Source - LSE Regulatory
RNS Number : 3259J
Chesnara PLC
29 March 2018
 

Chesnara plc

 

Record divisional cash pays dividends

 

During 2017 we have delivered against each of our core strategic objectives thanks to economic tailwinds, good operational delivery and a number of one-off items including the successful completion of the acquisition of Legal & General Nederland.

 

Financial Highlights

 

·        Economic Value (EcV) of £723.1m (31 December 2016: £602.6m) Note 1

We completed the acquisition of Legal and General Nederland (which we have since rebranded "Scildon") which created £65.4m of incremental EcV.  The movement is stated after recognising £29.5m of dividend payments during the year.

 

·        EcV earnings net of tax of £139.5m (2016: £72.5m)

Includes the aforementioned £65.4m gain arising from the Legal and General Nederland acquisition.  Favourable investment market conditions have contributed positively to the result.

 

·        EcV new business contribution of £12.4m (2016: £11.7m)

Movestic continues to contribute the vast majority of new business profits.  Scildon introduces a second open business to the group and is anticipated to deliver more meaningful contributions following delivery of a two year change programme.

 

·        Group cash generation, excluding the impact of the LGN acquisition, of £83.9m (2016: £36.5m) Note 2

The 2017 result includes £16.2m of post acquisition cash generation from Scildon.

 

·        Divisional cash generation of £86.7m (2016: £34.3m) Note 3

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

 

·        IFRS profit before tax of £89.6m (2016: £40.7m)

The 2017 result includes a £20.3m gain on the acquisition of Legal and General Nederland.  Economic profits of £30.9m compare to a corresponding profit of £5.8m in 2016.  The underlying core operating profit remains relatively stable at £38.4m (2016: £34.9m).

 

·        IFRS Total Comprehensive Income of £86.9m (2016: £55.4m)

This includes a foreign exchange gain of £8.3m (2016: £20.1m gain) arising on a strengthening of the euro and Swedish krona against sterling.

 

·        Group solvency ratio of 146% (31 December 2016: 144%Note 4)  

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

 

·        2.98% increase in full year dividend compared with 2016 

Total dividend of 20.07p per share (2016: 19.49p per share).  This increase represents the thirteenth successive rise in annual dividends.

 

Strategic delivery highlights

 

·        Completion of the Legal and General Nederland acquisition

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

 

·        £70m of divisional dividends

The results during the year, combined with associated solvency positions, have enabled the divisions to propose total dividends to Chesnara of £70.0m.  As expected, the UK's dividend of £32.0m continues to be the largest contributor but it is equally encouraging to see the Dutch businesses of Scildon and Waard propose dividends of £22.2m and £13.0m respectively.  The fact that a growth business such as Movestic has proposed a dividend of £2.8m is also very positive.

 

John Deane, Chief Executive said:

"2017 has been another good year for Chesnara during which we completed the acquisition of Legal and General Nederland, now successfully rebranded Scildon, and made good progress on integrating it into our business. The acquisition has contributed to an impressive set of results on all financial metrics, including IFRS, Economic Value and Solvency II.  In particular I am pleased to report an Economic Value growth, excluding the acquisition gain, of 9.1%.

 

All divisions have made significant contributions to cash and value generation.  The UK business had again generated cash ahead of expectations and Movestic continues to deliver significant growth, which has resulted in further cash generation.

 

During the post acquisition period, Scildon has delivered Economic Value growth and solvency surplus broadly in line with our initial expectations. That said, we retain our view that the business would benefit from some focussed improvements and have initiated a development programme to improve the profitability of new business.

 

As a result of the positive performance in the year, Chesnara expects total dividends from its divisions of £70.0m, including an inaugural Scildon dividend of £22.2m."

 

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

 

Note 2    The unadjusted group cash generation metric in 2016 was £85.4m, and included a £48.9m one-off positive impact in respect of equity raised ahead of completion of the acquisition of Legal and General Nederland.  We highlighted this as a temporary impact in our 2016 accounts.  The unadjusted group cash generation in 2017 of £28.6m includes, as expected, a consequential negative impact of £55.3m which arose on completion of the LGN acquisition.  The end to end impact of the acquisition of LGN resulted in a day 1 surplus cash reduction of £6.4m.

 

Note 3    Cash generation represents the movement in distributable surplus during the period.  Distributable surplus is defined as being the excess of Solvency II own funds over and above the group's internal capital management policies, which have been prepared in the context of the solvency capital requirements imposed by our regulators.

 

Note 4    The 2016 closing solvency ratio of 144% is an adjusted ratio, and removes the positive impact of the equity raised ahead of the purchase of Legal and General Nederland.  This is deemed to provide a more meaningful comparison to the solvency ratio at 31 December 2017.  The unadjusted position at 31 December 2016 was 158%.

 

 

 

The Board approved this statement on 28 March 2018.

 

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

 

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

 

Notes to Editors

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

 

CA plc is a UK life assurance subsidiary that is closed to new business.  In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for £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.

 

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

 

Further details are available on the Company's website (www.chesnara.co.uk).

 

 

CAUTIONARY STATEMENT

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

 

 

2017 HIGHLIGHTS 

 

FINANCIAL

 

IFRS PRE-TAX PROFIT £89.6M 2016 £40.7M

The 2017 result includes £20.3m gain on acquisition of Legal & General Nederland.

 

IFRS TOTAL COMPREHENSIVE INCOME £86.9M 2016 £55.4M

Includes foreign exchange gain of £8.3m (2016: £20.1m).

 

GROUP SOLVENCY 146% 2016 158% (144% excluding equity raise impact)*

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

 

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

 

ECONOMIC VALUE £723.1M 2016 £602.6M 

Movement in the period is stated after dividend distributions of £29.5m.  Includes gain on acquisition of Legal & General Nederland of £65.4m.

 

ECONOMIC VALUE EARNINGS £139.5M 2016 £72.5M

 

NEW BUSINESS PROFIT £12.4M 2016 £11.7M 

 

GROUP CASH GENERATION £28.6M 2016 £85.4M

A £48.9m one-off positive impact, in respect of equity raised ahead of completion of the acquisition of Legal & General Nederland, was included in the 2016 result. We highlighted this as a temporary impact in our 2016 accounts. As expected, on completion, the 2017 result includes a consequential negative impact of £55.3m. This explains the large year on year swing on the headline group cash generation metric. The end to end impact of the Legal & General Nederland acquisition is to reduce cash generation by £6.4m.

 

DIVISIONAL CASH GENERATION £86.7M 2016 £34.3M

Includes the cash generated post acquisition by Scildon of £16.2m.

 

 

OPERATIONAL AND STRATEGIC

 

FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 2.98% to 20.07p per share (7.00p interim and 13.07p proposed final).  This compares with 19.49p in 2016 (6.80p interim and 12.69p final).

 

COMPLETION OF LEGAL & GENERAL NEDERLAND ACQUISITION

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

 

EQUITY GROWTH, WEAKENING STERLING

Equity markets in all territories have performed positively during the year. The Swedish Krona and Euro have both strengthened against Sterling, resulting in positive exchange gains being reported in the period.

 

£70.0M OF TOTAL PROPOSED DIVISIONAL DIVIDENDS

The results during the year, combined with associated solvency positions, have enabled the divisions to propose total dividends to Chesnara of £70.0m. As expected, the UK business dividend of £32m continues to be the largest contributor but it is equally encouraging to see the Dutch businesses of Scildon and Waard propose dividends of £22.2m and £13.0m respectively. The fact that a growth business such as Movestic has proposed a dividend of £2.8m is also very positive.

 

SOLVENCY II IN ACTION

As planned, we have continued to enhance our understanding of the Solvency II figures during the year. This has resulted in a number of changes to the SCR. These changes consist of positive capital management actions such as de-risking Scildon's shareholder assets, improved asset analysis in Movestic and model enhancements which ensure the SCR better aligns to our business.

 

MEASURING OUR PERFORMANCE

 

HOW WE MEASURE PERFORMANCE WITHIN THESE REPORT & ACCOUNTS

Throughout our Report & Accounts, we use measures to assess and report how well we have performed.  The range of measures is broad and includes many measures that are not based on IFRS. The financial analysis of a life and pensions business also needs to recognise the importance of Solvency II figures, the basis of regulatory solvency.  In addition the measures aim to assess performance from the perspective of all stakeholders.

 

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

Whilst the IFRS results form the core of the Report & Accounts and hence retain prominence as a key financial performance metric, there is a general acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business. 

 

In light of the limitations of IFRS reporting, these Report & Accounts adopt several Alternative Performance Measures (APMs) to present a more meaningful view of the financial position and performance. The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and as such, all major financial APMs are derived from a defined rules-based regime.  The list below shows the core financial metrics that sit alongside the IFRS results, together with their associated KPIs.

 

FINANCIAL STATEMENT KPIS:

 

·     IFRS profits

·     IFRS net assets

 

ADDITIONAL METRICS:

 

·     Solvency

Own funds

Solvency capital requirement (SCR)

SCR plus management buffer

Solvency position (absolute value)

Solvency position ratio

 

·     Cash generation

Group cash generation

Divisional cash generation

 

·     Economic Value

Balance sheet position

Earnings

 

 

SOLVENCY

Solvency is a fundamental financial measure which is of paramount importance to investors and policyholders.  It represents the relationship between the value of the business as measured on a Solvency II basis and the capital the business is required to hold - the Solvency Capital Requirement (SCR).  Solvency can be reported as an absolute surplus value or as a ratio.

 

Solvency gives policyholders comfort regarding the security of their provider.  This is also the case for investors together with giving them a sense of the level of potential surplus available to invest in the business or distribute as dividends (subject to other considerations and approvals).

 

ECONOMIC VALUE

Economic Value (EcV) is deemed to be a more meaningful measure of the long term value of the group and it generally approximates to Embedded Value reporting, which was used before the introduction of SII. In essence, the IFRS balance sheet is not generally deemed to represent a fair commercial value of our business as it does not fully recognise the impact of future profit expectations of long term policies.

EcV is derived from Solvency II Own Funds and recognises the impact of future profit expectations from existing business.

 

CASH GENERATION

Cash generation is a measure of how much distributable surplus has been generated in the period, which supports the ability of the group to pay its dividends.  It is driven by the change in solvency surplus, taking into account board-approved capital management policies.

 

OPERATIONAL AND OTHER PERFORMANCE MEASURES

In addition to the financial performance measures, the Report & Accounts include measures that consider and assess performance all of our key stakeholder groups.  The table below summarises the performance measures adopted throughout the Report & Accounts.

 

MEASURE

WHAT IS IT AND WHY IS IT IMPORTANT?

Customer service levels

How well we service our customers is of paramount importance and so through various means we aim to assess customer service levels. The business reviews within the Report & Accounts refer to a number of indicators of customer service levels.

Broker satisfaction

Broker satisfaction is important because they sell new policies, provide ongoing service to their customers and influence book persistency. We include several measures within the Report & Accounts, including direct broker assessment ratings for Movestic and general assessment of how our brands fair in industry performance awards in the Netherlands.

Policy investment performance

This is a measure of how the assets are performing that underpin policyholder returns.  It is important as it indicates to the customer the returns that their contributions are generating.

Industry performance assessments

This is a comparative measure of how well our investments are performing against the rest of the industry, which provides valuable context to our performance.

Funds under management

This shows the value of the investments that the business manages. This is important because scale influences operational sustainability in run-off books and operational efficiency in growing books. Funds under management are also a strong indicator of fee income.

Policy count

Policy count is the number of policies that the group manages on behalf of customers.  This is important to show the scale of the business, particularly to provide context to the rate at which the closed book business is maturing. In our open businesses, the policy count shows the net impact of new business versus policy attrition.

Total shareholder returns

This includes dividend growth and yield and shows the return that an investor is generating on the shares that they hold.  It is highly important as it shows the success of the business in translating its operations into a return for shareholders.

New business profitability

This shows our ability to write profitable new business which increases the value of the group.  This is an important indicator given one of our core objectives is to "enhance value through profitable new business".

New business market share

This shows our success at writing new business relative to the rest of the market and is important context for considering our success at writing new business against our target market shares.

Gearing ratio

The gearing is a ratio of debt to IFRS net assets and shows the extent to which the business is funded by external debt versus internal resources. The appropriate use of debt is an efficient source of funding but in general Chesnara seek to avoid becoming overly dependent on permanent debt on the balance sheet.

Knowledge, skills and experience of the Board of Directors

This is a key measure given our view that the quality, balance  and effectiveness of the Board of Directors has a direct bearing on delivering positive outcomes to all stakeholders.

 

 

 

CHAIRMAN'S STATEMENT

 

2017 has been another good year for Chesnara during which we completed the acquisition of Legal and General Nederland, now successfully rebranded Scildon, and made good progress on integrating it into our business. The acquisition has contributed to an impressive set of results on all financial metrics, including IFRS, Economic Value and Solvency II.

 

In particular I am pleased to report an Economic Value growth, excluding the acquisition gain, of 9.1%.

 

All divisions have made significant contributions to cash and value generation.  The UK business had again generated cash ahead of expectations and Movestic continues to deliver significant growth, which has resulted in further cash generation.

 

During the post acquisition period, Scildon has delivered Economic Value growth and solvency surplus broadly in line with our initial expectations. That said, we retain our view that the business would benefit from some focussed improvements and have initiated a development programme to improve the profitability of new business.

 

As a result of the positive performance in the year, Chesnara expects total dividends from its divisions of £70.0m, including an inaugural Scildon dividend of £22.2m.

 

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

 

MAXIMISE VALUE FROM EXISTING BUSINESS


ACQUIRE LIFE AND PENSIONS BUSINESSES


ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS




£86.7m of divisional cash generation representing 288% dividend cover.


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

 


New business profits from Movestic of £11.8m plus a modest full year new business profit of £1.9m from Scildon.

 






 

Maximise value from existing business

The profitability of our existing business remains at the heart of our business model.  IFRS pre-tax profits, which predominantly flow from the in-force business, of £89.6m (2016: £40.7m) compare favourably to prior year and base case expectations.

 

In addition, all of our divisions, including Scildon, have made significant positive cash contributions totalling £86.7m. 

 

A 7.1% growth in the Economic Value of the existing business, excluding the impact of new business and acquisitions, is also dominated by the impact of positive economic conditions.  The group has reported a modest economic value operating profit of £3.3m. This consists of an underlying operating profit of £22.5m, offset by the negative impact of making provision to adopt a slightly more attractive pricing strategy on certain white label funds in Movestic and to cover the one-off costs of developing the Scildon business.

 

THE ECONOMIC VALUE OF THE GROUP HAS INCREASED BY 20.0% IN THE YEAR, OF WHICH 10.9% RELATES TO THE GAIN ON COMPLETION OF THE ACQUISITION OF LEGAL AND GENERAL NEDERLAND.

 

Acquire life and pensions businesses

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

 

Enhance value through new profitable new business

Movestic has continued to operate within its market share target range and has generated  £11.8m of new business profit representing a 5.2% growth on Movestic's opening Economic Value.

 

We acquired Scildon with an expectation that it was breaking even on writing new business. The fact that Scildon have reported a modest new business profit for the full year of £1.9m is encouraging but this level of profit is not deemed commercially acceptable. We have initiated changes, to be delivered over a two year timeframe, which we believe will improve market shares towards the upper end of our target 5% - 10% protection market share range and which would create more commercially meaningful levels of new business profit.

 

NEW BUSINESS PROFIT FROM MOVESTIC OF £11.8M AND AS EXPECTED SCILDON IS ONLY MARGINALLY PROFITABLE.  A DEVELOPMENT PROGRAMME HAS BEEN INITIATED TO IMPROVE SCILDON'S PROFITABILITY OVER THE NEXT TWO YEARS.

 

Solvency

At the end of 2016, the group solvency ratio, which includes no transitional adjustments, was 158% which translated to an absolute level of surplus of £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 2017, the absolute level of surplus, over and above the SCR increased by £58m after accounting for the impact of dividends.  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 it is still relatively early in the post acquisition period for Scildon, it was encouraging to see a surplus of £16.2m emerge during this time. On an annualised basis, this is broadly in line with expectations.

 

When expressed as a ratio, the closing solvency ratio as at 31 December 2017 of 146% is marginally improved compared to the end of 2016 (adjusted to exclude the temporary equity raise benefit).

 

Solvency II and IFRS 17

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

 

As Solvency II becomes embedded into day to day operations, the industry now faces the challenge of applying new accounting rules for insurance contracts, known as IFRS 17.  It is not expected to have any direct bearing on the commercial assessment of Chesnara.  That is, it is not expected to have an impact on Economic Value or cash generation, other than the direct impact of the cost of implementing the change. 

 

AN INCREASED UNDERSTANDING OF THE DYNAMICS OF SOLVENCY II HAS, AS EXPECTED, CREATED CAPITAL OPTIMISATION BENEFITS IN THE YEAR. WE WILL CONTINUE TO IDENTIFY FURTHER CAPITAL OPTIMISATION BENEFITS OVER THE COMING YEARS.

 

Regulation

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

 

Following the final guidance from the FCA's review of the "Fair treatment of long standing customers in the life insurance sector", we have been able to progress with the delivery of our Customer Strategy in the UK. The programme is now established and board approved budgets are recognised within our provisions. The work undertaken to date continues to support the level of provision made. The project does include enhancements to meet new regulatory standards.

 

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

 

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

 

Investment proposition

Given Chesnara shares are primarily held by those requiring attractive income, I am pleased to report a 2.98% increase in our full year dividend.

 

2.98% INCREASE IN FULL YEAR DIVIDEND

 

Governance and risk management

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

 

In line with our implementation of a strong governance framework, we have carried out a tender process for our external audit during the second half of 2017.  As a result of this, we recommend the reappointment of Deloitte.

 

AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS.  DURING THE YEAR, WE HAVE TAKEN THE OPPORTUNITY TO STEP BACK TO REFLECT UPON OUR CORPORATE PURPOSE.

 

Corporate purpose

We have assessed our corporate purpose by considering eight aspects of our business and by looking at the business from the perspective of all stakeholders.

 

BUSINESS MODEL

-    Our acquisition strategy is built upon long term commitments to any markets we operate in. Our consolidation model therefore offers a genuine solution to the challenges certain insurance markets face.

THE PRODUCTS AND SERVICES WE PROVIDE

-    We help protect people and their dependants through the provision of life, health and disability cover or by providing savings and pensions which help customers with their financial needs in the future. We seek to provide customers and their advisers with helpful and reliable support.

 SUSTAINABILITY

-    Driven in part by consumer demand, especially in our Dutch and Swedish operations, there is a continued positive shift towards an increased focus of sustainable fund investments.

-    The nature of our business is such that in general we have a relatively low carbon footprint.

SHAREHOLDER PROPOSITION

-    Investors, especially in a low interest rate environment do have a genuine need for income and hence our investor proposition, track record and responsible approach provides an investment opportunity for individuals seeking sustainable equity based income.

TAXATION

-    As per our tax strategy, we adopt a responsible and open approach to taxation and, as a consequence, pay the appropriate taxes.

STAFF

-    We provide high quality jobs with competitive remuneration and good working conditions both directly and through outsourced arrangements.

SUPPLIERS AND PARTNERS

-    We seek mutually respectful and sustainable relationships with our suppliers. We believe that supplier relationships only work in the long term if the terms and conditions are mutually beneficial. Our instinct and natural preference is to maintain established long term supplier relationships where they remain commercially competitive and operationally viable.

LOCAL COMMUNITY

-    Investment and continued commitment to the North West and Preston in particular creates high quality financial services roles outside of London.

-    All divisions support local community initiatives to the extent deemed appropriate given our financial responsibilities as a PLC.

 

In summary based on the above, our view is that Chesnara fulfils a positive corporate purpose.

 

OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE PURPOSE.

 

Outlook and Brexit

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

 

In particular, the UK business remains a robust source of cash, with additional potential to take management actions to enhance the core cash if required. Movestic now has the scale to continue contributing to the cash position and provisions made during the year create the required capacity to react to any market driven fee pressures without adverse profit impact.  Scildon has significant surplus capital and is also expected to be cash generative on an ongoing basis.

 

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

 

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

 

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

 

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

 

 

 

 

Peter Mason

Chairman

28 March 2018

 

BUSINESS REVIEW

 

OVERVIEW OF STRATEGY

 

Our strategy focuses on delivering value to shareholders and policyholders.  The strategy is delivered through a proven business model underpinned by a robust risk management and governance framework and our established culture and values.

 

MAXIMISE VALUE 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

 

 

BUSINESS REVIEW | UK

 

The UK division manages c300,000 policies and is in run-off.  The division follows an outsourcer-based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced.  A central governance team is responsible for managing all outsourced operations.

 

The division has delivered against its objectives.  The customer strategy plan is on track and delivering tangible benefits to our customers and the division has continued to deliver strong financial results.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

Capital and value management

Background

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

 

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

 

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

 

Initiatives and progress in 2017

-       Economic Value growth of £45.9m (21.9%) in the year (before the impact of the dividend paid in the year), driven by the positive investment market experience gains in the year.

.

-       Cash of £34.5m has been generated by the division.  This includes the positive benefit of £9.0m being transferred out of the S&P with profit funds, while still ensuring suitable protection for with profits customers.

 

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

 

-       Implemented a change to our assets backing the with-profit funds, focusing on seeking the appropriate balance from a customer and shareholder perspective.

 

Future priorities

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

 

KPIs

Continued underlying growth in economic value after removing the impact of dividends.

 

£m

2013

2014

2015

2016

2017







EEV / EcV

297.3

271.8

232.2

239.6

255.5

Cumulative dividends


48.0

113.0

143.5

173.5

Total

297.3

319.8

345.2

383.1

429.0







 

Cash generation of £34.5m continues to support the group's dividend strategy.

 

£m

2013

2014

2015

2016

2017







Cash generation

54.1

50.9

42.5

21.3

34.5







 

 

Customer outcomes

Background

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

 

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

 

Initiatives and progress in 2017

-       A key focus has been the delivery of a three-year customer strategy plan, which is overseen by the customer committee.  During 2017 the following has been delivered:

Designed a refreshed Countrywide Assured website ready for roll out in 2018.

Reviewed our key customer communications in the context of new guidelines issued by the FCA, ready for going live in 2018.

Developed a refreshed product governance framework, ready for the delivery of product reviews during 2018.

Continued to perform work seeking to get back in touch with customers that we no longer have contact with.

 

-       The FCA's investigation into the level of disclosure of exit charges to customers, which was announced in March 2016, remains open.  Full ongoing support has been provided to the FCA.  We have had seven separate information requests to date.

 

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

 

Future priorities

-       Continuation of the customer strategy implementation plan.  Key projects delivery in 2018 are:

Roll out of a new Countrywide Assured website.

Roll-out first wave of refreshed key customer communications to ensure ongoing compliance with the most recent FCA guidelines.

Deliver our updated approach to performing product reviews.

 

-       Continue to deliver competitive fund performance.

 

KPIs

Policyholder fund performance






2017

2016

CA Pension Managed





9.8%

17.2%

CWA Balanced Managed Pension





9.5%

15.8%

S&P Managed Pension





13.6%

14.2%

Benchmark - ABI Mixed Inv 40%-85% shares





9.5%

13.4%

 

Our main managed funds continue to be in line with or exceed relevant benchmarks.

 

Governance

Background

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

 

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

 

Initiatives and progress in 2017

-       Strong solvency position has been maintained throughout the year.

 

-       Solid delivery of outsourced services.

 

-       Continued to develop our General Data Protection Regulation (GDPR) readiness programme in advance of the legislation being implemented in 2018.

 

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

 

-       Planning commenced regarding the implementation of IFRS 17 "Insurance Contracts", a new insurance accounting standard which was issued in May 2017 and has an effective date of 1 January 2021.

 

Future priorities

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

 

-       Continue to support the FCA in its investigation.

 

-       Continue to develop and start to deliver against implementation plans for "IFRS 17 Insurance Contracts".  This will be a significant, multi-year project for both the UK division and the wider group. 

 

KPIs

Solvency ratio: 155%

Solvency remains robust.  The surplus generated in year increases the solvency position from 128% to 155%.  After the dividend, due to be paid during 2018, the ratio is 130%.

 





£m

Solvency Ratio







31 Dec 2016 surplus




36.5

128%

2017 Surplus generation




34.1


31 Dec 2017 surplus (pre-dividend)




70.6

155%

2017 dividend




(32.0)


31 Dec 2017 surplus




38.6

130%







 

 

BUSINESS REVIEW | SWEDEN

 

Movestic is a life and pension business based in Sweden, and is open to new business.  From its Stockholm base, Movestic operates as a challenger brand in the Swedish life insurance market.  It offers transparent unit linked pension and savings solutions through brokers and is well-rated within the broker community.

 

Movestic has delivered a positive set of results across key financial metrics.  Its new business operation continues to add value to the group and assets under management growth continues to support the division in achieving its ambitions on scale.  That said, the division is not complacent.  MiFID II and the Insurance Distribution Directive (IDD) are causing uncertainty in the broker community, the market remains price competitive, and the management team has a busy period ahead in delivering its ongoing digitalisation programme.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

Capital and value management

Background

-       Movestic creates value predominantly by generating growth in the unit linked assets under management (AuM) and by optimising the income that the assets generate, whilst assuring a high quality customer proposition.  AuM growth is dependent upon positive client cash flows and positive investment performance.  Capital surplus is a factor of both the value and capital requirements and hence surplus can also be optimised by effective management of capital.

 

Initiatives and progress in 2017

-       Economic value growth of £24.8m.  This includes a £11.4m loss relating to changes in future charge assumptions.  This change creates capacity to react, if commercial pressures were to drive fee changes in the future, without there being an adverse profit impact at the point of change.

 

-       Cash generation, on constant exchange rates, of £22.1m.

 

-       Growth in assets under management of 15.7% (£395m), driven by new business and strong investment market returns.

 

-       A new fund management company operating out of Luxembourg, Movestic Fund Management S.A., was established, and funds were migrated in June.

 

-       Optimised cost efficiency through the new management company by taking responsibility for additional parts of the value chain.

 

-       The life and health business has reported favourable claims development in the year.

 

-       Embedded a mass lapse reassurance arrangement

 

Future priorities

-       Deliver against plans to continue to modernise and automate processes.  This is designed to give better broker experience and deliver cost efficiencies.

 

-       Provide a sustainable and predictable dividend to Chesnara.

 

-       Continue to focus on generating positive client cash flows by:

maintaining lapse levels within valuation assumptions; and

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

 

-       Optimise the pricing model to changing market conditions.

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Growth in assets under management

 

£bn

2013

2014

2015

2016

2017

2017 Total assets under management

1.6

2.0

2.2

2.5

2.9







 

£bn





£bn







31 December 2016





2.5

New client cashflow





0.17

Investment growth





0.22

31 December 2017





2.9







 

 

IFRS profit

 

£m

2013

2014

2015

2016

2017







IFRS profit

2.1

3.9

7.9

9.6

9.8







 

Value growth (2012-15: EEV - 2016-17: EcV)

 

£m

2013

2014

2015

2016

2017







Cumulative dividends





2.7

Reported value

120.7

149.9

189.6

227.4

249.5

Total

120.7

149.9

189.6

227.4

252.2







 

 

Customer outcomes

Background

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

 

Initiatives and progress in 2017

-       During the year Movestic has improved its digital/web interfaces with its end-customers and brokers.  The focus on further digitalisation will continue into 2018.

 

-       Movestic has continued to develop its in-house advisory service to take care of existing customers.

 

-       Average fund performance has exceeded the Swedish stock market.

 

-       Movestic has continued to focus on its sustainable investments proposition, and issued the industry's first sustainability guide to savers.

 

Future priorities

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

 

-       Deliver competitive unit linked fund returns.

 

-       Improve digital business and the relationship with the end user.

 

-       Relaunch Life & Health business.

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Broker assessment rating (out of 5)

 


2013

2014

2015

2016

2017







Rating

3.6

3.6

3.7

3.8

3.7







 

2018 Policyholder average investment return:

8.2% (Swedish stock market 6.4%)

 

Governance

Background

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

 

-       Maintaining strong governance is a critical platform to delivering the various value-enhancing initiatives planned by the division.

 

Initiatives and progress in 2017

-       As part of its succession planning Movestic appointed a new CEO, Linnéa Ecorcheville, replacing Lars Nordstrand.

 

-       During the year Movestic delivered its inaugural Solvency II narrative reports.

 

-       Movestic has continued to deepen its understanding and analysis of the Solvency II capital position.  In particular Movestic has refined its solvency capital requirement calculation models through improved investment data and more refined mass lapse modelling, resulting in a positive SCR benefit of c£10m.

 

Future priorities

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

 

-       Improve efficiency of regulatory reporting routines.

 

-       Commence and deliver IFRS 17 "Insurance contracts" implementation programme.

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Solvency ratio: 155%

 

Solvency remains strong. Surplus of £27.6m in the year increases the solvency ratio from 140% to 155%. After the 2017 dividend, to be paid in 2018, the ratio is 153%.

 





£m

Solvency Ratio







31 Dec 2016 surplus




54.0

140%

2016 surplus generation




27.6


31 Dec 2017 surplus (pre-dividend)




81.6

155%

2017 dividend




(2.8)


31 Dec 2017 surplus




78.8

153%







 

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

Profitable new business

Background

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

 

Initiatives and progress in 2017

-       New business profits of £11.8m have been generated in the year.

 

-       Market shares continue to be within the target range.

 

Future priorities

-       Continue to focus on writing new business within our target range.

 

-       Ongoing digitalisation of processes to improve broker experience.

 

-       Focus on increasing brand awareness.

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Occupational pension market share %

 

%

2013

2014

2015

2016

2017







Market share

13.7

12.6

11.7

13.2

11.6







 

 

New business profit

 

£m

2013

2014

2015

2016

2017







New business profit

6.7

9.1

6.7

12.3

11.8







 

 

BUSINESS REVIEW | NETHERLANDS

 

The Netherlands division includes the businesses of both Waard and Scildon, with Scildon being acquired during the year.  Since acquisition the priority has been to integrate Scildon into the wider group, with significant progress in aligning the risk and governance frameworks, financial reporting processes and investment strategy.  Scildon sold a number of indirect investments in equity holdings as part of aligning its investment strategy, resulting in a reduction in solvency capital requirements.  Scildon has produced a solid set of results, including a modest new business profit, and Waard has continued to deliver in line with expectations.  Both businesses have strong solvency ratios, supporting the payment of dividends to Chesnara. 

 

2018 will see further development of the Scildon business, with the business planning process helping to identify key strategic priorities to achieve this.  These priorities include enhancing the profitable and scalable new business operations and refining the product offering to meet the needs and demands of the market.  Underpinning this, system and process developments will be implemented to enhance the customer and broker experience thus developing an organisation with a structure and culture that supports value generation.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

Capital and value management

Background

-       Both Waard and Scildon have a common aim to make capital available to Chesnara to fund further acquisitions or to contribute to the dividend funding. Whilst their aims are common, the dynamics by which the businesses add value do differ:

Waard is in run-off and has the benefit that the capital requirements reduce over time in-line with the attrition of the book.

As an "open business" Scildon's capital position does not benefit from book run-off. It therefore adds value and creates surplus capital through writing new business and by efficient operational management and capital optimisation.

 

Initiatives and progress in 2017

-       Post acquisition equity de-risk aligns the investment of shareholder funds with group policy and risk appetite.  Consequence was a reduction in Scildon capital requirements.

 

-       Guarantees have been removed from new business.

 

-       Successful transfer of Hollands Welvaren Leven into Waard Leven, thereby releasing capital.

 

-       Waard and Scildon ended the period with healthy pre-dividend solvency ratios of 613% and 258% respectively before deducting the proposed 2017 year end dividends.

 

-       EcV growth of £17.1m, consisting of £5.1m for Waard and £12.0m for Scildon since acquisition.

 

-       Cash of £25.3m has been generated, with £10.5m from Waard and £14.8m from Scildon.

 

-       IFRS profits of £23.6m, including £18.4m earned by Scildon since acquisition, largely due to favourable investment conditions which have not been offset by reserve movements.

 

Future priorities

-       Both businesses will pay a dividend to Chesnara in spring 2018 in respect of the 2017 year end.

 

-       In line with our integration plan, areas of Scildon requiring investment have been identified.  This investment will strengthen future cash generation and value growth and one-off costs for these developments have been provided for.  Plans include:

Process and value for money improvements such as increased levels of "straight through" processing;

Continuation of existing IT infrastructure developments to facilitate efficient processes;

Enhancing new business profitability and launching appropriate products to market in a timely fashion; and

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

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Scildon has a track record of delivering value growth enabling dividend distribution to the parent company and will pay its first dividend to Chesnara plc in April 2018.

 

Scildon value growth

£m

2013

2014

2015

2016

2017







EEV / EcV

293.6

269.3

241.4

224.1

221.1

Cumulative dividends


46.1

82.5

119.8

119.8

Total

293.6

315.4

323.9

343.9

340.9







 

 

Customer outcomes

Background

-       Great importance is placed on providing customers with high quality service and positive outcomes.

 

-       Whilst our ultimate priority is the end customer, in Scildon we also see the brokers who distribute our products as customers and developing processes to best support them is a key focus.

 

Initiatives and progress in 2017

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

 

-       The annual performance research for consumers shows high scores.

 

-       Scildon replaced some non-performing funds.

 

Future priorities

-       Enhancing and developing existing processes and customer experiences and the underlying infrastructure.

 

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

 

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

 

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

 

-       Continue to improve Scildon's brand recognition.

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Scildon client satisfaction rating (out of 10)


2014

2015

2016

2017






Rating

7.3

7.5

7.4

7.6






 

 

Governance

Background

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

 

Initiatives and progress in 2017

-       Both companies have successfully delivered their inaugural Solvency II reporting.

 

-       Progressed the alignment of the Scildon governance and risk management framework to Chesnara practices.

 

-       Scildon appointed Gert Jan Fritzsche as CEO and Rene Tuitert as CFO, who started in March 2018.

 

-       Waard appointed Lorens Kirchner and Andy Schaut as CEO and CFO respectively in 2017.

 

Future priorities

-       The continued focus is to fully align and integrate the governance routines such as the Risk Management Framework, Business Planning, MI production and ensuring local processes conform to the Chesnara governance map where appropriate.

 

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Solvency ratio: Scildon 258%; Waard 613%

 

Solvency is strong in both businesses.  £30.6m and £8.1m of surplus have been generated by Scildon and Waard respectively.  After the 2017 dividend, including the interim dividend paid by Waard to fund the LGN acquisition, solvency ratios are 231% and 483%.

 

Scildon





£m

Solvency Ratio







31 Dec 2016 surplus




98.0

204%

2017 surplus generation




30.6


31 Dec 2017 surplus (pre-dividend)




128.6

258%

2017 dividend




(22.2)


31 Dec 2017 surplus




106.4

231%







 

Waard





£m

Solvency Ratio







31 Dec 2016 surplus




74.4

710%

2017 surplus generation




8.1


31 Dec 2017 surplus (pre-dividend)




82.5

613%

2017 dividend




(44.3)


31 Dec 2017 surplus




38.2

483%







ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

Profitable new business

Background

-       The acquisition of Scildon has added a "New business" dimension to the Dutch business model.  Scildon sells protection, individual savings and group pensions contracts via a broker-led distribution model.  The aim is to deliver meaningful value growth from realistic market share.  Having realistic aspirations regarding volumes means we are able to pursue a profitable pricing strategy.  New business also helps the business maintain scale and hence contributes to unit cost management.

 

Initiatives and progress in 2017

-       LGN has been successfully rebranded to Scildon with no apparent adverse impact on new business levels or broker support, as shown by levels of Annual Premium Equivalent remaining consistent between 2016 and 2017.

 

-       There have been modest new business profits of £1.9m in the year.

 

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

 

-       New business processes have been reviewed with improvement opportunities identified which will be mutually beneficial to brokers, customers and profits.  These smart process changes aim to create more commercially meaningful levels of new business profit.

 

Future priorities

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

 

-       One of the objectives of the actions is to move the market share for protection business towards the top end of the 5-10% target range.

 

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

 

KPIs (all comparatives have been presented using 2017 exchange rates)

 

Scildon - term assurance market share %

 

%

2013

2014

2015

2016

2017







Market share

10.9

5.0

6.6

5.9

7.3







 

Scildon - new business profit

 

£m

2013

2014

2015

2016

2017







New business profit/(loss)

0.9

(3.6)

0.1

2.0

1.9







 

 

BUSINESS REVIEW | acquire life and pension businesses

 

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

 

The completion of Scildon, which had an economic value of €237.5m at the point of acquisition, results in the group having 39% of its Economic Value in the Netherlands.

 

This acquisition continues our acquisition strategy in the Netherlands.  We believe this deal leaves us with sufficient scale and presence to progress further value adding deals in the Dutch market.

 

Highlights of LGN acquisition

-       Completion purchase price of €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

-       A long established, award winning specialist insurer in the Netherlands.

-       Policy base predominantly individual protection and savings contracts.

-       Writes new business and sells protection, individual savings and group pensions contracts via a broker-led distribution model.

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

 

At the point of acquisition:

-       €237.5m EcV

-       204% solvency ratio

-       174,000 policies

-       €2.2bn AUM

-       149 employees

 

Impact on the group

 

CASH GENERATION

- Post acquisition cash generation expected to emerge at levels which would more than cover incremental funding costs, thereby creating a net positive impact on group cash.

VALUE

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

- The Netherlands now makes up 39% of group EcV.

CUSTOMER OUTCOMES

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

RISK APPETITE

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

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

 POLICY NUMBERS

- Scildon's 177,000 policies at 31 December 2017 result in the group now managing a policy base of over 1.1m, of which 27% are in the Netherlands.

SOLVENCY

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

FUNDING AND CAPITAL

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

- Our group gearing ratio, now 19.8%, remains well within our risk appetite.

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

 

OUR POST ACQUISITION INTEGRATION WORK IS PROGRESSING VERY WELL.  FOR MORE INFORMATION SEE THE NETHERLANDS BUSINESS REVIEW.

 

Acquisition outlook

-       Scildon contributes positively to the acquisition outlook due to increased scale and presence in the Netherlands.  We believe we are well-positioned to take advantage of any future acquisition opportunities.

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

-       The environment in which European life insurance companies operate continues to increase in complexity.  For example, "IFRS 17 Insurance Contracts" was issued this year, which is a fundamental overhaul of the way in which insurance contracts are accounted for.  We believe this additional complexity will potentially drive further consolidation as institutions seek to remove operational complexity and potentially release capital or generate funds from capital intensive life and pension businesses.

-       Chesnara is a well-established life and pensions consolidator with a proven track record.  Our financial foundations are strong, we have a proven and stringent acquisition assessment model, and we continue to have strong support from shareholders and lending institutions to progress our acquisition strategy.  We believe our operating model has the flexibility to accommodate a wide range of potential target books.  Our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures we are aware of most viable opportunities in the UK and Western Europe.  With this in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

-       To prepare for future deals, we have been working closely with our current debt provider, RBS, to convert our existing debt arrangement into a syndicated facility.  This will provide access to higher levels of debt financing from a wider panel of lenders, which in turn will enable us to fulfill our appetite of financing future deals up to the maximum levels of gearing set out in our debt and leverage policy, without being restricted by the lending capacity of one individual institution. This new syndicated facility is expected to be operational during April 2018.

 

 

 

 

CAPITAL MANAGEMENT - Solvency II

 

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

 

Chesnara group

The commentary below highlights key points in the year, starting with the pre-LGN starting position.

 

Surplus: The solvency position of the group remains strong, at 146%.  The group has £151m of distributable surplus over and above the internal capital management policy.  Each division has contributed positively to group surplus.  The graph shows that the Scildon acquisition has reduced the solvency surplus available at a group level by £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 of £4.7m.

 

Dividends:  The closing solvency position is stated after deducting the £19.6m proposed dividend (31 December 2016: £19.0m), and also reflects the payment of an interim dividend of £10.5m.

 

Own funds: A large contributor to the own funds growth of £172m is a £54m "day 1" gain arising on the acquisition of Scildon, coupled with the equity raise to support this acquisition of £62m.  The operating companies have collectively generated £88m of additional own funds.  The own funds movement recognises the full year dividend burden of £30.1m.

 

SCR: The SCR has increased by £111m in the year.  £109m of this arose from the day 1 acquisition impact of Scildon

 

Solvency position

 

£m

2017

2016

 

2016

(excl. LGN impact*)





Own funds (post dividend)

615

505

443

SCR

422

321

309

Surplus own funds above SCR

193

184

134

Capital buffer

42

32

31

Surplus own funds above capital buffer

151

153

104

Solvency ratio %

146%

158%

144%





 

Solvency surplus

 

£m




Group solvency 31 Dec 2016 - pre equity raise impact

134.6

CA

34.1

Movestic

27.5

Waard

8.1

Scildon

25.9

Chesnara / consol adj

(3.8)

Scildon acquisition impact

(8.0)

Exchange rates

5.0

Dividends

(30.1)

Total surplus 31 Dec 2017

193.4



 

The tables that follow present a divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within that division. Please note that prior year figures have been restated using 31 December 2017 exchange rates.

 

 

UK

Surplus: £13m above board's capital management policy.

 

Dividends: The solvency position is stated after deducting £32.0m proposed dividend (31 December 2016: £30.0m).

 

Own funds: Positive growth before dividends of £32.4m, driven largely by positive equity markets in the year.

 

SCR: Broadly flat for the year. Insurance risk capital has reduced in line with book run off, off-set by increases in market risk capital driven by equity growth.

 

£m

2017

2016




Own funds (post dividend)

167

166

SCR

128

130

Surplus own funds above SCR

39

36

Capital buffer

26

26

Surplus own funds above capital buffer

13

11

Solvency ratio %

130%

128%




 

 

Sweden

Surplus: £49m above board's capital management policy.

 

Dividends: The solvency position is stated after deducting £2.8m proposed dividend (31 December 2016: £2.7m).

 

Own funds: Positive growth before dividends of £39.9m, driven largely by positive investment returns in the year, offset by the negative impact of changing assumptions regarding future fee income.

 

SCR: Increased by £13m, largely due to growth in assets under management.

 

£m

2017

2016




Own funds (post dividend)

228

191

SCR

149

136

Surplus own funds above SCR

79

55

Capital buffer

30

27

Surplus own funds above capital buffer

49

27

Solvency ratio %

153%

140%

 

Netherlands - Waard

Surplus: £28m above board's capital management policy.

 

Dividends: The solvency position is stated after deducting £13.0m proposed year end dividend and £32.1m paid in the year (31 December 2016: £nil).

 

Own funds: Positive growth before dividends of £6.8m, driven by sold investment returns in the year and refined assumptions.

 

SCR: SCR has reduced slightly, largely due to decreased counterparty exposure through reduced cash holdings.

 

£m

2017

2016




Own funds (post dividend)

48

89

SCR

10

13

Surplus own funds above SCR

38

76

Capital buffer

10

13

Surplus own funds above capital buffer

28

64

Solvency ratio %

483%

712%

 

Netherlands - Scildon

Surplus: £25m above board's capital management policy.

 

Dividends: The solvency position is stated after deducting £22.2m proposed dividend (31 December 2016: £nil).

 

Own funds: Positive post acquisition growth before dividends of £10.0m. Underlying growth owing to favourable returns from fixed interest assets, offset by some one-off post acquisition expense strengthening.

 

SCR: Fall largely driven by reduction in equity holdings.

 

£m

2017

2016




Own funds (post dividend)

188

200

SCR

81

98

Surplus own funds above SCR

107

102

Capital buffer

81

98

Surplus own funds above capital buffer

25

4

Solvency ratio %

231%

204%

 

The group's solvency position can be affected by a number of factors over time.  As a consequence, the group's EcV and cash generation, both of which are derived from the group's solvency calculations, are also sensitive to these factors.

 

The below provides some insight into the immediate and longer term impact of certain sensitivities that the group is exposed to, covering solvency, cash generation and economic value.  As can be seen, EcV tends to take the "full force" of adverse conditions whereas cash generation is often protected in the short term and to a certain extent in the longer term due to compensating impacts on our required capital.

 

Sensitivity

Solvency surplus

Cash generation

EcV


Impact

5 year impact

Impact

20% Sterling appreciation

(2)

(3)

(5)

25% equity fall

(1)

(4)

(5)

25% equity rise

(1)

4

5

10% equity fall

1

(2)

(3)

10% equity rise

(1)

2

3

1% interest rate rise

2

3

1

50bps credit spread rise

(2)

(2)

(2)

25bps swap rate fall

(2)

(2)

(2)

10% mass lapse

(1)

(1)

(3)

10% expense rise
+ 1% inflation rise

(3)

(4)

(4)

 

Key:

Category

Range

1 / (1)

£0m to £15m / (£0m to £15m)

2 / (2)

£15m to £30m / (£15m to £30m)

3 / (3)

£30m to £50m / (£30m to £50m)

4 / (4)

£50m to £90m / (£50m to £90m)

5 / (5)

£90m to £140m / (£90m to £140m)

 

INSIGHT*

-    20% Sterling appreciation:  A material Sterling appreciation reduces the value of surplus in our overseas divisions, and hence has an immediate material day 1 impact on group cash generation.  It also reduces the value of projected own funds growth in our overseas divisions and also reduces the value of overseas investments CA holds in its linked funds.

-    Equity sensitivities:  The impact of an equity fall causes the own funds to fall and the SCR also falls as the value of the funds exposed to risk is lower.  Since the two movements largely offset each other, the net impact on surplus is small.  In an equity rise the own funds and SCR both rise and, again, the impact on balance sheet surplus is small.  The impacts are not symmetrical due to the use of management actions and differences in the application of tax depending on the direction of the stress.  The EcV impacts are more intuitive as they are more directly linked to the own funds impact.  The impact on future growth builds on the immediate impact as future returns are directly impacted by the rise/fall in fund values under the sensitivity.  The divisions that most contribute to equity sensitivities are CA and Movestic due to their large amounts of unit-linked business.

-    1 % interest rate rise:  An interest rate rise is generally positive across the group.  The total cash generation impact across the group of £42.1m is broadly equal across CA, Movestic and Scildon.

-    50bps credit spread rise: A credit spread rise has a notable adverse impact on day 1 cash surplus and future cash generation in Scildon, largely as a result of the extent of corporate bond holdings that form part of the asset portfolios backing non-linked insurance liabilities.  The impact on the other divisions is far less severe.

-    25bps swap rate fall:  This sensitivity measures the impact of a fall in the swap discount curve with no change in the value of assets.  The result is that liability values increase in isolation.  The most material impacts are on CA and Scildon due to the size of the non-linked books.

-    10% mass lapse:  For this sensitivity, there is only a small immediate impact on surplus as any the reduction in own funds is negated by a reduction in the SCR.  However, with fewer policies on the books there is less potential for future profits.  The division most affected is Movestic, largely because as a unit-linked business the loss in future AMCs following a mass lapse hits own funds by more than the associated reduction in SCR.

-    10% expense rise + 1% inflation rise:  The expense sensitivity hits the solvency position immediately as the increase in future expenses and inflation is capitalised into the balance sheet.  CA is affected more than the other divisions owing to the governance structure of the business.

*BASIS OF PREPARATION ON REPORTING:

Although it is not a precise exercise, the general aim is that the sensitivities modelled are deemed to be broadly similar (with the exception that the 10% equity movements are naturally more likely to arise) in terms of likelihood. Whilst the sensitivities provide a useful guide, in practice, how our results react to changing conditions is complex and the exact level of impact can vary due to the interactions of events and the starting position.

 

 

 

FINANCIAL REVIEW

The key performance indicators are a reflection of how we have performed in delivering our three strategic objectives and our core culture and values. 2017 has delivered strong results across all metrics, with cash generation, pre-tax EcV earnings and IFRS profits all in excess of prior year and plan, with a closing EcV of £723.1m.

 

Summary of each KPI:

 

IFRS

PRE-TAX PROFIT: £89.6M (2016: £40.7M)

TOTAL COMPREHENSIVE INCOME: £86.9M (2016: £55.4M)

 

What is it?

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

 

Why is it important?

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

 

Risks

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

 

£m

2017

2016




CA

50.6

42.7

Movestic

9.8

8.7

Waard

5.2

6.2

Scildon

18.4

-

Group & consol adj.

(14.7)

(16.9)

Profit on acquisition

20.3

-

Taxation

(11.2)

(5.4)

Forex impact*

8.5

20.1

Total

86.9

55.4

 

*includes other comprehensive income

 

-       Strong pre-tax results across all segments.

-       IFRS pre-tax profit of £89.6m significantly ahead of prior year and plan.  Pre-tax profit, excluding the profit on acquisition of LGN, was £69.3m and still represents a 70% uplift on prior year.

-       Operating profits of £38.4m are the foundation of the result, supported by economic earnings of £30.9m driven largely by equity markets.

-       Total comprehensive income includes a foreign exchange gain of £8.3m (2016: £20.1m gain) relating to sterling's depreciation against both the euro and Swedish krona.

 

CASH GENERATION

GROUP CASH GENERATION £28.6M (2016: £85.4M)        

DIVISIONAL CASH GENERATION £86.7M (2016: £34.3M)

 

What is it?

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

 

Why is it important?

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

 

Risks

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

 

£m

2017



UK

34.5

Sweden

24.9

Netherlands - Waard

11.1

Netherlands - Scildon

16.2

Divisional cash generation

86.7

Other group activities

(2.7)

Impact of Scildon acquisition

(55.3)

Total group cash generation

28.6



 

Divisional cash

-       Significant cash contributions from all businesses in the year.

-       Overall divisional cash generation is in excess of prior year and plan, underpinned by performance in the UK and Sweden.

 

Total cash generation

-       The completion of the Scildon deal in isolation had a £55.3m negative cash impact, because consideration exceeded the surplus acquired.  This is largely offset by the equity raised to fund the acquisition recognised as a positive in the 2016 cash figures, resulting in an adverse end to end impact of £6.4m.

 

 

ECONOMIC VALUE (EcV)

£723.1M (2016: £602.6M)

 

What is it?

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

 

Why is it important?

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

 

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

 

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets and yields on fixed interest securities.  In addition the EcV position of the group can be materially affected by exchange rate fluctuations.  For example a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group by 18.5%, based on the composition of the group's EcV at 31 December 2017.

 

£m




2016 Group EcV

602.6

EcV earnings

74.1

Acquisition

65.4

Dividends

(29.4)

Forex gain

10.4

2017 Group EcV

723.1



 

-       Economic value at the end of the year in excess £723m, having increased by £120.5m during the period.

-       Strong underlying earnings of £74.1m generated in the year.

-       Overall growth includes a gain of £65.4m realised on the acquisition of LGN in April.

-       Foreign exchange gains also contribute to the overall growth, offset by dividend payments.

-       EcV earnings were underpinned by significant economic results and the gain delivered on the acquisition of LGN

 

 

ECV EARNINGS NET OF TAX

£139.5M (2016: £72.5M)

 

What is it?

In recognition of the longer-term nature of the group's insurance and investment contracts, supplementary information is presented that provides information on the economic value of our business.

 

The principal underlying components of the Economic Value result are:

-       The expected return from existing business (being the effect of the unwind of the rates used to discount the value in-force).

-       Value added by the writing of new business.

-       Variations in actual experience from that assumed in the opening valuation.

-       The impact of restating assumptions underlying the determination of expected cash flows.

-       The impact of acquisitions.

 

Why is it important?

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

 

Risks

The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties and sensitivities analysis. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the future cash flows arising from our books of business.

 

£m

2017



Underlying operating earnings

22.5

Exceptional operating items

(19.2)

Economic earnings

76.7

Gain on acquisition

65.4

Other

(5.9)

Total EcV earnings

139.5



 

-       EcV earnings of £139.5m in the year, driven by a combination of strong underlying economic earnings supported by the substantial gain realised on the acquisition of LGN in April.

-       Strong underlying operating profits were adversely affected by two non-recurring items. The Movestic result includes an £11.4m impact relating to changes in future charge assumptions if, as expected, commercial pressures were to drive fee changes in the future. In addition, we have provided £7.8m to cover the Scildon development programme.

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

 

 

IFRS PRE-TAX PROFIT

£89.6M (2016: £40.7M)                                                      

 

IFRS TOTAL COMPREHENSIVE INCOME

£86.9M (2016: £55.4M)

 

Executive summary

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

 

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

 

(2) Variable element: Included within the CA segment is the Save & Prosper book.  This can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements due to product guarantees.  The IFRS results of Scildon are potentially relatively volatile although this is primarily due to reserving methodology rather than 'real world' value movements.

 

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

 

 IFRS results

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

 


2017

2016



£m

£m

Note

CA

50.6

42.7

1

Movestic

9.8

8.7

2

Waard Group

5.2

6.2

3

Scildon

18.4

-

4

Chesnara

(12.1)

(9.7)

5

Consolidation adjustments

(2.6)

(7.2)

6

Profit before tax and profit on acquisition

69.3

40.7


Profit on acquisition of Scildon

20.3

-

4

Profit before tax

89.6

40.7


Tax

(11.2)

(5.4)


Profit after tax

78.4

35.3


Foreign exchange  translation differences

8.3

20.1

7

Other comprehensive income

0.2

-

8

Total comprehensive income

86.9

55.4


 

 


2017

2016



£m

£m

Note

Operating profit

38.4

34.9

9

Economic profit

30.9

5.8

10

69.3

40.7


Profit on acquisition of LGN

20.3

-

4

Profit before tax

89.6

40.7


Tax

(11.2)

(5.4)


Profit after tax

78.4

35.3


Foreign exchange  translation differences

8.3

20.1

7

Other comprehensive income

0.2

-

7

Total comprehensive income

86.9

55.4


 


Note 1: The CA segment has reported results for the year in excess of those in 2016.  Positive economic conditions contributed £22.2m to the result, of which £11.9m related to a reduction in the cost of guarantees within the S&P book.  This was mainly driven by favourable equity returns in the year and to a lesser extent valuation interest rate movements.

 

Note 2: Movestic has reported a strong trading result, improving on the previous year.  This was principally driven by strong growth in assets under management which in turn generated increased fund rebates and investment related fee income within the Pensions and Savings division.  This was further boosted by higher premium volumes and favourable claims experience within the Life and Health division, offset slightly by an expense overrun, due to the higher than expected use of consultant resource in the year.

 

Note 3: The Waard Group result is in line with expectation.  The reduction in profit year on year is primarily due to the fact that the 2016 result benefited from a one-off profit arising on the sale of an investment asset.  After taking this into consideration, the profit emergence is in line with the run-off book profile.

 

Note 4: The Scildon division has posted a strong result for the nine months since acquisition.  Favourable economic factors have driven strong investment related returns.  This arises from the fact that the Scildon division measures the majority of its insurance contract liabilities using historical rates of interest, as is customary in the Netherlands.  This can lead to increased volatility in IFRS profits by virtue of the assets that back the liabilities being reported and measured on a fair value basis. In addition to the strong trading result, the Scildon purchase also generated a profit on acquisition of £20.3m in the year.

 

Note 5: The Chesnara result represents holding company expenses. The 2017 result reflects the adverse impact of creating a £2m provision in respect of the expected costs of delivering the implementation of IFRS 17 at group level.  It also reflects a foreign exchange loss of £2.6m in respect of the Euro denominated loan taken out to part-fund the Scildon acquisition.

 


Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets. These are lower than previously reported, due to an increase in the write-back of deferred acquisition costs arising from the Scildon acquisition and a one-off impairment of acquisition costs within Movestic.

 


Note 7: As a result of sterling weakening against both the euro and  Swedish krona in the period the IFRS result includes a large foreign exchange gain, albeit smaller sizeable than the prior period.

 

Note 8: Other comprehensive income includes movements relating to the revaluation of a defined benefit pension scheme and an investment property, both of which are held within the Scildon division.

 

Note 9: The operating result demonstrates the strength and stability of the underlying business, driving the generation of profit. Product based income and favourable movements in operating experience in the UK, were offset slightly by the strengthening of expense reserves to support future developments. Strong premium growth and favourable claims experience supported the Movestic operating result, whilst Waard and Scildon produced operating results broadly in line with expectation.

 


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

 

 

 

TOTAL GROUP CASH GENERATION

£28.6M (2016: £85.4M*)

*The LGN acquisition had an adverse total end to end impact of £6.4m. A £48.9m one-off impact in respect of the equity raise was included in the 2016 result, with a subsequent negative impact of £55.3m on completion in 2017.

 

DIVISIONAL CASH GENERATION

£86.7M (2016: £34.3M)

 

The three territories have generated £86.7m cash in the period, with all four businesses making significant contributions to the cash generation.

 

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

 

GROUP

-       Before taking into account the "day 1" impact of the acquisition of LGN, cash of £83.9m has been generated across the group, partly due to favourable economic conditions and the positive impact of some non-recurring management actions.

 

-       Other group activities reflect the residual group expenses and the impact of consolidation routines, specifically movements in capital requirements determined at a group level.  From a capital requirement perspective, this is driven by movements in required capital at a Chesnara holding company level coupled with consolidation adjustments.  At a Chesnara holding company level, capital is principally required to be held for the currency risk associated with the Movestic, Scildon and Waard Group surplus assets.

 

-       In line with expectations, the end to end impact of the acquisition of Legal & General Nederland is to reduce surplus cash by £6.4m.  The £6.4m cash impact consists of an increase in own funds of £116.2m (£62.1m of equity raised net of 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 reduction due to the equity de-risk post acquisition, which amounted to £12.7m.  Of the total impact, cash reduced by £55.3m in 2017, consisting of the own funds acquired less the capital required and the purchase price.  The 2016 positive impact of £48.9m represents the element of the equity raised before the 2016 year end.

 

UK

-       The UK continues to generate significant levels of cash, ahead of plan, supporting the dividend payment.

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

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

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

 

SWEDEN

-       Sweden had a positive cash generation of £24.9m due to strong own funds growth.

-       Own funds have benefitted from growth in assets under management, particularly in equity markets.

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

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

-       2016 included a one-off capital increase from a modelling change for mass lapse risk.

 

NETHERLANDS - WAARD

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

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

-       A fall in counterparty default risk underpins the reduction in the capital requirement.

-       2016 cash generation benefitted from an exchange rate gain of £8.5m.

 

NETHERLANDS - SCILDON

-       Scildon has reported positive cash generation of £16.2m since acquisition.

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

-       The movement in capital requirement has benefitted from the continuing capital management programme that has been initiated post acquisition.

 

 

£m


2017

2016




Movement in

own funds

Movement in management's capital

Requirement

Forex

impact

Cash generated

Cash generated



 UK


32.4

2.1

-

34.5

21.3

Sweden


37.3

(15.3)

2.8

24.9

(2.7)

Netherlands

Waard Group

5.4

5.1

0.6

11.1

15.7


Scildon

10.5

4.3

1.4

16.2

-

Divisional cash


85.6

(3.8)

4.9

86.7

34.3

Other group activities


(12.7)

10.0

-

(2.7)

2.2

Group cash pre-Scildon acquisition


72.9

6.2

4.9

83.9

36.5

Impact of Scildon acquisition


54.1

(109.4)

-

(55.3)

48.9

Total group cash


127.0

(103.2)

4.9

28.6

85.4








 

 

EcV EARNINGS 

£139.5M (2016: £72.5M)

 

Driven by generally beneficial investment markets throughout the year, with sterling depreciation and volatile yet growing equity markets, the group has reported significant underlying EcV earnings, reflecting the resilience and diversity of the business. In addition there has been a one off gain and post acquisition gains from Scildon.

 

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

 


31 Dec 2017

£m

 

31 Dec 2016

£m

Note

Expected movement in period

12.0

6.0


New business

12.4

11.9


Operating variances

1.2

22.7


Operating assumption changes

(3.6)

0.6


Other operating variances

0.5

(7.3)


Total underlying operating earnings

22.5

33.9


Exceptional operating variances

(19.2)

-

2

Total operating earnings

3.3

33.9


Economic experience variances

74.6

77.9

1

Economic assumption changes

2.2

(38.3)


Total economic earnings

76.8

39.6


Other non-operating variances

1.2

0.8


Risk margin movement

4.0

(3.8)


Gain on acquisition

65.4

-

3

Tax

(11.1)

2.0


Total EcV earnings

139.5

72.5


 

 

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

 


31 Dec  2017

£m

 

31 Dec  2016

£m

Note

UK

54.5

42.2

4

Sweden

24.0

30.8

5

Netherlands

21.8

5.9

6

Gain on acquisition

65.4

-


Group and group adjustments

(15.1)

(8.4)

7

EcV earnings before tax

150.6

70.5


Tax

(11.1)

2.0

8

EcV earnings after tax

139.5

72.5


 

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

-       The FTSE All share index has increased by 9.0%;

-       The Swedish OMX all share index has increased by 5.7%; and

-       10 year UK gilt yields have fallen from 1.28% to 1.26%.

 

Note 2 - Exceptional operating items:  The Movestic result includes an £11.4m impact relating to changes in future charge assumptions if, as expected, commercial pressures were to drive fee changes in the future. Also included was a £7.8m provision to cover the future Scildon development programme.

 

Note 3 - Gain on acquisition of LGN: The acquisition of LGN resulted in a "day 1" gain of £65.4m, representing the difference between the purchase price of £137.6m and the EcV of LGN at the point of acquisition of £203.0m.

 

Note 4 - UK:  The UK reported significant pre tax earnings of £54.5m for the year.  Solid operating earnings were supported by lower attrition rates and lower payments in respect of with profit contracts with guarantees.  This offset the adverse impact of the strengthening of assumptions in relation to the expense base during the year.  Economic profits of £41.1m underpin the result, supported by market conditions.  Key items driving the economic result include the investment return on shareholder and non linked assets and returns driven by the impact of the higher unit prices versus static guarantees on claims and AMCs.  The interaction of changing yields and inflation also contributed to this.  The result also benefited from a £9.0m release of previously trapped surplus from the with profit funds.

 

Note 5 - Sweden:  The Swedish division has reported another solid EcV return in the year. Underlying operating earnings of £15.3m were underpinned by strong new business performance, owing to transfer volumes and increased average policy premiums. This was partially offset by a non-recurring adverse movement in future charge assumptions (see note 2). An economic profit of £20.0m was reported, driven by equity market performance and strong returns on the unit linked investment portfolio, closing on a considerable total annual return of 8.7% for 2017.

 

Note 6 - Netherlands:  The Dutch division has reported earnings of £21.8m in the period.  Underlying operating earnings of £9.0m are offset by an exceptional non-recurring item in respect of Scildon expense assumptions (see note 2). Strong economic earnings underpin the result.

 

Note 7 - Group:  In line with expectations, a loss has been reported in the group component.  This is includes the impact of costs incurred in relation to the LGN acquisition, dividend payments and also underlying group level expenses and consolidation activities.

 

Note 8 - Tax:  The business is reporting a tax expense of £11.1m in the year.  This is driven by a combination of current tax on the profit in the period and movements in deferred tax relating to group level activities.

 

EcV

£723.1M (2016: £602.6M)

 

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

 

Value movement: 1 Jan 2017 to 31 Dec 2017:

 

£m




2016 Group EcV

602.6

EcV earnings

74.1

Acquisition

65.4

Dividends

(29.5)

Forex gain

10.4

2017 Group EcV

723.1



 

EcV earnings:  Positive EcV earnings have been reported in the year, a result of solid underlying operating profits and significant economic profits, driven by the net impact of equity market growth and return on assets.

 

Acquisition:  In April 2017, the group successfully completed the purchase of LGN, delivering a "day 1" acquisition gain of £65.4m.  This is reflected in the group closing EcV.

 

Dividends:  Under EcV, dividends are recognised in the period in which they are paid.  Dividends of £29.5m were paid during the 2017, being the final dividend from 2016 and interim 2017 dividend.

 

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

 

EcV by segment at 31 Dec 2017:

 

£m




UK

255.5

Sweden

249.5

Netherlands

283.9

Other group activities

(65.8)



 

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

 

EcV to Solvency II:

 

£m




2017 Group EcV

723.1

Risk margin

(47.4)

Contract boundaries

(14.4)

Own funds restrictions

(26.5)

Dividends

(19.6)

2017 SII own funds

615.2



 

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

 

Risk margin:  Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 2.75% cost of capital (2016: 3.00%) .

 

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

 

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

 

Dividends:  The proposed final dividend of £19.6m is recognised for SII regulatory reporting purposes.  It is not recognised within EcV until it is actually paid.

 

 

FINANCIAL management

 

The group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators.

 

OBJECTIVES

The group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators.  Accordingly we aim to:

 

-       Maintain solvency targets

-       Meet the dividend expectations of shareholders

-       Optimise the gearing ratio to ensure an efficient capital base

-       Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors

-       Maintain the group as a going concern

 

HOW WE DELIVER TO OUR OBJECTIVES

In order to meet our obligations we employ and undertake a number of methods.  These are centred on:

1.             Monitor and control risk & solvency

2.             Longer-term projections

3.             Responsible investment management

4.             Management actions

 

 

OUTCOMES

Key outcomes from our financial management process, in terms of meeting our objectives, are set out below:

 

1.             SOLVENCY:

Group Solvency Ratio:  146%

 

2.             SHAREHOLDER RETURNS

                2015-2017 TSR 33.6%

2017 dividend yield 5.3%

Based on closing 2017 share price and full year 2017 dividend of 20.07p.

 

3.             CAPITAL STRUCTURE

                Gearing ratio of 19.8%

This does not include the financial reinsurance within the Swedish business.

 

4.             LIQUIDITY AND POLICYHOLDER RETURNS

                Policyholders' reasonable expectations maintained.

Asset liability matching framework operated effectively in the year.

Sufficient liquidity in the Chesnara holding company.

 

5.             MAINTAIN THE GROUP AS A GOING CONCERN

                Group remains a going concern

 

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

 

1.             Capital structure

 

The group is funded by a combination of share capital, retained earnings and debt finance, with the debt gearing (excluding financial reinsurance in Sweden) being 19.8% at 31 December 2017 (13.4% at 31 December 2016).

 

The level of debt that the board is prepared to take on is driven by the group's "Debt and leverage policy" which incorporates the board's risk appetite in this area.

 

Over time, the level of gearing within the group will change, and is a function of:

-       funding requirements for future acquisitions (i.e. debt, equity and internal financial resources); and

-       repayment of existing debt that was used to fund previous acquisitions.

 

As referred to above, acquisitions are funded through a combination of debt, equity and internal cash resources.  The ratios of these three funding methods vary on a deal-by-deal basis and are driven by a number of factors including, but not limited to:

-       size of the acquisition;

-       current cash resources of the group;

-       current gearing ratio and the board's risk tolerance limits for additional debt;

-       expected cash generation profile and funding requirements of the existing subsidiaries and potential acquisition;

-       future financial commitments; and

-       regulatory rules.

 

In addition to the above, Movestic uses a financial reinsurance arrangement to fund its new business operation.

 

2.             Maintain the group as a going concern

 

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

 

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

 

The group results indicate a strong solvency position as at 31 December 2017 as measured at both the divisional and group levels.  As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to continue trading.  The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default.  In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified.  Other significant counterparty default risk relates to our principal reinsurers.  We monitor their financial position and are satisfied that any associated credit default risk is low.

 

In light of the above information, the board has concluded that the group and company has a reasonable expectation that the group and company have adequate resources to continue in operational existence for the foreseeable future, and the Financial Statements have continued to be prepared on a going concern basis.

 

3.             Assessment of prospects

 

Our business model provides resilience that is relevant to any consideration of our prospects and viability. In CA in the UK and in both Waard and Scildon in the Netherlands, we benefit from a largely predictable and well understood source of cash generation. In addition, Movestic and Scildon, provide a source of new business growth.

 

Our strategy of maximising value from our existing business, acquiring life and pensions businesses and enhancing value through profitable new business, is designed to support long-term and sustainable cash generation.

 

We assess our prospects on a regular basis through our financial planning process. Our three year medium term group business plan forecasts the group's profitability, cash generation, economic value and solvency position and is reviewed by the Board during the year. The business plan is built from the bottom up forecasts of each of our business segments, supplemented by items managed at group level and assumptions to be used in the basis of preparation. The performance of the group and our business segments against these forecasts is monitored quarterly through a series of quarterly business reviews performed by the group executive and internal management information which is reviewed by the Board.

 

The group also makes investments, such as life and pensions business acquisitions and longer term business development programmes that have a business case beyond our core three year planning horizon. Significant expenditure of this nature is subject to a detailed business case being prepared and approved by the board.

 

4.             Longer term viability statement

 

In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the directors have assessed the prospect of the company over a longer period than the twelve months required by the going concern provision.  The board conducted this review for a period of three years because the group's business plan covers a three year period and includes an assessment of group cash generation and group solvency margins over that time period.

 

The group business plan considers the group's cash flows, the group's ability to remain above target solvency levels and other key financial measures over the period, assuming continuation of the group's established dividend payment strategy.  These metrics are subject to scenario analysis representing the principal risks to which the group is most sensitive, both individually and in unison.  Where appropriate this analysis is carried out to evaluate the potential impact of adverse economic and other experience effects, including, but not limited to:

i.              Equity market declines

ii.             Reduction in yield curves

iii.            Credit spread rise

iv.            Swap rate fall

v.             Adverse mortality and lapse experience

vi.            Adverse expense experiences

vii.           Reduced new business volumes

viii.          Adverse exchange rate experience

 

Based on the results of this analysis, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment.

 

 

RISK MANAGEMENT

 

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

 

HOW WE MANAGE RISK

 

RISK MANAGEMENT SYSTEM

The risk management system supports the identification, assessment, and reporting of risks along with coordinated and economical application of resources to monitor and control the probability and/ or impact of adverse outcomes within the board's risk appetite or to maximise realisation of opportunities.

 

Strategy: The risk management strategy contains the objectives and principles of risk management, the risk appetite, risk preferences and risk tolerance limits.

 

Policies: The risk management policies implement the risk management strategy and provide a set of principles (and mandated activities) for control mechanisms that take into account the materiality of risks.

 

Processes: The risk management processes ensure that risks are identified, measured/ assessed, monitored and reported to support decision making.

 

Reporting: The risk management reports deliver information on the material risks faced by the business and evidence that principal risks are actively monitored and analysed and managed against risk appetite. 

 

RISK PROCESSES

Risk management processes are applied at a group, divisional and business unit level and are documented within a set of Board approved risk policies, for each category of risk.

 

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

 

In all divisions we maintain processes for identifying, evaluating and managing all material risks faced by the group, which are regularly reviewed by the divisional and group Audit & Risk Committees.  Our risk assessment processes have regard to the significance of risks, the likelihood of their occurrence and take account of the controls in place to manage them.  The processes are designed to manage the risk profile within the board's approved risk appetite.

 

Group and divisional risk management processes are enhanced by stress and scenario testing, which evaluates the impact on the group of certain adverse events occurring separately or in combination.  The results, conclusions and any recommended actions are included within Divisional and group ORSA Reports to the relevant boards.  There is a strong correlation between these adverse events and the risks identified in 'Principal risks and uncertainties'.  The outcome of this testing provides context against which the group can assess whether any changes to its risk appetite or to its management processes are required.

 

CHESNARA RISK PREFERENCES

The Chesnara Board has approved a set of risk preferences which articulate, in simple terms, the desire to increase, maintain, or reduce the level of risk taking for each main category of risk.  The risk position of the business is monitored against these preferences using risk tolerance limits, where appropriate, and they are taken into account by the management teams across the group when taking strategic or operational decisions that affect the risk profile.

 

PRINCIPAL RISKS AND UNCERTAINTIES

The following table outlines the principal risks and uncertainties of the group and the controls in place to mitigate or manage their impact.  It has been drawn together following regular assessment performed by the Audit and Risk Committee of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. Given that the Scildon business risk profile is similar to that of the Chesnara businesses prior to acquisition of Scildon, the description of the group's risk profile at this level is unchanged as a result of the integration of Scildon.

 

The impacts have not been quantified however by virtue of the risks being defined as principal, the impacts are potentially large. Although this is a matter of judgement the risks and impacts are ordered based on probabilities and impacts, putting the largest first.

 

RISK

IMPACT

CONTROL

Exposure to financial losses or value reduction arising from adverse movements in investment markets, counterparty defaults, or through inadequate asset liability matching

Market risk results from fluctuations in asset values, foreign exchange rates and interest rates and has the potential to affect the Company's ability to fund its commitments to customers and other creditors, as well as pay a return to shareholders.

Chesnara and each of its subsidiaries have obligations to make future payments, which are not always known with certainty in terms of timing or amounts, prior to the payment date.  This includes primarily the payment of policyholder claims, reinsurance premiums, debt repayments and dividends.  The uncertainty of timing and amounts to be paid gives rise to potential liquidity risk, should the funds not be available to make payment.

Other liquidity issues could arise from counterparty failures/credit defaults, a large spike in the level of claims or other significant unexpected expenses.

Chesnara performs regular monitoring of movements in the market and maintains matching programmes to ensure that exposure to any mismatching is at an acceptable level, forecasting cash requirements and adjusting investment management strategies to meet those requirements.

Chesnara seeks to limit the impacts of exposure to Market risks by:

Maintaining a well-diversified asset portfolio;

Holding a significant amount of surplus in highly liquid "Tier 1" assets such as cash and gilts;

Utilising a range of investment funds and managers to avoid significant concentrations of risk;

Having an established investment governance framework to provide review and oversight of external fund managers;

Carrying out regular liquidity forecasts and asset and liability modelling; and

Monitoring exchange rate movements. The group would consider the cost/benefit of hedging the currency risk on cash flows when appropriate.

In respect of a significant exposure to one major reinsurer, ReAssure (formerly known as Guardian), the group has a floating charge over the reinsurer's related investment assets, which ranks the group equally with ReAssure's policyholders.

 

Adverse changes in industry practice/ regulation, or inconsistent application of regulation across territories

Chesnara currently operates in four 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 minimum requirements. Potential consequences of this risk for Chesnara is the constraining of efficient and fluid use of capital within the group, or creating a non-level playing field with respect to future new business/acquisitions.

The jurisdictions which Chesnara operates in are currently subject to significant change arising from political, regulatory and legal change. These may either be localised or may apply more widely, following from EU-based regulation and law, or the potential unwinding of this following the UK's decision to leave the EU.

The group is therefore exposed to the risk of:

incurring one-off costs of addressing regulatory change as well as any permanent increases in the cost base in order to meet enhanced standards;

erosion in value arising from pressure or enforcement to reduce future policy charges;

erosion in value arising from pressure or enforcement to financially compensate for past practice; and

regulatory fines or censure in the event that it is considered to have breeched standards, or fails to deliver changes to the required regulatory standards on a timely basis.

Through the Risk Management Framework, regulatory risk is monitored and scenario tests are performed to understand the potential impacts of adverse political, regulatory or legal changes, along with consideration of actions that may be taken to minimise the impact, should they arise.

Chesnara seeks to limit any potential impacts of regulatory change on the business by:

Having processes in place for monitoring changes, to enable timely actions to be taken, as appropriate;

Maintaining strong open relationships with all regulators

Being a member of the ABI and utilising other means of joint industry representation;

Performing internal reviews of compliance with regulations; and

Utilising external specialist advice and assurance, when appropriate.

In extremis, Chesnara could consider the re-domiciling of subsidiaries or legal restructure of the business, should this result in a more commercially acceptable business model in a changed operating environment.

Failure to source acquisitions that meet Chesnara's criteria or the execution of acquisitions with subsequent unexpected financial loses or value reduction

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 within Chesnara's current target markets, for example arising as a result of a change in competition in the consolidation market or from regulatory change influencing the extent of life company strategic restructuring. 

Through the execution of acquisitions, Chesnara is also exposed to the risk of erosion of value or financial losses arising from risks inherent within businesses or funds acquired which are not adequately priced for or mitigated as part of the transaction.

Chesnara's financial strength, strong relationships and reputation as a "safe hands acquirer" via regular contact with regulators, banks and target companies enables the company to adopt a patient and risk-based approach to assessing acquisition opportunities. Operating in multi-territories provides some diversification against the risk of changing market circumstances in one of the territories.

 

Chesnara seeks to limit any potential unexpected impacts of acquisitions by:

Applying a structured Board approved risk-based acquisition process including CRO involvement in the due diligence process and deal refinement processes;

Having a management team with significant and proven experience in mergers and acquisitions; and

Adopting a cautious risk appetite and pricing approach

 

Adverse demographic experience compared with assumptions

In the event that demographic experience (rates of mortality, morbidity, persistency etc.) varies from the assumptions underlying product pricing and subsequent reserving, more or less profit will accrue to the group.

If mortality or morbidity experience is higher than that assumed in pricing contracts (I.e. more death and sickness claims are made than expected), this will typically result in less profit accruing to the group.

If persistency is significantly lower than that assumed in product pricing and subsequent reserving, this will typically lead to reduced group profitability in the medium to long-term, as a result of a reduction in future income arising from charges on those products.  The effects of this could be more severe in the case of a one-off event resulting in multiple withdrawals over a short period of time (a "mass lapse" event).    

Chesnara ensures close monitoring of persistency levels across all groups of business to support best estimate assumptions and identify trends. There is also partial risk diversification in that the group has a portfolio of annuity contracts where the benefits cease on death.

Chesnara seeks to limit the impacts of adverse demographic experience by:

Aiming to deliver good customer service and fair customer outcomes;

Having effective underwriting techniques and reinsurance programmes, including the application of "Mass Lapse reinsurance",, where appropriate;

Carrying out regular investigations, and industry analysis, to support best estimate assumptions and identify trends;

Active investment management to ensure competitive policyholder investment funds; and

Maintaining good relationships with Brokers which is independently measured via yearly external surveys that considers Brokers attitude towards different insurers.

Significant Operational failure / Business continuity event

The group and its subsidiaries are exposed to operational risks which arise through daily activities and running of the business. Operational risks may, for example, arise due to technical or human errors, failed internal processes, insufficient personnel resources or fraud caused by internal or external persons. As a result the group may suffer financial losses, poor customer outcomes, reputational damage, regulatory intervention or business plan failure.

Part of the group's operating model is to outsource support activities to specialist service providers. Consequently, a significant element of the operational risk arises within its outsourced providers.

The group perceives operational risk as an inherent part of the day-to-day running of the business and understands that it can't be completely eliminated. However, the Company's objective is to always control or mitigate operational risks, and to minimise the exposure when it's possible to do so in a convenient and cost effective way.

Chesnara seeks to reduce the impact and likelihood of operational risk by:

Monitoring of key performance indicators and comprehensive management information flows;

Effective governance of outsourced service providers including a regular financial assessment. Under the terms of the contractual arrangements the group may impose penalties and/or exercise step-in rights in the event of specified adverse circumstances;

Regular testing of business continuity plans;

Promoting the sharing of knowledge and expertise; and

Complementing internal expertise with established relationships with external specialist partners.

Expense overruns and unsustainable unit cost growth

The Company is exposed to expenses being higher than expected as a result of one-off increases in the underlying cost of performing key functions, or through higher inflation of variable expenses.

For the closed funds, the group is exposed to the impact on profitability of fixed and semi-fixed expenses, in conjunction with a diminishing policy base. 

For the companies open to new businesses, the group is exposed to the impact of expense levels varying adversely from those assumed in product pricing.

For all subsidiaries, the group maintains a regime of budgetary control.

Movestic and Scildon assume growth through new business such that the general unit cost trend is positive;

The Waard Group pursues a low cost-base strategy using a designated service company.  The cost base is supported by service income from third party customers;

Countrywide Assured pursues a strategy of outsourcing functions with charging structures such that the policy administration cost is more aligned to the book' s run off profile; and

The group has an ongoing expense management programme in place to monitor and manage the overall expense base.

 

IT/data security failures or cyber crime

Cyber risk is a growing risk affecting all companies, particularly those who are custodians of customer data. The most pertinent risk exposure relates to information security (i.e. protecting business sensitive and personal data) and can arise from failure of internal processes and standards, but increasingly companies are becoming exposed to potential malicious cyber attacks, organisation specific malware designed to exploit vulnerabilities, phishing attacks etc.  The extent of Chesnara's exposure to such threats also includes third party service providers.

The potential impact of this risk includes financial losses, inability to perform critical functions, disruption to policyholder services, loss of sensitive data and corresponding reputational damage or fines.

 

Chesnara seeks to limit the exposure and potential impacts from IT/data security failures or cyber crime by:

Embedding the Information Security Policy in all key operations and development processes;

Seeking ongoing specialist external advice, modifications to IT infrastructure and updates as appropriate;

Delivering regular staff training and attestation to the information security policy;

Conducting penetration and vulnerability testing, including third party service providers; and

Having established Chesnara and supplier business continuity plans which are regularly monitored and tested.

Chesnara has undertaken further work during 2017 to deliver an enhanced information security environment commensurate with the increase in risk exposure and in preparation for the new General Data Protection Regulation that applies from May 2018.

 

 

DIRECTORS' REsponsibilities STATEMENT

With regards to this preliminary announcement, the Directors confirm to the best of their knowledge that:

-      The financial statements have been prepared in accordance with International Reporting Financial Standards as adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit for the Company and the undertakings included in the consolidation as a whole;

-      Pursuant to Disclosure and Transparency Rules Chapter 4, the Chairman's Statement and Management Report include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the business.

 

On behalf of the Board

 

 

 

Peter Mason                         John Deane

Chairman                              Chief Executive Officer

 

28 March 2018                     28 March 2018

 

 

 

INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON THE PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC

 

As the independent auditor of Chesnara plc we are required by UK Listing Rule LR 9.7A.1(2)R to agree to the publication of Chesnara's preliminary announcement statement of annual results for the period ended 31 December 2017.

 

The preliminary statement of annual results for the period ended 31 December 2017 includes disclosures required by the Listing Rules and additional content such as highlights, Chairman's Statement, solvency update, component business review, and a consolidated statement of comprehensive income, balance sheet, and cash flows.

 

The directors of Chesnara plc are responsible for the preparation, presentation and publication of the preliminary statement of annual results in accordance with the UK Listing Rules.

 

We are responsible for agreeing to the publication of the preliminary statement of annual results, having regard to the Financial Reporting Council's Bulletin "The Auditor's Association with Preliminary Announcements made in accordance with UK Listing Rules".

Status of our audit of the financial statements

Our audit of the annual financial statements of Chesnara plc is complete and we signed our auditor's report on 28 March 2018. Our auditor's report is not modified and contains no emphasis of matter paragraph.

 

Our audit report on the full financial statements sets out the following key audit matters which had the greatest effect on our overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team, together with how our audit responded to those key audit matters and the key observations arising from our work:

Accuracy of Save & Prosper Cost of Guarantees

The risk

The assessment of the Cost of Guarantee reserves for policies written by Save and Prosper is complex and material, including the use of a stochastic model based on a variety of possible economic scenarios.

 

Historically, the residual cost to shareholders arising from the cost of guarantees has fluctuated as a result of movements in bond yields and equity markets with a value of £19.3m at 31 December 2017 (31 December 2016: £35.7m). This movement is mainly due to high asset returns over 2017, which increased policyholder asset shares, and reduce the residual cost to shareholders. The value is determined by a third party actuarial consultant, and the directors compare this valuation against an in-house derived estimate using an approximation model to validate its reasonableness.

 

Due to the highly judgemental nature of this balance, we identified manipulation of this estimate as an area of potential fraud.  

 

How the scope of our audit responded to this risk

We assessed the design and implementation of the internal controls in place to monitor and manage the risks associated with the cost of guarantee reserve.

 

We assessed the competence of the actuarial consultant. Such an assessment includes a direct challenge of the actuarial consultant's working papers and a challenge of the historical accuracy of modelling when compared with actual experience.

 

We used actuarial specialists within our audit team to challenge the appropriateness of assumptions input into the model and benchmark against external actuarial data. Sensitivity analysis was also performed to assess potential Management bias.

 

We developed an independent expectation of how the assumptions impact the model and challenged Management's explanation and analysis to support any variations.

 

Key observations

Based on the audit procedures performed, we consider that the S&P residual Cost of Guarantees is not materially misstated.

Valuation of the Scildon acquired value in-force ('Scildon AVIF') business intangible

The risk

Following the acquisition of Scildon in 2017, the Group have recorded an AVIF intangible asset on the Group balance sheet, reflecting the capitalised future profit in the Scildon life insurance business. There is significant judgement involved in the initial valuation of the AVIF, as well as in the discount rate used in the calculation.

 

Management is required to assess the impairment of the Scildon AVIF intangible balance at least annually, which also involves significant judgement.

 

How the scope of our audit responded to this risk

We assessed the design and implementation of the internal controls in place to monitor and manage the risks associated with the capitalisation of the AVIF intangible.

 

We constructed an independent discount rate and compared this to the discount rate used by Management.

 

We interrogated the policy cash flows which form the basis of the AVIF calculation through a combination of data analytics and tests of controls, to gain assurance over their completeness and accuracy.

 

We have also assessed the reasonableness of the valuation adjustments made to the base VIF.

 

We have challenged the amortisation profile produced by Management for the future run off of the Scildon book.

 

Key observations

Based on the audit procedures performed, we consider the assumptions in the base VIF, and the calculation and magnitude of the adjustments thereof, and the resultant AVIF to be reasonable. We conclude that the discount rate used and amortisation profile are appropriate.

Scildon Liability Adequacy Test

The risk

Scildon measures the majority of its life insurance contract liabilities using historical market rates of interest, along with a number of other parameters and assumptions.

 

IFRS 4 requires an insurer, at the end of each reporting period, to assess whether its recognised insurance liabilities are adequate, using current estimates of future cash flows (the "Liability adequacy test" or "LAT").

 

Given Scildon's accounting policy makes use of historical market interest rates, there is a heightened risk that its insurance liabilities are not adequate. We therefore considered the liability adequacy test to be a key audit matter, specifically in relation to the mortality, lapse and expense assumptions which feed into this test, given that the insurance liabilities are most sensitive to these factors.

 

How the scope of our audit responded to this risk

The following specific procedures have been performed:

-     Evaluation of the design and implementation of the key controls over the setting of the assumptions feeding in to the LAT;

-     Performing analytical checks on policy cash flows to identify outliers and movements compared to the prior period, which were then investigated;

-     For a sample of policies, ran the policy cash flows through a model to test that the calculations within Management's model are accurate; and

-     Assessed the results of the experience investigations carried out by Management to determine whether they provide support for the assumptions.

 

Key observations

Adequacy Test performed by management was reasonable, supporting the adequacy of Scildon's insurance contract liabilities.

 

Procedures performed to agree to the preliminary announcement of annual results

In order to agree to the publication of the preliminary announcement of annual results of  Chesnara plc we carried out the following procedures:

(a) checked that the figures in the preliminary announcement covering the full year have been accurately extracted from the audited or draft financial statements and reflect the presentation to be adopted in the audited financial statements;

(b) considered whether the information (including the management commentary) is consistent with other expected contents of the annual report;

(c)  considered whether the financial information in the preliminary announcement is misstated;

(d) considered whether the preliminary announcement includes a statement by directors as required by section 435 of CA 2006 and whether the preliminary announcement includes the minimum information required by UKLA Listing Rule 9.7A.1;

(e) where the preliminary announcement includes alternative performance measures ("APMs"), considered whether appropriate prominence is given to statutory financial information and whether:

-  the use, relevance and reliability of APMs has been explained;

-  the APMs used have been clearly defined, and have been given meaningful labels reflecting their content and basis of calculation;

-  the APMs have been reconciled to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period; and

-  comparatives have been included, and where the basis of calculation has changed over time this is explained.

(f)   read the management commentary, any other narrative disclosures and any final interim period figures and considered whether they are fair, balanced and understandable.

Use of our report

Our liability for this report, and for our full audit report on the financial statements is to the company's members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.

 

 

Stephen Williams ACA (Senior statutory auditor)

for and on behalf of Deloitte LLP

Statutory Auditor

Manchester, United Kingdom

 

28 March 2018

 

 

CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 December

2017

2016


£000

£000

Insurance premium revenue

231,515

109,450

Insurance premium ceded to reinsurers

(54,191)

(44,900)

Net insurance premium revenue

177,324

64,550

Fee and commission income

113,848

72,932

Net investment return

531,817

515,681

Total revenue net of reinsurance payable

822,989

653,163

Other operating income

17,242

17,614

Total income net of investment return

840,231

670,777

Insurance contract  claims and benefits incurred



Claims and benefits paid to insurance contract holders

(465,729)

(346,117)

Net increase in insurance contract provisions

51,033

11,392

Reinsurers' share of claims and benefits

49,449

62,364

Net insurance contract claims and benefits

(365,247)

(272,361)

Change in investment contract liabilities

(293,603)

(274,724)

Reinsurers' share of investment contract liabilities

3,681

5,617

Net change in investment contract liabilities

(289,922)

(269,107)

Fees, commission and other acquisition costs

(24,405)

(23,838)

Administrative expenses

(70,269)

(46,615)

Other operating expenses



Charge for amortisation of acquired value of in-force business

(13,271)

(10,419)

Charge for amortisation of acquired value of customer relationships

(101)

(236)

Other

(4,239)

(4,394)

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

(767,454)

(626,970)

Total income less expenses

72,777

43,807

Share of profit of associate

949

150

Profit recognised on business combination

20,319

-

Financing costs

(4,443)

(3,272)

Profit before income taxes

89,602

40,685

Income tax expense

(11,168)

(5,405)

Profit for the year

78,434

35,280

Items that will not be reclassified to profit and loss:



Foreign exchange translation differences arising on the revaluation of foreign operations

8,274

20,114

Revaluation of pension obligations

124

-

Revaluation of investment property

90

-

Total comprehensive income for the year

86,922

55,394

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

52.38p

27.67p

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

52.13p

27.56p

 

CONSOLIDATED BALANCE SHEET

31 December

2017

2016

 


£000

£000

Assets



Intangible assets



Deferred acquisition costs

61,858

48,318

Acquired value of in-force business

119,039

62,943

Acquired value of customer relationships

641

736

Goodwill

806

-

Software assets

6,358

6,560

Property and equipment

4,327

519

Investment in associates

6,407

5,433

Investment properties

1,199

245

Reinsurers' share of insurance contract provisions

233,154

254,859

Amounts deposited with reinsurers

38,776

37,437

Financial assets



Equity securities at fair value through income

512,724

485,165

Holdings in collective investment schemes at fair value through income

5,202,772

4,104,602

Debt securities at fair value through income

1,628,817

474,091

Policyholders' funds held by the Group

265,729

229,397

Mortgage loan portfolio

48,106

54,756

Insurance and other receivables

59,448

39,646

Prepayments

7,325

5,271

Derivative financial instruments

1,682

2,773

Total financial assets

7,726,603

5,395,701

Reinsurers' share of accrued policyholder claims

25,888

19,307

Income taxes

7,681

3,352

Cash and cash equivalents

210,647

260,353

Total assets

8,443,384

6,095,763

Liabilities



Insurance contract provisions

3,962,279

2,242,446

Other provisions

1,098

823

Financial liabilities



Investment contracts at fair value through income 

3,420,273

3,028,269

Liabilities relating to policyholders' funds held by the Group

265,729

229,397

Borrowings

129,202

86,843

Derivative financial instruments

22,494

1,348

Total financial liabilities

3,837,698

3,345,857

Deferred tax liabilities

22,794

5,420

Reinsurance payables

11,406

6,899

Payables related to direct insurance and investment contracts

97,163

61,416

Deferred income

4,701

5,438

Income taxes

8,514

8,624

Other payables

44,984

23,657

Bank overdrafts

1,091

1,622

Total liabilities

7,991,728

5,702,202

Net assets

451,656

393,561

Shareholders' equity



Share capital

43,766

43,766

Share premium

141,983

142,058

Treasury shares

(98)

(161)

Other reserves

27,664

19,300

Retained earnings

238,341

188,598

Total shareholders' equity

451,656

393,561

 

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended 31 December

2017

2016


£000

£000

Profit for the year

78,434

35,280

Adjustments for:



Depreciation of property and equipment

698

173

Amortisation of deferred acquisition costs

14,506

12,162

Amortisation of acquired value of in-force business

13,271

10,408

Amortisation of acquired value of customer relationships

101

172

Amortisation of software assets

2,218

794

Share based payment

(159)

623

Tax paid

11,209

5,405

Interest receivable

(4,785)

(20,882)

Dividends receivable

(4,619)

(30,209)

Interest expense

4,443

3,272

Fair value gains on financial assets

(210,706)

(205,870)

Profit arising on business combination

(20,319)

-

Share of profit of associate

(949)

(150)

Increase in intangible assets related to insurance and investment contracts

(28,634)

(16,448)

Interest received

4,560

20,281

Dividends received

4,336

29,446

Changes in operating assets and liabilities (excluding the effect of acquisitions)

124

-

Changes in operating assets and liabilities:



Increase in financial assets

(145,613)

(283,944)

Decrease in reinsurers' share of insurance contract provisions

17,074

34,177

Increase in amounts deposited with reinsurers

(1,339)

(3,496)

Decrease in insurance and other receivables

11,317

10,294

Decrease in prepayments

12,722

1,795

Decrease in insurance contract provisions

(91,110)

(16,530)

Decrease /(increase) in investment contract liabilities

414,014

362,641

(Increase)/decrease in provisions

272

(1,306)

Increase/(decrease) in reinsurance payables

4,424

(3,660)

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

2,432

(2,114)

(Decrease)/increase in other payables

(935)

2,808

Net cash generated from/(utilised by) operations

86,987

(54,878)

Income tax paid

(27,480)

(4,709)

Net cash generated from /(utilised by) operating activities

59,507

(59,587)

Cash flows from investing activities



Business combinations

(117,993)

-

Development of software

(928)

(3,502)

Disposal/(purchases) of property and equipment

(314)

948

Net cash utilised by investing activities

(119,235)

(2,554)

Cash flows from financing activities



(Loss)/Proceeds from issue of share capital

(75)

66,708

Net proceeds from borrowings

42,022

4,268

Sale of treasury shares

63

-

Dividends paid

(29,484)

(24,181)

Interest paid

(4,266)

(3,095)

Net cash generated from financing activities

8,260

43,700

Net decrease in net cash and cash equivalents

(51,468)

(18,441)

Net cash and cash equivalents at beginning of year

258,731

259,911

Effect of exchange rate changes on net cash and cash equivalents

2,293

17,261

Net cash and cash equivalents at end of the year

209,556

258,731

Note:  Net cash and cash equivalents includes overdrafts.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2017








Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total


£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 year

-

-

-

-

78,434

78,434

Dividends paid

-

-

-

-

(29,484)

(29,484)

Foreign exchange translation differences

-

-

8,274

-

-

8,274

Revaluation of pension obligations

-

-

-

-

124

124

Revaluation of investment property

-

-

90

-

-

90

Share based payment

-

-

-

-

669

669

Sale of treasury shares

-

(75)

-

63

-

(12)

Equity shareholders' funds at 31 December 2017

43,766

141,983

27,664

(98)

238,341

451,656

 

Year ended 31 December 2016








Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total


£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

Issue of new shares

1,166

65,542

-

-

-

66,708

Equity shareholders' funds at 31 December 2016

43,766

142,058

19,300

(161)

188,598

393,561

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

1.   Basis of presentation

The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2017, which are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('Adopted IFRSs') as adopted by the EU.

 

2.   Significant accounting policies

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements.

 

3.   Business combination

On 5 April 2017, Chesnara plc acquired the entire issued share capital (100%) of Legal & General Nederland Levensverzekering Maatschappij N.V. (Legal & General Nederland) an open book life assurance company based in the Netherlands, from Legal & General Group plc, a UK based financial services group for a total consideration of €161.2m (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 £20.3m 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

1,736,953

-

1,736,953

Derivatives

23,725

-

23,725

Deferred tax liabilities

10,919

13,634

24,553

Payables related to direct insurance contracts

31,967

-

31,967

Income taxes

10,183

-

10,183


15,595

-

15,595

Total liabilities

1,829,342

13,634

1,842,976

Net assets

116,946

40,899

157,845





Net assets acquired



157,845

Total consideration, paid in cash



(137,526)





Profit arising on business combination



20,319

 

The assets and liabilities at the acquisition date in the table above are stated at their provisional fair values and may be amended for 12 months after the date of acquisition in accordance with IFRS 3, Business Combinations.  We stated in our interim financial statements that we planned to consider the alignment of the IFRS reserving methodology within Scildon with that of the wider Chesnara group. After considering this further in the context of the introduction of the new insurance contract liability standard, IFRS 17, we have decided to defer this proposed alignment until the new standard becomes effective in 2021. 

 

Acquired receivables:  Within the net assets acquired are reinsurance related and other receivable balances totalling £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 £49.8m, which represents the present value of the future post-tax cash flows expected to arise from policies that were in force at the point of acquisition.  The asset has been valued using a discounted cash flow model that projects the future surpluses that are expected to arise from the business.  The model factors in a number of variables, of which the most influential are; the policyholders' ages, mortality rates, expected policy lapses, expenses that are expected to be incurred to manage the policies and future investment growth, as well as the discount rate that has been applied.  This asset will be amortised over its expected useful life.

Gain on acquisition:  As shown on the previous page, a gain of £20.3m has been recognised on acquisition.  Under IFRS 3, a gain on acquisition is defined as being a "bargain purchase".  At the point of price negotiation and subsequent deal completion, Legal & General was following a strategic plan to dispose of non-core businesses, which included its Dutch operation. In the opinion of the Directors, this resulted in a disposal pricing strategy for Legal & General Nederland that sought to offer an attractive investment opportunity for potential buyers.

 

Acquisition-related costs:  The costs in respect of the transaction amounted to £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 £119.8m, with contribution to overall consolidated profit before tax of £18.4m, before the amortisation of the AVIF and deferred acquisition cost intangible assets.  Had Scildon been consolidated from 1 January 2017, the Consolidated Statement of Comprehensive Income would have included net insurance premium revenue of £178.0m, and would have contributed £16.6m to the overall consolidated profit before tax.

 

4.   Operating segments

The group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the chief operating decision maker, which is the board of directors of Chesnara plc.

 

The segments of the group as at 31 December 2017 comprise:

 

CA:  This segment represents the group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the group's principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. This segment also contains Save & Prosper Insurance Limited which was acquired on 20 December 2010 and its then subsidiary Save & Prosper Pensions Limited. The S&P business was transferred to CA during 2011. This segment also contains the business of Protection Life, which was purchased on 28 November 2013 and the business of which was transferred to CA effective from 1 January 2015. CA is responsible for conducting unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk.

 

Movestic:  This segment comprises the group's Swedish life and pensions business, Movestic Livförsäkring AB ('Movestic') and its subsidiary and associated companies, which are open to new business and which are responsible for conducting both unit-linked and pensions and savings business and  providing some life and health product offerings.

 

Waard Group:  This segment represents the group's Dutch life and general insurance business, which was acquired on 19 May 2015 and comprises the three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Tadas Verzekering.  During the year, the book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard Leven via a Part VII transfer. The Waard Group's policy base is predominantly made up of term life policies, although also includes unit-linked policies and some non-life policies, covering risks such as occupational disability and unemployment.

 

Scildon:  This segment represents the Group's latest Dutch life insurance business, which was acquired on 5 April 2017.  Scildon's policy base is predominantly made up of individual protection and savings contracts.  It is open to new business and sells protection, individual savings and group pension contracts via a broker-led distribution model.

 

Other group activities:  The functions performed by the parent company, Chesnara plc, are defined under the operating segment analysis as Other group activities. Also included therein are consolidation and elimination adjustments.

 

The accounting policies of the segments are the same as those for the group as a whole.  Any transactions between the business segments are on normal commercial terms in normal market conditions.  The group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the group.  There were no changes to the measurement basis for segment profit during the year ended 31 December 2017.

 

(i)   Segmental income statement for the year ended 31 December 2017


 

 

CA

 

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

 

Total


£000

£000

£000

£000

£000

£000

Net insurance premium revenue

39,036

15,438

2,227

120,623

-

177,324

29,009

49,155

20

35,664

-

113,848

Net investment return

251,041

223,310

7,349

50,016

101

531,817

Total revenue (net of reinsurance payable)

319,086

287,903

9,596

206,303

101

822,989

Other operating income

13,985

3,215

42

-

-

17,242

Segmental income

333,071

291,118

9,638

206,303

101

840,231

Net insurance contract claims and benefits incurred

(191,524)

(5,447)

(1,051)

(167,225)

-

(365,247)

(66,969)

(222,953)

-

-

-

(289,922)

(1,368)

(31,959)

(331)

(1,494)

-

(35,152)







-

(2,052)

-

(124)

-

(2,176)

-

(292)

(52)

(229)

-

(573)

(21,678)

(13,485)

(3,015)

(18,813)

(10,528)

(67,520)

(952)

(3,302)

-

1

14

(4,239)

(4)

(2,756)

-

-

(1,683)

(4,443)

Share of profit from associates

-

949

-

-

-

949

Profit before tax and consolidation adjustments

50,576

9,821

5,189

18,419

(12,096)

71,908







(6,224)

(3,527)

(662)

(2,858)

-

(13,271)

-

(101)

-

-

-

(101)

-

6,601

-

4,146

-

10,747

Segmental income less expenses

44,352

12,794

4,527

19,707

(12,096)

69,283

Profit arising on business combination

-

-

-

-

20,319

20,319

Profit before tax

44,352

12,794

4,527

19,707

8,223

89,602

(7,085)

71

(1,068)

(4,946)

1,860

(11,168)

Profit after tax

37,267

12,865

3,459

14,761

10,083

78,434

 

(ii)  Segmental balance sheet as at 31 December 2017


 

 

CA

 

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

 

Total


£000

£000

£000

£000

£000

£000

Total assets

3,020,489

3,148,135

166,803

2,060,569

47,388

8,443,384

Total liabilities

(2,849,557)

(3,057,934)

(109,421)

(1,881,301)

(93,515)

(7,991,728)

Net assets

170,932

90,201

57,382

179,268

(46,127)

451,656

Investment in associates

-

6,407

-

-

-

6,407

Additions to non-current assets

-

23,836

313

3,719

-

27,868

 

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


 

 

CA

 

Movestic

 

Waard Group

Other Group Activities

Total


£000

£000

£000

£000

£000

Net insurance premium revenue

46,989

14,903

2,658

-

64,550

Fee and commission income

31,610

41,296

26

-

72,932


337,903

169,130

8,464

184

515,681

Total revenue (net of reinsurance payable)

416,502

225,329

11,148

184

653,163

Other operating income

13,360

3,751

503

-

17,614

Segmental income

429,862

229,080

11,651

184

670,777

Net insurance contract claims and benefits incurred

(263,202)

(7,695)

(1,464)

-

(272,361)

Net change in investment contract liabilities

(100,599)

(168,508)

-

-

(269,107)


(1,664)

(25,089)

(330)

-

(27,083)

Administrative expenses:






Amortisation charge on software assets

-

(1,243)

-

-

(1,243)

Depreciation charge on property and equipment

-

(197)

-

-

(197)

Other

(20,460)

(12,800)

(3,664)

(8,251)

(45,175)

Operating expenses

(1,204)

(3,209)

-

19

(4,394)

Financing costs

(2)

(1,629)

-

(1,641)

(3,272)

Share of profit from associates

-

150

-

-

150

Profit before tax and consolidation adjustments

42,731

8,860

6,193

(9,689)

48,095

Other operating expenses:






Charge for amortisation of acquired value of in-force business

(6,247)

(3,554)

(618)

-

(10,419)

Charge for amortisation of acquired value of customer relationships

-

(236)

-

-

(236)

Fees, commission and other acquisition costs

-

3,245

-

-

3,245

Segmental income less expenses

36,484

8,315

5,575

(9,689)

40,685


36,484

8,315

5,575

(9,689)

40,685

Income tax (expense)/credit

(6,663)

(7)

(1,721)

2,986

(5,405)

Profit after tax

29,821

8,308

3,854

(6,703)

35,280

 

(iv) Segmental balance sheet as at 31 December 2016


 

 

CA

Movestic

 

Waard Group

Other Group Activities

 

Total


£000

£000

£000

£000

£000

Total assets

3,047,490

2,718,156

207,160

122,957

6,095,763

Total liabilities

(2,883,575)

(2,638,490)

(122,655)

(57,482)

(5,702,202)

Net assets

163,915

79,666

84,505

65,475

393,561

Investment in associates

-

5,433

-

-

5,433

Additions to non-current assets

-

11,894

-

-

11,894

 

5.   Borrowings

Group

31 December




2017
£000

2016
£000

Bank loan

89,457

52,697

Amount due in relation to financial reinsurance

39,745

34,146


129,202

86,843

Current

32,379

61,471

Non-current

96,823

25,372

Total

129,202

86,843

 

The bank loan as at 31 December 2017 comprises the following:

 

-       on 3 April 2017 tranche one of a new facility was drawn down, amounting to £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 denominated bank loan at 31 December 2017 was £35.0m (31 December 2016: £52.8m).

 

The fair value of the euro denominated bank loan at 31 December 2017 was £55.0m (31 December 2016: nil).

 

The fair value of amounts due in relation to financial reinsurance was £42.2 (31 December 2016: £34.4m).

 

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

 

6.   Earnings per share

Year ended 31 December

2017

2016




Profit for the year attributable to shareholders (£000)

78,434

35,280

Weighted average number of ordinary shares

149,749,517

127,488,681

Basic earnings per share

52.38p

27.67p

Diluted earnings per share

52.13p

27.56p

 

The weighted average number of ordinary shares in respect of the years ended 31 December 2017 is based upon 149,885,761 shares in issue less 86,040 own shares held in treasury.  The weighted average number of ordinary shares in respect of the years ended 31 December 2017 was based upon 149,885,761 shares in issue less 147,535 own shares held in treasury.

 

There were 877,000 share options outstanding at 31 December 2017 (2016: 526,000).  Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2016.

 

7.   Retained earnings

Year ended 31 December




2017

£000

2016

£000

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



Balance at 1 January

188,598

177,021

Profit for the year

78,434

35,280

Revaluation of pension obligations

124

-

Share based payment

669

478

Dividends



   Final approved and paid for 2015

-

(15,586)

   Interim approved and paid for 2016

-

(8,595)

   Final approved and paid for 2016

(19,002)

-

   Interim approved and paid for 2017

(10,482)

-

Balance at 31 December

238,341

188,598

The interim dividend in respect of 2015, approved and paid in 2016 was paid at the rate of 6.80p per share.  The final dividend in respect of 2016, approved and paid in 2017, was paid at the rate of 12.69p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2016 was made at the rate of 19.49p per share.

 

A final dividend of 13.07p per share in respect of the year ended 31 December 2017 payable on 23 May 2018 to equity shareholders of the parent company registered at the close of business on 13 April 2018, the dividend record date, was approved by the directors after the balance sheet date.  The resulting total final dividend of £19.6m has not been provided for in these financial statements and there are no income tax consequences.

 

The interim dividend in respect of 2017, approved and paid in 2017, was paid at the rate of 7.00p per share to equity shareholders of the parent company registered at the close of business on 8 September 2017, the dividend record date.

 

The following summarises dividends per share in respect of the year ended 31 December 2017 and 31 December 2016:

 

Year ended 31 December




2017

P

2016

p

Interim - approved and paid

7.00

6.80

Final - proposed/paid

13.07

12.69

Total

20.07

19.49

 

8.   Related parties

a)     Identity of related parties

The shares of the company were widely held and no single shareholder exercised significant influence or control over the company.

 

The company has related party relationships with:

(i)   key management personnel who comprise only the directors of the company;

(ii)  its subsidiary companies;

(iii)  its associated company;

(iv) other companies over which the directors have significant influence; and

(v)  transactions with persons related to key management personnel

 

b)    Related party transactions

(i) Transactions with key management personnel.

Key management personnel comprise of the directors of the company.  There are no executive officers other than certain of the directors. Key management compensation is as follows:


2017

£000

2016

£000

Short-term employee benefits

1,324

1,849

Post-employment benefits

66

84

Total

1,390

1,933

 

In addition, to their salaries the company also provides non-cash benefits to directors, and contributes to a post employment defined contribution pension plan on their behalf, or where regulatory contribution limits are reached, pay an equivalent amount as an addition to base salary.

The following amounts were payable to directors in respect of bonuses and incentives:

 


2017

£000

2016

£000

Annual bonus scheme (included in the short-term employee benefits above)

588

521

 

These amounts have been included in Accrued Expenses.

 

The amounts payable under the annual bonus scheme were payable within one year.

 

(ii)   Transactions with subsidiaries

The company undertakes centralised administration functions, the costs of which it charges back to its operating subsidiaries.  The following amounts which effectively comprised a recovery of expenses at no mark up were credited to the Consolidated Statement of Comprehensive Income of the company for the respective periods:

Year ended 31 December




2017
£000

2016
£000

Recovery of expenses

3,272

3,470

 

(iii)  Transactions with associate

Movestic Livförsäkring AB and its associate Modernac SA

 

Year ended 31 December




2017
£000

2016
£000

Reinsurance premiums paid

(9,667)

(9,245)

Reinsurance recoveries received

5,820

4,983

Reinsurance commission received

(2,843)

1,761


(6,690)

(2,501)

Amounts outstanding as at balance sheet date

(2,442)

(3,570)

 

Movestic Livförsäkring AB had the following amounts outstanding at the balance sheet date:

 


2017

2016


Amounts owed by associate

£000

Amounts owed to associate

 £000

Amounts owed by associate

£000

Amounts owed to associate

 £000

Modernac S.A.

-

2,442

-

3,570

 

These amounts have been included in other payables.

 

(iv)  Transactions with persons related to key management personnel

During the year, the company engaged the professional services of Clare Rimmington, who is related to David Rimmington. Clare Rimmington is an on-line marketing expert with many years of experience developing and managing web based solutions in the Financial Services sector.

In the year an amount of £20,708 was paid by the company to Clare Rimmington for web-site related consultancy services. These amounts have been included in administration expenses.

 

 

GLOSSARY

 

AGM

Annual General Meeting.

ALM

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

APE

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

CA

Countrywide Assured plc.

CALH

Countrywide Assured Life Holdings Limited and its subsidiary companies.

BAU Cash Generation

This represents divisional cash generation plus the impact of non-exceptional group activity.

Cash Generation

This represents the operational cash that has been generated in the period.  The cash generating capacity of the group is largely a function of the movement in the solvency position of the insurance subsidiaries within the group, and takes account of the buffers that management has set to hold over and above the solvency requirements imposed by our regulators. Cash generation is reported at a group level and also at an underlying divisional level reflective of the collective performance of each of the divisions prior to any group level activity.

Divisional Cash Generation

This represents the cash generated by the three operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.

DNB

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

DPF

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

Dutch Business

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

EcV

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

FCA

Financial Conduct Authority.

FI

Finansinspektionen, being the Swedish Financial Supervisory Authority.

Form of Proxy

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

FSMA

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

Group

The company and its existing subsidiary undertakings.

Group Own Funds

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

Group SCR

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

Group Solvency

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

HCL

HCL Insurance BPO Services Limited.

IFRS

International Financial Reporting Standards.

IFA

Independent Financial Adviser.

KPI

Key performance indicator.

LGN

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

London Stock Exchange

London Stock Exchange plc.

LTI

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

Movestic

Movestic Livförsäkring AB.

Modernac

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

New business

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

Official List

The Official List of the Financial Conduct Authority.

Ordinary Shares

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

Own Funds

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

ORSA

Own Risk and Solvency Assessment

 

PRA

Prudential Regulation Authority.

QRT

Quantitative Reporting Template.

ReAssure

ReAssure Limited.

Resolution

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

RMF

Risk Management Framework.

Scildon

Scildon

Shareholder(s)

Holder(s) of Ordinary Shares.

Solvency II

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

SICAV

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

STI

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

SCR

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

Swedish Business

Movestic and its subsidiaries and associated companies.

S&P

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

TCF

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

Total Cash Generation

This represents the absolute cash generation for the period at total group level, comprising divisional cash generation as well as both exceptional and non-exceptional group activity.

TSR

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

UK or United Kingdom

The United Kingdom of Great Britain and Northern Ireland.

UK Business

CA and S&P

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR KVLFLVXFEBBB
Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account.