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Final Results

31 Mar 2017 07:00

RNS Number : 0943B
Chesnara PLC
31 March 2017
 

Chesnara plc

 

A year of delivery: Chesnara announces Legal and General Nederland acquisition and delivers strong value growth.

 

"2016 has been one of the busiest and most successful years in Chesnara's history and ended with a very well supported equity raise to fund the acquisition of Legal and General Nederland. We have delivered against each of our core strategic objectives, continued to embed Solvency II and delivered value to our customers. The business growth has been achieved without compromising our risk appetite, building on our reputation for solid returns to our shareholders."

 

Financial Highlights

 

· Economic Value (EcV) of £602.6m Note 1 Note 2 (31 December 2015: £453.4m). Growth of 33% during the year, which includes the impact of the equity raise (see note 2), earnings in the year and foreign exchange gains. Excluding the equity raise the EcV of the group has grown by 18%.

 

· Economic Value earnings net of tax of £72.5m (31 December 2015: £57.5m).  Growth achieved through a combination of strong operating earnings, new business growth in Sweden and economic earnings.

 

· Movestic EcV new business contribution of £11.7m (31 December 2015: £5.7m). Improvements due to the combined impact of increased market share and higher average gross margins result in record new business profits.

 

· Total group cash generation of £85.4m Note 2 Note 3 (31 December 2015: £82.4m). Total cash generation includes the impact of the equity raise (see note 2), whilst 2015 includes £39.9m gained on the acquisition of Waard Group.

 

· Total group cash generation (excluding the impact of equity raise) £36.5m Note 2 Note 3 (31 December 2015: £50.9m). UK cash generation remains in line with expectations but is lower than last year in part due to an increase in capital requirements driven by growing asset values. Movestic has reported a modest negative cash generation result as a consequence of continuing to invest in its new business operation. Waard has made a positive contribution of £15.7m which includes one-off gains from asset disposals and a foreign exchange gain.

 

· IFRS profit before tax of £40.7m (31 December 2015: £42.8m). A strong result delivered for the current period despite the adverse impact of a reduction in yield curves during the year. The prior year result includes a gain of £16.6m recognised on the acquisition of the Waard Group.

 

· IFRS Total Comprehensive Income of £55.4m (31 December 2015: £39.6m). The current period includes a foreign exchange gain of £20.1m compared to a corresponding loss of £0.2m in 2015.

 

· Group solvency ratio of 158% Note 2 (31 December 2015: 146%).  After taking account of the dividend the Group solvency ratio has improved and subsidiary solvency ratios remain strong and above internal targets. This metric includes the impact of the equity raise (see note 2). In calculating the group's solvency position we have applied the "standard formula" and have not used transitional arrangements or any other elements of the long-term guarantee package.

 

· Group solvency ratio (excluding the impact of equity raise) of 144% Note 2 (31 December 2015: 146%).   The Group solvency ratio has reduced marginally though subsidiary solvency ratios remain strong and above internal targets after accounting for dividends, with the UK at 128% (31 December 2015: 135%); Movestic at 140% (31 December 2015: 154%) and Waard Group at 712% (31 December 2015: 597%).

 

· 2.9% increase in final dividend compared with 2015. Recommended final dividend of 12.69p per share (2015: 12.33p per share). This increase represents the twelfth successive rise in final dividends.

 

Strategic delivery highlights

 

· Announcement of the acquisition of Legal and General Nederland. In November we announced the acquisition of LGN for a price of €160m at a discount to Economic Value of approximately 33%. The deal offers potential for phased, orderly extraction of excess capital and is expected to create an Economic Value gain of c£56m on completion. The DNB have confirmed their non-objection to the acquisition which is expected to complete in the week commencing 3 April 2017.

 

· Movestic dividend. Several years of growth have generated sufficient surplus for Movestic to declare its maiden dividend to Chesnara.

 

John Deane, Chief Executive said:

'2016 has been a year of significant development for the Chesnara group and we have delivered strongly against all of our strategic objectives.

 

The value of our existing businesses has grown across all territories, with cash emergence sufficient to fund a further increase in the annual dividend, the twelfth successive year of dividend growth. The increase in value includes an increasingly material contribution from new business profits in Sweden where we have delivered our best ever results.

 

Finally, the acquisition of Legal and General Nederland, announced in November 2016, represents a continuation of Chesnara's successful acquisition strategy. The acquisition will create significant scale in the Netherlands making Chesnara a well balanced three territory group. Legal and General Nederland is expected to have a significant positive impact on the Economic Value of the group and will further enhance ongoing cash generation thereby supporting the continuation of our dividend strategy.'

 

Note 1 Transition of our valuation methodology from Embedded Value reporting to Economic Value reporting has resulted in a small decrease in the valuation of Chesnara by £1.7m. Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced funds. We consider the Solvency II rules understate the commercial value of these items. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin is significantly higher than under Embedded Value.

 

Note 2 During 2016 we announced the acquisition of Legal and General Nederland which will complete in 2017. In respect of this we raised £70m of equity in the year. The full positive impact of the acquisition will be recognised on completion in the 2017 results.

 

Note 3 Cash generation represents the movement in the surplus assets that exists within the group over and above the level of capital that is required to be held. The level of capital required to be held takes account of the buffers that management has set to hold over and above the solvency requirements imposed by our regulators. From 1 January 2016 cash generation has been determined with reference to the Solvency II prudential regime. Previously cash generation was determined with reference to Solvency I.

 

The Board approved this statement on 30 March 2017.

 

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

 

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

 

Notes to Editors

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

 

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

 

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

 

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

 

 

 

FORWARD-LOOKING STATEMENTS

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

 

NOTE ON TERMINOLOGY

The principal reporting segments of the group are:

 

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

 

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

 

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

 

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

 

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

 

 

In this preliminary announcement:

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

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

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

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

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

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

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

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

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

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

(xi) 'LGN' or 'Legal and General Nederland' refers to the legal entity Legal & General Nederland Levensverzekering Maatschappij N.V, which Chesnara announced its intention to acquire in November 2016.

 

 

 

2016 HIGHLIGHTS 

 

FINANCIAL

 

 

IFRS

IFRS PRE-TAX PROFIT £40.7M 2015 £42.8M*

*includes gain on acquisition of Waard Group of £16.6m.

 

IFRS TOTAL COMPREHENSIVE INCOME £55.4M 2015 £39.6M

Includes foreign exchange gain of £20.1m (£0.2m foreign exchange loss for year ended 31 December 2015).

 

SOLVENCY

GROUP SOLVENCY 158% 2015 146%

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

 

GROUP SOLVENCY EXCLUDING THE IMPACT OF EQUITY RAISED DURING THE YEAR Note 1 144% 2015 146%

 

ECONOMIC VALUE

ECONOMIC VALUE Note 1 £602.6M 2015 £453.4M 

Movement in the year is stated after dividend distributions of £24.2m in the year and includes the impact of LGN equity raise.

 

ECONOMIC VALUE EARNINGS £72.5M 2015 £57.5M

Excludes impact of LGN equity raise (year ended 31 December 2015 £57.5m is on an EEV basis).

 

MOVESTIC NEW BUSINESS PROFIT £11.7M 2015 £5.7M 

 

CASH GENERATION

TOTAL GROUP CASH GENERATION £85.4M* 2015 £82.4M**

* includes impact of LGN equity raise

** includes cash on acquisition of Waard Group

 

DIVISIONAL CASH GENERATION £34.3M 2015 £50.9M

 

GROUP CASH GENERATION EXCLUDING THE IMPACT OF EQUITY RAISED DURING THE YEAR Note 1 £36.5M

 

Note 1: ACQUISITION OF LEGAL AND GENERAL NEDERLAND

During 2016 we announced the acquisition of Legal and General Nederland which will complete in 2017. We raised £70m of equity in the year. In the interest of balance, we have included additional Solvency and Cash Generation metrics which show the results excluding the impact of equity raised. The full positive impact of the acquisition will be recognised on completion in the 2017 results.

 

 

OPERATIONAL AND STRATEGIC

 

DIVIDEND

FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 2.9% to 19.49p per share (6.80p interim and 12.69p proposed final). This compares with 18.94p in 2015 (6.61p interim and 12.33p final).

 

ACQUISITIONS

ANNOUNCEMENT OF LEGAL AND GENERAL NEDERLAND ACQUISITION

Announcement of purchase of Dutch business for agreed price of €160m, expected to complete in 2017.

 

ECONOMIC BACKDROP

EQUITY GROWTH, FALLING BOND YIELDS, WEAKENING STERLING

Despite the low interest environment, interest rates have fallen further during the year from their opening position. Equity markets in all territories have performed well.

 

MOVESTIC DIVIDEND

FIRST DIVIDEND PAID TO CHESNARA

Several years of growth have generated sufficient Solvency II surplus for Movestic to declare its maiden dividend of £2.7m (30mSEK).

 

SOLVENCY

SOLVENCY II DELIVERED

New reporting requirements embedded with successful quarterly submissions to the regulator.

 

Notes

 

1. Cash generation represents the movement in the surplus assets that exists within the group over and above the level of capital that is required to be held. The level of capital required to be held takes account of the buffers that the board has set to hold over and above the solvency requirements imposed by our regulators. From 1 January 2016 cash generation has been determined with reference to the Solvency II prudential regime. Previously cash generation was determined with reference to Solvency I.

 

 

 

CHAIRMAN'S STATEMENT

 

"2016 has been a year of positive development for the Chesnara group and we have delivered strongly against all of our strategic objectives.

 

The value of our existing businesses has grown across all territories, with cash emergence sufficient to fund a further increase in the annual dividend, the twelfth successive year of dividend growth.

 

The increase in value includes an increasingly material contribution from new business profits in Sweden where we have delivered our best ever results.

 

Finally, the acquisition of Legal and General Nederland, announced in November 2016, represents a continuation of Chesnara's successful acquisition strategy. The acquisition will create significant scale in the Netherlands making Chesnara a well balanced three territory group. Legal and General Nederland is expected to have a significant positive impact on the Economic Value of the group and will further enhance ongoing cash generation thereby supporting the continuation of our dividend strategy."

 

2016 has been one of the busiest and most successful years in Chesnara's history. We have delivered against each of our core strategic objectives and continued to embed Solvency II. This has been achieved whilst remaining true to our well established culture and values of treating customers fairly and adopting a robust approach to regulatory compliance. Importantly the business growth has been achieved without compromising our risk appetite which is important given our position as a predictable and low risk investment.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

ACQUIRE LIFE AND PENSIONS BUSINESSES

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

18.2% growth in group Economic Value Note 1.

 

Note 1 - Excludes the impact of equity raised and costs incurred for the acquisition of L&G Nederland.

Acquisition of Legal and General Nederland at an expected 33% discount to Economic Value, creating an expected positive Economic Value impact of c£56m on completion in 2017.

 

Record new business profits from Movestic of £11.7m.

 

Maximise value from existing business

 

The existing books, particularly in the UK, remain the primary source of cash to fund our dividend strategy. As such, the increase in Economic Value, which implies an increase in future positive cash flows, is a positive outcome.

 

During the year our operating divisions have generated £34.3m of cash.

 

DESPITE THE LOW INTEREST RATE ENVIRONMENT, WE HAVE CONTINUED TO GENERATE CASH AT LEVELS IN EXCESS OF THE COST OF THE FULL YEAR DIVIDEND

 

The UK's cash generation, given the turbulent political backdrop and in a period of low and declining yields, is reassuring. Also, the declaration of an inaugural dividend from Movestic of £2.7m and a positive cash contribution from the Waard Group are encouraging developments with regards to supporting the Chesnara dividend strategy.

 

Acquire life and pensions businesses

 

EXCLUDING THE IMPACT OF EQUITY RAISED FOR THE IMMINENT ACQUISITION OF LEGAL AND GENERAL NEDERLAND, THE ECONOMIC VALUE OF THE GROUP HAS INCREASED BY 18.2%. WE EXPECT TO CREATE A FURTHER C9.5% OF VALUE GROWTH WHEN THE DEAL COMPLETES.

 

In November 2016 we announced our intended acquisition of Legal and General's Dutch Life subsidiary. The acquisition scored highly against our established assessment criteria and at a 33% discount to Economic Value is expected to add approximately £56m of value on completion in 2017. The deal is funded by a mix of new equity, additional debt and investment of some of our existing own funds. The support from existing and new investors for the £70m of new equity is testament to the attractiveness of the acquisition. The business is generally recognised as being a high quality operation as illustrated by the fact LGN have been awarded prestigious best insurers award in 2016. As a profitable and well capitalised business, we expect that as we integrate the business into the group it will contribute to ongoing cash generation and value growth through efficient management of the existing book and from writing profitable new business.

 

Enhance value through profitable new business

 

The record level of new business profit delivered by Movestic is encouraging. Not only is the impact on Economic Value most welcome but importantly it demonstrates that meaningful levels of new business profit can be delivered from realistic market shares, if the focus on product offering, pricing, service and expenses is clear and the right management is in place. This creates a proven "blueprint" that supports the intention to continue to run the newly acquired LGN business as an "open to new business" operation and gives comfort that resultant increase in new business focus can be delivered without compromising Chesnara's primary specialism of acquiring and managing in-force books.

 

RECORD LEVELS OF NEW BUSINESS PROFIT FROM MOVESTIC OF £11.7M.

 

The imminent completion of the acquisition of Legal and General Nederland will continue Chesnara's evolution from a UK operation to becoming a balanced three territory European group. This enhances the outlook in terms of cash generation potential, acquisition opportunities and creates options to optimise our governance model.

 

Solvency II

 

Solvency II has continued to have a significant two fold impact on the business during the year. Firstly, I am pleased to report that we have complied with all the requirements of the regime, including the production of the Pillar 3 reports and the development of the first narrative reports due in 2017. Our risk management framework has continued to be enhanced to ensure we deliver a best practice Solvency II governance framework.

 

Secondly, 2016 has been the first year of managing the business in a Solvency II world. As expected, deepening analysis of the Solvency II capital requirements has given an improved understanding of how economic conditions and general business decisions impact the Solvency Capital Requirements. Based on this ever increasing understanding of the dynamics of solvency post Solvency II, it is clear there is an opportunity to develop management actions to optimise capital efficiencies across the group. The evolution from "understanding and reporting solvency" to "a more proactive management of solvency" is a core objective and opportunity for 2017 and beyond.

 

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

 

Regulation

 

Compliance with regulation, not least Solvency II, remains a priority for the group. We have continued to maintain a positive and constructive relationship with regulatory bodies across the group.

 

I am pleased to report that the FCA's review "Fair treatment of long standing customers in the life industry sector" that was initially announced on 3 March 2016 has now, following a period of consultation, been issued as final guidance. The guidance is in line with our expectations and we are fully supportive of this industry wide enhancement programme. With the clarity of the final guidance, CA will progress with its improvement plan which includes an enhanced customer strategy. Our 2016 results include our best estimate of the financial impact of delivering to the revised best practice standards.

 

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

 

Investment proposition

 

Given Chesnara shares are primarily held by those requiring predictable and attractive income, I am pleased to report a 2.9% increase in our full year dividend, which represents a yield of 6.1% based on the average share price for the year.

 

2.9% INCREASE IN FULL YEAR DIVIDEND

 

People

 

2016 has been one of the busiest years of Chesnara's history during which we have delivered record new business in Sweden, announced a major acquisition in the Netherlands and managed the Legacy Review in the UK.

 

The board is extremely aware of the demands this has placed on management and staff across the group. I would like to take this opportunity to thank my colleagues for their dedication, expertise and commitment to making 2016 a successful year.

 

At the end of 2016 Peter Wright retired from the board and Jane Dale, who we welcomed on to the board in May 2016, took over as the Chair of the Audit and Risk Committee. Frank Hughes stepped down from the board and will leave the company at the end of April following the restructure of our UK operations. Ken Hogg was appointed CEO of the UK operations in October 2016. Lars Nordstrand the CEO of Movestic will hand over to Linnea Ecorcheville in April this year. I would like to thank Peter, Frank and Lars for all their hard work over the years and wish Ken, Jane and Linnea every success for the future.

 

With all our acquisitions, forming a view of the quality, commitment and cultural fit of the management and staff of the target organisation is a key consideration. During the extensive due diligence process for the acquisition of Legal and General Nederland, it became clear that Chesnara will be inheriting a dedicated and capable team and I very much look forward to welcoming new colleagues into the group during 2017.

 

Governance and risk management

 

Following the enhancements to our risk and governance systems in 2015, much of the activity in 2016 was focused on refinement, embedding and consistency of approach across the group, where appropriate. This was informed by a full group-wide attestation of our governance maps and risk and control policies. The results of the attestation exercise demonstrated significant progress with embedding the recently enhanced standards, but also recognised that further work is needed to achieve the desired level of consistency of approach.

 

Enhanced risk reporting in 2016, such as Own Risk and Solvency Assessment and the Quarterly CRO Report have provided greater insight and assurance to the board that risk is being controlled within the group's risk appetite. For example, "continuous solvency monitoring and recovery planning protocol" was improved and introduced into regular reporting routines during the year, providing greater comfort that timely actions can be taken, as appropriate, in the event of a decline in solvency resulting from changes in financial conditions.

 

The Legal and General Nederland acquisition demonstrated the strength and effectiveness of our risk based acquisition process, which includes a risk driven due diligence process, along with risk function oversight throughout. This will be refined further in 2017, based on learnings from the LGN acquisition.

 

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

 

Outlook and Brexit

In my 2015 statement I mentioned that we did not believe a vote to "leave" the EU would materially affect Chesnara's business. After the result of the referendum we retain the view that leaving the union will have minimal impact other than any knock on effect on general economic conditions. Should the decision to leave the European Union result in unexpected changes to regulatory requirements, then our operating model is suitably flexible for Chesnara to potentially adopt an alternative regulatory model where there are benefits for stakeholders.

 

Over recent years management has invested significant time and effort in ensuring we comply with Solvency II. As we move on from the development phase, I see increasing potential opportunities for the business from optimising our use of Solvency II capital.

 

Finally the outlook is greatly enhanced by the acquisition of LGN directly, in terms of future cash generation and value growth, and indirectly, in terms of strengthening the foundations for further acquisitions in the Netherlands. I also remain optimistic that as the uncertainty created by matters such as Solvency II and the FCA Legacy Review reduces, the UK acquisition market will become more active. I am confident that with our tried and tested acquisition track record and flexible funding strategy Chesnara is well positioned to take advantage of future opportunities that meet our stringent assessment criteria.

 

I remain optimistic that Chesnara can continue to deliver against its strategic objectives and provide value to policyholders and shareholders.

 

 

 

 

Peter Mason

Chairman

30 March 2017

BUSINESS REVIEW

|

OVERVIEW OF STRATEGY

 

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

 

MAXIMISE VALUE FROM EXISTING BUSINESS

ACQUIRE LIFE AND PENSION BUSINESSES

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

BUSINESS MODEL

MAINTAIN ADEQUATE FINANCIAL RESOURCES

FAIR TREATMENT OF CUSTOMERS

PROVIDE A COMPETITIVE RETURN TO SHAREHOLDERS

ROBUST REGULATORY COMPLIANCE

RESPONSIBLE RISK BASED MANAGEMENT

 

 

BUSINESS REVIEW | UK

 

The UK division manages 323,000 policies and is in run-off. The division follows an outsourcer-based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced. A central governance team is responsible for managing all outsourced operations.

 

During the year the UK division has focused on designing and implementing its customer strategy to reflect recent regulatory requirements, something that will continue into 2017. From a results perspective, cash has been generated broadly in line with plans and value continues to emerge, despite falling bond yields in the year.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

CAPITAL AND VALUE MANAGEMENT

GENERAL

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

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

- At the heart of delivering our strategy is ensuring that the division is governed well from a regulatory and customer perspective.

- The valuation and capital position of the division is strongly influenced by investment market factors, particularly equity markets and longer term bond yields.

 

INITIATIVES AND PROGRESS IN 2016

- Positive performance in equity markets contributes to growth in value of the UK division.

- Falling bond yields have put downward pressure on value in the year.

- During 2016 we implemented the recommendations from our strategic asset review of the assets backing the S&P with profit funds, improving the position of the funds.

- Our outsourcers and investment managers have delivered in line with plans and budgets.

- Cash of £21.3m has been generated by the division.

- The overall economic value of the division, before the impact of dividend distributions, has increased by £38m during the year.

- Positive mortality and morbidity experience.

 

PRIORITIES IN 2017

- Gain deeper understanding of the Solvency II balance sheet to ensure that the financial consequences of strategic decisions are appropriately considered. This will be delivered through establishing and embedding a Capital Optimisation Advisory Group, a sub committee of the division's executive committee, which will be tasked with identifying and prioritising the management actions to be delivered.

- Continued focus on managing the cost base.

 

KPIs UP TO 2016

EEV / EcV (2012-15: EEV - 2016: EcV)

 

£m

2012

2013

2014

2015

2016

EEV / EcV

311.1

297.3

271.8

232.2

239.6

Cumulative dividends

-

40.0

88.0

153.0

183.5

Total

311.1

337.3

359.8

385.2

423.1

A steady growth in value, before the impact of dividends.

 

CASH GENERATION:

 

£m

2012

2013

2014

2015

2016

Cash generation

34.7

54.1

50.9

42.5

21.3

Cash generation for 2016 is below that of prior years. Cash generation is a function of movements in both own funds and required capital. Under Solvency II, in rising equity markets the capital requirement tends to increase, thereby reducing short term cash. The opposite dynamic exists in falling equity markets. See pages 28 and 29 for further insights on Solvency II.

 

CUSTOMER OUTCOMES

GENERAL

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

- In December 2016 the FCA issued final guidelines entitled "FG 16/8 Fair treatment of long-standing customers in the life insurance sector". The guidance provides more detail supporting how firms should treat customers to ensure fair outcomes.

 

INITIATIVES AND PROGRESS IN 2016

- During March 2016 the FCA announced an investigation into the level of disclosure of exit charges to customers. Full support has been provided to the FCA during the year. The investigation is ongoing.

- An action plan has been created to ensure compliance with the draft and final guidelines of FG 16/8 that were issued by the FCA during the year. Good progress made to date.

- Establishment of customer committee to further embed customer focus.

- Enhancements to our product review framework to support ongoing assessment that products remain fit for purpose.

- Preparations for implementation of the 1% exit fee cap on all pension products where the policyholder is over 55. The financial impact of this fee cap amounts to approximately £3.5m and has been fully reflected in the 2016 financial results.

- Delivered policyholder returns in three main managed funds in excess of benchmark, representing a significant proportion of the assets under management.

 

PRIORITIES IN 2017

- Deliver the division's new customer strategy framework. This includes:

o Delivery of our action plan as communicated to the FCA.

o Embedding our newly created customer committee.

o Delivery of enhanced product review framework.

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

- Implement 1% exit fee cap on all pension products where the policyholder is over 55.

 

KPIs UP TO 2016

POLICYHOLDER FUND PERFORMANCE (ANNUAL RETURN)

2016

2015

CA Pension Managed

17.2%

1.9%

CWA Balanced Managed Pension

15.8%

1.7%

S&P Managed Pension

14.2%

4.7%

Benchmark - ABI Mixed Inv 40%-85% shares

13.4%

2.4%

 

GOVERNANCE

GENERAL

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

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

 

INITIATIVES AND PROGRESS IN 2016

- A number of new appointments have been made to strengthen the CA board during the year as part of delivering a more divisionalised group structure, including the appointment of a new CEO and a new non-executive director, independent of the Chesnara board.

- Successful transition to new Solvency II capital management and reporting regime.

- Continued embedding of risk management framework, including full implementation of governance.

- Solid delivery of outsourced services.

 

PRIORITIES IN 2017

- Continue to embed and develop the risk management framework.

- Ensure compliance with SII regime, notably the inaugural publication of the Solvency and Financial Condition Report and the submission of the Regular Supervisory Report to our regulator.

- Remain abreast of financial reporting developments, particularly the new accounting standard for insurance contracts, "IFRS 17 "insurance contracts".

 

KPIs UP TO 2016

DIVISIONAL SOLVENCY RATIO:

 

2016: 151%*

2015: 135%

 

* stated before the impact of the proposed year end 2016 dividend of £30.0m, the fulfilment of which remains subject to completion of a 'no objection' process with the PRA. After this proposed dividend our closing 2016 solvency ratio is 128%.

 

BUSINESS REVIEW | SWEDEN

 

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

 

2016 has been a positive year for Movestic. Improved fund ranges and investment performance, quality servicing and a smart pricing strategy for new transfer business have resulted in record levels of new business profit. This new business profit together with a marked reduction in lapse rates and a positive investment return has created a significant increase in AuM with a corresponding 20% increase in Economic Value. The growth in value has contributed to an increase in capital requirements and hence the absolute capital surplus remains broadly unchanged during the year.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

CAPITAL AND VALUE MANAGEMENT

GENERAL

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

 

INITIATIVES AND PROGRESS IN 2016

- Favourable equity market performance predominantly drives AuM growth (14.5%) and EcV growth (20%).

- Significant improvements in policyholder flows as a result of reductions in lapse levels and an increase in new business.

- Increase to the solvency capital requirement (SCR), largely due to the impact of the positive growth in value, has resulted in Solvency II surplus remaining broadly unchanged during the year.

- Optimising fee income by developing SICAV, white label funds and, Movestic funds.

- Inaugural dividend declared of 30mSEK.

 

PRIORITIES IN 2017

- Continue to generate positive client cash flows by:

o maintaining lapse levels at 2016 levels.

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

- Identify management actions to optimise the capital requirement.

- Provide a sustainable and predictable dividend to Chesnara plc.

 

KPIs UP TO 2016

GROWTH IN ASSETS UNDER MANAGEMENT

 

£bn

2012

2013

2014

2015

2016

Total assets under management

1.3

1.6

2.0

2.2

2.5

 

IFRS PROFIT

 

£m

2012

2013

2014

2015

2016

IFRS profit

0.8

2.0

3.7

7.5

9.2

 

VALUE GROWTH (2012-15: EEV - 2016: ECV)

 

£m

2012

2013

2014

2015

2016

EEV / EcV

100.5

120.0

149.0

188.5

226.0

 

CUSTOMER OUTCOMES

GENERAL

- Movestic places great importance on providing quality service to both customers and IFAs, with simple, clear unit linked products, supported by an attractive and broad investment fund range. The aim of Movestic is to offer policyholders the best funds and management services on the market. Year after year, customers have enjoyed good returns on their savings. This means that they can offer a real chance of a better future when the time comes for their customers' retirement.

 

INITIATIVES AND PROGRESS IN 2016

- Fund range development including improved sustainability rating.

- Competitive unit linked fund returns.

- Reduced lapse rates.

- Operational and fund performance improvements result in improved IFA assessment ratings.

 

PRIORITIES IN 2017

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

- Deliver competitive unit linked fund returns.

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

 

KPIs UP TO 2016

BROKER ASSESSMENT RATING (OUT OF 5)

 

2012

2013

2014

2015

2016

Rating

3.1

3.6

3.6

3.7

3.8

 

2016 POLICYHOLDER AVERAGE INVESTMENT RETURN:

7.5%

(Swedish stock market 5.8%)

 

GOVERNANCE

GENERAL

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

 

INITIATIVES AND PROGRESS IN 2016

- Full compliance with Solvency II reporting requirements.

- Deepened understanding and analysis of Solvency II dynamics.

- Enhancement of Governance and Risk Management framework, including ORSA and risk reporting.

- CEO announced his intention to retire during 2017 and replacement appointed.

 

PRIORITIES IN 2017

- Manage a smooth transition to the new CEO.

- Produce Solvency II annual and narrative reports.

 

KPIs UP TO 2016

DIVISIONAL SOLVENCY RATIO:

 

2016: 142%*

2015: 155%

 

* stated before the impact of the proposed year end 2016 dividend of £2.7m. After this proposed dividend the closing 2016 solvency ratio is 140%.

 

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

 

PROFITABLE NEW BUSINESS

GENERAL

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

 

INITIATIVES AND PROGRESS IN 2016

- Record new business profits of £11.7m.

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

- Market shares within target range.

- Increases in average gross margins.

 

PRIORITIES IN 2017

- Continue to write new business with a market share around 15% without any reductions in gross margins thereby delivering total profits at a similar level to 2016.

- Continue to target higher margin transfer business.

 

KPIs UP TO 2016

 

OCCUPATIONAL PENSION MARKET SHARE %

 

%

2012

2013

2014

2015

2016

Market share

8.1

13.7

12.6

11.7

13.2

 

NEW BUSINESS PROFIT

 

£m

2012

2013

2014

2015

2016

New business profit

2.4

6.3

8.7

6.3

11.7

 

 

BUSINESS REVIEW | NETHERLANDS

 

The Waard group was acquired by Chesnara in May 2015. The group manages life and income protection run-off portfolios and serves as a hub to implement Chesnara's acquisition strategy for the Netherlands.

 

2016 was a year in which the businesses developed rapidly on many fronts, both externally, through targeting the acquisition market, and internally through the embedding in to the Chesnara group, and implementing Solvency II.

 

MAXIMISE VALUE FROM EXISTING BUSINESS

 

CAPITAL AND VALUE MANAGEMENT

GENERAL

- Waard Group's capital and value management aims to make capital available for the Chesnara group for it to successfully pursue its acquisition strategy in the Netherlands and to provide a predictable dividend stream.

- The businesses of Waard are in run-off and cash is released as the capital requirements of the business reduce in line with the attrition of the book. By aiming for capital efficient transactions, such as in asset allocation and reinsurance programmes, capital releases can be accelerated for the benefit of the parent company, without impairing the solvency position of the businesses.

 

2016 UPDATE

- Obtained further reductions in capital requirements, by implementing revised reinsurances and restructuring the asset portfolio (diversification, reduced concentration).

- Accelerated growth of surplus by investment in a portfolio of mortgage loans, generating higher returns with lower risk as compared with the assets held previously.

 

2017 PRIORITIES

- Continue to generate cash flows and release capital by:

o integrating the business of Waard Leven and Hollands Welvaren Leven (merge into one risk carrier).

o fine-tune asset allocation to improve the balance of returns generated from capital held versus solvency capital requirements (SCR).

o insource certain activities to reduce cost.

o cooperating with our new sister business in the Netherlands.

- During 2017 the business will continue to seek opportunities to acquire portfolios or entities in the life insurance arena.

 

CUSTOMER OUTCOMES

GENERAL

- Waard Group places great importance on providing high quality service to its existing customers, whilst also maintaining a platform that exceeds the needs of its current portfolio, in anticipation of further acquisitions in the Netherlands.

 

2016 UPDATE

- Completed the AFM's (national conduct regulator) programme to pro-actively communicate with all unit linked policyholders on the appropriateness of the insurance product that they originally purchased.

- Continued investment in customer friendly tools, such as the re-design of the website and the roll out of the digital policy and transaction platform to a wider customer base, whilst also expanding it to provide further information and services.

 

2017 PRIORITIES

- Review potential additions to the existing platform infrastructure in respect of supplementary products for life insurance portfolios.

 

GOVERNANCE

GENERAL

- Waard Group operates in a regulated environment and aims to comply with rules and regulations both from a prudential and from a financial conduct point of view.

 

2016 UPDATE

- During 2016 Solvency II reporting has been embedded and successfully delivered, both for quantitative and qualitative requirements.

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

- Year end 2016 divisional solvency ratio of 712% (31 December 2015: 597%).

 

2017 PRIORITIES

- Successfully complete first full cycle of Solvency II related reporting.

 

BUSINESS REVIEW | acquire life and pensions businesses

 

We announced the acquisition of Legal and General Nederland for cash consideration of €160m in November, which at the time of writing, is nearing completion. The acquisition is very much in line with our strategy and confirms our belief that the acquisition of the Waard Group in the Netherlands in 2015 would bring further market consolidation opportunities. The deal not only provides immediate financial benefits (which, other than the equity raise, are not included in our 2016 results) but creates sufficient scale and presence to progress further value adding deals in the Dutch market.

 

HIGHLIGHTS OF LGN ACQUISITION

- Purchase price of €160m

- 33% discount to economic value

- Potential for phased, orderly extraction of excess capital

- Attractive risk profile well aligned to our existing risk appetite

 

ACQUISITION OF LEGAL AND GENERAL NEDERLAND

On 24 November 2016 we announced the acquisition of Legal and General Nederland, which was subject regulatory approval. We expect to complete the transaction shortly.

 

OVERVIEW OF LEGAL AND GENERAL NEDERLAND

Legal and General Nederland is a long established, award winning specialist insurer in the Netherlands. It has approximately 170,000 policies, predominantly individual protection and savings contracts and operates on a stand alone basis with few direct links to its existing parent company. It is open to new business and sells protection, individual savings and group pensions contracts via an IFA led distribution model.

 

- €239.3m EcV

- 219% solvency ratio

- 170,600 policies

- €2.2bn AUM

- 147 employees

 

Figures stated as at 30 June 2016

 

THE INVESTMENT CASE

CASH GENERATION

- Significant cash generation is expected from the business

- Material excess capital above the SCR despite conservative capital requirement model based on the standard formula and with no transitional measures.

 

VALUE ENHANCEMENT

- 33% discount to Economic Value

- c£56m increase in Economic Value (excluding equity raise) expected on completion.

 

CUSTOMER OUTCOMES

- Chesnara's focus on good business governance means we represent a "safe hands to safe hands" transfer.

- Continuity of the investment and operating model will ensure existing high quality customer outcomes are not compromised.

 

RISK APPETITE

- A thorough due diligence process identified that the risks associated with the Legal and General Nederland business align with the appetite of the Chesnara group.

 

DEAL STRUCTURE AND FUNDING

The deal is financed through an efficient funding model which includes £70m of equity, c£52m of incremental debt and c£23m of Chesnara's own cash.

 

ACQUISITION OUTLOOK

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

 

There has recently been a gradual increase in closed book market activity in the UK, driven in part by reduced uncertainty regarding Solvency II and regulatory developments. We believe the factors which will drive further consolidation persist, namely larger financial organisations wishing to re-focus on core activities and the desire to release capital or generate funds from potentially capital intensive life and pension businesses.

 

The acquisition of Legal and General Nederland creates scale and presence in the Dutch market and we are well positioned to take advantage of any value adding opportunities that may arise.

 

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

 

CAPITAL MANAGEMENT - Solvency II

 

WHAT IS SOLVENCY AND CAPITAL SURPLUS?

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

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

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

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

 

SOLVENCY SURPLUS TO CASH GENERATION

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

 

MORE ABOUT OWN FUNDS

WHAT ARE OWN FUNDS?

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

 

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

 

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

 

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

 

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

 

Transitional measures are available to temporarily increase own funds. To ensure clarity of the ultimate solvency position Chesnara does not take advantage of such measures.

 

HOW DO OWN FUNDS CHANGE?

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

 

MORE ABOUT THE CAPITAL REQUIREMENT

WHAT IS CAPITAL REQUIREMENT?

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

 

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

 

£m

2016

Total market risk

245.8

Counterparty default risk

35.0

Total life underwriting risk

140.4

Total health underwriting risk

19.9

Capital requirement for other subsidiary

0.4

Operational risk

8.0

SCR

449.5

 

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

 

There are three levels of capital requirement:

 

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

 

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

 

Min capital requirement: The MCR is between 45% and 25% of the SCR. At this point Chesnara would need to submit a recovery plan which if not effective within 3 months may result in authorisation being withdrawn.

 

HOW DOES THE SCR CHANGE?

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

 

CHESNARA GROUP SOLVENCY METRICS

£m

2016

2016

(excl. LGN impact*)

2015

Own funds

505

443

381

SCR

321

309

260

Solvency surplus

185

135

121

Solvency ratio %

158%

144%

146%

*Excluding impact of equity raised for LGN acquisition and associated costs

 

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

 

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

 

CHESNARA GROUP

ANALYSIS

- Surplus: The solvency position of the group remains strong, at 158%. On a like for like basis, after removing the impact of the capital raise and associated costs for the acquisition of LGN, the ratio is 144%.

- Dividends: The solvency position is stated after deducting £19.0m proposed dividend (31 December 2015: £15.6m).

- Own funds: The increase in own funds is principally driven by the impact of the equity raise to fund the LGN acquisition and the own funds generation in the group's divisions.

- SCR: The SCR has increased by £61.0m in the year. This is largely due to increases in the division's SCRs, depreciation of sterling against the Euro and SEK and additional market risk SCR being held for the equity capital raise.

 

SOLVENCY POSITION

£m

2016

2016

(excl. LGN impact*)

2015

Own funds (post dividend)

505

443

381

SCR

321

309

260

Buffer

32

31

26

Surplus

153

104

95

Solvency ratio %

158%

144%

146%

 

SENSITIVITIES

Impact (£m)

1% fall in yields

10% fall in equity values

Own funds

(12.8)

(27.5)

SCR

1.7

(22.5)

Surplus

(14.5)

(5.0)

 

UK

ANALYSIS

- Surplus: £11m above board's capital management policy.

- Dividends: The solvency position is stated after deducting £30.0m proposed dividend (31 December 2015: £30.5m). The dividend remains subject to completion of a 'no objection' process with the PRA.

- Own funds: Positive growth before dividends of £28m, driven by positive equity markets and positive experience variance, predominantly mortality and morbidity.

- SCR: Slight increase in year driven largely by higher market risk capital being held largely due to equity growth and spread risk due to investment portfolio changes.

 

SOLVENCY POSITION

£m

2016

2015

Own funds (post dividend)

166

168

SCR

130

124

Buffer

26

25

Surplus

11

19

Solvency ratio %

128%

135%

 

SENSITIVITIES

Impact (£m)

1% fall in yields

10% fall in equity values

Own funds

(7.2)

(8.5)

SCR

0.8

(11.1)

Surplus

(8.0)

2.6

 

SWEDEN

ANALYSIS

- Surplus: £27m above the board's capital management policy.

- Dividends: The solvency position is stated after deducting £2.7m proposed dividend (31 December 2015: £nil).

- Own funds:  Growth largely driven by positive economic experience due to positive equity markets coupled with positive operating experience on in force policies.

- SCR: Increase is largely due to increased market risk capital being held due to equity growth in year and higher currency stress. In addition, refined modelling for capital required for mass lapse risk has resulted in a c£5.0m increase in the SCR/

 

SOLVENCY POSITION

£m

2016

2015*

Own funds (post dividend)

190

168

SCR

136

109

Buffer

27

22

Surplus

27

37

Solvency ratio %

140%

154%

*Restated using 31 Dec 2016 exchange rates

The table above presents a divisional view of the solvency position, which is different to the reported position of the individual insurance company(ies) within the division.

 

SENSITIVITIES

Impact (£m)

1% fall in yields

10% fall in equity values

Own funds

(3.9)

(15.2)

SCR

0.2

(8.2)

Surplus

(4.2)

(7.0)

 

NETHERLANDS

ANALYSIS

- Surplus: £62m above the board's capital management policy.

- Dividends: No dividends are planned to be paid out of the Dutch division (31 December 2015: £nil). However, a dividend of c£31m is planned to be paid by the insurance companies within the division to the Dutch holding company to part-fund the acquisition of LGN.

- Own funds: Increase driven by positive impact of lapse assumption changes and economic experience due to yield curve reductions, off-set by the negative impact of updating expense modelling assumptions.

- SCR: Overall reduction over the year. Movement includes an increase in SCR due to the investment in a mortgage portfolio, offset by SCR reductions arising from the sale of two CDO assets and a "life insurance risk" SCR reduction as a result of a new reinsurance treaty.

 

SOLVENCY POSITION

£m

2016

2015*

Own funds (post dividend)

87

82

SCR

12

14

Buffer

12

14

Surplus

62

54

Solvency ratio %

712%

597%

*Restated using 31 Dec 2016 exchange rates

The table above presents a divisional view of the solvency position, which is different to the reported position of the individual insurance company(ies) within the division.

 

SENSITIVITIES

Impact (£m)

1% fall in yields

10% fall in equity values

Own funds

(0.2)

(0.5)

SCR

0.4

(0.2)

Surplus

(0.6)

(0.3)

 

FINANCIAL REVIEW

The key performance indicators below are a reflection of how we have performed in delivering our three strategic objectives and our core culture and values. 2016 has seen cash generation, before the impact of the LGN acquisition, which exceeds the full year dividend, IFRS profits in line with last year and robust EcV earnings, resulting in a closing EcV of £602.6m.

 

SUMMARY OF EACH KPI:

 

IFRS

PRE-TAX PROFIT: £40.7M (2015: £42.8M)

TOTAL COMPREHENSIVE INCOME: £55.4M (2015: £39.6M)

 

What is it?

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

 

Why is it important?

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

 

Highlights

£m

2016

2015

CA

28.4

23.9

S&P

14.3

10.6

Movestic

8.7

6.7

Waard

6.2

0.9

Group & consol adj.

(16.9)

(15.9)

Profit on acquisition

-

16.6

Taxation

(5.4)

(3.0)

Forex impact

20.1

(0.2)

Total

55.4

39.6

 

- Strong pre-tax results across all segments.

- IFRS pre-tax profit of £40.7m broadly in line with prior year. The prior year result included a one off gain of £16.6m relating to the acquisition of the Waard group and therefore the underlying result has improved by 53%.

- All segments have delivered results ahead of 2015, supported by positive equity markets during the year.

- Total comprehensive income includes a large foreign exchange gain of £20.1m (2015: £0.2m loss) relating to sterling's depreciation against both the euro and Swedish krona.

 

Risks

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

 

 

CASH GENERATION

GROUP CASH GENERATION £85.4M (2015: £82.4M*)

DIVISIONAL CASH GENERATION £34.3M (2015: £50.9M*)

 

What is it?

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

 

Why is it important?

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

 

Highlights

£m

2016

UK

21.3

Sweden

(2.7)

Netherlands

15.7

Divisional cash generation

34.3

Other group activities

2.2

Total cash generation (excl. LGN impact)

36.5

Impact of LGN

48.9

Total group cash generation

85.4

 

Divisional cash

- Positive cash contributions from UK and Netherlands, with Netherlands cash generation being a function of exchange rate gains.

- Overall divisional cash generation is lower than last year largely due to a reduction in the UK.

- This is off-set by small negative generation in Sweden as we continue to invest in our new business operations.

 

Total cash generation

- At a group level this includes the positive impact of the new equity capital that was raised to part-fund the LGN acquisition, due to complete in 2017. This has had a significant temporary positive benefit on our cash generation in the period. The temporary impact includes a positive £70m from the equity raise offset by £7.9m of one-off costs and £13.2m associated increase in capital requirement.

 

* includes one-off cash generation of £39.9m arising on the acquisition of the Waard group.

 

Risks

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

 

 

ECONOMIC VALUE (EcV)

£602.6M (2015: £453.4M)

 

What is it?

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

 

Why is it important?

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

 

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

 

Highlights

£m

2015 Group EcV

453.4

EcV earnings

72.5

Equity raise

66.9

Dividends

(24.2)

Forex gain

34.0

2016 Group EcV

602.6

 

- Economic value at the end of the year exceeds £600m for the first time, having increased by £149m since the start of the year.

- Growth includes impact of equity raise and associated costs to fund the LGN acquisition in 2016, expected to complete in 2017. A further EcV gain is expected to arise on acquisition.

- Strong earnings and large foreign exchange gains contribute to the overall growth in the year.

 

Risks

The economic value of the group is affected by economic factors such as equity and property markets and yields on fixed interest securities. In addition to this, whilst the other KPIs (which are all "performance measures") remain relatively insensitive to exchange rate movements, the EcV position of the group can be materially affected by exchange rate fluctuations. For example a 10.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group by 3.4% and 1.3% respectively, based on the composition of the group's EcV at 31 December 2016.

 

 

ECV EARNINGS NET OF TAX

£72.5M (2015: £57.5M*)

* comparative is measured on an EEV basis

 

What is it?

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

 

The principal underlying components of the economic value result are:

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

- Value added by the writing of new business.

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

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

- The impact of acquisitions.

 

Why is it important?

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

 

Highlights

£m

2016

Operating earnings

33.8

Economic earnings

39.6

Other

(1.1)

Total EcV earnings

72.5

 

- EcV earnings of £72.5m in the year, driven by a combination of strong operating and economic earnings.

- Strong operating earnings driven by new business profits in Sweden and positive operating experience items on in force polices.

- Economic earnings primarily driven by strong equity performance across Europe.

 

Risks

The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties as set out on pages 39 to 41. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the future cash flows arising from our books of business.

 

 

IFRS PRE-TAX PROFIT

£40.7M (2015: £42.8M)

 

IFRS TOTAL COMPREHENSIVE INCOME

£55.4M (2015: £39.6M)

 

Executive summary

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

 

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

 

Variable element: The S&P component can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements.

 

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

 

 IFRS results

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

 

2016

2015

£m

£m

Note

CA

28.4

23.9

1

S&P

14.3

10.6

2

Movestic

8.7

6.7

3

Waard Group

6.2

0.9

4

Chesnara

(9.7)

(9.5)

5

Consolidation adjustments

(7.2)

(6.4)

6

Profit before tax and profit on acquisition

40.7

26.2

Profit on acquisition of the Waard Group

-

16.6

4

Profit before tax

40.7

42.8

Tax

(5.4)

(3.0)

Profit after tax

35.3

39.8

Foreign exchange translation differences

20.1

(0.2)

7

Total comprehensive income

55.4

39.6

 

 

2016

2015

£m

£m

Note

Operating profit

34.9

16.6

8

Economic profit

5.8

9.6

9

Profit before tax and profit on acquisition

40.7

26.2

Profit on acquisition of the Waard Group

-

16.6

4

Profit before tax

40.7

42.8

Tax

(5.4)

(3.0)

Profit after tax

35.3

39.8

Foreign exchange translation differences

20.1

(0.2)

7

Total comprehensive income

55.4

39.6

 

 

Note 1: The CA segment has reported results for the period in excess of those in 2015. Positive mortality experience has resulted in a positive change in mortality assumptions being reflected in the results. Modest economic profits of c£2m have been reported, reflecting the impact of positive equity markets, offset by a fall in yields in the year.

 

Note 2: The S&P segment has reported an increase in profits on the prior year. Positive economic profits of c£4m arise from the net impact of positive equity markets offset by falling bond yields. Positive assumption changes of c£5m include the positive impact of lapse assumption changes and a change in annuity pricing assumptions, offset by a £3.5m charge in relation to the 1% exit fee cap on all policies where the policyholder is over 55.

 

Note 3: Movestic has reported its most successful result since its acquisition in 2009. This is principally driven by strong growth in assets under management and increased premium volumes, coupled with positive performance fees in the investment management side of the business.

 

Note 4: The Waard Group has reported a significant growth in profit compared with the prior year. In part this is because the prior year results are only for the short post-acquisition period. In addition the 2016 result has benefitted from the investment in a mortgage portfolio and the sale of other investments during the year. The group was purchased on 19 May 2015 and a one-off gain on acquisition of £16.6m was recognised in 2015.

 

Note 5: The Chesnara result represents holding company expenses, with 2016 costs being broadly in line with 2015. The current year includes one off expenses of £3.8m relating to the acquisition of LGN. The prior year includes a one off foreign currency re-translation loss of £3.5m arising from holding euros prior to the completion of the Waard Group purchase.

 

Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets and remain in line with prior year.

 

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

 

Note 8: The operating result demonstrates the strength and stability of the underlying business, driving the generation of profit. Product based income and favourable movements in operating experience and assumption changes, specifically mortality, have supported performance in the UK. Strong premium growth and favourable movement in transfers contribute to the Movestic operating result, whilst the Waard result benefitted from the investment in a mortgage portfolio.

 

Note 9: Economic profit represents the components of the earnings that are directly driven by movements in economic variables, e.g. the impact of yield movements on the cost of guarantees reserves. During 2016 the economic profit is generally driven by the net impact of positive equity markets, offset by falling bond yields in the year.

 

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

 

TOTAL GROUP CASH GENERATION

£85.4M (2015: £82.4M)

 

DIVISIONAL CASH GENERATION

£34.3M (2015: £50.9M)

 

Cash in the business is generated from increases in the group's surplus funds. Surplus funds represent the excess of assets held over management's internal capital needs, as in the capital management policies across the group. These are based on regulatory capital requirements, with the inclusion of additional "management buffers". This year is the first period that our cash generation metric has been calculated with reference to capital management policies based on Solvency II. Comparatives as reported applied our previous Solvency I based capital policies.

 

Highlights

31 Dec 2016

(£m)

Movement in

own funds

Movement in management's capital

requirement

Forex

impact

Cash generated

 UK

28.7

(7.4)

-

21.3

Sweden

23.5

(29.9)

3.7

(2.7)

Netherlands

5.0

2.1

8.5

15.7

Divisional cash

57.2

(35.1)

12.2

34.3

Other group activities

1.5

0.7

-

2.2

Group cash pre LGN equity raise

58.8

(34.4)

12.2

36.5

Impact of LGN equity raise

62.1

(13.2)

-

48.9

Total group cash

120.9

(47.6)

12.2

85.4

 

UK

- The UK continues to generate levels of cash in line with plans despite being hampered by falling bond yields in the year.

- Own funds growth is the main driver of cash generation in the UK, which has benefitted from favourable equity markets and positive mortality and morbidity experience.

- Off-setting this is an increase in required capital, principally due to additional market risk capital being held due to higher equity growth and a change in investment mix in the year.

 

SWEDEN

- Sweden has a negative cash generation in 2016 despite positive Swedish krona exchange gains against sterling.

- Own funds have benefited from equity returns driving growth in assets under management, whilst premium volume growth has also contributed to the increase in surplus.

- Under Solvency II regulations the movement in the equity market has also had an adverse impact of the level of capital the business is required to hold, driving the increase in management capital requirement. In addition the increase in required capital includes a one off capital increase for "mass lapse" risk due to a modelling change during the year.

 

NETHERLANDS

- The Netherlands continued the solid cash generation witnessed throughout the year with positive underlying movements in both own funds and capital requirements.

- Growth in own funds has benefited from returns generated from the mortgage portfolio investment and also the sale of other investments.

- Euro exchange gains against sterling however remain fundamental to the final result.

 

GROUP

- Cash has continued to be generated across the group, with total cash generation in the period of £85.4m. This includes the impact of the equity raise and associated costs for the LGN acquisition.

- Adjusting for this the group has generated £36.5m of cash which continues to be of a magnitude that would support our levels of dividend.

- Cash generation in the prior period benefitted from a one-off positive contribution of £39.9m, arising on the acquisition of the Waard group.

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

 

OTHER GROUP ACTIVITIES

- Other group activities include Chesnara holding company activities coupled with consolidation adjustments.

- Movement in own funds of £1.5m is largely as a result of group level expenses being offset by a tax credit in the year.

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

 

 

EcV EARNINGS 

£72.5M (2015: £57.5M)

 

Despite the level of variability in investment markets over the year, with falling bond yields, significant sterling depreciation and volatile yet growing equity markets, the group has reported significant EcV earnings in the period reflecting the resilience and diversity of the business.

 

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

 

 

31 Dec 2016

£m

Expected movement in period

6.0

New business

11.9

Operating variances

22.7

Operating assumption changes

0.6

Other operating variances

(7.3)

Total operating earnings

33.9

Economic experience variances

77.9

Economic assumption changes

(38.3)

Total economic earnings

39.6

Other non-operating variances

0.8

Risk margin movement

(3.8)

Tax

2.0

Total EcV earnings

72.5

 

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

 

 

31 Dec 2016

£m

Note

UK

42.2

1

Sweden

30.8

2

Netherlands

5.9

3

Group and group adjustments

(8.4)

4

EcV earnings before tax

70.5

Tax

2.0

5

EcV earnings after tax

72.5

 

* This is the first period that EcV earnings have been reported. Consequently comparative information has not been presented.

 

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

- The FTSE All share index has increased by 12.5%;

- The Swedish OMX all share index has increased by 6.6%; and

- 10 year UK gilt yields have fallen from 2.01% to 1.28%.

 

Note 1 - UK: The UK reported significant pre tax earnings of £42.2m for the period. Operating earnings of £25.2m demonstrate the strength and robustness of the underlying business. The result was supported by favourable movements in relation to assumptions on mortality and guaranteed policies. Economic profits of £20.5m were driven by positive equity market growth. This was partially offset by the negative impact of yield curve reductions across the year and resultant increase in risk margin.

 

Note 2 - Sweden: The Swedish division has reported a large EcV movement in the year. Operating earnings of £16.6m were underpinned by strong new business performance, owing to transfer volumes and increased average policy premiums. Substantial operating earnings on the in force business are offset by a negative movement in operating assumptions, predominantly relating to lower than expected fund rebates. An economic profit of £13.9m was also reported, driven by the recovery of equity markets in the latter stages of 2016. Following challenging conditions experienced in the first six months of the year, 2016 closed with a considerable total annual return of 7.6% achieved for the portfolio.

 

Note 3 - Netherlands: The Dutch division has reported earnings of £5.9m in the period. This is primarily all economic earnings supported by the disposal of CDO investments and returns generated on the property portfolio investment, following a decline in yield curve rates witnessed in the year.

 

Note 4 - Group: A loss has been reported in the group component. This is includes the impact of costs incurred in relation to LGN and also underlying group level expenses and consolidation activities.

 

Note 5 - Tax: The business is reporting a tax credit of £2.0m in the period. This is driven by a combination of deferred tax on the loss in the period relating to group level activities, coupled with a modelling adjustment for deferred tax when compared with the opening period.

 

EcV 

£602.6M (2015: £453.4M)

 

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

 

Value movement: 1 Jan 2016 to 31 Dec 2016:

 

£m

2015 Group EcV

453.4

EcV earnings

72.5

Equity raise

66.9

Dividends

(24.2)

Forex gain

34.0

2016 Group EcV

602.6

 

EcV earnings: Positive EcV earnings have been reported in the year, a result of strong operating profits and positive economic profits, driven by the net impact of equity market growth in the year offset by falling bond yields.

 

Equity raise: In December 2016 the group announced that new equity had been raised with the intention to purchase LGN, which is expected to complete during 2017. Consequently the growth in EcV reflects the proceeds of the equity raise.

 

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £24.2m were paid during the 2016, being the final dividend from 2015 and interim 2016 dividend.

 

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

 

EcV by segment at 31 Dec 2016:

 

£m

UK

239.6

Sweden

225.4

Netherlands

88.4

Other group activities

49.3

2016 Group EcV

602.6

 

The above graph shows that the EcV of the group is diversified across its different markets. In particular, the EcV of the UK and Swedish operations are of similar sizes, showing that we are well-balanced and not over-exposed to one particular geographic market.

 

EcV to Solvency II:

 

£m

2016 Group EcV

602.6

Risk margin

(40.6)

Contract boundaries

(27.0)

Own funds restrictions

(10.6)

Dividends

(19.0)

2016 SII own funds

505.4

 

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

 

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

 

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

 

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

 

Dividends: The proposed final dividend of £19.0m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

 

Replacement of EEV:

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

 

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

 

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

 

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

 

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

 

 

FINANCIAL management

 

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

 

SUMMARY:

 

OBJECTIVES

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

 

- Maintain solvency targets

- Meet the dividend expectations of shareholders

- Optimise the gearing ratio to ensure an efficient capital base

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

- Maintain the group as a going concern

 

HOW WE DELIVER TO OUR OBJECTIVES

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

1. Monitor and control risk & solvency

2. Longer-term projections

3. Responsible investment management

 

 

OUTCOMES

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

1. SOLVENCY: 

Group solvency ratio: 158%

 

2. SHAREHOLDER RETURNS

2016 TSR 15.7%

2016 dividend yield 6.1%

Based on average 2016 share price and full year 2016 dividend of 19.49p.

 

3. CAPITAL STRUCTURE

Gearing ratio of 13.4%

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

 

4. LIQUIDITY AND POLICYHOLDER RETURNS

Policyholders' reasonable expectations maintained.

Asset liability matching framework operated effectively in the year.

Sufficient liquidity in the Chesnara holding company.

 

5. MAINTAIN THE GROUP AS A GOING CONCERN

Group remains a going concern

 

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

 

1. Capital structure

 

The group is funded by a combination of share capital, retained earnings and debt finance, with the debt gearing (excluding financial reinsurance in Sweden) being 13.4% at 31 December 2016 (17.8% at 31 December 2015).

 

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

 

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

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

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

 

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

- size of the acquisition;

- current cash resources of the group;

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

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

- future financial commitments; and

- regulatory rules.

 

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

 

2. Maintain the group as a going concern

 

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

 

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

 

 The information set out above indicates a strong solvency position as at 31 December 2016 as measured at both the divisional and group levels. As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to continue trading. The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that any associated credit default risk is low.

 

In light of the above information, the board has concluded that the group and company has a reasonable expectation that the group and company have adequate resources to continue in operational existence for the foreseeable future, and, as stated in the Directors Report on page 82, the Financial Statements have continued to be prepared on a going concern basis.

 

3. Longer term viability statement

 

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

 

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

i. Equity market declines

ii. Reduction in yield curves

iii. Adverse mortality and lapse experience

iv. Adverse expense experiences

v. Reduced new business volumes

vi. Adverse exchange rate experience

 

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

 

 

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

 

Risks and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the ability of the group to meet its core strategic objectives. These currently centre on the intention of the group to maintain an attractive dividend profile whilst delivering good service and fair outcomes for our customers.

 

The group Audit and Risk Committee reviews (A&RC), challenges and approves the group Executive Committee's assessment of the group's Principal Risks and the adequacy of the controls in place to manage those risks on a quarterly basis. The assessment is based on pre-defined criteria for what constitutes a Principal Risk, and corresponding materiality levels, which is subject to annual review and approval by the group A&RC.

 

The specific principal risks and uncertainties are determined taking into account of the following:

 

i) the group's core operations centre on the run-off of closed life and pensions businesses in the UK and the Netherlands;

ii) notwithstanding this, the group has a material segment, which comprises an open life and pensions business; and

iii) these businesses are subject to local regulation, which significantly influences the amount of capital which they are required to retain and which may otherwise constrain the conduct of business.

 

The following table outlines the Principal Risks and Uncertainties of the group and the controls in place to mitigate or manage their impact. It has been drawn together following regular assessment performed by the Audit and Risk Committee of the Principal Risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. These have remained largely unchanged from those reported in the 2015 Annual Report & Accounts.

 

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

Risk

Impact

Control

 

Adverse mortality / morbidity / longevity experience

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

- Effective underwriting techniques and reinsurance programmes.

- Regular investigations, and industry analysis, to support best estimate assumptions and identify trends.

- The option on certain contracts to vary premium rates in the light of actual experience, subject to fair treatment of customers.

- Partial risk diversification in that the group has a portfolio of annuity contracts where the benefits cease on death.

 

Adverse persistency experience

If persistency is significantly lower than that assumed in product pricing and subsequent reserving, this will lead to reduced group profitability in the medium to long-term. Further, for parts of the business such as Movestic, where retention is too a degree dependent on Broker relationships, the business is exposed to losses arising from "mass lapse" events.

- Active investment management to ensure competitive policyholder investment funds.

- Stringent management of customer service delivery and adherence to principles of treating customers fairly.

- Product distributor relationship management processes.

- Close monitoring of persistency levels across all groups of business to support best estimate assumptions and identify trends.

- Movestic seeks to maintain good relationships with Brokers. This is independently measured via yearly external surveys that considers Broker's attitude towards different insurers.

- Movestic has clawback arrangements with Brokers.

 

Expense overruns and unsustainable unit cost growth

For the closed UK and Dutch businesses, the group is exposed to the impact on profitability of fixed and semi-fixed expenses, in conjunction with a diminishing policy base. For the Swedish open life and pensions business, the group is exposed to the impact of expense levels varying adversely from those assumed in product pricing.

- For the UK business the group pursues a strategy of outsourcing functions with charging structures such that the policy administration cost is more aligned to the book's run off profile.

- The Swedish operations assume growth through new business such that the general unit cost trend is positive.

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

- For all three divisions, the group maintains a strict regime of budgetary control.

- In the mid/longer term inorganic growth through acquisitions is expected to result in cost synergies and sharing of fixed overheads.

 

Significant and prolonged reduction in the market value of asset holdings

A significant part of the company's income and, therefore, overall profitability derives from fees received in respect of the

management of policyholder and investor funds. Fee levels are generally proportional to the value of funds under management and any material fall in their value will impact on future income. In addition, for with profits products with guarantees, a sustained fall in the market value of assets can increase the cost of meeting the guaranteed benefits.

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

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

- Wide range of investment funds and managers to avoid significant concentrations of risk

- Individual fund mandates are intended to give rise to a degree of diversification of risk.

- Established investment governance framework to provide review and oversight of external fund managers, and monitor adherence to investment policy

- Operation of controls which limit the level of exposure to any single counterparty and impose limits on exposure by credit rating.

- Certain investment management costs are also proportional to fund values thereby reduce in the event of market falls and hence some cost savings arise partially offsetting the impact on income.

 

 

Adverse exchange rate movements against Sterling

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

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

- The impact of any adverse currency movements can be reduced by timely movement of cash flows from subsidiaries to group, if appropriate given various other applicable criteria for transfers.

 

Counterparty failure

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

- its fixed interest security portfolio;

- cash deposits; and

- payments due from reinsurers.

- Operation of guidelines which limit the level of exposure to any single counterparty and which impose limits on exposure to credit ratings.

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

 

Adverse movements in yields on fixed interest securities

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

- The group maintains rigorous matching programmes to ensure that exposure to mismatching is minimised.

- Active investment management such that, where appropriate, asset mixes will be changed to mitigate the potential adverse impact of a decline in bond yields.

 

Failure of outsourced service providers to fulfil contractual obligations

The group's UK life and pensions businesses are heavily dependent on outsourced service providers to fulfil a significant number of their core functions. In the event of failure by any of the service providers to fulfil their contractual obligations, in whole or in part, to the requisite standards specified in the contracts, the group may suffer losses, poor customer outcomes, or reputational damage as its functions degrade.

- Rigorous service level measures and management information flows under its contractual arrangements.

- Continuing and close oversight of the performance of all service providers.

- The supplier relationship management approach is conducive to ensuring the outsource arrangements deliver to their obligations.

- Ongoing monitoring and testing of business continuity plans and financial assessments of outsourced service providers.

- Under the terms of the contractual arrangements the group may impose penalties and/or exercise step-in rights in the event of specified adverse circumstances.

 

Key man dependency

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

- The group promotes the sharing of knowledge and expertise to the fullest extent possible.

- It periodically reviews and assesses staffing levels, and, where the circumstances of the group justify and permit, will enhance resource to ensure that know how and expertise is more widely embedded.

- The group maintains succession plans and remuneration structures which comprise a retention element.

- The group complements its internal expertise with established relationships with external specialist partners.

 

Adverse regulatory and legal changes

The group operates in jurisdictions which are currently subject to significant change arising from regulatory and legal requirements. These may either be of a local nature, or of a wider nature, following from EU-based regulation and law. During 2016 this risk has been compounded by the increased political uncertainties following the UK referendum to leave the EU and US Presidential elections, which may lead to further change. Significant issues which have arisen and where there is continuing uncertainty as to their full impact on the group include:

i) the FCA's review of legacy business and other reviews such as the Asset Management market study;

ii) the introduction of a cap on exit charges on UK pensions business;

iii) consultations regarding commission and rebate income changes in Sweden.

iv) the embedding of Solvency II requirements, including Pillar 3 Disclosure implementation; and

v) the changes in pensions legislation in April 2015.

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

Strong project management disciplines are applied when delivering regulatory change programmes.

 

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

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

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

- Performing internal reviews of compliance with regulations; and

- Utilising external specialist advice and assurance, when appropriate .

 

Chesnara maintains strong relationships with all key regulators including regular and open dialogue about areas of potential change that could affect any of the Chesnara businesses.

 

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

Inconsistent regulation across territories

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

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

- Strong and open relationships are maintained with all regulators. Evidence is provided to regulators that demonstrates consistent stability and control across divisions, achieved through strong risk management and governance standards.

- In extremis, Chesnara could consider the re-domiciling of subsidiaries or legal restructure of the business.

Availability of future acquisitions

Chesnara's inorganic growth strategy is dependent on the availability of attractive future acquisition opportunities. Hence, the business is exposed to the risk of a reduction in the availability of suitable acquisition opportunities in Chesnara's current target markets, for example arising as a result of a change in competition in the consolidation market or from regulatory change influencing the extent of life company strategic restructuring.

- Chesnara's financial strength and market reputation for successful execution of transactions enables the company to adopt a patient and risk-based approach to assessing acquisition opportunities.

- Operating in multi-territories provides some diversification against the risk of changing market circumstances in one of the territories.

- Maintaining strong relationships and reputation as a "safe hands acquirer" via regular contact with regulators, banks and target companies.

Defective acquisition due diligence

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

- Structured board approved risk-based acquisition process including group CRO involvement in due diligence process.

- Management team with significant and proven mergers and acquisitions experience.

- Cautious risk appetite and pricing approach.

Cyber risk

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

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

- Information security policy embedded in all key operations and development processes.

- Ongoing specialist external advice, modifications to IT infrastructure and updates as appropriate.

- Regular staff training and attestation of the information security policy

- Penetration and vulnerability testing, including third party service providers.

- Chesnara and supplier Business continuity plans regularly monitored and tested.

 

Liquidity risk

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

- Chesnara has a liquidity policy in place which includes various controls to manage liquidity risk such as:

- Asset / Liability modelling;

- Regular liquidity forecasts; and

- Cash projections to support strategic initiatives such as acquisitions.

- Chesnara holds a significant amount of surplus in highly liquid tier 1 assets such as cash and gilts.

 

 

 

DIRECTORS' REsponsibilities STATEMENT

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

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

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

 

On behalf of the Board

 

 

 

Peter Mason John Deane

Chairman Chief Executive Officer

 

30 March 2017 30 March 2017

 

 

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

 

We confirm that we have issued an unqualified opinion on the full financial statements of Chesnara plc.

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

 

Accuracy of Save & Prosper Cost of Guarantees 

 

The risk

The assessment of the cost of guarantee reserves for policies written by Save and Prosper is complex and material, including the use of a stochastic model based on a variety of possible economic scenarios. Historically, the residual cost to shareholders arising from the cost of guarantees has fluctuated significantly as a result of movements in bond yields and equity markets with a value of £35.7m at 31 December 2016 (31 December 2015: £37.2m). The value is determined by a third party actuarial consultant and the directors compare this valuation against an in-house derived estimate using an approximation model to validate its reasonableness.

 

How the scope of our audit responded to this risk

We assessed the competence of the actuarial consultant. Such an assessment includes a direct challenge of the actuarial consultant's working papers and a challenge of the historical accuracy of modelling when compared with actual experience. We used actuarial specialists within our audit team to challenge the appropriateness of assumptions input into the model and benchmark against external actuarial data. Sensitivity analysis was also performed to assess potential management bias. We developed an independent expectation of how the assumptions impact the model and challenged management's explanation and analysis to support any variations.

 

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

 

Key observations

Based on the audit procedures performed, we found that the assumptions underpinning the stochastic modelling were reasonable and had been applied appropriately.been made following our reassessment of what matters require communicating. We also report to the Audit & Risk Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

 

Valuation of the Protection Life acquired value in-force ('PtL AVIF') business intangible

 

The risk

At 31 December 2016 the Group carried an intangible asset for the PtL AVIF of £11.6m (31 December 2015: £15.0m).

 

Following a review of the PtL AVIF business intangible in the prior year, we continued to focus on the valuation of this asset as it is the AVIF intangible which is most sensitive to changes in key assumptions used.

 

Assessing the recoverable value of the acquired in-force business intangible asset requires significant judgment in the estimation of the net present value of cash flows expected to arise from the pre-acquisition policies acquired in past business combinations. The key assumptions are persistency rates, discount rates and economic assumptions.

 

How the scope of our audit responded to this risk

We evaluated the carrying value of the PtL AVIF intangible asset by reviewing and challenging:

- the mechanical accuracy of the net present value calculation;

- the future cash flows within the model to assess whether these were the latest available and were those used consistently throughout the business;

- the level of headroom this calculation generated by reference to the post amortisation carrying value of the asset; and

- the appropriateness of the key assumptions used within the model by reference to actual experience and performance of sensitivity analysis where appropriate.

 

We assessed the design and implementation of the controls over the impairment test performed by management to evaluate the suitability of the carrying value of the intangible asset.

 

Key observations

We found that the assumptions underpinning the impairment test were appropriate and applied consistently. We found that the carrying value of the intangible asset remains appropriate.

 

Valuation of the Protection Life acquired value in-force ('PtL AVIF') business intangible

 

The risk

Actuarial liabilities are calculated using an appropriate discount rate to take account of the time value of future expected payments. The discount rate used to determine the UK actuarial liabilities includes an adjustment to reflect the credit risk of those future cash flows. The determination of the credit risk adjustment which is applied to non-government bond yields is a source of significant judgment and is material to the Balance Sheet.

 

How the scope of our audit responded to this risk

We evaluated the appropriateness of the principal assumptions relating to the credit risk element of the valuation interest rates assumption for discounting the technical provisions. This involved benchmarking the credit risk assumptions used against those obtained from external data, including a comparison with those adopted by industry peers, where available.

 

We substantively agreed a sample of non-government bonds used within the calculation of the valuation rate of interest to the value of those bonds on the balance sheet to check whether they were consistent.

 

We evaluated the design and implementation of the internal controls around the determination and application of the credit element of the valuation rate of interest applied in discounting actuarial liabilities.

 

Key observations

We found that the methodology for credit risk adjustments applied to the valuation interest rate is appropriate and applied consistently.

 

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we did not provide a separate opinion on these matters.

 

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

 

 

Deloitte LLP

Chartered Accountants and Statutory Auditor

 

CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 December

2016

2015

£000

£000

Insurance premium revenue

109,450

114,749

Insurance premium ceded to reinsurers

(44,900)

(46,811)

Net insurance premium revenue

64,550

67,938

Fee and commission income

72,932

66,249

Net investment return

515,681

148,514

Total revenue net of reinsurance payable

653,163

282,701

Other operating income

17,614

18,586

Total income net of investment return

670,777

301,287

Insurance contract claims and benefits incurred

Claims and benefits paid to insurance contract holders

(346,117)

(318,721)

Net increase in insurance contract provisions

11,392

191,850

Reinsurers' share of claims and benefits

62,364

32,004

Net insurance contract claims and benefits

(272,361)

(94,867)

Change in investment contract liabilities

(274,724)

(100,469)

Reinsurers' share of investment contract liabilities

5,617

733

Net change in investment contract liabilities

(269,107)

(99,736)

Fees, commission and other acquisition costs

(23,838)

(20,875)

Administrative expenses

(46,615)

(41,301)

Other operating expenses

Charge for amortisation of acquired value of in-force business

(10,419)

(9,274)

Charge for amortisation of acquired value of customer relationships

(236)

(222)

Other

(4,394)

(5,866)

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

(626,970)

(272,141)

Total income less expenses

43,807

29,146

Share of profit of associate

150

455

Profit recognised on business combination

-

16,644

Financing costs

(3,272)

(3,457)

Profit before income taxes

40,685

42,788

Income tax expense

(5,405)

(3,000)

Profit for the year

35,280

39,788

Foreign exchange translation differences arising on the revaluation of foreign operations

20,114

(173)

Total comprehensive income for the year

55,394

39,615

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

27.67p

31.48p

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

27.56p

31.41p

 

CONSOLIDATED BALANCE SHEET

31 December

2016

2015

£000

£000

Assets

Intangible assets

Deferred acquisition costs

48,318

36,061

Acquired value of in-force business

62,943

68,341

Acquired value of customer relationships

736

875

Software assets

6,560

4,720

Property and equipment

519

537

Investment in associates

5,433

4,707

Investment properties

245

245

Reinsurers' share of insurance contract provisions

254,859

282,628

Amounts deposited with reinsurers

37,437

33,941

Financial assets

Equity securities at fair value through income

485,165

486,243

Holdings in collective investment schemes at fair value through income

4,104,602

3,499,355

Debt securities at fair value through income

474,091

423,754

Policyholders' funds held by the Group

229,397

189,919

Mortgage loan portfolio

54,756

Insurance and other receivables

39,646

43,674

Prepayments

5,271

6,565

Derivative financial instruments

2,773

2,721

Total financial assets

5,395,701

4,652,231

Reinsurers' share of accrued policyholder claims

19,307

19,042

Income taxes

3,352

3,611

Cash and cash equivalents

260,353

260,863

Total assets

6,095,763

5,367,802

Liabilities

Insurance contract provisions

2,242,446

2,232,083

Other provisions

823

1,905

Financial liabilities

Investment contracts at fair value through income

3,028,269

2,457,521

Liabilities relating to policyholders' funds held by the Group

229,397

189,919

Borrowings

86,843

79,025

Derivative financial instruments

1,348

444

Total financial liabilities

3,345,857

2,726,909

Deferred tax liabilities

5,420

7,906

Reinsurance payables

6,899

9,660

Payables related to direct insurance and investment contracts

61,416

62,284

Deferred income

5,438

6,212

Income taxes

8,624

6,328

Other payables

23,657

18,401

Bank overdrafts

1,622

952

Total liabilities

5,702,202

5,072,640

Net assets

393,561

295,162

Shareholders' equity

Share capital

43,766

42,600

Share premium

142,058

76,516

Treasury shares

(161)

(161)

Other reserves

19,300

(814)

Retained earnings

188,598

177,021

Total shareholders' equity

393,561

295,162

 

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended 31 December

2016

2015

£000

£000

Profit for the year

35,280

39,788

Adjustments for:

Depreciation of property and equipment

173

203

Amortisation of deferred acquisition costs

12,162

9,251

Amortisation of acquired value of in-force business

6,797

9,274

Amortisation of acquired value of customer relationships

172

222

Amortisation of software assets

794

1,346

Share based payment

623

212

Tax paid

5,405

2,999

Interest receivable

(20,882)

(24,693)

Dividends receivable

(30,209)

(31,501)

Interest expense

3,272

3,457

Change in fair value of investment properties

-

(4,277)

Fair value gains on financial assets

(205,870)

(87,934)

Profit arising on business combination

-

(16,644)

Share of profit of associate

(150)

(455)

Increase in intangible assets related to insurance and investment contracts

(16,448)

(14,759)

Interest received

20,281

24,458

Dividends received

29,446

31,532

Changes in operating assets and liabilities:

Decrease in financial assets

(280,333)

62,365

Decrease in reinsurers share of insurance contract provisions

34,177

54,253

Increase/(decrease) in amounts deposited with reinsurers

(3,496)

1,557

Increase/(decrease) in insurance and other receivables

10,294

1,754

Increase in prepayments

1,795

(1,710)

Decrease in insurance contract provisions

(16,530)

(201,453)

Increase in investment contract liabilities

362,641

149,011

Decrease in provisions

(1,306)

(1,893)

(Decrease)/increase in reinsurance payables

(3,660)

(578)

Increase in payables related to direct insurance and investment contracts

(2,114)

1,708

Decrease in other payables

2,808

(1,630)

Net cash generated from operations

(54,878)

5,863

Income tax paid

(4,709)

(4,248)

Net cash generated from operating activities

(59,587)

1,615

Cash flows from investing activities

Acquisition of subsidiary, net of cash acquired

-

54,258

Development of software

(3,502)

(2,418)

Purchases of property and equipment

948

(265)

Net cash generated from/( utilised by) investing activities

(2,554)

51,575

Cash flows from financing activities

66,708

Proceeds from issue of share capital

4,268

-

Proceeds from borrowings

-

-

Repayment of borrowings

(7,815)

Dividends paid

(24,181)

(23,498)

Interest paid

(3,095)

(3,382)

Net cash (utilised by)/generated from financing activities

43,700

(34,695)

Net increase in net cash and cash equivalents

(18,441)

18,495

Net cash and cash equivalents at beginning of year

259,911

240,510

Effect of exchange rate changes on net cash and cash equivalents

17,261

906

Net cash and cash equivalents at end of the year

258,731

259,911

Note: Net cash and cash equivalents includes overdrafts.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2016

Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total

£000

£000

£000

£000

£000

£000

Equity shareholders' funds at 1 January 2016

42,600

76,516

(814)

(161)

177,021

295,162

Profit for the year

-

-

-

-

35,280

35,280

Dividends paid

-

-

-

-

(24,181)

(24,181)

Foreign exchange translation differences

-

-

20,114

-

-

20,114

Share based payment

-

-

-

-

478

478

Issue of new shares

1,166

65,542

-

-

-

66,708

Equity shareholders' funds at 31 December 2016

43,766

142,058

19,300

(161)

188,598

393,561

 

Year ended 31 December 2015

Share capital

Share premium

Other reserves

Treasury shares

Retained earnings

Total

£000

£000

£000

£000

£000

£000

Equity shareholders' funds at 1 January 2015

42,600

76,523

(641)

(168)

160,519

278,833

Profit for the year

-

-

-

-

39,788

39,788

Dividends paid

-

-

-

-

(23,498)

(23,498)

Foreign exchange translation differences

-

-

(173)

-

-

(173)

Share based payment

-

-

-

-

212

212

Sale of treasury shares

-

(7)

-

7

-

-

Equity shareholders' funds at 31 December 2015

42,600

76,516

(814)

(161)

177,021

295,162

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

1. Basis of presentation

The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2016, which are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('Adopted IFRSs') as adopted by the EU.

 

2. Significant accounting policies

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

 

3. Operating segments

The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc.

 

The segments of the Group as at 31 December 2016 comprise:

 

CA: This segment is part of the Group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the Group's principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. This segment also contains the business of Protection Life, which was purchased on 28 November 2013. Following the Part VII transfer on 31 December 2014 of the long-term business of Protection Life Company Limited into Countrywide Assured plc, the business of Protection Life (PL) is now reported within the CA segment, effective from 1 January 2015. Previously PL was reported as a separate segment. Comparative information has been restated to reflect this change. CA is responsible for conducting unit-linked and non-linked business.

 

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

 

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

 

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

 

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

 

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The Group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the Group. There were no changes to the measurement basis for segment profit during the year ended 31 December 2016.

 

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

 

CA

 

 

S&P

 

 

UK Total

 

Movestic

 

Waard Group

Other Group Activities

 

 

Total

£000

£000

£000

£000

£000

£000

£000

Net insurance premium revenue

42,103

4,886

46,989

14,903

2,658

-

64,550

Fee and commission income

29,000

2,610

31,610

41,296

26

-

72,932

Net investment return

206,748

131,155

337,903

169,130

8,464

184

515,681

Total revenue (net of reinsurance payable)

277,851

138,651

416,502

225,329

11,148

184

653,163

Other operating income

2,568

10,792

13,360

3,751

503

-

17,614

Segmental income/(expenses)

280,419

149,443

429,862

229,080

11,651

184

670,777

Net insurance contract claims and benefits incurred

(139,748)

(123,454)

(263,202)

(7,695)

(1,464)

-

(272,361)

Net change in investment contract liabilities

(98,393)

(2,206)

(100,599)

(168,508)

-

-

(269,107)

Fees, commission and other acquisition costs

(1,641)

(23)

(1,664)

(25,089)

(330)

-

(27,083)

Administrative expenses:

Amortisation charge on software assets

-

-

-

(1,243)

-

-

(1,243)

Depreciation charge on property and equipment

-

-

-

(197)

-

-

(197)

Other

(11,017)

(9,443)

(20,460)

(12,800)

(3,664)

(8,251)

(45,175)

Operating expenses

(1,203)

(1)

(1,204)

(3,209)

-

19

(4,394)

Financing costs

-

(2)

(2)

(1,629)

-

(1,641)

(3,272)

Share of profit from associates

-

-

-

150

-

-

150

Profit before tax and consolidation adjustments

28,417

14,314

42,731

8,860

6,193

(9,689)

48,095

Other operating expenses:

Charge for amortisation of acquired value of in-force business

(5,643)

(604)

(6,247)

(3,554)

(618)

-

(10,419)

Charge for amortisation of acquired value of customer relationships

-

-

-

(236)

-

-

(236)

Fees, commission and other acquisition costs

-

-

-

3,245

-

-

3,245

Segmental income less expenses

22,774

13,710

36,484

8,315

5,575

(9,689)

40,685

Profit before tax

22,774

13,710

36,484

8,315

5,575

(9,689)

40,685

Income tax (expense)/credit

(6,663)

(7)

(1,721)

2,986

(5,405)

Profit after tax

29,821

8,308

3,854

(6,703)

35,280

 

(ii) Segmental balance sheet as at 31 December 2016

 

CA

 

S&P

 

Movestic

 

Waard Group

Other Group Activities

 

Total

£000

£000

£000

£000

£000

£000

Total assets

1,829,944

1,217,546

2,718,156

207,160

122,957

6,095,763

Total liabilities

(1,728,019)

(1,155,556)

(2,638,490)

(122,655)

(57,482)

(5,702,202)

Net assets

101,925

61,990

79,666

84,505

65,475

393,561

Investment in associates

-

-

5,433

-

-

5,433

Additions to non-current assets

-

-

11,894

-

-

11,894

 

(iii) Segmental income statement for the year ended 31 December 2015

 

CA

 

 

S&P

 

 

UK Total

 

Movestic

 

Waard Group

Other Group Activities

 

 

Total

£000

£000

£000

£000

£000

£000

£000

Net insurance premium revenue

47,880

5,413

53,293

13,515

1,130

-

67,938

Fee and commission income

30,216

2,513

32,729

33,502

18

-

66,249

Net investment return

24,539

37,605

62,144

87,163

(1,238)

445

148,514

Total revenue (net of reinsurance payable)

102,635

45,531

148,166

134,180

(90)

445

282,701

Other operating income

2,854

11,331

14,185

4,399

2

-

18,586

Segmental income/(expenses)

105,489

56,862

162,351

138,579

(88)

445

301,287

Net insurance contract claims and benefits incurred

(54,093)

(37,282)

(91,375)

(6,079)

2,587

-

(94,867)

Net change in investment contract liabilities

(13,240)

641

(12,599)

(87,137)

-

-

(99,736)

Fees, commission and other acquisition costs

(1,986)

(21)

(2,007)

(21,864)

83

-

(23,788)

Administrative expenses:

Amortisation charge on software assets

-

-

-

(1,340)

-

-

(1,340)

Depreciation charge on property and equipment

(22)

-

(22)

(180)

-

-

(202)

Other

(10,691)

(9,628)

(20,319)

(9,884)

(1,715)

(7,841)

(39,759)

Operating expenses

(1,501)

-

(1,501)

(4,481)

-

-

(5,982)

Financing costs

-

-

-

(1,340)

-

(2,116)

(3,456)

Share of profit from associates

-

-

-

455

-

-

455

Profit before tax and consolidation adjustments

23,956

10,572

34,528

6,729

867

(9,512)

32,612

Other operating expenses:

Charge for amortisation of acquired value of in-force business

(4,975)

(661)

(5,636)

(3,282)

(356)

-

(9,274)

Charge for amortisation of acquired value of customer relationships

-

-

-

(107)

-

-

(107)

Fees, commission and other acquisition costs

-

-

-

2,913

-

-

2,913

Segmental income less expenses

18,981

9,911

28,892

6,253

511

(9,512)

26,144

Profit arising on business combinations

-

-

-

-

-

16,644

16,644

Profit before tax

18,981

9,911

28,892

6,253

511

7,132

42,788

Income tax (expense)/credit

(4,139)

(14)

(124)

1,277

(3,000)

Profit after tax

24,753

6,239

387

8,409

39,788

 

(iv) Segmental balance sheet as at 31 December 2015

 

CA

 

S&P

 

Movestic

 

Waard Group

Other Group Activities

 

Total

£000

£000

£000

£000

£000

£000

Total assets

1,809,494

1,181,272

2,134,143

188,993

53,900

5,367,802

Total liabilities

(1,702,363)

(1,125,113)

(2,070,860)

(120,216)

(54,088)

(5,072,640)

Net assets

107,131

56,159

63,283

68,777

(188)

295,162

Investment in associates

-

-

4,707

-

-

4,707

Additions to non-current assets

-

26

17,368

73

-

17,467

 

4. Borrowings

31 December

2016£000

2015£000

Bank loan

52,697

52,522

Amount due in relation to financial reinsurance

34,146

26,503

Total

86,843

79,025

Current

61,471

18,448

Non-current

25,372

60,577

Total

86,843

79,025

 

The bank loan subsisting at 31 December 2016, comprises the following:

 

- on 7 October 2013 tranche one of a loan facility was drawn down, amounting to £30.0m. This facility is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. During the year, £6.05.m was repayable, but the amount was deferred due pending arrangement of the new loan facility to part fund the LGN acquisitions.

- on 27 November 2013 tranche two of the loan facility was drawn down, amounting to £31.0m. As with tranche one, this facility is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. During the year, £6.05.m was repayable, but the amount was deferred due pending arrangement of the new loan facility to part fund the LGN acquisitions.

- on 27 November 2013 a short-term loan of £12.8m was drawn down. This was originally repayable in full on 27 May 2015. During 2014, the repayment date of this loan has been extended to December 2018. The outstanding principal on the loan bears interest at a rate of 2.75 percentage points above the London Inter-Bank Offer Rate.

 

The fair value of the bank loan at 31 December 2016 was £52,800,000 (31 December 2015: £52,800,000).

 

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

 

The fair value of amounts due in relation to financial reinsurance was £34,396,000 (31 December 2015: £26,879,000). The fair value of other borrowings is not materially different from their carrying value.

 

The bank loan has been classified as current as at the balance sheet date due to the timing of the LGN acquisition, which is anticipated to complete in the first half of 2017. At this point in time, the existing facility will be re-paid in full and replaced with a new facility.

 

5. Earnings per share

Year ended 31 December

2016

2015

Profit for the year attributable to shareholders (£000)

35,280

39,788

Weighted average number of ordinary shares

127,488,681

126,401,635

Basic earnings per share

27.67p

31.48p

Diluted earnings per share

27.56p

31.41p

 

The weighted average number of ordinary shares in respect of the years ended 31 December 2016 is based upon 149,885,761 shares in issue less 147,535 own shares held in treasury. The weighted average number of ordinary shares in respect of the years ended 31 December 2015 was based upon 126,552,427 shares in issue less 147,535 own shares held in treasury.

 

There were 526,000 share options outstanding at 31 December 2016 (2015: 271,000). Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2016.

 

6. Retained earnings

Year ended 31 December

2016

£000

2015

£000

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

Balance at 1 January

177,021

160,519

Profit for the year

35,280

39,788

Share based payment

478

212

Dividends

Final approved and paid for 2013

-

-

Interim approved and paid for 2014

-

-

Final approved and paid for 2014

(15,586)

(15,143)

Interim approved and paid for 2015

(8,595)

(8,355)

Balance at 31 December

188,598

177,021

 

The interim dividend in respect of 2015, approved and paid in 2015 was paid at the rate of 6.61p per share. The final dividend in respect of 2015, approved and paid in 2016, was paid at the rate of 12.33p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2015 was made at the rate of 18.94p per share.

The interim dividend in respect of 2016, approved and paid in 2016, was paid at the rate of 6.80p per share to equity shareholders of the parent company registered at the close of business on 8 September 2016, the dividend record date.

 

A final dividend of 12.69p per share in respect of the year ended 31 December 2016 payable on 24 May 2017 to equity shareholders of the parent company registered at the close of business on 18 April 2017, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final dividend of £19.0m has not been provided for in these financial statements and there are no income tax consequences.

 

The following summarises dividends per share in respect of the year ended 31 December 2016 and 31 December 2015:

Year ended 31 December

2016

p

2015

p

Interim - approved and paid

6.80

6.61

Final - proposed/paid

12.69

12.33

Total

19.49

18.94

 

7. Related parties

(a) Identity of related parties

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

 

The company has related party relationships with:

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

(ii) its subsidiary companies;

(iii) its associated company;

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

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

 

(b) Related party transactions

(i) Transactions with key management personnel.

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

2016

£000

2015

£000

Short-term employee benefits

1,849

1,713

Post-employment benefits

84

71

Total

1,933

1,784

 

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

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

 

2016

£000

2015

£000

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

521

495

 

These amounts have been included in Accrued Expenses.

 

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

 

(ii) Transactions with subsidiaries

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

Year ended 31 December

2016£000

2015£000

Recovery of expenses

3,470

3,054

 

(iii) Transactions with associate

Movestic Livförsäkring AB and its associate Modernac SA

 

Year ended 31 December

2016£000

2015£000

Reinsurance premiums paid

(9,245)

(8,456)

Reinsurance recoveries received

4,983

4,200

Reinsurance commission received

1,761

1,570

(2,501)

(2,686)

Amounts outstanding as at balance sheet date

(3,570)

(5,321)

 

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

 

2016

2015

Amounts owed by associate

£000

Amounts owed to associate

 £000

Amounts owed by associate

£000

Amounts owed to associate

 £000

Modernac S.A.

-

3,570

-

5,321

 

These amounts have been included in other payables.

 

(iv) Transactions with persons related to key management personnel

During the year, the company engaged the professional services of Clare Rimmington and Trisha Hughes, who are related to David Rimmington and Frank Hughes respectively.

 

Clare Rimmington is an on-line marketing expert with many years of experience developing and managing web based solutions in the Financial Services sector. Trisha Hughes has many years of project management experience including managing projects in the Financial Services sector. Their engagements are deemed to have been on terms that are more beneficial to Chesnara than would need to have been offered in an open consultancy market.

 

In the year an amount of £11,830 was paid by the company to Clare Rimmington for web-site related consultancy services. In addition, an amount of £65,610 was paid to Trisha Hughes for business consultancy services. These amounts have been included in administration expenses.

 

8. Post balance sheet event

On 24 November 2016 the company announced its proposed acquisition of Legal & General Nederland Levensverzekering Maatschappij N.V. At the time of the announcement the completion of the acquisition was subject to certain conditions being met. These included obtaining a declaration of no objection from the Dutch regulator, De Nederlandsche Bank (DNB), and completing the Works Council consultation process in the Netherlands. A declaration of no objection was received by DNB on 30 March 2017 and the consultation process with the Works Council of Legal & General Nederland has now been completed. The acquisition is expected to be completed by 6 April 2017 and therefore at the time of signing these financial statements the acquisition has not yet completed. As such full disclosures in accordance with IFRS 3 "Business combinations" will be reported in the next set of financial statements following completion.

 

The Prospectus and Notice of EGM that was issued on 24 November 2016 reported the following key financial metrics in relation to the proposed acquisition:

 

Consideration:

The headline consideration for the Acquisition is €160 million, to be paid in cash. The Acquisition consideration is proposed to be financed by a combination of a Firm Placing and Placing and Open Offer to raise in aggregate approximately £70 million (before expenses), New Debt Facilities totalling £100.2 million (£40 million and €71 million), which replace an existing debt facility of £52.8 million and raises £47.4 million of incremental debt and the balance from Chesnara's existing cash resources. In addition to the headline consideration, deferred capital related consideration will accrue from 1 October 2016 to the date of completion of the Acquisition, which is expected to occur during the first quarter of 2017. The company has calculated the maximum interest payable to be €2.3 million.

 

Key metrics:

Key Legal & General Nederland financial metrics at 30 June 2016 were as follows:

- €219.8 million of Solvency II own funds;

- €2.2 billion of funds under management;

- Approximately 170,600 policies;

- Solvency ratio of 219 per cent; and

- IFRS net assets of €138.6 million.

 

 

GLOSSARY

 

AGM

Annual General Meeting.

ALM

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

APE

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

CA

Countrywide Assured plc.

CALH

Countrywide Assured Life Holdings Limited and its subsidiary companies.

Own Funds

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

SCR

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

Directors or Board

The directors of the company as at the date of this document whose names are set out above.

DNB

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

DPF

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

Dutch Business

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

EcV

Economic Value.

FCA

Financial Conduct Authority.

FI

Finansinspektionen, being the Swedish Financial Supervisory Authority.

Form of Proxy

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

FSMA

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

Group Own Funds

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

Group SCR

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

Cash Generation

This represents the operational cash that has been generated in the period. The cash generating capacity of the group is largely a function of the movement in the solvency position of the insurance subsidiaries within the group, and takes account of the buffers that management has set to hold over and above the solvency requirements imposed by our regulators.

Group

The company and its existing subsidiary undertakings.

HCL

HCL Insurance BPO Services Limited.

IFRS

International Financial Reporting Standards.

IFA

Independent Financial Adviser.

KPI

Key performance indicator.

LGN

LGN or Legal and General Nederland refers to the legal entity Legal & General Nederland Levensverzekering Maatschappij N.V, which Chesnara announced its intention to acquire in November 2016.

London Stock Exchange

London Stock Exchange plc.

LTI

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

Movestic

Movestic Livförsäkring AB.

Modernac

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

Official List

The Official List of the Financial Conduct Authority.

Ordinary Shares

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

ORSA

Own Risk and Solvency Assessment.

PRA

Prudential Regulation Authority.

QRT

Quantitative Reporting Template.

ReAssure

ReAssure Limited.

Resolution

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

RMF

Risk Management Framework.

Shareholder(s)

Holder(s) of Ordinary Shares.

Solvency II

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

STI

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

Swedish Business

Movestic and its subsidiaries and associated companies.

S&P

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

TCF

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

TSR

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

UK or United Kingdom

The United Kingdom of Great Britain and Northern Ireland.

UK Business

CA, S&P and CALH.

 

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