Last checked at 31 Mar 2011 07:00
Chesnara plc
Acquisitions fuel strong growth in shareholder value and dividend growth continues
31 March 2011
Chesnara today reported final results for the year ended 31 December 2010.These are the first set of results which include the effect of the acquisitionof Save & Prosper Insurance Limited and its subsidiary Save & Prosper PensionsLimited ('Save & Prosper') which was acquired on 20th December 2010. The Groupremains committed to offering shareholders an attractive long-term incomestream arising from the profits of its life and pensions businesses.Profit on IFRS basis before tax for the year ended 31 December at £34.2mincluding profit of £15.9m arising from acquisitions, predominantly that ofSave & Prosper, (2009: £44.7m, including an acquisition profit of £25.1m) andat £18.3m excluding the profit arising on acquisitions (2009: £19.6m)
Earnings per share on IFRS basis of 29.05p, (2009: 45.26p)
On EEV basis pre-tax profit for the year of £77.0m including the exceptionalprofit of £41.0m arising on acquisitions, predominantly that of Save & Prosper,(2009: £78.2m, including an acquisition profit of £54.2m) and £36.0m excludingthe exceptional profit arising on acquisitions (2009: £24.0m).
Shareholder equity on EEV basis (pre proposed final dividend payment) now £ 354.6m - £3.09p per share (2009: £262.6m - £2.59p per share)
Group solvency ratio remains well above target at 200% post dividend (2009: 316%). In the UK, Countrywide Assured's solvency ratio remained strong at 213% (2009: 197%) whilst Save & Prosper had a ratio of 268%. Swedish business solvency ratio also remains above target at 188% (2009: 302%)
Completed acquisition of operations and certain assets of Aspis F¶rs¤kringar Liv AB ('Aspis'), a relatively small Swedish life and health insurer, in February 2010
Successful re-branding of Swedish business, Moderna, to Movestic with improving sales, however persistency remains challenging
Final proposed dividend increased to 10.6p (2009:10.3p). Total dividend for the year increased by 2.8% to 16.4p (2008:15.95p)
Board remains confident about future dividend flows
Continue to examine value adding acquisition opportunities
Graham Kettleborough, Chief Executive said:
'The key event in 2010 was the acquisition of Save & Prosper. This acquisition,secured at a significant 39% discount to its embedded value, brings animmediate uplift to shareholder value and provides an excellent fit with ourexisting UK operations. Challenges continue in our Swedish business. However,its relaunch, re-branded as Movestic together with the launch of a number ofnew product features, fund launches and the capabilities secured from the Aspistransaction are providing encouraging signs with regard to sales. Positiveinvestment market conditions have helped, both in the UK and in Sweden, wherefunds under management have grown significantly, to support the very welcomeimprovement in embedded value.On the acquisition front we continue to seek suitable opportunities and willcontinue to be selective and only pursue opportunities which will deliver anacceptable value uplift and/or support Chesnara's future dividend payingcapability.The Board are pleased to recommend an increase in the final dividend to 10.6pper share. This gives rise to a total dividend for the year of 16.4p per sharewhich represents a 2.8% increase.'
The Board approved this statement on 30 March 2011.
EnquiriesGraham KettleboroughChief Executive, Chesnara plc 07799 407519 Michael Henman Cubitt Consulting 0207 367 5100 Notes to editors:
Chesnara plc, which listed on the London Stock Exchange in May 2004, is the
owner of Countrywide Assured plc ("CA"), Save & Prosper Insurance Save & Prosper') and Movestic Livf¶rs¤kringar AB ('Movestic'). CA is a UK life assurance subsidiary that is substantially closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance ("CWA") - for £47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc.
Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009 for £20m. The company, which was launched in 2002, continues to write new business and grow its strong position in the Swedish unit-linked market. This position was strengthened in February 2010 with the acquisition of the operations of Aspis F¶rs¤kringar Liv AB which has a risk and health product bias.
Save & Prosper Insurance Limited, and its subsidiary, Save & Prosper Pensions Limited were acquired on 20th December 2010 for £63.5m in cash. This was funded by raising a new lending facility of £40m and the sale of new and treasury shares which raised £26.7m. The companies are closed to new business and operate an outsourced business model which is complementary to Chesnara's existing UK operations.
Note on terminology
The principal reporting segments of the Group are: (1) Countrywide Assured Life Holdings Limited and its subsidiary companies
(together 'CA');
(2) Save & Prosper Insurance Limited and its subsidiary company Save & Prosper
Pensions Limited (together 'S&P' or 'the S&P companies', as the context requires); and (3) Movestic Livf¶rs¤kring AB and its subsidiary and associated companies (together 'Movestic'). In addition:
(i) The operating segments under (1) and (2) above may be referred to as the 'UK
businesses' and the operating segment under (3) may be referred to as the 'Swedish business' as the context requires;
(ii) The principal operating subsidiary company within the CA segment is Countrywide
Assured plc, which is designated as 'CA plc'; and
(iii) Where it is necessary to distinguish Movestic Livf¶rs¤kring AB as a separate
entity from its subsidiary and associated companies it is designated as 'Movestic Liv'. Change of name
Movestic Livf¶rs¤kring AB was formerly known as Moderna F¶rs¤kringar Liv AB. The change of name occurred in November 2010.
FINANCIAL HIGHLIGHTS Year ended 31 DecemberIFRS basis 2010 2009 Operating profit/(loss) CA 25.7 24.7 S&P 0.2 - Movestic (2.5) (2.1) Other group activities (3.8) (2.3)
Profit arising on business combinations 15.9 25.1
-------- -------- 35.5 45.4 Financing costs (1.3) (0.7) -------- -------- Profit before tax GBP34.2m GBP44.7m ======== ======== Basic earnings per share 29.05p 45.26p
Dividend per share (including proposed dividend) 16.40p 15.95p
Shareholders' net equity GBP203.3m GBP159.8m ======== ========
European Embedded Value basis (EEV)
Operating profit/(loss) Covered business CA 16.0 22.0 S&P 0.2 - Movestic (9.8) (2.9) Other group activities (6.1) 0.9 -------- -------- 0.3 20.0
Investment variances and economic assumption changes
CA 7.6 (6.1) S&P (1.5) - Movestic 16.4 10.1 -------- --------
Profit before tax and before exceptional items 22.8 24.0
Exceptional items Profit arising on business combinations 41.0 54.2 Effect of modelling improvements 13.2 - -------- -------- Profit before tax 77.0 78.2 Tax (4.0) 12.1 -------- -------- Profit for the year GBP73.0m GBP90.3m ======== ========
Shareholders' equity on EEV basis
Embedded value CA 149.7 157.8 S&P 103.2 - Movestic 121.1 91.5 -------- -------- Embedded value of covered business 374.0 249.3 Acquired embedded value financed by debt (39.3) (4.2)
Shareholders' equity in other Group companies 19.9 17.5
-------- -------- GBP354.6m GBP262.6m ======== ======== EEV per share 308.8p 258.7p
In contrast with the IFRS basis of reporting, the EEV basis recognises thediscounted value of the expected future cash flows, arising from the long-termbusiness contracts in force at the year end, as a component of shareholderequity. Accordingly, the EEV result recognises, within profit, the movement inthis component.
S&P was acquired on 20 December 2010. Accordingly, the results for S&P set out above are for an 11-day post-acquisition period.
CHAIRMAN'S STATEMENT
I am pleased to present the seventh annual financial statements of Chesnara plc('Chesnara'). With ongoing recovery in global investment markets and theacquisition of Save & Prosper Insurance Company Limited and its subsidiary Save& Prosper Pensions Limited (together 'S&P') in December, 2010 has seen furtherpositive developments in the current and future trading prospects and in thefinancial strength of the Group. With continuing economic uncertainty, itremains pleasing that our results continue to show a high degree of resilience,allowing us to maintain a reliable and progressive dividend policy and tocontinue our pursuit of further value-enhancing acquisitions.
Review of the Business
On 20 December 2010, Chesnara completed the acquisition of S&P, a closed UKlife assurance and pensions group, which currently manages a portfolio of some172,000 life assurance and pensions policies. It is complementary to ourcurrent UK run-off business and provides the opportunity to extract capital andoperational synergies through combining it with our existing UK operations. Inearly 2010, we also expanded our presence in the Swedish market when wecompleted the acquisition of the operations and certain assets of AspisF¶rs¤krings Liv AB ('Aspis'), a Swedish life risk and health insurer.Furthermore, in December 2010 we completed the acquisition of the in-forceclaims portfolio of Aspis and, therefore, we now service all former Aspispolicyholders. These acquisitions widen the scope of our activities in Swedenand underpin our ability to offer a fully-rounded proposition to the Swedishmarket.S&P was acquired for GBP63.5m, funded by a new debt facility of GBP40mrepayable over a 5-year term and by the issue and sale of 10,458,877 new sharesand the sale of 2,897,183 shares formerly held in treasury, which togetherraised gross proceeds of GBP26.7m. We were pleased with the support of ourexisting investors and welcome some new shareholders to our register. Theacquisition was made at a significant discount of 39% to the embedded value onthe acquisition date, which gave rise to an accretion to Group embedded valueof GBP40.7m. On the IFRS basis of reporting, we have recognised a profit ofGBP15.5m arising on acquisition. Furthermore, the acquisition enhances ourability to generate cash surpluses, which will extend the dividend payingcapacity of the Group.During the year, global investment market influences have also had a notableimpact on the Group's results, with the leading UK equity market indices, forexample, posting gains of between 9% and 11%, and the leading Swedish equitymarket indices gains of between 21% and 23%, over the whole of 2010. While thelow interest rate environment has continued to dampen returns on the Group'sshareholder funds, this has been more than offset by the favourable impact ofrising equity markets on the Group's embedded value. This leads to highercurrent and prospective deductions from, and fee income arising on, unit-linkedfunds under management, with the UK businesses' embedded value benefiting tothe extent of GBP6.5m pre-tax and the Swedish business's embedded valuebenefiting to the extent of GBP19.0m pre-tax.On the EEV basis of reporting, excluding the profit of GBP41.0m arising on theacquisition of S&P and Aspis and the beneficial effect of GBP13.2m arising frommodelling improvements in Movestic, we have made pre-tax profits of GBP22.8mfor the year ended 31 December 2010, compared with GBP24.0m for the year ended31 December 2009 (excluding profit of GBP54.2m arising on the acquisition ofMovestic). Apart from the impact of rising equity markets and the expectedreturn from the unwind of the discount rate; the UK businesses continued tobenefit from favourable persistency, mortality and morbidity experience.However, we remain cautious about the underlying persistency assumptions forthe UK businesses, while the prospects for the UK economy remain uncertain andpressure on household budgets increases due to tax and likely interest rateincreases. While Movestic's EEV was impacted by adverse persistency and expenseexperience, this was more than offset by favourable investment market effects,the unwind of the discount rate and assumed higher future levels of fee income,following successful re-negotiation of terms with fund managers. There was alsoa creditable contribution from new business in what proved to be a challengingmarket.On the IFRS basis, we have achieved a pre-tax profit of GBP34.2m for the yearended 31 December 2010. Excluding GBP15.9m profits arising on the acquisitionof S&P and Aspis, the resulting amount of GBP18.3m compares with a pre-taxprofit of GBP19.6m (similarly adjusted to exclude GBP25.1m arising on theacquisition of Movestic) for the year ended 31 December 2009. Besidesfavourable investment market effects of GBP5.0m, the pre-tax result of the UKbusinesses also benefited from GBP3.0m favourable mortality and morbidityexperience. Movestic posted a pre-tax loss of GBP3.7m, which compares with a5-month post-acquisition loss of GBP2.6m in the previous year and which isbroadly in line with expectations, albeit the result was adversely impacted byGBP1.3m losses arising in respect of the Swedish broking subsidiary, where ithas been decided to scale down operations. Movestic is expected to incurtrading losses for a further two to three years as the business continues tobuild scale and until profits from an increasing base of in-force investmentcontracts outweighs the front-end strain of writing new business.
Shareholder Value and Returns to Shareholders
Total shareholder equity on the EEV basis, pre appropriation of GBP12.2m forthe final 2010 dividend, is GBP354.6m (308.8p per share), compared withGBP262.6m (258.7p per share) as at 31 December 2009. This notable upliftreflects principally the positive impact of acquiring the S&P business at adiscount of 39% to its embedded value, together with a strong core tradingresult in both the UK and Swedish businesses, driven by the ongoing recovery inglobal investment markets. In addition, the weakening of sterling against theSwedish Krona, over the year, gave rise to a further GBP9.5m accretion inembedded value through the recognition of foreign exchange translation gains.
The capacity of the Group to pursue its dividend policy relies on the continuing emergence of surplus in the UK businesses and in the ability to distribute that surplus which, in turn, depends on the regulatory solvency position of the UK businesses. I am pleased to report that CA's solvency ratio, post proposed dividends, at 213% (197% as at 31 December 2009) remains in excess of the target of 150% set by CA's Board, while S&P's ratio was at a healthy 268% as at 31 December 2010.
The Group's dividend policy takes account of the competing need for funds forthe development of the Swedish business which, in turn, depends on theunderlying regulatory solvency ratio of Movestic. This was 188% at the end ofthe year (302% as at 31 December 2009) which is comfortably in excess of thetarget of 150% set by the Movestic Board. Movestic's solvency ratio declines asthe increasing scale of its business requires a higher level of regulatorycapital: as the ratio approaches 150%, further planned capital contributionswill be made by the Group. The combined Group post dividend solvency ratio was200% as at 31 December 2010, compared with 316% at 31 December 2009. The fallin the ratio, which remains considerably in excess of the regulatoryrequirement of at least 100%, reflects the anticipated dilutive effect of the S&P acquisition.Based on the strength of our results and of our capital solvency ratios, theBoard has decided to recommend a final dividend of 10.6p per share (2009 finaldividend: 10.3p per share), giving rise to total dividends of 16.4p per sharefor 2010, which represents a 2.8% increase over total dividends of 15.95p pershare for 2009. At the recent trading range of 240p and 260p per share, thisrepresents a yield to shareholders of between 6.3% and 6.8%.
Outlook
The acquisition of S&P has strengthened the long-term position of our UKbusiness. In addition to adding further value to shareholders through thediscounted purchase we have the opportunity to, and will progress the releaseof further value through combining S&P with our existing UK operations. Thepurchase of the operations and certain assets of Aspis has accelerated there-branding of our Swedish business. In November, the launch of the new brand -Movestic - was accompanied by a number of new, well-received product featuresand fund launches. We expect that the acquisition of S&P and the development ofour activities in Sweden will provide positive outcomes for shareholders andour teams are well-positioned to deliver these.We also continue to focus on the implications for our businesses of thepan-European Solvency II implementation which is now due to be effective from 1January 2013. Currently, other than the challenges of the implementation andnew operational processes, we do not foresee any major implications as regardscapital requirements although a note of caution has to be raised as the rulesare, as yet, not fully finalised.The fall-out from the credit crunch and the implications of Solvency II in 2013continue to give rise to a flow of possible acquisition opportunities. We willcontinue to be selective and will only pursue opportunities which demonstratethe capability of prolonging our ability to generate a dividend stream and/orof delivering a significant value uplift for shareholders.
We wish to welcome our new colleagues in S&P to the Group and thank all our UK and Swedish employees for their continuing dedication and commitment.
Peter MasonChairman30 March 2011 CHIEF EXECUTIVE'S STATEMENTDevelopments during 2010
The key development in 2010 was the acquisition of S&P, which we announced on26 November 2010 and which was completed on 20 December 2010 followingshareholder approval at a General Meeting on 16 December 2010. The purchaseprice of GBP63.5m, funded by a new bank facility of GBP40m and the proceeds ofa share placing and of the sale of treasury shares, together amounting toGBP26.7m, represented a significant 39% discount to S&P's Embedded Value onacquisition.Save & Prosper Insurance Limited and its subsidiary Save & Prosper PensionsLimited are UK-based providers of life assurance and pension products and thecompanies have been closed to new business for over 12 years. Theadministration of these businesses is outsourced and therefore it alreadyoperates in line with Chesnara's preferred model for its UK businesses. Thisacquisition builds the scale of our UK operations and offers, in addition tothe value added for shareholders arising from its purchase at a significantdiscount to its embedded value, further potential financial synergies as weseek to merge it into our current UK operations.In February 2010 we acquired the operational business of Aspis F¶rs¤krings LivAB('Aspis'), a Swedish-based life and health risk insurer. Aspis was to haveits operating licence revoked due to solvency concerns and we took theopportunity to acquire the in-force portfolio, personnel, intellectual propertyand systems of Aspis but not the liabilities for existing claims, although weagreed to undertake the administration of these claims on a commercial basisfor the Administrator of Aspis. Aspis, which has focussed on risk and healthinsurance, provides an extremely good fit with the existing Movestic businesswhich formerly focussed on pensions and savings. Movestic has utilised theattributes of Aspis to offer a full solution to corporate pension schemecustomers as well as separately marketing a strong range of risk products whereappropriate. Further synergies continue to be obtained through therationalisation of the capabilities of Movestic and Aspis. The rebranding ofthe merged entity which was launched in November together with new productfeatures and marketing initiatives has been very well received. Late in 2010 weannounced that we had acquired the aforementioned existing claims portfoliofrom the Administrator and, therefore, we now service all former Aspis clients.Businesses in both the UK and Sweden have performed well with positiveinvestment markets assisting, in conjunction with good underlying businessperformance, in providing strong returns for shareholders. IFRS pre-taxprofits, steady at GBP18.3m, compared with GBP19.6m last year (excluding thegains arising on business combinations in both years) and EV increasing by 35%over the year to GBP354.6m - a particularly pleasing outcome - provide strongtestament to this.The completion of another successful acquisition has not dulled our appetite tomake further value-adding purchases and we continue to review suitableopportunities in the UK and in Western Europe. In particular we believe thatthe implementation of the Solvency II regime in January 2013 will give rise tofurther acquisition opportunities.The availability of capital to support acquisitions has improved, asdemonstrated by our ability to raise funds to support the S&P acquisition.Should further financing for an attractive opportunity be required, we would,again, consider seeking funding from shareholders via the issue of furtherequity following their very strong support in the recent S&P transaction - ofwhich we remain appreciative.We look forward to investigating acquisition opportunities as they arise as wecontinue to believe that we can leverage further value from our existing andnewly-acquired capabilities.
Future trends and developments
In line with our continued primary aim of delivering an attractive long-termdividend yield, we remain focussed on the efficient management of ourbusinesses. The acquisition of S&P and its significant accretion to embeddedvalue are welcome and will add strength and longevity to our ability togenerate future dividend payments particularly after the synergies which weexpect to arise from merging it with our current UK business are realised. Thatsaid, support for dividends from the UK run-off businesses will still diminishover time, albeit from a higher base, as the book inevitably runs down.Therefore, we recognise that further acquisitions which have income generatingcapability remain necessary to provide dividend growth in the medium term.
The EU Solvency II Directive brings challenges both in terms of capital requirements and, not least, in terms of implementation. We believe we remain in relatively good shape and, at this time, we are not expecting any significant adverse capital effects to arise in any of our businesses (including S&P).
All our businesses remain exposed to macroeconomic and industry-relatedfactors. Provided that these areas do not adversely impact the prospects ofthe Group significantly, the short- to medium-term outlook is positive for theongoing emergence of surplus and, accordingly, for dividend support. FINANCIAL REVIEWBasis of AccountingThe Group reports in accordance with International Financial ReportingStandards (`IFRS'). IFRS essentially permits the `grandfathering' of theprinciples and bases used to measure profit arising on long-term insurancecontracts under previously-adopted UK and Swedish GAAP, where the contractscontain significant insurance risk. Profits on contracts where no significantinsurance risk subsists are measured using the principles of IAS 39 FinancialInstruments: Recognition and Measurement.The Group continues to provide financial information supplementary to the IFRSbasis. With effect from reporting periods commencing on 1 January 2006, theGroup adopted European Embedded Value (`EEV') principles as the basis forproviding this supplementary information. EEV methodology aims to measure theunderlying embedded value of the Group's life assurance, pensions and annuitybusinesses and provides a framework which is intended to improve thecomparability and transparency of embedded value reporting across Europe.During 2011 we will consider compliance with the European Insurance CFO ForumMarket Consistent Embedded Value (MCEV) Principles (copyright © Stichting
CFOForum Foundation 2008).IFRS Result
The IFRS result for the year ended 31 December 2010 comprises:
Year ended 31 December 2010 Year ended 31 December 2009 Pre-tax Tax Post-tax Pre-tax Tax Post-tax GBP000 GBP000 GBP000 GBP000 GBP000 GBP000Profit arising on business combinations Movestic - - - 25,056 - 25,056 Aspis 376 - 376 - - - S&P 15,488 - 15,488 - - - CA result 25,692 (4,740) 20,952 24,784 948 25,732 S&P result 224 (63) 161 - - - Movestic result (3,730) 176 (3,554) (2,626) (148) (2,774) Other group (3,882) 160 (3,722) (2,473) 392 (2,081)activities -------- -------- -------- -------- -------- -------- Total result 34,168 (4,467) 29,701 44,741 1,192 45,933 ======== ======== ======== ======== Non-controlling 118 7interest -------- --------Total result attributable to shareholders 29,819 45,940 ======== ========
The derivation of the profit arising on business combinations is set out in Note 3 following.
The CA result, which is net of an amortisation charge of GBP3.5m in respect ofthe acquired value of in-force business, continues to be dominated by thestrong emergence of surplus from its life and pensions contract portfolio,which is in run-off. Investment market recovery over the year led to netpre-tax gains of some GBP5m. Favourable mortality and morbidity experience wasGBP3m pre-tax, while the pre-tax result was also significantly enhanced by therelease of GBP3.2m in respect of amounts previously set aside to provide forpolicyholder claims. A thorough review determined that the business had nofurther liability in respect of these claims.The pre-tax loss of GBP3.7m attributable to Movestic is stated net of anamortisation charge of GBP1.2m in respect of the acquired value of in-forcebusiness and compares with a pre-tax loss of GBP2.6m in the five-monthpost-acquisition period in 2009. It is also stated net of a write down ofassets of GBP0.5m in respect of its IFA subsidiary, Akademiker, where it hasbeen decided to scale down the operations. Taking account of these items, thereis a core pre-tax trading loss of some GBP2.0m, which represents a slightimprovement over the core pre-tax loss of GBP2.6m reported at the half-yearposition. This largely reflects gradually improving confidence in investmentmarkets. Movestic, however, is expected to incur trading losses for a furthertwo years, as it continues to build scale and until realised profits from anincreasing base of in-force investment contracts outweigh the front-end strainof writing new business. It also faces the challenge of competition which hasled to transfers out of the business being higher than expected during theyear.
The S&P result is in respect of an 11-day post-acquisition period and is not considered to be significant in the context of the total Group result.
The result of other group activities, which principally relates to the operations of the parent company, includes GBP3.2m of expenses incurred in connection with the acquisition of S&P.
European Embedded Value (EEV) Result
Supplementary information prepared in accordance with EEV principles and setout later is presented to provide alternative information to that presentedunder IFRS. EEV principles assist in identifying the value being generated bythe UK and Swedish life and pensions businesses. The result determined underthis method represents principally the movement in the UK and Swedishbusinesses' embedded value, before transfers made to the parent company andignoring any capital movements. Through including the in-force value ofinsurance and investment contracts, EEV recognises the discounted profit streamexpected to arise from those contracts. The principal underlying components ofthe EEV result are the expected return from existing business, in both the UKand Swedish businesses, being the unwind of the rate used to discount therelated cash flows, and the value added by the writing of new business in theSwedish business. Adjustments are made to the result for variations in actualexperience from that assumed for each component of policy cash flows arising inthe period and for the impact of restating assumptions for each component ofthe prospective cash flows.
The movement in Group EEV may be summarised as:
Year ended 31 December 2010 2009 GBP000 GBP000 GBP000 GBP000 EEV at beginning of year 262,585 182,708 Effect of modelling 13,239 -improvements -------- -------- EEV at beginning of year restated 275,824 182,708 Profit arising on acquisition of Movestic - 54,187 Aspis 376 - S&P 40,667 - Result for the period UK businesses (CA and S&P) New business 685 1,482 Existing business 21,618 14,438 Tax (4,336) 11,893 -------- -------- Post-tax *17,967 27,813 Movestic New business 2,057 783 Existing business 4,492 6,437 Non-covered business (3,674) 1,623 Tax 177 (161) -------- -------- Post-tax 3,052 **8,682 Other group activities net
of tax (2,295) (417) Movement on
non-controlling interest 118 7 Foreign exchange reserve
movement 9,517 5,539 Dividends paid (16,340) (15,934) Share capital issued 22,588 - Disposal of Treasury 3,162 -shares -------- -------- EEV at end of year 354,636 262,585 -------- --------
* Comprises the results of CA and S&P, the latter being for the 11-day post-acquisition period and not considered to be significant in the context of the overall result for the UK businesses.
** The Movestic result for the year ended 31 December 2009 is in respect of the 5-month post-acquisition period.
EEV at end of the year is stated before recognition of the final proposed dividend of GBP12.2m in respect of the year ended 31 December 2010 (year ended 31 December 2009: GBP10.5m).
The significant foreign exchange reserve movement for the year ended 31 December 2010 arises from the impact of the 9% appreciation of the Swedish Krona against sterling over the year on the translation of the Krona-denominated Movestic embedded value,
The profit of GBP40.7m arising on the acquisition of S&P is the excess of theembedded value of S&P at the acquisition date over the purchase considerationof GBP63.5m. This represents a discount of 39% to S&P's embedded value at theacquisition date.The effect of modelling improvements, as shown in the table above, which is inthe nature of an exceptional profit, arises from the fact that, during 2010,Movestic introduced a new system for modelling the value of its in-forcepolicies. This provided a capability for (i) more accurately modelling theimpact on commission paid on policies becoming paid-up and for (ii) determiningfuture fee income on a case-by-case investment mix basis, whereas previously ithad been necessary to adopt high-level estimates.The dominant feature underpinning the results of both the UK and Swedishbusinesses over the year has been the recovery in investment markets, withleading UK equity indices posting gains of 9-11% over the year and leadingSwedish equity indices 21-23%. These gains were particularly strong in thesecond half of the year following a dull first half. Yields on fixed interestsecurities and swap rates drifted down over the year, but recovered towards theend of the year, the recovery in Swedish market rates being earlier andstronger than in the UK.
Within the UK businesses favourable investment market effects gave rise to pre-tax gains over the year of some GBP6.5m (GBP5.2m net of tax) arising principally from higher deductions from unit-linked funds, which have increased in value. Other significant factors underlying the UK businesses' pre-tax result of GBP22.3m are:
(i) unwind of the discount rate on existing business of GBP5.2m (GBP4.2m net
of tax);
(ii) a new business contribution of GBP0.7m (GBP0.6m net of tax);
(iii) continuing favourable mortality and morbidity experience of GBP1.1m
(GBP0.9m net of tax); and
(iv) continuing favourable persistency experience of GBP6m (GBP4.8m net of tax).
In addition, the UK businesses' result was further enhanced by GBP3.2m (GBP2.6mnet of tax) in respect of the release to income of certain claims liabilities,as explained within 'IFRS Result' above.
Within Movestic favourable investment market effects gave rise to gains over the year of GBP19m (all amounts stated in respect of Movestic are pre- and post-tax, the effective rate of Swedish company tax not being significant).
This outcome was enhanced by:
(i) GBP6.2m unwind of the discount rate on existing business;
(ii) a GBP2.1m new business contribution;
(iii) a favourable effect of GBP2.2m arising from the change in investment
mix within underlying investor funds; and
(iv) a favourable effect of GBP6m arising from higher projected levels
of fee income, following negotiation of enhanced terms from investment
fund managers.
On the adverse side the result was impacted by:
(i) unfavourable persistency experience of GBP6.5m, giving rise to an additional adverse impact of GBP11.3m in respect of assumed future persistency rates; and(ii) an expense overrun of GBP2m, giving rise to an additional adverse impact of GBP8.8m in respect of assumed future expense levels.The Movestic non-covered business, which relates principally to its Risk andHealth business and to its IFA subsidiary, Akademiker, has posted a combinednet loss due to:
(i) the impact of losses incurred in the IFA broking subsidiary, together
with a write down of related net assets, following the decision to
scale down the operation;
(ii) a re-allocation of expenses from the covered Pensions and Savings
business to the Risk and Health business, following a detailed
expenses review, based on activity analysis; and
(iii) higher reinsurance financing costs.
Shareholders' Equity and Embedded Value of Covered Business - EEV Basis
The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 Value of in-force business 79,360 41,307 144,748 - 265,415 Other net 70,348 22,673 (24,111) 20,311 89,221 assets -------- -------- -------- -------- -------- 149,708 63,980 120,637 20,311 354,636 ======== ======== ======== ======== ======== Represented by: Embedded value ('EV') of regulated entities 149,708 103,267 121,069 - 374,044 Less: amount - (39,287) - - (39,287)financed by borrowings -------- -------- -------- -------- -------- EV of regulated entities attributable to shareholders 149,708 63,980 121,069 - 334,757 Net equity of - - (432) 20,311 19,879 other Group companies ------- -------- -------- -------- -------- Shareholders' 149,708 63,980 120,637 20,311 354,636 equity ======== ======== ======== ======== ======== 31 December 2009 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of 85,559 - 112,753 - 198,312 in-force business Other net 68,098 - (22,323) 18,498 64,273 assets -------- -------- -------- -------- -------- 153,657 - 90,430 18,498 262,585 ======== ======== ======== ======== ======== Represented by: Embedded 157,854 - 91,478 - 249,332 value ('EV') of regulated entities Less: amount (4,197) - - - (4,197) financed by borrowings -------- -------- -------- -------- -------- EV of 153,657 - 91,478 - 245,135 regulated entities attributable to shareholdersNet equity of - - (1,048) 18,498 17,450 other Group companies -------- -------- -------- -------- -------- Shareholders' 153,657 - 90,430 18,498 262,585 equity ======== ======== ======== ======== ========
The tables below set out the components of the value of in-force business by major product line at each period end:
31 December 2010 31 December 2009 CA S&P Movestic Total CA S&P Movestic TotalNumber of policies 000 000 000 000 000 000 000 000 Endowment 50 8 15 73 55 - 15 70 Protection 52 6 - 58 58 - - 58 Annuities 5 1 - 6 5 - - 5 Pensions 48 143 75 266 51 - 70 121 Other 7 14 - 21 7 - - 7 -------- -------- -------- -------- ------- ------- -------- -------- Total 162 172 90 424 176 - 85 261 -------- -------- -------- -------- ------- ------- -------- -------- 31 December 2010 31 December 2009 CA S&P Movestic Total CA S&P Movestic TotalValue of in-force GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Endowment 34.1 8.3 14.0 56.4 40.2 - 15.2 55.4 Protection 49.1 2.6 - 51.7 48.1 - - 48.1 Annuities 0.5 1.5 - 2.0 3.9 - - 3.9 Pensions 31.1 68.1 131.0 230.2 36.2 - 98.6 134.8 Other 1.7 0.7 - 2.4 0.7 - - 0.7 -------- -------- -------- -------- ------- ------- ------- -------- Total at product level 116.5 81.2 145.0 342.7 129.1 - 113.8 242.9 Valuation adjustments Holding company expenses (8.6) - - (8.6) (9.8) - - (9.8) Other (23.4) (22.0) - (45.4) (26.5) - - (26.5)Cost of capital/ (1.0) (3.7) (0.3) (5.0) (0.8) (1.0) (1.8)frictional costs -------- -------- -------- -------- ------- ------- ------- -------- Value in-force pre-tax 83.5 55.5 144.7 283.7 92.0 - 112.8 204.8 Taxation (4.1) (14.2) - (18.3) (6.4) - - (6.4) -------- -------- -------- ------- ------- ------- -------- -------- Value 79.4 41.3 144.7 265.4 85.6 - 112.8 198.4in-force post-tax
======== ======== ======== ======== ======= ======= ======== ========
The value-in-force represents the discounted value of the future surplusesarising from the insurance and investment contracts in force at each respectiveperiod end. The future surpluses are calculated by using realistic assumptionsfor each component of the cash flow.'Other' valuation adjustments in CA principally comprise expenses of managingpolicies which are not attributed at product level. In S&P they represent theestimated cost of guarantees to with-profits policyholders.
Returns to Shareholders
The Board's primary aim is to continue to provide a reliable and progressivedividend flow to shareholders within the context of the emergence of surplus inthe UK life businesses. Returns to shareholders are underpinned by theemergence of surpluses in, and transfer of surpluses from, the UK lifebusinesses' long-term insurance funds to shareholder funds and by the return onshareholder net assets representing shareholder net equity. These realisationsare utilised in the first instance for the repayment and servicing of the bankloan on the basis set out in Note 6 following. The surpluses arise from therealisation of in-force value of the UK businesses, which are in run-off. Thereturn on shareholder net assets is determined by the Group's investmentpolicy. Shareholder funds bear central corporate governance costs which cannotbe fairly attributed to the long-term insurance funds and which arise largelyin connection with Chesnara's obligations as a listed company.The acquisition of Movestic in July 2009 had a twofold impact on the prospectfor shareholder returns. First, as the business was acquired at a significantdiscount of 73% to its embedded value, there was an immediate accretion ofGBP54.2m to shareholder net equity as measured on the European Embedded Valuebasis. Secondly, in contrast to the UK businesses, which are in run-off,Movestic is open to new business and offers a growth element to totalshareholder return. Movestic is expected to become cash generative and,therefore, to have the ability to support the Group's dividend capacity withintwo to three years.The acquisition of S&P in December 2010, besides giving rise to an immediateaccretion of GBP40.7m to shareholder net equity as measured on the EEV basis,following from the fact that it was acquired at a discount of 39% to itsembedded value, reinforces the Group's core proposition of realising surplusesfrom life businesses in run off. Besides extending the time profile over whichChesnara realises such surpluses, S&P offers diversification within the overallGroup portfolios, insofar as it includes a significant tranche of with-profitspolicies and also affords the opportunity to realise synergies by way oftransfer of its long-term business funds under the provisions of Part VII ofthe Financial Services and Markets Act 2000.Between mid November 2009 and early March 2010, the share price strengthenedconsiderably, generally trading in a range of between 185p and 210p per share.This implied a yield, based on total 2009 proposed dividends, of between 7.6%and 8.6%, with the shares trading at a discount of between 19% and 28% toembedded value of GBP262.6m, as reported at 31 December 2009. The improvementfollowed our interim management statement issued on 19 November 2009, which setout the full extent of the accretive impact of the acquisition of Movestic,while also pointing to an improvement in the fundamentals underpinning the UKbusinesses.Between early March 2010 and the end of November 2010 the share price averagedsome 220p per share. During that period it generally traded within a range of200p to 250p per share and was subject to sharp fluctuations within the range,generally reflecting wider market conditions.Since the announcement of the acquisition of S&P on 20 December 2010 up tomid-March 2011, the share price has steadily strengthened so that it is nowconsistently trading within a range of 240p to 260p per share. Based on totalproposed dividends for 2010 of 16.4p per share, this implies a yield of between6.3% and 6.8%, with the shares trading at a discount of between 13% to 19% tothe latest published embedded value of GBP354.6m at 31 December 2010.
It is also worthy of note that, during 2010, our share price performance has consistently outperformed the Life sector as a whole.
Solvency and Regulatory Capital
Regulatory Capital Resources and Requirements
The regulatory capital of both the UK and Swedish businesses is calculated byreference to regulations established and amended from time to time by the FSAin the UK and by Finansinspektionen in Sweden. The rules are designed to ensurethat companies have sufficient assets to meet their liabilities in specifiedadverse circumstances. As such, there is, in the UK, a restriction on the fulltransfer of surpluses from the long-term business funds to shareholder funds ofCA and S&P, and on the full distribution of reserves from CA and S&P toChesnara and, in Sweden, on distributions from shareholder funds.Within the UK, the regulations include minimum standards for assessing thevalue of liabilities, including making an appropriate allowance for defaultrisk on corporate bonds held to match liabilities when assessing the valuationdiscount rates used for valuing these liabilities. Market turmoil in 2008 ledto significant widening of spreads on corporate bonds above gilts, throughchanged assessment of default risk and liquidity issues, and therefore, withthe widening spreads, this issue was of concern to the industry. CA continuesto maintain a prudent approach of limiting the assumed liquidity premium forcorporate bonds to a maximum of 50bps as at 31 December 2010 (31 December 2009:50bps). For S&P, where the with-profits funds have a diverse range of assets,the assumed liquidity premium for corporate bonds is limited to 200bps.Additionally, the CA Board continues to maintain their stance that permissivechanges to regulations introduced in 2006, in FSA policy statement PS06/14,that would allow a reduction in liabilities are not appropriate for CA at thistime.The following summarises the capital resources and requirements of CA for UKregulatory purposes, after making provision for dividend payments from CA toChesnara, which were approved after the respective period ends: 31 December 2010 2009 GBPm GBPmAvailable capital resources ('CR') 44.1 43.6 -------- -------- Long-term insurance capital requirement ('LTICR') 19.1
19.8
Resilience capital requirement ('RCR') 1.6 2.3 -------- -------- Total capital resources requirement ('CRR') 20.7 22.1 -------- -------- Target capital requirement cover 30.2 32.0 -------- -------- Ratio of available CR to CRR 213% 197% -------- -------- Excess of CR over target requirement GBP13.9m GBP11.6m -------- --------
The CA Board, as a matter of policy, continues to target CR cover for total CRRat a minimum level of 150% of the LTICR and 100% of the RCR. To the extent thatthe target capital requirement cover of GBP30.2m as at 31 December 2010 fallsshort of the GBP40m share capital component of CR, so it follows that GBP9.8mof the reported excess of CR over target requirement is not available fordistribution to shareholders except by way of a capital reduction.
It can be seen from this information that Chesnara, which relies on dividend distributions from CA, is currently in a favourable position to service its loan commitments and to continue to pursue a progressive dividend policy.
The following summarises the capital resources and requirements of S&P for UKregulatory purposes. The Boards of the S&P companies have availed themselves ofcertain of the provisions of PS06/14 which has led to a reduction in certainliabilities. 31 December 2010 2009 GBPm GBPm Available capital resources ('CR') 69.7 74.4 -------- -------- Long-term insurance capital requirement ('LTICR') 24.3
22.9
Resilience capital requirement ('RCR') 1.7 4.1 -------- -------- Total capital resources requirement ('CRR') 26.0 27.0 -------- -------- Ratio of available CR to CRR 268% 276% -------- -------- Excess of CR over target requirement GBP43.7m GBP47.4m -------- -------- The information as at 31 December 2009 relates to the pre-acquisition periodand is provided for illustrative purposes: it is presented after makingadjustment for dividends totalling GBP91m, which were paid to S&P's previousshareholder prior to the acquisition date.The Boards of the S&P companies have not established formal targets for CRcover for total CRR. It is not intended to make dividend distributions from S&Pto Chesnara prior to transfer of the long-term insurance funds of S&P to CA:this process is planned to be completed towards the end of 2011.Movestic, in contrast to the UK businesses, and being open to new business, is,in the short to medium term, a net consumer of capital. The ratio of capitalresources to capital resource requirements is a key indicator of the capitalhealth of the business as it expands and provides the context in which furthercapital contributions are made by the parent company to finance that expansionin a predictable and orderly manner.The following summarises the capital resources and requirements of Movestic forSwedish regulatory purposes: 31 December 2010 2009 GBPm GBPm Available capital resources (CR) represented by: - Share capital 1.2 1.1 - Additional equity contributions 35.2 33.6 - Accumulated deficit (13.1) (10.2) -------- -------- 23.3 24.5 -------- --------
Regulatory capital resource requirement (CRR) 12.4 8.1
-------- -------- Target requirement 18.6 12.1 -------- -------- Ratio of CR to CRR 188% 302% -------- -------- Excess of CR over target requirements GBP4.7m GBP12.4m -------- -------- The Movestic Board sets a minimum target of 150% of the regulatory capitalrequirement. Swedish solvency regulation requires that a certain proportion ofassets, to be fully admissible, is to be held in the form of cash. Theoperation of this requirement may, from time to time, act as the operativeconstraint in determining the level of additional funding requirements, therebycausing the solvency ratio to rise above what it would otherwise have been, hadthe form of assets matching capital resources not been a constraint. Movestic'ssolvency ratio declines as the increasing scale of its business requires ahigher level of regulatory capital: as the ratio approaches 150%, furtherplanned capital contributions will be made by the Group.
Insurance Groups Directive
In accordance with the EU Insurance Groups Directive, the Group calculates theexcess of the aggregate of regulatory capital employed over the aggregateminimum solvency requirement imposed by local regulators for all of theconstituent members of the Group, all of which are based in Europe. Thefollowing sets out these calculations after the recognition of final dividendsfor the respective financial year, but approved by the Board and paid to Groupshareholders after the respective dates: 31 December 2010 2009 GBPm GBPm
Available group capital resources 121.2 99.7
Group regulatory capital (60.6) (31.6)requirement -------- -------- Excess 60.6 68.1 -------- -------- Cover 200% 316% -------- -------- The fall in the ratio, which remains considerably in excess of the regulatoryrequirement of at least 100%, reflects the anticipated dilutive effect of the S&P acquisition.
Individual Capital Assessments
The FSA Prudential Sourcebooks require UK insurance companies to make their ownassessment of their capital needs to a required standard (a 99.5% probabilityof being able to meet liabilities to policyholders after one year). In thelight of scrutiny of this assessment, the FSA may impose its own additionalindividual capital guidance. The Individual Capital Assessment (ICA) is basedon a realistic liability assessment, rather than on the statutory mathematicalreserves, and involves stress testing the resultant realistic balance sheet forthe impact of adverse events, including such market effects as significantfalls in equity values, interest rate increases and decreases, bond defaultsand further widening of bond spreads.CA completed a further full annual assessment during 2010 as a result of whichit was concluded that the effective current and medium-term capital requirementconstraints on distributions to Chesnara will continue to be on the basis setout under `Regulatory capital resources and requirements' above. Thisassessment is subject to quarterly high-level updates until the next fullannual assessment.
S&P plans to complete a full annual ICA, based on the position as at 31 December 2010, during May 2011: it is not expected that this will lead to a requirement to hold regulatory capital higher than that set out under 'Regulatory Resources and Requirements' above.
We are currently developing Movestic's ability to produce similar assessments,so that the determination of risk-based capital is more clearly aligned with UKbest practice. In the meantime, Movestic, in accordance with local regulatoryrequirements, continues to make quarterly assessments of the risk-based capitalrequirements of its business: these indicate that capital resources currentlyprovide a comfortable margin over capital resource requirements.
International Reporting Developments
Over the year, we have continued to monitor developments in the EU Solvency IIframework which will impact the UK and Swedish businesses. We have establisheda Steering Group to oversee our implementation of the regulations, which aredue to become effective on 1 January 2013. Besides ensuring that there arerobust processes for the calculation of technical reserves and solvencycapital, the implementation will embrace wide-ranging changes in riskmanagement processes on a Group-wide basis. In the meantime, we have continuedinternal quantitative analysis and are currently formulating a detailedimplementation plan.During 2010 the IASB issued an Exposure Draft relating to Insurance Contractsto which we responded. We will continue to monitor progress on this significantIFRS development.In June 2008, the European Insurance CFO Forum (`CFO Forum') issued theEuropean Insurance CFO Forum Market Consistent Embedded Value (`MCEV')Principles. These principles, with which we had intended to comply with effectfrom 2009, represent a development of the existing European Embedded Value(`EEV') principles issued by the same Forum, which form the current basis ofpreparation of our Supplementary Information - European Embedded Value Basis asset out in Note 1 to the Supplementary Information. However, on 22 May 2009,the CFO Forum announced that the mandatory MCEV reporting date forall its member firms would be deferred until 2011, in light of developmentsarising from the recent financial crisis. We will consider compliance withthese principles during 2011.
Capital Structure, Treasury Policy and Liquidity
The Group's UK operations are ordinarily financed through retained earnings andthrough the current emergence of surplus in the UK life businesses. Movestic isfinanced by a combination of financial reinsurance arrangements and capitalcontributions from Chesnara. With respect to acquisitions the Group seeks tofinance these through a suitable mix of debt and equity, within the constraintsimposed by the operation of regulatory rules over the level of debt financewhich may be borne by Insurance Groups. The acquisition of S&P in December 2010for GBP63.5m was accomplished by way of debt:equity financing broadly in aratio of 2:1. This has introduced a modest level of gearing to the structure ofGroup financing.The Board continues to have a conservative approach to the investment ofshareholders' funds in the UK life businesses, which underpins our strongsolvency position. For the UK businesses, where the greater part ofshareholders' funds subsist, this approach targets the investment of 100% ofavailable funds in cash and fixed interest securities. In the light of recentvolatility in financial markets, particular attention is given to the mix andspread of these investments to ensure that we are not unduly exposed toparticular sectors and that our counterparty limits are strictly adhered to.Cash available for more than twelve months in the UK is normally transferred tofund managers for longer-term investment.
Current economic conditions heighten the risk of corporate bond default and observations on this are made in the 'Going Concern' section below.
The profile and mix of investment asset holdings between fixed interest stocks and cash on deposit in the UK is such that realisations to support dividend distributions can be made in an orderly and efficient way.
Other factors which may place a demand on capital resources in the futureinclude the costs of unavoidable large scale systems development such as thosewhich may be involved with changing regulatory requirements. To the extent thatongoing administration of the UK life businesses is performed within the termsof its third party outsourcing agreements, the Group is sheltered, to a degree,from these development costs as they are likely to be on a shared basis.
Cash Flows
The Group's longer-term cash flow cycle continues to be characterised by thestrong inflow to shareholders' funds of transfers from the long-term insurancefund of CA, which is supported by the emergence of surplus within that fund.These flows are used (i) to repay our debt obligations as set out in Note 6following; (ii) to support dividend distributions to shareholders; and (iii) tosupport the medium-term requirements of Movestic to meet regulatory solvencycapital requirements as it expands.
Going Concern
The Group's cash flow position described above, together with the return onfinancial assets in the parent company, supports the ability to trade in theshort-term. Accordingly, the underlying solvency position of the UK lifebusinesses and their ongoing ability to generate surpluses which support cashtransfers to shareholders' funds is critical to the ongoing ability of theGroup to continue trading and to meet its obligations as they fall due.The information set out in `Solvency and Regulatory Capital' above indicates astrong solvency position as at 31 December 2010 as measured at both theindividual regulated life company levels in both the UK and Sweden and at theGroup level. In addition, in respect of CA, a Financial Condition Report and adetailed annual Individual Capital Assessment have been prepared, as also setout above. These include assessments of the ability of the business towithstand key events, including increased rates of policy lapse, expenseoverruns and unfavourable investment market conditions. The assessmentsindicate that CA is able to withstand the impact of these adverse scenarios,including the effect of continuing significant investment market falls, whilethe business's outsourcing arrangements protect it from significant expenseoverruns. As also indicated above, the current assessment of the risk-basedcapital requirements of Movestic indicates a comfortable excess of capitalresources over those requirements.Notwithstanding that the Group is well capitalised, the current financial andeconomic environment continues to present specific threats to its short-termcash flow position and it is appropriate to assess other relevant factors. Inthe first instance, the Group does not rely on the renewal or extension of bankfacilities to continue trading - indeed, as indicated, its normal operationsare cash generative. The Group does, however, rely on cash flow from thematurity or sale of fixed interest securities which match its obligations toits Guaranteed Bond policyholders: in the current economic environment thereremains a continuing higher risk of bond default, particularly in respect offinancial institutions. In order to manage this risk we ensure that our bondportfolio is actively monitored and well diversified. However, this risk hascontinued to abate through 2010 as our underlying bond obligations topolicyholders continued to mature. Other significant counterparty default riskrelates to our principal reassurer Guardian Assurance plc (`Guardian'). Wemonitor Guardian's financial position and are satisfied that any associatedcredit default risk is low.Our expectation is that, notwithstanding the risks set out above, the Groupwill continue to generate surplus in its UK long-term businesses sufficient tomeet its debt obligations as they fall due, to continue to pursue a reliableand progressive dividend policy and to meet the medium-term financingrequirements of Movestic, which is expected to become cash-generative withintwo to three years. Consolidated Statement of Comprehensive Income for the year ended 31 December2010 Year ended 31 December 2010 2009 Note GBP000 GBP000 Insurance premium revenue 114,950 100,105 Insurance premium ceded to reinsurers (35,695) (24,997) -------- -------- Net insurance premium revenue 79,255 75,108 Fee and commission income 63,410 51,120 Net investment return 303,850 326,680 -------- --------
Total revenue (net of reinsurance payable) 446,515 452,908
Other operating income 9,216 4,689 -------- -------- Total income 455,731 457,597 -------- --------
Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (139,424)
(129,557)
Net increase in insurance contract provisions (106,618) (127,840)
Reinsurers' share of claims and benefits 45,635 47,897
-------- -------- Net insurance contract claims and benefits (200,407) (209,500) -------- -------- Change in investment contract liabilities (180,021)
(199,748)
Reinsurers' share of investment contract 3,904 4,710
liabilities -------- -------- Net change in investment contract liabilities (176,117) (195,038) -------- --------
Fees, commission and other acquisition costs (14,688) (5,167)
Administrative expenses (29,375) (18,245) Other operating expenses (16,157) (9,336) -------- -------- Total expenses (436,744) (437,286) -------- -------- Total income less expenses 18,987 20,311
Share of profit from associates 597 39 Profit recognised on business combinations 3 15,864 25,056
-------- -------- Operating profit 35,448 45,406 Financing costs (1,280) (665) -------- --------
Profit before income taxes 34,168 44,741 Income tax (expense)/credit 5 (4,467) 1,192
-------- -------- Profit for the year 29,701 45,933 -------- -------- Attributable to: Shareholders 4 29,819 45,940 Non-controlling interest (118) (7) -------- -------- 29,701 45,933
Foreign exchange translation differences arising on the revaluation of foreign operations 4,285 3,381
-------- --------
Total comprehensive income for the year 33,986 49,314
======== ======== Attributable to: Shareholders 34,104 49,321 Non-controlling interest (118) (7) -------- -------- 33,986 49,314 ======== ========
Basic earnings per share (based on profit for the year attributable to shareholders) 10 29.05p 45.26p ======== ========
Diluted earnings per share (based on profit for the year attributable to shareholders) 10 29.05p 45.26p ======== ========
Consolidated Balance Sheet at 31 December 2010
31 December 2010 2009 Note GBP000 GBP000 Assets Intangible assets Deferred acquisition costs 14,659 9,327
Acquired value of in-force business 93,046 86,463 Acquired value of customer relationships 3,032 2,682
Software assets 6,829 4,060 Property and equipment 671 491 Investment in associates 1,783 1,051 Investment properties 120,820 3,355
Reinsurers' share of insurance contract provisions 280,743 236,866 Amounts deposited with reinsurers 30,264 27,056 Financial assets Equity securities at fair value through income 492,321 454,970 Holdings in collective investment schemes at fair value through income 3,177,265 1,612,861 Debt securities at fair value through income 319,516 247,836 Policyholders' funds held by the Group 52,337 41,107 Insurance and other receivables 33,225 19,822
Prepayments 3,908 3,784
Derivative financial instruments 9,707 7,964
-------- -------- Total financial assets 4,088,279 2,388,344 -------- --------
Reinsurers' share of accrued policyholder claims 3,678 4,728
Income taxes 5,486 395 Cash and cash equivalents 194,134 155,241 Assets held for sale 380 - -------- -------- Total assets 4,843,804 2,920,059 -------- -------- Liabilities Liabilities held for sale 380 - Bank overdrafts 2,154 2,312 Insurance contract provisions 2,404,079 1,077,033 Unallocated divisible surplus 83 - Financial liabilities Investment contracts at fair value through income 2,002,712 1,529,221 Liabilities relating to policyholders' funds
held by the Group 52,337 41,107 Borrowings 6 62,694 28,996
Derivative financial instruments 137 54
-------- -------- Total financial liabilities 2,117,880 1,599,378 -------- -------- Provisions 1,822 1,452 Deferred tax liabilities 20,526 10,366 Reinsurance payables 22,310 15,039
Payables related to direct insurance and
investment contracts 35,808 30,433 Deferred income 11,647 13,132 Income taxes 6,923 1,313 Other payables 16,923 9,833 -------- -------- Total liabilities 4,640,535 2,760,291 -------- -------- Net assets 4 203,269 159,768 ======== ======== Shareholders' equity Share capital 7 42,024 41,501 Share premium 42,523 20,458 Treasury shares 8 (217) (3,379) Other reserves 7,716 3,431 Retained earnings 9 111,223 97,744 -------- -------- Total shareholders' equity 203,269 159,755 Non-controlling interest - 13 -------- -------- Total equity 203,269 159,768 ======== ========
Consolidated Statement of Cash Flows for the year ended 31 December 2010
Year ended 31 December 2010 2009 GBP000 GBP000 Profit for the year 29,819 45,940 Adjustments for:
Depreciation of tangible fixed assets 294 65
Amortisation of deferred acquisition costs 5,737 2,080 Amortisation of acquired value of in-force
business 8,148 6,953 Amortisation of acquired value of customer relationships 1,182 188 Amortisation of internally-developed software 1,176 414
Tax expense/(recovery) 4,467 (1,192) Interest receivable (16,913) (17,959) Dividends receivable (31,090) (24,048) Interest expense 1,280 665
Change in fair value of investment properties (113) 77 Fair value gains on financial assets (252,456)
(284,739)
Loss on sale of property and equipment 2 21 Profit arising on business combinations (15,864)
(25,056)
Share of profit of associate net of impairment (597) 122
Interest received 16,370 20,893 Dividends received 30,792 23,304
Increase in intangible assets related to insurance and investment contracts (10,343)
(3,157)
Changes in operating assets and liabilities
Increase in financial assets (78,785) (58,028)
Increase in reinsurers share of insurance contract provisions (31,471)
(27,211)
Increase in amounts deposited with reinsurers (3,208)
(4,875)
Decrease/(increase) in insurance and other receivables 1,305
(4,671)
Decrease/(increase) in prepayments 80
(1,293)
Increase in assets held for sale (380) - Increase in liabilities held for sale 380 - Increase in insurance contract provisions 121,382 120,648 Increase in investment contract liabilities 270,801 219,609 Increase/(decrease) in provisions 370
(2,229)
Increase in reinsurance payables 5,677 3,629 (Decrease)/increase in payables related to direct insurance and investment contracts (6,050) 3,604
Decrease in other payables (422) (970) -------- -------- Cash utilised by operations 51,570 (7,216) Income tax paid (4,537) (2,371) -------- --------
Net cash generated from/(utilised by) operating
activities 47,033 (9,587) ======== ========
Cash flows from investing activities Business combinations net of cash acquired (46,483) (5,944) Investment in associates (38) (334) Development of software (2,541) (918) Purchases of property and equipment (296) (180) -------- -------- Net cash utilised by investing activities (49,358) (7,376) ======== ========
Cash flows from financing activities Proceeds from the issue of share capital, net of
expenses 22,588 - Sale of treasury shares 3,162 - Proceeds from borrowings 40,000 - Repayment of borrowings (7,236) (5,759) Dividends paid (16,340) (15,934) Interest paid (2,365) (821) -------- --------
Net cash generated from/(utilised by) financing
activities 39,809 (22,514) ======== ========
Net increase/(decrease) in cash and cash equivalents 37,484 (39,477)
Cash and cash equivalents at beginning of the year 152,929 191,287 Effect of exchange rate changes on cash and cash
equivalents 1,567 1,119 -------- --------
Cash and cash equivalents at end of the year 191,980 152,929
======== ========
Consolidated Statement of Changes in Equity for the year ended 31 December 2010
Year ended 31 December 2010 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2010 41,501 20,458 3,431 (3,379) 97,744 159,755 Profit for the period representing total recognised income and expenses - - - - 29,819 29,819 Dividends paid - - - - (16,340) (16,340) Issue of new shares 523 22,065 - - - 22,588 Sale of treasury shares - - - 3,162 - 3,162 Foreign exchange - - 4,285 - - 4,285 translation reserve -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 31 December 42,024 42,523 7,716 (217) 111,223 203,269 2010 ======== ======== ======== ======== ======== ======== Year ended 31 December 2009 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Purchase of treasury shares - - - - - - Profit for the year attributable to shareholders - - - - 45,940 45,940 Dividends paid - - - - (15,934) (15,934) Foreign exchange - - 3,381 - - 3,381 translation reserve -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 31 December 41,501 20,458 3,431 (3,379) 97,744 159,755 2009 ======== ======== ======== ======== ======== ======== NOTES
1 Significant accounting policies
In the information which follows distinction is made, where necessary, in respect of the applicability of certain policies, or as to their clarification:
(i) as between the UK businesses and the Swedish business, which comprises the
Movestic segment, and
(ii) as between the CA and S&P segments of the UK businesses.
(a) Statement of compliance
The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2010, which are prepared in accordance with International Financial Reporting Standards (`IFRSs') as adopted by the European Union (`Adopted IFRSs') as adopted by the EU.
The Group has applied, for the first time, Improvements to IFRSs 2009, and those elements of Improvements to IFRSs 2010 effective for accounting periods beginning on or after January 1 2010. Their application has not led to any changes in Group accounting policies.
At the date of authorisation of these financial statements, the followingStandards, which are applicable to the Group and which have not been applied inthese financial statements, were in issue, but were not yet effective, and insome cases had not yet been adopted by the EU:
- IFRS9 Financial Instruments
- IAS24 (revised) Related Party Disclosures
The Directors anticipate that the application of these Standards in future periods will have no material impact on the financial statements of the Group.
(b) Basis of consolidation
The consolidated financial statements incorporate the financial statements ofthe Company and of entities controlled by the Company (its subsidiaries), madeup to 31 December each year. Control is achieved where the Company has thepower to govern the financial and operating policies of an investee entity soas to obtain benefits from its activities. The Parent Company financialstatements present information about the Company as a separate entity and notabout its group.Non-controlling interests in the net assets of consolidated subsidiaries areidentified separately from the Group's equity therein. Non-controllinginterests consist of the amount of those interests at the date of the originalbusiness combination and the non-controlling interest's share of changes inequity since the date of the combination.Profit or loss and each component of other comprehensive income are attributedto the Company and to the non-controlling interests. Total comprehensive incomeis attributed to the Company shareholders and to the non-controlling interestseven if this results in the non-controlling interests having a deficit balance. The results of subsidiaries acquired or disposed of during the year areincluded in the consolidated statement of comprehensive income from theeffective date of acquisition or up to the effective date of disposal. Wherenecessary, adjustments are made to the financial statements of subsidiaries tobring the accounting policies used into line with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
(c) Basis of preparation
The Consolidated financial statements have been prepared on a going concernbasis. The Directors believe that they have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. In making this assessment, the Directors have taken intoconsideration the points as set out in the Financial Review in the sectionheaded `Going Concern'.The financial statements are presented in pounds sterling, rounded to thenearest thousand and are prepared on the historical cost basis except that thefollowing assets and liabilities are stated at their fair value: derivativefinancial instruments, financial instruments at fair value through income,assets and liabilities held for sale, unallocated divisible surplus, investmentproperty and investment contract liabilities at fair value through income.Assets and liabilities are presented on a current and non-current basis in thenotes to the financial statements. If assets are expected to be recovered andliabilities expected to be settled within a year, they are classified ascurrent. If they are expected to be recovered or settled in more than one year,they are classified as non-current.The preparation of financial statements in conformity with IFRSs requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the year in which theestimate is revised if the revision affects only that year, or in the year ofthe revision and future years if the revision affects both current and futureyears
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements.
(d) Business combinations
The Group uses the purchase method of accounting to account for the acquisitionof subsidiaries. The cost of an acquisition is measured as the fair value ofthe assets given, equity instruments issued and liabilities incurred or assumedat the date of exchange. Expenses directly attributable to the acquisition areexpensed as incurred. The acquiree's identifiable assets, liabilities, andcontingent liabilities, which meet the conditions for recognition under IFRS 3are measured initially at their fair values at the acquisition date. Gainsarising on a bargain purchase, where the net fair value of the identifiableassets, liabilities and contingent liabilities of the acquiree exceeds the costof acquisition, is recognised in profit or loss at the acquisition date.
The non-controlling interest in the acquiree is initially measured at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.
(e) Investments in associates
An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. Significantinfluence is the power to participate in the financial and operating policydecisions of the investee, but is not control or joint control over thosepolicies.
The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments.
Where a Group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the associate.Losses may provide evidence of an impairment of assets transferred, in whichcase appropriate provision is made for impairment.
(f) Foreign currencies
The individual financial statements of each Group company are presented in thecurrency of the primary economic environment in which it operates, being itsfunctional currency. For the purpose of these consolidated financialstatements, the results and financial position of each Group company areexpressed in pounds sterling, which is the functional currency of the ParentCompany and the presentation currency of the consolidated financial statements.In preparing the financial statements of the individual companies, transactionsin currencies other than the entity's functional currency, being foreigncurrencies, are recorded at the rates of exchange prevailing on the dates ofthe transactions. At each balance sheet date, monetary assets and liabilitieswhich are denominated in foreign currencies are retranslated at the ratesprevailing on the balance sheet date. Non-monetary items carried at fair value,which are denominated in foreign currencies are translated at the ratesprevailing when the fair value was determined. Non-monetary items, which aremeasured in terms of historical cost in a foreign currency, are notretranslated. Exchange differences are recognised in profit or loss in theperiod in which they arise, except when they relate to items for which gainsand losses are recognised in equity.For the purpose of presenting consolidated financial statements, the assets andliabilities of the Group's foreign operations are translated at exchange ratesprevailing on the balance sheet date. Income and expense items are translatedat the average exchange rates for the period, unless exchange rates fluctuatesignificantly during the period, in which case the exchange rates at the datesof transactions are used. Exchange differences arising are classified as equityand are recognised in the Group's foreign currency translation reserve. Suchtranslation differences are recognised as income or as expense in the period inwhich the operation is disposed of.
Transactions relating to business combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date.
(g) Product classification
The Group's products are classified at inception as either insurance orinvestment contracts for accounting purposes. Insurance contracts are contractswhich transfer significant insurance risk and remain as insurance contractsuntil all rights and obligations are extinguished or expire. They may alsotransfer financial risk. Investment contracts are contracts which carryfinancial risk, with no significant insurance risk. Where contracts containboth insurance and investment components and the investment components can bemeasured reliably, the contracts are unbundled and the components areseparately accounted for as insurance contracts and investment contractsrespectively.
In some insurance contracts and investment contracts the financial risk is borne by the policyholders. Such contracts are usually unit-linked contracts.
With-profits contracts, which subsist only within the UK businesses, all contain a discretionary participation feature (''DPF'') which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses, which may be a significant portion of the total contractual benefits.
In respect of S&P the amount and timing of such contractual benefits are at thediscretion of the Group and are contractually based on realised and/orunrealised investment returns on a specified pool of assets held by the Group.The terms and conditions of these contracts, together with UK regulations, setout the bases for the determination of the amounts on which the additionaldiscretionary benefits are based and within which the Group may exercise itsdiscretion as to the quantum and timing of their payment to contract holders.In respect of CA all such contracts are wholly reinsured with GuardianAssurance plc ('Guardian'), a subsidiary of Aegon NV, and the amount or timingof the additional payments are contractually at the discretion of the reinsurerand are contractually based on:(i) the performance of a specified pool of contracts or a specified type of contract;(ii) realised and/or unrealised investment returns on a specified pool of assets held by the reinsurer; or(iii) the profit or loss of the reinsurer.
All contracts with discretionary participation features are classified as insurance contracts.
(h) Insurance contractsThere are fundamental differences between the nature of the insurance contractssubsisting in the UK and Swedish businesses, including inter alia contractlongevity. As a consequence, the alignment of income and expense recognitionwith the underlying assumption of risk leads to the adoption of separateaccounting policies appropriate to each business, as follows:
UK Businesses
(i) Premiums
Premiums are accounted for when due, or in the case of unit-linked insurancecontracts, when the liability is recognised, and exclude any taxes or dutiesbased on premiums. Outward reinsurance premiums are accounted for when due.
(ii) Claims and benefits
Claims are accounted for in the accounting period in which they are due ornotified. Surrenders are accounted for in the accounting period in which theyare paid. Claims include policyholder bonuses allocated in anticipation of abonus declaration. Reinsurance recoveries are accounted for in the same periodas the related claim.(iii) Acquisition costsAcquisition costs comprise all direct and indirect costs arising from theconclusion of insurance contracts. They are initial fees amortised at a ratebased on the pattern of anticipated margins in respect of the related policies.An explicit deferred acquisition cost asset is established in the balance sheetto the extent that acquisition costs exceed initial fees deducted. At 31December each year, such costs that are deferred to future years are reviewedto ensure they do not exceed available future margins.
Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred.
(iv) Measurement of insurance contract provisions
Insurance contract provisions are measured using accounting policies having regard to the principles laid down in Council Directive 2002/83/EC.
Insurance contract provisions are determined following an annual actuarial investigation of the long-term funds and are calculated initially on a statutory solvency basis in order to comply with the reporting requirements of the Prudential Sourcebook for Insurers. This valuation is then adjusted to remove certain contingency and other reserves. In accordance with this, the provisions are calculated on the basis of current information, using the specific valuation methods set out below.
Unit-linked provisions are measured by reference to the value of the underlyingnet asset value of the Group's unitised investment funds, determined on a bidvalue basis, at the balance sheet date. Deferred tax on unrealised capitalgains on the underlying investments in the unitised funds is also reflected inthe measurement of unit-linked provisions and is not discounted.For immediate annuities in payment the provision is calculated as thediscounted value of the expected future annuity payments under the policies,allowing for mortality, including projected improvements in future mortality,interest rates and expenses. For certain temporary annuities in payment noallowance for mortality has been made.
In respect of S&P, for those classes of non-linked business with a discretionary participation feature, a gross premium method has been used to value the liability, whereby expected income and costs have been projected, allowing for mortality, interest rates and expenses.
For the other classes of non-linked business the provision is calculated on anet premium basis, being the level of premium consistent with a premium stream,the discounted value of which, at the outset of the policy, would be sufficientto cover exactly the discounted value of the original guaranteed benefits atmaturity, or at death if earlier, on the valuation basis. The provision is thencalculated by subtracting the present value of future net premiums from thepresent value of the benefits guaranteed at maturity, or death if earlier, as aresult of events up to the balance sheet date. Negative provisions do not ariseunder the net premium method, which makes no allowances for voluntarydiscontinuances by policyholders, and which only implicitly allows for futurepolicy maintenance costs.
In respect of CA for those classes of non-linked and unit-linked business where policyholders participate in profits the liability is wholly reassured to Guardian. The liability is calculated on a net premium basis, but is then increased to the realistic liability as a result of the liability adequacy test.
Insurance contract provisions are tested for adequacy by discounting currentestimates of all contractual cash flows and comparing this amount to thecarrying value of the provision and any related assets: this is known as theliability adequacy test. Where a shortfall is identified, an additionalprovision is made and the Group recognises the deficiency in income for theyear.
Insurance contract provisions can never be definitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis.
Swedish Business - Life(i) Premiums
Premiums are accounted for when received, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due.
(ii) Claims and benefits
Claims are accounted for in the accounting period in which they are due or notified. Reinsurance recoveries are accounted for in the same period as the related claim.
(iii) Acquisition costsAcquisition costs comprise expenditure incurred arising from the completion ofinsurance contracts. They are initial fees amortised at a rate based on thepattern of anticipated margins in respect of the related policies. An explicitdeferred acquisition cost asset is established in the balance sheet to theextent that acquisition costs exceed initial fees deducted. At the end of eachyear, such costs that are deferred to future years are reviewed to ensure theydo not exceed available future margins.
Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred.
(iv) Measurement of insurance contract provisions
Provision is made at the year-end for the estimated cost of claims incurred butnot settled at the balance sheet date, including the cost of claims incurredbut not yet reported. The estimated cost of claims includes expenses to beincurred in settling claims. Outstanding claim provisions are not discountedother than for income protection and waiver of premium benefits, where paymentsmay be made for a considerable period of time.
All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established.
Insurance contract provisions are tested for adequacy by discounting currentestimates of all contractual cash flows and comparing this amount to thecarrying value of the provision and any related assets: this is known as theliability adequacy test. Where a shortfall is identified, an additionalprovision is made and the deficiency in income for the year is recognised.
Swedish Business - Non-life
(i) Premiums
Written premiums for non-life (general) insurance business comprise the premiums on contracts incepting in the financial year. Written premiums are stated gross of commission payable to intermediaries and exclusive of taxes and duties paid on premiums.
Unearned premiums are those proportions of the premium which relate to periods of risk after the balance sheet date. Unearned premiums are calculated on a straight-line basis according to the duration of the policy underwritten.
(ii) Acquisition costs
Acquisition costs, which represent commission payable, incurred in writing written premiums, are deferred and amortised over the period in which the related premiums are earned.
(iii) ClaimsClaims incurred
Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions for claims incurred but not yet reported and related expenses, together with any adjustments to claims from previous years.
Outstanding claims provisions
Provision is made at the year-end for the estimated cost of claims incurred butnot settled at the balance sheet date, including the cost of claims incurredbut not yet reported. The estimated cost of claims includes expenses to beincurred in settling claims. Outstanding claims provisions are not discounted.Provisions are calculated gross of any reinsurance recoveries.
All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established.
(i) Investment contracts
(i) Amounts collected
Amounts collected on investment contracts, which primarily involve the transferof financial risk such as long-term savings contracts, are accounted for usingdeposit accounting, under which the amounts collected, less any initial feesdeducted, are credited directly to the balance sheet as an adjustment to theliability to the investor.
(ii) Amounts deposited with reinsurers
Amounts deposited with reinsurers under reinsurance arrangements, whichprimarily involve the transfer of financial risk, are entered directly to thebalance sheet as amounts deposited with reinsurers. These assets are designatedon initial recognition as at fair value through income.
(iii) Benefits
For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid.
(iv) Acquisition costs
Acquisition costs relating to investment contracts comprise directlyattributable incremental acquisition costs, which vary with, and are relatedto, securing new contracts, and are recognised as an asset to the extent thatthey represent the contractual right to benefit from the provision ofinvestment management services. The asset is presented as a deferredacquisition cost asset and is amortised over the expected term of the contract,as the fees relating to the provision of the services are recognised. All othercosts are recognised as expenses when incurred.
(v) Liabilities
All investment contract liabilities are designated on initial recognition asheld at fair value through income. The Group has designated investment contractliabilities at fair value through income as this more closely reflects thebasis on which the businesses are managed.The financial liability in respect of unit-linked contracts is measured byreference to the value of the underlying net asset value of the unitisedinvestment funds, determined on a bid value, at the balance sheet date. For theUK businesses, deferred tax on unrealised capital gains and for the Swedishbusiness a yield tax in respect of an estimate of the investment return on theunderlying investments in the unitised funds are also reflected in themeasurement of the respective unit-linked liabilities.In respect of the UK businesses guaranteed income and guaranteed growth bondliabilities and other investment contract liabilities are managed together withrelated investment assets on a fair value basis as part of the documented riskmanagement strategy.
The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts.
(j) Unallocated divisible surplus
The unallocated divisible surplus represents the excess of policyholder assetsover policyholder liabilities in respect of the S&P with-profits funds. Aspermitted under IFRS 4, the Group has opted to continue to record anunallocated surplus of such with-profits funds wholly as a liability. Theannual excess or shortfall of income over expenditure of the with-profitsfunds, after declaration and attribution of the cost of bonuses topolicyholders is transferred to or from the unallocated divisible surplus eachyear through a charge or credit to the income statement. The balance retainedin the unallocated divisible surplus represents cumulative income arising onthe with-profits business that has not been allocated to policyholders orshareholders. The balance of the unallocated divisible surplus is determinedafter full provision for deferred tax on unrealised appreciation oninvestments. In the event of the estimated liability attributable topolicyholders exceeding available funds, the balance is transferred toshareholder funds.
(k) Reinsurance
The Group cedes reinsurance in the normal course of business for the purpose ofavoiding the retention of undue concentration of risk on any one life,policyholder or loss event (for example multiple losses under a Group Lifecontract). Assets, liabilities and income and expense arising from cededreinsurance contracts are presented separately from the related assets,liabilities, income and expenses from the related insurance contracts becausethe reinsurance arrangements do not relieve the Group from its directobligations to its policyholders.Only rights under contracts that give rise to a significant transfer ofinsurance risk are accounted for as reinsurance assets, which comprise amountsdue from insurance companies for paid and unpaid losses and ceded life policybenefits. Rights under contracts that do not transfer significant insurancerisk are accounted for as financial instruments and are presented as amountsdeposited with reinsurers.The net premiums payable to a reinsurer may be more or less than thereinsurance assets recognised by the Group in respect of the reinsurance coverpurchased. Any gain or loss is recognised in the income statement in the periodin which the reinsurance premiums are payable.Rights under reinsurance contracts comprising the reinsurers' share ofinsurance contract provisions and accrued policyholder claims are estimated ina manner that is consistent with the measurement of the provisions held inrespect of the related insurance contracts and in accordance with the terms ofthe reinsurance contract. Such assets are deemed impaired if there is objectiveevidence, as a result of an event that occurred after its initial recognition,that the Group may not recover all amounts due and the event has a reliablymeasurable impact on the amounts that the Group will receive from thereinsurer. Impairment losses reduce the carrying value of the relatedreinsurance assets to their recoverable amount and are recognised as an expensein the income statement.The Group enters into certain financing arrangements, which are established inthe form of a reinsurance contract, but which are substantively in the form ofa financial instrument. Such arrangements are classified and presented asborrowings within financial liabilities.
(l) Fee and commission income
Fees charged for investment management services provided in connection withinvestment contracts are recognised as revenue as the services are provided.Initial fees which exceed the level of recurring fees and relate to the futureprovision of services are deferred and amortised over the anticipated period inwhich services will be provided.
Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned.
For both insurance and investment contracts, initial fees, annual managementcharges and contract administration charges are recognised as revenue on anaccruals basis. Surrender charges are recognised as a reduction to policyholderclaims and benefits incurred when the surrender benefits are paid.
Benefit-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity benefits are recognised as revenue on an accruals basis.
For insurance and investment contracts, commissions received or receivablewhich do not require the Group to render further services are recognised asrevenue by the Group on the effective commencement or renewal dates of therelated contract. However, when it is probable that the Group will be requiredto render further services during the life of the contract, the commission, orpart thereof, is deferred and recognised as revenue over the period in whichservices are rendered.(m) Investment income
Investment income comprises income from financial assets and rental income from investment properties.
Income from financial assets comprises dividend and interest income, net fairvalue gains and losses (both unrealised and realised) in respect of financialassets classified as fair value through income, and realised gains on financialassets classified as loans and receivables.Dividends are accrued on an ex-dividend basis. Interest received and receivablein respect of interest- bearing financial assets classified as at fair valuethrough income is included in net fair value gains and losses. For loans andreceivables and cash and cash equivalents interest income is calculated usingthe effective interest method.Rental income from investment properties under operating leases is recognisedin the income statement on a straight-line basis over the term of each lease.Lease incentives are recognised in the income statement as an integral part
ofthe total lease income.(n) Expenses
(i) Operating lease payments
Leases where a significant proportion of the risks and rewards of ownership isretained by the lessor are classified as operating leases. Payments made underoperating leases are recognised in the income statement on a straight-linebasis over the term of the lease. Lease incentives received are recognised inthe income statement as an integral part of the total lease expense.
(ii) Financing costs
Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the effective interest rate method.
(o) Income taxes
Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the income statement. Tax that relates directly to transactions reflected within equity is also presented within equity.
(i) Current tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
(ii) Deferred tax
Deferred tax is provided using the balance sheet liability method, providingfor temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxationpurposes. The amount of deferred tax provided is based on the expected mannerof realisation or settlement of the carrying amount of assets and liabilities,using tax rates enacted or substantively enacted at the balance sheet date.A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised.
(iii) Policyholders' fund yield tax
Certain of the Group's policyholders within the Swedish business are subject toa Swedish yield tax which is calculated based on an estimate of the investmentreturn on underlying investments within their unitised funds. The Group isunder an obligation to deduct the yield tax from the policyholders' unitisedfunds and to remit these deductions to the tax authorities. The deduction frompolicyholders' unitised funds is presented as management fee income with anequal charge reflected in the current tax charge.
(p) Acquired value of in-force business
Acquired in-force insurance and investment contracts arising from business combinations are measured at fair value at the time of acquisition.
The difference between the fair value of insurance contracts and the liabilitymeasured in accordance with the Group's accounting policies for the contractsis recorded as acquired present value of in-force business. Present value ofin-force business is carried gross of tax and is amortised against income on atime profile which, it is intended, will broadly match the profile of theunderlying emergence of surplus as anticipated at the time of acquisition. Thepresent value of in-force insurance contracts is tested for recoverability/impairment as part of the liability adequacy test.The present value of in-force investment contracts is stated at cost lessaccumulated amortisation and impairment losses. The initial cost is deemed tobe the fair value of the contractual customer relationships acquired. Theacquired present value of the in-force investment contracts is carried gross oftax and is amortised against income on a time profile which, it is intended,will broadly match the profile of the underlying emergence of profit from thecontracts. The recoverable amount is estimated at each balance sheet date. Ifthe recoverable amount is less than the carrying amount, an impairment loss isrecognised in the income statement and the carrying amount is reduced to itsrecoverable amount.
(q) Acquired value of customer relationships
The acquired value of customer relationships arising from business combinationsis measured at fair value at the time of acquisition. This comprises thediscounted cash flows relating to new insurance and investment contracts whichare expected to arise from existing customer relationships. These are carriedgross of tax, are amortised in accordance with the expected emergence of profitfrom the new contracts and are tested periodically for recoverability.
(r) Software assets
An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met:
(i) an asset is created that can be identified;
(ii) it is probable that the asset created will generate future economic
benefits; and
(iii) the development costs of the asset can be measured reliably.
Where no internally-generated intangible asset can be recognised, developmentexpenditure is recognised as an expense in the period in which it is incurred.Software assets, including internally developed software, are amortised on astraight-line basis over their estimated useful life, which typically variesbetween 3 and 5 years.
(s) Property and equipment
Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of the property and equipment on the following basis:
Computers and similar equipment 3 yearsFixtures and other equipment 5 years
Assets held under finance leases are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the relevant lease.
(t) Investment propertyInvestment properties are properties which are held either to earn rentalincome or for capital appreciation or for both. On initial recognitioninvestment properties are measured at cost including attributable transactioncosts, and are subsequently measured at fair value. Independent externalvaluers, having an appropriate recognised professional qualification and recentexperience in the location and category of property being valued, value theportfolio every twelve months.
The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (m).
(u) Financial assets
Financial assets are classified into different categories depending on the typeof asset and the purpose for which it is acquired. Currently two differentcategories of financial assets are used: `financial assets at fair valuethrough income' and `loans and receivables'. Financial assets classified as atfair value through income comprise financial assets designated as such oninitial recognition and derivative financial instruments.All financial assets held for investment purposes other than derivativefinancial instruments are designated as at fair value through income on initialrecognition since they are managed, and their performance is evaluated, on afair value basis in accordance with documented investment and risk managementstrategies. This designation is also applied to the Group's investmentcontracts, since the investment contract liabilities are managed together withthe investment assets on a fair value basis as part of the documented riskmanagement strategy.
Purchases and sales of `regular way' financial assets are recognised on the trade date, which is when the Group commits to purchase, or sell, the assets.
All financial assets are initially measured at fair value plus, in the case offinancial assets not classified as at fair value through income, transactioncosts that are directly attributable to their acquisition.
Subsequent to initial recognition, financial assets classified as at fair value through income are measured at their fair value without any deduction for transaction costs that may be incurred on their disposal.
The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date.
Financial assets classified as loans and receivables are stated at amortisedcost less impairment losses. A provision for the impairment of loans andreceivables is established when there is objective evidence that the Group willnot be able to collect all the amounts due according to the original contractterms after the date of the initial recognition of the asset and when theimpact on the estimated cash flows of the financial asset can be reliablymeasured.
Financial assets classified as prepayments are held at cost and are amortised over the relevant time period.
Financial assets at fair value through income are regularly reviewed for objective evidence of impairment. In determining whether objective evidence exists, the Group considers, among other factors, the financial stability of the counterparty, current market conditions and fair value volatility.
Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred together with substantially all the risks and rewards of ownership.
(v) Derivative financial instruments
Derivative financial instruments are recognised at fair value. The gain or losson re-measurement to fair value is recognised immediately in profit or loss.Hedge accounting has not been applied.The fair value of interest rate swaps is the estimated amount that the Groupwould receive or pay to terminate the swap at the balance sheet date, takinginto account current interest rates and the current creditworthiness of theswap counterparties. The fair value of forward exchange contracts is theirquoted market price at the balance sheet date, being the present value of thequoted forward price.
The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
Embedded derivatives which are not closely related to their host contracts andwhich meet the definition of a derivative are separated and fair valued throughincome.
(w) Policyholders' funds held by the group and liabilities relating to policyholders' funds held by the group
Policyholders' funds held by the Group and liabilities relating to policyholders' funds held by the Group are recognised at fair value.
Policyholders' funds held by the Group
The policyholders' funds held by the Group represent the assets associated withan Investment product in the Swedish business, where the assets are held onbehalf of the policyholder and where all the risks and rewards associated withthe assets are the policyholders' not the Group's.The policyholders' funds held by the Group are held for investment purposes onbehalf of the policyholders and are designated as at fair value through income.The fair values of the policyholders' funds held by the Group are theaccumulation of the bid prices of the underlying assets at the balance sheetdate. Transactions in these financial assets are recognised on the trade date,which is when the Group commits (on behalf of the policyholder) to purchase, orsell the assets.
Liabilities relating to policyholders' funds held by the Group
The liability relating to policyholders' funds held by the Group represents theliability that matches the asset policyholders' funds held by the Group. Asstated previously, the risk and rewards associated with the investment product(and its underlying assets and matching liability) lie with the policyholders,not the Group.
(x) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as having a short maturity of three months or less at their acquisition.
(y) Assets held for sale and liabilities held for sale
Assets and liabilities are classified as held for sale if their carrying amountis to be recovered principally through a sale transaction that is highly likelyto complete within one year from the date of classification, rather thanthrough continuing use. Such assets are measured at the lower of carryingamount and fair value and are classified separately from other assets in thebalance sheet. Assets and liabilities are not netted. In the period where anon-current asset or disposal group is recognised for the first time, thebalance sheet for the comparative prior period is not restated.
(z) Impairment
The carrying amounts of the Group's assets other than reinsurance assets (referto (k) above) and assets which are carried at fair value are reviewed at eachbalance sheet date to determine whether there is any indication of impairment.If any such indication exists, the assets' recoverable amount is estimated inorder to determine the extent of the impairment loss, if any. An impairmentloss is recognised whenever the carrying amount of an asset exceeds itsrecoverable amount and impairment losses are recognised in the incomestatement. The recoverable amount is the higher of fair value less costs tosell and value in use. In assessing value in use, the estimated future cashflows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money.Impairment losses are reversed through the income statement if there is achange in the estimates used to determine the recoverable amount. Such lossesare reversed only to the extent that the assets' carrying amount does notexceed the carrying amount that would have been determined, net of depreciationor amortisation where applicable, if no impairment loss had been recognised.
(aa) Provisions
Provisions are recognised when the Group has a present, legal or constructiveobligation as a result of past events such that it is probable that an outflowof economic benefits will be required to settle the obligation and a reliableestimate of the amount of the obligation can be made. Where the effect of thetime value of money is material, the amount of the provision is the presentvalue of the expenditures expected to be required to settle the obligation. TheGroup recognises provisions for onerous contracts when the expected benefits tobe derived from a contract are less than the unavoidable costs of meeting theobligations under the contract.
(bb) Borrowings
Borrowings are recognised initially at fair value, less transaction costs, andare subsequently measured at amortised cost using the effective interestmethod, with interest expense recognised in the income statement on aneffective yield basis. The effective interest method is a method of calculatingthe amortised cost of a financial liability and of allocating interest expenseover the relevant period. The effective interest rate is the rate that exactlydiscounts future cash payments through the expected life of the financialliability.(cc) Employee benefits(i) Pension obligationsUK BusinessesGroup companies operate defined contribution pension schemes, which are fundedthrough payments to insurance companies, to which Group companies pay fixedcontributions. There are no legal or constructive obligations on Groupcompanies to pay further contributions if the fund does not hold sufficientassets to pay employee benefits relating to service in current and priorperiods. Accordingly, Group companies have no further payment obligations oncethe contributions have been paid. Contributions to defined contribution pensionschemes are recognised in the income statement when due.
Swedish Business
The Group participates in a combined defined benefit and defined contributionscheme for the benefit of its employees. However, the scheme is amulti-employer scheme, with the associated assets and liabilities maintained ona pooled basis. There is limited information available to the Group to allow itto account for the scheme as a defined benefit scheme and, in accordance withIAS19 Employee Benefits, it is, therefore, accounted for as a definedcontribution scheme. Contributions paid to the scheme are recognised in theincome statement when due.
(ii) Bonus plans
The Group recognises a liability and an expense for bonuses based on a formulathat takes into consideration the profit attributable to the Company'sshareholders after certain adjustments. The expense is recognised in the incomestatement on an accruals basis.
(dd) Share capital and shares held in treasury
(i) Share capital
Shares are classified as equity when there is no obligation to transfer cash orother assets. Incremental costs directly attributable to the issue of equityinstruments are shown in equity as a deduction from the proceeds, net of tax.Incremental costs directly attributable to the issue of equity instruments, asconsideration for the acquisition of a business, are included in the cost ofacquisition.
(ii) Shares held in treasury
Where the Company purchases its own equity share capital, the considerationpaid, including directly attributable costs, is deducted from totalshareholders' equity and shown separately as `treasury shares' until they arecancelled. Where such shares are subsequently sold, any consideration receivedis credited to the share premium account.
(ee) Dividends
Dividend distributions to the Company's shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by the Company's shareholders at the annual general meeting.
(ff) Other payables and payables related to direct insurance and investment contracts
Insurance and investment contract payables and other payables are recognisedwhen due and are measured on initial recognition at the fair value of theconsideration paid. Subsequent to initial recognition, payables are measured atamortised cost using the effective interest rate method.
2 Status of financial information
The financial information contained in this preliminary announcement does notconstitute the Company's consolidated statutory financial statements for theyears ended 31 December 2009 or 2010 but is derived from those financialstatements. The financial statements for the year ended 31 December 2010 willbe delivered following the Company's Annual General Meeting. The auditors havereported on those financial statements; their reports were unqualified and didnot contain statements under section 498(2) or (3) of the Companies Act 2006. 3 Business combinations
Profit recognised on business combinations arises on acquisition of:
Year ended 31 December 2010 2009 GBP000 GBP000 Save & Prosper Insurance Limited 15,488 - Aspis F¶rs¤kringar Liv AB 376 - Movestic Livf¶rs¤kring AB - 25,056 -------- -------- 15,864 25,056 ======== ========
Acquisition of Save & Prosper Insurance Limited
On 20 December 2010, Chesnara plc acquired the entire issued share capital (100%) of Save & Prosper Insurance Limited ("S&P") from JPMorgan Asset Management Marketing Limited for a total consideration of GBP63,524,000, paid in cash.
Save & Prosper Insurance Limited is a UK-based insurance and investment Group underwriting primarily life assurance risks and providing a portfolio of contracts for the saving and retirement needs of customers through asset management, and is effectively closed to new business.
In life assurance companies there is a requirement for businesses to hold alevel of regulatory capital, whilst the cash flows relating to the policy bookgenerate a profit stream. The inability of a company acquiring a closed booklife assurance business to freely distribute the net assets supporting theregulatory capital leads to a value being placed on the business, as a whole,lower than the fair value of the net assets acquired. This was taken intoaccount, during negotiations, by Chesnara in determining a suitableconsideration, which was less than the previously-reported value of the netassets of S & P. Subsequent to acceptance of the purchase offer price, butbefore completion, investment valuation movements have resulted in significantchanges in the valuation of insurance liabilities and related assets which haveincreased the value of the net assets acquired of S & P at the completion dateof 20 December 2010. The key sensitivities relating to the determination of theinsurance liabilities, considered within the completion balance sheet and keyfactors considered in determining the value of the acquired in-force businessare disclosed in the full financial statements for the year ended 31 December2010.
The acquisition of this shareholding has given rise to a profit on acquisition of GBP15,488,000 calculated as follows:
The estimated book and fair values of the assets and Provisional liabilities at the date of fair value acquisition were: Book value adjustments Fair valueAssets GBP000 GBP000 GBP000Intangible assets: Value of in-force contracts - 9,093 9,093Investment properties 117,925 - 117,925Reinsurers' share of insurancecontract provisions 7,692 -
7,692
Amounts deposited with reinsurers - -
-Total financial assets 1,261,883 - 1,261,883Reinsurers' share of accruedpolicyholder claims 256 - 256Income taxes 4,943 - 4,943Cash and cash equivalents 15,217 - 15,217 -------- -------- --------Total assets 1,407,916 9,093 1,417,009 -------- -------- --------LiabilitiesBank overdraft 29 - 29Insurance contract provisions 1,197,067 - 1,197,067Investment contracts 108,862 - 108,862Unallocated divisible surplus 83 - 83Deferred tax liabilities 9,777 2,455 12,232Reinsurance payables 23 - 23Payables related to directinsurance and investment contracts 10,919 - 10,919Income taxes 3,217 - 3,217Other payables 5,565 - 5,565 -------- -------- --------Total liabilities 1,335,542 2,455 1,337,997 -------- -------- --------Net assets 72,374 6,638 79,012 -------- -------- --------Net assets acquired(100%) 79,012Total consideration (63,524) --------Profit arising on acquisition of subsidiary 15,488 ========The assets and liabilities as at the acquisition date in the table above arestated at their provisional fair values and may be amended for 12 months afterthe date of acquisition in accordance with paragraph 62 of IFRS 3, BusinessCombinations.
Within the net assets acquired are receivable balances totalling GBP12.9m, which are held at fair value: an impairment review conducted as part of the fair value and accounting policy adjustment process has been completed.
The costs in respect of the transaction which have been written off in the Consolidated Statement of Comprehensive Income are GBP3,169,000 and are included in Administration Expenses.
The results of S&P have been included in the consolidated financial statementsof the Group with effect from 20 December 2010, and have contributed revenue ofGBP17.4m over this period, whilst contributing GBP0.2m profit to the overallconsolidated profit before tax.
Had S&P been consolidated from 1 January 2010 the consolidated statement of comprehensive income would have included revenue of GBP177.7m, and would have contributed GBP11.7m loss to the overall consolidated profit before tax.
Acquisition of business relating to Aspis F¶rs¤kringar Liv AB
On 19 February 2010, Chesnara plc's Swedish subsidiary, Movestic Livf¶rs¤kringLiv AB (`Movestic'), entered into an agreement with the Swedish RegulatoryAuthority, Finansinspektionen ('FI') to take over the operational managementand certain of the assets and liabilities of Aspis F¶rs¤kringar Liv AB(`Aspis') for a total consideration of SEK 20.75m (GBP1.8m), paid in cash.Movestic has acquired the in force business, the personnel, expertise andsystems of Aspis and will also manage, but not be responsible for, the paymentof in-force claims that had occurred up to 12 November 2009. Movestic hadpreviously, under the terms of an asset transfer agreement entered into on 10December 2009, acquired the right to offer renewal policies to Aspispolicyholders from 12 November 2009. Movestic acquired the net assets of the business at less than their fair value,because it was in a position, at short notice, to provide the regulatorycapital required by the Swedish regulator to back the policyholder liabilitiesacquired, the previous owner having defaulted on this obligation.
The acquisition of this business has given rise to a profit on acquisition of GBP376,278 calculated as follows:
The estimated book and fair values of the assets and liabilities at Provisional the date of Book fair value Fairacquisition were: value adjustments value Assets GBP000 GBP000 GBP000Intangible assets Value of in-force insurance contracts - 235 235Software assets - 927 927Value of customer relationships - 1,306 1,306Deferred acquisition costs 235 (235) -Property and equipment 154 - 154Cash and cash equivalents 3,651 - 3,651 -------- -------- --------Total assets 4,040 2,233 6,273 -------- -------- --------LiabilitiesInsurance contract provisions 3,911 - 3,911Other payables 154 - 154 -------- -------- --------Total liabilities 4,065 - 4,065 -------- -------- --------Net assets (25) 2,233 2,208 -------- -------- --------Net assets acquired 2,208 Total consideration (1,832) --------Profit arising on acquisition of business 376 ========The assets and liabilities as at the acquisition date in the table above arestated at their provisional fair values and may be amended for 12 months afterthe date of acquisition in accordance with paragraph 62 of IFRS 3, BusinessCombinations.
The costs in respect of the transaction which have been written off in the Consolidated Statement of Comprehensive Income are GBP64,279 and are included in Administration expenses.
The results of Aspis have been included in the consolidated financialstatements of the Group with effect from 19 February 2010, and have contributedrevenue of GBP7.5m over this period, whilst contributing GBP1.2m loss to theoverall consolidated profit before tax.Had Aspis been consolidated from 1 January 2010 the consolidated statement ofcomprehensive income would have included revenue of GBP7.9m, and the resultswould have contributed GBP1.3m loss to the overall consolidated profit beforetax.
Acquisition of Movestic Livf¶rs¤kring AB
On 23 July 2009, Chesnara plc acquired the entire issued share capital (100%)of Movestic Livf¶rs¤kring AB ('Movestic') from Moderna Finance AB for a totalconsideration of SEK 250m (GBP19,956,000), paid in cash.Movestic is a Stockholm-based insurance and investment company whichspecialises in corporate and personal pension arrangements and life assurancepolicies. Primarily it aggregates client funds into a range of investmentproviders and provides policy wrappers. It sells principally through theindependent financial adviser channel and has, approximately, a 5.7% per centmarket share of the Swedish unit-linked pension market. It was established in2000, with its unit-linked business being launched in 2002.
The book value and fair values of the assets and liabilities at the date of acquisition were disclosed in the financial statements for the year ended 31 December 2009, together with the profit arising on acquisition.
Chesnara considers that the primary factor that gave rise to the significantprofit arising on acquisition was the desire of Movestic's parent group todivest itself rapidly of Movestic, combined with Chesnara's ability to completethe transaction within a short period of time for a cash consideration. Priorto its acquisition by Chesnara, Movestic was a 100% subsidiary of ModernaFinance AB (MFAB), which in turn was owned by Glitnir Bank in Iceland. Thisbank was adversely affected by the Icelandic banking crisis and wasnationalised by the Government of Iceland in October 2008. MFAB had recentlysold its non-life insurance operation, which was the significantly larger partof its business. We understood that it was keen to divest itself quickly of theremaining life insurance and pensions business (Movestic).As far as we are aware, although we are not able to be 100% certain, there wereno other potential purchasers. From the negotiations, we understood thatMFAB's primary concern was speed of execution rather than obtaining a fullervalue for the disposal.
The acquisition of this business gave rise to a profit on acquisition of £25,056,000
4 Operating segments
The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc.
The segments of the Group as at 31 December 2010 comprise:
CA
This segment comprises part of the Group's UK insurance and investmentoperation, being Countrywide Assured Life Holdings Limited ('CA'), which holdspart of the Group's UK insurance and investment assets and liabilities, and isresponsible for managing unit-linked and non-linked business. Up until 20December 2010 it was designated as the 'UK Business' segment.
S&P
This segment, which was acquired on 20 December 2010, comprises the balance of the Group's UK insurance and investment operation, Save & Prosper Insurance Limited (S&P), which holds the balance of the Group's UK insurance and investment assets, and is responsible for managing both unit-linked and non-linked business, including a significant with-profits portfolio, which carries significant additional market risk.
Movestic
This segment comprises the Swedish insurance and investment operation, MovesticLivf¶rs¤kring AB (`Movestic'), formerly known as Moderna F¶rs¤kringar Liv AB('Moderna'), which holds the Group's Swedish insurance and investment assetsand liabilities, and is responsible for managing both unit-linked andnon-linked business. Up until 20 December 2010 it was designated as the'Swedish Business' segment. Other Group ActivitiesThe functions performed by the holding company, Chesnara plc, are defined underthe operating segment analysis as Other Group Activities. Also included thereinare consolidation and elimination adjustments.
Apart from the changes set out above, there were no changes to the basis of segmentation during the year ended 31 December 2010.
The accounting policies of the segments are the same as those for the Group asa whole. Any transactions between the business segments are on normalcommercial terms in normal market conditions. The Group evaluates performanceof operating segments on the basis of the profit before tax attributable toshareholders and on the total assets and liabilities of the reporting segmentsand the Group. There were no changes to the measurement basis for segmentprofit during the year ended 31 December 2010.
(i) Segmental income statement for the year ended 31 December 2010
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 80,157 372 34,421 - 114,950 Insurance premium (14,563) - (21,132) - (35,695)
ceded to reinsurers
-------- -------- -------- -------- -------- Net insurance premium revenue 65,594 372 13,289 - 79,255 Fee and commission income 38,532 77 24,801 - 63,410 Net investment 178,664 16,949 108,023 214 303,850return -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 282,790 17,398 146,113 214 446,515 Other operating 3,481 201 5,534 - 9,216income -------- -------- -------- -------- -------- Segmental income 286,271 17,599 151,647 214 455,731 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (124,449) (3,347) (11,628) - (139,424) Net (increase)/ decrease in insurance contract provisions (89,773) (13,820) (3,025) -
(106,618)
Reinsurers' share of 37,084 - 8,551 -
45,635
claims and benefits
-------- -------- -------- -------- -------- Net insurance contract claims and (177,138) (17,167) (6,102) - (200,407)benefits incurred -------- -------- -------- -------- -------- Change in investment contract liabilities (71,672) - (98,437) - (170,109) Change in liabilities relating to policyholders' funds held by the Group - - (9,912) - (9,912) Reinsurers' share of investment contract 3,904 - - - 3,904liabilities -------- -------- -------- -------- -------- Net change in (67,768) - (108,349) -
(176,117)
investment contract liabilities -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (1,252) - (13,436) - (14,688) Administrative expenses (9,524) (208) (15,407) (4,236) (29,375) Other operating (4,897) - (11,470) 210 (16,157)expenses -------- -------- -------- -------- -------- (260,579) (17,375) (154,764) (4,026) (436,744)Segmental expenses -------- -------- -------- -------- -------- Segmental income less expenses 25,692 224 (3,117) (3,812) 18,987 Share of profit from associates - - 597 - 597 Profit recognised on - - 376 15,488 15,864acquisition of subsidiary -------- -------- -------- -------- -------- Segmental operating profit/(loss) 25,692 224 (2,144) 11,676 35,448 Financing costs - - (1,210) (70) (1,280) -------- -------- -------- -------- -------- Profit/(loss) before tax 25,692 224 (3,354) 11,606 34,168 Income tax (expense) /credit (4,740) (63) 176 160 (4,467) Non-controlling - - 118 - 118interest -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to 20,952 161 (3,060) 11,766 29,819shareholders
======== ======== ======== ======== ========
(ii) Segmental income statement for the year ended 31 December 2009
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 88,469 - 11,636 - 100,105 Insurance premium ceded to reinsurers (15,831) - (9,166) - (24,997) -------- -------- -------- -------- -------- Net insurance premium revenue 72,638 - 2,470 - 75,108 Fee and commission income 42,543 - 8,577 - 51,120 -------- -------- -------- -------- -------- Net investment return 233,926 - 92,239 515 326,680 -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 349,107 - 103,286 515 452,908 Other operating income 4,689 - - - 4,689 -------- -------- -------- -------- -------- Segmental income 353,796 - 103,286 515 457,597 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (126,737) - (2,820) - (129,557) Net (increase)/ decrease in insurance contract provisions (128,064) - 224 - (127,840) Reinsurers' share of claims and benefits 45,630 - 2,267 - 47,897 Net insurance contract claims and (209,171) - (329) - (209,500)benefits incurred -------- -------- -------- -------- -------- Change in investment contract liabilities (107,524) - (92,224) - (199,748) Reinsurers' share of investment contract liabilities 4,710 - - - 4,710 Net change in investment contract (102,814) - (92,224) - (195,038)liabilities -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (1,116) - (4,051) - (5,167) Administrative expenses (9,806) - (5,276) (3,163) (18,245) Other operating (6,105) - (3,563) 332 (9,336)expenses -------- -------- -------- -------- -------- Segmental expenses (329,012) - (105,443) (2,831) (437,286) -------- -------- -------- -------- -------- Segmental income less expenses 24,784 - (2,157) (2,316) 20,311 Share of profit from associates - - 39 - 39 Profit recognised on - - - 25,056 25,056acquisition of subsidiary -------- -------- -------- -------- -------- Segmental operating profit/(loss) 24,784 - (2,118) 22,740 45,406 Financing costs - - (508) (157) (665) -------- -------- -------- -------- -------- Profit/(loss) before tax 24,784 - (2,626) 22,583 44,741 Income tax credit/ (expense) 948 - (148) 392 1,192 Non-controlling - - 7 - 7interest -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to 25,732 - (2,767) 22,975 45,940shareholders ======== ======== ======== ======== ========
(iii) Segmental balance sheet as at 31 December 2010
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 27,870 9,055 80,641 - 117,566 Property and equipment 67 - 604 - 671 Investment in associates - - 1,783 - 1,783 Reinsurers' shareof insurancecontract provisions 228,276 7,692 44,775 - 280,743 Amounts depositedwith reinsurers 30,264 - - - 30,264 Investment properties 2,895 117,925 - - 120,820 Financial assets 1,491,088 1,276,303 1,320,645 243 4,088,279 Reinsurers' share of accruedpolicyholder claims 3,422 256 - - 3,678 Income tax - 4,943 - 543 5,486 Cash and cash equivalents 133,716 14,972 24,248 21,198 194,134 Assets held for sale - - 380 - 380 -------- -------- -------- -------- -------- Total assets 1,917,598 1,431,146 1,473,076 21,984 4,843,804 -------- -------- -------- -------- -------- Liabilities heldfor sale - - 380 - 380 Bank overdrafts 2,125 29 - - 2,154 Insurance contractprovisions 1,129,558 1,210,810 63,711 - 2,404,079 Unallocated divisiblesurplus - 83 - - 83 Investment contractsat fair valuethrough income 646,609 108,862 1,247,241 - 2,002,712 Liabilities relatingto policyholders'funds held by the Group - - 52,337 - 52,337 Borrowings - - 23,407 39,287 62,694 Derivativefinancial instruments 137 - - - 137 Provisions 1,822 - - - 1,822 Deferred tax liabilities 7,525 12,222 779 - 20,526 Reinsurance payables 1,921 23 20,366 - 22,310 Payables related todirect insurance and investment contracts 19,338 10,919 5,551 - 35,808 Deferred income 11,647 - - - 11,647 Income taxes 3,188 3,280 455 - 6,923 Other payables 3,098 5,773 6,050 2,002 16,923 -------- -------- -------- -------- -------- Total liabilities 1,826,968 1,352,001 1,420,277 41,289 4,640,536 -------- -------- -------- -------- -------- Net assets 90,630 79,145 52,799 (19,305) 203,269Non-controllinginterest - - - - - -------- -------- -------- -------- -------- Net assets attributableto shareholders 90,630 79,145 52,799 (19,305) 203,269 ======== ======== ======== ======== ========
Segmental balance sheet as at 31 December 2009
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 32,471 - 70,061 - 102,532 Property and equipment - - 491 - 491 Investment in associates - - 1,051 - 1,051 Reinsurers' shareof insurance contract provisions 209,604 - 27,262 - 236,866 Amounts deposited with reinsurers 27,056 - - - 27,056 Investment properties 3,355 - - - 3,355 Financial assets 1,413,798 - 974,475 71 2,388,344 Reinsurers' share ofaccrued policyholderclaims 4,728 - - - 4,728 Income tax - - - 395 395 Cash and cash equivalents 120,830 - 14,776 19,635 155,241 -------- -------- -------- -------- -------- Total assets 1,811,842 - 1,088,116 20,101 2,920,059 -------- -------- -------- -------- -------- Bank overdrafts 2,312 - - - 2,312 Insurance contractprovisions 1,044,680 - 32,353 - 1,077,033 Investment contractsat fair value throughincome 610,930 - 918,291 - 1,529,221 Liabilities relatingto policyholders' funds held by the Group - - 41,107 - 41,107 Borrowings - - 24,799 4,197 28,996 Derivative financialinstruments 54 - - - 54 Provisions 1,452 - - - 1,452 Deferred tax liabilities 9,613 - 751 2 10,366 Reinsurance payables 2,064 - 12,975 - 15,039 Payables related to direct insurance and investment contracts 24,751 - 5,682 - 30,433 Deferred income 13,132 - - - 13,132 Income taxes 854 - 459 - 1,313 Other payables 3,825 - 3,990 2,018 9,833 -------- -------- -------- -------- -------- Total liabilities 1,713,667 - 1,040,407 6,217 2,760,291 -------- -------- -------- -------- -------- Net assets 98,175 - 47,709 13,884 159,768 Non-controlling - - (13) - (13)interest -------- -------- -------- -------- -------- Net assetsattributable to shareholders 98,175 - 47,696 13,884 159,755 ======== ======== ======== ======== ======== 5 Income tax expense Year ended 31 December Total income tax expense/(credit) comprises: 2010 2009 GBP000 GBP000 CA, S&P and Other Group Activities 4,643 (1,340) Movestic (176) 148 -------- -------- 4,467 (1,192) Total ======== ======== Year ended 31 December CA, S&P and Other Group Activities 2010 2009 GBP000 GBP000 Current tax expense Current year 5,685 3,548 Overseas tax 617 976 Adjustment to prior years 441 (4,681) -------- -------- Net expense/(credit) 6,743 (157) Deferred tax credit Origination and reversal of temporary differences (2,100) (1,183) -------- -------- Total income tax expense/(credit) 4,643 (1,340) ======== ======== Reconciliation of effective Year ended 31 December tax rate on profit before tax 2010 2009 GBP000 GBP000 Profit before tax 37,522 47,367 -------- -------- Income tax using the domesticcorporation tax rate of 28% (2009: 28%) 10,506 13,263 Non-taxable profit on acquisition of subsidiary (4,337) (7,016) Permanent differences 777 304 Effect of UK taxing bases on insurance profits Offset of franked investment income (3,373) (3,859) Variation in rate of tax on amortisation of acquired in-force value 72 73 Other 556 576 Under/(over) provided in prior years 442 (4,681) -------- -------- Total income tax expense/(credit) 4,643 (1,340) ======== ======== The amount overprovided for the year ended 31 December 2009 relates principallyto the writeback of a provision for current tax in Countrywide Assured plc inrespect of 2007. This provision had been established because of uncertaintysurrounding the interpretation of UK tax legislation relating to that year. Inthe event, the submission to HMRC of the tax computation for that year hasresolved the uncertainty and the provision has, accordingly, been released.
Year ended 31 December Movestic 2010 2009 GBP000 GBP000 Current tax expense Current year 1 12 Adjustment to prior years (15) - -------- -------- Deferred tax expense (14) 12
Origination and reversal of temporary differences (162) 136 -------- -------- Total income tax (credit)/expense (176) 148
======== ========
Reconciliation of effective tax rate on profit Year ended 31 December
before tax 2010 2009 GBP000 GBP000 Loss before tax (3,354) (2,626) -------- -------- Income tax using the domestic corporation tax rate of 26.3% (882) (691) Non-taxable income in relationto unit-linked nbusiness 202 349 Policyholder tax - 13 Non-taxable fair value adjustmenton acquisition 469 440 Impact of different rate for subsidiaries 22 5 Permanent differences (22) (13) Unrecognised tax recoverable 49 47 Non-deductible expenses - 8 Overprovided in prior years (14) (10) -------- --------
Total income tax (credit)/expense (176) 148
======== ======== 6 Borrowings Group 31 December 2010 2009 GBP000 GBP000 Bank loan 39,287 4,197
Amount due in relation to financial reinsurance 23,406 24,686
Other 1 113 -------- -------- Total 62,694 28,996 ======== ======== Current 13,107 12,474 Non-current 49,587 16,522 -------- -------- Total 62,694 28,996 ======== ======== The bank loan subsisting at 31 December 2009, which was drawn down on 2 June2005 under a facility made available on 4 May 2005, was unsecured and wasrepayable in five equal annual instalments on the anniversary of the draw downdate. Accordingly the loan was fully repaid on 2 June 2010. The outstandingprincipal on the loan bore interest at a rate based on the London Inter-BankOffer Rate, payable in arrears over a period which varies between one and sixmonths at the option of the borrower.The bank loan subsisting at 31 December 2010, which was drawn down on 20December 2010 under a facility made available on 17 November 2010, is unsecuredand is repayable in five increasing annual instalments on the anniversary ofthe draw down date. The outstanding principal on the loan bears interest at arate of 2.25 percentage points above the London Inter-Bank Offer Rate and isrepayable over a period which varies between one and six months at the optionof the borrower.
The fair value of the bank loan at 31 December 2010 was GBP40,000,000 (31 December 2009: GBP4,200,000).
The fair value of amounts due in relation to financial reinsurance was GBP24,590,409 (31 December 2009: GBP26,415,353).
The fair value of other borrowings is not materially different from their carrying value.
7 Share capital and share premium 31 December 2010 31 December 2009 Share Share Number of capital Number of capital shares GBP000 shares GBP000 Share capital 115,047,662 42,024 104,588,785 41,501 ======== ======== ======== ======== Share Share Premium Premium GBP000 GBP000 42,523 20,458 ======== ========
The number of shares in issue at the balance sheet date included 199,011 shares held in treasury (31 December 2009: 3,096,194).
Share capital for the Group includes the impact of "reverse acquisitionaccounting" associated with Chesnara plc's acquisition of Countrywide AssuredLife Holdings Limited ('CALH') from Countrywide plc ('Countrywide') on 24 May2004. As a result of this, included within share capital of the Group isGBP41,501,000, which represents the amount of issued share capital ofCountrywide Assured Life Holdings Limited (the legal subsidiary) immediatelybefore the acquisition. As a result of this accounting treatment the Groupshare capital differs from the Chesnara plc company position, which is set outbelow.
The following sets out changes in Group share capital and share premium during the year ended 31 December 2009:
Share Issued share capital premium Number GBP000 GBP000 Balance at 1 January 2010 104,588,785 41,501 20,458 Issue and allocation on 26
November 2010 arising from non pre-emptive placing 10,458,877 523 20,394 Expenses incurred in connection
with non pre-emptive placing - - (962)Arising on sale of treasury shares - - 2,633 -------- -------- -------- Balance at 31 December 2010 115,047,662 42,024 42,523 ======== ======== ========
On 26 November 2010 Chesnara plc launched and completed a bookbuilt, non pre-emptive placing of 10,458,877 new ordinary shares of 5p each with institutional investors and thereby raised gross proceeds of GBP20,917,754 (GBP19,955 622 net of expenses of GBP962,132).
During November 2010 the Chesnara plc sold 2,897,183 ordinary shares held intreasury, thereby raising gross proceeds of GBP5,794,366: the profit arising ofGBP2,632,670 arising on the sale has been credited to the share premium accountThere were no changes in Group share capital or share premium during the yearended 31 December 2009.8 Treasury shares 31 December 2010 2009 GBP000 GBP000 Balance at 1 January 3,379 3,379 Sales during the year (3,162) - -------- -------- Balance at 31 December 217 3,379 ======== ======== During November 2010, the Company sold 2,897,183 ordinary shares held intreasury for a total consideration of GBP5,794,366. The cost of those shareswas GBP3,161,696 and the consequential profit arising on sale of GBP2,632,670has been credited to the share premium account.9 Retained earnings 31 December 2010 2009 GBP000 GBP000 Retained earnings attributable to equity holders of the parent company comprise Balance at 1 January 97,744 67,738 Profit for the year 29,819 45,940 Dividends Final approved and paid for 2008 -
(10,200)
Interim approved and paid for 2009 -
(5,734)
Final approved and paid for 2009 (10,453)
-
Interim approved and paid for 2010 (5,887)
- -------- -------- Balance at 31 December 111,223 97,744 ======== ========The interim dividend in respect of 2009, approved and paid in 2009, was paid atthe rate of 5.65p per share. The final dividend in respect of 2009, approvedand paid in 2010, was paid at the rate of 10.30p per share so that the totaldividend paid to the equity shareholders of the Parent Company in respect ofthe year ended 31 December 2009 was made at the rate of 15.95p per share.The interim dividend in respect of 2010, approved and paid in 2010, was paid atthe rate of 5.8p per share to equity shareholders of the Parent Companyregistered at the close of business on 10 September 2010, the dividend recorddate.A final dividend of 10.6p per share in respect of the year ended 31 December2010 payable on 20 May 2011 to equity shareholders of the Parent Companyregistered at the close of business on 8 April 2011, the dividend record date,was approved by the Directors after the balance sheet date. The resulting totalfinal dividend of GBP12.2m has not been provided for in these financialstatements and there are no income tax consequences.
The following summarises dividends per share in respect of the year ended 31 December 2009 and 31 December 2010:
2010 2009 p p Interim - approved and paid 5.80 5.65 Final - proposed 10.60 10.30 -------- -------- Total 16.40 15.95 ======== ======== 10 Earnings per share
Earnings per share are based on the following:
Year ended 31 December 2010 2009 Profit for the year attributable to shareholders (GBP000) 29,819 45,940 -------- -------- Weighted average number ofordinary shares 102,642,750 101,492,591 -------- -------- Basic earnings per share 29.05p 45.26p -------- -------- Diluted earnings per share 29.05p 45.26p ======== ========
The weighted average number of ordinary shares in respect of the year ended 31December 2010 is based on 104,588,785 shares in issue at the beginning of theperiod less 3,096,194 own shares held in treasury and on 115,047,662 shares inissue at the end of the period, less 199,011 own shares held in treasury,taking account of the timing of the issue of new shares and of the sale oftreasury shares.The weighted average number of ordinary shares in respect of the year ended 31December 2009 is based on 104,588,785 shares in issue at the beginning of theperiod and on 104,588,785 shares in issue at the end of the period less3,096,194 own shares held in treasury, taking account of the timing of thepurchases of own shares.There were no share options outstanding during the year ended 31 December 2009or during the year ended 31 December 2010. Accordingly, there is no dilution ofthe average number of ordinary shares in issue in respect of these periods.Earnings per share for the year ended 31 December 2010 includes the impact ofGBP15,864,000 of profit recognised on the acquisition of S&P and of the Aspisbusiness. Excluding this item, both the basic and diluted earnings per sharefor the year ended 31 December 2010 would have been 13.60pEarnings per share for the year ended 31 December 2009 includes the impact ofGBP25,056,000 of profit recognised on the acquisition of Movestic. Excludingthis item both the basic and diluted earnings per share for the year ended 31December 2009 would have been 20.58p per share.
11 Additional Information
Additional information relating to the Company can be found on its website www.chesnara.co.uk.
12 Forward looking statements
This document may contain forward-looking statements with respect to certain ofthe plans and current expectations relating to future financial condition,business performance and results of Chesnara plc. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances that are beyond the control of Chesnara plcincluding, amongst other things, UK domestic and global economic and businessconditions, market-related risks such as fluctuations in interest rates,inflation, deflation, the impact of competition, changes in customerpreferences, delays in implementing proposals, the timing, impact and otheruncertainties of future acquisitions or other combinations within relevantindustries, the policies and actions of regulatory authorities, the impact oftax or other legislation and other regulations in the jurisdiction in whichChesnara plc and its subsidiaries operate. As a result, Chesnara plc's actualfuture condition, business performance and results may differ materially fromthe plans, goals and expectations expressed or implied in these forward-lookingstatements.
Supplementary Information - European Embedded Value Basis
Summarised EEV consolidated income statement
Year ended 31 December 2010 2009 Note GBP000 GBP000
Operating profit of covered business 6 6,364 19,120
Other operational result 6 (6,114) 868 -------- -------- Operating profit 250 19,988
Variation from longer-term investment return 6 26,941 13,750 Effect of economic assumption changes 6 (4,453) (9,730)
-------- --------
Profit before tax and before exceptional item 22,738 24,008
Exceptional items
Profit recognised on business combinations 6,9 41,043 54,187 Effect of modelling improvements 6 13,239 -
-------- -------- Profit before tax 77,020 78,195 Tax 6 (4,014) 12,070 -------- -------- Profit for the year 73,006 90,265 -------- -------- Attributable to: Shareholders 73,124 90,272 Non-controlling interest (118) (7) -------- -------- 73,006 90,265 ======== ======== Earnings per share Based on profit for the period attributable to shareholders 71.24p 88.94p -------- -------- Diluted earnings per share Based on profit for the periodattributable to shareholders 71.24p 88.94p -------- --------
Supplementary Information - European Embedded Value Basis
Summarised EEV consolidated balance sheet
31 December 2010 2009 Assets Note GBP000 GBP000 Value of in force business 5,8 265,415 198,312 Deferred acquisition costs arising on unmodelled business 616 197 Acquired value of customer relationships 983 346 Software assets 6,829 4,060 Property and equipment 671 491 Investment in associate 1,783 1,051 Reinsurers' share of insurance contract provisions 247,432 209,537 Amounts deposited with reinsurers 29,002 26,240 Investment properties 120,820 3,355 Deferred tax assets - 1,972 Financial assets Equity securities at fair value through income 492,321 454,970 Holdings in collective investment schemes at fair value through income 3,177,265 1,612,861 Debt securities at fair value through income 319,516 247,836 Insurance and other receivables 33,234 19,822 Prepayments 3,908 3,784 Policyholders' funds held by the Group 52,337 41,107 Derivative financial instruments 9,707 7,964 -------- -------- Total financial assets 4,088,288 2,388,344 -------- -------- Reinsurers' share of accrued policy claims 3,678 4,728 Income taxes 5,486 395 Cash and cash equivalents 194,134 155,241 Assets held for sale 380 - -------- -------- Total assets 4,965,517 2,994,269 -------- -------- Liabilities Liabilities held for sale 380 - Bank overdraft 2,154 2,312 Insurance contract provisions 2,370,948 1,049,906 Unallocated divisible surplus 14,930 - Financial liabilities Investment contracts at fair value through income 2,010,954 1,543,915 Borrowings 70,148 36,307 Derivative financial instruments 137 54 Liabilities relating to policyholders' 52,337 41,107 funds held by the Group -------- -------- Total financial liabilities 2,133,576 1,621,383 -------- -------- Provisions 1,822 1,452 Deferred tax liabilities 5,578 - Reinsurance payables 21,830 15,039 Payables related to direct insurance and investment contracts 35,808 30,433 Income taxes 6,923 1,313 Other payables 16,932 9,833 -------- -------- Total liabilities 4,610,881 2,731,671 -------- -------- Net assets 354,636 262,598 ======== ======== Equity Share capital 42,024 41,501 Share premium 42,523 20,458 Treasury shares (217) (3,379) Foreign exchange reserve 15,056 5,539 Other reserves 50 50 Retained earnings 255,200 198,416 -------- -------- Total shareholders' equity 354,636 262,585 Non-controlling interest - 13 -------- -------- Total equity 5,8 354,636 262,598 ======== ========
NOTES TO THE SUPPLEMENTARY INFORMATION
1 Basis of preparation
This section sets out the detailed methodology followed for producing theseGroup financial statements which are supplementary to the Group's primaryfinancial statements which have been prepared in accordance with InternationalFinancial Reporting Standards ('IFRS'). These financial statements have beenprepared in accordance with the European Embedded Value ('EEV') principlesissued in May 2004 by the European CFO Forum and supplemented by AdditionalGuidance on EEV Disclosures issued by the same body in October 2005. Theprinciples provide a framework intended to improve comparability andtransparency in embedded value reporting across Europe.In order to improve understanding of the Group's financial position andperformance, certain of the information presented in these financial statementsis presented on a segmental basis: the business segments are the same as thosedescribed in Note 4 to the primary financial statements prepared on the IFRSbasis. The S&P Business was acquired on 20 December 2010: accordingly, theresults relating thereto, as reflected in segmental analysis are for a periodof 11 days. Prior year information in respect of the financial position as at31 December 2009 and for the year then ended is designated as GBPnil in respectof the S&P Business, while other prior year data are designated as notapplicable ('n/a'). 2 Covered business
The Group uses EEV methodology to value the bulk of its long-term business (the 'covered business'), which is written primarily in the UK and Sweden, as follows:
(i) for the UK businesses (comprising the CA and S&P segments), the covered business comprises the business's long-term business being those individual life insurance, pensions and annuity contracts falling under the definition of long-term insurance business for UK regulatory purposes. The operating expenses of the holding company, Chesnara plc, are treated as an integral part of the UK covered business.
(ii) for the Swedish business (comprising the Movestic segment), thecovered business comprises the business's long-term pensions and savingsunit-linked business. Group life and sickness business, including waiver ofpremium and non-linked individual life assurance policies are not included inthe covered business: the result relating to this business is established inaccordance with IFRS principles and is included within 'other operationalresult' within the consolidated summarised income statement.
Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments.
3 Methodology(a) Embedded ValueOverview
Shareholders' equity comprises the embedded value of the covered business,together with the net equity of other Group companies, including that of theholding company which is stated after writing down fully the carrying value ofthe covered business.The embedded value of the covered business is the aggregate of the shareholdernet worth ('SNW') and the present value of future shareholder cash flows fromin-force covered business (value of in-force business) less any deduction for(i) the cost of guarantees within S&P, and (ii) the cost of required capital.It is stated after allowance has been made for aggregate risks in the business.SNW comprises those amounts in the long-term business, which are eitherregarded as required capital or which represent surplus assets within that
business.New businessCA and S&PMuch of the covered business is in run-off and is, accordingly, substantiallyclosed to new business. The UK businesses do still sell a small amount of newbusiness but, overall, the contribution from new business to the resultsestablished using EEV methodology is not material. Accordingly, not all ofthose items related to new business values, which are recommended by the EEVguidelines, are reported in this supplementary financial information.
Movestic
New business, in relation to the pensions and savings covered business is takenas all business where contracts are signed and new premiums paid during thereporting period, for both new policies and premium increases on existingbusiness, but excluding standard renewals. New business premium volumes. Newbusiness premium volume for the period which is consistent with the analysis ofprofit in Note 6 is as follows:
New business premium income relating to
pensions and savings covered business,
GBP24.9m *
* Basis: annualised premium plus 1/10 single premium translated into sterling at the 2010 average rate of SEK 11.1249 = GBP1.
The new business contribution has been assessed as at the end of the period, using opening assumptions.
Value of in-force business
The cash flows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash flow.
The present value of the projected cash flows is established by using adiscount rate which reflects the time value of money and the risks associatedwith the cash flows which are not otherwise allowed for. There is a deductionfor the cost of holding the required capital, as set out below.
Participating business
For participating business within the S&P business the Group maintains theassets and liabilities in a separate with-profits fund. In accordance with thePrinciples and Practices of Financial Management, in the first instance allbenefits, which in some cases include guaranteed minimum investment returns,are paid from policyholder assets within the fund. The participating businesseffectively operates as a smoothed unit linked contract subject to minimumbenefit guarantees. The with-profits fund contains assets which areattributable to shareholders as well as those attributable to policyholders. Assets attributable to shareholders can only be released from the fund subjectto meeting prudent liabilities in respect of minimum benefits and thefrictional cost of this restriction has been allowed for in determining thevalue of the in-force business. Fundamentally, the value of the with-profits in-force business is driven by thefund management charges levied on the policyholder assets subject to the effectof minimum benefit guarantees.
Taxation
The present value of the projected cash flows arising from in-force businesstakes into account all tax which is expected to be paid under currentlegislation, including tax which would arise if surplus assets within thecovered business were eventually to be distributed. For the UK businesses,allowance has been made for planned reductions in corporation tax, as announcedby the Chancellor in his budget speech on 22 June 2010. No allowance has beenmade for the changes announced by the Chancellor in his budget speech on 23March 2011.
The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement. The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax in the UK businesses and yield tax in Movestic.
Cost of capital
A market-consistent valuation approach requires consideration of 'frictional'costs of holding shareholder capital: in particular, the cost of tax oninvestment returns and the impact of investment management fees can reduce theface value of shareholder funds. For CA, the expenses relating to corporategovernance functions eliminate any taxable investment return in shareholderfunds, while investment management fees are not material. The cost of holdingthe required capital to support the covered business (see 3(b) below) isreflected as a deduction from the value of in-force business.
Financial options and guarantees
CA
The principal financial options and guarantees in CA are (i) guaranteed annuityrates offered on some unit-linked pension contracts and (ii) a guaranteeoffered under Timed Investment Funds that the unit price available at theselected maturity date (or at death, if earlier) will be the highest priceattained over the policy's life. The cost of these options and guarantees hasbeen assessed, in principle, on a market-consistent basis, but, in practice,this has been carried out on approximate bases, which are appropriate to thelevel of materiality of the results.
S&P
The principal financial options and guarantees in S&P are (i) minimum benefitspayable on maturity or retirement for participating business; (ii) the optionto extend the term under the Personal Retirement Account contract on termspotentially beneficial to the policyholder; (iii) the option to increasepremiums under the Personal Retirement Account contract on terms potentiallybeneficial to the policyholder; and (iv) certain insurability options offered.The cost of guaranteeing a minimum investment return on participatingcontracts, being the only material guarantee, has been assessed on a marketconsistent basis. For the remaining options and guarantees the cost has beenassessed on an approximate basis, appropriate to the level of materiality ofthe results.MovesticIn respect of Movestic, some contracts provide policyholders with an investmentguarantee, whereby a minimum rate of return is guaranteed for the first 5 yearsof the policy, at a rate of 3% per annum. As at 31 December 2010, the totalamount guaranteed was approximately GBP0.1m. Thus, due to low volumes and thelimited exposure, the value of the guarantee is ignored as not material to
theresults.Allowance for risk
Allowance for risk within the covered business is made by:
(i) setting required capital levels by reference to the assessment of capital needs
made by the directors of the regulated entities within the respective
businesses ( the 'Directors');
(ii) setting the risk discount rate, which is applied to the projected cash flows
arising on the in-force business, at a level which includes an appropriate risk
margin (see 3(c) below); and
(iii) explicit allowance for the cost of financial options and guarantees and, where
appropriate, for reinsurer default.
Internal group company
EEV Guidance requires that actual and expected profit or loss incurred by aninternal group company on services provided to the covered business should beincluded in allowances for expenses. The covered business in Movestic ispartially managed by an internal group fund management company. Not allrelevant future income and expenses of that company have been included in thecalculation of embedded value. However, the effect is not considered to be
material. Consolidation adjustments
Consolidation adjustments have been made to:
(i) eliminate the investment in subsidiaries;
(ii) allocate group debt finance against the segment to which it refers; and
(iii)allocate corporate expenses as explained in note 4(d) below.
(b) Level of Required Capital
The level of required capital of the covered business reflects the amount ofcapital that the Directors consider necessary and appropriate to manage therespective businesses. In forming their policy the Directors have regard to theminimum statutory requirements and an internal assessment of the market,insurance and operational risks inherent in the underlying products andbusiness operations. The capital requirement resulting from this assessmentrepresents:
(i) for CA, 150% of the long-term insurance capital requirement ('LTICR') together
with 100% of the resilience capital requirement ('RCR'), as determined by the
regulations of the Financial Services Authority in the UK;
(ii) for Movestic, 150% of the regulatory solvency requirement as determined by
Finansinspektionen in Sweden.
The boards of the S&P companies have not established a formal internalassessment of the capital requirement for S&P. However, pending thisassessment, a provisional requirement has been set at 175% of the long-terminsurance capital requirement ('LTICR') together with 100% of the resiliencecapital requirement ('RCR') as determined by the regulations of the FinancialServices Authority in the UK.
The required level of regulatory capital is provided as follows:
(i) for the UK businesses, by the retained surplus within the long-term business
fund and by share capital and retained earnings within the shareholder funds of
the regulated entities; and
(ii) for Movestic, by share capital and additional equity contributions from the
parent company, net of the accumulated deficit in the regulated entity, these
components together comprising shareholder's equity.
Movestic is reliant, in the medium term, on further equity contributions from the parent company, Chesnara plc.
(c) Discount Rates
The discount rates are a combination of the reference rate and a risk margin.The reference rate reflects the time value of money and the risk marginreflects any residual risks inherent in the covered business and makesallowance for the risk that future experience will differ from that assumed. Inorder to reduce the subjectivity when setting the discount rates, the Group hasdecided to adopt a 'bottom up' market-consistent approach to allow explicitlyfor market risk.Using the market-consistent approach, each cash flow is valued at a discountrate consistent with that used in the capital markets: in accordance with this,equity-based cash flows are discounted at an equity discount rate andbond-based cash flows at a bond discount rate. In practice a short-cut methodknown as the 'certainty equivalent' approach has been adopted. This methodassumes that all cash flows earn the reference rate of return and arediscounted at the reference rate.In general, and consistent with the market's approach to valuing financialinstruments for hedging purposes, the reference rate is based on swap yields.These have been taken as mid swap yields available in the market at 31 December2010. Allowance also needs to be made for non-market risks. For some of these risks,such as mortality and expense risk, it is assumed that the shareholder candiversify away any uncertainty where the impact of variations in experience onfuture cash flows is symmetrical. For those risks that are assumed to bediversifiable, no adjustment has been made. For any remaining risks that areconsidered to be non-diversifiable risks, there is no risk premium observablein the market and, therefore, a constant margin has been added to the riskmargin. The margin added reflects the assumed risks within the businesses andis 50 basis points for CA and S&P and 70 basis points for Movestic. This marginis applied to the basic value of in-force business prior to the deductions forfinancial options and guarantees and the cost of required capital.
(d) Analysis of Profit
The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources:
(i) new business;(ii) return from in-force business; and(iii) return from shareholder net worth.
Additional contributions to profit arise from:
(i) variances between the actual investment return in the period and the assumed
long-term investment return; and
(ii) the effect of economic assumption changes.
The contribution from new business represents the value recognised at the endof each period in respect of new business written in that period, afterallowing for the cost of acquiring the business, the cost of establishing therequired technical provisions and after making allowance for the cost ofcapital, calculated on opening assumptions.
The return from in-force business is calculated using closing assumptions and comprises:
(i) the expected return, being the unwind of the discount rates over the period
applied to establish the value of in-force business at the beginning of the
period;
variances between the actual experience over the period and the assumptions (ii) made to establish the value of business in force at the beginning of the
period; and
(iii) the net effect of changes in future assumptions, made prospectively at the end
of the period, from those used in establishing the value of business in force
at the beginning of the period, other than changes in economic assumptions.
The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital.
(e) Assumption Setting
There is a requirement under EEV methodology to use best estimate demographicassumptions and to review these at least annually with the economic assumptionsbeing reviewed at each reporting date. The current practice is detailed below.
Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2010.
The detailed projection assumptions, including mortality, morbidity,persistency and expenses reflect recent operating experience. Allowance is madefor future improvement in annuitant mortality based on experience andexternally published data. Favourable changes in operating experience,particularly in relation to expenses and persistency, are not anticipated untilthe improvement in experience has been observed. Holding company expenses (forthe Chesnara Group such expenses relate largely to listed company functions)are allocated to the CA covered business, except for a relatively small amountof expense, which is assumed to relate to business development functions, toreflect effort expended within the holding company relating to the transactionof life assurance business through the subsidiary companies. Hence the expenseassumptions used for the cash flow projections include the full cost ofservicing this business.The economic assumptions are reviewed and updated at each reporting date basedon underlying investment conditions at the reporting date. The assumed discountrates and inflation rates are consistent with the investment returnassumptions.In addition, the demographic assumptions used at 31 December 2010 areconsidered to be best estimate and, consequently, no further adjustments arerequired. In respect of the CA business, the assumptions required in thecalculation of the value of the annuity rate guarantee on pension business havebeen set equal to best-estimate assumptions.
(f) Pension Schemes
In Movestic, where the Group participates in a combined defined benefit and defined contribution scheme, future contributions to the scheme are reflected in the value of in-force business.
(g) Financial Reassurance
In respect of Movestic the Group uses financial reinsurance to manage the impact of its new business strain. Whilst this liability is valued at fair value within the IFRS statements, allowing for an option which provides the Group with the right to settle the liability early on beneficial terms, when valuing the shareholder net worth within the EEV it is considered more appropriate to assess this liability at a higher cost, reflecting the likelihood of the option not being utilised.
4 Assumptions (a) Investment ReturnsInvestment returns are assumed to be equal to the reference rate, as covered innote 3(c) above. For linked business, the aggregate return has been determinedby the reference rate less an appropriate allowance for tax. CA S&P Movestic 31 December 31 December 31 December 2010 2009 2010 2009 2010 2009 Investment Return* 3.1%** 3.8%** 5 year 2.69% n/a 3.18% 2.87% 10 year 3.70% n/a 3.61% 3.62% 15 year 4.09% n/a 3.80% 3.89% 20 year 4.15% n/a 3.94% 4.01% 25 year 4.12% n/a 3.94% 4.01% 30 year 4.04% n/a 3.94% 4.01% Inflation - RPI 2.95% 2.9% 2.95% n/a 2.3% 2.0%
* For S&P and Movestic, a full swap curve is used: the rates quoted are presented as indicative spot rates.
** For CA business, a single rate is applied for all durations.
(b) Actuarial Assumptions
The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identified in the periodic actuarial investigations.
(c) Taxation
Projected tax has been determined assuming current tax legislation and ratescontinue unaltered, except where future tax rates or practices have beenannounced. The tax rates for CA and S&P allow for changes in Corporation Tax asannounced by the Chancellor in his budget speech of 22 June 2010, so reflect areduction from the current rate of 28% to 24% in steps of 1%. If allowance hadonly been made for the enacted change to 27%, the embedded value would havebeen GBP2.5m lower as at 31 December 2010. The tax rates do not allow forfurther changes announced by the Chancellor in his budget speech on 23 March 2011 for a reduction in the UK Corporation Tax rate to 26%from April 2011 and to reduce thereafter by annual decrements of 1% to 23%.
(d) Expenses
The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions.
For CA and S&P, these have been determined by reference to:
(i) the outsourcing agreements in place with our third-party business process administrators;(ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and(iii) corporate governance costs relating to the covered business.
For Movestic, these have been determined by reference to:
(i) an expense analysis in which all expenses were allocated to covered
and uncovered business, with expenses for the covered business being allocated
to acquisition and maintenance activities; and
(ii) expense drivers, being, in relation to acquisition costs, the number of
policies sold during the period and, in relation to maintenance expenses, the
average number of policies in force during the period.
The expense assumptions for CA also include the expected future holding company expenses which will be recharged to the worldwide covered business.
No allowance has been made for future productivity improvements in the expense assumptions.
(e) Discount RateAn explicit constant margin is added to the reference rate shown in (a) aboveto cover any remaining risks that are considered to be non-market,non-diversifiable risks, as there is no risk premium observable in the market.This margin, which is 50 basis points for CA and S&P (CA as at 31 December 2009: 50 basis points) and 70 basis points for Movestic (as at 31 December 2009 70basis points), gives due recognition to the relative sensitivity of the valueof in-force business to the discount rate for the different businesses, and
tothe fact that:a) For CA:(i) the covered business is substantially closed to new business;(ii) there is no significant exposure in the with profit business, which is wholly reinsured;(iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related
functions to third-party
business process administrators; and(iv) for much of the life business the Group has the ability to vary risk charges made to policyholders. b) For S&P:(i) the covered business is substantially closed to new business;and(ii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related
functions to third-party
business process administrators.
c) For Movestic:
(i) the covered business remains open;(ii) the in-force business is relatively small; (iii) reinsurance is used to significantly reduce insurance risks;and(iv) a number of the risks provide diversification benefits within the Chesnara Group, in relation to reinsurance
counterparties, market
exposures and policyholder populations.
5 Analysis of shareholders' equity
31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Regulated entities Capital 30,172 26,056 12,390 - 68,618required Free 40,176 35,904 10,931 - 87,011surplus -------- -------- -------- --------- ------- Shareholders' net worth of regulated entities 70,348 61,960 23,321 - 155,629 Adjustments to shareholder net worth Deferred - - (51,243) - (51,243)acquisition costs Financial - - (6,145) - (6,145)reinsurance liability Other - - 8,649 - 8,649asset / liability adjustments --------- --------- -------- -------- ------- Adjusted 70,348 61,960 (25,418) - 106,890shareholder net worth In-force 79,360 41,307 144,748 - 265,415value of covered business -------- -------- -------- -------- ------- Embedded 149,708 103,267 119,330 - 372,305value of regulated entities Less: amount - (39,287) - - (39,287)financed by borrowings -------- -------- -------- -------- ------- Embedded value of regulated 149,708 63,980 119,330 - 333,018entities attributable to shareholders Net equity of - - 1,307 20,311 21,618other Group companies -------- -------- -------- -------- ------- Total 149,708 63,980 120,637 20,311 354,636shareholders' equity ======== ======== ======== ======== ======= 31 December 2009 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Regulated entities Capital 32,042 - 12,123 - 44,165required Free 40,253 - 12,337 - 52,590surplus -------- -------- -------- -------- ------- Shareholders' net worth of regulated entities 72,295 - 24,460 - 96,755 Adjustments to shareholder net worth Deferred - - (44,721) - (44,721)acquisition costs Financial - - (5,313) - (5,313)reinsurance liability Other - - 4,299 - 2,203asset / liability adjustments -------- -------- -------- -------- -------Adjusted 72,295 - (21,275) - 48,924shareholder net worth In-force 85,559 - 112,753 - 198,312value of covered business -------- -------- -------- -------- ------- Embedded 157,854 - 91,478 - 243,039value of regulated entities Less: amount (4,197) - - - (4,197)financed by borrowings -------- -------- -------- -------- -------Embedded 153,657 - 91,478 - 245,135value of regulated entities attributable to shareholders Net equity of - - (1,048) 18,498 19,546other Group companies -------- -------- -------- -------- ------- Total 153,657 - 90,430 18,498 262,585shareholders' equity ======== ======== ======== ======== =======
The movement in the in-force value of covered business comprises:
Year ended 31 December CA S&P Movestic Total 2010 GBP000 GBP000 GBP000 GBP000 Value at beginning of 35,559 - 112,753 198,312 period Amount arising on - 42,391 - 42,391 acquisition Amount credited/ charged (6,199) (1,084) 31,995 24,712 to operating profit -------- -------- -------- -------- Value at end of period 79,360 41,307 144,748 265,415 ======== ======== ======== ======== Year ended 31 December CA S&P Movestic Total 2009 GBP000 GBP000 GBP000 GBP000 Value at beginning of 84,940 - - 84,940 period Amount arising on - - 95,953 95,953 acquisition -------- Amount credited/ charged 619 - 16,800 17,419 to operating profit -------- -------- -------- -------- Value at end of period 85,559 - 112,753 198,312 ======== ======== ======== ======== CAOn 2 June 2005, the Group drew down GBP21m on a bank loan facility, in order topart fund the acquisition of CWA Life Holdings plc ('CWA'). This effectivelyrepresented a purchase of part of the underlying value in force of CWA by wayof debt finance and it follows that the embedded value of the UK regulatedentity is not attributable to equity shareholders of the Group to the extent ofthe outstanding balance on the loan account at each balance sheet date. Theloan was repayable in five equal annual instalments on the anniversary of thedraw down date, the funds for the repayment effectively being provided by wayof the realisation of the underlying value of in-force business of the coveredbusiness. In accordance with this, GBP4.2m of the loan was repaid on 2 June2009 and a further GBP4.2m was repaid on 2 June 2010, leaving principaloutstanding at that date of GBPnil.
S&P
On 20 December 2010, the Group drew down GBP40m on a bank loan facility, inorder to part fund the acquisition of Save & Prosper Insurance Limited and itssubsidiary, Save & Prosper Pensions Limited (together 'S&P'). This effectivelyrepresented a purchase of part of the underlying value in force of S&P by wayof debt finance and it follows that the embedded value of the UK regulatedentity is not attributable to equity shareholders of the Group to the extent ofthe outstanding balance on the loan account at each balance sheet date. Theloan is repayable in five annual instalments on the anniversary of the drawdown date, the funds for the repayment effectively being provided, in part, byway of the realisation of the underlying value of in-force business of thecovered business. There was a principal outstanding at the balance sheet dateof GBP40m. MovesticThe adjusted shareholder net worth of Movestic is that of the regulated entity,which includes also the net worth attributable to the non-covered businesswithin the regulated entity. Accordingly, for Movestic, the embedded value ofregulated entities comprises the embedded value of covered business and thevalue of the non-covered business of the regulated entity, the latter componentbeing valued on an IFRS basis.
6 Summarised statement of changes in equity and analysis of profit
(a) Changes in equity may be summarised as:
Statement of changes in equity Year ended 31 December 2010 2009 GBP000 GBP000 Shareholders' equity at beginning of period 262,585 182,708 13,239 - Effect of modelling improvements -------- -------- Shareholders' equity at beginning of period restated 275,824 182,708 Profit for the period attributable to
shareholders 59,885 90,272 Issue of new shares Share capital 523 - Share premium 22,065 - Sale of treasury shares 3,162 -
Foreign exchange reserve movement 9,517 5,539
(16,340) (15,934) Dividends paid -------- -------- 354,636 262,585
Shareholders' equity at end of period -------- -------- During 2010, Movestic introduced a new system for modelling value-in-force,which provided the capability for (i) more accurately modelling the impact oncommission paid of policies becoming paid-up and (ii) for determining futurefee income on a case-by-case investment mix basis, whereas previously it hadbeen necessary to adopt high-level estimates.
The effect of the modelling improvements is classified as an exceptional credit in the consolidated income statement and is presented after operating profit.
(b) The profit for the period is analysed as:
Year ended 31 Other December 2010 Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Covered business New business 685 - 2,057 - 2,742contribution Return from in-force business Expected return 5,203 6 6,207 - 11,416 Experience 11,315 101 (7,942) - 3,474variances Operating (1,985) - (10,142) - (12,127)assumption changes Return on shareholder 736 123 - - 859net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 15,954 230 (9,820) - 6,364 Variation from longer-term investment return 14,880 - 12,061 - 26,941 Effect of economic (7,248) (1,513) 4,308 - (4,453)assumption changes -------- -------- -------- -------- -------- Profit on covered 23,586 (1,283) 6,549 - 28,852business before tax Tax thereon (4,695) 359 - - (4,336) -------- -------- -------- -------- -------- Profit on covered 18,891 (924) 6,549 - 24,516business after tax Results of non-covered business and of other group companies Loss before tax, and - - (3,674) (2,440) (6,114)exceptional items Exceptional profit recognised on - business combination - - 376 - 376of Aspis - business combination of S&P - - - 40,667 40,667 Tax - - 177 145 322 -------- -------- -------- -------- -------- Profit after tax 18,891 (924) 3,428 38,372 59,767 Non-controlling - - 118 - 118interest -------- -------- -------- -------- -------- Profit for the period attributable to shareholders 18,891 (924) 3,546 38,372 59,885 ======== ======== ======== ======== ======== The exceptional profit recognised on business combinations relates to theacquisition by Movestic of the business of Aspis Forsakringar Liv AB ('Aspis')and the acquisition by Chesnara plc of Save & Prosper Insurance Limited and itssubsidiary company Save & Prosper Pensions Limited (together 'S&P').The determination of the profit relating to Aspis is set out in Note 3 to theIFRS financial statements and the determination of the profit relating to S&Pis set out in Note 9 following.Year ended 31 Other December 2009 Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000Covered business New business 1,482 - 783 - 2,265contribution Return from in-force business Expected 7,357 - 1,682 - 9,039return Experience 4,499 - 2,060 - 6,559variances Operating 8,862 - (7,405) - 1,457assumption changes Return on (200) - - - (200)shareholder net worth -------- -------- -------- -------- -------- Operating profit 22,000 - (2,880) - 19,120 Variation from longer-term investment 6,206 - 7,544 - 13,750 return Effect of (12,286) - 2,556 - (9,730)economic assumption changes -------- -------- -------- -------- -------- Profit on 15,920 - 7,220 - 23,140covered business before tax Tax thereon 11,893 - - - 11,893 -------- -------- ------- -------- -------- Profit on 27,813 - 7,220 - 35,033covered business after tax ======== ======== ======== ======== ======== Results of non-covered business and of other group companies Profit - - 1,623 (755) 868before tax, and exceptional item Exceptional profit arising on combination - - - 54,187 54,187of Movestic business Tax - - (161) 338 177 -------- -------- -------- -------- -------- Profit after 27,813 - 8,682 53,770 90,265tax Non-controlling - - 7 - 7 interest -------- -------- -------- -------- -------- Profit for the period attributable to 27,813 - 8,689 53,770 90,272 shareholders ======== ======== ======== ======== ========
The results of the non-covered business and of other group companies before taxand before exceptional item are presented as 'other operational result' in theconsolidated income statement. For CA, the result of the covered businessincludes the expenses of the holding company, with an equal and oppositeadjustment to the result of the non-covered business and of other groupcompanies.Included within the effect of economic assumption changes in respect of CA forthe year ended 31 December 2009 is an amount of GBP5,620,000 being a reductionof pre-tax profit relating to a change in the basis of taxation of overseasdividends. This change leads to a reduction in the estimate of futuredeductions for taxation from policyholder linked funds and is matched by abroadly offsetting reduction in the estimate of future tax payable. This is asignificant component of the tax credit of GBP11,893,000 in respect of tax forCA for the year ended 31 December 2009 as shown above.
7 Sensitivities to alternative assumptions
The following tables show the sensitivity of the embedded value as reported at31 December 2010, and of the new business contribution of Movestic, tovariations in the assumptions adopted in the calculation of the embedded value.Sensitivity analysis is not provided in respect of the new businesscontribution of CA and S&P for the year ended 31 December 2010 as the reportedlevel of new business contribution is not considered to be material (see Note 3(a) above). It largely relates to guaranteed bond business, where a close asset/liability matching approach leaves values broadly insensitive to changes inexperience. New Business Embedded Value Contribution CA S&P Movestic Movestic GBPm GBPm GBPm GBPm Published value as at 31 149.7 103.3 120.6 2.1December 2010 -------- -------- -------- -------- Changes in embedded value/new business contribution arising from: Economic sensitivities 100 basis point increase in (5.7) 16.4 (0.5) (0.1)yield curve 100 basis point reduction in 4.0 (21.5) 0.4 -yield curve 10% decrease in equity and (2.8) (10.7) (9.7) -property values Operating sensitivities 10% decrease in maintenance 2.2 3.7 6.3 0.6expenses 10% decrease in lapse rates 2.8 (1.3) 8.6 0.9 5% decrease in mortality/ morbidity rates Assurances 1.3 1.2 0.4 - Annuities (1.5) - - - Reduction in the required capital to statutory minimum 0.6 1.3 - -
The key assumption changes represented by each of these sensitivities are as follows:
Economic sensitivities
(i) 100 basis point increase in the yield curve: The reference rate is increased by 1% and the rate of future inflation has also been increased by 1% so that real yields remain constant;
(ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% and the rate of future inflation has also been reduced by 1% so that real yields remain constant; and
(iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding would reduce by 6% in value.
Operating sensitivities
(i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of GBP20 per policy pa reducing to GBP18 per policy pa;
(ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa;
(iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a baseassumption of 95% of the parameters in a selected mortality/morbidity tablereducing to 90.25% of the parameters in the same table, assuming no changes aremade to policyholder charges or any other management actions; and (iv) the sensitivity to the reduction in the required capital to the statutoryminimum shows the effect of reducing the required capital from that defined inNote 3(b) above to the minimum requirement prescribed by regulation.
In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate.
8 Reconciliation of shareholders' equity on the IFRS basis to shareholders'equity on the EEV basis Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 31 December 2010 Shareholders' 90,301 39,858 52,799 20,311 203,269 equity on the IFRS basisAdjustments Deferred acquisition costs Investment (6,265) - (7,298) - (13,563) contracts Deferred 10,885 - - - 10,885 income Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (10,739) 1,997 - - (8,742) Adjustments to provisions on insurance (180) - - - (180) contracts, net of reinsurers' share Adjustments to provisions on unallocated - (14,847) - - (14,847) divisible surplus Acquired (15,563) (6,610) (62,866) - (85,039) in-force value Acquired value - - (2,049) - (2,049) of customer relationships Adjustment to - - (7,454) - (7,454) borrowings Deferred tax 1,909 2,275 2,757 - 6,941 -------- -------- -------- -------- -------- Shareholder 70,348 22,673 (24,111) 20,311 89,221 net worth Value of 79,360 41,307 144,748 - 265,415 in-force business -------- -------- -------- -------- -------- Shareholders' 149,708 63,980 120,637 20,311 354,636 equity on the EEV basis Shareholder net worth comprises: Shareholder 70,348 61,960 (25,418) - 106,890 net worth in regulated entities Shareholders' net equity in other Group companies - - 1,307 20,311 21,618 Debt finance - (39,287) - - (39,287) -------- -------- -------- -------- -------- Total 70,348 22,673 (24,111) 20,311 89,221 ======== ======== ======== ======== ======== Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 31 December 2009 Shareholders' 93,561 - 47,696 18,498 159,755 equity on the IFRS basis Adjustments Deferred acquisition costs Investment (7,173) - (1,447) - (8,620) contracts Deferred 12,319 - - - 12,319 income Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (15,038) - - - (15,038) Adjustments to provisions on insurance contracts, net of reinsurers' share (238) - - - (238) Acquired (18,282) - (61,675) - (79,957) in-force value Acquired - - (2,336) - (2,336) value of customer relationships Adjustment to - - (5,073) - (5,073) borrowings Deferred tax 2,949 - 512 - 3,461 -------- -------- -------- -------- -------- Shareholder 68,098 - (22,323) 18,498 64,273 net worth Value of 85,559 - 112,753 - 198,312 in-force business -------- -------- -------- -------- -------- Shareholders' 153,657 - 90,430 18,498 262,585 equity on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder 72,295 - (21,275) - 51,020 net worth in regulated entities Shareholders' net equity in other Group companies - - (1,048) 18,498 17,450 Debt finance (4,197) - - - (4,197) -------- -------- -------- -------- -------- Total 68,098 - (22,323) 18,498 64,273 ======== ======= ======== ======== ======== 9 Exceptional item
Profit arising on business combinations is presented as an exceptional item in the consolidated income statement and comprises:
Arising on business combination with: Year ended 31 December
2010 2009 GBP000 GBP000 S&P 40,667 - Aspis 376 - Movestic - 54,187 -------- -------- 41,043 54,187 ======== ========
Details of the combination with the Aspis business are set out in Note 3 to theIFRS financial statements. The profit arising on the combination with S&Parises on the purchase, on 20 December 2010, of 100% of the issued sharecapital of Save & Prosper Insurance Limited and its subsidiary, Save & ProsperPensions Limited, comprising the S&P businesses, and is measured as thedifference between the purchase consideration of GBP63,524,000 and the embeddedvalue of the S&P businesses at the purchase date, being GBP104,191,000, whichwas established in accordance with the methodology set out in Notes 2 to 4 ofthese supplementary financial statements.10 Earnings per share Year ended 31 December 2010 2009 p p Basic earnings per share Based on profit for the period attributable to 71.24 88.94shareholders -------- --------
Based on profit for the period attributable to shareholders before exceptional item 31.26 35.55 -------- -------- Diluted earnings per share Based on profit for the period attributable to 71.24 88.94shareholders -------- -------- 31.26 35.55
Based on profit for the period attributable to shareholders before exceptional item --------
--------
11 Foreign exchange translation reserve
A foreign exchange translation reserve arises on the translation of thefinancial statements of Movestic, the functional currency of which is theSwedish Krona, into pounds sterling, which is the presentational currency ofthe Group financial statements. Items in the consolidated income statement aretranslated at the average exchange rate of SEK11.1249= GBP1 ruling in thereported period (Year ended 31 December 2009: SEK11.5594=GBP1), while all itemsin the balance sheet are stated at the closing rates ruling at the reportedbalance sheet date, being SEK10.5250 = GBP1 at 31 December 2010 (SEK11.5305=GBP1 at 31 December 2009). The differences arising on translation using thismethodology are recognised directly in shareholders' equity within the foreignexchange translation reserve.
The reported embedded value is sensitive to movements in the SEK:GBP exchange rate. Had the exchange rate as at 31 December 2010 been 10% higher at SEK11.5775 = GBP1, then the reported embedded value of GBP354.6m as at 31 December 2010 would have been reported as GBP343.7m.
12 Post balance sheet event
In his budget speech on 23 March 2011, the Chancellor announced changes which will affect the taxation of UK-based Life Insurance companies as follows:
the rate of UK Corporation Tax will reduce to 26% from April 2011 and, thereafter, by annual decrements of 1% to 23%. No allowance has been made for the impact of these changes as disclosed in Note 4(c) above; and
the basis of taxation of insurance companies will be changed following theintroduction of solvency II regulations. While the announcement contained theprinciples to be adopted, key elements of the detailed provisions remain to befinalised. These changes may have a material impact on the embedded value.
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