Last checked at 26 Aug 2010 07:00
Chesnara plc - Interim Results for the six months ended 30 June 2010
2.65% increase continues strong dividend growth at Chesnara
26 August 2010
Chesnara today reported interim results for the half year ended 30 June 2010.The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life assurance businesses.
* Profit (on IFRS basis) before tax for the six months ended 30 June 2010 of
GBP12.0m, (2009: GBP11.2m)
* Earnings per share (on IFRS basis) of 7.71p, (2009: 8.17p)
* On EEV basis pre-tax profit for the half-year of GBP6.3m (2009: GBP7.8m)
* Continuing positive UK persistency experience
* Market volatility continues to impact results
* Shareholder equity on EEV basis (pre proposed interim dividend payment) now
GBP255.1m - GBP2.51p per share (30 June 2009: GBP178.9m - GBP1.76p per
share)
* UK Life company solvency ratio, after dividend payment remains strong at 263%
(30 June 2009: 241%). Group solvency ratio 330% post interim dividend
(30 June 2009: 408%).
* 5.8p interim dividend per share proposed (2009: 5.65p), an increase of 2.65%
* Board remains confident about future dividend flows * Completed acquisition of business assets of Aspis F¶rs¤krings Liv in February 2010 * Search for value adding acquisition opportunities continues
Commenting on the results, Graham Kettleborough, Chief Executive said:
"The resilience of our underlying business has again enabled us to deliver strong results in the face of volatile investment market conditions."
"We continue to search for further acquisitions and are seeing a reasonable
flow of opportunities. Once again, our financial strength allows the Board to deliver on our promise of a reliable and progressive dividend stream by proposing a 2.65% increase in the interim dividend to 5.8p per share."
The Board approved this statement on 25 August 2010.
Enquiries
Graham KettleboroughChief Executive, Chesnara plc 07799 407519Michael Henman Cubitt Consulting 0207 367 5100 Notes to editors:
Chesnara plc, which listed on the London Stock Exchange in May 2004, is the ownerof Countrywide Assured plc ("CA") and Moderna F¶rs¤kringar Liv AB ("Moderna"). CA is a UK life assurance subsidiary that is substantially closed to new business.
In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance ("CWA") - for GBP47.8m. With effect from 30 June 2006, CWA's
policies and assets were transferred into CA plc.
Moderna, a life assurance company which focuses on pensions and savings, was acquired on 23 July 2009 for GBP20m. The company, which was launched in 2002, continues to writenew business and grow its strong position in the Swedish unit-linked market. Moderna's market presence was increased through the acquisition of a controlling stake inAkademikerR¥dgivning I Sverige AB, an IFA, in late 2009 and the purchase of thepolicyholders, personnel, intellectual property and systems of Aspis F¶rs¤krings Liv AB, a life and health insurer, in February 2010. Chesnara plc Condensed Consolidated Financial Statements for the Six Months Ended 30 June 2010FINANCIAL CALENDAR
26 August 2010...................... Interim results for the six months
ended 30 June 2010 announced 8 September 2010.................... Ex dividend date 10 September 2010................... Dividend record date 12 October 2010..................... Dividend payment date 19 November 2010.................... Interim Management Statement for the quarter ending 30 September 2010 March 2011.......................... Results for the year ending 31
December 2010 announced Forward-looking statements
This document may contain forward-looking statements with respect to certain of the plans and current expectations relating to 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 and global
economic and business conditions, market-related risks such as fluctuations in interest 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'sactual future condition, business performance and results may differ materiallyfrom the plans, goals and expectations expressed or implied in these forward-looking statements. KEY CONTACTS Registered and Head Harbour House Office Portway Preston Lancashire PR2 2PR Tel: 01772 840000 Fax: 01772 840010 www.chesnara.co.uk Legal Advisors Ashurst LLP Addleshaw Goddard LLP Broadwalk House 100 Barbirolli Square 5 Appold Street Manchester London M2 3AB EC2A 2HA Auditor Deloitte LLP Chartered Accountants and Statutory Auditors 2 Hardman Street Manchester M60 2AT United Kingdom Registrars Capita The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Stockbrokers Panmure Gordon (UK) Limited Collins Stewart Europe Moorgate Hall Limited 155 Moorgate 88 Wood Street London London EC2M 6XB EC2V 7QR Bankers National Westminster Bank plc Lloyds TSB Bank plc 135 Bishopsgate 3rd Floor, Black Horse London House EC2M 3UR Medway Wharf Road Tonbridge The Royal Bank of Scotland Kent 8th Floor, 135 Bishopsgate TN9 1QS London EC2M 3UR Public Relations Cubitt Consulting Limited Consultants 30 Coleman Street London EC2R 5AL Corporate Advisors Hawkpoint Partners Limited 41 Lothbury London EC2R 7AE Note on terminology
On 30 June 2006 the long-term business of City of Westminster Assurance Company Limited, a Group subsidiary, acquired on 2 June 2005, was transferred, under the provisions of Part VII of the Financial Services and Markets Act 2000, to the Group's other UK operating subsidiary, Countrywide Assured plc, in which the whole of the UK-based Life operations of the Group now subsist. However, within this document reference is made to `CWA' and to `CA' to continue to identify respectively the long-term business which had been conducted within the respective companies prior to this transfer.
This document refers throughout to the `UK Business' and the `Swedish Business'. As explained in Note 5 to these Condensed Consolidated Financial Statements, these are the business segments of the Group, comprising, for the UK Business, Countrywide Assured Life AssuranceHoldings Limited and its subsidiary companies and, for the Swedish Business, Moderna F¶rs¤kringar Liv AB ('Moderna') and its subsidiaryand associated companies. FINANCIAL HIGHLIGHTS Unaudited 6 months ended Year ended 30 June 31 December 2010 2009 2009IFRS basis Operating profit/(loss) UK Business 16.8 11.6 24.7 Swedish Business (4.3) - (2.1) Other group activities (0.7) (0.3) (2.3)
Profit arising on business combinations 0.9 -
25.1 ---------- ---------- ---------- 12.7 11.3 45.4 Financing costs (0.7) (0.1) (0.7) ---------- ---------- ---------- Profit before income taxes GBP12.0m GBP11.2m GBP44.7m ========== ========== ========== Basic earnings per share 7.71p 8.17p 45.26p Dividend per share 5.80p 5.65p 15.95p Shareholders' net equity GBP156.8m GBP124.5m GBP159.8m ========== ========== ==========
European Embedded Value basis (EEV)
Operating (loss)/profit UKBusiness 10.0 10.1 22.0 Swedish Business (16.5) - (2.9) Other group activities (0.8) 0.1 0.9 ---------- ---------- ---------- (7.3) 10.2 20.0
Investment variances and economic assumption
changes UKBusiness (4.9) (2.4) (6.1) Swedish Business 7.2 - 10.1 ---------- ---------- -----------
(Loss)/profit before tax and before
exceptional items (5.0) 7.8 24.0 Exceptional items
Profit recognised on business combinations 0.9 -
54.2
Effect of modelling improvements 10.4 -
- ---------- ---------- ---------- Profit before tax 6.3 7.8 78.2 Tax (2.4) (1.4) 12.1 ---------- ---------- ---------- Profit for the period GBP3.9m GBP6.4m GBP90.3m ========== ========== ==========
Shareholders' equity on EEV basis
Embedded value UKBusiness 132.1 135.2 157.8 Swedish Business 93.7 - 91.5 --------- ---------- ---------- Embedded value of covered business 225.8 135.2
249.3
Acquired embedded value financed by debt - (4.2)
(4.2)
Shareholders' equity in other Group companies 29.3 47.9 17.5 ---------- ---------- ---------- GBP255.1m GBP178.9m GBP262.6m ========== ========== ========== EEV per share 251.3p 176.3p 258.7p UK business Life annual premium income (AP) GBP40.2m GBP43.5m
GBP85.5m
Life single premium income (SP) GBP12.3m GBP13.2m
GBP23.3m
Life annualised premium income (AP + 1/10 SP) GBP41.4m GBP44.8m GBP87.8m Swedish business
New business premium income (AP + 1/10 SP) GBP33.1m - GBP49.9m
Total premium income (AP + SP) GBP138.2m - GBP269.4m
In contrast with the IFRS basis of reporting, the EEV basis recognises thediscounted value of the expected future cash flows, arising from the long-termbusiness contracts in force at the period end, as a component of shareholders'equity. Accordingly, the EEV result recognises, within profit, the movement inthis component.The Swedish Business was acquired on 23 July 2009. Accordingly, certain of thepremium income amounts shown above relate to the pre-acquisition period and arepresented here for illustrative purposes.CHAIRMAN'S STATEMENTI am pleased to present the seventh interim financial statements of Chesnaraplc ('Chesnara'). In the light of continuing economic uncertainty andinvestment market volatility, it is pleasing that our results continue to showa high degree of resilience, allowing us to maintain a reliable and progressivedividend policy, while being in a good position to pursue furthervalue-enhancing acquisitions as they arise.
Review of the Business
Global investment market volatility continues to have a significant impact onthe Group's results, with the leading UK market indices, for example, postinggains of 5% in the first quarter rising to 8% by mid-April only to fall backsharply to levels at the end of June which represented a 9% reduction from theprior year end closing position. In addition, a reduction in swap yields which areused to both set the rate of investment return and the discount rate for futurecashflows together with little corresponding changes in market values of ourfixed interest securities and in future inflation expectations, also gave riseto negative influences. On a more positive note we completed the acquisition ofthe business of Aspis F¶rs¤krings Liv AB ('Aspis') in Sweden and therebyacquired the capability to write significantly higher volumes of Risk andHealth business which represents an excellent strategic fit with the existingSwedish Pensions and Savings business.On the IFRS basis, we have posted a pre-tax profit of GBP12.0m for thehalf-year ended 30 June 2010 compared with GBP11.2m for the correspondingperiod in 2009. The UK Business generated a pre-tax profit of GBP16.8m arisingfrom the continuing strong emergence of surplus from its run off book enhancedby the release of a claims reserve of some GBP3.2m. The Swedish Business posteda loss before tax of GBP4.1m: overall this is in line with expectations as the business builds scale. However, competition for transfer business and subdued investment sales have inhibited progress, this being partially offset by gains arising from the Aspis acquisition.
On the EEV basis of reporting we have posted a pre-tax profit of GBP6.3m compared with GBP7.8m for the corresponding period in 2009. The UK Business benefited from favourable lapse and mortality experience which gave rise to a pre-tax increase of GBP3.9m in embedded value. The result was further enhanced by GBP3.2m in respect of the release to income of certain claims liabilities as mentioned above. These favourable effects were offset by adverse investment market impacts of some GBP6.0m, so that the net pre-tax resultat GBP5.1m is close to management expectations.
The Swedish Business contributed GBP2.0m to the pre-tax EEV profit. Thisprimarily resulted from adjustments to expense and transfer rate assumptionsamounting to some GBP11m adverse, countered by the positive effects resultingfrom refinements to modelling systems, which together with profit arising fromthe acquisition of Aspis amounted to GBP11.3m, the balance being generated from the core trading result.
Shareholder Value and Returns to Shareholders
Total shareholder equity on the EEV basis, pre appropriation of the proposed interim dividend is GBP255.1m (251.3p per share) compared with GBP262.6m (258.7p per share) as at 31 December 2009. As mentioned earlier this demonstrates the resilience of the business in a difficult economic, trading and investment environment.
The capacity of the Group to pursue its dividend policy relies on the continuing emergence of surplus in the UK Business and in the ability to distribute that surplus which, in turn, depends on the regulatory solvency position of Countrywide Assured plc ('CA plc'), the principal operating subsidiary of the UK Business. I am pleased to report that CA plc's solvency ratio, post proposed dividends, at 263% (197% as at 31 December 2009) remains in excess of the target of 150% set by the CA plc Board.
The Group's dividend policy now has to take account of the competing need forfunds of the developing Swedish Business which, in turn, depends on theunderlying regulatory solvency ratio of the Swedish Life Business. This was220% as at 30 June 2010 which is comfortably in excess of the target of 150%set by the Moderna Board. The combined Group post dividend solvency ratioremains at a healthy 330% as at 30 June 2010 (31 December 2009: 316%).
Based on the strength of our results and of our capital solvency ratios, the Board has decided to declare an interim dividend of 5.8p per share (2009 interim dividend: 5.65p per share) which represents a 2.65% increase and equates to a total dividend payable to shareholders of GBP5.9m
Outlook
In line with our primary aim of delivering an attractive and reliable dividend yield, we remain focused on the efficient management of our businesses.
Whilst Group performance has been relatively robust through the economic crisisand, indeed it was the catalyst which generated the value-enhancing acquisitionof Moderna, the ongoing effects still bring challenges to our businesses.Macroeconomic and industry-related factors will continue to challenge theGroup and provided we can continue to navigate a successful path through theseareas the short- to medium-term outlook is positive for the ongoing emergenceof surplus and, accordingly, for dividend support.We continue to see a reasonable flow of potential acquisition opportunities and,as demonstrated with the Moderna and Aspis transactions, we will readily progressthese where we see value and a clear strategic fit. We remain open-minded as to location in the UK and Western Europe, and will continue to apply strict financialand risk criteria in assessing them. Peter MasonChairman25 August 2010DIRECTORS' INFORMATIONPeter Mason was the Senior Independent Non-executive Director of Chesnara plcand Chairman of the Audit Committee during 2008. He was appointed as Chairmanof Chesnara plc and Chairman of the Nomination Committee on 1 January 2009. Hewas re-appointed as a member of the Remuneration and Audit Committees witheffect from 22 December 2009 and was appointed as Chairman of ModernaF¶rs¤kringar Liv AB with effect from 23 July 2009. He is currently aNon-executive Director of Homeowners Friendly Society and is the InvestmentDirector and Actuary of Neville James Group, an investment management company.He was admitted as a Fellow of the Institute of Actuaries in 1979.Graham Kettleborough is the Chief Executive of Chesnara plc. He joinedCountrywide Assured plc in July 2000 with responsibility for marketing andbusiness development and was appointed as Managing Director and to the Board inJuly 2002. He was appointed as a Non-executive Director of Moderna F¶rs¤kringarLiv AB and as Chairman of Moderna Fonder & Analys AB with effect from 23 July2009. Prior to joining Countrywide Assured plc, he was Head of Servicing and aDirector of the Pension Trustee Company at Scottish Provident. He has lifetimeexperience in the financial services industry, primarily in customer service,marketing, product and business development, gained with Scottish Provident,Prolific Life, City of Westminster Assurance and Target Life.Ken Romney is the Finance Director and Company Secretary of Chesnara plc. Hejoined Countrywide Assured plc in 1989 and became a member of the Board in1997. He has worked in the life assurance industry for the last 27 years. Hewas Chief Accountant at Laurentian Life (formerly Imperial Trident) up to 1987and was Financial Controller at Sentinel Life between 1987 and 1989. He workedfor Price Waterhouse in their audit division until 1983 in both the UK andSouth Africa. He is a Fellow of the Institute of Chartered Accountants inEngland and Wales.
Frank Hughes is the Business Services Director of Chesnara plc. He joined Countrywide Assured plc in November 1992 as an IT Project Manager and was appointed to the Board as IT Director in May 2002. He has 26 years' experience in the life assurance industry gained with Royal Life, Norwich Union and CMG.
Mike Gordon is an Independent Non-executive Director of Chesnara plc and isChairman of the Remuneration Committee. He was appointed as Senior IndependentNon-executive Director of Chesnara plc on 1 January 2009. He also serves on theAudit Committee and the Nomination Committee and was appointed as aNon-executive Director of Moderna F¶rs¤kringar Liv AB with effect from 23 July2009. He spent 12 years as Group Sales Director of Skandia Life AssuranceHoldings.
Terry Marris is a Non-executive Director of Chesnara plc and serves on the Audit Committee, the Remuneration Committee and the Nomination Committee. He joined Countrywide Assured Group plc in 1992 and was Managing Director of Countrywide Assured plc until July 2002. Previous roles included senior management positions at Lloyds Bank and General Accident.
Peter Wright is an Independent Non-executive Director who was appointed to theChesnara plc Board on 1 January 2009. At the same date he was appointed asChairman of the Audit Committee and as a member of the Remuneration Committee.He was appointed as a member of the Nomination Committee with effect from 9July 2009. He retired as a Principal of Towers Perrin on 1 January 2008 and isa former Vice President of the Institute of Actuaries, having been admitted
asa Fellow in 1979.INTERIM MANAGEMENT REPORTBackgroundChesnara continues to seek to acquire life assurance and pensions businesses inthe UK and Western Europe. When the Company was listed on the London StockExchange in 2004, we acquired Countrywide Assured plc ('CA') on its demergerfrom Countrywide plc. In 2005 we acquired City of Westminster Assurance CompanyLimited ('CWA') from Irish Life and Permanent plc and in 2006 we merged thelong-term business of the two companies. In early 2009, following a periodwhere valuations had increased to unattractive levels following whichsignificant uncertainty arose due to the disruption in financial markets, weacquired an open Swedish life assurance and pensions company - ModernaF¶rs¤kringar Liv AB ('Moderna') - at a very attractive discount to its embeddedvalue. The acquisition was completed in July 2009. In December 2009 weannounced that Moderna had agreed to take over the in-force business,personnel, expertise and systems of Aspis F¶rs¤krings Liv AB ('Aspis'), a smallSwedish life and health risk insurer, which complements Moderna's focus onpensions and savings contracts. Completion of the acquisition of Aspis tookplace on 16 February 2010. The acquisitions of Moderna and Aspis add a growthelement to Chesnara's proposition to shareholders. Whilst requiring capital inthe early years, the prospect for the creation of value for shareholders in themedium to longer term remains significant.The UK Business is substantially closed to new business and its primary focusremains on the efficient run-off of its existing life and pensions portfolios.This gives rise to the emergence of surplus which supports our primary aim ofdelivering an attractive long-term dividend yield to our shareholders. By thevery nature of the life business assets, the surplus arising will deplete overtime as the policies mature, expire or are the subject of a claim.The Swedish Business remains open to new business and its primary aim is todevelop profits through regaining market share in the company-paid andindividual pensions market, whilst developing business in other areas. Writingnew business requires funding to support the initial costs incurred: this isprovided either by way of financial reinsurance or by way of cash contributionsfrom Chesnara. As the in-force business portfolio grows in scale the incomegenerated by it eventually allows the business to self fund and become a netgenerator of cash. Moderna is targeted to reach this pivotal point in the nextthree to four years.Following the acquisition of Moderna, and in order to prolong the yielddelivery to investors, we continue to examine opportunities to acquirebusinesses, primarily in the small to medium sector of the life assurance andpensions market in the UK and Western Europe. The experience gained from theacquisition of Moderna and Aspis leads us to believe that we can leveragefurther value from our existing, and acquired, capabilities. As a consequenceof changes in the wider financial market environment sellers' expectations ofvalue have moderated to levels where transactions may provide the returns weare seeking. Whilst the environment is now more challenging, due to marketuncertainty and possible higher solvency capital requirements, potentiallyattractive opportunities are emerging.We primarily target acquisitions with a value of between GBP50m and GBP200m,although other opportunities are considered. All opportunities are assessedagainst a number of key criteria including size, risk (including actual orpotential product and financial liabilities), discount to embedded value,capital requirements and the pattern and quality of predicted profit emergence.Our strategic approach, however, remains that such potential acquisitionsshould not detract significantly from the primary aim of delivering a steadyand attractive dividend yield although opportunities which present asignificant value uplift or growth opportunity will also be evaluated.Developments during 2010UK Business
In the UK this has been a relatively quiet period for the business. Effort hasbeen directed to the sourcing and initial review of potential acquisition opportunities and the advancement of longer-term corporate issues. Of these theimplementation of Solvency II, which also applies to the Swedish business, is keyand this is described in more detail on page 21.
Swedish Business
In Sweden we completed the acquisition of the business operations of Aspis on 16February 2010. This has enabled us to progress the integration of the Aspispersonnel and develop plans for integrating the product ranges, beginrationalisation of the systems and initiate reorganisation of the business both interms of structure and operational location consequent upon the utilisation ofthe administrative capabilities brought to us by Aspis.
Review of the Business
In addition to finalising the acquisition of Aspis, the Group has continued toconcentrate on its policy of delivering enhanced value to shareholders throughfocusing on the efficient run-off of its UK Life business.The continued strength of the emergence of surplus has underpinned the overallfinancial performance of the business and enabled the delivery of an improvedprofit on the IFRS basis of reporting, a positive outturn in EEV profit and themaintenance of a healthy regulatory solvency position.The result has, inevitably, been affected by the volatility prevailing in theinvestment markets with good performance in the first quarter being more thaneroded in the second quarter. The performance of investment markets and widereconomic concerns have restricted Moderna's ability to make significant inroadsinto its recapture of its former market share. The sales effort has beenreorganised and this is beginning to show some positive improvement in newbusiness figures compared to prior year comparative periods. On the Risk andHealth side we are pleased to report that the renewals being generated from theAspis portfolio are ahead of expectations and are delivering profitablereturns.
There have been no new regulatory issues that have given rise to any significant concerns or costs.
The key performance areas in the UK and Swedish businesses are reviewed in more detail in the following sections.
UK Business
Per policy expenses
Management of the expenses incurred in the servicing of the in-force life andpensions policy base remains a key area of focus for the UK business. Throughour outsourcing contracts we have maximised the proportion of expenses whichvary with policy volume and we maintain a small focussed governance team tominimise non-policy-related expense. This, together with further continuedimprovement in policy lapse experience, which leads to a favourable impact inper policy costs (as the fixed expenses are spread over a larger policy base),has resulted in per policy expenses being slightly lower than expectations.
Policy Attrition
The longer a policy stays in force the greater the profit that accrues to theGroup. We have continued to maintain a strong focus on the retention ofpolicies where it is in the interests of customers to continue with theirarrangements. At the 2009 year-end we reported that the rate of policyattrition had decreased. This improvement has been sustained and a furtherslight reduction in policy cessation rates has been evident. However, thisbenefit has not been reflected in the assumptions underpinning the EEV at thehalf year as we beleive that the current economic climate may, at leasttemporarily, stall the improvements we have seen historically. Unaudited 6 months ended Year ended
Number of in-force policies (000's) 30 June 31 December
2010 2009 2009 Beginning of period 176 192 192 End of period 169 184 176 Rate of attrition (annualised) 8.0% 8.3% 8.3% Investment Funds
Strong performance in the unit-linked funds helps promote policy retention andincreases the embedded value of the Group as future management charges will beof a higher magnitude. The CA Pension Managed Fund, which represents asignificant proportion of the CA policyholder funds under management, returned19.74% during the twelve months ended 30 June 2010 and the CWA Balanced ManagedPension Fund, which represents a significant proportion of CWA policy fundsunder management, returned 17.53% over the same period. These returns, onbalance, compare favourably with the average of 17.77% achieved by the ABIPension Balanced (up to 85% Equity) Managed Funds sector.As these are Managed Funds the returns reflect the performance of the equity,fixed interest and property markets consequent upon the general economicclimate. Market performance does affect fund values and, consequently, embeddedvalue. Guidance as to the sensitivity of embedded value to market movements isprovided on pages 53 and 54.The Board continues to have a prudent approach to the investment of shareholderfunds, which underpins our strong solvency position. The benchmark of 70% cashand 30% fixed interest has been maintained
Mortgage Endowments
We continue to carry potentially significant exposure to mortgage endowment misselling complaints, which may become subject to redress payments to policyholders. Three of the key statistics which define and limit the extent of this exposure are set out below:
Unaudited 6 months ended Year ended 30 June 31 December 2010 2009 2009 Number of complaints received 348 660 1,210
% of complaints assessed upheld 26% 27%
27%
% of complaints assessed time barred 57% 53%
62% Swedish BusinessPremium Income and Market Share Unaudited 6 months ended Year ended 30 June 31 December 2010 2009 2009 Total premium income* GBPm GBPm GBPm Pensions and savings 121.9 126.2 244.2 Risk Insurance 17.4 10.1 25.2 ---------- ---------- ---------- Total 139.3 136.3 269.4 ---------- ---------- ---------- New Business premium income* Pensions and savings 26.2 27.4 46.8 Risk Insurance 6.2 0.8 3.1 ---------- ---------- ----------- Total 32.4 28.2 49.9 ---------- ---------- ----------- Unaudited Unaudited 6 months ended Year ended Market share of unit-linked pensions business 30 June 31 December 2010 2009 2009 Total business 4.7% 8.0% 5.7% Company-paid business 6.1% 10.4% 7.4%
Note - Information in respect of the half-year ended 30 June 2009 and the year ended 31 December 2009 includes performance prior to the acquisition of the Swedish Business on 23 July 2009 and is presented for illustrative purposes.
* Translated into sterling at a constant rate of SEK11.5 = GBP1
Moderna F¶rs¤kringar Liv AB ('Moderna') has continued to seek to re-establishits sales and market share in Sweden. Recently pensions and savings income hasrecovered with single premium income for the six months well ahead ofthe comparative period last year. Risk insurance premiums have surged followingthe acquisition of the operations of Aspis.
Policy Attrition
As with the UK business the longer a policy stays in force the greater theprofit that accrues to the Group. The economic climate in Sweden and theuncertainty regarding Moderna ownership during 2008/9 led to some historicallyhigh attrition rates. We are seeing some improvement in the discontinuancerates but the relatively newly opened transfer market, where, in particular,banks are targeting their customers with related offers, remains challenging. Unaudited 6 months ended Year ended Annualised rate of attrition 30 June 31 December 2010 2009 2009 Surrenders 13.3% - 21.7% Transfers 5.3% - 5.6% Assets under Management Unaudited Unaudited 30 June 2010 31 March 2010 31 December 2009 GBPm GBPm GBPm Assets under management* 1,036.6 1,043.0 962.3 * Translated into sterling at a constant rate of SEK11.5 = GBP1 The above illustrates the growth in assets being managed and the effects of thepositive market performance in the first quarter countered by the falls in thesecond quarter. Comparing the end of period figure with the year end figuredemonstrates a 7.7% growth despite the markets being lower at the end of theperiod. Fund Performance
Relative fund performance is as follows:
Unaudited 6 months ended Year ended Number of funds 30 June 31 December 2010 2009 2009 Outperformed against relevant index 9 - 19 Underperformed against relevant index 19 - 14 No relevant index 3 - 2 The decline in relative performance is a consequence of the investment stylewhich focuses on a value driven approach. The funds advanced in the firstquarter as markets improved. As markets retreated in the second quarteropportunities were taken to reposition in order to regain comparativeperformance when values increased and this has produced good performance postthe reporting period. As part of the ongoing search for attractive investmentopportunities two new funds were added in the first half of the year and theircomparative performance to the end of the reporting period is above that of
therelevant indices.IFRS Result
The results analysed below relate to profit for the period and, therefore, exclude foriegn exchange translation differences.
The IFRS result for the six months ended 30 June 2010 comprises:
Unaudited six months ended 30 June 2010 Pre-tax Tax Post-tax GBP000 GBP000 GBP000 UK Business result 16,795 (4,238) 12,557 Swedish Business result (4,060) 44 (4,016) Other group activities result (757) - (757) ---------- ---------- ---------- Total result 11,978 (4,194) 7,784 =========== ========== Non-controlling interest 40 ---------- Total result attributable to shareholders 7,824 ========== Unaudited six months ended 30 June 2009 Pre-tax Tax Post-tax GBP000 GBP000 GBP000 UK Business result 11,650 (2,927) 8,723 Swedish Business result - - - Other group activities result (439) 5 (434) ---------- ---------- ---------- Total result 11,211 (2,922) 8,289 ========== =========== Non-controlling interest - ---------- Total result attributable to shareholders 8,289 ========== Year ended 31 December 2009 Pre-tax Tax Post-tax GBP000 GBP000 GBP000
Profit arising on acquisition of Swedish
Business 25,056 - 25,056 UK Business result 24,784 948 25,732 Swedish Business result (2,626) (148) (2,774) Other group activities (2,473) 392 (2,081) ---------- ---------- ---------- Total result 44,741 1,192 45,933 ========== ========== Non-controlling interest 7 ---------- Total result attributable to shareholders 45,940 =========== The result of the UK Business, which is net of an amortisation charge ofGBP1.8m in respect of the acquired value of in-force business, continuesto be dominated by the strong emergence of surplus from its life and pensionscontracts, which are in run-off. Fixed interest yoelds reduced with consequentincreases in asset values in the first six months of 2010, which resulted infavourable experience of some GBP5m, compared with GBP2.3m previously reported at the first quarter position. Pre-tax earnings were significantly enhanced bythe release of GBP3.2m in respect of amounts previously set aside in respect ofpolicyholder claims. A thorough review has determined that the business has nofurther liability in respect of these claims.The pre-tax loss attributable to the Swedish Business of GBP4.1m is stated net ofan amortisation charge of GBP3.8m in respect of the acquired value of in-forcebusiness and of an associated write back of GBP1.4m of deferred acquisition costs.However, the current period loss is also net of a profit of GBP0.9mrecognised on the acquisition of the Aspis business, which has, accordingly,sheltered an underlying loss on core trading in excess of GBP2.6m. The SwedishBusiness is expected to incur trading losses for up to a further three years asit continues to build scale and until profits from an increasing base ofin-force investment contracts outweigh the front-end strain of writing newbusiness. That said, conditions in the Swedish economy continue to be challenging,while transfers out of business are higher than expected. Key performanceindicators relating to the Swedish Business are set out above.
EEV Result
Supplementary information prepared in accordance with EEV principles and setout in the financial statements on pages 41 to 56 is presented to providealternative information to that presented under IFRS. EEV principles assist inidentifying the value being generated by the UK and Swedish Life Businesses.The result determined under this method represents principally the movement inthe UK and Swedish Businesses' embedded value, before transfers made to theparent company and ignoring any capital movements. Through including thein-force value of insurance and investment contracts, EEV recognises thediscounted profit stream expected to arise from those contracts. The principalunderlying components of the EEV result are the expected return from existingbusiness, in both the UK and Swedish businesses, being the unwind of the rateused to discount the related cash flows, and the value added by the writing ofnew business in the Swedish Business. Adjustments are made to the result forvariations in actual experience from that assumed for each component of policycash flows arising in the period and for the impact of restating assumptionsfor each component of the prospective cash flows.
The movement in Group European Embedded Value may be summarised as:
Unaudited Year ended 31 December 6 months ended 30 June 2010 2009 2009 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 EEV at 262,585 182,708 182,708beginning of period Effect of 10,363 - -modelling improvements ---------- ---------- ---------- EEV at 272,948 182,708 182,708beginning of period restated Profit arising on acquisition - - 54,187of Swedish Business Profit arising on acquisition 989 - -of Aspis business Result for the period UK Business New 383 188 1,482 business Existing 4,720 7,470 14,438business Tax ( 2,428) (1,392) 11,893 ---------- ---------- ---------- Post-tax 2,675 6,266 27,813 Swedish Business New 288 - 783 business Existing (9,635) - 6,437 business Tax - - - ---------- ----------- ---------- Post-tax (9,347) - 7,220 Other (762) 111 1,052group activities net of tax Foreign (918) - 5,539exchange reserve movement Dividends (10,454) (10,200) (15,934)paid ---------- ---------- ---------- EEV at end 255,131 178,885 262,585of period ---------- ---------- ----------- The effect of the modelling improvements set out above, which is in the natureof an exceptional profit arises from the fact that, during the first half of2010, the Swedish Business introduced a new system for modelling the value ofits in-force policies. This provided a capability for (i) more accuratelymodelling the impact on commission paid on policies becoming paid-up and (ii)for determining future fee income on a case-by-case investment mix basis,whereas previously it had been necessary to adopt high-level estimates. Thesefactors led to an increase in the measure of embedded value of GBP6.3m andGBP4.1m respectively.These gains have been virtually offset by the net impact of a number of other significant variances affecting the Swedish Business. The expected return (unwind of the risk discount rate) of just over GBP1.5m was enhanced by favourableinvestment market performance in the period of just over GBP2.5m. This, however, displayed a weaker position than the previously-reported more robust result at the end of the first quarter and is one indication of the condition of theSwedish economy, which has contributed to lower new business volumes. These inturn gave rise to associated expense overruns of some GBP1.6m as the business did not reach its planned scale. In view of this and additional adverse effectsof some GBP2.6m arising from worsening lapse experience (principally arising from transfers out on pensions savings products), it was decided to take the opportunity to adopt a more cautious stance and to strengthen key assumptions used to value the in-force business. Accordingly, maintenance expense assumptionswere strengthened, giving rise to a reduction of GBP7.7m in embedded value, whilethe adoption of a more conservative transfer rate assumption has led to areduction of GBP3.4m in embedded value. All of the factors set out above,including the impact of model improvements of GBP10.4m and the profit arising onthe acquisition of Aspis as referred to under 'IFRS Result' above, have led toan EEV pre-tax profit of GBP2m in respect of the Swedish Business.
The UK Business, while being influenced by a degree of economic and investment market uncertainty has posted a result closer to expectations. It has, however, also displayed a less positive picture than the previously reported first quarter position, largely driven by equity market movements,
with a number of leading indices reflecting a fall of approximately 9% over the half-year. On the positive side, favourable lapse and mortality experiencegave rise to a pre-tax increase of some GBP3.9m in embedded value and the result was further enhanced by GBP3.2m in respect of the release to income of certain claims liabilities as explained in 'IFRS Result' above. These favourableeffects were offset by adverse investment market impacts of some GBP6m, so thatthe net pre-tax result at GBP5.1m is close to expectations. The underlying volatility in investment markets has been reflected through declining swap yields, without a corresponding decline in fixed interest rates of return, particularly in the first quarter and through the sharp rise and fall inequity markets referred to above. It is worthy of note that the greater part of the equity market decline experienced over the first half of the year had reversed by mid August 2010.At the net-of-tax position, the UK Business is slightly behind expectations asthe exposure of the GBP3.2m release to income of claims liabilities to tax at thefull rate has increased the marginal rate of tax on the overall result, asthere is no corresponding release of deferred tax within the value in-force.
Shareholders' Equity and Embedded Value of Covered Business - EEV Basis
The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: Unaudited 30 June 2010 Other UK Swedish group business business activities Total GBP000 GBP000 GBP000 GBP000 Value of in-force business 73,581 114,493 - 188,074 Other net assets 58,523 (22,970) 31,504 67,057 ---------- ---------- ---------- ---------- 132,104 91,523 31,504 255,131 ========== ========== ========== ========== Represented by: Embedded value (`EV') of regulated entities 132,104 93,717 - 225,821 Less: amount financed by borrowings - - - - ---------- ---------- ---------- ---------- EV of regulated entities
attributable to shareholders 132,104 93,717 - 225,821
Net equity of other Group companies - (2,194) 31,504 29,310 ---------- ---------- ---------- ---------- Shareholders' equity 132,104 91,523 31,504 255,131 ========== ========== ========== ========== Unaudited 30 June 2009 Other UK Swedish group business business activities Total GBP000 GBP000 GBP000 GBP000 Value of in-force business 80,153 - - 80,153 Other net assets 50,828 - 47,904 98,732 ----------- ---------- ---------- ---------- 130,981 - 47,904 178,885 ========== ========== ========== ========== Represented by: Embedded value (`EV') of regulated entities 135,175 - - 135,175 Less: amount financed by borrowings (4,194) - - (4,194) ---------- ---------- ---------- ---------- EV of regulated entities
attributable to shareholders 130,981 - - 130,981
Net equity of other Group companies - - 47,904 47,904 ---------- ---------- ---------- --------- Shareholders' equity 130,981 - 47,904 178,885 ========== ========== ========== ========== 31 December 2009 Other UK Swedish group business business activities Total GBP000 GBP000 GBP000 GBP000 Value of in-force business 85,559 112,753 - 198,312 Other net assets 68,098 (22,323) 18,498 64,273 ---------- ---------- ---------- ---------- 153,657 90,430 18,498 262,585 ========== ========== ========== ========== Represented by: Embedded value (`EV') of regulated entities 157,854 91,478 - 249,332 Less: amount financed by borrowings (4,197) - - (4,197) ----------- ---------- ---------- ---------- EV of regulated entities attributable to shareholders 153,657 91,478 - 245,135 Net equity of other Group companies - (1,048) 18,498 17,450 ----------- ------------ ---------- ---------- Shareholders' equity 153,657 90,430 18,498 262,585 ========== ========== ========== ==========
The tables below set out the components of the value of in-force business by major product line at each period end:
Unaudited 30 June 2010 UK Swedish Number of business business Total policies 000 000 000 Endowment 52 15 67Protection 55 - 55Annuities 5 - 5 Pensions 50 74 124 Other 7 - 7 ---------- ---------- ----------Total 169 89 258 Unaudited 30 June 2009 UK Swedish Number of business business Total policies 000 000 000 Endowment 58 - 58 Protection 61 - 61 Annuities 5 - 5 Pensions 52 - 52 Other 8 - 8 ---------- ---------- ---------- Total 184 - 184 ========== ========== ========== 31 December 2009 UK Swedish Number of business business Total policies 000 000 000 Endowment 55 15 70 Protection 58 - 58 Annuities 5 - 5 Pensions 51 70 121 Other 7 - 7 ---------- ---------- ---------- Total 176 85 261 ========== ========== ========== Unaudited 30 June 2010 UK Swedish business business Total Value of in-force GBPm GBPm GBPm Endowment 36.6 12.7 49.3 Protection 46.3 - 46.3 Annuities (0.2) - (0.2) Pensions 33.3 102.0 135.3 Other - - - ---------- ---------- ---------- Total at product level 116.0 114.7 230.7 Valuation adjustments Holding company expenses (10.1) - (10.1) Other (27.7) - (27.7) Cost of capital (0.9) (0.2) (1.1) ---------- ---------- ---------- Value in-force pre-tax 77.3 114.5 191.8 Taxation (3.7) - (3.7) ---------- ----------- ---------- Value in-force post-tax 73.6 114.5 188.1 ========== ========== ========== Unaudited 30 June 2009 UK Swedish business business Total Value of in-force GBPm GBPm GBPm Endowment 46.5 - 46.5 Protection 47.3 - 47.3 Annuities 5.3 - 5.3 Pensions 32.7 - 32.7 Other - - - ---------- ---------- ---------- Total at product level 131.8 - 131.8 Valuation adjustments Holding company expenses (8.8) - (8.8) Other (23.1) - (23.1) Cost of capital (4.4) - (4.4) ----------- ---------- ---------- Value in-force pre-tax 95.5 - 95.5 Taxation (15.3) - (15.3) ---------- ---------- ---------- Value in-force post-tax 80.2 - 80.2 ========== ========== ========== 31 December 2009 UK Swedish business business Total Value of in-force GBPm GBPm GBPm Endowment 40.2 15.2 55.4 Protection 48.1 - 48.1 Annuities 3.9 - 3.9 Pensions 36.2 98.6 134.8 Other 0.7 - 0.7 ---------- ---------- ---------- Total at product level 129.1 113.8 242.9 Valuation adjustments Holding company expenses (9.8) - (9.8) Other (26.5) - (26.5) Cost of capital (0.8) (1.0) (1.8) ----------- ----------- ----------- Value in-force pre-tax 92.0 112.8 204.8 Taxation (6.4) - (6.4) ---------- ---------- ----------- Value in-force post-tax 85.6 112.8 198.4 ========== ========== ==========
The value-in-force represents the discounted value of the future surplusesarising from the insurance and investment contracts in force at each respectiveperiod end. The future surpluses are calculated by using realistic assumptionsfor each component of the cash flow.
Other valuation adjustments in the UK Business principally comprise expenses of managing policies which are not attributed at product level.
Principal Risks and Uncertainties
The Group's management of insurance risk is a critical aspect of the business.The primary insurance activity carried out by the Group comprises theassumption of the risk of loss from persons that are directly subject to therisk. Such risks in general relate to life, accident, health and financialperils that may arise from an insurable event, with the majority of the Group'sexposure relating to mortality risk on individual lives, predominantly in theUK. As such, the Group is exposed to the uncertainty surrounding the timing andseverity of claims under the related contracts.The Group is also exposed to a range of financial risks through its lifeassurance contracts, financial assets, financial liabilities, includinginvestment contracts and borrowings, and its reinsurance assets. In particular,the key financial risk is that in the long term its investment proceeds are notsufficient to fund the obligations arising from its insurance and investmentcontracts. The most important components of this financial risk are market risk(interest rate risk and equity price risk), and credit risk, including the riskof reinsurer default. The Group has procedures for setting and monitoring theGroup's assets and liability position with the objective of ensuring that theGroup can always meet its obligations without undue cost and in accordance withthe Group's internal and regulatory capital requirements.Detailed information on the characteristics and management of insurance andfinancial risks borne by the Group is provided in Notes 5 and 6 respectively ofthe Company's published consolidated financial statements for the year ended 31December 2009.
In addition, insofar as the Group makes estimates and assumptions that affect the reported amounts of the following assets and liabilities, there is uncertainty as to the amounts at which they may eventually be settled or realised and as to the timing of settlement or realisation:
(i) estimates of future benefits payments arising from long-term insurance contracts;
(ii) fair value of investment contracts;
(iii)liability for redress in respect of mortgage endowment misselling complaints;
(iv) deferred acquisition costs and deferred income;
(v) amortisation of acquired value of in-force business;
(vi)insurance claim reserves; and
(vii) insurance claim reserves - reinsurance recoverable.
In addition, in respect of the Swedish Business, commission payable andreceivable from fund managers in respect of the unit-linked business have beenincluded as part of the unit-linked funds and subject to fund yield tax.Management is aware that the Swedish tax authority has questioned, in respectof another unit-linked business, whether such commissions receivable from fundmanagers should be part of the Group's income and be subject to corporation taxof 26.3% (the Swedish corporation tax rate for the year 2010). Managementconsider that the current accounting treatment remains appropriate.
Detailed information on these items is provided in Note 3 of the Company's published consolidated financial statements for the year ended 31 December 2009.
There have been no changes in the nature and incidence of the principal risksand uncertainties, referred to above, during the six months ended 30 June 2010,except in relation to continuing volatility in global investment markets. Theimpact of this on reported results for the six months ended 30 June 2010 is setout in the commentary under 'IFRS Result' and 'EEV Result' above. Clearly thereis continuing significant uncertainty with regard to the direction ofinvestment markets over the remaining six months of the current financial yearand attention is drawn particularly to the sensitivity of the reported embeddedvalue of the Company to investment market and interest rate movements set outin Note 7 to the European Embedded Value Basis Supplementary Information on
page 53 and 54.Related Party Transactions
There have been no related party transactions that have occurred during the first six months of the financial year that have materially affected the financial position or performance of the Group during that period and there have been no changes in the related party transactions described in the last annual report that could do so.
Solvency and Regulatory Capital
Regulatory Capital Resources and Requirements
The regulatory capital of both the UK and Swedish Businesses is calculated byreference to regulations established and amended from time to time by the FSAin the UK and by Finansinspektionen in Sweden. The rules are designed to ensurethat companies have sufficient assets to meet their liabilities in specifiedadverse circumstances. As such, there is, in the UK, a restriction on the fulltransfer of surplus from the long-term business fund to shareholder funds ofCountrywide assured plc ('CA plc'), and on the full distribution of reservesfrom CA plc to Chesnara and, in Sweden, on distributions from shareholderfunds.Within the UK, the regulations include minimum standards for assessing thevalue of liabilities, including making an appropriate allowance for defaultrisk on corporate bonds held to match liabilities when assessing the valuationdiscount rates used for valuing these liabilities. Market turmoil in 2008 ledto significant widening of spreads on corporate bonds above gilts, throughchanged assessment of default risk and liquidity issues, and therefore, withthe widening spreads, this issue was of concern to the industry. CA plccontinues to maintain a prudent approach of limiting the assumed liquiditypremium in corporate bonds to a maximum of 50bps as at 30 June 2010 (30 June2009 and 31 December 2009: 50bps). Additionally, the CA plc Board continues tomaintain their stance that permissive changes to regulations introduced in2006, in FSA policy statement PS06/14, that would allow a reduction inliabilities are not appropriate for CA plc at this time.The following summarises the capital resources and requirements of CA plc forUK regulatory purposes, after making provision for dividend payments from CAplc to Chesnara, which were approved after the respective period ends: Unaudited 30 June 31 December 2010 2009 2009 GBPm GBPm GBPm Available capital resources (`CR') 58.2 55.0 43.6 ---------- ---------- ----------
Long-term insurance capital requirement
(`LTICR') 19.2 21.2 19.8 Resilience capital requirement (`RCR') 2.9 1.6 2.3 ---------- ---------- ---------- Total capital resources requirement (`CRR') 22.1 22.8 22.1 ---------- ---------- ---------- Target capital requirement cover 31.7 33.5 32.0 ---------- ---------- ---------- Ratio of available CR to CRR 263% 241% 197% ---------- ---------- ---------- Excess of CR over target requirements GBP26.5m GBP21.5m GBP11.6m ========== ========== ========== The CA plc Board, as a matter of policy, continues to target CR cover for totalCRR at a minimum level of 150% of the LTICR and 100% of the RCR. To the extentthat the target capital requirement cover of GBP31.7m as at 30 June 2010 fallsshort of the GBP40m share capital component of CR, so it follows that GBP8.3mof the reported excess of CR over target requirement is not available fordistribution to shareholders except by way of a capital reduction.
It can be seen from this information that Chesnara, which relies on dividend distributions from CA plc, is currently in a favourable position to continue to pursue a progressive dividend policy.
In contrast to the UK Business, the Sewdish Business which is open to newbusiness, is, in the short to medium term, a net consumer of capital. The ratioof capital resources to capital resource requirements is a key indicator of thecapital health of the business as it expands and provides the context in whichfurther capital contributions are made by the parent company to finance thatexpansion in a predictable and orderly manner.
The following summarises the capital resources and requirements of Moderna F¶rs¤kringar Liv AB ('Moderna') for Swedish regulatory purposes:
Unaudited 30 June 31 December 2010 2009 2009 GBPm GBPm GBPm
Available capital resources (CR)
represented by: Share capital 1.1 - 1.1
Additional equity contributions 33.6 -
33.6 Accumulated deficit (14.5) - (10.2) ---------- ---------- ---------- 20.2 - 24.5 ---------- ---------- ----------
Regulatory capital resource requirement
(CRR) 9.2 - 8.1 ---------- ---------- ----------- Target requirement 13.8 - 12.1 ---------- ---------- ---------- Ratio of CR to CRR 220% - 302% ---------- ---------- ---------- Excess of CR over target requirements GBP6.4m - GBP12.4m ---------- ---------- ----------
The Moderna Board, as a matter of policy, sets a minimum target of 150% of theregulatory capital requirement. Swedish solvency regulation requires that to befully admissible a certain proportion of assets are to be held in the form of cash.The operation of this requirement may, from time to time, act as the operativeconstraint in determining the level of additional funding requirements, therebycausing the solvency ratio to rise above what it would otherwise have been, hadthe form of assets matching capital resources not been a constraint.
Insurance Groups Directive
In accordance with the EU Insurance Groups Directive, the Group calculates theexcess of the aggregate of regulatory capital employed over the aggregateminimum solvency requirement imposed by local regulators for all of theconstituent members of the Group, all of which are based in Europe. Thefollowing sets out these calculations after the recognition of final dividendsfor the respective financial year, but approved by the Board and paid to Groupshareholders after the respective dates: Unaudited 30 June 31 December 2010 2009 2009 GBPm GBPm GBPm Available group capital resources 106.9 93.0
99.7
Group regulatory capital requirement (32.4) (22.8) (31.6) ---------- ---------- ---------- Excess 74.5 70.2 68.1 ----------- ---------- ---------- Cover 330% 408% 316% ----------- ---------- ----------
The regulatory requirement is that available group capital resources should be at least 100% of the capital requirement.
Individual Capital Assessments
The FSA Prudential Sourcebooks require UK insurance companies to make their ownassessment of their capital needs to a required standard (a 99.5% probabilityof being able to meet liabilities to policyholders after one year). In thelight of scrutiny of this assessment, the FSA may impose its own additionalindividual capital guidance. The Individual Capital Assessment is based on arealistic liability assessment, rather than on the statutory mathematicalreserves, and involves stress testing the resultant realistic balance sheet forthe impact of adverse events, including such market effects as significantfalls in equity values, interest rate increases and decreases, bond defaultsand further widening of bond spreads.CA plc completed a further full annual assessment during 2009 as a result ofwhich it was concluded that the effective current and medium-term capitalrequirement constraints on distributions to Chesnara will continue to be on thebasis set out under `Regulatory capital resources and requirements' above. Thisassessment is subject to quarterly high-level updates until the next fullannual assessment.We are currently developing the Swedish Business's ability to produce similarassessments, so that the determination of risk-based capital is more clearlyaligned with UK best practice. In the meantime, the Swedish Business, inaccordance with local regulatory requirements, continues to make quarterlyassessments of the risk-based capital requirements of its business: theseindicate that capital resources currently provide a comfortable margin overcapital resource requirements.
EU Solvency II Framework
Over the year, we have continued to monitor developments in the EU Solvency IIframework which will impact both the UK and Swedish Businesses. We haveestablished a Steering Group to oversee our implementation of the regulations,which are currently due to become effective on 31 October 2012. Besides ensuringthat there are robust processes for the calculation of technical reserves andsolvency capital, the implementation will embrace wide-ranging changes in riskmanagement processes on a Group-wide basis. In the meantime, we have continuedinternal quantitative analysis and continue to assess the impact on the Groupof the content of the numerous Consultation Papers which have been issued bythe Committee of European Insurance and Occupational Pensions Supervisors(`CEIOPS'). Going concern statementAfter making appropriate enquiries, the Directors confirm that they aresatisfied that the Company and the Group have adequate resources to continue inbusiness for the foreseeable future. Accordingly, they continue to adopt thegoing concern basis in the preparation of the financial statements.
Outlook
In line with our primary aim of delivering an attractive and reliable dividend yield we remain focussed on the efficient management of our businesses.
Whilst Group performance has been relatively robust through the economic crisisand, indeed it was the catalyst which generated the value-enhancing acquisitionof Moderna, the ongoing effects still bring challenges to our businesses.Macroeconomic and industry-related challenges include:
(i) Ongoing volatility in investment markets - which affects surplus generation
and embedded value as customers propensity to invest further or, indeed,
maintain their exposure to equity and related markets is challenged;
(ii) Historically low interest rates - which diminish the returns we can achieve
on our significant cash holdings;
(iii) Economic environment - whilst low inflation and interest rates help policy
affordability, any significant increase in unemployment will have an inevitable
effect although we have factored this prospect into our discontinuance rates;
(iv) Regulatory or legislative change - Solvency II is providing a significant
operational challenge however we are not currently expecting any
significant capital threats. On the legislation front we have a new
government in the UK which is keen to raise funds to cut the deficit and an
election imminent in Sweden. That said there appear to be no immediate issue
other than a tax consultation paper issued in the UK where we currently
believe the outcomes will not have any significant effects on the UK business; and
(v) Exchange rates - which may affect the cost of funding Moderna and give rise to
fluctuations in the reported embedded value of the Swedish businesses.
Provided that these areas do not adversely impact the prospects of the Groupsignificantly, the short- to medium-term outlook is positive for the ongoingemergence of surplus and, accordingly, for dividend support.On the more positive side we continue to see a reasonable flow of potentialacquisition opportunities (at least in part generated by some of the issuesnoted above) and, as demonstrated with the Moderna and Aspis transactions, wewill readily progress these where we see value and a clear strategic fit. Asregards other opportunities, while we remain open-minded as to location in theUK and Western Europe, we will continue to apply strict financial and risk
criteria in assessing them. DividendWe have signalled that we aim to provide a reliable and progressive dividendpayment. With the continuing healthy cashflow generated by the emergence ofsurplus from the underlying UK product base and the strong solvency position ofthe business, the Board is pleased to be able to declare an interim dividendof 5.8p, which represents an increase of 2.65% over the 2009 interim payment. Graham KettleboroughChief Executive Officer25 August 2010
DIRECTORS'RESPONSIBILITY STATEMENT IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT
Responsibility statement
We confirm that to the best of our knowledge:
(a) the condensed set of financial statements has been prepared in accordance
with IAS 34 'Interim Financial Reporting'
(b) the interim management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first
six months and description of principal risks and uncertainties for the
remaining six months of the year); and
(c) the interim management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions and
changes therein).By order of the Board Peter Mason Graham Kettleborough Chairman Chief Executive Officer 25 August 2010
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT
We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30 June2010 which comprises the condensed consolidated statement of comprehensive income,the condensed consolidated balance sheet, the condensed consolidated statement ofcash flows, the condensed consolidated statement of changes in equity and relatedNotes 1 to 7. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatementsor material inconsistencies with the information in the condensed set of financial statements.This report is made solely to the company in accordance with InternationalStandard on Review Engagements (UK and Ireland) 2410 "Review of InterimFinancial Information Performed by the Independent Auditor of the Entity"issued by the Auditing Practices Board. Our work has been undertaken so thatwe might state to the company those matters we are required to state to them inan independent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilitiesThe half-yearly financial report is the responsibility of, and has beenapproved by, the directors. The directors are responsible for preparing thehalf-yearly financial report in accordance with the Disclosure and TransparencyRules of the United Kingdom's Financial Services Authority.As disclosed in note 1, the annual financial statements of the group areprepared in accordance with IFRSs as adopted by the European Union. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with International Accounting Standard34, "Interim Financial Reporting," as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview.Scope of Review
We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 June 2010 is not prepared, in allmaterial respects, in accordance with International Accounting Standard 34 asadopted by the European Union and the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority. Deloitte LLPChartered Accountants and Statutory AuditorsManchester, United Kingdom25 August 2010 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIXMONTHS ENDED 30 JUNE Unaudited Six months ended Year ended 30 June 31 December 2010 2009 2009 Note GBP000 GBP000 GBP000 Insurance premium revenue 59,044 44,577 100,105
Insurance premium ceded to reinsurers (18,999) (8,110)
(24,997) --------- ---------- ---------- Net insurance premium revenue 40,045 36,467 75,108 Fee and commission income Insurance contracts 18,915 17,573 35,864 Investment contracts 14,943 3,299 15,256 Net investment return (150) 9,145 326,680 --------- ---------- ---------- Total revenue (net of reinsurance payable) 73,753 66,484 452,908 Other operating income 7,028 1,498 4,689 ----------- ---------- ---------- Total income 80,781 67,982 457,597 ---------- ---------- ----------
Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract
holders (64,345) (60,417) (129,557)
Net (increase)/decrease in insurance contract
provisions 14,006 9,809 (127,840)
Reinsurers' share of claims and benefits 15,049 7,287
47,897 ---------- ---------- ---------- Net insurance contract claims and benefits (35,290) (43,321) (209,500) ---------- ---------- ----------- Change in investment contract liabilities (465) (3,658)
(199,748)
Reinsurers' share of investment contract
liabilities (303) 193 4,710 ---------- ---------- ---------- Net change in investment contract liabilities (768) (3,465) (195,038) ---------- ---------- ---------- Fees, commission and other acquisition costs (7,630) (661) (5,167) Administrative expenses (13,272) (6,322) (18,245) Other operating expenses
Charge for amortisation of acquired value of
in-force business (5,636) (1,863) (6,953)
Charge for amortisation of acquired value of
customer relationships (442) - (188) Other (6,003) (1,027) (2,195) ---------- ---------- ---------- Total expenses (69,041) (56,659) (437,286) ---------- ----------- ---------- Total income less expenses 11,740 11,323 20,311
Share of (loss)/profit of associates (101) -
39 Profit recognised on business combinations 4 989 - 25,056 ----------- ----------- ---------- Operating profit 12,628 11,323 45,406 Financing costs (650) (112) (665) ---------- ----------- ----------- Profit before income taxes 5 11,978 11,211 44,741 Income tax (expense)/credit (4,194) (2,922) 1,192 ---------- ---------- ---------- Profit for the period 7,784 8,289 45,933 ---------- ---------- ---------- Attributable to: Shareholders 2,5 7,824 8,289 45,940 Non-controlling interest (40) - (7) ---------- ---------- ---------- 7,784 8,289 45,933
Foreign exchange translation differences arising on the revaluation of foreign operations (329) -
3,381 ---------- ---------- ----------
Total comprehensive income for the period 7,455 8,289
49,314 ========== ========= ======== Attributable to: Shareholders 7,495 8,289 49,321 Non-controlling interest (40) - (7) ---------- --------- --------- 7,455 8,289 49,314 ========== ========== ========== Basic earnings per share (based onprofit for the period attributableto shareholders) 2 7.71p 8.17p 45.26p ========== =========== ========== Diluted earnings per share (based onprofit for the period attributableto shareholders) 2 7.71p 8.17p 45.26p =========== ========== ==========
CONDENSED CONSOLIDATED BALANCE SHEET AT 30 JUNE 2010
Unaudited 30 June 31 December 2010 2009 2009 Note GBP000 GBP000 GBP000 Assets Intangible assets Deferred acquisition costs 10,914 8,116 9,327
Acquired value of in-force business
Insurance contracts 13,484 15,512 14,937 Investment contracts 66,864 11,101 71,526 Acquired value of customer relationships 3,498 - 2,682 Internally-developed software 5,456 - 4,060 Property and equipment 681 - 491 Investment in associates 943 - 1,051 Investment properties 3,355 3,272 3,355
Reinsurers' share of insurance contract
provisions 239,078 181,769 236,866 Amounts deposited with reinsurers 26,571 22,339 27,056 Financial assets
Equity securities at fair value through
income 397,509 356,387 454,970
Holdings in collective investment
schemes at fair value through income 1,537,247 589,530 1,612,861
Debt securities at fair value through
income 380,057 258,410 247,836 Policyholders' funds held by the Group 44,336 -
41,107
Insurance and other receivables 27,477 9,812 19,822 Prepayments 3,396 2,920 3,784 Derivative financial instruments 7,405 2,410 7,964 ---------- ---------- ---------- Total financial assets 2,397,427 1,219,469 2,388,344 ---------- ---------- ---------- Reinsurers' share of accrued policyholder claims 3,996 3,519 4,728 Income taxes 941 - 395 Cash and cash equivalents 174,183 178,789 155,241 ---------- ---------- ---------- Total assets 5 2,947,391 1,643,886 2,920,059 ---------- ----------- ---------- Liabilities Bank overdrafts 1,590 2,074 2,312 Insurance contract provisions 1,065,147 910,174 1,077,033 Financial liabilities
Investment contracts at fair value
through income 1,564,816 535,536 1,529,221
Liabilities relating to policyholders'
funds held by the Group 44,336 - 41,107 Borrowings 6 22,452 4,194 28,996
Derivative financial instruments 1,542 746
54 --------- ---------- ---------- Total financial liabilities 1,633,146 540,476 1,599,378 ---------- ---------- ---------- Provisions 1,696 2,580 1,452 Deferred tax liabilities 9,558 9,647 10,366 Reinsurance payables 22,105 1,772 15,039
Payables related to direct insurance
and investment contracts 29,139 24,948 30,433 Deferred income 12,254 13,779 13,132 Income taxes 7,543 6,956 1,313 Other payables 8,417 7,023 9,833 ---------- ---------- --------- Total liabilities 5 2,790,595 1,519,429 2,760,291 ---------- ---------- ---------- Net assets 156,796 124,457 159,768 ========== ========== ========== Shareholders' equity Share capital 41,501 41,501 41,501 Share premium 20,458 20,458 20,458 Treasury shares (3,379) (3,379) (3,379) Other reserves 3,102 50 3,431 Retained earnings 3 95,114 65,827 97,744 ---------- ---------- ----------- Total shareholders' equity 156,796 124,457 159,755 Non-controlling interest - - 13 ---------- ---------- ---------- Total equity 156,796 124,457 159,768 ========= =========== ========== CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE 2010 Unaudited Year ended Six months ended 30 June 31 December 2010 2009 2009 GBP000 GBP000 GBP000 Profit for the year 7,824 8,289 45,940 Adjustments for:
Depreciation of property and equipment 148 -
65
Amortisation of deferred acquisition costs 3,040 474 2,080
Amortisation of acquired value of in-force
business 5,637 1,863 6,953
Amortisation of acquired value of customer
relationships 442 - 188
Amortisation of internally-developed
software 527 - 414 Tax expense/(recovery) 4,194 2,922 (1,192) Interest receivable (6,752) (8,558) (17,959) Dividends receivable (13,749) (15,266) (24,048) Interest expense 650 112 665
Change in fair value of investment
properties - 160 77
Fair value (gains)/ losses on financial
assets 31,095 3,824 (284,739)
(Profit)/loss on sale of property and
equipment (2) - 21 Profit arising on business combination (989) -
(25,056)
Share of loss of associate net of
impairment 101 - 122 Interest received 6,363 8,627 20,893 Dividends received 13,064 15,024 23,304
Increase in intangible assets related to insurance and investment contracts (4,479) -
(3,157)
Changes in operating assets and liabilities
(Increase)/decrease in financial assets (44,764) 14,494 (58,028)
(Increase)/decrease in reinsurers share of insurance contract provisions (1,859) 1,505
(27,211)
Decrease/(increase) in amounts deposited
with reinsurers 485 (158) (4,875)
(Increase)/decrease in insurance and other
receivables (6,983) 1,417 (4,671) Decrease/(increase) in prepayments 376 (1,320)
(1,293)
(Decrease)/increase in insurance contract
provisions (14,575) (13,332) 120,648
Increase/(decrease) in investment contract
liabilities 50,682 (23,006) 219,609 Increase/(decrease) in provisions 244 (817)
(2,229)
Increase in reinsurance payables 7,422 375
3,629
(Decrease)/increase in payables related to
direct insurance and investment contracts (1,119) 1,057 3,604
Increase/(decrease) in other payables 4,564 427
(970) ---------- ---------- ---------- Cash generated from/(utilised by) operations 41,587 (1,887) (7,216) Income tax (paid)/recovered (4,694) 1,811 (2,371) ---------- ---------- ----------
Net cash generated from/(utilised by)
operating activities 36,893 (76) (9,587) ========== ========== ==========
Cash flows from investing activities Acquisition of subsidiary net of cash
acquired 1,830 - (5,944) Investment in associates - - (334) Development of software (1,079) - (918)
Purchases of property and equipment (193) -
(180) ---------- ---------- ----------
Net cash generated from/(utilised by)
investing activities 558 - (7,376) ========== ========== ==========
Cash flows from financing activities
Repayment of borrowings (6,177) (4,200) (5,759) Dividends paid (10,454) (10,200) (15,934) Interest paid (853) (96) (821) ---------- ---------- ---------- Net cash utilised by financing activities (17,484) (14,496) (22,514) ========== ========== ===========
Net increase/(decrease) in cash and cash
equivalents 19,967 (14,572) (39,477)
Cash and cash equivalents at beginning of
the year 152,929 191,287 191,287
Effect of exchange rate changes on cash and
cash equivalents (303) - 1,119 ---------- ---------- ----------
Cash and cash equivalents at end of the
period 172,593 176,715 152,929 ========== ========== ========== CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED30 JUNE 2010 Unaudited six months ended 30 June 2010 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2010 41,501 20,458 3,431 (3,379) 97,744 159,755 Profit for the period attributable to shareholders - - - - 7,824 7,824 Dividends paid - - - - (10,454) (10,454) Foreign exchange translation reserve - - (329) - - (329) ---------- ---------- ---------- ---------- ---------- ---------- Equity shareholders' funds at 30 June 2010 41,501 20,458 3,102 (3,379) 95,114 156,796 ========== ========== ========== ========== ========== ========== Unaudited six months ended 30 June 2009 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Profit for the period attributable to shareholders - - - - 8,289 8,289 Dividends paid - - - - (10,200) (10,200) ---------- ---------- ---------- ---------- ----------- ---------- Equity shareholders' funds at 30 June 2009 41,501 20,458 50 (3,379) 65,827 124,457 ========== ========= ========== ========== ========== ========== Year ended 31 December 2009 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Profit for the year attributable to shareholders - - - - 45,940 45,940 Dividends paid - - - - (15,934) (15,934) Foreign exchange translation reserve - - 3,381 - - 3,381 ---------- ---------- ----------- ---------- ---------- ---------- Equity shareholders' funds at 31 December 2009 41,501 20,458 3,431 (3,379) 97,744 159,755 ========= ========= ======== ========= ======== =======
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 Basis of preparation
This condensed set of consolidated financial statements has been prepared inaccordance with IAS 34 'Interim Financial Reporting' as adopted by the EU. Asrequired by the Disclosure and Transparency Rules of the Financial ServicesAuthority, the condensed set of consolidated financial statements has beenprepared applying the accounting policies and presentation that were applied inthe preparation of the Group's published consolidated financial statements forthe year ended 31 December 2009, which were prepared in accordance with IFRS asadopted by the EU. Any judgements and estimates applied in the condensed set offinancial statements are consistent with those applied in the preparation ofthe Group's published consolidated financial statements for the year ended 31December 2009.
The financial information shown in this half-year review is unaudited and does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006.
The comparative figures for the financial year ended 31 December 2009 are notthe company's statutory accounts for that financial year. Those accounts havebeen reported on by the company's auditors and delivered to the Registrar ofCompanies. The report of the auditors was (i) unqualified, (ii) did not includea reference to any matters to which the auditors drew attention by way ofemphasis without qualifying their report and (iii) did not contain a statementsunder section 298(2) or (3) of the Companies Act 2006.
2 Earnings per share
Earnings per share are based on the following:
Unaudited Year ended six months ended 30 June 31 December 2010 2009 2009
Profit for the year attributable to
shareholders (GBP000) 7,824 8,289 45,940 ----------- -------- --------- Weighted average number of ordinary shares 101,492,591 101,492,591 101,492,591 ---------- ---------- ---------- Basic earnings per share 7.71p 8.17p 45.26p --------- ---------- ---------- Diluted earnings per share 7.71p 8.17p 45.26p ========= ======= =========
The weighted average number of ordinary shares in respect of the six monthsended 30 June 2010, the six months ended 30 June 2009 and the year ended 31 December 2009 is based on 104,588,785 shares in issue at the beginning andend of the period less 3,096,194 own shares held in treasury at the beginningand end of the period.
There were no share options outstanding during the periods under review. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods.
Earnings per share for the year ended 31 December 2009 includes the impact ofGBP25,056,000 of profit recognised on the acquisition of Moderna. Excludingthis item both the basic and diluted earnings per share for the year ended 31December 2009 would have been 20.58p per share.3 Retained earnings Unaudited six months ended Year ended 30 June 31 December 2010 2009 2009 GBP000 GBP000 GBP000
Retained earnings attributable to equity holders of the parent company comprise
Balance at 1 January 97,744 67,738 67,738 Profit for the period 7,824 8,289 45,940 Dividends Final approved and paid for 2008 - (10,200)
(10,200)
Interim approved and paid for 2009 - -
(5,734)
Final approved and paid for 2009 (10,454) -
- ---------- ---------- ---------- Balance at 30 June/31 December 95,114 65,827 97,744 ========== ========== ==========
The final dividend in respect of 2008, approved and paid in 2009, was paid at the rate of 10.05p per share.
The interim dividend in respect of 2009, approved and paid in 2009, was paid at the rate of 5.65p per share.
The final dividend in respect of 2009, approved and paid in 2010, was paid at the rate of 10.3p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2009 was made at the rate of 15.95p per share.
An interim dividend of 5.80p per share in respect of the year ending 31December 2010, payable on 12 October 2010 to equity shareholders of the parentcompany registered at the close of business on 10 September 2010, the dividendrecord date, was approved by the Directors after 30 June 2010. The resultinginterim dividend of GBP5.9m has not been provided in these financialstatements.
The following summarises dividends per share in respect of the year ended 31 December 2009 and 31 December 2010:
2010 2009 p p Interim dividend 5.80 5.65 ========= Final dividend 10.30 ---------- Total 15.95 ========== 4 Business combinations
Business combination relating to Aspis F¶rs¤kringar Liv AB
On 16 February 2010, Chesnara plc's Swedish subsidiary, Moderna F¶rs¤kringarLiv AB (`Moderna'), entered into an agreement with the Swedish RegulatoryAuthority, Finansinspektionen ('FI') to take over the operational managementand certain of the assets and liabilities of Aspis F¶rs¤kringar Liv AB(`Aspis') for a total consideration of SEK 20.75m (GBP1.8m), paid in cash. This followed the FI's decision to take control of Aspis on 26 November 2009after revoking Aspis' license as it was unable to demonstrate its solvency.Moderna has acquired the in force business, the personnel, expertise andsystems of Aspis and will also manage, but not be responsible for, the paymentof in-force claims that had occurred up to 12 November 2009. Moderna hadpreviously, under the terms of an asset transfer agreement entered into on 10December 2009, acquired the right to offer renewal policies to Aspispolicyholders from 12 November 2009.
The acquisition of this business has given rise to a profit on acquisition of GBP989,257 calculated as follows:
The estimated book Fair value and fair values of and the assets and accounting liabilities at the policydate of Book value adjustments Fair value acquisition were: GBP000 GBP000 GBP000 Assets Intangible assets Value of in-forceinsurance contracts - 235 235Software assets - 927 927
Value of customer relationships - 1,306 1,306
Deferred acquisition costs 235 (235) - Property and equipment 154 - 154 Cash and cash equivalents 3,651 - 3,651 ---------- ---------- ---------- Total assets 4,040 2,233 6,273 ---------- ---------- ---------- Liabilities
Insurance contract provisions 3,298 - 3,298
Other payables 154 - 154 ---------- ----------- ---------- Total liabilities 3,452 - 3,452 ---------- ----------- ---------- Net assets 588 2,233 2,821 ---------- ----------- ----------- Net assets acquired 2,821 Total consideration (1,832) ---------- Profit arising onacquisition of subsidiary 989 =========== The assets and liabilities as at the acquisition date in the table above arestated at their provisional fair values and may be amended for 12 months afterthe date of acquisition in accordance with paragraph 45 of IFRS 3(2008), BusinessCombinations.The results of Aspis have been included in the consolidated financialstatements of the Group with effect from 16 February 2010, and have contributedrevenue of GBP3.0 million over this period, whilst contributing GBP0.6 millionloss to the overall consolidated profit before tax.Had Aspis been consolidated from 1 January 2010 the consolidated statement ofcomprehensive income would have included revenue of GBP4.1 million, and theresults would have contributed GBP0.8 million loss to the overall consolidatedprofit before tax.5 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.
There were no changes to the basis of segmentation or the measurement basis for segment profit during the periods under review.
UK Business
This segment comprises the UK insurance and investment operation, CountrywideAssured Life Holdings Limited (`CAHL'), which holds the Group's UK insuranceand investment assets and liabilities, and is responsible for managing bothunit-linked and non-linked business.
Swedish Business
This segment comprises the Swedish insurance and investment operation, ModernaF¶rs¤kringar Liv AB (`Moderna'), which holds the Group's Swedish insurance andinvestment assets and liabilities, and is responsible for managing bothunit-linked and non-linked business.
Other Group Activities
The functions performed by the holding company, Chesnara plc, are defined underthe operating segment analysis as Other Group Activities. Also included thereinare consolidation and elimination adjustments.
Measurement basis
The accounting policies of the segments are the same as those for the Group asa whole. Any transactions between the business segments are on normalcommercial terms and market conditions. The Group evaluates performance ofoperating segments on the basis of the profit before tax attributable toshareholders and the total assets and liabilities of the reporting segments andthe Group.
(i) Segmental income statement for the six months ended 30 June 2010
(unaudited) UK Swedish Other Group Business Business Activities Total GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 41,851 17,193 - 59,044 Insurance premium ceded to reinsurers (7,391) (11,608) - (18,999) ---------- ---------- ---------- ----------- Net insurance premium revenue 34,460 5,585 - 40,045 Fee and commission income Insurance contracts 16,255 2,660 - 18,915 Investment contracts 5,124 9,819 - 14,943 Net investment return (7,947) 7,689 108 (150) ---------- ---------- ---------- ---------- Total revenue (net of reinsurance payable) 47,892 25,753 108 73,753 Other operating income 1,560 5,468 - 7,028 --------- ----------- ---------- --------- Segmental income 49,452 31,221 108 80,781 ---------- ---------- ---------- ---------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (58,361) (5,984) - (64,345) Net decrease/(increase) in insurance contract provisions 18,318 (4,312) - 14,006 Reinsurers' share of claims
and benefits 7,888 7,161 - 15,049 ---------- ---------- ---------- ----------- Net insurance contract claims and benefits incurred (32,155) (3,135) - (35,290) ---------- ---------- ---------- ---------- Change in investment contract liabilities 7,673 (8,138) - (465) Reinsurers' share of investment contract liabilities (303) - - (303) ----------- ----------- ----------- ----------- Net change in investment contract liabilities 7,370 (8,138) - (768) ---------- ---------- --------- ---------- Fees, commission and other acquisition costs (711) (6,919) - (7,630) Administrative expenses (4,723) (7,659) (890) (13,272) Other operating expenses
Charge for amortisation of acquired value of inâ€"force business (1,847) (3,789) - (5,636) Charge for amortisation of customer relationships - (442) - (442) Other (591) (5,466) 54 (6,003) ---------- ---------- ---------- ---------- Segmental expenses (32,657) (35,548) (836) (69,041)
Segmental income less expenses ---------- ---------- ---------- ----------
Share of profit from associates - (101) - (101) Profit recognised on acquisition of subsidiary - 989 - 989 ---------- ---------- ---------- ----------- Segmental operating profit/ (loss) 16,795 (3,439) (728) 12,628 Financing costs - (621) (29) (650) ---------- ---------- ---------- ---------- Profit/(loss) before tax 16,795 (4,060) (757) 11,978 Income tax credit/(expense) (4,238) 44 - (4,194) Non-controlling interest - 40 - 40 ---------- ---------- ---------- ---------- Profit/(loss) after tax attributable to shareholders 12,557 (3,976) (757) 7,824 ========== ========= ========== ========== (ii) Segmental income statement for the six months ended 30 June 2009(unaudited) Swedish Other Group UKBusiness Business Activities Total GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 44,577 - - 44,577 Insurance premium ceded to reinsurers (8,110) - - (8,110) ---------- ---------- ---------- ----------
Net insurance premium revenue 36,467 - - 36,467
Fee and commission income Insurance contracts 17,573 - - 17,573 Investment contracts 3,299 - - 3,299 Net investment return 8,745 - 400 9,145 ---------- ---------- ---------- ---------- Total revenue (net of reinsurance payable) 66,084 - 400 66,484 Other operating income 1,498 - - 1,498 ---------- ---------- ---------- ---------- Segmental income 67,582 - 400 67,982 ---------- ---------- ---------- ----------
Insurance contract claims and
benefits incurred Claims and benefits paid to insurance contract holders (60,417) - - (60,417) Net decrease in
insurance contract provisions 9,809 - - 9,809
Reinsurers' share of claims and benefits 7,287 - - 7,287 ---------- ---------- ---------- ----------
Net insurance contract claims
and benefits incurred (43,321) - - (43,321) ---------- ---------- ---------- ----------
Change in investment contract
liabilities (3,658) - - (3,658) Reinsurers' share of investment contract liabilities 193 - - 193 ---------- ---------- ---------- ---------- Net change in investment contract liabilities (3,465) - - (3,465) ---------- ---------- ---------- ---------- Fees, commission and other acquisition costs (661) - - (661) Administrative expenses (5,378) - (944) (6,322) Other operating expenses Charge for amortisation of
acquired value of inâ€"force
business (1,863) - - (1,863) Other (1,244) - 217 (1,027) ---------- ---------- ---------- ---------- Segmental expenses (55,932) - (727) (56,659) ---------- ---------- ---------- ----------
Segmental income less expenses
Share of profit from associates - - - - Profit recognised on acquisition of subsidiary - - - - ---------- ---------- ---------- ---------- Segmental operating profit/ (loss) 11,650 - (327) 11,323 Financing costs - - (112) (112) ---------- ---------- ---------- ---------- Profit/(loss) before tax 11,650 - (439) 11,211 Income tax credit/(expense) (2,927) - 5 (2,922) ---------- ---------- ---------- ---------- Profit/(loss) after tax attributable to shareholders 8,723 (434) 8,289 ========= ========= ========== ==========(iii) Segmental income statement for the year ended 31 December 2009 Swedish Other Group UKBusiness Business Activities Total GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 88,469 11,636 - 100,105 Insurance premium ceded to reinsurers (15,831) (9,166) - (24,997) ---------- ---------- ---------- ---------
Net insurance premium revenue 72,638 2,470 - 75,108
Fee and commission income Insurance contracts 34,285 1,579 - 35,864 Investment contracts 8,258 6,998 - 15,256 Net investment return 233,926 92,239 515 326,680 ---------- ---------- ---------- ---------- Total revenue (net of reinsurance payable) 349,107 103,286 515 452,908 Other operating income 4,689 - - 4,689 ---------- ---------- ---------- ---------- Segmental income 353,796 103,286 515 457,597 ---------- ---------- ---------- ----------
Insurance contract claims and
benefits incurred Claims and benefits paid to insurance contract holders (126,737) (2,820) - (129,557) Net (increase)/decrease in insurance contract provisions (128,064) 224 - (127,840) Reinsurers' share of claims and benefits 45,630 2,267 - 47,897 ---------- ---------- ---------- ----------
Net insurance contract claims
and benefits incurred (209,171) (329) - (209,500) ---------- ---------- ---------- ----------
Change in investment contract
liabilities (107,524) (92,224) - (199,748) Reinsurers' share of investment contract liabilities 4,710 - - 4,710 ---------- ---------- ---------- ---------- Net change in investment contract liabilities (102,814) (92,224) - (195,038) ---------- ---------- ---------- ---------- Fees, commission and other acquisition costs (1,116) (4,051) - (5,167) Administrative expenses (9,806) (5,276) (3,163) (18,245) Other operating expenses Charge for amortisation of
acquired value of inâ€"force business (3,688) (3,265) -
(6,953)
Charge for amortisation of customer relationships - (188) - (188) Other (2,417) (110) 332 (2,195) ----------- ---------- ---------- ---------- Segmental expenses (329,012) (105,443) (2,831) (437,286) ----------- ---------- ---------- ----------
Segmental income less expenses 24,784 (2,157) (2,316) 20,311 Share of profit from associates - 39 - 39 Profit recognised on acquisition of subsidiary - - 25,056 25,056 ---------- ---------- ---------- ---------- Segmental operating profit/
(loss) 24,784 (2,118) 22,740 45,406 Financing costs - (508) (157) (665) ----------- ---------- ----------- ---------- Profit/(loss) before tax 24,784 (2,626) 22,583 44,741
Income tax credit/(expense) 948 (148) 392 1,192
Non-controlling interest - 7 - 7 ----------- ---------- ----------- ---------- Profit/(loss) after tax
attributable to shareholders 25,732 (2,767) 22,975 45,940 ========== ========== ========== ========== (iv) Segmental balance sheet as at 30 June 2010 (unaudited) Swedish Other Group UKBusiness Business Activities Total GBP000 GBP000 GBP000 GBP000 Intangible assets 30,093 70,123 - 100,216 Property and equipment - 681 - 681 Investment in associates - 943 - 943 Reinsurers' share of insurance contract provisions 208,715 30,363 - 239,078 Amounts deposited with reinsurers 26,571 - - 26,571 Investment properties 3,355 - - 3,355 Financial assets 1,350,351 1,046,773 303 2,397,427 Reinsurers' share of accrued policyholder claims 3,996 - - 3,996 Income tax 546 - 395 941 Cash and cash equivalents 123,603 19,125 31,455 174,183 ------------ ----------- ---------- ----------- Total assets 1,747,230 1,168,008 32,153 2,947,391 ----------- ---------- ---------- ---------- Bank overdrafts 1,590 - - 1,590 Insurance contract provisions 1,023,893 41,254 - 1,065,147 Investment contracts at fair value through income 584,921 979,895 - 1,564,816 Liabilities relating to policyholders' funds held by the Group - 44,336 - 44,336 Borrowings - 22,452 - 22,452 Derivative financial instruments 1,542 - - 1,542 Provisions 1,696 - - 1,696 Deferred tax liabilities 8,870 686 2 9,558 Reinsurance payables 2,476 19,629 - 22,105 Payables related to direct insurance and investment contracts 19,975 9,164 - 29,139 Deferred income 12,254 - - 12,254 Income taxes 4,600 2,943 - 7,543 Other payables 3,178 4,261 978 8,417 ----------- ---------- ----------- ---------- Total liabilities 1,664,995 1,124,620 980 2,790,595 ---------- ------------ ---------- ---------- Net assets 82,235 43,388 31,173 156,796 Non-controlling interest - - - - ----------- ---------- ----------- ---------- Net assets attributable to shareholders 82,235 43,388 31,173 156,796 ========== ========== ========== ==========
(v) Segmental balance sheet as at 30 June 2009 (unaudited)
Swedish Other Group UKBusiness Business Activities Total GBP000 GBP000 GBP000 GBP000 Intangible assets 34,729 - - 34,729 Reinsurers' share of insurance contract provisions 181,769 - - 181,769 Amounts deposited with reinsurers 22,339 - - 22,339 Investment properties 3,272 - - 3,272 Financial assets 1,218,955 - 514 1,219,469 Reinsurers' share of accrued policyholder claims 3,519 - - 3,519 Cash and cash equivalents 130,429 - 48,360 178,789 ---------- ---------- ---------- ---------- Total assets 1,595,012 - 48,874 1,643,886 ---------- ----------- ------------ ---------- Bank overdrafts 2,074 - - 2,074 Insurance contract provisions 910,174 - - 910,174 Investment contracts at fair value through income 535,536 - - 535,536 Borrowings - - 4,194 4,194 Derivative financial instruments 746 - - 746 Provisions 2,580 - - 2,580 Deferred tax liabilities 9,647 - - 9,647 Reinsurance payables 1,772 - - 1,772 Payables related to direct insurance and investment contracts 24,948 - - 24,948 Deferred income 13,779 - - 13,779 Income taxes 7,102 - (146) 6,956 Other payables 5,487 - 1,536 7,023 ---------- ---------- ---------- ---------- Total liabilities 1,513,845 - 5,584 1,519,429 ----------- ----------- ------------ ---------- Net assets 81,167 - 43,290 124,457 Non-controlling interest - - - - ----------- ----------- ----------- ----------- Net assets attributable to shareholders 81,167 - 43,290 124,457 =========== =========== =========== ========= (vi) Segmental balance sheet as at 31 December 2009 Swedish Other Group UKBusiness Business Activities Total GBP000 GBP000 GBP000 GBP000 Intangible assets 32,471 70,061 - 102,532 Property and equipment - 491 - 491 Investment in associates - 1,051 - 1,051 Reinsurers' share of insurance contract provisions 209,604 27,262 - 236,866 Amounts deposited with reinsurers 27,056 - - 27,056 Investment properties 3,355 - - 3,355 Financial assets 1,413,798 974,475 71 2,388,344 Reinsurers' share of accrued policyholder claims 4,728 - - 4,728 Income tax - - 395 395 Cash and cash equivalents 120,830 14,776 19,635 155,241 --------- ----------- ---------- ---------- Total assets 1,811,842 1,088,116 20,101 2,920,059 ---------- ---------- ---------- ---------- Bank overdrafts 2,312 - - 2,312 Insurance contract provisions 1,044,680 32,353 - 1,077,033 Investment contracts at fair value through income 610,930 918,291 - 1,529,221 Liabilities relating to policyholders' funds held by the Group - 41,107 - 41,107 Borrowings - 24,799 4,197 28,996 Derivative financial instruments 54 - - 54 Provisions 1,452 - - 1,452 Deferred tax liabilities 9,613 751 2 10,366 Reinsurance payables 2,064 12,975 - 15,039 Payables related to direct insurance and investment contracts 24,751 5,682 - 30,433 Deferred income 13,132 - - 13,132 Income taxes 854 459 - 1,313 Other payables 3,825 3,990 2,018 9,833 ---------- ------------- ----------- ------------ Total liabilities 1,713,667 1,040,407 6,217 2,760,291 ---------- ---------- ---------- ---------- Net assets 98,175 47,709 13,884 159,768 Non-controlling interest - (13) - (13) ---------- ---------- ----------- ---------- Net assets attributable to shareholders 98,175 47,696 13,884 159,755 ========== ========== ========== =========6 Borrowings Unaudited 30 June 31 December 2010 2009 2009 GBP000 BP000 GBP000 Bank loan - 4,194 4,197 Amount due in relationto financial reinsurance 22,340 - 24,686 Other 112 - 113 ----------- ---------- ---------- Total 22,452 4,194 28,996 ========== ========== ========== The bank loan, which was drawn down on 2 June 2005 under a facility madeavailable on 4 May 2005, was unsecured and was repayable in five equal annualinstalments on the anniversary of the draw down date. The outstanding principalon the loan bore interest at a rate based on the London Inter-bank Offer Rate,payable in arrears over a period which varies between one and six months at theoption of the borrower.
The fair value of the bank loan at 30 June 2010 was GBPnil (30 June 2009: GBP4,200,000).
The fair value of amounts due in relation to financial reinsurance was GBP22,885,000 (30 June 2009: GBPnil)
The fair value of other borrowings was not materially different from its carrying value at any of the period ends under review.
7 Approval of consolidated report for the six months ended 30 June 2010This condensed consolidated report was approved by the Board of Directors on 25August 2010. A copy of the report will be available to the public at theCompany's registered office, Harbour House, Portway, Preston, PR2 2PR, UK andat www.chesnara.co.uk.
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
The Directors have chosen to prepare Supplementary Information in accordance with the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005.
When compliance with the EEV Principles is stated, those principles require theDirectors to prepare supplementary information in accordance with the EmbeddedValue Methodology (`EVM') contained in the EEV Principles and to disclose andexplain any non-compliance with the EEV guidance included in the EEVPrinciples.
In preparing the EEV supplementary information, the Directors have:
● Prepared the supplementary information in accordance with the EEV Principles;● Identified and described the business covered by the EVM;● Applied the EVM consistently to the covered business;● Determined assumptions on a realistic basis, having regard to past,
current and expected future experience and to any relevant external
data, and then applied them consistently;● Made estimates that are reasonable and consistent; and
● Described the basis on which business that is not covered business has
been included in the supplementary information, including any material
departures from the accounting framework applicable to the Group's financial statements.
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE DIRECTORS OF CHESNARA PLC ON THE EEV BASIS SUPPLEMENTARY INFORMATION
We have been engaged by the company to review the Supplementary Information -European Embedded Value Basis in the half-yearly financial report for the sixmonths ended 30 June 2010 which comprises the summarised EEV consolidatedincome statement, the summarised EEV consolidated balance sheet, the summarisedEEV consolidated statement of changes in equity and the related notes 1 to 9.We have read the other information contained in the half-yearly financialreport and considered whether it contains any apparent misstatements ormaterial inconsistencies with the information in the Supplementary Information- European Embedded Value Basis.We have reported separately on the condensed financial statements of Chesnaraplc for the six months ended 30 June 2010. The information contained in theSupplementary Information - European Embedded Value Basis should be read inconjunction with the condensed set of financial statements prepared on an IFRSbasis. This information is described within the Chesnara plc condensed set offinancial statements in the half-yearly financial report as having beenreviewed.This report is made solely to the company's directors in accordance with ourengagement letter and solely for the purpose of expressing an opinion as towhether anything has come to our attention that causes us to believe that theSupplementary information - European Embedded Value Basis for the six monthsended 30 June 2010 is not prepared, in all material respects, in accordancewith the European Embedded Value ('EEV') principles issued in May 2004 by theEuropean CFO Forum and supplemented by Additional Guidance on EEV Disclosuresissued by the same body in October 2005 Our work has been undertaken so thatwe might state to the company's directors those matters we are required tostate to them in an independent review report and for no other purpose. To thefullest extent permitted by law, we do not accept or assume responsibility toanyone other than the company's directors, for our review work, for thisreport, or for the conclusions we have formed.
Directors' responsibilities
The Supplementary Information - European Embedded Value Basis is theresponsibility of, and has been approved by, the directors. The directors areresponsible for preparing the Supplementary Information - European EmbeddedValue Basis in accordance with the European Embedded Value ('EEV') principlesissued in May 2004 by the European CFO Forum and supplemented by AdditionalGuidance on EEV Disclosures issued by the same body in October 2005.
Our responsibility
Our responsibility in relation to the Supplementary Information - European Embedded Value Basis is to express to the Company a conclusion on the Supplementary Information - European Embedded Value Basis based on our review.
Scope of Review
We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us tobelieve that the Supplementary information - European Embedded Value Basis forthe six months ended 30 June 2010 is not prepared, in all material respects, inaccordance with the European Embedded Value ('EEV') principles issued in May2004 by the European CFO Forum and supplemented by Additional Guidance on EEVDisclosures issued by the same body in October 2005. Deloitte LLPChartered Accountants and Statutory AuditorsManchester, United Kingdom25 August 2010SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASISSummarised Consolidated Interim Income Statement for the sixmonths ended 30 June 2010 Unaudited Year ended six months ended 30 June 31 December 2010 2009 2009 Note GBP000 GBP000 GBP000
Operating (loss)/profit of covered
business 6 (6,579) 10,075 19,120 Other operational result (762) 152 868 ---------- ---------- ----------- Operating (loss)/profit (7,341) 10,227 19,988 Variation from longer-term investment return 6 8,169 (2,710) 13,750 Effect of economic assumption changes 6 (5,834) 293 (9,730) ---------- ---------- ----------
(Loss)/profit before tax and before
exceptional item (5,006) 7,810 24,008 Exceptional items Profit recognised on business combinations 6 989 - 54,187
Effect of modelling improvements 6 10,363 -
- ------------ ----------- ---------- Profit before tax 6,346 7,810 78,195 Tax 6 (2,399) (1,433) 12,070 ------------ ---------- ---------- Profit for the period 3,947 6,377 90,265 ------------ ------------ ----------- Attributable to: Shareholders 3,947 6,377 90,272 Non-controlling interest - - (7) ------------- ------------ ----------- 3,947 6,377 90,265 =========== ========== =========== Earnings per share
Based on profit for the period
attributable to shareholders 3.89p 6.28p 88.94p ---------- ----------- ----------- Diluted earnings per share
Based on profit for the period
attributable to shareholders 3.89p 6.28p 88.94p ---------- ---------- ----------
SUPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS Summarised Consolidated Balance Sheet as at 30 June 2010
Unaudited six months ended 30 June 31 December 2010 2009 2009 Note GBP000 GBP000 GBP000 Assets Value of in force business 5,8 188,074 80,153 198,312
Deferred acquisition costs arising
on unmodelled business 640 - 197 Acquired value of customer relationships 1,416 - 346 Internally-developed software 5,456 - 4,060 Property and equipment 681 - 491 Investment in associate 943 - 1,051
Reinsurers' share of insurance
contract provisions 209,555 165,377 209,537 Amounts deposited with reinsurers 25,299 21,584 26,240 Investment properties 3,355 3,272 3,355 Deferred tax assets 1,638 - 1,972 Financial assets
Equity securities at fair value
through income 397,509 356,387 454,970
Holdings in collective schemes at
fair value through income 1,537,247 589,530 1,612,861
Debt securities at fair value
through income 380,057 258,410 247,836 Insurance and other receivables 27,477 9,812 19,822 Prepayments 3,396 2,920 3,784
Policyholders' funds held by the
Group 44,336 - 41,107 Derivative financial instruments 7,405 2,410 7,964 ---------- ---------- ---------- Total financial assets 2,397,427 1,219,469 2,388,344 ---------- ---------- ---------
Reinsurers' share of accrued policy
claims 3,996 3,519 4,728 Income taxes 941 - 395 Cash and cash equivalents 174,183 178,789 155,241 ---------- ---------- ---------- Total assets 3,013,604 1,672,163 2,994,269 ---------- ------------- ----------- Liabilities Bank overdraft 1,590 2,074 2,312 Insurance contract provisions 1,035,702 893,908 1,049,906 Financial liabilities
Investment contracts at fair value
through income 1,578,342 549,063 1,543,915 Borrowings 28,558 4,194 36,307
Derivative financial instruments 1,542 746
54 Liabilities relating to
policyholders' funds held by the
Group 44,336 - 41,107 ----------- ----------- ---------- Total financial liabilities 1,652,778 554,003 1,621,383 ---------- ---------- ---------- Provisions 1,696 2,580 1,452 Deferred tax liabilities - 14 - Reinsurance payables 21,608 1,772 15,039
Payables related to direct insurance
and investment contracts 29,139 24,948 30,433 Income taxes 7,543 6,956 1,313 Other payables 8,417 7,023 9,833 ----------- ----------- ---------- Total liabilities 2,758,473 1,493,278 2,731,671 ----------- ----------- ----------- Net assets 255,131 178,885 262,598 ========== =========== =========== Equity Share capital 41,501 41,501 41,501 Share premium 20,458 20,458 20,458 Treasury shares (3,379) (3,379) (3,379) Other reserves 4,642 - 5,589 Retained earnings 191,909 120,255 198,416 ---------- ---------- ----------- Total shareholders' equity 255,131 178,885 262,585 Non-controlling interest - - 13 ---------- ---------- ---------- Total equity 255,131 178,885 262,598 =========== ========== ==========
NOTES TO THE SUPPLEMENTARY INFORMATION
1 Basis of preparation
This section sets out the detailed methodology followed for producing theseGroup financial statements which are supplementary to the Group's primaryfinancial statements which have been prepared in accordance with InternationalFinancial Reporting Standards (`IFRS'). These financial statements have beenprepared in accordance with the European Embedded Value (`EEV') principlesissued in May 2004 by the European CFO Forum and supplemented by AdditionalGuidance on EEV Disclosures issued by the same body in October 2005. Theprinciples provide a framework intended to improve comparability andtransparency in embedded value reporting across Europe.In order to improve understanding of the Group's financial position andperformance, certain of the information presented in these financial statementsis presented on a segmental basis: the business segments are the same as thosedescribed in Note 5 to the condensed consolidated interim financial statementsprepared on the IFRS basis. The Swedish Business was acquired on 23 July 2009:accordingly, the results relating thereto, as reflected in segmental analysis for prior year information in respect of the financial position as at 31 December 2009 and for the year then ended in respect of the Swedish Business,are for a period just in excess of five months.
2 Covered business
The Group uses EEV methodology to value the bulk of its long-term business (the `covered business'), which is written primarily in the UK and Sweden, as follows:
(i) for the UK Business, the covered business comprises the business'slong-term business being those individual life insurance, pensions and annuitycontracts falling under the definition of long-term insurance business for UKregulatory purposes. The operating expenses of the holding company, Chesnaraplc, are treated as an integral part of the UK covered business.(ii) for the Swedish Business, the covered business comprises thebusiness's long-term pensions and savings unit-linked business. Group life andsickness business, including waiver of premium and non- linked individual lifeassurance policies are not included in the covered business: the resultrelating to this business is established in accordance with IFRS principles andis included within `other operational result' within the consolidatedsummarised income statement.
Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments.
3 Methodology(a) Embedded ValueOverview
Shareholders' equity comprises the embedded value of the covered business,together with the net equity of other Group companies, including that of theholding company which is stated after writing down fully the carrying value ofthe covered business.The embedded value of the covered business is the aggregate of the shareholdernet worth (`SNW') and the present value of future shareholder cash flows fromin-force covered business (value of in-force business) less any deduction forthe cost of required capital. It is stated after allowance has been made foraggregate risks in the business. SNW comprises those amounts in the long-termbusiness, which are either regarded as required capital or which representsurplus assets within that business.
New business
UKBusiness
Much of the covered business is in run-off and is, accordingly, substantiallyclosed to new business. The UK Business does still sell a small amount of newbusiness but, overall, the contribution from new business to the resultsestablished using EEV methodology is not material. Accordingly, not all ofthose items related to new business values, which are recommended by the EEVguidelines, are reported in this supplementary financial information.
Swedish Business
New business, in relation to the pensions and savings covered business is takenas all business where contracts are signed and new premiums paid during thereporting period, for both new policies and premium increases on existingbusiness, but excluding standard renewals. New business premium volume for theperiod is as follows:New business premium income relating topensions and savings covered business, GBP12.9m *
*Basis: annualised premium plus 1/10 single premium translated into sterling at the average rate of SEK 11.2608 = GBP1.
The new business contribution has been assessed as at the end of the period, using opening assumptions.
Value of in-force business
The cash flows attributable to shareholders arising from in-force business areprojected using assumptions for each component of cash flow. The present valueof the projected cash flows is established by using a discount rate whichreflects the time value of money and the risks associated with the cash flowswhich are not otherwise allowed for.
The estimates used for projecting the components of the cash flow are best estimate assumptions for the non-economic assumptions and risk free market consistent assumptions for the investment returns.
There is a deduction for the cost of holding the required capital, as set out below.
TaxationThe present value of the projected cash flows arising from in-force businesstakes into account all tax which is expected to be paid under currentlegislation, including tax which would arise if surplus assets within thecovered business were eventually to be distributed. For the UK business,allowance has been made for planned reductions in corporation tax, as announcedby the Chancellor in his budget speech on 22 June 2010.
The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement. The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax in the UK Business and yield tax in the Swedish Business.
Cost of capital
The cost of holding the required capital to support the covered business (see 3(b) below) is reflected as a deduction from the value of in-force business andis determined as the difference between the amount of the required capital andthe projected release of capital and investment income.
Financial options and guarantees
UKBusiness
The principal financial options and guarantees in the UK Business are (i)guaranteed annuity rates offered on some unit-linked pension contracts and (ii)a guarantee offered under Timed Investment Funds that the unit price availableat the selected maturity date (or at death, if earlier) will be the highestprice attained over the policy's life. The cost of these options and guaranteeshas been assessed, in principle, on a market-consistent basis, but, inpractice, this has been carried out on approximate bases, which are appropriateto the level of materiality of the results.
Swedish Business
In respect of the Swedish Business, some contracts provide policyholders withan investment guarantee, whereby a minimum rate of return is guaranteed for thefirst 5 years of the policy, at a rate of 3% per annum. As at 30 June 2010, thetotal amount guaranteed was approximately GBP0.5m. Thus, due to low volumes andthe limited exposure, the value of the guarantee is ignored as not material
tothe results.Allowance for risk
Allowance for risk within the covered business is made by:
(i) setting required capital levels by reference to the assessment of capital needs made by the directors of the regulated entities within the UK and Swedish Businesses (the `Directors');
(ii) setting the risk discount rate, which is applied to the projected cash flows arising on the in-force business, at a level which includes an appropriate risk margin; and
(iii) explicit allowance for the cost of financial options and guarantees.
Internal Group Company
EEV Guidance requires that actual and expected profit or loss incurred by aninternal group company on services provided to the covered business should beincluded in allowances for expenses. The covered business in the SwedishBusiness is partially managed by an internal group fund management company. Notall relevant future income and expenses of that company have been included inthe calculation of embedded value. However, the effect is not considered to bematerial.
(b) Level of Required Capital
The level of required capital of the covered business reflects the amount ofcapital that the Directors consider necessary and appropriate to manage therespective businesses. In forming their policy the Directors have regard to theminimum statutory requirements and an internal assessment of the market,insurance and operational risks inherent in the underlying products andbusiness operations. The capital requirement resulting from this assessmentrepresents (a) for the UK Business, 150% of the long-term insurance capitalrequirement (`LTICR') together with 100% of the resilience capital requirement(`RCR'), as determined by the regulations of the Financial Services Authorityin the UK and (b) for the Swedish Business, 150% of the regulatory solvencyrequirement as determined by Finansinspektionen in Sweden.
The required level of regulatory capital is provided as follows:
(i) for the UK Business, by the retained surplus within the long-term business fund and by share capital and retained earnings within the shareholder funds of the regulated entity; and
(ii) for the Swedish Business, by share capital and additional equity contributions from the parent company, net of the accumulated deficit in the regulated entity, these components together comprising shareholder's equity.
The Swedish Business is reliant, in the medium term, on further equity contributions from the parent company, Chesnara plc.
(c) Discount Rates
The discount rates are a combination of the reference rate and a risk margin.The reference rate reflects the time value of money and the risk marginreflects any residual risks inherent in the covered business and makesallowance for the risk that future experience will differ from that assumed. Inorder to reduce the subjectivity when setting the discount rates, the Group hasdecided to adopt a `bottom up' market- consistent approach to allow explicitlyfor market risk.Using the market-consistent approach, each cash flow is valued at a discountrate consistent with that used in the capital markets: in accordance with this,equity-based cash flows are discounted at an equity discount rate andbond-based cash flows at a bond discount rate. In practice a short-cut methodknown as the `certainty equivalent' approach has been adopted. This methodassumes that all cash flows earn the reference rate of return and arediscounted at the reference rate.In general, and consistent with the market's approach to valuing financialinstruments for hedging purposes, the reference rate is based on swap yields.These have been taken as mid swap yields available in the market at the end ofthe reporting period.Allowance also needs to be made for non-market risks. For some of these risks,such as mortality and expense risk, it is assumed that the shareholder candiversify away any uncertainty where the impact of variations in experience onfuture cash flows is symmetrical. For those risks that are assumed to bediversifiable, no adjustment has been made. For any remaining risks that areconsidered to be non-diversifiable risks, there is no risk premium observablein the market and, therefore, a constant margin has been added. The marginadded reflects the assumed risks within the businesses and is 50 basis pointsfor the UK Business and 70 basis points for the Swedish Business.A market-consistent valuation approach also generally requires consideration of`frictional' costs of holding shareholder capital: in particular, the cost oftax on investment returns and the impact of investment management fees canreduce the face value of shareholder funds. For the UK Business, the expensesrelating to corporate governance functions eliminate any taxable investmentreturn in shareholder funds, while investment management fees are not material.For the Swedish Business, appropriate allowance is made for the cost of tax onlocked-in capital and the cost for an investor of owning an asset indirectlyvia an investment policy rather than by direct investment into the underlyingassets.(d) Analysis of Profit
The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources:
(i) new business;(ii) return from in-force business; and(iii) return from shareholder net worth.
Additional contributions to profit arise from:
(i) variances between the actual investment return in the period and the assumed long-term investment return; and
(ii) the effect of economic assumption changes.
The contribution from new business represents the value recognised at the endof each period in respect of new business written in that period, afterallowing for the cost of acquiring the business, the cost of establishing therequired technical provisions and after making allowance for the cost ofcapital, calculated on opening assumptions.
The return from in-force business is calculated using closing assumptions and comprises:
(i) the expected return, being the unwind of the discount rates over theperiod applied to establish the value of in-force business at the beginning ofthe period;
(ii) variances between the actual experience over the period and the assumptions made to establish the value of business in force at the beginning of the period; and
(iii) the net effect of changes in future assumptions, made prospectivelyat the end of the period, from those used in establishing the value of businessin force at the beginning of the period, other than changes in economicassumptions.
The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital.
(e) Assumption Setting
There is a requirement under EEV methodology to use best estimate demographicassumptions and to review these at least annually with the economic assumptionsbeing reported at each reporting date. The current practice is detailed below.
Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2009.
The detailed projection assumptions, including mortality, morbidity,persistency and expenses reflect recent operating experience. Allowance is madefor future improvement in annuitant mortality based on experience andexternally published data. Favourable changes in operating experience,particularly in relation to expenses and persistency, are not anticipated untilthe improvement in experience has been observed. Holding company expenses (forthe Chesnara Group such expenses relate largely to listed company functions)are allocated to the UK covered business, except for a relatively small amountof expense, which is assumed to relate to business development functions, toreflect effort expended within the holding company relating to the transactionof life assurance business through the subsidiary companies. Hence the expenseassumptions used for the cash flow projections include the full cost ofservicing this business.The economic assumptions are reviewed and updated at each reporting date basedon underlying investment conditions at the reporting date. The assumed discountrate and inflation rates are consistent with the investment return assumptions.In addition, the demographic assumptions used at December 2009 are consideredto be best estimate for both the UK and Swedish business except for, in respectof the Swedish Business, the rate at which pensions business transfers out,
where it has been considered appropriate to increase the assumed rate of withdrawal. In respect of the UK Business, the assumptions required in the calculation of the value of the annuity rate guarantee on pension business have been set equal to best-estimate assumptions.
(f) Pension Schemes
In the Swedish Business, where the Group participates in a combined defined benefit and defined contribution scheme, future contributions to the scheme are reflected in the value of in-force business.
(g) Financial ReinsuranceIn the Swedish Business the Group ises financial reinsurance to manage the impact of its new business strain. Whilst this liability is valued at fairvalue within the IFRS statements, allowing for an option which provides the Groupwith the right to settle the liability early on beneficial terms, when valuingthe shareholder net worth within the EEV it is considered more appropriate to assess this liability at a higher cost reflecting the likelihood of the optionbeing utilised. 4 Assumptions
(a) Investment Returns (pre-tax)
Investment returns are assumed to be equal to the reference rate, as covered innote 3(c) above. For linked business, the aggregate return has been determinedby the reference rate less an appropriate allowance for tax.Unaudited 30 June 2010 UK Business Swedish Business Investment return 2.8% 3.05%* Inflation RPI 2.7% 2.0% Unaudited 30 June 2009 UK Business Swedish Business Investment return 4.3% n/a Inflation RPI 2.4% n/a 31 December 2009 UK Business Swedish Business Investment return 3.8% 3.74%* Inflation RPI 2.9% 2.0%
* A full swap rate curve is used : the rate quoted is for a term of ten years and is presented as an indicative rate.
(b) Actuarial Assumptions
The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identified in the periodic actuarial investigations.
(c) Taxation
Projected tax has been determined assuming current tax legislation and, for theUK business, allows for changes in corporation tax announced by the Chancellorin his budget speech of 22 June 2010 so reflects a reduction from the current28% to 24% in steps of 1%.(d) Expenses
The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions.
For the UK Business, these have been determined by reference to:
(i) the outsourcing agreements in place with our third-party business process administrators;
(ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and
(iii) corporate governance costs relating to the covered business.
For the Swedish business, these have been determined by reference to:
(i) an expense analysis in which all expenses were allocated to coveredand uncovered business, with expenses for the covered business being allocatedto acquisition and maintenance activities; and(ii) expense drivers, being, in relation to acquisition costs, the numberof policies sold during the period and, in relation to maintenance expenses,the average number of policies in force during the period.
The expense assumptions for the UK Business also include the expected future holding company expenses which will be recharged to the worldwide covered business.
No allowance has been made for future productivity improvements in the expense assumptions.
(e) Discount RateAn explicit constant margin is added to the reference rate to cover anyremaining risks that are considered to be non-market, non-diversifiable risks,as there is no risk premium observable in the market. This margin, which is 50basis points for the UK Business and 70 basis points for the Swedish Business,gives due recognition to the fact that:(a) For the UK Business:(i) the covered business is substantially closed to new business;
(ii) there is no significant exposure in the with profit business, which is wholly reinsured;
(iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators; and
(iv) for much of the life business the Group has the ability to vary risk charges made to policyholders.
(b) For the Swedish Business:(i) the covered business remains open;(ii) the in-force business is relatively small;(iii) reinsurance is used to significantly reduce insurance risks; and
(iv) a number of the risks provide diversification benefits within the Chesnara Group, in relation to reinsurance counterparties, market exposures and policyholder populations.
The sensitivity of the value of in-force business to the discount rate beinggreater for the Swedish Business than for the UK Business, the relative marginsprovided by these adjustments is more material (more than twice) for theSwedish Business than for the UK Business, to reflect these different risks. Unaudited 30 June 2010 UK Business Swedish Business Reference rate 2.9% 3.05%* Non-diversifiable risk 0.5% 0.7% Discount rate 3.4% 3.75%* Unaudited 30 June 2009 UK Business Swedish Business Reference rate 4.3% - Non-diversifiable risk 0.5% - Discount rate 4.8% - 31 December 2009 UK Business Swedish Business Reference rate 3.8% 3.74%* Non-diversifiable risk 0.5% 0.7% Discount rate 4.3% 4.44%*
*A full swap curve is used: the rate quoted is for a term of ten years and is presented as an indicative rate.
5 Analysis of shareholders' equity
Swedish Other Group Unaudited 30 June 2010 UKBusiness Business Activities Total GBP000 GBP000 GBP000 GBP000 Regulated entities Capital required 31,712 10,608 - 42,320 Free surplus 26,811 11,552 - 38,363 ----------- ---------- ---------- ---------- Shareholders' net worth of regulated entities 58,523 22,160 - 80,683 Adjustments to shareholder net worth Deferred acquisition costs - (44,576) - (44,576) Financial reinsurance liability - (5,232) - (5,232) Other asset / liability adjustments - 6,872 - 6,872 ---------- ---------- ---------- ---------- Adjusted shareholder net worth 58,523 (20,776) - 37,747 In-force value of covered business 73,581 114,493 - 188,074 ---------- ---------- ---------- ---------- Embedded value of regulated entities 132,104 93,717 - 225,821 Net equity of other Group companies - (2,194) 31,504 29,310 ---------- ----------- ----------- ---------- Total shareholders' equity 132,104 91,523 31,504 255,131 ========= ========== ========== ========== Swedish Other Group Unaudited 30 June 2009 UK Business Business Activities Total GBP000 GBP000 GBP000 GBP000 Regulated entities Capital required 33,494 - - 33,494 Free surplus 21,528 - - 21,528 ----------- ----------- ---------- ---------- Shareholders' net worth of regulated entities 55,022 - - 55,022 Adjustments to shareholder net worth Deferred acquisition costs - - - - Financial reinsurance liability - - - -
Other asset / liability adjustments - - - - ---------- ---------- ---------- ----------- Adjusted shareholder net worth 55,022 - - 55,022 In-force value of covered business 80,153 - - 80,153 ---------- ----------- ---------- ----------- Embedded value of regulated entities 135,175 - - 135,175 Less: amount financed by borrowings (4,194) - - (4,194) ---------- ---------- ---------- ---------- Embedded value of regulated entities attributable to shareholders 130,981 - - 130,981 Net equity of other Group companies - - 47,904 47,904 ----------- ----------- ---------- ---------- Total shareholders' equity 130,981 - 47,904 178,885 ========= ========= ========== ========== Swedish Other Group 31 December 2009 UK Business Business Activities Total GBP000 GBP000 GBP000 GBP000 Regulated entities Capital required 32,042 12,123 - 44,165 Free surplus 40,253 12,337 - 52,590 ---------- ---------- ---------- ----------
Shareholders' net worth of regulated entities 72,295 24,460 - 96,755 Adjustments to shareholder net worth Deferred acquisition costs - (44,721) - (44,721) Financial reinsurance liability - (5,313) - (5,313)
Other asset / liability
adjustments - 4,299 - 4,299 ---------- ---------- ---------- ----------
Adjusted shareholder net worth 72,295 (21,275) - 51,020 In-force value of covered
business 85,559 112,753 - 198,312 ----------- ---------- ---------- ----------
Embedded value of regulated
entities 157,854 91,478 - 249,332 Less: amount financed by borrowings (4,197) - - (4,197) ---------- ---------- ----------- ----------
Embedded value of regulated entities attributable to shareholders 153,657 91,478 - 245,135 Net equity of other Group
companies - (1,048) 18,498 17,450 ---------- ---------- ----------- ----------
Total shareholders' equity 153,657 90,430 18,498 262,585
========== ========== ========== =========
6 Summarised statement of changes in equity and analysis of profit
(a) Changes in equity may be summarised as:
Unaudited six months ended Year ended 30 June 31 December 2010 2009 2009 GBP000 GBP000 GBP000 Shareholders' equity at beginningof period 262,585 182,708 182,708 Effect of modelling improvements 10,363 - - --------- ---------- ---------- Shareholders' equity at beginningof period restated 272,948 182,708 182,708 Profit for the period attributableto shareholders (6,416) 6,377 90,272 Foreign exchange reserve movement (947) - 5,539 Dividends paid (10,454) (10,200) (15,934) ---------- ---------- ---------- Shareholders' equity at end ofperiod 255,131 178,885 262,585 ========= ========== ==========
During the first half of 2010 the Swedish Business introduced a new system formodelling value-in-force, which provided the capability for (i) more accuratelymodelling the impact on commission paid of policies becoming paid-up and (ii)for determining future fee income on a case-by-case investment mix basis,whereas previously it had been necessary to adopt high-level estimates.The effect of the modelling improvements is classified as an exceptional creditin the consolidated income statement and is presented after operating (loss)/profit.
(b) The profit for the period is analysed as:
Unaudited six months ended Swedish 30 June 2010 UK Business Business Total GBP000 GBP000 GBP000 Covered business New business contribution 383 288 671
Return from in-force business
Expected return 2,688 1,529 4,217 Experience variances 7,204 (5,374) 1,830 Operating assumption changes (853) (11,074) (11,927) Return on shareholder net worth 530 (1,900) (1,370) ---------- ---------- ----------
Operating profit/(loss) of covered business 9,952 (16,531) (6,579) Variation from longer-term investment return 4,069 4,100 8,169
Effect of economic assumption changes (8,918) 3,084 (5,834)
---------- ---------- ----------
Profit on covered business before tax 5,103 (9,347) (4,244)
Tax thereon (2,428) 29 (2,399) ---------- ---------- ----------
Profit/(loss) on covered business after
tax 2,675 (9,318) (6,643) ========== ==========
Results of non-covered business and of other group companies Profit before tax, and exceptional item (762) Exceptional profit recognised on business
combination 989 Tax - ---------- Profit after tax (6,416) ==========The determination of profit recognised on business combination relates to theacquisition by the Swedish Business of certain of the net assets of AspisF¶rs¤kringar Liv AB and is set out in Note 4 to the IFRS financial statements. Unaudited six months ended Swedish30 June 2009 UKBusiness Business Total GBP000 GBP000 GBP000 Covered business New business contribution 188 - 188 Return from in-force business Expected return 3,965 - 3,965 Experience variances 6,651 - 6,651 Operating assumption changes (218) - (218) Return on shareholder net worth (511) - (511) ---------- ---------- ---------- Operating profit 10,075 - 10,075
Variation from longer-term investment return (2,710) - (2,710) Effect of economic assumption changes 293 - 293 ---------- ---------- ---------- Profit on covered business before tax 7,658 - 7,658 Tax thereon (1,392) - (1,392) ---------- ---------- --------- Profit on covered business after tax 6,266 - 6,266 ========= =========
Results of non-covered business and of
other group companies Profit before tax, 152 Tax (41) ---------- Profit after tax 6,377 Non-controlling interest - ----------
Profit for the period attributable to
shareholders 6,377 ========== Swedish Year ended 31 December 2009 UK Business Business Total GBP000 GBP000 GBP000 Covered business New business contribution 1,482 783 2,265 Return from in-force business Expected return 7,357 1,682 9,039 Experience variances 4,499 2,060 6,559 Operating assumption changes 8,862 (7,405) 1,457 Return on shareholder net worth (200) - (200) ---------- ---------- ---------- Operating profit 22,000 (2,880) 19,120
Variation from longer-term investment return 6,206 7,544 13,750
Effect of economic assumption changes (12,286) 2,556 (9,730)
----------- ----------- -----------
Profit on covered business before tax 15,920 7,220 23,140
Tax thereon 11,893 - 11,893 ---------- ----------- ----------
Profit on covered business after tax 27,813 7,220 35,033
========== ==========
Results of non-covered business and of other group companies Profit before tax, and exceptional item 868 Exceptional profit recognised on
business combination 54,187 Tax 177 ---------- Profit after tax 90,265 Non-controlling interest 7 ----------
Profit for the period attributable to
shareholders 90,272 ==========
The results of the non-covered business and of other Group companies before taxand before exceptional item are presented as `other operating income' in theconsolidated income statement. For UK Business, the result of the coveredbusiness includes the expenses of the holding company, with an equal andopposite adjustment to the result of the non-covered business and of otherGroup companies.Included within the effect of economic assumption changes in respect of the UKBusiness for the year ended 31 December 2009 is an amount of GBP5,620,000 beinga reduction of pre-tax profit relating to a change in the basis of taxation ofoverseas dividends. This change leads to a reduction in the estimate of futuredeductions for taxation from policyholder linked funds and is matched by abroadly offsetting reduction in the estimate of future tax payable. This is asignificant component of the tax credit of GBP11,893,000 in respect of tax forthe UK Business for the year ended 31 December 2009 as shown above.
7 Sensitivities to alternative assumptions
The following tables show the sensitivity of the embedded value as reported at30 June 2010, and of the new business contribution of the Swedish Business, tovariations in the assumptions adopted in the calculation of the embedded value.Sensitivity analysis is not provided in respect of the new businesscontribution of the UK Business for the period ended 30 June 2010 as thereported level of new business contribution is not considered to be material(see Note 3a) above). Unaudited Unaudited New Business Embedded Value Contribution Swedish Swedish UK Business Business Business GBPm GBPm GBPm
Published value as at 30 June 2010 132.1 91.5 0.3
---------- ---------- ----------
Changes in embedded value/new business contribution arising from: Economic sensitivities 100 basis point increase in yield curve (4.7) 6.5 0.3
100 basis point reduction in yield curve 1.2 (7.4) (0.4)
10% decrease in equity and property
values (3.4) (7.4) (0.3) Operating sensitivities
10% decrease in maintenance expenses 2.1 6.3 0.3 10% decrease in lapse rates 2.0 7.9 0.4 5% decrease in mortality/morbidity rates
Assurances 1.2 0.2 - Annuities (1.5) n/a n/a
Reduction in the required capital to
statutory minimum 0.2 - -
The key assumption changes represented by each of these sensitivities are as follows:
Economic sensitivities(i) 100 basis point increase in the yield curve. The reference rate isincreased by 1%. The rate of future inflation has also been increased by 1% sothat real yields remain constant;(ii) 100 basis point reduction in the yield curve. The reference rate isreduced by 1%. The rate of future inflation has also been reduced by 1% so thatreal yields remain constant; and(iii) 10% decrease in the equity and property values. This gives rise to asituation where, for example, a Managed Fund unit liability with a 60% equityholding would reduce by 6% in value.
Operating sensitivities
(i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of GBP20 per policy pa reducing to GBP18 per policy pa;
(ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa;
(iii) 5% decrease in mortality/morbidity rates giving rise to, for example,a base assumption of 95% of the parameters in a selected mortality/morbiditytable reducing to 90.25% of the parameters in the same table; and
(iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that defined in Note 3(b) above to the minimum requirement prescribed by regulation.
In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate.
Excluding the sensitivities relating to a 100 basis point increase andreduction in the yield curve, both of which are presented, the sensitivities tochanges in the assumptions in the opposite direction will result in changes ofsimilar magnitude to those shown in the above table but in the oppositedirection.
8 Reconciliation of shareholders' equity on the IFRS basis to shareholders' equity on the EEV basis
Swedish Other Group Unaudited 30 June 2010 Business UK Business Activities Total GBP000 GBP000 GBP000 GBP000 Shareholders' equity on the IFRS basis 43,388 81,904 31,504 156,796 Adjustments Deferred acquisition costs Investment contracts (3,121) (6,656) - (9,777) Deferred income - 11,465 - 11,465 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers - (14,009) - (14,009) Adjustments to provisions on insurance contracts, net of reinsurers' share - (78) - (78) Acquired in-force value (57,408) (16,909) - (74,317) Acquired value of customer relationships (2,082) - - (2,082) Adjustment to borrowings (6,106) - - (6,106) Deferred tax 2,359 2,806 - 5,165 ---------- ---------- ---------- ---------- Shareholder net worth (22,970) 58,523 31,504 67,057 Value of in-force business 114,493 73,581 - 188,074 ---------- ---------- ---------- ---------- Shareholders' equity on the EEV basis 91,523 132,104 31,504 255,131 ========== ========== ========== ========= Shareholder net worth comprises: Shareholder net worth in regulated entities (20,776) 58,523 - 37,747 Shareholders' net equity in other Group companies (2,194) - 31,504 29,310 Debt finance - - - - ---------- ----------- ---------- ---------- Total (22,970) 58,523 31,504 67,057 ========= ========== ========== ========== Swedish UK Other Group Unaudited 30 June 2009 Business Business Activities Total GBP000 GBP000 GBP000 GBP000
Shareholders' equity on the IFRS basis - 76,553 47,904 124,457 Adjustments Deferred acquisition costs
Investment contracts - (7,590) - (7,590) Deferred income - 12,938 - 12,938
Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers - (13,967) -
(13,967)
Adjustments to provisions on insurance contracts, net of reinsurers' share - (126) -
(126)
Acquired in-force value - (19,636) -
(19,636)
Acquired value of customer
relationships - - - - Adjustment to borrowings - - - - Deferred tax - 2,656 - 2,656 ---------- ---------- ---------- ----------- Shareholder net worth - 50,828 47,904 98,732 Value of in-force business - 80,153 - 80,153 ---------- ---------- ---------- ---------- Shareholders' equity on the EEV basis - 130,981 47,904 178,885 ========== ========== ========= ========= Shareholder net worth comprises: Shareholder net worth in regulated entities - 55,022 - 55,022
Shareholders' net equity in
other Group companies - 47,904 47,904 Debt finance - (4,194) - (4,194) --------- ---------- ----------- ---------- Total - 50,828 47,904 98,732 ========= ========= =========== ========== Swedish Other Group 31 December 2009 Business UK Business Activities Total GBP000 GBP000 GBP000 GBP000
Shareholders' equity on the IFRS basis 47,696 93,561 18,498 159,755 Adjustments Deferred acquisition costs
Investment contracts (1,447) (7,173) - (8,620) Deferred income - 12,319 - 12,319
Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers - (15,038) -
(15,038)
Adjustments to provisions on insurance contracts, net of reinsurers' share - (238) -
(238)
Acquired in-force value (61,675) (18,282) -
(79,957)
Acquired value of customer
relationships (2,336) - - (2,336) Adjustment to borrowings (5,073) - - (5,073) Deferred tax 512 2,949 - 3,461 ---------- ----------- ---------- ---------- Shareholder net worth (22,323) 68,098 18,498 64,273 Value of in-force business 112,753 85,559 - 198,312 ---------- ---------- ---------- ---------- Shareholders' equity on the EEV basis 90,430 153,657 18,498 262,585 ========== ========== ========= ========== Shareholder net worth comprises: Shareholder net worth in regulated entities (21,275) 72,295 - 51,020 Shareholders' net equity in other Group companies (1,048) - 18,498 17,450 Debt finance - (4,197) - (4,197) ---------- ---------- ---------- ---------- Total (22,323) 68,098 18,498 64,273 ========== ========== ========== ========== 9 Foreign exchange translation reserveA foreign exchange translation reserve arises on the translation of thefinancial statements of the Swedish Business, the functional currency of whichis the Swedish Krona, into pounds sterling, which is the presentationalcurrency of the Group financial statements. Items in the consolidated incomestatement are translated at the average exchange rate of SEK11.2608 = GBP1ruling in the reported period (31 December 2009: SEK11.5594 = GBP1), while allitems in the balance sheet are stated at the closing rates ruling at thereported balance sheet date, being SEK11.6438 = GBP1 at 30 June 2010 (31December 2009: 11.5305). The differences arising on translation using thismethodology are recognised directly in shareholders' equity within the foreignexchange translation reserve.
The reported embedded value is sensitive to movements in the SEK:GBP exchange rate. Had the exchange rate as at 30 June 2010 been 10% higher at SEK12.8082 = GBP1, then the reported embedded value of GBP255.1m as at 30 June 2010 would have been reported as GBP246.8m.
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