Chesnara Regulatory News (CSN)

5 May 2005 07:01

Chesnara PLC05 May 2005 NOT FOR RELEASE OR DISTRIBUTION IN THE US, CANADA, AUSTRALIA, THE REPUBLIC OFIRELAND OR JAPAN Chesnara plc ("Chesnara" or "the Company") Proposed acquisition of Irish Life (UK) Holdings plc and placing and open offer to raise approximately £22 million Highlights: Acquisition • Proposed acquisition of the holding company of City of Westminster Assurance Company Limited ("CWA"), from Irish Life & Permanent plc • CWA operates a closed life assurance and pensions book • Cash consideration for the acquisition is £47.5 million • Acquisition subject to FSA and shareholder approval Fundraising • Proposed placing and open offer to raise c.£22 million • The placing and open offer has been fully underwritten by Numis Securities Limited • An Extraordinary General Meeting to approve the acquisition and to enable the placing and open offer to proceed will take place on 31 May 2005 Graham Kettleborough (Chief Executive) of Chesnara, commented: "This is an important first strategic step for Chesnara. We have acquired awell-established run-off book, with cash flows which will help support ourobjective of delivering steady, long term income to our investors. Since thesuccessful outsourcing of our back office at the beginning of the year, we havelooked at a number of opportunities and see real attractions in City ofWestminster. It matches our business profile well, will give us access toadditional management resources and, as an established run-off business, hasfuture surplus flows which can be predicted with a reasonable degree ofcertainty. This is a good deal for Chesnara and its shareholders." Peter Fitzpatrick (Group Finance Director) of Irish Life & Permanent, commented: "We've been looking at our strategic choices for the company for some time.While we've been happy with the financial performance of the business, it had nolong term strategic significance for us and, therefore, it was incumbent on usto explore other options. We're very happy with the deal we've reached withChesnara which we believe meets the needs of both policyholders in City ofWestminster Assurance and our own shareholders. We look forward to a continuingrelationship with the business through ILIM's involvement in the fund managementof the book." Enquiries: Chesnara plc Tel: +44 (0) 7799 407519Graham Kettleborough, Chief Executive Numis Securities Limited(Financial advisers and broker to Chesnara) Tel: +44 (0) 20 7776 1500Malcolm StrangLee Aston Cubitt Consulting(Public relations advisers to Chesnara) Tel: +44 (0) 20 7367 5100Michael Henman Irish Life & Permanent plc Tel: +353 1 704 2000David Went, Group Chief ExecutivePeter Fitzpatrick, Group Finance Director Hawkpoint Tel: +44 (0) 20 7665 4500(Financial advisers to Irish Life & Permanent)Hugh ElwesRupert Pepper MRPA Consultants Tel: +353 1 678 8099(Public relations advisers to Irish Life & Permanent)Ray Gordon This announcement, for which the directors of Chesnara plc are responsible, hasbeen issued by Chesnara plc This announcement does not constitute an offer ofsecurities for sale in the United States. The New Shares may not be offered orsold in the United States, Canada, Australia, The Republic of Ireland or Japanabsent registration or an exemption from registration. Numis Securities Limited, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively for Chesnaraplc and for no one else in connection with this matter. Numis Securities Limitedwill not be responsible to anyone other than Chesnara plc for providing theprotections afforded to the customers of Numis Securities Limited, nor forproviding advice in relation to the contents of this announcement or any matterreferred to herein. Hawkpoint Partners Limited, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively for IrishLife & Permanent plc and for no one else in connection with this matter.Hawkpoint Partners Limited will not be responsible to anyone other than IrishLife & Permanent plc for providing the protections afforded to the customers ofHawkpoint Partners Limited, nor for providing advice in relation to the contentsof this announcement or any matter referred to herein. Proposed acquisition of Irish Life (UK) Holdings plc Proposed placing and open offer of 18,333,333 New Shares at 120p per Share,incorporating an Open Offer of 8,625,545 New Shares on the basis of 1 New Share for every 10 Existing Ordinary Shares 1. Introduction Further to the announcement, on 25 April 2005, that Chesnara was in discussionswith Irish Life & Permanent, the boards of Chesnara and Irish Life & Permanentare pleased to announce that they have entered into an agreement for Chesnara toacquire the entire issued and to be issued share capital of Irish Life (UK)Holdings plc ("Irish Life Holdings"). Irish Life Holdings is ultimately asubsidiary of Irish Life & Permanent and is the holding company of City ofWestminster Assurance Company Limited, which operates a life assurance andpensions book that is effectively closed to new business. The consideration forthe acquisition is £47.5 million, which will be paid in cash on Completion. The Consideration will be financed by a mixture of existing cash resources ofChesnara, new bank facilities which have been arranged for the purposes of theAcquisition and by a placing and open offer to raise approximately £22 million(before expenses). In view of the size of the Acquisition in relation to Chesnara, the Acquisitionis conditional, inter alia, on the approval of Shareholders, which will besought at an Extraordinary General Meeting of the Company. The placing and openoffer will be conditional, inter alia, upon shareholder approval and the passingof the resolution to approve the Acquisition. 2. Information on Chesnara Detailed information on Chesnara is set out in Appendix 2 to this announcement. 3. Information on Irish Life Holdings and on CWA Irish Life Holdings is ultimately a subsidiary of Irish Life & Permanent. Itsprincipal function is as a holding company for CWA, which operates a lifeassurance book in the UK which is effectively closed to new business. Inaddition, Irish Life Holdings owns Irish Life UK Trustees, which acts as trusteeto some of CWA's pension policies but has no other trading activities. CWA's life assurance business consists of unit-linked and non-profit policiesonly. The business includes protection plans, mortgage endowments, savingsplans, single premium bonds, pension policies and permanent health insurancepolicies. As at 31 December 2004, there were approximately 86,000 policies inforce, with approximately 53 per cent. being regular premium policies.Approximately 86 per cent. of these policies were unit-linked. Policies within the CWA book were sourced from two main sources - approximately66,000 of the current policies were originally sold by Irish Life Assurance's UKbranch and these were included in a transfer of business from Irish LifeAssurance to CWA at the end of 1996. The balance was written by City ofWestminster Assurance Company and City of Westminster Assurance Society. Thesetwo companies were acquired by the Irish Life group in 1993, and subsequentlymerged to form CWA. The book was closed to new business in December 1995 but CWA still accepts asmall volume of new business where an existing policyholder has a contractualentitlement. This includes regular and single premium increments to existingplans, rebates received from the Department of Work and Pensions in relation tothe State Second Pension and vesting annuities when pension policyholders reachtheir retirement age. CWA's key business objective is to maintain maximum shareholder profitability atminimum risk through the efficient and compliant administration of the existingbook. The company is based in Luton and employs nine permanent employees in itsretained operations. These operations include management of the company'soutsourcing arrangements, governance, compliance, actuarial, finance, riskmanagement and statutory/regulatory reporting functions. The outsourcing arrangements are as follows: • Administration and IT support functions are outsourced to CSC. This includes premium collection, claims payments, policyholder enquiries, record keeping, customer services and relevant control functions. This agreement has been in place since February 1999, and relevant CWA staff transferred to CSC as part of the agreement; and • Irish Life Investment Managers provide investment management services for both the unit-linked and non-linked funds, under an intra-group arrangement. The services include fund management, fund accounting and unit pricing. Following completion, it is intended that these arrangements will continue tooperate in substantially the same form as at present. The nine permanentemployees of CWA will be retained within the Chesnara Group. Irish LifeInvestment Managers (which is not part of the CWA Group and therefore not partof the Acquisition) will continue to provide investment management services on asimilar basis to those provided currently. In the year ended 31 December 2004, the CWA Group achieved a pre-tax profit of£7.4 million on net premium income (earned premiums, net of reinsurance) of£39.8 million. Total assets of the CWA Group as at 31 December 2004 were £825.0million, including assets held to cover linked liabilities of £664.3 million. Asat 31 December 2004, the embedded value of the CWA Group (using the currentassumptions of its directors) was £59.6 million after payment of the dividend inrespect of 2004 to Irish Life & Permanent of £4.6 million. 4. Background to and reasons for the Acquisition Since listing in May 2004, Chesnara has indicated that it would consideropportunities for consolidation. To this end the Directors have looked at anumber of potential acquisitions and believe that CWA offers a suitable andattractive opportunity for shareholders, policyholders and management. Inparticular: • CWA is approximately 40 per cent. of the size of Chesnara and therefore CWA represents both a manageable and sizeable addition; • Chesnara is ungeared with a clean capital position, no significant regulatory issues, a substantial surplus in solvency capital and minimal with profits exposure. CWA also has a clean capital position, no significant regulatory issues and no with profits exposure; • Chesnara is the only 'pure play' listed life company and has no substantial asset management operations. It concentrates solely on the management of the closed life book. CWA also outsources its asset management and concentrates on managing the closed life book; • Chesnara has recently outsourced its back office and transferred 184 staff under a TUPE arrangement to Liberata Financial Services Limited. CWA outsourced its back office to CSC in 1999; • Chesnara's strategic operating model envisions a virtual office with acquisitions being transferred in under Part VII of FSMA 2000 arrangements, thereby maintaining a focussed and skilled management team. The Directors believe the experience of the CWA team will be valuable in progressing this model; • Chesnara and CWA's business mix are similar, being predominantly unit-linked and non-linked; • Chesnara's management are experienced in the run-off of life books as demonstrated by, for example, their successful integration of the Premium Life business, which was acquired in 1995. Chesnara's business model is to offer fair service and value to policyholders and the Directors believe that there is a cultural fit in this respect with CWA's activities since closing to new business; and • The Directors believe that the acquisition will enhance the short, medium and long-term cash flow of the Enlarged Group. The Directors believe that Chesnara, with its well capitalised financialstructure and simple operating model based on working with blue chip outsourcingpartners will provide greater security to both Chesnara and CWA's policyholders.The Directors also believe that Chesnara's strategy of controlled growth throughvalue-enhancing acquisition should further increase security through increasedscale and should also reduce costs with benefits being passed on, whereappropriate, to policyholders. Furthermore, the Directors are confident that thefact that Chesnara's sole focus is the professional, efficient and effectivemanagement of the run off of life companies will provide a further measure ofconfidence. 5. Current trading and prospects of the Enlarged Group As a company that has been in run off for a number of years, CWA's futuresurplus flows can be predicted with a reasonable degree of certainty. Chesnarais less mature as a run off business and therefore it has, in the past, sufferedfrom volatile results. In its results for the year ended 31 December 2004, itwas noted that "In the first six months of the year the results were adverselyaffected by mortgage endowment mis-selling claims experience. However, theconsidered action taken in response to this challenge resulted in a morepositive second half.'' Since the year end, the Company has continued to benefit from strong surplusflows and the Directors look forward with confidence to the year ahead. With theaddition of the more predictable surplus flow from CWA added to the recentimprovement in Chesnara's financial performance, the Board is confident that theEnlarged Group can deliver a stable and progressive dividend flow toShareholders. 6. Principal terms of the Acquisition The Acquisition will be effected pursuant to the terms of the AcquisitionAgreement. The consideration for the Acquisition is £47.5 million, payable incash on completion. The Acquisition is conditional, inter alia, on: (a) Admission; (b) the FSA approving the change of control of the CWA Group; and (c) Shareholder approval. The Directors expect that the Acquisition will complete on or around 2 June 2005(assuming that all conditions are satisfied). The Financial Services and MarketsAct 2000 requires the FSA to process a notification of proposed change ofcontrol of a regulated business within 3 months from the date of receipt of avalid notification but the Directors believe that this condition should besatisfied prior to the end of the three month period. 7. Details of the Placing and Open Offer General The Company is proposing to raise approximately £22 million before expenses(approximately £20.8 million net of expenses) through the Placing and OpenOffer, which have been fully underwritten by Numis. The New Shares will represent, in aggregate, approximately 17.5 per cent. of theenlarged issued ordinary share capital on Admission. The New Shares will beissued credited as fully paid and will rank in full for all dividends anddistributions declared, paid or made on the Ordinary Shares after their issueand otherwise pari passu in all respects with the Existing Ordinary Shares. The Placing and Open Offer are conditional, inter alia, upon: (a) the passing of the Resolution; (b) the Placing Agreement becoming unconditional and not having been terminated in accordance with its terms; (c) the Acquisition Agreement being completed in accordance with its terms; (d) Admission by no later than 10 August 2005. The Placing The Placing comprises an issue of 9,707,788 New Shares at 120p per share (toraise approximately £11.65 million gross) to institutional and other investors.The Placing is fully underwritten by Numis. The Placing Shares have been placed by Numis on behalf of the Company at theIssue Price and are being placed firm (that is, not subject to clawback underthe Open Offer). The Placing is conditional upon, inter alia, admission of the Placing Shares andthe Open Offer Shares to the Official List and to trading on the London StockExchange's market for listed securities, all conditions to the Acquisition beingsatisfied (except for Admission) and the Acquisition Agreement not having beenrescinded or terminated in accordance with its terms prior to Admission. The Placing Shares shall rank pari passu in all respects with the ExistingOrdinary Shares. The Placing Shares will be issued in registered form, may beheld in uncertificated form and are/will be eligible for settlement withinCREST. The Open Offer The Open Offer of 8,625,545 New Shares at 120p per share (to raise approximately£10.35 million gross) is being made by Numis Securities Limited as an agent forand on behalf of Chesnara. The Open Offer is being fully underwritten by Numis. Numis has conditionally placed the Open Offer Shares, subject to clawback to theextent that valid applications are received from Qualifying Shareholders underthe Open Offer. Under the Open Offer, the Open Offer Shares are being offered to QualifyingShareholders at 120p per share, payable in full on application on the followingbasis: 1 Open Offer Share for every 10 Existing Ordinary Shares held on the Record Date and so in proportion for any other number of Existing Ordinary Shares held onthe Record Date. Where appropriate, the entitlements of Qualifying Shareholderswill be rounded down to the nearest whole number of Open Offer Shares. The Open Offer (and the placing of the Open Offer Shares) is conditional upon,inter alia, Admission, all conditions to the Acquisition being satisfied (exceptfor Admission) and the Acquisition Agreement not having been rescinded orterminated in accordance with its terms prior to Admission. The Open Offer Shares shall rank pari passu in all respects with the ExistingOrdinary Shares. The Open Offer Shares will be issued in registered form, may beheld in uncertificated form and will be eligible for settlement within CREST. Shareholders should be aware that the Open Offer is not a rights issue and thatentitlements to New Shares under the Open Offer will not be tradable or sold inthe market for the benefit of those who do not apply under the Open Offer.Application Forms are personal to shareholders and may not be transferred exceptto satisfy bona fide market claims. 8. Use of proceeds The Directors intend that the net proceeds of the Placing and of the Open Offer(amounting to approximately £20.8 million) will be applied to part finance theconsideration payable for the Acquisition. The Placing and Open Offer areconditional upon the Acquisition proceeding to completion. 9. Directors' intentions The executive directors have undertaken to take up their entitlements under theOpen Offer, representing, in aggregate, 3,343 New Shares. The non-executiveDirectors (who have beneficial interests in Ordinary Shares) have undertaken notto take up their entitlements under the Open Offer, representing, in aggregate,13,020 New Shares. These New Shares have been placed firm by Numis pursuant tothe Placing and Open Offer Agreement. A prospectus, which will include a notice convening the EGM, will be posted toShareholders in due course. 10. Expected timetable of principal events Record date for the Open Offer 29 April 2005 Latest time and date for receipt of completed Forms of Proxy 11.00a.m. on 27 May 2005 Latest time and date for splitting of Application Forms (to satisfy bona fide market 3.00p.m. on 24 May 2005claims only) Latest time and date for receipt of Application Forms and payment in full under the Open 3.00p.m. on 26 May 2005Offer EGM 31 May 2005 Date of Admission 2 June 2005 Expected date for crediting of CREST Accounts 2 June 2005 Despatch of share certificates in respect of New Shares to be held in certificated form 9 June 2005 Appendix 1 Definitions The following definitions shall apply to other words and phrases used in thisannouncement, except where the context requires otherwise. ''Acquisition'' The proposed acquisition of Irish Life (UK) Holdings PLC; ''Acquisition Agreement'' The agreement dated 4 May 2005 between (1) the Company and (2) Irish Life relatingto the acquisition of Irish Life (UK) Holdings; ''Admission'' Admission of the New Shares to (i) listing on the Official List; and (ii) trading on the London Stock Exchange's markets for listed securities; ''Board'' or ''Directors'' the directors of Chesnara ''Chesnara'' or ''the Company'' Chesnara plc, incorporated and registered in England and Wales under the CompaniesAct with registered number 4947166; ''Chesnara Group'' Chesnara its subsidiary undertakings; ''Chesnara Shares'' ordinary shares in Chesnara, having a nominal value of 5 pence each; ''Chesnara Shareholders'' or '' holders of Chesnara Shares;Shareholders'' ''EGM'' or ''Extraordinary General an extraordinary general meeting of Chesnara, notice of which will be set out in theMeeting'' prospectus to be sent to Shareholders; ''Existing Ordinary Shares'' the 86,255,452 Ordinary Shares currently in issue; "Irish Life & Permanent" Irish Life & Permanent plc "Irish Life Holdings" Irish Life (UK) Holdings PLC ''Issue Price'' 120 p per New Share; ''London Stock Exchange'' the London Stock Exchange plc or any registered investment exchange for the purposes of the Financial Services and markets Act 2000 which may take over the function of the London Stock Exchange plc; ''Numis'' Numis Securities Limited; ''Official List'' the Official List of the UK Listing Authority; ''Open Offer'' the conditional invitation made by Numis, acting as agent for the Company, to Qualifying Shareholders to subscribe for the New Shares at the Issue Price on the terms and conditions to be set out in the Prospectus to be issued by the Company in relation to the Placing and Open Offer and the Acquisition and the accompanying application form; ''Open Offer Shares'' the 8,625,545 New Shares conditionally placed by Numis, subject to clawback to satisfy valid applications by Qualifying Shareholders under the Open Offer; ''Overseas Shareholders'' Shareholders resident in, or citizens of jurisdictions outside of the UK; ''Placing'' the placing by Numis of the New Shares at the Issue Price pursuant to the Placing Agreement; ''Placing Agreement'' the conditional agreement dated 4 May 2005 between (1) Numis and (2) the Company, further details of which will be set out in the Prospectus; ''Placing Shares'' the 9,707,788 New Shares that have been placed firm by Numis, pursuant to the Placing Agreement; ''Proposals'' the Acquisition and the Placing and Open Offer; ''Qualifying Shareholders'' holders of Existing Ordinary Shares on the register of members as at the Record Date (other than certain Overseas Shareholders to whom the Open Offer will not be extended); ''UK'' or ''United Kingdom'' the United Kingdom of Great Britain and Northern Ireland; ''UK Listing Authority'' the Financial Services Authority acting in its capacity as the competent authorityfor the purposes of Part VI of the Financial Services and Markets Act 2000 and in the exercise of its functions in respect of the admission to the Official List otherwise than in accordance with Part VI of the Financial Services and Markets Act 2000; ''US'' the United States of America; ''US Securities Act'' the United States Securities Act of 1993, as amended. Appendix 2 Information on Chesnara Chesnara, which was listed on the Official List on 25 May 2004, was formed tobecome the holding company of the life assurance activities formerly owned byCountrywide Assured Group plc (''CAG''). Chesnara's principal subsidiary,Countrywide Assured plc (''CA'') was established in 1988 as the life assurancedivision of CAG, selling mortgage-related life assurance products through CAG'sfinancial services division. In 1995, CA acquired Premium Life Assurance CompanyLimited, a life assurance company, and integrated it into its existingoperations. In August 2002, CAG entered into a distribution agreement withFriends Provident Life and Pensions Limited (''Friends Provident''), whichresulted in new business being switched to Friends Provident in August 2003. Aspart of these arrangements, the Company continued to write significant volumesof protection business under a reinsurance agreement with Friends Provident fromSeptember 2002 to August 2003, at which point CAG's business was placed directlywith Friends Provident. Following the consequent substantial closure to newbusiness CA continues to administer an existing portfolio of some 208,000policies which, by number are 38 per cent. endowment, 48 per cent. protectionand whole life and 14 per cent. other. This split reflects the Company's historyof providing mortgage-related policies to the estate agency-based financialservices sales force of CAG and a strategic decision to exit the endowmentmarket in 2001 and sell only protection products in this marketplace. Most ofthe endowment and other investment-related business is unit-linked and althoughthere is a small amount of with profits business (less than 2.5 per cent. bypolicy count) this is wholly reinsured to Guardian Assurance plc (''Guardian'').Guardian is a subsidiary of Aegon N.V., one of the world's largest insurancegroups. The investment management of the related unit-linked funds ispredominantly outsourced to Schroders plc and Henderson Global Investors plcwith the remainder being managed by Invesco Perpetual Asset Management Limited. CA continues to sell and market Guaranteed Income and Growth Bonds throughIndependent Financial Advisers and directly to investors, resulting in £73.5million of single premium income in 2004 (2003: £23.1 million). In addition itsells a small amount of life protection business to existing customers, as wellas offering them a limited range of other financial products supplied by thirdparties. Chesnara is not currently seeking any new major distribution outletsbut will consider writing new business, in partnership with third partydistributors, where acceptable levels of risk and reward are available. Objectives of the Business Chesnara's priority is to maximise shareholder returns through the efficient andcompliant management of the existing business. It will seek to add valuethrough the sale of Guaranteed Income and Growth Bonds and may also choose tosell other low risk products in order to enhance future cash flows. In addition,the Directors believe that there are opportunities for consolidation in thesmall to medium sector of closed books and run-off situations in the lifeassurance industry. The Board will, therefore, continue to investigate thesewhere there is potential to enhance shareholder value. As Chesnara has successfully concluded the outsourcing of its back office toLiberata Financial Services Limited (''Liberata''), a significant element of itsexpense base is now directly linked to the reducing policy base. This removesthe fixed and semi-fixed cost issues that would have had a potentially damagingeffect on shareholder returns. The Company's focus on customer retention hasbeen captured in the service and performance levels agreed with Liberata andtherefore, barring external factors, the Directors believe that a reasonablypredictable level of income can be expected to flow from the policy base. Chesnara management retains regulatory responsibility for the business and willbuild on these requirements to ensure that key risks are identified and managedto maximise the flow of emerging surplus. As CA is regulated, as describedbelow, management will operate with a level of prudence but will seek to ensurethat shareholders receive distributions consistent with the constraints on thebusiness. In the absence of any value-enhancing consolidation opportunities orother developments that require capital then there is, in the medium term, thepossibility of the release of surplus capital to shareholders. The following is a summary of the key strengths and resources which theDirectors believe underpin the Group's ability to meet its objectives: • Financial strength - Chesnara has a strong balance sheet and is well capitalised. CA maintains capital resource cover well in excess of regulatory capital requirements. • Knowledge and experience - Chesnara has a strong Board and management team with an average of over 15 years' experience in managing life assurance business. The senior management team also has experience in the integration and management of closed books within a highly regulated environment. • Regulatory record - Chesnara has a strong focus on compliance and risk management and it maintains a close relationship with CA's primary regulator, the FSA. All issues raised in its last formal FSA ''Arrow'' assessment in 2002 were cleared in good time and, although there are some points that have been raised as a result of themed reviews, we regard these as being of minor consequence. The next formal Arrow assessment is scheduled for the second quarter of 2005. • Future development costs - as a consequence of outsourcing the back office to Liberata, future development costs are likely to be lower than as a stand alone entity as, following migration, they will be incurred on a shared platform. This arrangement also offers the benefit of consultation with other platform users in the definition of development requirements. Such developments are expected to be funded out of emerging surplus and these, to a degree, are allowed for in calculating the value of the business. Some development costs may, under the terms of the policies, be passed to policyholders and this will limit the effect on shareholder returns. In the year ended 31 December 2004, Chesnara recorded profit before tax of £4.6million, and as at 31 December 2004 had net assets of £74.0 million and anembedded value of £143.1 million. This information is provided by RNS The company news service from the London Stock Exchange