Source - LSE Regulatory
RNS Number : 3950U
Chesnara PLC
29 March 2019
 

Chesnara plc                                                                             

 

Dividend increased by 3% supported by solid cash generation.

 

Chesnara has continued to deliver significant cash generation, funding the dividend strategy as well as strengthening the group solvency ratio, despite the challenging economic backdrop in 2018.  Economic Value was however impacted by the adverse economic conditions, though this was in line with sensitivities.

 

FINANCIAL HIGHLIGHTS

 

·        GROUP CASH GENERATION OF £47.8M (2017: £28.6M) Note 1

The 2018 result benefits from a £26.8m release of surplus from the UK with-profits funds. The 2017 comparative includes a one-off £55.3m negative arising on the acquisition of Legal & General Nederland.

 

·        DIVISIONAL CASH GENERATION OF £63.9M (2017: £86.7M) 

This includes the benefit of a £26.8m release of surplus from the UK's with-profits funds.

 

·        GROUP SOLVENCY RATIO OF 158% (31 DECEMBER 2017: 146%) 

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

 

·        3.00% INCREASE IN FINAL DIVIDEND COMPARED WITH 2017 

The results support the continued growth of the final dividend to 13.46p per share (2017 final: 13.07p per share), the fourteenth annual consecutive increase.

 

·        ECONOMIC VALUE (ECV) OF £626.1M (31 DECEMBER 2017: £723.1M) Note 2

The movement includes the earnings for the year, and is stated after recognising £30.4m of dividend payments and a foreign exchange loss of £5.8m during the year.

 

·        ECV EARNINGS NET OF TAX OF £(60.9)M (2017: £139.5M)

The loss includes £49.7m relating directly to economic market conditions. The 2017 result included a non-

recurring £65.4m gain arising on the acquisition of Legal & General Nederland.

 

·        ECV NEW BUSINESS CONTRIBUTION OF £10.6M (2017: £12.4M)

Solid new business profits have emerged from Movestic. Scildon's new business operation saw positive volume trends, while we continue to work on initiatives to further enhance margins.

 

·        IFRS PROFIT BEFORE TAX OF £27.0M (2017: £89.6M)

The underlying core operating profit improved to £42.5m (2017: £38.4m).  Economic losses of £15.5m compare to a corresponding profit of £30.9m in 2017.  The 2017 result included a £20.3m gain arising on the acquisition of Legal & General Nederland.

 

·        IFRS TOTAL COMPREHENSIVE INCOME OF £23.7M (2017: £86.9M)

The 2018 result includes a foreign exchange loss of £0.8m (2017: gain of £8.3m). The 2017 result included a £20.3m gain on acquisition of Legal & General Nederland.

 

STRATEGIC DELIVERY HIGHLIGHTS

 

·        FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 3% to 20.67p per share (7.21p interim and 13.46p proposed final). This compares with 20.07p in 2017 (7.00p interim and 13.07p final).

 

·      GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN

The group's IFRS 17 programme has progressed well during the year.  The initial impact assessment phase has been completed and an implementation plan has been drawn up which is now being progressed.

 

·        FCA INVESTIGATION CLOSURE

The FCA investigation into the fair treatment of long standing customers in the UK was closed without further action.

 

John Deane, Chief Executive said:

"It is pleasing to report that in 2018 we continued to generate cash in excess of our dividend costs and we ended the year with a strong solvency ratio of 158% (2017: 146%).  This was achieved against a backdrop of adverse economic conditions, especially during the last quarter of the year.  Economic Value has been impacted by the market conditions in line with our sensitivities.

 

The adverse economic conditions, primarily reduced equity and bond values and the strengthening of sterling against the Swedish krona, contributed to a reduction in total Economic Value from £723.1m at the start of the year to a closing value of £626.1m.  The closing value recognises the payment of £30.4m of dividends during the year.

 

Good progress on operational performance developments during the year has resulted in improvements in business resilience and higher new business volumes compared to 2017.

 

The FCA investigation into the fair treatment of longstanding customers in the UK was closed without further action.

 

In the early part of 2019, markets have recovered somewhat but uncertainty remains as a result of political, economic and business conditions.  For Chesnara, with our structure of separate subsidiary companies in each European territory, debt capacity and management capability, we remain open to the opportunities this uncertainty could bring to us as a disciplined buyer with a focus on cash generation and long term value."

 

Note 1    Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

 

Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.

 

Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara.  Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed.

 

Note 2    Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced with-profit funds.  We consider the Solvency II rules understate the commercial value of these items.  Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin rules, in our view, overstate the cost of capital.

 

The Board approved this statement on 28 March 2019.

 

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

 

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

 

Notes to Editors

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

 

CA plc is a UK life assurance subsidiary that is closed to new business.  In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for £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 Protection Life business transferred into CA plc.  CA plc operates an outsourced business model.

 

Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009 for £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 & General Nederland) is a leading provider in the Dutch market of risk and investment-linked products, sold through brokers to high net worth customers.  It also offers a defined contribution group pension platform focussing on Dutch SMEs.  The company was acquired on 5 April 2017 from Legal and General.

 

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

 

CAUTIONARY STATEMENT

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

 

 

2018 HIGHLIGHTS 

 

FINANCIAL

 

IFRS PRE-TAX PROFIT £27.0M 2017 £89.6M

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

 

IFRS TOTAL COMPREHENSIVE INCOME £23.7M 2017 £86.9M

The 2018 result includes a foreign exchange loss of £0.8m (2017: gain of £8.3m). The 2017 result includes a £20.3m gain on acquisition of Legal & General Nederland.

 

GROUP SOLVENCY 158% 2017 146%

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

 

ECONOMIC VALUE  £626.1M 2017 £723.1M 

Movement in the year is stated after dividend distributions of £30.4m and includes a foreign exchange retranslation loss of £5.8m.

 

ECONOMIC VALUE EARNINGS £(60.9)M 2017 £139.5M

The loss includes £49.7m relating directly to economic market conditions. The 2017 result includes a non-recurring £65.4m gain arising on the acquisition of Legal & General Nederland.

 

NEW BUSINESS PROFIT £10.6M 2017 £12.4M 

 

GROUP CASH GENERATION £47.8M 2017 £28.6M

The 2018 result benefits from a £26.8m release of surplus previously constrained within the UK with-profit funds. The 2017 comparative includes a £55.3m adverse effect of completing the acquisition of Legal & General Nederland.

 

DIVISIONAL CASH GENERATION £63.9M 2017 £86.7M

The 2018 cash result benefits from a £26.8m release of previously constrained surplus within the UK with-profit funds.

 

 

OPERATIONAL AND STRATEGIC

 

FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 3% to 20.67p per share (7.21p interim and 13.46p proposed final). This compares with 20.07p in 2017 (7.00p interim and 13.07p final).

 

BREXIT UNCERTAINTY, FALLING EQUITY MARKETS AND WIDENING BOND SPREADS

The uncertainty over Brexit was an unwelcome background to the economic backdrop for the year. 2018 saw volatility in equity markets, with many leading equity indices closing more than 10% lower than at the start of the year.  In addition to this we have seen pricing pressures in corporate and some government bonds.

 

GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN

The group's IFRS 17 programme has progressed well during the year.  The initial impact assessment phase has been completed and an implementation plan has been drawn up which is now being progressed.

 

MEASURING OUR PERFORMANCE

 

HOW WE MEASURE PERFORMANCE WITHIN THIS PRELIMINARY ANNOUNCEMENT

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

 

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

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

 

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

 

FINANCIAL STATEMENT KPIS:

 

-      IFRS profits

-      IFRS net assets

 

ADDITIONAL METRICS:

 

-      Solvency

·      Own funds

·      Solvency capital requirement (SCR)

·      SCR plus management buffer

·      Solvency position (absolute value)

·      Solvency position ratio

 

-      Cash generation

·      Group cash generation

·      Divisional cash generation

 

-      Economic Value

·      Balance sheet

·      Earnings

 

 

SOLVENCY

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

 

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

 

ECONOMIC VALUE

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

 

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

 

CASH GENERATION

Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

 

Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.

Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara.  Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed

 

OPERATIONAL AND OTHER PERFORMANCE MEASURES

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

 

MEASURE

WHAT IS IT AND WHY IS IT IMPORTANT?

Customer 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 preliminary announcement refer to a number of indicators of customer service levels.

Broker satisfaction

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

Policy investment 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 seeks 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

 

It is pleasing to report that in 2018 we continued to generate cash in excess of our dividend costs and we ended the year with a strong solvency ratio of 158% (2017: 146%). This was achieved against a backdrop of adverse economic conditions, especially during the last quarter of the year.  Economic Value has been impacted by the market conditions in line with our sensitivities.

 

The adverse economic conditions, primarily reduced equity and bond values and the strengthening of sterling against the Swedish krona, contributed to a reduction in total Economic Value from £723.1m at the start of the year to a closing value of £626.1m.  The closing value recognises the payment of £30.4m of dividends during the year.

 

Good progress on operational performance developments during the year has resulted in improvements in business resilience and higher new business volumes compared to 2017.

 

The FCA investigation into the fair treatment of longstanding customers in the UK was closed without further action.

 

In the early part of 2019 markets have recovered somewhat but uncertainty remains as a result of political, economic and business conditions. For Chesnara with our structure of separate subsidiary companies in each European territory, debt capacity and management capability we remain open to the opportunities this uncertainty could bring to us as a disciplined buyer with a focus on cash generation and long term value.

 

PETER MASON,

CHAIRMAN

 

Against a backdrop of continuing political uncertainty, economic volatility with a net adverse outcome, and during a period of significant operational development, the Chesnara business model has held up well.

 

Adverse economic conditions have an immediate, but potentially temporary impact, on Economic Value. Solvency and cash generation are less affected in the short term and hence our ability to continue our dividend track record has not been impacted.

 

At the heart of Chesnara's proposition as a reliable income stock, the UK business has continued to generate sufficient cash to fund the Chesnara dividend and the recent trend of Movestic and Waard making meaningful positive cash contributions continues.  In contrast Scildon has generated a negative cash result of £17.8m, primarily as a result of investment valuation losses on various corporate and government bonds.  This does not impact our view regarding the future cash generation potential of the business.  The group cash generation provides 157% coverage of the total annual dividend.

 

As we have previously reported, Scildon remains in transition and this is reflected in its short term financial results.  The successful launch of a new mortgage term assurance product during May has contributed to a modest improvement in new business volumes.  Although the increase in new business volumes was reassuring, the fact that the new business operation only made modest profits serves to highlight the importance of successfully completing the Scildon improvement initiatives.

 

The financial resilience of the established business units creates a strong foundation to support the continued improvement programme in Scildon.

 

The headline results for 2018 are generally lower by comparison to 2017.  The 2017 results were unusually strong due to a combination of non-recurring items (including the completion of the acquisition of Legal & General Nederland) and highly beneficial economic conditions.  The 2018 IFRS result of £27.0m includes a loss of £15.5m from economic conditions compared to a corresponding economic profit of £30.9m in 2017.  In addition, the 2017 result included a £20.3m gain on the acquisition of Legal and General Nederland. Excluding the investment market driven impacts and the one off acquisition gain, the underlying IFRS results are more consistent year on year. Whilst the IFRS results are worthy of note in my statement, it is my view that they are not the most meaningful measure for the purpose of assessing the performance of the company and hence my focus within the Chairman's statement is on solvency, cash generation and economic value. The IFRS results are analysed in more detail below.

 

In addition to funding an attractive dividend strategy, we have a long-term objective to protect the post dividend Economic Value of the group.  This means that over time we aim to create value at least to the level of the annual dividend.  Due to the sensitivity of the Economic Value to key investment market variables (see our sensitivity analysis in the Annual Report & Accounts), it can be particularly difficult to meet this Economic Value protection objective in periods where conditions are adverse as has been the case during 2018.  The combination of a £49.7m economic loss, £22.8m of operating losses and the payment of £30.4m of dividends are the primary drivers in a reduction in total Economic Value from £723.1m at the beginning of the year to a closing value of £626.1m.

 

I will now report on how we have delivered against our three strategic objectives in a little more detail:

 

01.  MAXIMISE VALUE FROM EXISTING BUSINESS

Divisional cash generation of £63.9m.

 

When assessed in terms of levels of cash generated in the year we have, with the exception of Scildon, delivered broadly in line with expectations.  £29.0m of cash emerged from the UK division (excluding £6.2m which is currently restricted within the with-profit fund) during the period which, together with £26.8m of previously constrained surplus released from the with-profits fund, resulted in total cash significantly in excess of total annual dividends.  Movestic has increased its level of surplus resulting in a further £18.1m of cash generation.  Scildon has reported negative cash generation of £17.8m.  This is primarily due to the impact of a downward valuation on its fixed interest investments.  The Scildon result in the year does not impact our view regarding the future cash generation potential of the business.

 

Economic Value in the period has been more affected by economic conditions with total value falling by £97.0m.  The majority of the loss is directly due to economic conditions.  Operating losses of £22.8m including the impact of the strengthening of Scildon mortality assumptions, have also contributed to the reduction. Foreign exchange losses of £5.8m have emerged in the period, largely as a result of a weakening of Swedish krona.  These factors, coupled with the payment of £30.4m of dividends have resulted in a 13.4% reduction in EcV since the start of the year.

 

Operational resilience is a vital factor with regards to our ability to protect and service our customers.  We have therefore invested heavily on improving operational resilience across all aspects of the business and our assessment is that the operational resilience and security of the business has improved significantly during the year.

 

02.  ACQUIRE LIFE AND PENSIONS BUSINESSES

We continue to see activity in our preferred markets and are well positioned to take advantage of any future opportunities.

 

THE OUTLOOK REMAINS POSITIVE. ACQUISITION ACTIVITY CONTINUES TO TAKE PLACE IN OUR TARGET MARKETS, WITH OPPORTUNITIES CONTINUING TO EMERGE.

 

During the year we finalised arrangements to form a broader debt syndicate and this, together with increases in solvency surplus, means we are in a strong position to fund future acquisitions where they meet our assessment criteria.

 

03.  ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

Increase in business volumes result in total new business profits of £10.6m.

 

Chesnara writes new business in both Sweden and the Netherlands.  The ultimate aim is to create sufficient annual profits, either through returns on the existing business, or through writing new business, to replace the proportion of Economic Value lost by way of dividend payments.  Movestic continues to deliver within its target profit range with a profit for the year of £8.9m.  This represents a reduction compared to 2017 mainly due to adopting a more prudent assessment of the profitability of increments to existing policies.  Profits from new contracts remain broadly consistent with 2017.

 

Despite improved new business volumes, Scildon are not currently generating sufficient new business profits with a total profit of £1.7m.  This is in line with our expectation at this stage and the need to drive profitability improvements over the coming years was factored into our acquisition price.  A provision for the improvement programme has been made.  During 2018 the focus has been on setting strong foundations and ensuring a clarity of direction.  Whilst certain early operational enhancements have been delivered, the scale of the change to date has not been sufficient to have a marked impact on new business profits.  During 2019 we intend to deliver sufficient organisational and process change to have a material impact on the cost base and to deliver a step change in how we interact with advisors.

 

SOLID NEW BUSINESS PROFITS HAVE EMERGED FROM MOVESTIC IN A CHALLENGING MARKET.  SCILDON'S NEW BUSINESS OPERATION IS NOT GENERATING SUFFICIENT PROFIT AND THE FOCUS OVER 2019 IS TO ADDRESS THIS ISSUE.

 

The successful launch of a new mortgage term assurance product is a first positive step on our Scildon improvement plan although we recognise that we will only see the full potential from products when they are supported by highly efficient processes and a lower cost organisation.

 

Solvency

The group continues to show a robust solvency position, with a solvency ratio of 158% at 31 December 2018 (31 December 2017: 146%).  A large contributing factor to this increase is a £26.8m release of capital from the UK's with profit funds, which positively benefitted own funds in the period.  This was subject to FCA approval.  The closing solvency position is stated after recognising the £20.2m cost of the proposed final dividend.

 

Regulation and governance

 

IFRS 17

Our programme has progressed well in the year, with our immediate focus being on delivering an impact assessment.  This deals with an initial early view on the technical application of the standard to the group and its associated financial and operational impacts.  We completed our initial impact assessment in Q3 and have now transitioned to the delivery phase.  We have previously provided for the cost of delivering the programme within our actuarial expense reserves. From an operational and risk management perspective, the proposed one year implementation delay is helpful but it is expected that there will be additional costs. These too have been provided for in the 2018 results.

 

We continue to be of the view that IFRS 17 should not have any significant bearing on the commercial assessment of Chesnara, with our expectation that capital management decision making will continue to be driven by regulatory solvency and Economic Value as opposed to our IFRS results and position.

 

Regulatory compliance

Compliance with regulation remains a priority for the group.  We have continued to maintain a positive and constructive relationship with regulatory bodies across the three territories.  During the period we have delivered our GDPR readiness programmes, for the new rules which were effective from 25 May 2018.

 

On 19 September 2018 the FCA announced that it had closed its investigation, into whether CA had failed to meet the standards expected of it regarding the fair treatment of long-standing customers. As expected, no further action has resulted from the investigation.

 

Governance framework

We continue to place great importance on ensuring our risk and governance system is fit for purpose.  Work has continued to progress on ensuring that Scildon's risk and governance monitoring and reporting routines are in line with the wider group's.

 

AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS.

 

Corporate purpose

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

 

Business model

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

The products and services we provide

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

 

WE HELP PROTECT PEOPLE AND THEIR 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.

 Sustainability

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

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

Shareholder proposition

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

Taxation

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

Staff

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

Suppliers and partners

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

Local community

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

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

 

OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE PURPOSE FOR ALL KEY STAKEHOLDERS.

 

Outlook and Brexit

Chesnara is in a good position to continue its delivery against its strategic objectives, which in turn fund our well established dividend strategy.  The ability to generate cash in less economically beneficial conditions, as has been the case during 2018, clearly demonstrates this.

 

In particular, the UK business remains a robust source of cash, with additional potential to take management actions to enhance the core cash if required.  Movestic now has the scale to continue contributing to the cash position.  Scildon has surplus capital and despite the negative cash emerging during the period, is also expected to be cash generative, in the absence of adverse economic conditions.

 

We now have sufficient scale and presence in both the UK and the Netherlands to continue our focus on acquisition activity in those territories in a disciplined manner.  We also remain open to opportunities in Sweden particularly where they provide scale benefits. We would consider new territories but the benefits would need to outweigh the inherent challenge of adding another regulatory environment into our business model.  Our balance sheet has further capacity for debt having completed a debt syndication process during the year, and we have significant levels of surplus capital.  This, together with operational capacity, means we remain well positioned to act should an opportunity arise that meets our stringent price and risk profile criteria.

 

Movestic has become an established profitable new business operation.  They have made meaningful steps in improving the organisational effectiveness and efficiency of the business including some major automation initiatives, which have resulted in a notable reduction in the cost base.  They are in a good position to deliver further digitalisation plans.  We recognise that current new business profits from Scildon are not sufficient.  However, the fact that we have recorded a modest profit calculated on a suitably stringent basis of assessment, means we retain our view that Scildon has the potential to create meaningful new business profits. 2019 will be a critical year regarding the delivery of material change to improve profits.

 

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

 

From an investment markets perspective equity markets have generally risen since the end of the year, and spreads on bonds have narrowed.  Both of these factors are positive drivers of Economic Value for the group.  

 

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

 

Peter Mason

Chairman

28 March 2019

 

 

BUSINESS REVIEW

 

OVERVIEW OF STRATEGY

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

 

01. MAXIMISE VALUE FROM EXISTING BUSINESS

02. ACQUIRE LIFE AND PENSION BUSINESSES

03. ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

Maintain adequate financial resources

Fair treatment of customers

Provide a competitive return to shareholders

Robust regulatory compliance

Responsible risk based management

                                                          Business Model

 

 

BUSINESS REVIEW n UK

The UK division is principally made up of Countrywide Assured plc, a life insurance company that is in run off.  The company has 277,000 policies and its operations are predominantly outsourced, and overseen by a central governance team.

 

The division has continued to focus on delivering its core strategic objectives of managing the capital and value of the business effectively, focusing on customer outcomes and ensuring that the business is governed well.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

 

INITIATIVES AND PROGRESS IN 2018

-       Cash generation of £55.8m emerged during the year despite volatile equity markets, including £26.8m arising from a transfer of surplus capital from the company's with-profit funds following approval by the Financial Conduct Authority.

-       Proposed final dividend to Chesnara of £59.0m.

-       Looking through the impact of dividends, the EcV of the division reduced by £8m since the start of the year, largely as a result of the fall in equity markets in 2018.

-       IFRS pre-tax profits of £28.2m have been made in the period.

 

FUTURE PRIORITIES

-       As a closed book operation, a key priority for the division is to continue to monitor expenses closely, especially in light of the ever-demanding regulatory environment in which the company operates.

-       Continue to consider investment strategy of the division, including the mix of assets we invest in and also the operating model used to deliver investment management.

-       The division will continue to support the group in delivering its acquisition strategy in the UK.

 

KPIs

2018 value reduced as a result of investment market conditions towards the end of the year. 

£m

2014

2015

2016

2017

2018







EEV / EcV reported value

271.8

232.2

239.6

255.5

215.5

Cumulative dividends

-

65.0

95.5

125.5

157.5

Total

271.8

297.2

335.1

381.0

373.0







 

Cash generation of £55.8m, which includes a one-off surplus transfer from with profit funds, continues to support the group's dividend strategy.

 

£m

2014

2015

2016

2017

2018







Cash generation

50.9

42.5

21.3

34.5

55.8







 

               

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

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

 

INITIATIVES AND PROGRESS IN 2018

-       On 19 September 2018 the FCA announced that, it had closed its investigation, without further action, into whether CA had failed to meet the standards expected of it regarding the fair treatment of long-standing customers.

-       The division's customer strategy implementation plan has continued to be progressed during the year.  Key items of delivery have included:

Reviewing key event communications with customers and making sure they meet the expected standards.  This work will continue into 2019.

Updating the CA website to improve the accessibility of information that customers may wish to refer to.  A second phase roll-out to provide more information on fund unit prices and performance, as well as enhanced information on savings and protection products, was progressed during 2018 and went live in 2019.

-       The business has continued its programme to stay in touch with customers through its "goneaways" programme.

-       Good customer services standards have been maintained throughout the year.

 

FUTURE PRIORITIES

-       The division's customer strategy implementation programme is expected to come to a close in early 2020, with the programme transferring the updated processes into a business as usual environment.  Key items that are planned to be delivered in 2019 include:

Implementing the vast majority of the updated customer communications, most notably annual statements, retirement communications, and the remaining transfers and surrender letters.

Continue the cycle of seeking to make contact with customers who have not provided us with their most recent contact information.  This will include writing to all customers who we believe we have traced to new addresses.

 

KPIs

Policyholder fund performance






2018

2017

CA Pension Managed





(5.5)%

9.8%

CWA Balanced Managed Pension





(4.9)%

9.5%

S&P Managed Pension





(7.8)%

13.6%

Benchmark - ABI Mixed Inv 40%-85% shares





(6.2)%

9.5%

 

Our main managed funds continue to generally perform well against their benchmarks although the S&P managed pension fund experienced a disappointing end to the year as a result of its higher relative exposure to equities, which fell during the year. The S&P performance over a longer term period compares favourably to benchmark.

 

GOVERNANCE

BACKGROUND INFORMATION

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

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

 

INITIATIVES AND PROGRESS IN 2018

-       The division has started a programme to enhance its operational resilience following the Bank of England's paper entitled "Building the UK financial sector's operational resilience" which was issued in July 2018.

-       The division's IFRS 17 programme commenced, with the first phase involving an impact assessment.  This work has been utilised to scope the delivery phase of the plan, which has now commenced.

-       Positive engagement with all regulators has continued during the year.

-       The General Data Protection Regulation (GDPR) project was completed prior to the rules coming into force on 25 May 2018.

 

FUTURE PRIORITIES

-       2019 will focus on delivering the division's operational resilience plans following the Bank of England's discussion paper that was issued in 2018.

-       The division will continue with its IFRS 17 implementation plan, noting that the standard is subject to further review by the IASB.  At this stage these plans include producing a balance sheet valuation under IFRS 17 valuation rules.

 

KPIs

SOLVENCY RATIO: 191%

Solvency remains robust. The surplus generated in the period increases the solvency position from 130% to 191%. After the dividend, due to be paid during 2019, the ratio is 130%.

 





£m

Solvency Ratio







31 Dec 2017 surplus




38.6

130%

Surplus generation in 2018




49.5


31 Dec 2018 surplus (pre-dividend)




88.1

191%

2018 proposed dividend




(59.0)


31 Dec 2018 surplus




29.1

130%







 

 

BUSINESS REVIEW = SWEDEN

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

 

Movestic has delivered a stable set of results across key financial metrics and shows resilience in a negative investment market environment. Its new business operation continues to add value to the group and assets under management growth as a result of positive net client cash flow continues to support the division in achieving its ambitions on scale. The division will continue to focus on its IT streamlining plans, which are anticipated to bring cost efficiencies and improvements in broker and policyholder experience.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

-       Movestic creates value predominantly by generating growth in the unit linked assets under management (AuM). AuM growth is dependent upon positive client cash flows and positive investment performance. Capital surplus is a factor of both the value and capital requirements and hence surplus can also be optimised by effective management of capital.

 

INITIATIVES AND PROGRESS IN 2018

-       Cash of £19.4m has been generated, on constant exchange rates (£18.1m post foreign exchange retranslation).

-       IFRS profit of £9.3m.

-       Assets under management resilient despite investment market drop in the period, on constant exchange rates.

-       The transfer market remains intense. Movestic reflects the market trend with transfers in at a similar level to outgoing transfers.

-       The division has implemented an operational change programme, designed to improve efficiencies and reduce costs within the business and hence combat the impact of price pressure.

-       The Swedish Krona has weakened against sterling by 3.2% during the year, resulting in retranslation losses being reported in EcV and cash generation. During 2017 the Swedish Krona strengthened by 0.6%.

-       Equity markets developed negatively during the fourth quarter resulting in a negative investment return for the full year.

 

FUTURE PRIORITIES

-       Continue the journey of digitising and automating processes, with a view to improving both efficiency and control.

-       Continue to develop more digitised and individualised customer proposition and experience.

-       Provide a predictable and sustainable dividend to Chesnara.

 

KPIs (all comparatives have been presented using 2018 exchange rates)

 

Growth in assets under management

 

£bn

2014

2015

2016

2017

Jun 2018

Total assets under management

1.9

2.1

2.4

2.8

2.8







 






£bn

31 December 2017





2.8

New client cashflow





0.2

Investment growth





(0.2)

31 December 2018





2.8

 

 

IFRS profit

 

£m

2014

2015

2016

2017

2018







IFRS profit

3.7

7.5

9.1

9.3

9.3







 

Value growth

 

£m

2014

2015

2016

2017

2018







EEV / EcV reported vlaue

145.3

183.8

220.4

240.3

227.4

Cumulative dividends

-

-

-

2.7

5.4

Total

145.3

183.8

220.4

243.0

232.8







 

 

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

-       Movestic provides personalised long-term savings, insurance policies and occupational pensions for individuals and business owners. We believe that recurring independent financial advice increases the likelihood of a solid and well-planned financial status, hence we are offering our products and services through advisors, licenced brokers or digitally.

 

INITIATIVES AND PROGRESS IN 2018

-       Policyholder average investment return of -6.0 % in the year to date (2017: +8.2%), ahead of the Swedish stock market return of -7.7%.

-       Fees have been lowered in Movestic's funds to strengthen its customer proposition.

-       Movestic was elected as one of the unit linked providers in the procurement of the collective agreement ITP, where 2 million clients have their occupational pension solution. The offering was made available on 1 October and was combined with our digital investment advisory tool MAIA. This is the first time that kind of solution was made available for this group of clients. It should be noted that this represents low margin business.

 

FUTURE PRIORITIES

-       Continue to develop new solutions and tools to support the brokers' value-enhancing customer proposition.

 

KPIs (all comparatives have been presented using 2018 exchange rates)

 

Broker assessment rating (out of 5)

 


2014

2015

2016

2017

2018







Rating

3.6

3.7

3.8

3.7

3.8







 

POLICYHOLDER AVERAGE INVESTMENT RETURN:

(6.0)%

(SWEDISH STOCK MARKET (7.7)%)

 

GOVERNANCE

BACKGROUND INFORMATION

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

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

 

INITIATIVES AND PROGRESS IN 2018

-       The General Data Protection Regulation (GDPR) project was completed prior to the rules coming into force on 25 May 2018.

-       Movestic has successfully implemented the first phase of the Insurance Distribution Directive (IDD), which applied from 1 October 2018.

-       The IFRS 17 project has progressed well, with the initial impact assessment study delivered during Q4.

 

FUTURE PRIORITIES

-       Continue to deliver compliance with the new Insurance Distribution Directive (IDD). The IDD seeks to improve consumer protection and transparency within the distribution of insurance-based products.

-       Deliver IFRS 17 implementation plans.

 

KPIs

 

SOLVENCY RATIO: 176%

 

Solvency remains strong at 176%. Solvency surplus of £12.1m has been generated in the period. After the dividend, due to be paid during 2019, the ratio is 174%.

 





£m

Solvency Ratio







31 Dec 2017 surplus




78.8

153%

Surplus generation in 2018




12.1


31 Dec 2018 surplus (pre-dividend)




90.9

176%

2018 proposed dividend




(2.9)


31 Dec 2018 surplus




88.0

174%







 

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

-       As an "open" business, Movestic not only adds value from sales but as it gains scale, it will become increasingly cash generative which will fund further growth or contribute towards the group's dividend strategy. Movestic has a clear sales focus and targets a market share of 6.5% - 10.0% of the advised occupational pension market. This focus ensures we are able to adopt a profitable pricing strategy.

 

INITIATIVES AND PROGRESS IN 2018

-       Movestic continues to operate within its target market range.

-       Annual premium equivalent of new contracts sold increased by 3% compared with 2017, although gross margin rates have deteriorated slightly, reflecting the pricing pressures that exist in the market.

-       Overall profits from new contracts have remained consistent with 2017 despite price pressure. A reassessment of the profitability of increments to existing policies has however driven a reduction in overall new business profit.

-       Movestic are redesigning their organisation for a digital world to increase business efficiency and reduce cost. As part of this process outsourcing of some IT operations capability was completed in the year.

 

FUTURE PRIORITIES

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

-       Ongoing digitalisation of processes to improve customer and broker experience.

-       Focus on increasing brand awareness.

 

KPIs (all comparatives have been presented using 2018 exchange rates)

 

Occupational pension market share %

 

%



2016

2017

2018







Market share



8.3

7.6

6.6







Market shares have been restated to better reflect the market excluding increments. On the restated base our target range becomes 6.5% to 10.0%.

 

New business profit

 

£m

2014

2015

2016

2017

2018







New business profit

6.3

8.7

6.3

11.7

8.9







 

 

BUSINESS REVIEW = NETHERLANDS

Our Dutch division consists of two separate businesses; Scildon and Waard. Scildon, acquired in 2017, is an open business, writing new policies focusing on three product markets via a broker network. Scildon is a well-established player in the term assurance market, the current market leader in unit-linked savings insurance and is a challenger brand in the Dutch defined contribution pension insurance market. Waard manages c100,000 policies and is in run-off, focusing on the efficient administration of its existing book of business.

 

2018 has seen positive developments for the Dutch division, including dividend payments to Chesnara from both Scildon and Waard with further dividends to be received during 2019.  Waard continues to deliver in line with expectations and the integration of Scildon into the group has continued in line with its improvement plan, with key steps taken including key organisational changes and the launch of its new mortgage term product.  A senior management team is now in place which is more strategically aligned with the group.  The benefits from the actions taken during 2018 have not been realised in the results thus far and as previously highlighted, there remains further work to do, which is our focus for 2019.  Economic conditions in 2018 have impacted results; however, these results do not have any bearing on the ongoing view of the cash and profit potential from the Scildon business.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

 

INITIATIVES AND PROGRESS IN 2018

-       During 2018, Waard and Scildon paid dividends to Chesnara of £12.9m and £21.7m respectively and ended the period with healthy solvency ratios of 643% and 203%. Further combined distributions of £8.4m are due in 2019 in respect of 2018.

-       Including the impact of foreign exchange, Scildon has reported an EcV loss of £30.0m with Waard delivering a profit of £2.3m.  The loss in Scildon is primarily driven by adverse asset valuation movements from widening credit spreads on corporate and certain government bonds together with updated mortality assumptions to reflect the latest industry data.

-       Cash utilisation of £10.0m, representing a £7.8m gain from Waard primarily due to SCR reductions, offset by a cash loss of £17.8m from Scildon.

-       IFRS profit of £1.7m reflects a £2.8m profit in Waard offset by a £1.1m loss in Scildon. 

-       Progressed a focused plan for Scildon to drive improvements in new business development, cost management and organisational structure.

-       Aligned some functions between the two Dutch businesses to provide operational efficiencies.

 

FUTURE PRIORITIES

-       Continue dividends from both businesses to support the group dividend.

-       Continuation of the Scildon improvement plan which will strengthen future cash generation and value growth.  The plans include:

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

Assessment of IT infrastructure to ensure it is able to facilitate efficient processes through a simplified approach with reduced delivery risk; and

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

 

KPIs (all comparatives have been presented using 2018 exchange rates)

 

Scildon's EcV has been impacted in the year as a result of adverse market conditions, in particular the widening of spreads.  The business has a track record of delivering surplus growth which has enabled dividend distributions to its parent company and paid its first dividend to Chesnara in 2018

 

Scildon value growth

£m

2014

2015

2016

2017

2018







EEV / EcV reported value

272.2

244.0

226.6

223.5

171.1

Cumulative dividends

-

36.8

74.4

74.4

96.6

Total

272.2

280.8

301.0

297.9

267.7







 

 

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

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

-       Whilst the ultimate priority is the end customer,  Scildon also see the brokers who distribute their products as being customers and hence developing processes to best support their needs is a key focus.

 

INITIATIVES AND PROGRESS IN 2018

-       Updated the Scildon service desk to enhance the 'customer journey' for IFAs and consumers.

-       Scildon has again received an award from Afdiz, the Dutch broker organisation.  In 2018, the business was awarded "Best occupational pension insurer" and was rated second for term insurance.

-       The annual performance research for consumers shows high scores.

 

FUTURE PRIORITIES

-       Continuing to enhance and develop Scildon's existing processes, customer experiences and the underlying infrastructure.

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

-       Regular customer assessment, with the outcome used to improve Scildon's service quality.

 

KPIs (all comparatives have been presented using 2018 exchange rates)

 

Scildon client satisfaction rating (out of 10)


2014

2015

2016

2017

2018







Rating

7.3

7.5

7.4

7.6

7.7







 

GOVERNANCE

BACKGROUND INFORMATION

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

 

INITIATIVES AND PROGRESS IN 2018

-       Scildon has aligned its governance and risk management framework to Chesnara practices.

-       Scildon strengthened its governance framework during 2018 through changes in structure and personnel.

-       The IFRS 17 project is underway for both companies.

-       Implemented GDPR, in line with regulatory requirements, in both companies.

 

FUTURE PRIORITIES

-       The focus during 2019 is to further embed the governance and risk management framework.

-       Deliver IFRS 17 implementation plans.

 

KPIs

 

SOLVENCY RATIO: SCILDON 210%; WAARD 665%

 

Solvency is strong in both businesses.  Scildon has reported a reduction in surplus during 2018, largely due to increasing spreads reducing asset values.  Waard has generated surplus capital of £5.9m. After the dividend, due to be paid during 2019, solvency ratios are 203% and 624% for Scildon and Waard respectively.

 

Scildon





£m

Solvency Ratio







31 Dec 2017 surplus




106.0

231%

Surplus generation in 2018




(19.2)


31 Dec 2018 surplus (pre-dividend)




86.8

210%

2018 proposed dividend




(5.2)


31 Dec 2018 surplus




81.6

203%







 

Waard





£m

Solvency Ratio







31 Dec 2017 surplus




38.1

483%

Surplus generation in 2018




5.9


31 Dec 2018 surplus (pre-dividend)




43.9

665%

2018 proposed dividend




(3.2)


31 Dec 2018 surplus




40.7

624%







 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

-       Scildon primarily sells protection and individual savings contracts via a broker-led distribution model.  The aim is to deliver meaningful value growth from a realistic market share.  Having realistic aspirations regarding volumes means we are able to adopt a profitable pricing strategy.  New business also helps the business maintain scale and hence contributes to unit cost management.

 

INITIATIVES AND PROGRESS IN 2018

-       Scildon generated new business profits of £1.7m. This is in line with expectations and shows marginal increases since acquisition but it is not currently generating sufficient new business profits and this is therefore a focus of our improvement plans.

-       As part of those plans, Scildon successfully launched a new mortgage term product in 2018, which was well received by the market.

-       A Scildon management team is in place which is strategically aligned with the group, including the appointment of a new Finance Director and interim Chief Operating Officer.

-       Market share for the core protection business is within the 5.0%-10.0% target range but we have further work to do to strengthen the proposition and reduce costs. 

-       The number of policies increased by 4% over the year.

-       Scildon updated the group pension offering to maximise value transfers and premium levels.

 

FUTURE PRIORITIES

-       Management actions are planned as part of the improvement plans to generate a more commercially meaningful level of new business profit.

-       An objective of the improvement programme is to deliver cost reductions whilst strengthening the proposition and maintaining market share.

 

KPIs (all comparatives have been presented using 2018 exchange rates)

 

Scildon - term assurance market share %

 

%

2014

2015

2016

2017

2017







Market share

5.0

6.6

5.9

7.3

7.6







 

Scildon - new business profit

 

£m

2014

2015

2016

2017

2017







New business profit/(loss)

(3.6)

0.1

2.0

1.9

1.7







 

 

BUSINESS REVIEW = acquire life and pension businesses

Well considered and appropriately priced acquisitions maintain the effectiveness of the operating model, create a source of value enhancement and sustain the cash generation potential of the group.

 

HOW WE DELIVER OUR ACQUISITION STRATEGY

-       Identify potential deals through an effective network of advisers and industry associates, utilising both group and divisional management expertise as appropriate.

-       We primarily focus on acquisitions in the UK and Netherlands, although will consider other territories should the opportunity arise.

-       We assess deals applying well established criteria which consider the impact on cash generation and Economic Value under best estimate and stressed scenarios.

-       We work cooperatively with regulators.

-       The financial benefits are viewed in the context of the impact the deal will have on the enlarged group's risk profile.

-       Transaction risk is minimised through stringent risk-based due diligence procedures and the senior management team's acquisition experience and positive track record.

-       We fund deals with a combination of debt, equity or cash depending on the size and cash flows of each opportunity.

 

HOW WE ASSESS DEALS

Cash generation

-       Collectively our future acquisitions must be suitably cash generative to continue to fund the Chesnara dividend strategy.

Value enhancement

-       Acquisitions are required to have a positive impact on the Economic Value per share under best estimate and certain more adverse scenarios.

Customer outcomes

-       Acquisitions must ensure we protect, or ideally enhance, customer interests.

Risk appetite

-       Acquisitions should normally align with the group's documented risk appetite. If a deal is deemed to sit outside our risk appetite the financial returns must be suitably compelling.

 

RISKS

-       There is the risk that if a lack of suitable acquisition opportunities come to market at a realistic valuation, the investment case for Chesnara diminishes over time.

-       There is the risk that we make an inappropriate acquisition that adversely impacts the financial strength of the group.

-       Our acquisition strategy includes both UK and non-UK markets. 

 

WHAT WE CAN DO ABOUT THIS

-       Operating in three territories increases our options thereby reducing the risk that no further value adding deals are done.

-       A broader target market also increases the potential for deals that meet our strategic objectives.

-       Flexibility over the timing of subsequent divisional dividend flows provide an element of management control over the sterling value of cash inflows.

-       Each acquisition is supported by a financial deal assessment model which includes high quality financial analysis.  This is reviewed and challenged by management and the board, mitigating the risk of a bad deal being pursued.

 

ACQUISITION OUTLOOK

-       In the UK, in recent times we have seen a gradual increase in closed book market activity which, in our view, is driven in part at a global level by regulatory developments and, at a company level, strategic developments.  We expect these drivers to continue to be relevant going forward.

-       Regarding the Netherlands, we have also seen a gradual increase in market activity which we are well positioned to take advantage of, given our scale and presence.  Again, regulatory and strategic developments are the drivers, and we expect these themes to continue into the future.

-       We continue to assess opportunities within Western Europe that are outside of Chesnara's current territories.  All opportunities and territories considered are assessed on the basis that these do not compromise the well-established Chesnara acquisition assessment model, as well as ensuring that these fit within Chesnara's governance framework and that they are able to support our strategy and business model.  There has been a reasonable level of market activity in Western Europe.

-       The environment in which European life insurance companies operate continues to increase in complexity.  For example, "IFRS 17 Insurance Contracts" was issued in 2017, which is a fundamental overhaul of the way in which insurance contracts are accounted for.  We believe this additional complexity will potentially drive further consolidation as institutions seek to remove operational complexity and potentially release capital or generate funds from capital intensive life and pension businesses.

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

-       In April 2018 we converted our existing debt arrangement with RBS into a syndicated facility. This will provide access to higher levels of debt financing from a wider panel of lenders, which in turn will enable us to fulfil our appetite of financing future deals up to the maximum levels of gearing set out in our debt and leverage policy, without being restricted by the lending capacity of one individual institution. This facility enables Chesnara to access an increased level of funds efficiently, which in turn supports our acquisition strategy.

 

CAPITAL MANAGEMENT = Solvency II

 

WHAT IS SOLVENCY AND CAPITAL SURPLUS?

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

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

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

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

 

SOLVENCY SURPLUS TO CASH GENERATION

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

 

MORE ABOUT OWN FUNDS

WHAT ARE OWN FUNDS?

A valuation which reflects the net assets of the company and includes a value for future profits expected to arise from in-force policies.

 

The own fund valuation is deemed to represent a commercially meaningful figure with the exception of:

-       Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain policies despite a high probability of receipt.

-       Risk margin: The Solvency II rules require a "risk margin" liability which is deemed to be above the realistic cost.

-       Restricted with profit surpluses:  Surpluses in the group's with-profit funds are not recognised in Solvency II Own Funds despite their commercial value.

 

We define Economic Value (EcV) as being the Own Funds adjusted for the items above.  As such our Own Funds and EcV have many common characteristics and tend to be impacted by the same factors.

 

Transitional measures, introduced as part of the long-term guarantee package when Solvency II was introduced, are available to temporarily increase Own Funds.  Chesnara does not take advantage of such measures.

 

HOW DO OWN FUNDS CHANGE?

Own Funds (and Economic Value) are sensitive to economic conditions.  In general, positive equity markets and increasing yields lead to OF growth and vice versa.  Other factors that improve Own Funds include writing profitable new business, reducing the expense base and improvements to lapse rates.

 

 

MORE ABOUT THE CAPITAL REQUIREMENT

WHAT IS CAPITAL REQUIREMENT?

The solvency capital requirement can be calculated using a "Standard formula" or "internal model". Chesnara adopts the "Standard formula".

 

The standard formula requires capital to be held against a range of risk categories.  The following chart shows the categories and their relative weighting for Chesnara:

 

£

2018



Total market risk

259,385,389

Counterparty default risk

16,466,845

Total life underwriting risk

185,641,586

Total health underwriting risk

15,851,780

Diversification risk

(109,247,134)

Capital requirement for other sub

304,643

Operational risk

13,862,924

SCR

382,286,033



 

Note: The table above does not include the impact of the loss absorbing capacity of deferred tax.

 

 

There are three levels of capital requirement:

 

Minimum dividend paying requirement: The board sets a minimum solvency level above the SCR which creates a more prudent level is applied when making dividend decisions.

 

Solvency capital requirement: Amount of capital required to withstand a 1 in 200 event. The SCR acts as an intervention point for supervisory action including cancellation or the deferral of distributions to investors.

 

Minimum capital requirement: The MCR is between 45% and 25% of the SCR.  At this point Chesnara would need to submit a recovery plan which if not effective within three months may result in authorisation being withdrawn.

 

HOW DOES THE SCR CHANGE?

Given the largest component of Chesnara's SCR is market risk, changes in investment mix or changes in the overall value of our assets has the greatest impact on the SCR.  For example, equity assets require more capital than low risk bonds.  Also, positive investment growth in general creates an increase in SCR.  Book run-off will tend to reduce SCR but this will be partially offset by an increase as a result of new business.

 

CHESNARA GROUP SOLVENCY METRICS

 

£m


2018

2017





Own funds


553

615

SCR


350

422

Solvency surplus


203

193

Solvency ratio %


158%

146%





 

WE ARE WELL CAPITALISED AT BOTH A GROUP AND SUBSIDIARY LEVEL, AND WE HAVE NOT USED ANY ELEMENTS OF THE LONG TERM GUARANTEE PACKAGE. 

 

CHESNARA GROUP

SOLVENCY POSITION

 

£m


2018

2017





Own funds (post dividend)


553

615

SCR


350

422

Buffer


35

42

Surplus above SCR and buffer


168

151

Solvency ratio %


158%

146%





 

SOLVENCY SURPLUS MOVEMENT

 

£m




Group surplus 31 Dec 2017

193.4

CA

49.5

Movestic

14.3

Waard

5.2

Scildon

(20.4)

Chesnara / consol adj

(7.9)

Exchange rates

(0.8)

Dividends

(31.0)

Group surplus 31 Dec 2018

202.4



 

Surplus: The solvency position of the group has improved, from 146% to 158%.  The group now has £168.0m of surplus over and above the internal capital management policy, compared to £151.2m at the end of 2017.  The growth in surplus has arisen from a reduction in capital requirements, which have fallen more than the reduction in Own Funds.

Dividends:  The closing solvency position is stated after deducting the £20.2m proposed dividend (31 December 2017: £19.6m), and also reflects the payment of an interim dividend of £10.8m

Own Funds: Own Funds have fallen by £62.6m. This is driven by falls in equity markets during the year, in particular during Q418, which had a significant impact on Movestic and CA. In addition, rising spreads have reduced the value of the bond holdings, which particularly affects Scildon. The depreciation of the Swedish krona has also caused a reduction in the sterling value of the Swedish business.

SCR: The SCR has fallen by £72.2m this year. The key movements underlying this are reductions in equity risk, spread risk, currency risk and lapse risk.

 

The numbers that follow present a divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within that division. Please note that prior year figures have been restated using 31 December 2018 exchange rates.

 

UK

SOLVENCY POSITION 

 

£m

2018

2017




Own funds (post dividend)

126

167

SCR

97

128

Buffer

19

26

Surplus

10

13

Solvency ratio %

130%

130%




 

Surplus: £9.8m above board's capital management policy.

Dividends: The solvency position is stated after deducting £59.0m proposed dividend (2017: £32.0m).

Own Funds: Increased by £18.0m (pre-dividend) due to the transfer of £26.8m capital from WP funds, partially offset by negative economic variances.

SCR: Reduced by £31.5m, driven by market risk falls. Equity risk has reduced, due to equity market falls (which also has knock-on impacts on currency and lapse risk). Spread risk also reduced due to falls in corporate bond exposure and improvements in asset data.

 

SWEDEN

 

£m

2018

2017




Own funds (post dividend)

207

221

SCR

119

144

Buffer

24

29

Surplus

64

47

Solvency ratio %

174%

153%

 

Surplus: £64.2m above board's capital management policy.

Dividends: The solvency position is stated after deducting £2.9m proposed dividend (2017: £2.8m).

Own Funds: Reduced by £17.8m (pre-dividend). Driven by falls in investment returns (in particular equities during Q4), strengthening of assumptions (operating expense and transfer rates) and the loss in GBP caused by the relative depreciation of  the Swedish krona against sterling.

SCR: Capital requirements have fallen by £25.0m. Market risk has fallen, driven by the equity market falls during the year.

 

NETHERLANDS - WAARD

 

£m

2018

2017




Own funds (post dividend)

48

49

SCR

8

10

Buffer

8

10

Surplus

33

29

Solvency ratio %

624%

483%

 

Surplus: £32.9m above board's capital management policy.

Dividends: The solvency position is stated after deducting £3.2m proposed dividend (2017: £13.0m).

Own Funds: Positive growth of £3.5m (pre-dividend), due to expected returns and changes in assumed mortality rates.

SCR: Reduced by £2.2m, due to a reduction in counterparty default risk following Chesnara dividend payment, which reduced cash holdings, and reduced underwriting risk following change in demographic assumptions.

 

NETHERLANDS - SCILDON

 

£m

2018

2017




Own funds (post dividend)

161

190

SCR

79

82

Buffer

79

82

Surplus

2

25

Solvency ratio %

203%

231%

 

Surplus: £2.5m above board's capital management policy.

Dividends: The solvency position is stated after deducting £5.2m proposed dividend (2017: £22.2m).

Own Funds: Reduction of £21.8m (pre-dividend), principally due to rising spreads and strengthening of the mortality assumptions.

SCR: Decreased by £2.3m. Spread risk has fallen (due to rising spreads reducing corporate bond values) and lapse risk has reduced (due to higher mortality assumptions reducing profits).This is offset to some extent by increases in currency risk and mortality risk, in addition to changing tax rates having an adverse impact on capital requirements.

 

 

CAPITAL MANAGEMENT = Sensitivities

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

 

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

 


Solvency surplus

Cash generation

EcV


Impact

5 year impact

Impact

20% Sterling appreciation

(2)

(4)

(5)

25% equity fall

(2)

(4)

(4)

25% equity rise

(1)

4

5

10% equity fall

(1)

(2)

(3)

10% equity rise

1

2

3

1% interest rate rise

2

3

2

50bps credit spread rise

(1)

(1)

(1)

25bps swap rate fall

(2)

(2)

(2)

10% mass lapse

(1)

(1)

(3)

10% expense rise
+ 1% inflation rise

(4)

(4)

(4)

10% mortality increase

(2)

(3)

(2)

 

Key:

Category

Range

1 / (1)

£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 translated value of surplus in our overseas divisions, and hence has an immediate impact on the group's solvency surplus and available cash. It also reduces the value of projected Own Funds growth in our overseas divisions and also reduces the value of overseas investments in CA.

 

Equity sensitivities:  The equity fall sensitivities cause both the Own Funds and SCR to fall, as the value of the funds exposed to risk is lower.  The reduction in SCR is smaller than Own Funds, resulting in an immediate impact on surplus. Conversely, in an equity rise, the Own Funds and SCR both rise. The extent to which the SCR increase offsets the Own Funds movement depends on the stress applied. The impacts are not symmetrical due to the use of management actions and differences in the application of tax depending on the direction of the stress.  The EcV impacts are more intuitive as they are more directly linked to the Own Funds impact. CA and Movestic contribute the most due to their large amounts of unit-linked business.  

 

1% interest rate rise:  An interest rate rise is generally positive across the group.  CA, Movestic and Scildon all contribute towards the total group cash generation impact.

 

50bps credit spread rise: A credit spread rise has an adverse impact on surplus and future cash generation, particularly in Scildon due to the corporate bond holdings that form part of the asset portfolios backing non-linked insurance liabilities.  The impact on the other divisions is less severe.

 

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

 

10% mass lapse:  This sensitivity has a small impact on surplus as the reduction in Own Funds is largely offset by the SCR fall.  However, with fewer policies on the books there is less potential for future profits.  The division most affected is Movestic; the loss in future fee income following a mass lapse hits Own Funds by more than the associated reduction in SCR.

 

10% expense rise + 1% inflation rise:  The expense sensitivity hits the solvency position immediately as the increase in future expenses and inflation is capitalised into the balance sheet.

 

10% mortality increase: This sensitivity has an adverse impact on surplus and cash generation, particularly for Scildon due to their term products.

 

*BASIS OF PREPARATION ON REPORTING:

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

 

FINANCIAL REVIEW

The key performance indicators are a reflection of how the business has performed in delivering its three strategic objectives.  The 2018 results reflect the impact of equity falls and bond price pressure that was witnessed during the year.

 

Summary of each KPI:

 

IFRS

PRE-TAX PROFIT: £27.0M (2017: £89.6M)

TOTAL COMPREHENSIVE INCOME: £23.7M (2017: £86.9M)

 

What is it?

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

 

Why is it important?

IFRS profit is a statutory measure used both internally and by our external stakeholders in assessing the performance of the business.  IFRS profit is an indicator of how we are performing against our stated strategic objective of 'maximising value from the existing business' and can also be impacted by one-off gains arising from delivering against our stated objective of 'acquiring life and pensions businesses'. Whilst the IFRS results form the core of reporting and hence retain prominence as a key financial performance metric, there is a general acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business. 

 

Risks

The IFRS profit can be affected by a number of our principal risks and uncertainties.  In particular, volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit, and foreign currency fluctuations can affect total comprehensive income. The IFRS results of Scildon are potentially relatively volatile, in part, due to the different approach used by the division for valuing assets and liabilities, as permitted under IFRS 4.

 

 

£m

2018

2017




CA

28.2

50.6

Movestic

9.3

9.8

Waard

3.5

5.2

Scildon

(1.1)

18.4

Group & consolidation adjustments

(12.9)

(14.7)

Profit on acquisition

-

20.3

Pre-tax profit

27.0

89.6

Taxation

(2.9)

(11.2)

Forex and other comprehensive income

(0.5)

8.5

Total

23.7

86.9

 

 

-       IFRS pre-tax profit of £27.0m is significantly lower than in the prior year, owing largely to economic losses in the closing months of 2018 and the profit on the acquisition of Scildon that was reported in 2017.

-       The performance in CA is the major contributor to the group result.

-       Operating profits of £42.5m are the foundation of the result, demonstrating the resilience and stability of the underlying business, offset in part by  economic losses, driven by markets conditions.

-       Total comprehensive income includes a small foreign exchange loss of £0.8m (2017: £8.3m gain) predominantly relating to sterling's appreciation against the Swedish Krona.

 

CASH GENERATION

GROUP CASH GENERATION £47.8M (2017: £28.6M)

DIVISIONAL CASH GENERATION £63.9M (2017: £86.7M)

 

What is it?

Cash generation is calculated as being the movement in surplus own funds over the internally required capital.  The internally required capital is determined with reference to the group's capital management policies, which have Solvency II rules at their heart.  Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

 

Why is it important?

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

 

Risks

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

 

£m

2018



UK

55.8

Sweden

18.1

Netherlands - Waard

7.8

Netherlands - Scildon

(17.8)

Divisional cash generation

63.9

Other group activities

(16.1)

Total group cash generation

47.8



 

Divisional cash generation

-       Significant cash generation from the UK, with strong contributions again from Movestic and Waard. Adverse economic conditions were the primary basis for the reduction in Scildon's Own Funds and subsequent negative cash result.

-       The result includes the non-recurring benefit of a £26.8m capital transfer from restricted with profit funds in the UK.

 

Group cash generation

-       Total group cash generation includes the impact of other group activities, primarily the impact of group expenses on own funds and changes to capital requirements upon consolidation of divisions.

-       Total cash generation in 2017 included the negative impact of the completion of the Legal & General Nederland acquisition (£55.3m).

 

 

ECONOMIC VALUE (EcV)

£626.1M (2017: £723.1M)

 

What is it?

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

 

Why is it important?

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

 

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

 

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets and yields on fixed interest securities.  In addition, the EcV position of the group can be materially affected by exchange rate fluctuations.  For example a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group by 14.7%, based on the composition of the group's EcV at 31 December 2018.

 

£m




Group EcV at 31 Dec 2017

723.1

EcV earnings

(60.9)

Dividends

(30.4)

Forex loss

(5.8)

Group EcV at 31 Dec 2018

626.1



 

-       Economic value fell by 13.4% to £626.1m during the year.

-       Of this reduction, £60.9m was attributable to an earnings loss, primarily a consequence of adverse economic conditions with falling equity values and widening bond spreads. However, an adverse operating result has also contributed to the loss.

-       The movement in EcV since the start of the year includes the impact of the payment of the final 2017 and interim 2018 dividends.

-       Foreign exchange losses arising on re-translating of the Dutch and Swedish divisions have contributed to the overall reduction, primarily representing the strengthening of sterling against the Swedish krona since the start of the year

 

ECV EARNINGS NET OF TAX

£(60.9)M (2017: £139.5M includes £65.4 gain on acquisition)

 

What is it?

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

 

The principal underlying components of the Economic Value result are:

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

-       Value added by the writing of new business;

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

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

-       The impact of acquisitions.

 

Why is it important?

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

 

Risks

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

 

£m

2018



Underlying operating earnings

(0.0)

Material other operating items

(22.8)

Economic earnings

(49.7)

Other

11.7

Total EcV earnings

(60.9)



 

-       An EcV loss of £60.9m was incurred during the year.

-       The underlying operating performance was nil, with positive mortality experience, offset by adverse expense and lapse results.

-       Material other operating items primarily relates to the strengthening of mortality assumptions in Scildon.

-       Economic losses represent the largest component of the EcV loss, driven by equity falls and rising spreads.

-       EcV earnings in the prior year benefitted from a one off gain of £65.4m arising as a result of the completion of the acquisition of Legal & General Nederland.

 

IFRS

 

IFRS PRE-TAX PROFIT

£27.0M (2017: £89.6M)

 

IFRS TOTAL COMPREHENSIVE INCOME

£23.7M (2017: £86.9M)

 

Executive summary

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

 

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

 

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

 

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

 

IFRS results

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

 


2018

2017



£m

£m

Note

CA

28.2

50.6

1

Movestic

9.3

9.8

2

Waard Group

3.5

5.2

3

Scildon

(1.1)

18.4

4

Chesnara

(5.5)

(12.1)

5

Consolidation adjustments

(7.4)

(2.6)

6

Profit before tax and profit on acquisition

27.0

69.3


Profit on acquisition of LGN

-

20.3

6

Profit before tax

27.0

89.6


Tax

(2.9)

(11.2)


Profit after tax

24.1

78.4


Foreign exchange  translation differences

(0.8)

8.3

7

Other comprehensive income

0.3

0.2


Total comprehensive income

23.7

86.9


 


2018

2017



£m

£m

Note

Operating profit

42.5

38.4

8

Economic profit

(15.5)

30.9

9

Profit before tax and profit on acquisition

27.0

69.3


Profit on acquisition of LGN

-

20.3

6

Profit before tax

27.0

89.6


Tax

(2.9)

(11.2)


Profit after tax

24.1

78.4


Foreign exchange translation differences

(0.8)

8.3

7

Other comprehensive income

0.3

0.2


Total comprehensive income

23.7

86.9


 

Note 1: The CA segment result remains strong but is lower than 2017.  The year on year movement emerges within the more variable S&P book. This is mainly reflective of the positive economic factors in 2017 which have not been repeated in the current period, resulting in overall economic profits being circa £23m lower year on year.  Operating profits of £27.1m are in line with the prior year. Within the operating profit total there  is a £4.3m profit as a result of a general improvement in UK mortality tables.

 

Note 2: Movestic continues to contribute positively to the overall group IFRS result despite a small reduction in profits when compared to the same period in 2017.  Lower investment returns due to adverse market factors, together with a fall in the profits generated by its associate, Modernac, were the main drivers.

 

Note 3: The Waard Group result is in line with expectations, with profits emerging in line with the run-off book profile.

 

Note 4: Scildon's IFRS loss for the year of £1.1m compares with a profit of £18.4m in the prior year. Scildon has delivered a strong operating profit driven mainly by positive mortality experience. Within the Netherlands new mortality tables suggest less positive future mortality improvements, this however, because of our reserving policy (see note 31) has no impact on the IFRS results.  The operating profit is more than offset by economic losses of £16.5m, largely driven by the widening of credit spreads which have caused valuation losses in its bond portfolio.

 

Note 5: The Chesnara result largely represents holding company expenses. The current year loss is significantly lower than last year largely due to 2017 including larger one off items such as foreign exchange loss of £2.6m coupled with the impact of providing for the group's IFRS 17 programme.

 

Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets. These are higher than last year largely due to the full year impact of the Scildon acquisition and an adjustment to the impairment of acquisition costs within Movestic.  The prior year results also reported a one off gain of £20.3m arising on the acquisition of LGN.

 

Note 7: Sterling strengthened against the Swedish krona in the period, resulting in a small exchange loss in 2018.

 

Note 8: The IFRS operating result demonstrates the stability of the underlying business.  Product based income and favourable movements in operating experience in the UK, were offset slightly by the marginal strengthening of expense reserves to support future developments.  Strong premium growth and higher fund rebates, offset by unfavourable claims experience in the year supported the Movestic operating result.  Both the Waard Group and Scildon have reported solid operating results.

 

Note 9: Economic profit represents the components of the earnings that are directly driven by movements in economic variables. During 2018, the economic result is mainly driven by the impact on Scildon of widening credit spreads, whereas 2017 benefitted from positive equity market growth which has not been witnessed in the same period in 2018.

 

 

CASH GENERATION

 

GROUP CASH GENERATION

£47.8M (2017: £28.6M)

 

DIVISIONAL CASH GENERATION

£63.9M (2017: £86.7M)

 

Significant cash generation in the UK has driven a total divisional cash result of £63.9m for the year, with supporting contributions from Movestic and Waard.  Cash is generated from increases in the group's solvency surplus, which is represented by the excess of assets held over management's internal capital needs.  These are based on regulatory capital requirements, with the inclusion of additional "management buffers".  

 

GROUP

-       Sufficient group cash has been generated in the year to cover the cost of last year's dividend. 

-       The overall increase in group cash year on year is a factor of several material items. The 2017 result includes the impact of the completion of the Legal and General Nederland (Scildon) acquisition which, in line with expectations, resulted in a £55.3m negative impact on cash generation. A £26.8m release from the with-profit funds has driven a sizeable increase in UK cash in 2018. In the opposite direction there has been a £34m adverse year on year movement in Scildon's cash generation. Much of the movement is due to the fact that economic conditions had a positive impact on Own Funds in 2017 whereas in 2018 falling bond values resulted in Own Fund losses of over £20m. A strengthening of mortality assumptions also had an adverse impact in 2018.

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

 

UK

-       The UK has continued to deliver substantial cash generation in 2018, following significant reductions in capital requirements.

-       Own Funds growth includes the benefit of a £26.8m release of restricted surplus from the with-profit funds. A further £5.7m of surplus capital exists within the with-profit funds that has not been recognised in the results.

-       Underlying Own Funds performance was hampered by investment markets in the later stages of the year, with widening spreads having a negative impact on Own Funds.

-       The fall in equity markets also had a positive effect on cash generation due to the subsequent reduction in required capital through lower equity and mass lapse risk.

-       This was supported by further reductions in equity risk and spread risk, following the capital transfer.

 

SWEDEN

-       Sweden generated £18.1m of cash for the year, due to a fall in the level of required capital.

-       Own Funds suffered from the decline in equity markets in the second half of 2018, with lower fund values and investment returns resulting in a reduction of £10.7m at the year end.

-       Conversely, the fall in investment markets also created a significant positive cash impact. With equity values decreasing, the level of capital the business was required to hold also fell substantially, primarily through lower equity risk exposure and diminished lapse risk.

-       SEK depreciation against sterling resulted in an exchange loss of £1.3m.

 

NETHERLANDS - WAARD

-       The Waard Group has continued to supply stable cash generation, with positive movements in both Own Funds and capital requirements.

-       The growth in Own Funds was primarily a consequence of lower mortality experience and subsequent reductions in assumed mortality lapse rates.

-       Falls in lapse risk and counterparty default risk underpin the reduction in the capital requirement.

 

NETHERLANDS - SCILDON

-       Scildon has reported a cash loss in the year, owing to a reduction in Own Funds.

-       The steep widening of spreads in the second half of the year compounded the valuation losses on Italian bonds reported earlier in 2018, driving down the value of Own Funds.

-       Own Funds also include the impact of strengthening mortality assumptions in the year.

-       Capital requirements moved favourably to partially offset the reduction in Own Funds. Investment market conditions had a positive impact with exposure to spread risk and equity risk shrinking materially in the second half of the year. This also drove significant favourable movements in lapse risk.

 

£m


2018

2017



Movement in

Own Funds

Movement in management's capital

requirement

Forex

impact

Cash generated

Cash generated



 UK


18.0

37.8

-

55.8

34.5

Sweden


(10.7)

30.1

(1.3)

18.1

24.9

Netherlands

Waard Group

3.0

4.6

0.2

7.8

11.1


Scildon

(23.5)

6.2

(0.4)

(17.8)

16.2

Divisional cash generation


(13.2)

78.6

(1.4)

63.9

86.7

Other group activities


(13.6)

(3.6)

1.0

(16.1)

(2.7)

Impact of LGN acquisition


-

-

-

-

(55.3)

Group cash generation


(26.8)

75.0

(0.4)

47.8

28.6








 

 

EcV EARNINGS

 

£(60.9)M (2017: £139.5M includes £65.4m gain on acquisition)

 

The group's EcV earnings reflect the challenging investment market conditions that have been witnessed, including the general fall in equity prices during Q4.

 

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

 


31 Dec 2018

£m

 

31 Dec 2017

£m

Note

Expected movement in period

(0.8)

0.2


New business

10.6

12.4


Operating variances

(9.0)

1.2

2

Operating assumption changes

-

(3.6)


Other operating variances

(0.8)

0.7


Total underlying operating earnings

-

10.8


Material other operating items

(22.8)

(19.2)

3

Total operating earnings

(22.8)

(8.4)


Economic experience variances

(50.3)

86.4

1

Economic assumption changes

0.6

2.2


Total economic earnings

(49.7)

88.6


Other non-operating variances

1.5

1.0


Risk margin movement

(1.9)

4.0


Gain on acquisition of LGN

-

65.4

4

Tax

12.0

(11.1)


Total EcV earnings

(60.9)

139.5


 

 

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

 


31 Dec  2018

£m

 

31 Dec  2017

£m

Note

UK

(11.0)

54.5

5

Sweden

(11.6)

24.0

6

Netherlands

(35.6)

21.8

7

Gain on acquisition of LGN

-

65.4


Group and group adjustments

(14.8)

(15.1)

8

EcV earnings before tax

(72.9)

150.6


Tax

12.0

(11.1)

9

EcV earnings after tax

(60.9)

139.5


 

Note 1 - Economic conditions: The EcV result is sensitive to investment market conditions. Some of the key investment market conditions in the year are as follows:

-       The FTSE All share index has decreased by 13.0% (12 months to 31 Dec 2017: increased by 9.0%);

-       The Swedish OMX all share index has decreased by 7.7% (12 months to 31 Dec 2017: increased by 5.7%);

-       The Netherland AEX all share index has decreased by 11.6% (12 months to 31 Dec 2017: increased by 11.7%); and

-       10 year UK gilt yields have increased from 1.26% to 1.32%.

 

Note 2 - Operating experience variances: These reflect where the results have emerged differently to what was assumed. The reported experience loss of £9.0m for 2018 is made up of a number of smaller positive and adverse variances, including less fee income for Movestic, some adverse lapse experience in Scildon coupled with some adverse expense experience across the group.

 

Note 3 - Material other operating items:  This includes operating items in the year that are individually material and have therefore been separately analysed to aid an understanding of the operating result. In accordance with local practice Scildon adopt centrally defined mortality tables. Whilst there is no reason to believe this creates prudence, it is worthy to note that the resultant strengthening of reserves (with an adverse profit impact of £13.2m) is at odds with recent experience of mortality profits on the Scildon book.  The remainder of the total relates to model enhancements regarding quantifying risk margins in Scildon (£3.8m) and how we recognise certain future central recurring costs (£5.8m).

 

Note 4 - Gain on acquisition of LGN:  The acquisition of LGN in April 2017 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 5 - UK:  The UK sustained a pre-tax loss of £11.0m in the year. Economic losses suffered in the second half of 2018 shape the result, with a full year economic loss of £15.0m. Falling equity markets in the later stages of the year were the key factor behind the reported loss. Solid operating earnings of £4.8m were driven by favourable movements in both future expense and mortality assumptions. This was supported by lower than expected rates of attrition across the books of business, resulting in higher assumed future fee income.

 

Note 6 - Sweden:  Movestic reported an £11.6m loss for the year, with the result significantly hampered by investment market conditions in the tail end of 2018. Economic losses of £12.8m, predominantly arising in Q4, were the consequence of falling equities and offset operational gains through new business. This was reflected by the closing policyholder average investment return of (6.0)%  (2017: +8.2%), though this remains ahead of the average Swedish stock market return of (7.7)%. New business profits of £8.9m reflect the combination of increased sales volumes (both transfers and single premiums) but lower average margin rates versus prior year.  This was partially offset by adverse movement in future fund management fee and fund rebate assumptions in line with industry expectations.

 

Note 7 - Netherlands:  Our Dutch division has reported a pre-tax loss of £35.6m for 2018. Investment market volatility, primarily a significant widening of bond spreads, underpin economic losses of £21.6m in Scildon. The total pre-tax loss of £38.8m also includes £17.0m of exceptional items, relating to one-off mortality assumption and modelling changes. Waard delivered earnings of £3.2m owing, for the most part, to favourable mortality experience and subsequent impact of a reduction in assumed mortality rates.

 

Note 8 - Group: This component includes costs incurred at group level, dividend payments and the impact of consolidation activities, with a loss reported for the year.

 

Note 9 - Tax:  The business is reporting a tax credit of £12.0m in the year. This is driven by a combination of current tax on the loss for the period and movements in deferred tax relating to group level activities.

 

EcV

 

£626.1M (31 DEC 2017: £723.1M)

 

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

 

Value movement: 1 Jan 2018 to 31 Dec 2018:

 

£m




Group EcV at 31 Dec 2017

723.1

EcV earnings

(60.9)

Dividends

(30.4)

Forex gain

(5.8)

Group EcV at 31 Dec 2018

626.1



 

EcV earnings:  A loss of £60.9m has been reported for the year.  The primary driver of this are the significant economic losses arising from economic conditions in the second half of the year.  This was compounded by a small number of individually material adverse operating items incurred in the year.

 

Dividends:  Under EcV, dividends are recognised in the period in which they are paid.  Dividends of £30.4m were paid during the period, being the final dividend from 2017 and the 2018 interim dividend.

 

Foreign exchangeThe EcV of the group suffered a foreign exchange loss in the period, a consequence of the sterling appreciation against the Swedish krona.

 

EcV by segment at 31 Dec 2018:

 

£m




UK

215.5

Sweden

227.4

Netherlands

221.1

Other group activities

(39.7)

Group EcV

626.1



 

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

 

EcV to Solvency II:

 

£m




2018 Group EcV

626.1

Risk margin

(37.9)

Contract boundaries

(9.8)

Own funds restrictions

(5.7)

Dividends

(20.2)

2018 SII own funds

552.6

 

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

 

Risk margin:  Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 3.25% cost of capital.

 

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

 

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

 

Dividends:  The proposed final dividend of £20.2m is recognised for SII regulatory reporting purposes.  It is not recognised within EcV until it is actually paid.

 

FINANCIAL management

 

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

 

Summary:

 

OBJECTIVES

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

 

-       Maintain solvency targets

-       Meet the dividend expectations of shareholders

-       Optimise the gearing ratio to ensure an efficient capital base

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

-       Maintain the group as a going concern

 

HOW WE DELIVER TO OUR OBJECTIVES

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

1.   Monitor and control risk & solvency

2.   Longer-term projections

3.   Responsible investment management

4.   Management actions

 

 

OUTCOMES

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

 

1.   SOLVENCY:

-   Group Solvency Ratio: 158%

 

2.   SHAREHOLDER RETURNS

-   2016-2018 TSR 18.41%

-   2018 dividend yield 5.4%

-   Based on average 2018 share price and full year 2018 dividend of 20.67p.

 

3.   CAPITAL STRUCTURE

-   Gearing ratio of 15.6%

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

 

4.   LIQUIDITY AND POLICYHOLDER RETURNS

-   Policyholders' reasonable expectations maintained.

-   Asset liability matching framework operated effectively in the year.

-   Sufficient liquidity in the Chesnara holding company.

 

5.   MAINTAIN THE GROUP AS A GOING CONCERN

-   Group remains a going concern

 

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

 

1. Capital structure

 

The group is funded by a combination of share capital, retained earnings and debt finance, with the debt gearing (excluding financial reinsurance in Sweden) being 15.6% at 31 December 2018 (19.8% at 31 December 2017).

 

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

 

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

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

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

 

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

-   size of the acquisition;

-   current cash resources of the group;

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

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

-   future financial commitments; and

-   regulatory rules.

 

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

 

2. Maintain the group as a going concern

 

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

 

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

 

The group results indicate a strong solvency position as at 31 December 2018 as measured at both the divisional and group levels.  As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to continue trading.  The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default.  In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified.  Other significant counterparty default risk relates to our principal reinsurers.  We monitor their financial position and are satisfied that any associated credit default risk is low.

 

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

 

3. Assessment of prospects

 

An understanding of the group's strategy and business model is central to assessing its prospects.

 

Core books within our overall portfolio provide a level of more stable earnings, hence making the overall business and financial model more resilient to potential adverse movements on the books with more volatile earnings. In addition, in the short term, solvency and cash are less affected by economic conditions which has a positive impact regarding confidence levels in our dividend paying capacity.

 

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

 

We assess our prospects on a regular basis through our financial planning process. Our three year medium term group business plan forecasts the group's profitability, cash generation, economic value and solvency position and is reviewed by the board during the year.

 

The business plan is built from the bottom up forecasts of each of our business segments, supplemented by items managed at group level and assumptions to be used in the basis of preparation. The performance of the group and our business segments against these forecasts is monitored quarterly through a series of quarterly business reviews performed by the group executive and internal management information which is reviewed by the board. The group also makes investments, such as life and pensions business acquisitions and longer term business development programmes that have a business case beyond our core three year planning horizon. Significant expenditure of this nature is subject to a detailed business case being prepared and approved by the board.

 

 

4. Longer term viability statement

 

In accordance with provision C.2.2 of the 2016 revision of the UK Corporate Governance Code, the directors have assessed the prospect of the company over a longer period than the twelve months required by the going concern provision.  The board conducted this review for a period of three years because the group's business plan covers a three year period and includes an assessment of group cash generation and group solvency margins over that time period.

 

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

-   Equity market declines;

-   Reduction in yield curves;

-   Credit spread rise;

-   Swap rate fall;

-   Adverse mortality and lapse experience;

-   Adverse expense experiences;

-   Reduced new business volumes; and

-   Adverse exchange rate experience.

 

Other than the fact that Brexit could impact the investment markets to which our results are sensitive we consider that our operating model is relatively unaffected by Brexit. We do not trade across borders nor do we share resource between our European businesses. Each division operates to autonomous local regulatory frameworks and we believe we have the flexibility to change our regulatory structure if Brexit results in an inefficient regulatory structure of the organisation.

 

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

 

 

RISK MANAGEMENT

 

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

 

HOW WE MANAGE RISK

 

RISK MANAGEMENT SYSTEM

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

 

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

 

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

 

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

 

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

 

RISK PROCESSES

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

 

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

 

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

 

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

 

CHESNARA RISK PREFERENCES

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

 

PRINCIPAL RISKS AND UNCERTAINTIES

The following table outlines the principal risks and uncertainties of the group and the controls in place to mitigate or manage their impact.  It has been drawn together following regular assessment performed by the Audit and Risk Committee of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity.

 

The impacts are not quantified in the table.  However, by virtue of the risks being defined as principal, the impacts are potentially significant. 

 

RISK

IMPACT

CONTROL

Exposure 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 group's ability to fund its commitments to customers and other creditors, as well as pay a return to shareholders.

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

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

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 (including Movestic's asset management company in Luxembourg) 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 breached 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.

Chesnara will continue to monitor the outcome of Brexit including any restructuring required to align to changes in the requirements of cross border regulatory supervision. 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 losses or value reduction

The acquisition element of Chesnara's 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.

All parts of the business have documented robust plans for operational resilience covering:

Alternate physical working locations;

Data back-ups (with suitable network isolation);

Alternate systems/applications;

Crisis Management Team Terms of Reference; and

Crisis communication strategies.

Expense 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.

All entities within the Chesnara Group have invested in improving their operational resilience during 2018.  The nature of the developments vary across the group, dependent on the existing processes and infrastructure of the entity.  Activities include:

enhancements to preventative measures against external threats, and monitoring of such threats arising;

education and training of employees on information security;

improvement to the documentation of our incident response and crisis management protocol; and

testing our resilience to external threats and the effectiveness of our response/ recovery in the event of incidents occurring.

 

 

DIRECTORS' REsponsibilities STATEMENT

 

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

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

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

 

On behalf of the Board

 

 

 

Peter Mason                         John Deane

Chairman                              Chief Executive Officer

 

28 March 2019                     28 March 2019

 

 

 

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 plc's preliminary announcement statement of annual results for the period ended 31 December 2018.

 

The preliminary statement of annual results for the period ended 31 December 2018 includes disclosures required by the Listing Rules and any additional content such as highlights/overview, Chairman's Statement, solvency update, component business review, and a consolidated statement of comprehensive income, balance sheet and cash flows.

 

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

 

We are responsible for agreeing to the publication of the preliminary statement of annual results, having regard to the Financial

Reporting Council's Bulletin "The Auditor's Association with Preliminary Announcements made in accordance with UK Listing Rules".

 

Status of our audit of the financial statements

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

 

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

 

Valuation of insurance liabilities

Key audit matter description

 

Across the Group, there are two matters relating to insurance liabilities which we have identified as key audit matters:

 

a)    Accuracy of Save & Prosper Cost of Guarantees

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

 

Historically, the residual cost to shareholders arising from the cost of guarantees has fluctuated as a result of movements in bond yields and equity markets with a value of £23.1m at 31 December 2018 (31 December 2017: £19.3m). This movement is mainly due to lower asset returns over 2018, which decreased policyholder asset shares, and increased the residual cost to shareholders. The value is determined by a third party actuarial consultant, and the directors compare this valuation against an in-house derived estimate using an approximation model to validate its reasonableness.

 

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

  

b)    Scildon Liability Adequacy Test

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

 

IFRS 4 requires an insurer, at the end of each reporting period, to assess whether its recognised insurance liabilities are adequate, using current estimates of future cash flows (the "Liability adequacy test", or "LAT"). Given Scildon's accounting policy makes use of historical market interest rates, there is a heightened risk that its insurance liabilities are not adequate. There is also a risk of management override over the setting of the parameters used to calculate the reserves at inception.

 

We therefore view the liability adequacy test and initial parameter setting process as key audit matters, specifically in relation to the mortality, lapse and expense assumptions which feed into the test, given that the insurance liabilities are most sensitive to these factors.

 

How the scope of our audit responded to the key audit matter

 

In respect of the Accuracy of Save & Prosper Cost of Guarantees:

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

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

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

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

 

In respect of the Scildon Liability Adequacy Test we performed the following procedures:

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

-      Performed checks on the initial parameters used in setting the book cost reserves;

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

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

-      Assessed the results of the experience investigations carried out by management in comparison to industry studies and other sources of evidence to determine whether they provide support for the assumptions.

 

Key observations

 

Based on the audit procedures performed, we consider that the S&P Cost of Guarantees reserve is not materially misstated and we found that the initial parameter setting process and Liability Adequacy Test performed by management were reasonable, supporting the adequacy of Scildon's insurance contract liabilities.

 

Valuation of the Scildon AVIF ("Acquired Value In-Force) intangible asset

Key audit matter description

 

Following the acquisition of Scildon, Chesnara recorded an AVIF intangible asset of £66m on the Group balance sheet, reflecting the capitalised future profit in the Scildon business.

 

Our key audit matter in the prior year related to the valuation of the intangible; this risk has then evolved in the current period, based on our ongoing assessment, to focus on the discount rate used by Management to discount the future policyholder cash flows underpinning the VIF.

 

Management is required to assess the impairment of the Scildon AVIF intangible balance at least annually, in line with IAS 36 Impairment of assets for investment contracts or, for insurance contracts, under the IFRS 4 Insurance Contracts liability adequacy test, which involves significant judgement.

 

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

 

How the scope of our audit responded to the key audit matter

 

We assessed the design and implementation of the internal controls in place to monitor and mitigate the risk of inappropriate management adjustments to the key assumptions.

 

We constructed an independent discount rate, comparing this to the discount rate used by management and performing sensitivity analysis.

 

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

 

Key observations

 

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

 

Valuation of specific Level 2 financial instruments

Key audit matter description

 

There are a number of complex financial instruments held on the group's balance sheet, with a fair value modelled using Level 2 inputs, per IFRS 13.  Due to the significance of the balance, a small difference in input sources could result in a material variation. The instruments of focus are the financial reinsurance contract, within Movestic (£39.1m), and the interest rate swap, within Scildon (£21.2m).

 

The financial reinsurance contract within Movestic is deemed to have one component that transfers significant insurance risk, and a component that is deemed not to transfer significant insurance risk. The component of the contract that does not transfer significant insurance risk has two components and has been accounted for as a financial liability at amortised cost, and an embedded derivative asset at fair value.

 

The interest rate swap held within Scildon has been entered into to hedge some of the risk of changes in the value of its obligations under insurance contract liabilities.

 

Due to the judgement involved in the valuation of these complex financial instruments, namely the margin applied to the embedded derivative, we identified manipulation of these as an area of potential fraud.

 

How the scope of our audit responded to the key audit matter

 

We assessed the design and implementation of the internal controls in place to understand and challenge the valuation methods used.

 

We used financial instrument specialists within our audit team to challenge the appropriateness of assumptions input into the model and benchmark against external actuarial data.

 

We developed an independent expectation of the valuations and challenged management's explanation and analysis to support any variations.

 

Key observations

 

Based on the audit procedures performed, we conclude that the valuation of the embedded derivative and the interest rate swap, and the associated judgements used, namely the margin used for the embedded derivative, to be reasonable.

 

Procedures performed to agree to the preliminary announcement of annual results

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

 

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

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

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

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

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

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

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

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

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

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

 

Use of our report

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

 

Stephen Williams ACA (Senior statutory auditor)

for and on behalf of Deloitte LLP

Statutory Auditor

Manchester, United Kingdom

28 March 2019

 

 

IFRS FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 









Year ended 31 December


2018


2017





£000


£000



Insurance premium revenue


274,916


231,515



Insurance premium ceded to reinsurers


(55,536)


(54,191)



Net insurance premium revenue


219,380


177,324



Fee and commission income


101,783


90,301



Net investment return


(335,035)


531,817



Total revenue net of reinsurance payable


(13,872)


799,442



Other operating income


41,236


40,789



Total income net of investment return


27,364


840,231



Insurance contract  claims and benefits incurred







Claims and benefits paid to insurance contract holders


(471,205)


(465,729)



Net decrease in insurance contract provisions


351,812


51,033



Reinsurers' share of claims and benefits


43,648


49,449



Net insurance contract claims and benefits


(75,745)


(365,247)



Change in investment contract liabilities


196,940


(293,603)



Reinsurers' share of investment contract liabilities


(1,611)


3,681



Net change in investment contract liabilities


195,329


(289,922)



Fees, commission and other acquisition costs


(28,158)


(24,405)



Administrative expenses


(69,795)


(70,269)



Other operating expenses







Charge for amortisation of acquired value of in-force business


(12,093)


(13,271)



Charge for amortisation of acquired value of customer relationships


(83)


(101)



Other


(4,840)


(4,239)



Total income/(expenses) net of change in insurance contract provisions and investment contract liabilities


4,615


(767,454)



Total income less expenses


31,979


72,777



Share of profit of associate


(616)


949



Profit recognised on business combination


-


20,319



Financing costs


(4,351)


(4,443)



Profit before income taxes


27,012


89,602



Income tax expense


(2,888)


(11,168)



Profit for the year


24,124


78,434



Items that will not be reclassified to profit and loss:







Foreign exchange translation differences arising on the revaluation of foreign operations


(783)


8,274



Revaluation of pension obligations


56


124



Revaluation of investment property


277


90



Total comprehensive income for the year


23,674


86,922



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


16.10p


52.38p



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


16.01p


52.13p









 

CONSOLIDATED BALANCE SHEET

 









31 December


2018


2017





£000


£000



Assets







Intangible assets







Deferred acquisition costs


65,039


61,858



Acquired value of in-force business


106,609


119,039



Acquired value of customer relationships


537


641



Goodwill


781


806



Software assets


5,711


6,358



Property and equipment


4,293


4,327



Investment in associates


5,840


6,407



Investment properties


1,299


1,199



Reinsurers' share of insurance contract provisions


213,369


233,154



Amounts deposited with reinsurers


34,349


38,776



Financial assets







Equity securities at fair value through income


413,851


512,724



Holdings in collective investment schemes at fair value through income


4,835,621


5,202,772



Debt securities at fair value through income


1,521,616


1,628,817



Policyholders' funds held by the group


259,836


265,729



Mortgage loan portfolio


41,191


48,106



Insurance and other receivables


55,849


59,448



Prepayments


7,309


7,325



Derivative financial instruments


446


1,682



Total financial assets


7,135,719


7,726,603



Reinsurers' share of accrued policyholder claims


17,640


25,888



Income taxes


10,702


7,681



Cash and cash equivalents


215,212


210,647



Total assets


7,817,100


8,443,384



Liabilities







Insurance contract provisions


3,569,014


3,962,279



Other provisions


882


1,098



Financial liabilities







Investment contracts at fair value through income 


3,235,519


3,420,273



Liabilities relating to policyholders' funds held by the group


259,836


265,729



Borrowings


109,202


129,202



Derivative financial instruments


22,714


22,494



Total financial liabilities


3,627,271


3,837,698



Deferred tax liabilities


19,463


22,794



Reinsurance payables


10,535


11,406



Payables related to direct insurance and investment contracts


91,229


97,163



Deferred income


3,948


4,701



Income taxes


3,428


8,514



Other payables


44,756


44,984



Bank overdrafts


958


1,091



Total liabilities


7,371,484


7,991,728



Net assets


445,616


451,656



Shareholders' equity







Share capital


43,767


43,766



Share premium


142,053


141,983



Treasury shares


-


(98)



Other reserves


27,158


27,664



Retained earnings


232,638


238,341



Total shareholders' equity


445,616


451,656









 

. Approved by the board of directors and authorised for issue on 28 March 2019 and signed on its behalf by:

 

 

 

Peter Mason            John Deane

Chairman                 Chief Executive Officer

 

Company Number: 04947166

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 








Year ended 31 December


2018

2017





£000

£000



Profit for the year


24,124

78,434



Adjustments for:






Depreciation of property and equipment


647

698



Amortisation of deferred acquisition costs


13,629

14,506



Amortisation of acquired value of in-force business


12,093

13,271



Amortisation of acquired value of customer relationships


83

101



Amortisation of software assets


1,671

2,218



Share based payment


501

(159)



Tax paid


2,888

11,209



Interest receivable


(4,796)

(4,785)



Dividends receivable


(2,939)

(4,619)



Interest expense


4,351

4,443



Fair value gains on financial assets


(205,410)

(210,706)



Profit arising on business combination


-

(20,319)



Share of loss/(profit) of associate


616

(949)



Increase in intangible assets related to insurance and investment contracts


(18,457)

(28,634)



Interest received


5,360

4,560



Dividends received


1,579

4,336



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


56

124



Changes in operating assets and liabilities:






Decrease/(increase) in financial assets


715,390

(145,613)



Decrease in reinsurers' share of insurance contract provisions


26,462

17,074



Decrease/(increase) in amounts deposited with reinsurers


4,427

(1,339)



Decrease in insurance and other receivables


11,937

11,317



(Increase)/decrease in prepayments


(86)

12,722



Decrease in insurance contract provisions


(409,405)

(91,110)



(Decrease)/increase in investment contract liabilities


(102,577)

414,014



(Decrease)/increase in provisions


(180)

272



(Decrease)/increase in reinsurance payables


(792)

4,424



(Decrease)/increase in payables related to direct insurance and investment contracts


(5,947)

2,432



Decrease in other payables


(2,549)

(935)



Net cash generated from operations


72,676

86,987



Income tax paid


(12,104)

(27,480)



Net cash generated from operating activities


60,572

59,507



Cash flows from investing activities






Business combinations


-

(117,993)



Development of software


(1,839)

(928)



Disposal/(purchases) of property and equipment


71

(314)



Net cash utilised by investing activities


(1,768)

(119,235)



Cash flows from financing activities






Proceeds/(loss) from issue of share capital


1

(75)



Proceeds from the issue of share premium


70

-



Net (loss)/proceeds from borrowings


(18,974)

42,022



Sale of treasury shares


98

63



Dividends paid


(30,384)

(29,484)



Interest paid


(4,174)

(4,266)



Net cash (utilised by)/generated from financing activities


(53,363)

8,260



Net increase/(decrease) in net cash and cash equivalents


5,441

(51,468)



Net cash and cash equivalents at beginning of year


209,556

258,731



Effect of exchange rate changes on net cash and cash equivalents


(743)

2,293



Net cash and cash equivalents at end of the year (note 28)


214,254

209,556






 

 

Note:  Net cash and cash equivalents includes overdrafts.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

 

 

 




Year ended 31 December 2018





Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total




£000

£000

£000

£000

£000

£000



Equity shareholders' funds at 1 January 2018

43,766

141,983

27,664

(98)

238,341

451,656



Profit for the year

-

-

-

-

24,124

24,124



Dividends paid

-

-

-

-

(30,384)

(30,384)



Foreign exchange translation differences (note 4)

-

-

(783)

-

-

(783)



Revaluation of pension obligations

-

-

-

-

56

56



Revaluation of investment property

-

-

277

-

-

277



Share based payment

-

-

-

-

501

501



Issue of share capital

1

-

-

-

-

1



Issue of share premium

-

70

-

-

-

70



Sale of treasury shares

-

-

-

98

-

98



Equity shareholders' funds at 31 December 2018

43,767

142,053

27,158

-

232,638

445,616











 

 

 

 





Year ended 31 December 2017





Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total




£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 (note 4)

-

-

8,274

-

-

8,274



Revaluation of pension obligations

-

-

-

-

124

124



Revaluation of investment property

-

-

90

-

-

90



Share based payment

-

-

-

-

669

669



Sale of treasury shares

-

(75)

-

63

-

(12)



Equity shareholders' funds at 31 December 2017

43,766

141,983

27,664

(98)

238,341

451,656











 

 

NOTES TO THE CONSOLIDATED IFRS FINANCIAL STATEMENTS

 

1.   Basis of presentation

The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2018, which are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('Adopted IFRSs') as adopted by the EU.

 

2.   Significant accounting policies 

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

 

3.   Operating segments

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

 

The segments of the group as at 31 December 2018 comprise:

 

CA:  This segment represents the group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the group's principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. This segment also contains Save & Prosper Insurance Limited which was acquired on 20 December 2010 and its then subsidiary Save & Prosper Pensions Limited. The S&P business was transferred to CA during 2011. This segment also contains the business of Protection Life, which was purchased on 28 November 2013 and the business of which was transferred to CA effective from 1 January 2015. CA is responsible for conducting unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk, as described in note 6 'Management of financial risk'.

 

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

 

Waard Group:  This segment represents the group's Dutch life and general insurance business, which was acquired on 19 May 2015 and comprised the three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Tadas Verzekering.  During 2017, the book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard Leven and consequently Hollands Welvaren Leven N.V. was deregistered on 19 December 2018. The Waard Group's policy base is predominantly made up of term life policies, although also includes unit-linked policies and some non-life policies, covering risks such as occupational disability and unemployment.

 

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

 

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

 

The accounting policies of the segments are the same as those for the group as a whole.  Any transactions between the business segments are on normal commercial terms in normal market conditions.  The group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the group.  There were no changes to the measurement basis for segment profit during the year ended 31 December 2018.

 

(i)   Segmental income statement for the year ended 31 December 2018

 












 

 

CA

 

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

 

Total




£000

£000

£000

£000

£000

£000



Net insurance premium revenue

34,028

13,663

1,698

169,991

-

219,380



Fee and commission income

28,143

23,567

19

50,054

-

101,783



Net investment return

(112,960)

(165,091)

629

(57,870)

257

(335,035)



Total revenue (net of reinsurance payable)

(50,879)

(127,861)

2,346

162,175

257

(13,872)



Other operating income

12,792

28,444

-

-

-

41,236



Segmental (expense)/income

(37,997)

(99,417)

2,346

162,175

257

27,364



Net insurance contract claims and benefits incurred

59,945

(5,018)

4,419

(135,091)

-

(75,745)



Net change in investment contract liabilities

30,321

165,008

-

-

-

195,329



Fees, commission and other acquisition costs

(1,215)

(29,563)

(293)

(1,907)

-

(32,978)



Administrative expenses:









Amortisation charge on software assets

-

(1,463)

-

(208)

-

(1,671)



Depreciation charge on property and equipment

-

(126)

(52)

(468)

-

(646)



Other

(22,034)

(13,578)

(2,903)

(25,607)

(3,356)

(67,478)



Operating expenses

(838)

(3,991)

-

-

(11)

(4,840)



Financing costs

(4)

(1,953)

-

-

(2,394)

(4,351)



Share of loss from associates

-

(616)

-

-

-

(616)



Profit before tax and consolidation adjustments

28,178

9,283

3,517

(1,106)

(5,504)

34,368



Other operating expenses:









Charge for amortisation of acquired value of in-force business

(4,497)

(3,106)

(669)

(3,821)

-

(12,093)



Charge for amortisation of acquired value of customer relationships

-

(83)

-

-

-

(83)



Fees, commission and other acquisition costs

-

1,137

-

3,683

-

4,820



Segmental income less expenses

23,681

7,231

2,848

(1,244)

(5,504)

27,012



Profit before tax

23,681

7,231

2,848

(1,244)

(5,504)

27,012



Income tax (expense)/credit

(3,125)

(944)

(642)

779

1,044

(2,888)



Profit/(loss) after tax

20,556

6,287

2,206

(465)

(4,460)

24,124











 

 

(ii)  Segmental balance sheet as at 31 December 2018

 












 

 

CA

 

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

 

Total




£000

£000

£000

£000

£000

£000



Total assets

2,636,499

3,033,654

137,640

1,948,490

60,817

7,817,100



Total liabilities

(2,476,949)

(2,942,300)

(90,585)

(1,789,841)

(71,809)

(7,371,484)



Net assets

159,550

91,354

47,055

158,649

(10,992)

445,616



Investment in associates

-

5,840

-

-

-

5,840



Additions to non-current assets

-

14,480

21

6,140

-

20,641











 

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

 












 

 

CA

 

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

 

Total




£000

£000

£000

£000

£000

£000



Net insurance premium revenue

39,036

15,438

2,227

120,623

-

177,324



Fee and commission income

29,009

25,608

20

35,664

-

90,301



Net investment return

251,041

223,310

7,349

50,016

101

531,817



Total revenue (net of reinsurance payable)

319,086

264,356

9,596

206,303

101

799,442



Other operating income

13,985

26,762

42

-

-

40,789



Segmental income

333,071

291,118

9,638

206,303

101

840,231



Net insurance contract claims and benefits incurred

(191,524)

(5,447)

(1,051)

(167,225)

-

(365,247)



Net change in investment contract liabilities

(66,969)

(222,953)

-

-

-

(289,922)



Fees, commission and other acquisition costs

(1,368)

(31,959)

(331)

(1,494)

-

(35,152)



Administrative expenses:









Amortisation charge on software assets

-

(2,052)

-

(124)

-

(2,176)



Depreciation charge on property and equipment

-

(292)

(52)

(229)

-

(573)



Other

(21,678)

(13,485)

(3,015)

(18,813)

(10,528)

(67,520)



Operating expenses

(952)

(3,302)

-

1

14

(4,239)



Financing costs

(4)

(2,756)

-

-

(1,683)

(4,443)



Share of profit from associates

-

949

-

-

-

949



Profit before tax and consolidation adjustments

50,576

9,821

5,189

18,419

(12,096)

71,908



Other operating expenses:









Charge for amortisation of acquired value of in-force business

(6,224)

(3,527)

(662)

(2,858)

-

(13,271)



Charge for amortisation of acquired value of customer relationships

-

(101)

-

-

-

(101)



Fees, commission and other acquisition costs

-

6,601

-

4,146

-

10,747



Segmental income less expenses

44,352

12,794

4,527

19,707

(12,096)

69,283



Profit arising on business combination

-

-

-

-

20,319

20,319



Profit before tax

44,352

12,794

4,527

19,707

8,223

89,602



Income tax (expense)/credit

(7,085)

71

(1,068)

(4,946)

1,860

(11,168)



Profit after tax

37,267

12,865

3,459

14,761

10,083

78,434











 

(iv) Segmental balance sheet as at 31 December 2017

 












 

 

CA

 

 

Movestic

 

Waard Group

 

Scildon

Other Group Activities

 

 

Total




£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











 

4.   Borrowings

 






Group

31 December






2018
£000

2017
£000



Bank loan

69,580

89,457



Amount due in relation to financial reinsurance

39,622

39,745



Total

109,202

129,202



Current

25,785

32,379



Non-current

83,417

96,823



Total

109,202

129,202







 

The bank loan as at 31 December 2018 comprises the following:

 

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

-    In April 2018 we converted our existing debt arrangement with RBS into a syndicated facility. This will provide access to higher levels of debt financing from a wider panel of lenders, which in turn will enable us to fulfill our appetite of financing future deals up to the maximum levels of gearing set out in our debt and leverage policy, without being restricted by the lending capacity of one individual institution. This facility enables Chesnara to access an increased level of funds efficiently, which in turn supports our acquisition strategy.

 

The fair value of the sterling denominated bank loan at 31 December 2018 was £27.0m (31 December 2017: £35.0m).

 

The fair value of the euro denominated bank loan at 31 December 2018 was £42.8m (31 December 2017: £55.0m).

 

The fair value of amounts due in relation to financial reinsurance was £41.6 (31 December 2017: £42.2m).

 

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

 

5.   Earnings per share

Earnings per share are based on the following:







Year ended 31 December

2018

2017








Profit for the year attributable to shareholders (£000)

24,124

78,434



Weighted average number of ordinary shares

149,847,736

149,749,517



Basic earnings per share

16.10

52.38p



Diluted earnings per share

16.01

52.13p







 

The weighted average number of ordinary shares in respect of the year ended 31 December 2018 is based upon 149,908,956 shares.  The weighted average number of ordinary shares in respect of the year ended 31 December 2018 was based upon 149,908,956 shares in issue. No shares were held in treasury.

 

There were 845,346 share options outstanding at 31 December 2018 (2017: 877,000).  Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2017.

 

6.   Retained earnings

 







Group

Year ended 31 December






2018

£000

2017

£000



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





Balance at 1 January

238,341

188,598



Profit for the year

24,124

78,434



Revaluation of pension obligations

56

124



Share based payment

501

669



Dividends





   Final approved and paid for 2016

-

(19,002)



   Interim approved and paid for 2017

-

(10,482)



   Final approved and paid for 2017

(19,578)

-



   Interim approved and paid for 2018

(10,806)

-



Balance at 31 December

232,638

238,341







The interim dividend in respect of 2016, approved and paid in 2017 was paid at the rate of 7.00p per share.  The final dividend in respect of 2017, approved and paid in 2018, was paid at the rate of 13.07p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2017 was made at the rate of 20.07p per share.

 

A final dividend of 13.46p per share in respect of the year ended 31 December 2018 payable on 24 May 2019 to equity shareholders of the parent company registered at the close of business on 12 April 2019, the dividend record date, was approved by the directors after the balance sheet date.  The resulting total final dividend of £20.2m has not been provided for in these financial statements and there are no income tax consequences.

 

The interim dividend in respect of 2018, approved and paid in 2018, was paid at the rate of 7.21p per share to equity shareholders of the parent company registered at the close of business on 5 September 2018, the dividend record date.

 

The following summarises dividends per share in respect of the year ended 31 December 2017 and 31 December 2018:

 







Year ended 31 December






2018

P

2017

p



Interim - approved and paid

7.21

7.00



Final - proposed/paid

13.46

13.07



Total

20.67

20.07







 

7.   Related parties

(a)    Identity of related parties

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

 

The company has related party relationships with:

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

(ii)  its subsidiary companies;

(iii) its associated company;

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

(v)  transactions with persons related to key management personnel.

 

(b)    Related party transactions

(i) Transactions with key management personnel.

 

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

 








2018

£000

2017

£000



Short-term employee benefits

988

1,324



Post-employment benefits

68

66



Total

1,056

1,390







 

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

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

 


2018

£000

2017

£000

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

216

588

 

These amounts have been included in Accrued Expenses. The amounts payable under the annual bonus scheme were payable within one year.

 

(ii)   Transactions with subsidiaries

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

Year ended 31 December




2018
£000

2017
£000

Recovery of expenses

3,976

3,272

 

(iii)  Transactions with associate

Movestic Livförsäkring AB and its associate Modernac SA

 

Year ended 31 December




2018
£000

2017
£000

Reinsurance premiums paid

(8,253)

(9,667)

Reinsurance recoveries received

5,460

5,820

Reinsurance commission received

(1,561)

(2,843)


(4,354)

(6,690)

Amounts outstanding as at balance sheet date

(2,700)

(2,442)

 

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

 










2018

2017




Amounts owed by associate

£000

Amounts owed to associate

 £000

Amounts owed by associate

£000

Amounts owed to associate

 £000



Modernac S.A.

-

2,700

-

2,442









 

These amounts have been included in other payables.

 

(iv)  Transactions with persons related to key management personnel

During the year, there were no transactions with persons related to key management personnel.

 

 

FINANCIAL CALENDAR

29 March 2019

Results for the year ended 31 December 2018 announced

 

11 April 2019

Ex-dividend date

 

12 April 2019

Dividend record date

 

17 April 2019

Published Report & Accounts issued to shareholders

 

01 May 2019

Last date for dividend reinvestment plan elections

 

14 May 2019

Annual General Meeting

 

24 May 2019

Dividend payment date

 

29 August 2019

Half year results for the 6 months ending 30 June 2018 announced

 

KEY CONTACTS

Registered and Head Office

2nd Floor, Building 4

West Strand Business Park

West Strand Road

Preston

Lancashire

PR1 8UY

 

Tel:  01772 972050            

www.chesnara.co.uk

 

 

Advisors

Ashurst LLP

Broadwalk House

5 Appold Street

London

EC2A 2HA

 

Addleshaw Goddard LLP

One St Peter's Square

Manchester

M2 3DE

 

 

Auditor

Deloitte LLP

Statutory Auditor

Saltire Court

2 Hardman Street

Manchester

M3 3HF

 

 

Registrars

Link Asset Services

The Registry

34 Beckenham Road

Beckenham

Kent

BR3 4TU

 

Joint Stockbrokers

Panmure Gordon

One New Change

London

EC4M 9AF

 

Shore Capital Stockbrokers Limited

Bond Street House

14 Clifford Street

London

W1S 4JU

 

Bankers

National Westminster Bank plc

135 Bishopsgate

London

EC2M 3UR

 

The Royal Bank of Scotland

8th Floor, 135 Bishopsgate

London

EC2M 3UR

 

Lloyds Bank plc

3rd Floor, Black Horse House

Medway Wharf Road

Tonbridge

Kent

TN9 1QS

 

Public Relations Consultants

FWD

145 Leadenhall Street

London

EC3V 4QT

 

Corporate Advisors

Shore Capital Stockbrokers Limited

Bond Street House

14 Clifford Street

London

W1S 4JU

 

GLOSSARY

 

AGM

Annual General Meeting.

ALM

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

APE

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

CA

Countrywide Assured plc.

CALH

Countrywide Assured Life Holdings Limited and its subsidiary companies.

BAU Cash Generation

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

Cash Generation

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

Divisional Cash Generation

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

DNB

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

DPF

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

Dutch Business

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

Economic Profit

A measure of pre-tax profit earned from investment market conditions in the period and any economic assumption changes in the future (alternative performance metrice - APM)

EcV

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

FCA

Financial Conduct Authority.

FI

Finansinspektionen, being the Swedish Financial Supervisory Authority.

Form of Proxy

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

FSMA

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

Group

The company and its existing subsidiary undertakings.

Group Cash generation

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

Group Own Funds

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

Group SCR

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

Group Solvency

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

HCL

HCL Insurance BPO Services Limited.

IFRS

International Financial Reporting Standards.

IFA

Independent Financial Adviser.

KPI

Key performance indicator.

LGN

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

London Stock Exchange

London Stock Exchange plc.

LTI

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

Movestic

Movestic Livförsäkring AB.

Modernac

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

New business

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

Official List

The Official List of the Financial Conduct Authority.

Operating Profit

A measure of the pre-tax profit earned from a company's ongoing core business operations, excluding any profit earned from investment market conditions in the period and any economic assumption changes in the future (alternative performance metric - APM).

Ordinary Shares

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

Own Funds

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

ORSA

Own Risk and Solvency Assessment.

PRA

Prudential Regulation Authority.

QRT

Quantitative Reporting Template.

ReAssure

ReAssure Limited.

Resolution

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

RMF

Risk Management Framework.

Scildon

Scildon

Shareholder(s)

Holder(s) of Ordinary Shares.

Solvency II

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

SICAV

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

STI

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

SCR

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

Swedish Business

Movestic and its subsidiaries and associated companies.

S&P

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

TCF

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

UK or United Kingdom

The United Kingdom of Great Britain and Northern Ireland.

UK Business

CA and S&P.

 

NOTE ON TERMINOLOGY

 

The principal reporting segments of the group are:

CA

which comprises the original business of Countrywide Assured plc, the group's original UK operating subsidiary; City of Westminster Assurance Company Limited, which was acquired by the group in 2005, the long-term business of which was transferred to Countrywide Assured plc during 2006; S&P which was acquired on 20 December 2010.  This business was transferred from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide Assured plc on 31 December; and Protection Life Company Limited which was acquired by the group in 2013, the long-term business of which was transferred into Countrywide Assured plc in 2014;

Movestic

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

The Waard Group

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

Scildon

which was acquired on 5 April 2017; and

Other group activities

which represents the functions performed by the parent company, Chesnara plc.  Also included in this segment are consolidation adjustments.

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
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