Ensuring that appropriate time and resources are dedicated to delivering robust governance processes provides management with a platform to deliver the other aspects of the business strategy.  As a result a significant proportion of management's time and attention continues to be focused on ensuring that both the existing governance processes, coupled with future developments, are delivered.

 

Initiatives and progress in 2017

-    Strong solvency position has been maintained throughout the period.

-    Solid delivery of outsourced services.

-    Delivered our inaugural Solvency and Financial Condition Report (SFCR) and Regular Supervisory Report (RSR), reports required by Solvency II rules.

 

Future priorities

-    Ensure we deliver our plans to meet the General Data Protection Regulation (GDPR) well within the timeframes of the regulatory deadline of 25 May 2018.

-    Develop and start to deliver against implementation plans for "IFRS 17 Insurance Contracts", a new insurance accounting standard which was issued in May 2017 and has an effective date of 1 January 2021.

 

KPIs

Divisional solvency ratio

30 Jun 2017:        154%

31 Dec 2016:        128%

 

 

 

BUSINESS REVIEW | SWEDEN

 

Movestic is currently the part of the Chesnara group which delivers most prominently against the core objective "Enhance value through profitable new business". From its Stockholm base, Movestic operates as a challenger brand in the Swedish life insurance market. It offers transparent unit linked pension and savings solutions through brokers. Movestic is currently one of the most selected providers of advised occupational pension plans within the fund insurance segment in Sweden.

 

Movestic has had a positive start to 2017. New business and recurring regular premiums have resulted in net positive client money inflows, which together with investment growth, has created a continued increase in AuM with a corresponding 5.6% increase in Economic Value. Despite an increase in capital requirements (as a direct consequence of the value growth) the absolute capital surplus has increased during the period.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

Capital and value management

Background

-    Movestic creates value predominantly by generating growth in the unit linked assets under management and by optimising the income that the assets generate, without compromising the fees incurred by policyholders. AuM growth is dependent upon positive client cash flows and positive investment performance. Capital surplus is a factor of both the value and capital requirements and hence surplus can also be optimised by effective management of capital.

 

Initiatives and progress in 2017

-    Favourable equity market performance and further positive policyholder cash flows contribute in broadly equal measure to a total AuM growth of 8.6%.

-    Economic Value growth of 5.6%.

-    Increase to the solvency capital requirement (SCR), largely due to the impact of the positive growth in value.

-    Optimising fee income by developing an investment fund (SICAV) which manages white label funds and Movestic funds.

-    Improved life and health business loss ratios.

-    Movestic management company, which operates out of Luxembourg, became fully operational during the period with a successful migration from the previous outsource provider.

 

Future priorities

-    Continue to generate positive client cash flows by:

maintaining lapse levels within valuation assumptions; and

strategic pricing to maintain transfers-in to 2016 levels or above.

-    Identify management actions to optimise the capital requirement.

-    Provide a sustainable and predictable dividend to Chesnara plc.

 

KPIs

Growth in assets under management

 

£bn

2013

2014

2015

2016

30 Jun 2017







Total assets under management

1.6

2.0

2.2

2.5


New client cashflow





0.09

Investment growth





0.13







2017 Total assets under management

1.6

2.0

2.2

2.5

2.8







 

IFRS profit

 

£m

2013

2014

2015

2016

30 Jun 2017







IFRS profit

2.1

3.9

7.8

9.5

7.1







 

Value growth

 

£m

2013

2014

2015

2016

30 Jun 2017







EEV / EcV

122

152

192

230

243







 

Customer outcomes

Background

-    Movestic places great importance on providing quality service to both customers and brokers, with simple, clear unit linked products, supported by an attractive and broad investment fund range. The aim of Movestic is to offer policyholders the best funds and management services on the market.

 

Initiatives and progress in 2017

-    Fund range development including improved sustainability rating.

-    Competitive unit linked fund returns.

 

Future priorities

-    Fund range development in line with customer and market requirements.

-    Deliver competitive unit linked fund returns.

-    Consolidate the recent operational and fund performance improvements to maintain broker assessment ratings.

 

KPIs

Broker assessment rating (0 to 5)

 


2012

2013

2014

2015

2016







Rating

3.1

3.6

3.6

3.7

3.8







2016 Policyholder average investment return:

7.5% (Swedish stock market 5.8%)

 

Note: Broker assessment and investment return KPIs are not available at half year.

 

 

Governance

Background

-    Movestic operates to exacting regulatory standards and adopts a robust approach to risk management.

 

Initiatives and progress in 2017

-    Full compliance with Solvency II reporting requirements.

-    Deepened understanding and analysis of Solvency II dynamics.

-    Inaugural Solvency II narrative reports.

 

Future priorities

-    Continue to deepen the understanding of the Solvency II dynamics.

-    Improved continuous solvency monitoring.

-    Improve efficiency of regulatory reporting routines.

 

KPIs

Divisional solvency ratio

30 Jun 2017:        148%               

31 Dec 2016:        142%

 

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

Profitable new business

Background

-    As an "open" business, Movestic not only adds value from sales but as it gains scale, it will become increasingly cash generative which will fund further growth or contribute towards the group's dividend strategy. Movestic has a clear sales focus and targets a market share of 10 -15% of the advised occupational pension market. This focus ensures we are able to adopt a profitable pricing strategy.

 

Initiatives and progress in 2017

-    New business profits of £6.5m.

-    Successful pricing strategy attracts increased levels of high value and higher margin transfer business.

-    Market shares within target range.

-    Increases in average gross margins.

 

Future priorities

-    Continue to write new business within our target range without any reductions in gross margins thereby delivering total profits at a similar level to 2016.

 

KPIs

Occupational pension market share %

 

%

2013

2014

2015

2016

30 Jun 2017







Market share

13.7

12.6

11.7

13.2

14.1







 

New business profit

 

£m

2013

2014

2015

2016

30 Jun 2017







New business profit

6.6

9.0

6.6

12.1

6.5







 

 

BUSINESS REVIEW | NETHERLANDS

 

The completion of the acquisition of Scildon N.V. (formerly known as Legal & General Netherlands) brings a "New business profit" dimension to the business model in the Netherlands. From Hilversum, the 33 year old company focuses on three product market combinations via brokers. Scildon is a well-established profitable player on the term market, the current market leader in unit-linked savings insurances with transparent products and is a challenger brand in the Dutch defined contribution pension insurance market. As a challenger, Scildon is assessed as the most preferred pension insurer by brokers in the SME-market.

 

The first half of 2017 has been positive for the Dutch businesses. The IFRS result includes a maiden contribution from Scildon, driven by developments in credit spreads and equity market growth. A good start has been made on integrating the reporting processes for Finance, Actuarial and Risk.

 

The growth in sales and assets, in combination with equity de-risking, contributed to an increase in Scildon's capital surplus. Waard's solvency ratio of 533% remains strong but has fallen during the period due to their part funding of the Scildon acquisition.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

Capital and value management

Background

-    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 do 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.

Waard management assists Chesnara with regards to pursuing its acquisition strategy in the Netherlands. Successful acquisitions need to satisfy dual financial criteria being positive Economic Value impact and the creation of surplus capital and hence dividend potential.

 

Initiatives and progress in 2017

-    Successful transfer of Hollands Welvaren Leven into Waard Leven.

-    Equity de-risk in Scildon post acquisition to reduce capital requirements and align the investment of shareholder funds to Chesnara's policy and risk appetite.

-    Towards the end of 2016 the re-insurance structure was improved to reflect the positive effect of underwriting in the mortality result of Scildon.

-    During 2017 and beyond capital and value management should benefit from the recent removal of guarantees on new business, now focussing instead on growth in the UL market, without providing future guarantees.

 

Future priorities

-    Over a two year period the Dutch businesses plan to deliver efficiency improvements from a range of developments including:

Identifying and delivering modest synergies between Waard and Scildon.

Insourcing certain activities to reduce costs.

Realising the benefits from an already well progressed IT system development in Scildon.

Process and value for money improvements in Scildon such as increased levels of "straight through" processing.

Continual assessment of the business model to ensure an optimal balance between returns generated versus the solvency capital requirements.

 

£m

2013

2014

2015

2016

30 Jun 2017







EEV / EcV

304.5

326.1

334.5

354.3

366.9

Cumulative dividends

14.0

59.7

95.7

132.6

132.6

Total

318.5

385.8

430.2

486.9

499.5







Scildon has a track record of delivering value growth enabling dividend distribution to the parent company

 

Customer outcomes

Background

-    Regardless of whether the customers are of the closed Waard Group or the Scildon business, which is open to new business, 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 2017

-    Scildon received awards for "Best occupational pension insurer" and "Best annuity insurer". Scildon was rated in 2nd place for term insurance according to the broker organisation (Adfiz).

-    The annual performance research for consumers shows high scores.

-    Scildon replaced some non-performing funds.

 

Future priorities

-    Organise discussions with brokers to support the development of our processes in conjunction with their requirements.

-    Perform a customer assessment and use the outcome to improve quality of service.

-    Introduce chat-function on new website, improve navigation to documents and disclose more relevant information on-line.

-    Improve the brand recognition of Scildon.

 

KPIs

Client satisfaction rating (0-10)

 


2014

2015

2016





Rating

7.3

7.3

8.5





 

Governance

Background

-    The Waard Group and Scildon operate in a regulated environment and comply with rules and regulations both from a prudential and from a financial conduct point of view.

 

Initiatives and progress in 2017

-    Waard and Scildon both successfully delivered their Solvency II narrative reports. This represented the final step of the transition to the Solvency II regime.

-    Aligning the Governance and Risk Management framework to Chesnara practices, including ORSA, RSR, SFCR and risk reporting.

-    The short term priority for Scildon has been the successful integration of statutory reporting routines to enable the production of the group's Half Year Report.

-    Waard and Scildon ended the period with healthy solvency ratios of 533% and 240% respectively.

 

Future priorities

-    The focus during the second half of the year and into 2018 is to fully align and integrate the governance routines such as the Risk Management Framework, Business planning, MI production and ensuring local processes conform to the Chesnara group Governance Map where appropriate.

 

KPIs

Divisional solvency ratio

Scildon                  30 Jun 2017:        240%                     31 Mar 2017:        204%

Waard 2017          30 Jun 2017:        533%                     31 Dec 2016:        712%

 

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

Profitable new business

Background

-    The acquisition of Scildon has added a "New business" dimension to the Dutch business model. Scildon sell protection, individual savings and group pensions contracts via a broker-led distribution model. As with Movestic 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 2017

-    During the period there has been a modest recovery in new business profits with a half year profit of c£1.7m.

-    Market share for the core Protection business is towards the middle of our 5 - 10% range.

-    The business has been successfully rebranded to Scildon and the change of ownership of the company appears to have had no adverse impact on new business levels or broker support.

-    New business processes have been reviewed and the exercise has identified improvement opportunities which will be mutually beneficial to brokers, customers and new business profit levels.

 

Future priorities

-    Whilst the new business foundations are solid, management actions are planned over the next two years to generate a more commercially meaningful level of new business profit.

-    The objective of the improvement programme is to move the market share for protection business towards the top end of the 5-10% target range.

-    Whilst maintaining the focus on protection, Scildon plan to increase the assets under management for pension business and remain market leader in the small but growing unit linked market.

 

KPIs

Scildon - term assurance market share %

 

%

2013

2014

2015

2016

30 Jun 2017







Market share

10.9

5.0

6.6

5.9

7.4







 

Scildon - new business profit

 

£m

2013

2014

2015

2016

30 Jun 2017







New business profit/(loss)

0.9

(3.5)

0.1

2.0

1.7







 

 

BUSINESS REVIEW | acquire life and pensions businesses

 

On 5 April 2017 we completed the acquisition of Legal & General Nederland (subsequently renamed Scildon).

 

The completion of Scildon, which had an economic value of €237.5m at the point of acquisition, results in the group having 40% of its Economic Value in the Netherlands.

 

The deal was funded by a combination of debt, equity and existing cash resources.

 

This acquisition represents the ongoing delivery of our acquisition strategy in the Netherlands, following the purchase of the Waard Group in 2015.  We believe this deal leaves us with sufficient scale and presence to progress further value adding deals in the Dutch market.

 

Highlights of Scildon acquisition:

-    Completion purchase price of €161.2m

-    Economic value of €237.5m at acquisition, representing a purchase price discount of 32%

-    The impact of the acquisition, after taking account of the equity de-risk programme, is to increase the solvency surplus of the group by £4.7m

-    Integration plans progressing well, with equity de-risk programme completed

 

Acquisition of Scildon

About Scildon

 

€237.5m EcV

204% Solvency ratio

175,000 Policies

€2.2bn AUM

149 Employees

 

-    Scildon is a long established, award winning specialist insurer in the Netherlands.

-    It has approximately 175,000 policies, predominantly individual protection and savings contracts and operates on a stand alone basis.

-    It is open to new business and sells protection, individual savings and group pensions contracts via a broker led distribution model.

-    Scildon is well-capitalised, with a solvency ratio of 204% at the point of acquisition.  It applies the standard formula with no transitional measures.

 

Impact on the group

Cash generation

-    Cash generation is expected to emerge from the business post acquisition at levels which would more than cover incremental funding costs thereby creating a net positive impact on group cash.

 

Value

-    Scildon was purchased at a 32% discount to its economic value, resulting in a day 1 gain of £65.4m.

-    This one off gain contributes materially to overall group EcV of £700.4m.

-    The Netherlands now makes up 40% of group EcV.

 

Customer outcomes

-    Continuity of Scildon's operating model will ensure existing high quality customer outcomes are not compromised.

 

Risk appetite

-    The risks associated with Scildon align with the appetite of the Chesnara group following the equity de-risk activity.

-    Our integration plans include bringing Scildon within the group's risk management framework.

 

Policy numbers

-    Additional policies of 175,000 results in the group now managing a policy base of over 1 million, of which 26% are in the Netherlands.

 

Solvency

-    The acquisition has given rise to an increase in the absolute level of group capital above its capital requirements, after taking account of the planned equity de-risk programme.

-    The group remains well capitalised, with a solvency ratio of 143%, with a surplus of £181.9m.

 

Capital

-    The deal was financed through £66.7m of equity after costs, £49.0m of incremental debt and £21.9m of Chesnara's own cash.

-    Our group gearing ratio of 23.7% remains well within our risk appetite.

-    Further equity raising capacity is expected to be available for future deals.

 

Post acquisition integration

A post acquisition integration plan is in the process of being delivered, and has progressed in line with expectations.  In particular:

-    On 11 April 2017 the Scildon brand was launched, replacing the previous name of Legal and General Nederland.

-    The acquisition business case assumed that the investment management strategy of Scildon would be aligned with the existing Chesnara group, and consequently a number of indirect equity holdings were sold post acquisition, as planned.  This has resulted in a reduction in the level of market risk capital required to be held, thus improving the solvency position of both Scildon and the group.

-    The alignment of financial reporting processes has progressed as planned.  Some further alignment of finance processes will continue to be delivered over the course of the year.

-    Our integration plans include aligning risk and governance processes of Scildon with the group framework.  This has progressed in line with plans, with further integration work expected to be delivered during the remainder of the year.

-    Ongoing review with local management is underway to deliver process and value for money enhancements over the next two years.

 

Acquisition outlook

The successful completion of the Scildon acquisition contributed positively to the acquisition outlook due to increased scale and presence in the Netherlands, and we are well-positioned to take advantage of any future acquisition opportunities.

 

From a UK perspective we have seen a gradual increase in closed book market activity which, in our view, is driven in part by reduced uncertainty regarding Solvency II and regulatory developments.  

 

The environment in which European life insurance companies operate continues to increase in complexity.  In particular, in May 2017 "IFRS 17 Insurance Contracts" was issued, which is a fundamental overhaul of the way in which insurance contracts are accounted for under international accounting rules.  We believe this contributes to the factors that exist that will drive further consolidation, namely larger financial organisations wishing to re-focus on core activities and remove operating complexities, and the desire to release capital or generate funds from potentially capital intensive life and pension businesses. 

 

Chesnara is a well-established life and pensions consolidator with a proven track record.  This, together with a good network of contacts in the adviser community, who understand the Chesnara acquisition model and are mindful of our track record and good reputation with our regulators, ensures we are aware of most viable opportunities in the UK and Western Europe.

 

Our financial foundations are strong, we have a proven and stringent acquisition assessment model, and we continue to have strong support from shareholders and lending institutions to progress our acquisition strategy.  In addition, our operating model which consists of well established outsource arrangements plus efficient, modern in-house solutions, means we have the flexibility to accommodate a wide range of potential target books.  With all the above in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

 

 

CAPITAL MANAGEMENT | Solvency II

                                                                                    

What is solvency and capital surplus?

-    Solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold.

-    The value of the company is referred to as its "own funds" (OF) and this is measured in accordance with the rules of the Solvency II regime.

-    The capital requirement is again defined by Solvency II rules and the primary requirement is referred to as the Solvency Capital Requirement (SCR).

-    Solvency is expressed as either a ratio:    OF/SCR % or as an absolute surplus OF less SCR

 

Solvency surplus to cash generation

Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for liquid resources available to fund matters such as dividends, acquisitions or business investment. As such Chesnara defines cash generation as the movement in surplus, above management buffers, during the period.

 

GROUP SOLVENCY AT 30 JUNE 2017

 

Group solvency remains strong and the impact of the Scildon acquisition, after taking into account the equity de-risking programme, has had a positive impact.  During the period all divisions have contributed positively to the absolute levels of surplus capital available.

 

Solvency position

£m

30 Jun 2017

31 Dec  2016

 

31 Dec  2016

(excl. LGN impact*)





Own funds (post dividend)

606

505

443

SCR

425

321

309

Buffer

42

32

31

Surplus

139

153

104

Solvency ratio %

143%

158%

144%





Analysis

-    Surplus: The group remains well capitalised at 143%, equating to an absolute level of surplus own funds above SCR of £181.9m.  Removing the impact of the equity raise, which relates to the Scildon acquisition, the closing solvency surplus has increased by £47.3m.  Further detail on the solvency surplus movement has been provided in the table below.

-    Dividends:  The solvency position is stated after deducting £10.5m proposed dividend (31 December 2016: £19.0m).

-    Own funds: Own funds have increased by £111.6m, before the impact of the interim dividend.  This includes underlying own funds growth across the divisions and holding company of £57.6m, coupled with a net increase in own funds of £54.0m arising on completion of the Scildon acquisition, representing the difference between the purchase price of £137.6m and the own funds acquired of £191.6m.

-    SCR: The group's underlying SCR, before the impact of the Scildon acquisition, has reduced by £8.3m.  The Scildon acquisition has, as expected, resulted in a large increase in the group's SCR of £112.2m.  This is made up of the underlying Scildon SCR of £93.0m coupled with an increase in additional group SCR of £19.2m.

 

Sensitivities

Impact (£m)

1% fall in yields

10% fall in equity values




Own funds

(16.7)

(34.4)

SCR

4.9

(39.2)

Surplus

(21.6)

4.8




 

Solvency surplus movement

£m




Group solvency 31 Dec 2016 - pre equity raise impact

134.6

CA

28.8

Movestic

15.0

Waard

5.3

Scildon

17.6

Chesnara / consol adj

(5.9)

Scildon acquisition impact

(8.0)

Exchange rates

5.0

Interim dividends

(10.5)

Total surplus 30 Jun 2017

181.9



The table above provides some further analysis of how the solvency surplus has developed over the first half of the year.  To provide an end to end impact of the Scildon acquisition, the starting point reflects the solvency position of the group at the start of the year before the impact of the equity that was raised in November 2016 to fund the acquisition.

 

-    All divisions have contributed positively to the level of solvency surplus available.

-    The table shows that the Scildon acquisition has reduced the solvency surplus available at a group level by £8.0m.  This was expected and does not include the impact of the equity de-risking, which was delivered post acquisition.  Adjusting for this, the "day 1" impact of the Scildon acquisition has resulted a small positive contribution to the overall group solvency position by £4.7m.

-    The overall closing surplus of £181.9m includes the impact of the £10.5m interim dividend, due to be paid in October 2017.

 

Managing the group and subsidiaries' capital positions appropriately is a critical part of ensuring we remain true to the group's culture and values. 

 

We are well capitalised at both a group and subsidiary level, and we have not used any elements of the long term guarantee package. 

 

Note: 31 Dec 2016 figures restated in the charts at 30 Jun 2017 exchange rates for comparison

 

 

UK

Analysis

-    Surplus:  £65m above regulatory requirements and £41m above board's capital management policy.

-    Dividends:  Dividend of £30m was paid to Chesnara in May 2017.

-    Own funds:  Positive growth driven by a transfer of £9m out of the with profit funds, a reduction in the with profit cost of guarantees and an increase in the spread of swap yields over gilt yields and positive equity growth.

-    SCR:  Reduction of £8m driven by a reduction in spread risk due to investment portfolio changes and a reduction in counterparty default risk owing to a change in the assumed likelihood of reinsurer default, offset by an increase in equity risk due to equity growth.

 

Solvency position

£m

30 Jun 2017

31 Dec 2016




Own funds (post dividend)

187

166

SCR

122

130

Buffer

24

26

Surplus

41

11

Solvency ratio %

154%

128%




 

Sensitivities

Impact (£m)

1% fall in yields

10% fall in equity values




Own funds

(6.9)

(9.8)

SCR

2.1

(11.6)

Surplus

(9.0)

1.8




 

SWEDEN

Analysis

-      Surplus: £71m above regulatory requirements and £41m above board's capital management policy.

-      Dividends:  Dividend of £2.7m was paid to Chesnara in June 2017.

-      Own funds:  Growth largely driven by positive economic experience due to positive equity markets coupled with positive operating experience on in force policies, offset by the negative impact of lowering the assumption for future expected charge income on certain investment funds.

-      SCR: Increase of £12m is largely due to increased market risk capital being held due to strong investment growth in year increasing the risk on equities, corporate bonds and foreign currencies.

 

Solvency position

£m

30 Jun 2017

31 Dec 2016




Own funds (post dividend)

218

193

SCR

148

138

Buffer

30

27

Surplus

41

28

Solvency ratio %

148%

140%

 

Sensitivities

Impact (£m)

1% fall in yields

10% fall in equity values




Own funds

(6.4)

(22.5)

SCR

0.1

(21.8)

Surplus

(6.5)

(0.6)




 

NETHERLANDS - WAARD GROUP

Analysis

-      Surplus:  £49m above regulatory requirements and £38m above board's capital management policy.

-      Dividends:  A dividend of £32m was paid in April 2017 by the insurance companies within the division to the Dutch holding company and then subsequently used to part-fund the acquisition of LGN.

-      Own funds: Reduction driven by the dividend of £32m, offset by modest economic variances, positive operating mortality experience and the positive impact of changing mortality assumptions in the modelling.

-      SCR: Reduction of £2m over the period is primarily due to a fall in counterparty default risk from a reduction in cash at bank following the £32m transfer to part-fund the acquisition of LGN.

 

Solvency position

£m

30 Jun 2017

31 Dec 2016




Own funds (post dividend)

59

89

SCR

11

12

Buffer

11

12

Surplus

38

64

Solvency ratio %

533%

712%

 

Sensitivities

 

Impact (£m)

1% fall in yields

10% fall in equity values




Own funds

(0.5)

(0.3)

SCR

0.4

(0.2)

Surplus

(0.8)

(0.1)




 

NETHERLANDS - SCILDON

Analysis

-      Surplus:  £119m above regulatory requirements and £34m above board's capital management policy.

-      Dividends:  No dividends have been paid in the post acquisition period.

-      Own funds: Increase since acquisition driven by positive economic experience, including the weakening of sterling relative to the Euro, offset by the negative impact of a change in the assessment of persistency and mortality risk leading to an increase in the risk margin.

-      SCR: Reduction of £9m due to a substantial reduction in equity risk owing to a sale of equities in the division, partially offset by an increase in spread risk and counterparty default risk following reinvestment of proceeds from the equity sale.

 

Solvency position

£m

30 Jun 2017

31 Mar 2017




Own funds (post dividend)

205

192

SCR

85

94

Buffer

85

94

Surplus

34

3

Solvency ratio %

240%

204%

 

Sensitivities

 

Impact (£m)

1% fall in yields

10% fall in equity values




Own funds

(4.6)

(1.8)

SCR

1.7

(1.3)

Surplus

(6.3)

(0.5)




 

FINANCIAL REVIEW

The key performance indicators below are a reflection of how we have performed in delivering our three strategic objectives and our core culture and values. The first half results of 2017 are dominated by the impact of the completion of the acquisition of Scildon. Looking through this impact, all divisions have performed well across all financial metrics, resulting in a closing EcV of over £700m.

 

Summary of each KPI:

 

IFRS

PRE-TAX PROFIT: £51.6M (30 Jun 2016: £0.2M)

TOTAL COMPREHENSIVE INCOME: £53.8M (30 Jun 2016: £15.7M)

 

What is it?

The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the profit arising from the longer term insurance and investment contracts over the life of the policy.

 

Why is it important?

IFRS profit is an indicator of the value that has been generated within the long-term insurance funds of the divisions within the group, and is a key measure used both internally and by our external stakeholders in assessing the performance of the business.  IFRS profit is an indicator of how we are performing against our stated strategic objective of "maximising value from the existing business" and can also be impacted by one-off gains arising from delivering against our stated objective of "acquiring life and pensions businesses".

 

Risks

The IFRS profit can be affected by a number of our principal risks and uncertainties as set out in the Risk Management section.  In particular, volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit, and foreign currency fluctuations can affect total comprehensive income.

 

Highlights



£m

30 Jun 17

30 Jun 16




CA

8.4

14.3

S&P

14.7

(13.9)

Movestic

7.1

3.6

Waard

2.3

2.3

Scildon

7.0

-

Group & consol adj.

(8.6)

(6.1)

Profit on acquisition

20.7

-

Taxation

(4.9)

0.2

Forex impact

7.1

15.3

Total

53.8

15.7

 

-      Strong pre-tax results across all segments.

-      IFRS pre-tax profit of £51.6m significantly ahead of prior year (2016: £0.2m). The underlying performance is supported by a one off gain of £20.7m relating to the acquisition of Legal and General Nederland.

-      All territories have delivered results ahead of 2016, supported by positive equity markets during the first half of the year.

-      Total comprehensive income includes a foreign exchange gain of £7.1m (2016: £15.3m) relating to sterling's depreciation against both the euro and Swedish krona.

 

 

CASH GENERATION

GROUP CASH GENERATION £46.2M* (30 Jun 2016: £13.6M)         

DIVISIONAL CASH GENERATION £54.8M (30 Jun 2016: £9.8M)

 

What is it?

Cash generation is a measure of how much distributable cash has been generated in the period.  Cash generation is driven by the change in solvency surplus in the period, taking into account board-approved capital management policies.

 

Why is it important?

Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which support Chesnara's dividend-paying capacity and acquisition strategy.  Cash generation can be a strong indicator of how we are performing against our stated objective of "maximising value from the existing business".  However, our cash generation is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of the group.

 

Risks

The ability of the underlying regulated subsidiaries within the group to generate cash is affected by a number of our principal risks and uncertainties as set out in the Risk Management section.  Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, they are impacted by similar drivers, and therefore factors such as yields on fixed interest securities and equity and property performance contribute significantly to the level of cash generation within the group.

 

Highlights


£m

30 Jun 2017



UK

30.4

Sweden

13.8

Netherlands

10.6

Divisional cash generation

54.8

Other group activities

(2.2)

Group cash pre-Scildon acquisition

52.6

Impact of Scildon acquisition

(6.4)

Total group cash generation

46.2



Divisional cash

-      Significant cash contributions from all divisions in the first half of the year.

-      UK cash generation underpins the result, with favourable movements in both own funds and capital requirements.

-      Positive economic experience, primarily equity markets, have driven the growth in own funds and ultimately cash generation in Sweden and the Netherlands.

 

Total cash generation

-      At group level, the impact of the outflow of funds utilised in facilitating the purchase of Scildon, and the addition of the associated capital requirement on completion, have resulted in a negative cash generation for the period.

 

* Includes the end to end impact of the Scildon acquisition

 

 

ECONOMIC VALUE (EcV)

£700.4M (30 Jun 2016: £459.9M)

 

What is it?

Economic value (EcV) was introduced in 2016 by Chesnara as a replacement metric for European Embedded Value.  This was introduced following the introduction of Solvency II at the start of 2016 with EcV being derived from Solvency II own funds.  Conceptually EcV is broadly similar to EEV in that both reflect a market-consistent assessment of the value of existing insurance business, plus adjusted net asset value of the non-insurance business within the group.

 

Why is it important?

EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is an important reference point by which to assess Chesnara's intrinsic value.  A life and pensions group may typically be characterised as trading at a discount or premium to its economic value.  Analysis of EcV provides additional insight into the development of the business over time.

 

The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through writing profitable new business.  It ignores the potential of new business to be written in the future (the franchise value of our Movestic and Scildon businesses) and the value of the company's ability to acquire further businesses.

 

Risks

The economic value of the group is affected by economic factors such as equity and property markets and yields on fixed interest securities.  In addition to this, whilst the other KPIs (which are all "performance measures") remain relatively insensitive to exchange rate movements, the EcV position of the group can be materially affected by exchange rate fluctuations.  For example a 10.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group by 3.1% and 3.6% respectively, based on the composition of the group's EcV at 30 June 2017.

 

£m




2016 Group EcV

602.6

EcV earnings

40.4

Acquisition

65.4

Dividends

(19.0)

Forex gain

11.0

2017 Group EcV

700.4



-      Economic value at the end of June exceeds £700m for the first time, having increased by £98m since the start of the year.

-      Strong underlying earnings achieved in the period of £40m.

-      Total growth includes the gain delivered upon the acquisition of Scildon.

-      Foreign exchange gains also contribute to the overall growth, offset by the payment of the final dividend in relation to 2016.

-      Pre tax EcV earnings of £105.8m in the first half of the year, driven by a combination of strong underlying economic earnings supported by the substantial gain realised on the acquisition of Legal & General Nederland in April.

 

 

ECV EARNINGS NET OF TAX

£105.8M (30 Jun 2016: £(3.5)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.

-      The impact of acquisitions.

 

Why is it important?

By recognising the market-related value of in-force business (in-force value), a different perspective is provided in the performance of the group and on the valuation of the business.  Economic value earnings are an important KPI as they provide a longer-term measure of the value generated during a period.  The economic value earnings of the group can be a strong indicator of how we have delivered against all three of our core strategic objectives.  This includes new business profits generated from writing profitable new business, economic value profit emergence from our existing businesses, and the economic value impact of acquisitions.

 

Risks

The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties as set out in the Risk Management section.  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.

 

£m

2017



Operating earnings

5.3

Economic earnings

37.0

Gain on acquisition

65.4

Other

(1.9)

Total EcV earnings

105.8



 

-      Pre tax EcV earnings of £105.8m in the first half of the year, driven by a combination of strong underlying economic earnings supported by the substantial gain realised on the acquisition of LGN in April.

-      Operating results were adversely affected by two non-recurring items. The expense assumptions now include the impact of the LGN acquisition on group overheads and we have made provision to adopt a more attractive pricing strategy in Movestic which has resulted in lower assumed fees on certain white label funds. Underlying operating profits include new business profits of £7.1m and are in line with expectations.

-      Economic earnings primarily driven by strong equity market performance across Europe in the period.

 

 

IFRS PRE-TAX PROFIT

£51.6M (30 Jun 2016: £0.2M)

 

IFRS TOTAL COMPREHENSIVE INCOME

£53.8M (30 Jun 2016: £15.7M)

 

Executive summary

The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major components:

 

(1) Stable core: At the heart of surplus, and hence cash generation, are the CA and Waard group segments.  The requirements of these books are to provide a predictable and stable platform for the financial model and dividend strategy.  As closed books, the key is to sustain this income source as effectively as possible.  The IFRS results below show that, despite some period on period movements, the long term trend of material positive results indicates that the stable core continues to deliver against these requirements.

 

(2) Variable element: The S&P component within the UK division can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements. Hence the split of the UK division results showing S&P separately is shown below.

 

(3) Growth operation: The long-term financial model of Movestic is based on growth, with levels of new business and premiums from existing business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee income.

 

IFRS results

The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:

 


Unaudited

Year



6 months ended

ended



30 Jun 17

30 Jun 16

31 Dec 16



£m

£m

£m

Note

CA

8.4

14.3

28.4

1

S&P

14.7

(13.9)

14.3

2

Movestic

7.1

3.6

8.7

3

Waard Group

2.3

2.3

6.2

4

Scildon

7.0

-

-

5

Chesnara

(6.6)

(2.9)

(9.7)

6

Consolidation adjustments

(2.0)

(3.2)

(7.2)

7

Profit before tax and profit on acquisition

30.9

0.2

40.7


Profit on acquisition of Scildon

20.7

-

-

5

Profit before tax

51.6

0.2

40.7


Tax

(4.9)

0.2

(5.4)


Profit after tax

46.7

0.4

35.3


Foreign exchange

7.1

15.3

20.1

8

Total comprehensive income

53.8

15.7

55.4


 


Unaudited

Year



6 months ended

ended



30 Jun 17

30 Jun 16

31 Dec 16



£m

£m

£m

Note

Operating profit

16.6

9.5

34.9

9

Economic profit

14.3

(9.3)

5.8

10

Profit before tax and profit on acquisition

30.9

0.2

40.7


Profit on acquisition of Scildon

20.7

-

-

5

Profit before tax

51.6

0.2

40.7


Tax

(4.9)

0.2

(5.4)


Profit after tax

46.7

0.4

35.3


Foreign exchange  translation differences

7.1

15.3

20.1

8

Total comprehensive income

53.8

15.7

55.4


 

Note 1: The CA segment continues to deliver material and stable IFRS profits in line with plans. Prior year result benefitted from significant increases in bond values.

 

Note 2: The S&P segment has reported an increase in profits on the prior year.  Positive economic profits of c£12m arise from the net impact of positive equity markets. 

 

Note 3: Movestic has continued to generate strong results in the period, principally driven by strong growth in assets under management and increased fund performance fee income generation.

 

Note 4: The Waard Group has reported a profit which is slightly improved from the prior year and in line with profit generation expectations. The mortgage portfolio acquired in 2016 continues to generate favourable returns.

 

Note 5: The Scildon result represents profit generation for the three months from the date of acquisition and is broadly in line with expectations. The profit arising from the acquisition represents the difference between the value of the net assets acquired (post acquisition accounting fair value adjustments) and the purchase consideration paid. Scildon's IFRS reserving basis, whilst technically compliant, does not align to the Chesnara reserving approach. Scildon's current book reserving approach creates a level of volatility which is greater than commercial reality. In light of this, we plan to align Scildon's IFRS reserving policy during the second half of 2017. We do not anticipate that this change in reserving methodology will materially alter the reported profit arising on acquisition.

 

Note 6: The Chesnara result represents holding company expenses. The year to date loss includes a foreign currency re-translation loss of c£1.8m in respect of the euro denominated loan facility taken out in the year, to part fund the Scildon acquisition. The result also reflects increased financing costs of c£0.8m due to the higher level of bank debt carried in the period.

 

Note 7: Consolidation adjustments relate to items such as the amortisation of intangible assets.  The current year figures reflect the introduction of adjustments relating to the Scildon acquisition.

 

Note 8: As a result of sterling weakening against both the euro and Swedish krona in the period the IFRS result includes a large foreign exchange gain.

 

Note 9: The operating result demonstrates the strength and stability of the underlying business, driving the generation of profit. Product based income and favourable movements in operating experience, offset by assumption changes, specifically expenses, have supported performance in the UK. Strong fund performance growth contributes to the Movestic operating result, whilst the Waard result continues to benefit from the investment in its mortgage portfolio. The introduction of Scildon as a source of profit generation adds further strength to the underlying business model. 

 

Note 10: Economic profit represents the components of the earnings that are directly driven by movements in economic variables, e.g. the impact of yield movements on the cost of guarantees reserves. During 2017 the economic profit is generally driven by the net impact of positive equity markets, offset by falling bond yields in the year.

 

Note: Movestic, Waard Group and Scildon economic surplus is not readily determinable. While there is an element of movement due to economic conditions, they are immaterial in comparison to non-economic items, therefore all surplus is treated as derived from operating activities.

 

 

GROUP CASH GENERATION £46.2M

(30 Jun 2016: £13.6M)       

 

DIVISIONAL CASH GENERATION £54.8M

(30 Jun 2016: £9.8M)

 

The three territories have generated £54.8m cash in the period, with all four businesses making positive contributions to the cash generation.

 

Cash in the business is generated from increases in the group's surplus funds.  Surplus funds represent the excess of assets held over management's internal capital needs, as in the capital management policies across the group.  These are based on regulatory capital requirements, with the inclusion of additional "management buffers".  

 

HIGHLIGHTS

GROUP

-      Before taking into account the impact of the acquisition of Scildon, cash has been generated across the group, with total cash generation in the period of £52.6m.  As highlighted in the divisional commentary below, this includes the positive impact of some non-recurring management actions in the period amounting to £16.0m.

-      Other group activities also reflected the residual group expenses and the impact of consolidation routines, specifically movements in capital requirements determined at a group level.

-      From a capital requirement perspective, this is driven by movements in required capital at a Chesnara holding company level coupled with consolidation adjustments.  At a Chesnara holding company level capital is principally required to be held for the currency risk associated with the Movestic, Scildon and Waard Group surplus assets.

-      The end to end impact of the acquisition of Legal & General Nederland is to reduce surplus cash by £6.4m.  This was in line with expectations. The £6.4m cash reduction consists of an increase in own funds of £116.2m (£62.1m of equity raised and deal costs; £191.6m of own funds acquired; less purchase price of £137.6m) offset by an increase in capital requirement of £122.6m (£88.4m of capital required in Scildon itself, including management group buffer, plus additional capital at group level of £34.3m).  The £88.4m of capital required for Scildon includes the positive impact of the equity de-risk in the period, which amounted to £12.7m.

 

UK

-      The UK continues to generate significant levels of cash to support the dividend payment.

-      Own funds growth is the main driver of cash generation in the UK, which has benefitted from a reduction in the cost of guarantees.

-      There has also been a reduction in required capital due to changes in investment portfolio and reduced counterparty default risk.

-      Cash generation includes the benefit of a £9.0m release of previously trapped surplus from the with profit funds.

 

SWEDEN

-      Sweden had a positive cash generation in the period of £13.8m primarily due to own funds growth.

-      Own funds have benefitted from growth in equity markets during the period.

-      Growth in equity has also had an adverse impact on the level of capital the business is required to hold, driving the increase in management capital requirement.

-      Cash generation includes a one off benefit of enhancing our modelling for commission clawbacks amounting to £7.0m.

 

NETHERLANDS - WAARD GROUP

-      The Waard Group has continued the solid cash generation witnessed in the prior year with positive underlying movements in both own funds and capital requirements.

-      Movement in own funds was driven by mortality experience and assumption changes.

-      Fall in counterparty default risk underpins the reduction in the capital requirement.

 

NETHERLANDS - SCILDON

-      Scildon has reported positive cash generation of £3.2m in the three months since the acquisition of the business.

-      Positive economic experience, including euro exchange gains against sterling, support increase in own funds.

 

30 June  2017

(£m)


Movement in

own funds

Movement in management's capital

requirement

Forex

impact

Cash generated



 UK


20.7

9.7

-

30.4

Sweden


24.4

(11.3)

0.7

13.8

Netherlands

Waard Group

3.6

3.5

0.3

7.4


Scildon

7.2

(4.9)

0.9

3.2

Divisional cash


55.9

(3.0)

1.9

54.8

Other group activities


(8.7)

6.5

-

(2.2)

Group cash pre- Scildon acquisition


47.2

3.5

1.9

52.6

Impact of Scildon acquisition


116.2

(122.6)

-

(6.4)

Total group cash


163.4

(119.1)

1.9

46.2







 

 

EcV EARNINGS

£105.8M

(30 Jun 2016: £(3.5)M)

 

Driven by generally beneficial investment markets in the first half of the year, with sterling depreciation and volatile yet growing equity markets, the group has reported significant underlying EcV earnings, reflecting the resilience and diversity of the business. This performance and the acquisition of Legal & General Nederland have delivered comprehensive EcV earnings for the period.

 

Analysis of the EcV result in the period by earnings source:

 


30 Jun

2017

 £m

30 Jun

 2016

 £m

 

31 Dec

2016

£m

Note

Expected movement in period

11.7

4.3

6.0


New business

7.1

4.0

11.9


Operating variances

4.4

3.2

22.7


Operating assumption changes

(17.9)

(8.5)

0.6

2

Other operating variances

-

(3.2)

(7.3)


Total operating earnings

5.3

(0.2)

33.9


Economic experience variances

29.0

34.2

77.9

1

Economic assumption changes

7.6

(39.7)

(38.3)


Total economic earnings

36.6

(5.5)

39.6


Other non-operating variances

5.0

(4.1)

(3.0)


Gain on acquisition

65.4

-

-


Tax

(6.5)

6.3

2.0


Total EcV earnings

105.8

(3.5)

72.5


 

 

Analysis of the EcV result in the year by business segment:

 


30 Jun

  2017

£m

30 Jun

  2016

£m

 

31 Dec

  2016

£m

Note

UK

26.2

(5.5)

42.2

3

Sweden

15.8

(3.8)

30.8

4

Netherlands

14.8

0.6

5.9

5

Gain on acquisition

65.4

-

-


Group and group adjustments

(9.9)

(1.1)

(8.4)

6

EcV earnings before tax

112.3

(9.8)

70.5


Tax

(6.5)

6.3

2.0

7

EcV earnings after tax

105.8

(3.5)

72.5


 

 

Note 1 - Economic conditions: As with our previously reported EEV metric, the EcV result is sensitive to investment market conditions.  Key investment market conditions in the period are as follows:

-      The FTSE All share index has increased by 3.3%;

-      The Swedish OMX all share index has increased by 7.2%; and

-      10 year UK gilt yields remain at 1.28%.

 

Note 2 - Operating assumptions: Provision has been made to adopt a slightly more attractive pricing strategy on certain white label funds in Movestic should the business model benefit from such a change and the expense assumptions now include the impact of the LGN acquisition on group overheads.

 

Note 3 - UKThe UK reported strong pre tax earnings of £26.2m for the period. The result was mainly driven by Economic profits of £15.9m which was the result of positive equity market growth. 

 

Note 4 - Sweden:  The Swedish division has also reported a strong EcV movement in the year. Operating earnings were underpinned by strong new business performance, which generated positive earnings of £6.5m owing to transfer in volumes and increased average policy premiums. These new business earnings are offset by the negative effect of assuming a more attractive pricing strategy on certain white label funds. An economic profit of £13.9m was also reported, driven by improving equity markets in the first half of the year.

 

Note 5 - Netherlands:  The Dutch division has reported earnings of £14.8m in the period.  This is primarily all economic earnings within the newly acquired Scildon supported investment returns.

 

Note 6 - Group:  A loss has been reported in the group component. This is includes the impact of a foreign exchange loss incurred in relation to a Euro denominated loan taken out for the LGN acquisition, increased loan financing costs and also underlying group level expenses and consolidation activities.

 

Note 7 - Tax:  The business is reporting a tax expense of £6.5m in the period.  This is driven by a combination of current tax on the profit in the period and movements in deferred tax relating to group level activities.

 

 

EcV

£700.4M

(30 Jun 2016: £459.9M)

 

The economic value of Chesnara represents the present value of future profits of the existing insurance business, plus the adjusted net asset value of the non-insurance business within the group.  EcV is an important reference point by which to assess Chesnara's intrinsic value.

 

Value movement: 1 Jan 2017 to 30 Jun 2017:

 

£m




2016 Group EcV

602.6

EcV earnings

40.4

Acquisition

65.4

Dividends

(19.0)

Forex gain

11.0

2017 Group EcV

700.4



 

EcV earnings:  Strong EcV earnings have been reported in the year to date, a result of strong operating profits and positive economic profits, driven by the equity market growth.

 

Acquisition: In April 2017 the group successfully completed the purchase of LGN, delivering an underlying £65m economic value gain on acquisition upon day one. This is reflected in the group closing EcV at the end of June.

 

Dividends:  Under EcV, dividends are recognised in the period in which they are paid.  Dividends of £19.0m were paid during the 2017, being the final dividend from 2016.

 

FX gain:  The EcV of the group benefited from foreign exchange gains that were reported in the period as a result of sterling deprecation against both the euro and Swedish krona.

 

EcV by segment at 30 Jun 2017

 

£m




UK

231.5

Sweden

242.7

Netherlands

277.5

Other group activities

(51.3)



 

The above table shows that the EcV of the group is diversified across its different markets, demonstrating that we are well-balanced and not over-exposed to one particular geographic market.

 

EcV to Solvency II:

 

£m




2017 Group EcV

700.4

Risk margin

(53.9)

Contract boundaries

(16.5)

Own funds restrictions

(13.1)

Dividends

(10.5)

SII own funds

606.5



Our reported EcV is based on a Solvency II assessment of the value of the business, but adjusted for certain items where it is deemed that Solvency II does not reflect the commercial value of the business.  The above table shows the key difference between EcV and SII, with explanations for each item below.

 

Risk margin:  Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 3% cost of capital.

 

Contract boundaries:  Solvency II rules do not allow for the recognition of future cash flows on certain in-force contracts, despite the high probability of receipt.  We therefore make an adjustment to reflect the realistic value of the cash flows under EcV.

 

Ring-fenced fund restrictions:  Solvency II rules require a restriction to be placed on the value of certain ring-fenced funds.  These restrictions are reversed for EcV valuation purposes as they are deemed to be temporary in nature.

 

Dividends:  The proposed interim dividend of £10.5m is recognised for SII regulatory reporting purposes.  It is not recognised within EcV until it is actually paid.

 

Replacement of EEV:

During 2016 we replaced the previous group valuation metric, European Embedded Value, with a new metric, economic value (EcV).  This has been introduced to align our valuation metric with Solvency II, with EcV being derived from the Solvency II balance sheet.

 

As expected, the new valuation metric gives a broadly similar value of the Chesnara plc group.  At 31 December 2015 our previously reported EEV was £455.2m, compared with an opening EcV for 2016 of £453.4m.

 

Our Embedded Value figures have historically been subject to an external audit opinion addressed to the directors of Chesnara plc. This reflected the significance of the Embedded Value figures and was consistent with industry best practice.

 

The Economic Value figures are at this stage not subject to audit opinion other than to the extent the general audit opinion of the Financial Statements considers their consistency with the Financial Statements.

 

The annual external audit requirements cover Solvency II disclosures and as such given the Economic Value figures are derived from the Solvency II balance sheet the Economic Value figures benefit from a degree of external audit comfort.

 

 

RISK MANAGEMENT

Managing risk is a key part of our business model.  We achieve this by understanding the current and emerging risks to the business, mitigating them where appropriate and ensuring they are appropriately monitored and managed at all times.

 

Chesnara adopts the "three lines of defence" model across the group taking into account size, nature and complexity, with a single set of risk and governance principles applying consistently across the business.

 

PRINCIPAL RISKS AND UNCERTAINTIES

Risks and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the ability of the group to meet its core strategic objectives. 

 

There are a number of potential risks and uncertainties which could have a material impact on performance over the remaining months of the financial year causing material fluctuation in actual results from those expected.

 

Recent geopolitical events, such as the European Union referendum result, have triggered an increase in economic uncertainty.

 

Completion of the acquisition of Scildon during the first half of the year has not materially changed the nature of the risks facing the organisation.  It has in some cases impacted the sensitivity of the key financial metrics to those risks. The 'Capital Management: Solvency II' section provides further information on the sensitivities.

 

A detailed explanation of the risks faced by Chesnara and how they are mitigated can be found on pages 39 to 41 of the annual report.  These risks are summarised in the table below.

 

Risk

Impact

Adverse mortality / morbidity / longevity experience

In the event that actual mortality or morbidity rates vary from the assumptions underlying product pricing and subsequent reserving, more or less profit will accrue to the group.

Adverse persistency experience

If persistency is significantly lower than that assumed in product pricing and subsequent reserving, this will lead to reduced group profitability in the medium to long-term.  The business is exposed to losses arising from "mass lapse" events (i.e. a large number of customers terminating their contracts early within a short period of time).  This risk is most prevalent for parts of the business such as Movestic, where retention is to a degree dependent on Broker relationships.

Expense overruns and unsustainable unit cost growth

For the closed UK and Dutch businesses, the group is exposed to the impact on profitability of fixed and semi-fixed expenses with the potential to increase per policy administration costs as the book runs off and the costs remain fixed.  For the open life and pensions businesses (Movestic and Scildon), the group is exposed to the impact of expense levels varying adversely from those assumed in product pricing.

Significant and prolonged reduction in the market value of asset holdings

A significant part of the company's income and, therefore, overall profitability derives from fees received in respect of the management of policyholder and investor funds. Fee levels are generally proportional to the value of funds under management and any material fall in their value will impact on future income.  In addition, for with profits products with guarantees, a sustained fall in the market value of assets can increase the cost of meeting the guaranteed benefits.

The most material risk is equity risk, as overall investment funds comprise a significant equity content. However, material market risks also exist if there is a sustained fall in the value of fixed interest holdings, a fall in the value of property holdings and exchange rate risk in respect of overseas investments held by policyholders.

Income levels may also reduce if policyholders switch from equity based funds to lower margin, fixed interest funds, as a consequence of a material fall in the market value of equities.

Adverse exchange rate movements against Sterling

Exposure to adverse sterling:swedish krona and sterling:euro exchange rate movements (Sterling appreciating) arises from cash flows between Chesnara and its overseas subsidiaries and from the impact on reported IFRS and EcV results which are expressed in sterling.

Financial counterparty failure

The group carries significant inherent risk of counterparty failure in respect of:

-    its fixed interest security portfolio;

-    cash deposits; and

-    payments due from reinsurers.

Adverse movements in yields on fixed interest securities

The group maintains portfolios of fixed interest securities (i) in order to match its insurance contract liabilities, in terms of yield and cash flow characteristics, and (ii) as an integral part of the investment funds it manages on behalf of policyholders and investors.  It is exposed to mismatch losses arising from a failure to match its insurance contract liabilities or from the fact that sharp and discrete fixed interest yield movements may not be associated fully and immediately with corresponding changes in liability valuation interest rates.

Failure of outsourced service providers to fulfil contractual obligations

The group's business model includes outsourcing arrangements with providers that deliver policyholder administration and other key business functions, particularly in the UK.  In the event of failure by any of the service providers to fulfil their contractual obligations, in whole or in part, to the requisite standards specified in the contracts, the group may suffer losses, poor customer outcomes, or reputational damage as its functions degrade or underperform.

Key man dependency

The nature of the group is such that it relies on a number of key individuals who have particular knowledge, experience and know how.  The group is, accordingly, exposed to the sudden loss of the services of these individuals.

Adverse regulatory and legal changes

The group operates in jurisdictions which are currently subject to significant change arising from regulatory and legal requirements.  These may either be of a local nature, or of a wider nature, following from EU-based regulation and law.  This risk has been compounded by the increased geopolitical political uncertainties particularly within the EU but also on a global scale.

The group is therefore exposed to the one-off costs of addressing regulatory change as well as any permanent increases in the cost base in order to meet enhanced standards.  Further, the group is exposed to the risk of fines or censure in the event that it fails to deliver changes to the required regulatory standards on a timely basis.

Inconsistent regulation across territories

Chesnara currently operates in three regulatory domains and is therefore exposed to inconsistent application of regulatory standards across divisions, such as the imposition of higher Capital Buffers over and above regulatory minimums.

Potential consequences of this risk for Chesnara include constraining the efficient and fluid use of capital within the group, or creating a non-level playing field with respect to future deal assessments.

Availability of future acquisitions

Chesnara's inorganic growth strategy is 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 in 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. 

Defective acquisition due diligence

Through the execution of acquisitions, Chesnara is 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 within the transaction.

IT/data security risk and the risk of cyber crime

Cyber crime 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 main potential impacts of this risk include financial losses, inability to perform critical functions, disruption to policyholder services, loss of sensitive data and corresponding reputational damage or fines.

Liquidity risk

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.

 

Going concern

The directors have considered the ability of the group to continue on a going concern basis.  As such the board has performed an assessment as to whether the group can meet its liabilities as they fall due for a period of at least 12 months from which this half year report has been signed.

 

In performing this work, the board has considered the current cash position of the group and company, coupled with the group's and company's expected cash generation as highlighted in its most recent business plan, which covers a three year period.  The business plan considers the financial projections of the group and its subsidiaries on both a base case and a range of stressed scenarios, covering projected IFRS, EcV and solvency positions.  These projections also focus on the cash generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company.

 

The information set out in the 'Capital Management: Solvency II' section indicates a strong Solvency II position as at 30 June 2017 as measured at both the individual regulated life company levels and at the group level.  As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to continue trading.  The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default.  In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified.  Other significant counterparty default risk relates to our principal reinsurers.  We monitor their financial position and are satisfied that any associated credit default risk is low.

 

In light of this information, the board has concluded that the group and company has adequate resources to continue in operational existence for at least 12 months from the date of approval of this half year report, and as a result the IFRS Financial Statements have been prepared on a going concern basis.

 

 

SECTION C:  IFRS FINANCIAL STATEMENTS

 

 

DIRECTORS' RESPONSIBILITIES STATEMENT

 

We confirm that to the best of our knowledge:

-      the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

-      the management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

-      the management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

 

By order of the Board

 

 

 

Peter Mason                         John Deane

Chairman                              Chief Executive Officer

30 August 2017                   30 August 2017

 

 

INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC

 

We have been engaged by the company to review the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2017 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 9.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board.  Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

 

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom.  A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) 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 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

 

 

 

Deloitte LLP

Statutory Auditor

Manchester

United Kingdom

 

30 August 2017

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


Note

Unaudited

Six months ended

30  June

Year ended 31 December



2017

2016

2016



£000

£000

£000

Insurance premium revenue


91,643

55,524

109,450

Insurance premium ceded to reinsurers


(25,274)

(22,586)

(44,900)

Net insurance premium revenue


66,369

32,938

64,550

Fee and commission income


51,833

34,769

72,932

Net investment return


245,734

108,657

515,681

Total revenue net of reinsurance payable


363,936

176,364

653,163

Other operating income


9,377

9,397

17,614

Total income net of investment return


373,313

185,761

670,777

Insurance contract  claims and benefits incurred





Claims and benefits paid to insurance contract holders


(204,085)

(159,552)

(346,117)

Net increase/(decrease) in insurance contract provisions


47,368

(8,485)

11,392

Reinsurers' share of claims and benefits


22,640

34,372

62,364

Net insurance contract claims and benefits


(134,077)

(133,665)

(272,361)

Change in investment contract liabilities


(156,783)

(13,147)

(274,724)

Reinsurers' share of investment contract liabilities


1,762

1,918

5,617

Net change in investment contract liabilities


(155,021)

(11,229)

(269,107)

Fees, commission and other acquisition costs


(10,600)

(11,050)

(23,838)

Administrative expenses


(33,229)

(20,253)

(46,615)

Other operating expenses





Charge for amortisation of acquired value of in-force business


(5,225)

(4,645)

(10,419)

Charge for amortisation of acquired value of customer relationships


(50)

(114)

(236)

Other


(2,894)

(2,911)

(4,394)

Total expenses net of change in insurance contract provisions and investment contract liabilities


(341,096)

(183,867)

(626,970)

Total income less expenses


32,217

1,894

43,807

Share of profit/(loss) of associate


682

(428)

150

Profit recognised on business combination


20,742

-

-

Financing costs


(2,011)

(1,226)

(3,272)

Profit before income taxes

4

51,630

240

40,685

Income tax (expense)/credit


(4,878)

237

(5,405)

Profit for the period

3,4

46,752

477

35,280

Foreign exchange translation differences arising on the revaluation of foreign operations


7,084

15,188

20,114

Revaluation of pension obligations

8

(71)

-

-

Total comprehensive income for the period


53,765

15,665

55,394

Basic earnings per share (based on profit for the period)

2

31.22p

0.38p

27.67p

Diluted earnings per share (based on profit for the period)

2

31.04p

0.38p

27.56p

 

 

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)


Note

Unaudited

Six months ended

30 June

 

Year ended 31 December



2017

2016

2016



£000

£000

£000

Assets





Intangible assets





Deferred acquisition costs


55,281

43,083

48,318

Acquired value of in-force business


126,659

67,753

62,943

Acquired value of customer relationships


698

841

736

Software assets


7,123

7,133

6,560

Property and equipment


4,684

584

519

Investment in associates


6,221

4,721

5,433

Investment properties


1,255

245

245

Reinsurers' share of insurance contract provisions


244,459

276,304

254,859

Amounts deposited with reinsurers


38,147

34,642

37,437

Financial assets





Equity securities at fair value through income


497,569

479,452

485,165

Holdings in collective investment schemes at fair value through income


5,043,537

3,682,362

4,104,602

Debt securities at fair value through income


1,611,176

494,774

474,091

Policyholders' funds held by the Group


245,687

209,073

229,397

Mortgage loan portfolio


52,624

-

54,756

Insurance and other receivables


86,383

55,775

39,646

Prepayments


21,143

6,079

5,271

Derivative financial instruments


2,414

3,443

2,773

Total financial assets


7,560,533

4,930,958

5,395,701

Defined benefit pension scheme surplus


416

-

-

Reinsurers' share of accrued policyholder claims


18,026

21,367

19,307

Income taxes


3,497

1,693

3,352

Cash and cash equivalents


244,760

253,369

260,353

Total assets

4

8,311,759

5,642,693

6,095,763

Liabilities





Insurance contract provisions


3,971,521

2,260,524

2,242,446

Other provisions


1,857

925

823

Financial liabilities





Investment contracts at fair value through income 


3,281,368

2,678,190

3,028,269

Liabilities relating to policyholders' funds held by the Group


245,687

209,073

229,397

Borrowings

6

139,622

83,737

86,843

Derivative financial instruments


23,188

3,884

1,348

Total financial liabilities


3,689,865

2,974,884

3,345,857

Deferred tax liabilities


22,688

7,246

5,420

Reinsurance payables


5,461

6,743

6,899

Payables related to direct insurance and investment contracts


97,187

66,772

61,416

Deferred income


5,071

5,815

5,438

Income taxes


3,445

1,660

8,624

Other payables


84,511

21,203

23,657

Bank overdrafts


1,469

1,509

1,622

Total liabilities

4

7,883,075

5,347,281

5,702,202

Net assets


428,684

295,412

393,561

Shareholders' equity





Share capital


43,766

42,600

43,766

Share premium


142,064

76,516

142,058

Treasury shares


(157)

(161)

(161)

Other reserves


26,384

14,374

19,300

Retained earnings

3

216,627

162,083

188,598

Total shareholders' equity


428,684

295,412

393,561

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


Unaudited

Six months ended

30 June

 

Year ended 31 December


2017

2016

2016


£000

£000

£000

Profit for the period

46,752

477

35,280

Adjustments for:




Depreciation of property and equipment

203

93

173

Amortisation of deferred acquisition costs

5,228

5,233

12,162

Amortisation of acquired value of in-force business

5,225

4,645

6,797

Amortisation of acquired value of customer relationships

50

114

172

Amortisation of software assets

1,032

549

794

Share based payment

350

171

623

Tax paid /(recovery)

4,488

(53)

5,405

Interest receivable

(4,400)

(7,997)

(20,882)

  Dividends receivable

(15,458)

(18,076)

(30,209)

Interest expense

2,011

1,226

3,272

Fair value gains on financial assets

(209,345)

(203,005)

(205,870)

Profit arising on business combination

(20,742)

-

-

Share of (profit)/loss of associate

(682)

428

(150)

Interest received/(paid)

3,788

8,096

(16,448)

Dividends received

14,695

16,897

20,281

(Increase)/decrease in intangible assets related to insurance and investment contracts

(10,903)

(8,848)

29,446

Changes in operating assets and liabilities:




Decrease/(increase) in financial assets

78,496

140,550

(280,333)

Decrease in reinsurers share of insurance contract provisions

14,111

9,400

34,177

Increase in amounts deposited with reinsurers

(710)

(701)

(3,496)

(Increase)/decrease in insurance and other receivables

(27,031)

(9,589)

10,294

(Increase)/decrease in prepayments

(2,851)

902

1,795

Decrease in defined benefit pension scheme surplus

765

-

-

(Decrease)/increase in insurance contract provisions

(61,584)

7,584

(16,530)

Increase in investment contract liabilities

220,932

46,916

362,641

Increase/(decrease) in provisions

1,020

(1,125)

(1,306)

Decrease in reinsurance payables

(1,515)

(3,581)

(3,660)

Increase/(decrease) in payables related to direct insurance and investment contracts

2,738

3,233

(2,114)

Increase in other payables

46,069

4,978

2,808

Cash generated from/(utilised by) operations

92,732

(1,483)

(54,878)

Income tax paid

(22,287)

(3,498)

(4,709)

Net cash generated from/(utilised by) operating activities

70,445

(4,981)

(59,587)

Cash flows from investing activities




Business combination

(117,993)

-

-

Development of software

(462)

(2,404)

(3,502)

Purchases of property and equipment

(220)

(84)

948

Net cash utilised by investing activities

(118,675)

(2,488)

(2,554)

Cash flows from financing activities




Proceeds from issue of share capital

6

-

66,708

Net proceeds from borrowings

51,958

1,950

4,268

Sales of treasury shares

4

-

-

Dividends paid

(19,002)

(15,586)

(24,181)

Interest paid

(1,834)

(1,166)

(3,095)

Net cash generated/(utilised by) from financing activities

31,132

(14,802)

43,700

Net decrease in net cash and cash equivalents

(17,098)

(22,271)

(18,441)

Cash and cash equivalents at beginning of period

258,731

259,911

259,911

Effect of exchange rate changes on net cash and cash equivalents

1,658

14,220

17,261

Cash and cash equivalents at end of the period

243,291

251,860

258,731

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY(UNAUDITED)

Unaudited six months ended 30 June 2017








Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Equity shareholders' funds at 1 January 2017

43,766

142,058

19,300

(161)

188,598

393,561

Profit for the period

-

-

-

-

46,752

46,752

Dividends paid

-

-

-

-

(19,002)

(19,002)

Foreign exchange translation differences

-

-

7,084

-

-

7,084

Revaluation of pension obligations

-

-

-

-

(71)

(71)

Sale of treasury shares

-

6

-

4

-

10

Share based payment

-

-

-

-

350

350

Equity shareholders' funds at 30 June 2017

43,766

142,064

26,384

(157)

216,627

428,684

 

Unaudited six months ended 30 June 2016








Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Equity shareholders' funds at 1 January 2016

42,600

76,516

(814)

(161)

177,021

295,162

Profit for the period

-

-

-

-

477

477

Dividends paid

-

-

-

-

(15,586)

(15,586)

Foreign exchange translation differences

-

-

15,188

-

-

15,188

Share based payment

-

-

-

-

171

171

Equity shareholders' funds at 30 June 2016

42,600

76,516

14,374

(161)

162,083

295,412

 

Year ended 31 December 2016








Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Equity shareholders' funds at 1 January 2016

42,600

76,516

(814)

(161)

177,021

295,162

Profit for the year

-

-

-

-

35,280

35,280

Dividends paid

-

-

-

-

(24,181)

(24,181)

Foreign exchange translation differences

-

-

20,114

-

-

20,114

Share based payment

-

-

-

-

478

478

Sale of treasury shares

1,166

65,542

-

-

-

66,708

Equity shareholders' funds at 31 December 2016

43,766

142,058

19,300

(161)

188,598

393,561

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS (UNAUDITED)

1.   Basis of presentation

This condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU.  As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed set of consolidated financial statements has been prepared applying the accounting policies and presentation which were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2016.

 

The Group's published consolidated financial statements for the year ended 31 December 2016 were prepared in accordance with IFRS as adopted by the EU.  Any judgements and estimates applied in the condensed set of financial statements are consistent with those applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2016.

 

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 2016 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies.  The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statements under section 498(2) or (3) of the Companies Act 2006.

 

Scildon reports under IFRS and its accounting policies have been assessed as being in compliance with those of the Group. As part of this assessment, it has been identified that the basis for measuring insurance contract liabilities differs to other parts of the Chesnara Group.  In particular, Scildon measures the majority of its insurance contract liabilities using historical market rates of interest, as is customary in the Netherlands.  This approach can lead to increased volatility in IFRS profits by virtue of the assets that back the insurance contract provisions being reported on a fair value basis (i.e. incorporating current market rates of interest) but with the liabilities using historical rates.  Whilst "IFRS 4 Insurance Contracts" permits this, the Group is planning on aligning the current approach adopted by Scildon with those used in other parts of the group as it believes that this will make the financial statements more relevant to the economic decision-making needs of users.  This alignment is planned to be implemented prior to reporting the Group financial statements for the year ending 31 December 2017.  Note 5 Business combinations, has been prepared using the current measurement basis adopted by Scildon.  The Group does not anticipate that this alignment of measurement bases will materially impact the reported profit arising on acquisition as any consequential change in insurance contract liabilities is expected to result in an equal and opposite change to the "acquisition VIF", as reported in note 5.

 

 

2.   Earnings per share

Earnings per share are based on the following:

 


Unaudited

Six months ended

30 June

Year ended 31 December

 


2017

2016

2016


£000

£000

£000

Profit for the period attributable to shareholders (£000)

46,752

477

35,280

Weighted average number of ordinary shares

149,741,550

126,404,892

127,488,681

Basic earnings per share

31.22p

0.38p

27.67p

Diluted earnings per share

31.04p

0.38p

27.56p

 

The weighted average number of ordinary shares in respect of the six months ended 30 June 2017 is based upon 149,885,761 shares in issue, less 144,211 own shares held in treasury. 

 

The six months ended 30 June 2016 is based upon 126,552,427 shares in issue, less 147,535 own shares held in treasury at the beginning of the period, and 126,552,427 shares in issue less 147,535 own shares held in treasury at the end of the period. 

 

The weighted average number of ordinary shares in respect of the year ended 31 December 2016 is based upon 149,885,761 shares in issue less 147,535 own shares held in treasury. 

 

There were 876,926 share options outstanding at 30 June 2017 (30 June 2016: 526,648). Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2017. There were 526,648 share options outstanding as at 31 December 2016.

 

 

3.   Retained earnings


Unaudited

Six months ended

30 June

Year ended 31 December

 


2017

2016

2016


£000

£000

£000

Retained earnings attributable to equity holders of the parent company comprise:




Balance at 1 January

188,598

177,021

177,021

Profit for the period

46,752

477

35,280

Revaluation of pension obligations

(71)

-

-

Share based payment

350

171

478

Dividends




   Final approved and paid for 2015

-

(15,586)

(15,586)

   Interim approved and paid for 2016

-

-

(8,595)

   Final approved and paid for 2016

(19,002)

-

-

Balance at period end

216,627

162,083

188,598

The interim dividend in respect of 2016, approved and paid in 2016 was paid at the rate of 6.80p per share. 

The final dividend in respect of 2016, approved and paid in 2016, was paid at the rate of 12.69p per share so that the total dividend paid to the equity shareholders of the Company in respect of the year ended 31 December 2016 was made at the rate of 19.49p per share.

 

An interim dividend of 7.00p per share in respect of the year ending 31 December 2017 payable on 11 October 2017 to equity shareholders of the Company registered at the close of business on 8 September 2017, the dividend record date, was approved by the Directors after the balance sheet date.  The resulting dividend of £10.5m 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 2017 and the year ended 31 December 2016:


Six months ended

30 June

Year ended 31 December


2017

p

2016

p

Interim - approved and paid

7.00

6.80

Final - proposed/paid

-

12.69

Total

7.00

19.49

 

 

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 2017 comprise:

 

CA:  This segment is part of the Group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the Group's principal UK operating subsidiary, and City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. This segment also contains the business of Protection Life, which was purchased on 28 November 2013.  CA is responsible for conducting unit-linked and non-linked business.

 

S&P: This segment, which was acquired on 20 December 2010, comprises the business of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited.  It is responsible for conducting both unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk, as described in Note 6 'Management of financial risk' in the Chesnara plc 2014 Annual Report and Accounts. On 31 December 2011 the whole of the business of this segment was transferred to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000.

 

Movestic:  This segment comprises the Group's Swedish life and pensions business, Movestic Livförsäkring AB ('Movestic') and its subsidiary and associated companies, which are open to new business and which are responsible for conducting both unit-linked and non-linked business.

 

Waard Group:  This segment represents the Group's first Dutch life and general insurance business, which was acquired on 19 May 2015 and comprises the three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Waard Verzekeringen B.V..  During the period, the book of business in Hollands Welvaren Leven was transferred to it's direct parent company, Waard Leven. 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 2017.

 

(i)   Segmental income statement for the six months ended 30 June 2017


 

CA

 

 

S&P

 

 

UK Total

 

Movestic

 

Waard Group

Scildon

Other Group Activities

 

 

Total


£000

£000

£000

£000

£000

£000

£000

£000

Net insurance premium revenue

18,364

1,995

20,359

7,681

1,303

37,026

-

66,639

Fee and commission income

13,516

1,217

14,733

24,032

10

13,058

-

51,833

Net investment return

53,181

62,339

115,520

125,026

3,309

1,831

48

245,734

Total revenue (net of reinsurance payable)

85,061

65,551

150,612

156,739

4,622

51,915

48

363,936

Other operating income/(expense)

1,366

5,748

7,114

2,393

36

(166)

-

9,377

Segmental income

86,427

71,299

157,726

159,132

4,658

51,749

48

373,313

Net insurance contract claims and benefits incurred

(42,174)

(50,029)

(92,203)

(3,154)

(674)

(38,046)

-

(134,077)

Net change in investment contract liabilities

(28,786)

(1,496)

(30,282)

(124,739)

-

-

-

(155,021)

Fees, commission and other acquisition costs

(713)

(8)

(721)

(13,634)

(168)

686

-

(13,837)

Administrative expenses:









Amortisation charge on software assets

-

-

-

(1,032)

-

(54)

-

(1,086)

Depreciation charge on property and equipment

-

-

-

(84)

(21)

(118)

-

(223)

Other

(5,864)

(5,116)

(10,980)

(6,358)

(1,479)

(7,254)

(5,849)

(31,920)

Operating (expenses)/income

(473)

1

(472)

(2,434)

-

-

12

(2,894)

Financing costs

-

(2)

(2)

(1,238)

-

-

(771)

(2,011)

Share of profit from associates

-

-

-

682

-

-

-

682

Profit/(loss) before tax and consolidation adjustments

8,417

14,649

23,066

7,141

2,316

6,963

(6,560)

32,926

Other operating expenses:









Charge for amortisation of acquired value of in-force business

(2,841)

(271)

(3,112)

(1,739)

(325)

(49)

-

(5,225)

Charge for amortisation of acquired value of customer relationships

-

-

-

(50)

-

-

-

(50)

Fees, commission and other acquisition costs

-

-

-

1,681

1,556

-

-

3,237

Segmental income less expenses

5,576

14,378

19,954

7,033

3,547

6,914

(6,560)

30,888

Profit arising on business combination

-

-

-

-

20,742

-

-

20,742

Profit before tax

14,378

19,954

7,033

24,289

6,914

(6,560)

51,630

Income tax (expense)/credit



(3,235)

(311)

(838)

(1,757)

1,263

(4,878)

Profit/(loss) after tax



16,719

6,722

23,451

5,157

(5,297)

46,752

 

(ii)  Segmental balance sheet as at 30 June 2017


 

CA

 

S&P

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

Total


£000

£000

£000

£000

£000

£000

£000

Total assets

1,763,109

1,237,283

2,991,394

227,898

2,019,490

72,585

8,311,759

Total liabilities

(1,689,073)

(1,160,852)

(2,906,248)

(129,627)

(1,893,450)

(103,825)

(7,883,075)

Net assets

74,036

76,431

85,146

98,271

126,040

(31,240)

428,684

Investment in associates

-

-

6,221

-

-

-

6,221

Additions to non-current assets

-

-

11,525

134

1,360

-

13,019

 

(iii) Segmental income statement for the six months ended 30 June 2016


 

CA

 

 

S&P

 

 

UK Total

 

Movestic

 

Waard Group

Other Group Activities

 

 

Total


£000

£000

£000

£000

£000

£000

£000

Net insurance premium revenue

21,730

2,622

24,352

7,118

1,468

-

32,938

Fee and commission income

14,431

1,326

15,757

19,000

12

-

34,769

Net investment return

92,909

43,364

136,273

(29,550)

1,822

112

108,657

Total revenue (net of reinsurance payable)

129,070

47,312

176,382

(3,432)

3,302

112

176,364

Other operating income

1,224

5,141

6,365

2,553

479

-

9,397

Segmental income/(expenses)

130,924

52,453

182,747

(879)

3,781

112

185,761

Net insurance contract claims and benefits incurred

(68,903)

(61,287)

(130,190)

(3,851)

376

-

(133,665)

Net change in investment contract liabilities

(40,343)

(467)

(40,810)

29,581

-

-

(11,229)

Fees, commission and other acquisition costs

(870)

(14)

(884)

(11,581)

(157)

-

(12,622)

Administrative expenses:








Amortisation charge on software assets

-

-

-

(1,340)

-

-

(1,340)

Depreciation charge on property and equipment

(22)

-

(22)

(180)

-

-

(202)

Other

(5,283)

(4,607)

(9,890)

(4,909)

(1,734)

(2,178)

(18,711)

Operating expenses

(603)

-

(603)

(2,308)

-

-

(2,911)

Financing costs

-

(1)

(1)

(403)

-

(822)

(1,226)

Share of profit/(loss) from associates

-

-

-

(428)

-

-

(428)

Profit/(loss) before tax and consolidation adjustments

14,270

(13,923)

347

3,702

2,226

(2,888)

3,427

Other operating expenses:








Charge for amortisation of acquired value of in-force business

(2,324)

(302)

(2,626)

(1,725)

(294)

-

(4,645)

Charge for amortisation of acquired value of customer relationships

-

-

-

(114)

-

-

(114)

Fees, commission and other acquisition costs

-

-

-

1,572

-

-

1,572

Segmental income less expenses

11,946

(14,225)

(2,279)

3,435

1,972

(2,888)

240

Profit before tax

11,946

(14,225)

(2,279)

3,435

1,972

(2,888)

240

Income tax credit/(expense)



144

(333)

(684)

1,110

237

Profit after tax



(2,135)

3,102

1,288

(1,778)

477

 

(iv) Segmental balance sheet as at 30 June 2016


 

CA

 

S&P

 

Movestic

 

Waard Group

Other Group Activities

 

Total


£000

£000

£000

£000

£000

£000

Total assets

1,835,090

1,187,101

2,380,344

204,527

35,631

5,642,693

Total liabilities

(1,715,423)

(1,145,106)

(2,307,514)

(125,701)

(53,537)

(5,347,281)

Net assets

119,667

41,995

72,830

78,826

(17,906)

295,412

Investment in associates

-

-

4,721

-

-

4,721

Additions to non-current assets

-

-

11,894

7

-

11,901

 

(v)  Segmental income statement for the year ended 31 December 2016


 

CA

 

 

S&P

 

 

UK Total

 

Movestic

 

Waard Group

Other Group Activities

 

 

Total


£000

£000

£000

£000

£000

£000

£000

Net insurance premium revenue

42,103

4,886

46,989

14,903

2,658

-

64,550

Fee and commission income

29,000

2,610

31,610

41,296

26

-

72,932

Net investment return

206,748

131,155

337,903

169,130

8,464

184

515,681

Total revenue (net of reinsurance payable)

277,851

138,651

416,502

225,329

11,148

184

653,163

Other operating income

2,568

10,792

13,360

3,751

503

-

17,614

Segmental income

280,419

149,443

429,862

229,080

11,651

184

670,777

Net insurance contract claims and benefits incurred

(139,748)

(123,454)

(263,202)

(7,695)

(1,464)

-

(272,361)

Net change in investment contract liabilities

(98,393)

(2,206)

(100,599)

(168,508)

-

-

(269,107)

Fees, commission and other acquisition costs

(1,641)

(23)

(1,664)

(25,089)

(330)

-

(27,083)

Administrative expenses:








Amortisation charge on software assets

-

-

-

(1,243)

-

-

(1,243)

Depreciation charge on property and equipment

-

-

-

(197)

-

-

(197)

Other

(11,017)

(9,443)

(20,460)

(12,800)

(3,664)

(8,251)

(45,175)

Operating expenses

(1,203)

(1)

(1,204)

(3,209)

-

19

(4,394)

Financing costs

-

(2)

(2)

(1,629)

-

(1,641)

(3,272)

Share of profit from associates

-

-

-

150

-

-

150

Profit before tax and consolidation adjustments

28,417

14,314

42,731

8,860

6,193

(9,689)

48,095

Other operating expenses:








Charge for amortisation of acquired value of in-force business

(5,643)

(604)

(6,247)

(3,554)

(618)

-

(10,419)

Charge for amortisation of acquired value of customer relationships

-

-

-

(236)

-

-

(236)

Fees, commission and other acquisition costs

-

-

-

3,245

-

-

3,245

Segmental income less expenses

22,774

13,710

36,484

8,315

5,575

(9,689)

40,685

Profit/(loss) before tax

22,774

13,710

36,484

8,315

5,575

(9,689)

40,685

Income tax (expense)/credit



(6,663)

(7)

(1,721)

2,986

(5,405)

Profit/(loss) after tax



29,821

8,308

3,854

(6,703)

35,280

 

(vi) Segmental balance sheet as at 31 December 2016


 

CA

 

S&P

 

Movestic

 

Waard Group

Other Group Activities

 

Total


£000

£000

£000

£000

£000

£000

Total assets

1,829,944

1,217,546

2,718,156

207,160

122,957

6,095,763

Total liabilities

(1,728,019)

(1,155,556)

(2,638,490)

(122,655)

(57,482)

(5,702,202)

Net assets

101,925

61,990

79,666

84,505

65,475

393,561

Investment in associates

-

-

5,433

-

-

5,433

Additions to non-current assets

-

-

11,894

-

-

11,894

 

 

5.   Business combinations

On 5 April 2017, Chesnara plc acquired the entire issued share capital (100%) of Legal & General Nederland Levensverzekering Maatschappij N.V. (Legal & General Nederland) an open book life assurance company based in Netherlands, from Legal & General Group plc, a UK based financial services group for a total consideration of €161,236,164 (approximately £137.5m), comprising €160.0m base consideration plus interest for the period to completion of €1.2m.  On 11 April 2017, it was announced that the newly acquired company was to be re-branded as Scildon.  Scildon's policy base is predominantly made up of individual protection and savings contracts. It is open to new business and sells protection, individual savings and group pension contracts via a broker-led distribution model.  The acquisition creates scale and presence in the Dutch market and leaves us well positioned to take advantage of any further value adding opportunities that may arise.

 

The acquisition of this shareholding has given rise to a profit on acquisition of £20.7m calculated as follows:

 


Book Value

Provisional fair value adjustments

 

Fair value


£000

£000

£000

Assets




Intangible assets




   Deferred acquisition costs

11,763

(11,763)

-

   Acquired value of in-force business

-

66,296

66,296

   Software assets

1,002

-

1,002

Property and equipment

4,022

-

4,022

Investment properties

981

-

981

Reinsurers' share of insurance contract provisions

1,314

-

1,314

Financial assets:




   Holdings in collective investment schemes at fair value through income

811,715

-

811,715

   Debt securities at fair value through income

1,058,393

-

1,058,393

   Insurance and other receivables

15,567

-

15,567

   Prepayments

12,647

-

12,647

Total financial assets

1,898,322

-

1,898,322

Deferred tax asset

8,168

-

8,168

Defined benefit pension scheme surplus

1,056

-

1,056

Income taxes

127

-

127

Cash and cash equivalents

19,533

-

19,533

Total assets

1,946,288

54,533

2,000,821

Liabilities




Insurance contract provisions

1,736,389

-

1,736,389

Derivatives

23,725

-

23,725

Deferred tax liabilities

10,919

13,634

24,553

Payables related to direct insurance contracts

31,967

-

31,967

Income taxes

10,324

-

31,967

Other payables

15,595

-

10,324

Total liabilities

1,828,919

13,634

1,842,553

Net assets

117,369

40,899

158,268





Net assets acquired



158,268

Total consideration, paid in cash



(137,526)





Profit arising on business combination



20,742

 

The assets and liabilities at the acquisition date in the table above are stated at their provisional fair values and may be amended for 12 months after the date of acquisition in accordance with IFRS 3, Business Combinations.  It should be noted that a restatement of insurance contract provisions is planned to take place in the second half of 2017, as reported in note 1 Basis of preparation.  The Group does not anticipate that this change in measurement basis for insurance contract liabilities will materially alter the overall reported profit arising on acquisition as any consequential change in insurance contract liabilities is expected to result in an equal and opposite change to the "acquisition value of in-force business" intangible asset.

 

Acquired receivables:  Within the net assets acquired are reinsurance related and other receivable balances totalling £16.9m, which are held at fair value.  For all receivables other than reinsurers' share of insurance contract provisions the gross contractual amounts receivable are equal to fair value.  The reinsurers' share of insurance contract provisions receivable balance of £1.3m is discounted as a result of the long-term nature of this asset.

 

Acquired value of in-force business:  The acquisition has resulted in the recognition of net of tax intangible asset amounting to £49.7m, which represents the present value of the future post-tax cash flows expected to arise from policies that were in force at the point of acquisition.  The asset has been valued using a discounted cash flow model that projects the future surpluses that are expected to arise from the business.  The model factors in a number of variables, of which the most influential are; the policyholders' ages, mortality rates, expected policy lapses, expenses that are expected to be incurred to manage the policies and future investment growth, as well as the discount rate that has been applied.  This asset will be amortised over its expected useful life.

 

Gain on acquisition:  As shown above, a gain of £20.7m has been recognised on acquisition.  Under IFRS 3, a gain on acquisition is defined as being a "bargain purchase".  At the point of price negotiation and subsequent deal completion, Legal & General was following a strategic plan to dispose of non-core businesses, which included its Dutch operation. In the opinion of the Directors this resulted in a disposal pricing strategy for Legal & General Nederland that sought to offer an attractive investment opportunity for potential buyers.

 

Acquisition-related costs:  The costs in respect of the transaction amounted to £8.1m.  £4.1m of these costs have been included in Administration Expenses, of which £3.8m was recognised within the Consolidated Statement of Comprehensive Income in 2016, with the remainder recognised in the current period.  Transaction costs of £3.3m were incurred in respect of the equity fund-raising and were deducted from equity in 2016.  Debt fund-raising costs amounted to £0.8m and will be amortised over the life of the loan using the effective interest rate method of amortisation.

 

Results of Scildon:  The results of Scildon have been included in the consolidated financial statements of the Group with effect from 5 April 2017. Net insurance premium revenue for the period was £37.0m, with contribution to overall consolidated profit before tax of £7.0m, before the amortisation of the AVIF and deferred acquisition cost intangible assets.  Had Scildon been consolidated from 1 January 2017, the Consolidated Statement of Comprehensive Income would have included net insurance premium revenue of £94.6m, and would have contributed £5.4m to the overall consolidated profit before tax.

 

 

6.   Borrowings


      Unaudited

        30 June

31 December


2017

2016

2016


£000

£000

£000

Bank loan

101,665

52,580

52,697

Amount due in relation to financial reinsurance

37,957

31,157

34,146

Total

139,622

83,737

86,843

 

The bank loan subsisting at 30 June 2017 comprises the following:

 

-    on 3 April 2017 tranche one of a new facility was drawn down, amounting to £40.0m.  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 £52.8m.

 

-    on 3 April 2017 tranche two of the new loan facility was drawn down, amounting to €71.0m.  As with tranche one, this facility is unsecured and is repayable in ten six-monthly instalments on the anniversary of the draw down date.  The outstanding principal on the loan bears interest at a rate of 2.00 percentage points above the European Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower.

 

The fair value of the sterling bank loan at 30 June 2017 was £40,000,000 (31 December 2016: £52,800,000).

 

The fair value of the euro denominated bank loan at 30 June 2017 was €71,000,000 (£62,329,910).

 

The fair value of amounts due in relation to financial reinsurance was £37,903,000 (31 December 2016: £34,396,000). 

 

Bank loans are presented net of unamortised arrangement fees.  Arrangement fees are recognised in profit or loss using the effective interest rate method.

 

 

7.   Financial instruments fair value disclosures

The table below shows the determination of the fair value of financial assets and financial liabilities according to a three-level valuation hierarchy.  Fair values are generally determined at prices quoted in active markets (Level 1).  However, where such information is not available, the Group applies valuation techniques to measure such instruments.  These valuation techniques make use of market-observable data for all significant inputs where possible (Level 2), but, in some cases it may be necessary to estimate other than market-observable data within a valuation model for significant inputs (Level 3).

 

The Group held the following financial instruments at fair value at 30 June 2017.  There have not been any transfers of assets or liabilities between levels of the fair value hierarchy. There are no non-recurring fair value measurements.

 

Fair value measurement at 30 June 2017 using






Level 1

Level 2

Level 3

Total

Financial assets

£000

£000

£000

£000

Equities





   Listed

497,569

-

-

497,569

Holdings in collective investment schemes

5,032,115

11,422

-

5,043,537

Debt securities - fixed rate





   Government Bonds

935,306

2,699

-

938,005

   Corporate Bonds

667,169

-

-

667,169

Debt securities - floating rate





   Listed

6,002

-

-

6,002

Total debt securities

1,608,477

2,699

-

1,611,176

Policyholders' funds held by the group

245,687

-

-

245,687

Derivative financial instruments

418

1,996

-

2,414

Total

7,384,266

16,117

-

7,400,383

Current




4,862,206

Non-current




2,538,177

Total




7,400,383






Financial liabilities





   Investment contracts at fair value through income

-

3,281,368

-

3,281,368

   Liabilities related to policyholders' funds held by the group

245,687

-

-

245,687

   Derivative financial instruments

-

23,188

-

23,188

Total

245,687

3,304,556

-

3,550,243






 

Holdings in collective investment schemes

Included within Holdings in collective investment schemes are amounts held by Scildon, which represents a unit-linked fund containing a mixture of government bonds. The value of the fund is calculated using an internal market model. These amounts have been classified as level 2 in the above hierarchy table as the overall fund price is not collectively quoted but is valued using market-observable data.

 

Debt securities

The debt securities classified as Level 2 are Dutch government bond-type products, held by our newly acquired Dutch subsidiary Scildon. These assets are valued by the use of valuation models maintained by the holding investment managers, using the Dutch government interest rate curve plus an additional 20 basis point margin to represent the illiquid nature of the assets.

 

These assets have been classified as Level 2 because the third-party valuation models include observable inputs to the valuation of these assets, including yield curves.

 

Derivative financial instruments

Within derivative financial instruments is a financial reinsurance embedded derivative related to our Movestic operation. The Group has entered into a reinsurance contract with a third party that has a section that is deemed to transfer significant insurance risk and a section that is deemed not to transfer significant insurance risk. The element of the contract that does not transfer significant insurance risk has two components and has been accounted for as a financial liability at amortised cost and an embedded derivative asset at fair value.

 

The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being determined by reference to market interest rate at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination hierarchy set out above.

 

The derivative balance classified as a Level 2 liability, predominantly relates to interest rate swaps held within our Scildon operation, to hedge some of the risk of changes in the value of its obligations under insurance contract liabilities. The valuation of these derivatives is modelled using market observable variables and are hence classified as Level 2.

 

Investment contract liabilities

The Investment contract liabilities in Level 2 of the valuation hierarchy represent the fair value of non-linked and guaranteed income and growth bonds liabilities valued using established actuarial techniques utilising market observable data for all significant inputs, such as investment yields.

 

 

Except as detailed in the following table, the Directors consider that the carrying value amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements are approximately equal to their fair values:

 





 


Carrying amount


Fair value

 


30 June

30 June

31 December


30 June

30 June

31 December


2017

2016

2016


2017

2016

2016


£000

£000

£000


£000

£000

£000









Financial liabilities:








Borrowings

139,622

83,737

86,843


140,233

84,536

87,196

 

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.

 

 

8.   Defined benefit pension scheme obligations

Scildon has a defined benefit plan, the costs of which are calculated using the projected unit credit method. This means that the cost of providing pensions charged to the profit and loss account are placed over the service lives of employees, according to actuarial calculations. The obligations are calculated as the difference between the present value of pension obligations, net of the fair value of the existing plan assets.  The present value of pension liabilities is determined by discounting the expected future retirement benefits at the rate of return on high quality corporate bonds in euros, which have a similar remaining period to when the pension payments are expected to be incurred. Any deficiency is recognised as a liability in the consolidated balance sheet, and any surplus is recognised as an asset.  Actuarial gains and losses arising from deviations from expected outcomes are recognised as revaluations through other comprehensive income and are recognised directly in equity.

 

Scildon is required to contribute a cost covering premium. This cost covering premium contains the actuarial cost of newly arising unconditional benefits (using the pension fund's assumptions), the related administration cost and related buffer requirements.  The pension fund does not guarantee the nominal benefits. In case of underfunding the nominal benefits can be reduced.  Scildon is not obliged to pay for:

-    Past service benefit increases due to wage increases;

-    Past service benefit increases due to (full) indexation of past service benefits to active participants;

-    Past service benefit increases due to (full) indexation of past service benefits to deferred participants and participants receiving benefits;

-    Catch up contributions (e.g. for a transitory plan); and

-    Fund deficits.

 

Vested benefits have been funded with the pension fund which manages the assets.  Newly arising benefits are funded through contributions to the pension fund.  The agreement between Scildon and the pension fund contains provisions that the pension fund may grant discounts and/or restitutions to Scildon, if the funding position of the pension fund exceeds a certain level and outlooks are positive.

The assets and liabilities of the defined benefit scheme are shown below.

 


30 June


2017


£000

Total fair value of assets

46,217

Present value of scheme liabilities

(45,802)

Net surplus in the scheme

415

 

The surplus at the date of acquisition was £1,056,000.  The movement to 30 June 2017 is primarily due to current service costs, together with broadly offsetting asset and liability valuation movements.  There were no employer contributions into the scheme in the period post acquisition.

 

 

9.   Approval of consolidated report for the six months ended 30 June 2017

This condensed consolidated report was approved by the Board of Directors on 30 August 2017.  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.

 

 

SECTION D:  ADDITIONAL INFORMATION

 

 

financial calendar

31 August 2017

Interim results for the six months ending 30 June 2017 announced.

 

7 September 2017

Ex dividend date.

 

8 September 2017

Interim dividend record date

 

11 October 2017

Interim dividend payment date.

 

29 March 2018

Results for the year ending 31 December 2017 announced.

 

 

 

KEY CONTACTS

 

Registered and Head Office

2nd Floor, Building 4

West Strand Business Park

West Strand Road

Preston

Lancashire

PR1 8UY

 

Tel:  01772 972050

www.chesnara.co.uk

 

 

Legal 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

Chartered Accountants and Statutory Auditor

Saltire Court

20 Castle Terrace

Edinburgh

EH1 2DB

 

Registrars

Capita Asset Services

The Registry

34 Beckenham Road

Beckenham

Kent

BR3 4TU

 

Joint Stockbrokers

Panmure Gordon

One New Change

London

EC4M 9AF

 

Shore Capital Stockbrokers Limited

Bond Street House

14 Clifford Street

London

W1S 4JU

 

Bankers

National Westminster Bank plc

135 Bishopsgate

London

EC2M 3UR

 

The Royal Bank of Scotland

8th Floor, 135 Bishopsgate

London

EC2M 3UR

 

Lloyds Bank plc

3rd Floor, Black Horse House

Medway Wharf Road

Tonbridge

Kent

TN9 1QS

 

Public Relations Consultants

FWD

145 Leadenhall Street

London

EC3V 4QT

 

Corporate Advisors

Shore Capital Stockbrokers Limited

Bond Street House

14 Clifford Street

London

W1S 4JU

 

GLOSSARY

AGM

Annual General Meeting.

ALM

Asset Liability Management - management of risks that arise due to mismatches between assets and liabilities.

APE

Annual Premium Equivalent - an industry wide measure that is used for measuring the annual equivalent of regular and single premium policies.

CA

Countrywide Assured plc.

CALH

Countrywide Assured Life Holdings Limited and its subsidiary companies.

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.

DNB

De Nederlandsche Bank is the central bank of the Netherlands and is the regulator of our Dutch subsidiaries,

DPF

Discretionary Participation Feature - A contractual right under an insurance contract to receive, as a supplement to guaranteed benefits, additional benefits whose amount or timing is contractually at the discretion of the issuer.

Dutch Business

Scildon and the Waard Group, consisting of Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V. and Waard Verzekeringen B.V.

EcV

Economic Value is a financial metric that is derived from Solvency II own funds that is broadly similar in concept to European Embedded Value. It provides a market consistent assessment of the value of existing insurance businesses, plus adjusted net asset value of the non-insurance business within the group.

FCA

Financial Conduct Authority.

FI

Finansinspektionen, being the Swedish Financial Supervisory Authority.

Form of Proxy

The form of proxy relating to the General Meeting being sent to Shareholders with this document.

FSMA

The Financial Services and Markets Act 2000 of England and Wales, as amended.

Group

The company and its existing subsidiary undertakings.

Group Own Funds

In accordance with the UK's regulatory regime for insurers it is the sum of the individual capital resources for each of the regulated related undertakings less the book-value of investments by the group in those capital resources.

Group SCR

In accordance with the UK's regulatory regime for insurers it is the sum of individual capital resource requirements for the insurer and each of its regulated undertakings.

Group Solvency

Group solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold in accordance with Solvency II regulations.

HCL

HCL Insurance BPO Services Limited.

IFRS

International Financial Reporting Standards.

IFA

Independent Financial Adviser.

KPI

Key performance indicator.

LGN

LGN or Legal & General Nederland refers to the legal entity Legal & General Nederland Levensverzekering Maatschappij N.V acquired by Chesnara in April 2017.

London Stock Exchange

London Stock Exchange plc.

LTI

Long-Term Incentive Scheme - A reward system designed to incentivise executive directors' long-term performance.

Movestic

Movestic Livförsäkring AB.

Modernac

Modernac SA, an associated company which is 49% owned by Movestic.

New business

The present value of the expected future cash inflows arising from business written in the reporting period.

Official List

The Official List of the Financial Conduct Authority.

Ordinary Shares

Ordinary shares of five pence each in the capital of the company.

Own Funds

Own Funds - in accordance with the UK's regulatory regime for insurers it is the sum of the individual capital resources for each of the regulated related undertakings less the book-value of investments by the company in those capital resources.

ORSA

Own Risk and Solvency Assessment.

PRA

Prudential Regulation Authority.

QRT

Quantitative Reporting Template.

ReAssure

ReAssure Limited.

Resolution

The resolution set out in the notice of General Meeting set out in this document.

RMF

Risk Management Framework.

Scildon

Scildon.

Shareholder(s)

Holder(s) of Ordinary Shares.

Solvency II

A fundamental review of the capital adequacy regime for the European insurance industry. Solvency II aims to establish a set of EU-wide capital requirements and risk management standards and has replaced the Solvency I requirements.

SICAV

A type of open-ended investment fund in which the amount of capital in the fund varies according to the number of investors. Shares in the fund are bought and sold based on the fund's current net asset value.

STI

Short-Term Incentive Scheme - A reward system designed to incentivise executive directors' short-term performance.

SCR

In accordance with the UK's regulatory regime for insurers it is the sum of individual capital resource requirements for the insurer and each of its regulated undertakings.

Swedish Business

Movestic and its subsidiaries and associated companies.

S&P

Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.

TCF

Treating Customers Fairly - a central PRA principle that aims to ensure an efficient and effective market and thereby help policyholders achieve fair outcomes.

TSR

Total Shareholder Return, measured with reference to both dividends and capital growth.

UK or United Kingdom

The United Kingdom of Great Britain and Northern Ireland.

UK Business

CA and S&P.

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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