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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Chesnara Plc | LSE:CSN | London | Ordinary Share | GB00B00FPT80 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 260.00 | 260.00 | 261.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Life Insurance | -1.11B | -98.33M | -0.6537 | -3.98 | 391.12M |
From Apr 2019 to Apr 2024
TIDMCSN
RNS Number : 4739I
Chesnara PLC
31 August 2016
Chesnara plc
Cash and Solvency underpin increase in dividend.
Chesnara today reported results for the six months ended 30 June 2016. The Group remains committed to delivering competitive returns to both its shareholders and policyholders, and continues to focus on:
-- maximising value from the in-force life and pensions book.
-- making further life and pensions acquisitions where they meet stringent assessment criteria.
-- value enhancement through writing profitable new business in Sweden.
Financial Highlights
-- Group solvency ratio of 148% (31 December 2015: 146%). After taking account of the interim dividend the Group solvency ratio has improved slightly and subsidiary solvency ratios remain strong and above internal targets, with the UK at 137% (31 December 2015: 135%); Movestic at 154% (31 December 2015: 154%) and Waard Group at 584% (31 December 2015: 597%). We have not used transitional arrangements.
-- Cash generation of GBP13.6m (Note 1) (six months ended 30 June 2015: GBP16.8m *excluding exceptional cash gain on acquisition of Waard). UK cash generation has been adversely impacted by the reduction in the yield curve, but continued contributions from Movestic and Waard have added to a total half year figure which represents over 50% of the 2015 total dividend.
-- Economic Value (EcV) of GBP459.9m (Note 2) (31 December 2015: GBP453.4m). Growth of 1.4% driven by the combined impact of a loss in the period of GBP3.5m, a dividend payment of GBP15.6m and a foreign exchange gain of GBP25.6m.
-- IFRS profit before tax of GBP0.2m (six months ended 30 June 2015: GBP30.4m). The current period is adversely impacted by a reduction in the yield curve. The prior year result includes a gain of GBP16.2m recognised on the acquisition of the Waard Group. Significant foreign exchange gains not recognised in this financial metric have been made.
-- IFRS Total Comprehensive Income of GBP15.7m (six months ended 30 June 2015: GBP22.9m). The current period includes a foreign exchange gain of GBP15.2m compared to a corresponding loss of GBP5.4m in 2015.
-- Economic Value loss net of tax of GBP3.5m. Primarily the impact of the reduction in the yield curve on the UK results. Significant foreign exchange gains not included in this metric have been made.
-- Movestic new business contribution of GBP4m (six months ended 30 June 2015: GBP2.4m). Improvements due to the combined impact of increased market share and higher average gross margins.
-- 2.9% increase in interim dividend compared with 2015. Recommended interim dividend of 6.80p per share (2015: 6.61p per share). This increase represents the twelfth successive rise in interim dividends.
Strategic delivery highlights
EU Referendum Despite the initial short term impact of the further reduction in yield curve following the Bank of England's reduction in interest rate, we retain the view that the outlook for Chesnara remains largely unchanged.
Movestic continues to write targeted profitable new business. Profitable new business continues to be written against a backdrop of investment market volatility and uncertainty which creates a more competitive environment for traditional product providers compared to the Movestic unit linked proposition.
New acquisition opportunities. Value enhancing acquisition opportunities in the UK and Western Europe, principally in the GBP50m - GBP200m range, continue to be sought and examined. Our short term focus remains on the Dutch market where we see a positive environment for future acquisitions.
John Deane, Chief Executive said:
'The Chesnara strategy continues to deliver cash to support our dividend. Whilst the IFRS pre tax profits have been adversely impacted by the reduction in interest rates we have benefited from foreign exchange movements. I am particularly pleased to report that our Economic Value has increased during the period and our Group Solvency ratio has improved. The reductions in the yield curve in the UK has dampened the level of cash emerging from the UK books this half year but the overseas divisions have continued their cash generation that funds our dividend strategy.
In light of the operational achievements and financial results in the period, the Board is pleased to recommend an interim dividend of 6.80p per share, an interim dividend increase of 2.9% over 2015.'
Note 1 Cash generation represents the movement in the surplus assets that exists within the group over and above the level of capital that is required to be held. The level of capital required to be held takes account the buffers that management has set to hold over and above the solvency requirements imposed by our regulators. From 1 January 2016 cash generation has been determined with reference to the Solvency II prudential regime. Previously cash generation was determined with reference to Solvency I.
Note 2 Transition of our valuation methodology from Embedded Value reporting to Economic Value reporting has resulted in a small decrease in the valuation of Chesnara of GBP1.8m. Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced funds. Solvency II rules regarding these items are deemed to understate the commercial value. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin is significantly higher than under Embedded Value.
The Board approved this statement on 30 August 2015.
Enquiries
John Deane, Chief Executive, Chesnara plc - 01772 972079
Roddy Watt, fwd Consulting - 0207 623 2368 / 07714 770493
Notes to Editors
Chesnara plc ('Chesnara'), which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ('CA plc'), Protection Life Company Limited ('PL'), Movestic Livförsäkringar AB ('Movestic') and Chesnara Holdings BV, the intermediate holding company of the 'Waard Group'.
CA plc is a UK life assurance subsidiary that is closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for GBP47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc. Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited, were acquired on 20 December 2010 for GBP63.5 million. With effect from 31 December 2011, the business of Save & Prosper was transferred into CA plc. On 28 November 2013 Chesnara acquired Direct Line Life Insurance Company Limited (subsequently renamed Protection Life Company Limited) from Direct Line Group plc for GBP39.3m. On 31 December 2014 the PL business transferred into CA plc. CA plc operates an outsourced business model.
Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009 for GBP20 million. The company is open to new business and seeks to grow its position in the Swedish unit-linked market. Its proposition was strengthened in February 2010 with the acquisition of the operations of Aspis Försäkringar Liv AB which has a risk and health product bias.
The Waard Group, a Netherlands-based Group comprising three closed book insurance companies and a servicing company, was acquired on 19 May 2015 for EUR69.9m. The Waard Group, comprising Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V. and Tadas Verzekeringen B.V. was previously owned by DSB Beheer B.V., a Dutch financial services Group. The policy base of the Waard Group is predominantly term life policies, with some unit linked policies and some non-life policies. Further details are available on the Company's website (www.chesnara.co.uk).
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FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements
with respect to certain of the plans and current
expectations relating to the future financial condition,
business performance and results of Chesnara plc.
By their nature, all forward-looking statements involve
risk and uncertainty because they relate to future
events and circumstances that are beyond the control
of Chesnara plc including, amongst other things,
UK domestic, Swedish domestic, Dutch domestic and
global economic and business conditions, market-related
risks such as fluctuations in interest rates, currency
exchange rates, inflation, deflation, the impact
of competition, changes in customer preferences,
delays in implementing proposals, the timing, impact
and other uncertainties of future acquisitions or
other combinations within relevant industries, the
policies and actions of regulatory authorities, the
impact of tax or other legislation and other regulations
in the jurisdictions in which Chesnara plc and its
subsidiaries operate. As a result, Chesnara plc's
actual future condition, business performance and
results may differ materially from the plans, goals
and expectations expressed or implied in these forward-looking
statements.
----------------------------------------------------------------
NOTE ON TERMINOLOGY
As explained in Note 4 to the IFRS financial statements,
the principal reporting segments of the group are:
CA, which comprises the original business of Countrywide
Assured plc, the Group's original UK operating subsidiary;
City of Westminster Assurance Company Limited, which
was acquired by the Group in 2005, the long-term
business of which was transferred to Countrywide
Assured plc during 2006; and Protection Life Company
Limited which was acquired by the Group in 2013,
the long-term business of which was transferred into
Countrywide Assured plc in 2014;
S&P, which was acquired on 20 December 2010. This
business was transferred from Save & Prosper Insurance
Limited and Save & Prosper Pensions Limited to Countrywide
Assured plc on 31 December 2011 under the provisions
of Part VII of the Financial Services and Markets
Act 2000;
Movestic, which was purchased on 23 July 2009 and
comprises the Group's Swedish business, Movestic
Livförsäkring AB and its subsidiary and
associated companies;
The Waard Group, which was acquired on 19 May 2015
and comprises three insurance companies; Waard Leven
N.V., Hollands Welvaren Leven N.V. and Waard Schade
N.V.; and a service company, Tadas Verzekering; and
Other Group Activities; which represents the functions
performed by the parent company, Chesnara plc. Also
included in this segment are consolidation adjustments.
In this half year report:
(i) The CA & S&P segments may also be collectively
referred to as the 'UK Business';
(ii) The Movestic segment may also be referred to
as the 'Swedish Business';
(iii) The Waard Group segment may also be referred
to as the 'Dutch Business';
(iv) 'CA plc' refers to the legal entity Countrywide
Assured plc, which includes the long term business
of the CA and S&P segments;
(v) 'CWA' refers to the long-term business of City
of Westminster Assurance Company Limited, which subsides
within Countrywide Assured plc;
(vi) 'S&P' refers collectively to the original business
of Save & Prosper Insurance Limited and Save & Prosper
Pensions Limited, which subsides within Countrywide
Assured plc;
(vii) 'PL' refers to the long-term business that
was, prior to the Part VII transfer into CA plc on
31 December 2014, reported within Protection Life
Company Limited; and
(viii) 'Movestic' may also refer to Movestic Livförsäkring
AB, as the context implies.
----------------------------------------------------------------------------
HIGHLIGHTS
FINANCIAL
GBP0.2M IFRS PRE-TAX PROFIT
IFRS pre-tax profit for the six months ended 30 June 2016 of GBP0.2m (six months ended 30 June 2015: GBP30.4m*).
* includes gain on acquisition of Waard group of GBP16.2m.
GBP15.7M IFRS TOTAL COMPREHENSIVE INCOME
IFRS total comprehensive income for the six months ended 30 June 2016 of GBP15.7m (six months ended 30 June 2015: GBP22.9m). This is stated after foreign exchange gains of GBP15.3m in the period (six months ended 30 June 2015: foreign exchange loss of GBP5.4m).
GBP13.6M CASH GENERATION Note 2
Cash generation of GBP13.6m in the period (six months ended 30 June 2015: GBP56.7m).
GBP459.9M ECONOMIC VALUE (EcV) Note 3
Increase in economic value from GBP453.4m at 31 December 2015 to GBP459.9m at 30 June 2016. Movement of GBP6.5m includes the impact of dividend payments of GBP15.6m.
GBP(3.5)M ECONOMIC VALUE EARNINGS AFTER TAX Note 3
Economic value loss net of tax of GBP3.5m in the period.
GBP4.0M MOVESTIC EMBEDDED VALUE NEW BUSINESS CONTRIBUTION Note 4
Movestic has generated a new business contribution of GBP4.0m in the period (six months ended 30 June 2015: GBP2.4m).
148% GROUP SOLVENCY RATIO
Strong group solvency ratio of 148% (31 December 2015: 146%). We have not used transitional arrangements.
2.9% INTERIM DIVID INCREASE
Interim dividend increased by 2.9% to 6.80p per share (2015: 6.61p interim and 12.33p final).
OPERATIONAL AND STRATEGIC
IMPLEMENTATION OF SOLVENCY II REPORTING
During 2015, significant effort was put in across the group to ensure that we were ready for Solvency II going live on 1 January 2016. The group has successfully met this challenge and has delivered all the reporting required under the new regulatory regime.
Notes: 1. Throughout the Chairman's statement, business review and financial review sections, all results quoted at a business segment level exclude the impact of consolidation adjustments. 2. Cash generation represents the movement in the surplus assets that exists within the group over and above the level of capital that is required to be held. The level of capital required to be held takes account the buffers that management has set to hold over and above the solvency requirements imposed by our regulators. From 1 January 2016 cash generation has been determined with reference to the Solvency II prudential regime. Previously cash generation was determined with reference to Solvency I. 3. During the period a new valuation measure, replacing EEV, was introduced by the business. The opening Economic Value of GBP453.4m is GBP1.8m lower than on an EEV basis. As a result of reporting this new measure no earnings comparatives are available. 4. Although we have moved to the new economic value metric we have continued to use the embedded value methodology to report the value of new business in Movestic as it is deemed to remain the most commercially relevant and consistent measure at this point in time.
CHAIRMAN'S STATEMENT
During the first half of 2016 we have seen considerable political, economic and regulatory change. Whilst Chesnara is not immune to these external factors, I am pleased to see how resilient the Chesnara business model and financial results are to these challenging conditions.
Our group solvency ratio under the new regime has improved from 146% to 148% and our economic value has increased during the period, after recognising the impact of the final dividend payment.
Despite Brexit-driven yield curve reductions leading to reduced UK cash generation levels compared to recent years, we are able to continue our attractive dividend strategy because our overseas divisions have made notable cash contributions and our historic dividend payments have recognised the need to manage the exposure of short term cash volatility.
We await the conclusion from the FCA's review into the "Fair treatment of long-standing customers in the life insurance sector" and are ready to deliver any changes required to meet future best practice recommendations where appropriate and have reserved to cover the estimated cost of any process and communication change. Regulatory conditions in Sweden and the Netherlands remain broadly unchanged.
Peter Mason, Chairman
I start my Chairman's statement by reviewing how Chesnara has delivered against its three core strategic objectives.
MAXIMISE VALUE FROM EXISTING ACQUIRE LIFE AND PENSIONS BUSINESSES ENHANCE VALUE THROUGH PROFITABLE
BUSINESS NEW BUSINESS
GBP13.6 million of cash generation Our short term focus is on the Dutch New business profits of GBP4.0m
which includes a further contribution market where we continue to see a continue to contribute to value
from Movestic of positive environment growth. An improvement in
GBP2.5m. for future acquisitions. new business margins has driven a
67% improvement compared to the
Closing economic value of GBP459.9m prior year (six months to
compared to an opening embedded value 30 June 2015: GBP2.4m)
of GBP455.2m
Maximise value from existing business
Operationally, our in-force books have performed well during the six months to 30 June 2016. Customer service levels have been good across all our divisions and expense and persistency levels are broadly in line with expectation. In fact, in Movestic, there are encouraging signs that the level of business transferring out from the in-force book has reduced. We have not fully recognised this improvement in the half year results but would expect to do so at the year end should the low transfer out levels continue throughout the remainder of the year.
Despite a general decline in equity values in the Movestic book, the business has continued to grow its profits on an IFRS basis. Our Dutch business is not sensitive to economic variables and profit and value have emerged in line with expectations.
The UK business has not been as immune to the impact of economic conditions. In particular, the marked reduction in the yield curve, due at least in part to the impact of the result of the EU referendum, has led to losses arising from a significant increase in the cost of guarantees in the Save and Prosper book. Much of the yield curve impact on the IFRS and economic value results has been compensated by the impact of the reduction in the valuation of sterling post referendum, reflecting that 57% of our balance sheet economic value is in non sterling denomination. As such, our IFRS results, when taking into account all economic factors and excluding 2015 exceptional items, are broadly comparable to the prior year equivalent.
The currency exchange rate movement also has a positive impact on the cash generation result but the impact does not fully compensate for the low cash generation results in the UK resulting from the reduction in the yield curve. In partial compensation, our overseas divisions have increased their cash generation results across the group. The total cash generated represents 56.8% of the total 2015 dividend payment indicating that even in the difficult conditions the books continue to fund our dividend strategy.
Our closing valuation on the revised economic basis is GBP459.9m which is GBP4.7m higher than the closing 2015 value as reported on an embedded value basis. The overall increase is after recognising payment of the final 2015 dividend and includes a small negative item of GBP1.8m relating to the impact of the transition from European Embedded Value to the new Economic Value methodology.
Acquire life and pensions businesses
Our short term focus is on the Dutch market where we continue to see a positive environment for future acquisitions.
Group and local management continues to investigate opportunities and remains confident that the market drivers for consolidation are increasingly relevant and Chesnara is seen as a credible consolidation solution.
Enhance value through profitable new business
The improvement in new business profits, measured on our traditional embedded value basis, is encouraging and within management's target range. We have a realistic strategy regarding market share and continue to hold the view that there is little value in chasing volume at the expense of profitability. In light of this, whilst a 12% volume improvement is good to see, I am particularly encouraged to report our average gross new business margin has increased in the period.
Regulation and solvency
Across our group the primary focus has been the implementation of Solvency II. 2016 is a year of transition as we move Solvency II from being a development programme to it being embedded as a robust and effective ongoing governance framework. In light of this I am pleased to report that we have delivered all of our initial regulatory reporting requirements, our ORSA is becoming increasingly embedded in day to day management and our enhanced risk management framework has been fully implemented.
Our group solvency ratio has remained resilient to the generally difficult economic conditions.
Group solvency ratio 148%
(31 Dec 2015: 146%)
In the UK there have been three additional areas of regulatory focus during the first half of 2016:
- The FCA have issued their review into the "Fair treatment of long-standing customers in the life Insurance sector" for consultation. The consultation period ended in June and we await the conclusions. We are ready to initiate an action plan to deliver any changes required to meet future recommendations where appropriate. We hold a provision to cover the estimated costs of improvements to meet new standards of best practice.
- We continue to work closely with the FCA on the Countrywide Assured specific investigation they are undertaking with regards to the appropriateness of our level of disclosure regarding exit charges. To provide a little context I note that during the 8 year period under review 12,000 policies exited with capital unit charges (these represent a mechanism for recovering initial policy set-up costs over the life time of the policy) and 1,000 exited with other types of exit fee (20.7% and 1.7% of the total early exits in that period). I emphasise that the investigation is into the disclosure of exit charges only.
- The matter of pension exit charges remains under consideration. It appears that exit charges for those aged over 55 are likely to be capped at 1% of the fund value. Based on the normal level of early exits the impact of a 1% cap is not material to Chesnara's cash and economic value results.
Culture and values
Our continued focus on risk management, operational performance and financial stability is at the heart of ensuring we offer value to customers and shareholders. In light of this, the fact that we have delivered good service standards, provided investment returns that compare well against benchmark and have improved the solvency ratio of the group contributes to delivering a fair outcome to customers. We are committed to ensuring our customers benefit from any recommendations arising from the FCA's review into the "Fair treatment of long-standing customers in the life insurance sector". In light of our commitment to be transparent and fair to customers, we are giving the investigation into the disclosure of exit charges our full attention. We await conclusions from the investigation but remain of the view that customers have not been in any way disadvantaged by any inappropriate exit charges.
Investment proposition
The interim dividend continues our attractive dividend strategy. Whilst the results in the period have been affected by economic conditions, the dividend strategy is well supported by our continued strong solvency position and our previous policy to retain earnings to fund future acquisitions and protect our dividend from the short term impacts of economic profit volatility, as experienced in the first half of 2016.
Outlook post EU referendum result
Whilst the board remains vigilant regarding managing the potential impact of the vote to leave the European Union, our assessment is that in the long term the Chesnara business and financial model is not materially impacted by that decision. Our financial results are sensitive to equity market values and interest rates and the referendum therefore affects our results to the extent it impacts these economic variables. We benefit significantly from the sterling consequences of interest rates changes driven by Bank of England initiatives. In the short term equity values have performed well post the vote to leave. Fixed interest yields have however fallen further in the UK and we are assuming that one outcome of the referendum result is an increased likelihood of a sustained period of low interest rates. Our half year reserves fully reflect this low interest environment and the cost of our product guarantees has increased accordingly during the six months to 30 June 2016. The devaluing of sterling post referendum has a positive impact on Chesnara's value and improves the sterling value of cash flows emerging from our overseas divisions.
It is too early to conclude how the referendum result will affect the regulatory landscape. The fact that Chesnara does not rely on European passporting arrangements and the fact that we already operate with ring-fenced regulatory arrangements in our three business territories leads us to conclude that the business model will not be fundamentally affected by any potential regulatory changes in the UK.
From an operating perspective all of our territories operate virtually autonomously and as such there is no potential risk from any cross border trading constraints that Brexit may create.
Finally, we have considered how the referendum result has affected the outlook for our acquisition strategy. The fundamental drivers for life companies coming to the market remains unchanged. A general increase in uncertainty and hence market and exchange rate volatility may create some short term pricing challenges although arguably working with vendors to find mutually beneficial pricing arrangements is nothing new and to date Chesnara's ability to work constructively with vendors to find commercial solutions has been a key strength and this should remain the case. We are mindful that the Brexit process may create potential short term funding challenges. In particular raising equity in more nervous markets might be more challenging. However, given our core business model is expected to be able to absorb much of any Brexit fallout, an opportunity for investors to further invest into our dividend stream should make the right deal attractive. We do not expect the Brexit process to directly impact our ability to raise further debt for a deal with the appropriate risk profile and cashflow projections.
In summary, despite the significant initial concerns regarding Brexit we retain the view that once the dust settles the outlook for Chesnara remains largely unchanged and our dividend strategy will be increasingly attractive in a sustained low interest environment.
Peter Mason
Chairman
30 August 2016
BUSINESS REVIEW
INTRODUCTION
The business review is structured to report on how we have performed against each of our three stated strategic objectives and our culture and values. Where relevant the review reports separately for our UK, Swedish and Dutch operations.
This review focuses on:
- How we have performed generally.
- Key developments or challenges.
- Key performance indicators.
- Risks associated with each objective.
MAXIMISE VALUE FROM ACQUIRE LIFE AND ENHANCE VALUE THROUGH
EXISTING BUSINESS PENSION BUSINESSES PROFITABLE NEW BUSINESS
---------------------- --------------------- ------------------------------------------
Business model
-----------------------------------------------------------------------------------------
Maintain adequate Fair treatment Provide a competitive Robust regulatory
financial resources of customers return to shareholders compliance
-------------------- --------------------- ------------------------- -----------------
Responsible risk-based management
-----------------------------------------------------------------------------------------
Our strategic objectives and culture and values are reassessed on an annual basis as part of the group business planning process. Their continued relevance gives consideration to recent performance, emerging risks and future opportunity and they are assessed giving full regard to both internal and external influences e.g. changes to regulatory requirements.
The three core strategic objectives, which are underpinned by the group's culture and values, are consistent with those reported in the 2015 Annual Report & Accounts. No significant change in focus is expected during the latter half of 2016.
The governance framework seeks to ensure that controls and procedures are in place to protect all stakeholders. The control environment has remained effective and robust throughout the period. Further details of the operation of the governance framework, and its future development, are included in Section C - Corporate Governance, of the 2015 Annual Report & Accounts.
STRATEGIC OBJECTIVES, OVERVIEW
CULTURE & VALUES
--------------------- ------------------------------------------------------------
CULTURE & VALUES Our strong culture and values underpin
everything we do.
* Responsible risk-based management for the benefit of
all our stakeholders.
* Fair treatment of customers.
* Provide a competitive return to our shareholders.
* Robust regulatory compliance.
* Maintain adequate financial resources.
--------------------- ------------------------------------------------------------
BUSINESS MODEL Our strategic objectives and culture and
values are delivered through the operation
of our business model.
In the UK Chesnara adopts an outsourced
business model. Governance oversight and
Corporate management is provided by a
highly experienced centralised governance
team. This governance team also ensures
robust and consistent governance practice
across the group, although operational
autonomy is devolved to Sweden and the
Netherlands to ensure we benefit from
our strong divisional management teams.
Core operations are not outsourced in
Sweden or the Netherlands because it would
not suit the open business model or inherited
model in those territories respectively.
--------------------- ------------------------------------------------------------
MAXIMISE VALUE The existing in-force books are the principal
FROM EXISTING source of value and cash generation and
BUSINESS are hence the heart of the investment
case. Detail of how we have delivered
this objective is below.
--------------------- ------------------------------------------------------------
ACQUIRE LIFE AND Chesnara is primarily a closed book operation
PENSIONS BUSINESSES and as such will inevitably lose scale
over time. Acquisitions maintain the effectiveness
of the operating model. In addition, well
considered and appropriately priced acquisitions
will create a source of value enhancement
and sustain the cash generation potential
of the group.
--------------------- ------------------------------------------------------------
ENHANCE VALUE Whilst new business profits are a relatively
THROUGH PROFITABLE modest component of the Chesnara financial
NEW BUSINESS model, they are an important and welcome
regular source of value growth which supplements
growth delivered from our periodic acquisitions.
Detail of how we have delivered this objective
is below.
--------------------- ------------------------------------------------------------
Maximise value from EXISTING BUSINESS | UK
A challenging six months for the division driven by regulatory change and a reduction in gilt yields following the vote for Brexit.
Highlights
- Significant progress on preparing for changes arising from recent FCA market communications on the treatment of long-standing customers.
- Government bond yield falls dampen performance.
- Cash generation continues despite challenge of falling bond yields.
Review of the period
The UK division continues to focus on the efficient run off of the books it manages, which in turn helps deliver value to Chesnara and its shareholders. This means management's focus remains on value generation whilst continuing to ensure that the strong culture and values of the division and group is maintained. In practice this means that significant management attention is given to regulatory compliance, customer outcomes, solvency management, risk and governance, the key constituent parts of the culture and values of the division.
The first six months of the year can be characterised by two key external factors. Firstly, there has been an ongoing high level of focus by the FCA on legacy business in the life insurance sector. In particular, during March 2016 the FCA issued both firm-specific and industry-wide feedback (through a consultation process) in relation to the review work that it performed in late 2014 relating to the fair treatment of long-standing customers. During the first half of 2016 management has developed an action plan that considers the aforementioned FCA feedback, with an expectation that the observations and recommendations made in the March consultation will be issued as final guidance during Q4 2016. In addition the FCA issued a consultation paper proposing to cap early exit charges to 1% of the fund value for those policyholders aged over 55 in support of their plans to enhance pensions freedoms. The proposals have yet to come into force, but we are expecting this to apply in substantially the same form as currently drafted. As a result we have reserved for the impact of capping exit fees on pension policies over 55 to 1% of the fund value, resulting in a one off charge on an IFRS basis of GBP3.5m. The IFRS impact is influenced by the fact that IFRS reserving does not recognise best estimates of policy attrition. The direct impact of the cap on our Solvency II own funds and economic value is cGBP1m and this is deemed to be a more commercially realistic assessment of the impact of this cap.
The second key factor affecting the division is the impact of the vote to leave the EU. In the run up to the referendum decision UK government bond yields had declined from where they were at the start of the year. Following the decision to leave the EU yields have fallen further still. In general lower yields puts pressure on the financial results of the business, largely because government bonds are used to back a number of our products, including those which contain guaranteed minimum returns. That said, some of our unit-linked funds are invested in equities, both in the UK and overseas, and equity performance during the first half of the year, coupled with a depreciation of sterling resulting in growth in value in overseas equities, has slightly dampened the impact of the sharp decline in bond yields.
Financial performance and solvency
The solvency position of the UK division remains strong, at 137% (see below for further information), although IFRS and EcV losses have been reported in the period, largely driven by falling bond yields. Further financial information covering IFRS profitability, our new economic value measure (EcV) and cash generation can be found below).
Value driver metrics
Unit-linked funds under management
Funds under management are a key driver of value for the UK business as fund-related charges provide an important component of profit. Movements in value of the funds under management are driven by:
- performance of funds during the period;
- policyholder premiums; and
- policies closed, due to surrender, transfer or claim.
During the first half of 2016 funds under management have reduced by less than 1%. This is driven by 3% reduction in pension policies in the period off-set by investment returns and policyholder premiums.
Unit-linked funds under management (GBPm)
30 Jun 2016 31 Dec 2015 30 Jun 2015
GBPm GBPm GBPm
Total UK 2,067 2,083 2,182
Fund performance
Two out of the three managed funds out-performed their benchmark in the period, and the S&P managed fund was marginally below benchmark. Fund performance is monitored closely by management and actions are taken where there are apparent sustained periods of under-performance.
Fund performance (annual return)
Twelve Twelve
months to months to
30 Jun 30 Jun
2016 2015
CA Pension Managed 2.9% 8.4%
CWA Balanced Managed Pension 5.4% 6.3%
S&P Managed Pension 1.6% 9.8%
Benchmark - ABI Mixed Inv 40%-85% shares 1.8% 6.6%
Policy attrition
There has been a slight increase in policy attrition in the period, predominantly owing to the impact of a slight increase in pension product attrition.
Annual policy attrition rate, based on policy count
Six months Six months
to 30 Jun to 30 Jun
2016 2015
CA 8.4% 7.6%
S&P 6.4% 5.9%
Total UK 7.7% 7.0%
Risks associated with the strategic objective
The key risks that could affect the successful delivery of this objective are:
Expense risk: A key driver of value is the expense base of the business, which is critical to control on a closed book operation. A key factor in how we manage this is through operating an outsourced model, where the costs of policy administration are designed to reduce as the book runs off.
Market risk: Performance of equities and bonds affects the value of the division. For our unit-linked business value is created through strong investment returns to our policyholders, which in turn generates fee income. For our non-linked business certain products in the S&P book contains products that include minimum guaranteed returns, and in situations where investment performance does not meet the guarantee, this becomes a cost to the division. These risks are managed through setting appropriate investment strategies, using reputable investment managers and effective governance of both by management.
Lapse risk: Increased lapses on cash generative products are also a risk to the delivery of this strategic objective. This risk is managed through:
- close monitoring of persistency levels.
- active investment management with the aim of delivering competitive policyholder investment returns.
- outsourcer service levels that ensure strong customer service standards.
- customer retention processes.
Regulatory risk: The business operates in a highly regulated environment, and regulatory changes can pose a risk to this objective. This is managed through careful monitoring of enacted and proposed regulatory changes to ensue that we continue to operate within our regulatory requirements.
Maximise value from EXISTING BUSINESS | Sweden
The Swedish division has delivered positive value generation and has continued to grow in challenging economic conditions.
Highlights
- Strong cash generation in period despite challenging economic conditions.
- Continued development of investment operations.
- Improved persistency levels.
Review of the period
The Swedish division continues to focus on a combination of managing its existing business whilst also developing its new business operation. Further information on the new business operation can be found on below.
Economic conditions have been an overriding factor affecting the development of the division in the period:
- Investment market volatility has been a feature in the period. Overall Movestic's equity funds have provided negative return in the period, amounting to -1.7%. The Stockholm OMX 30 equity index having been down as low as 14% on its opening position during the period. The Swedish economy was not immune to the impact of the referendum in the UK, with an 8% fall in the OMX 30 being seen immediately after the vote. A consequence of market volatility is that this creates a degree of uncertainty for policyholders and as a result this can drive more defensive and risk averse behaviour. This has been seen in the division through a slight shift in the balance of policyholder investments which have moved out of equity funds and into fixed income funds, much of the movement being in the mixed funds held by policyholders. Despite this slight shift fund rebates have held up well, although continued market uncertainty means this remains an area of management attention.
- From an interest rate perspective, the base rate in Sweden continues to be held at -0.5%, with expectations that this will remain until the second half of 2018.
- The Swedish krona has strengthened against sterling by 10% during the period, resulting in a positive impact to group solvency, cash generation and IFRS profits.
From an internal point of view, the investment operation within the division has continued to develop in line with plans. Performance fees have seen positive developments during the period and this, coupled with three new white label funds being launched in 2016 demonstrates the success of the effort put into developing this aspect of the Swedish operations.
In the year end report we commented on our IT developments. This work continues, with a particular current focus on front end development to ensure we continue to meet the demands of our customers and IFAs.
Financial performance
Despite the economic volatility the Swedish business has continued to deliver profit and cash in the first half of the year. Further information on solvency and financial performance can be seen below.
Value driver metrics
New business
A review of the new business operation of Movestic is covered below.
Assets under management
Assets under management are a key value driver of the business through providing a source of revenue in the forms of performance fees from asset managers and charges to policyholders. Despite a challenging investment market environment, assets under management have grown by 1.6% during the first six months of the year, closing at SEK 24.7bn. The growth in assets under management is a function of three key drivers:
- performance of the new business operation (see below);
- overall performance of investments within the funds (see below); and
- behaviour of policyholders (see below).
Assets under management
30 Jun 2016 31 Dec 2015 30 Jun 2015
Total funds SEK (bn) 24.7 24.3 24.2
Investment performance: During the period overall policyholder fund performance has been negative at -1.4%. Although disappointing, this needs to be viewed in the context of an 8.5% decline in the Swedish stock market in the same period. Investment returns that are competitive relative to other providers not only supports income generation for the business but is also important in retaining existing policyholders and attracting new ones. The fund performance analysis below shows that 32 out of 64 funds out-performed their benchmark index during the period.
Fund performance (for those with benchmarks)
Six months Twelve months
to 30 June to 31 Dec
2016 2015
Outperformed against relevant index 32 38
Under-performed against relevant index 32 21
Policyholder behaviour: The division has seen positive experience on persistency during the period, with the number of policies that have either become paid up or surrendered decreasing slightly when compared with the same period in 2015. In addition there has been a decrease in policyholders transferring out their policies to another provider, resulting in the transfers-in to transfers-out ratio becoming more favourable compared with 2015. That said, customers moving to other providers remains a negative dynamic in the industry and remains a continued area of management focus. In particular, in the recent economic climate we have seen a slight increase in volumes of more traditional insurance products being sold in the market place.
Policy attrition
30 Jun 30 Jun
2016 2015
Transfers (pensions) 4.1% 4.9%
Lapses/paid-ups (pensions
and endowments) 16.8% 17.7%
Transfers
Six months Six months Six months
to 30 to 31 to 30
Jun Dec Jun
2016 2015 2015
Transferred in 48% 42% 44%
Transferred out 52% 58% 56%
Risks associated with the strategic objective
The key risks that could affect the successful delivery of this objective are:
Lapse risk:
- High levels of lapses and transfers remains a risk. Given that the Movestic product proposition already offers significantly more portability for transferring pensions than the general market, our view is that an increased right to transfer would be beneficial to customers and to Movestic in terms of its market position with other more traditional competitors.
- Loss of key IFAs can result in increases in the level of transfers-out.
Market risk:
- Profit emerging from the in-force book is dependent upon the size of the funds under management. Adverse investment market conditions would therefore adversely impact this strategic objective.
- From a group perspective we are exposed to foreign currency fluctuations which impacts the sterling value emerging from the Swedish operations.
Regulatory risk:
Regulatory change can potentially impact the cash flows arising from the in-force book. For example, there remains ongoing debate in Sweden regarding possible changes to up-front fees and rebate commissions, although we have embarked on restructuring plans to obviate the effects of this risk.
Maximise value from EXISTING BUSINESS | NETHERLANDS
Continued delivery of value and strong solvency position.
Highlights
- Positive cash generation in the period.
- Ongoing investment in systems and processes to support SII and wider group reporting requirements.
- Business now fully integrated, providing a sound platform for future acquisitions within the Netherlands.
Review of the period
As a closed book operation, the main priority of the Dutch division is the efficient run off of the existing book. In practice this means management focuses on three key areas, namely: management of the assets of the business, regulatory compliance and ensuring that a high quality service to policyholders is continued in terms of administration service levels. That said, an additional focus of local management is to support the group in delivering its objective of making value-adding acquisitions, with the Dutch market being a current priority for the group in this area.
As with the UK and Sweden the development of the division has been dominated by economic factors, in particular euro swap curves have fallen significantly, with the impact of the Brexit vote considered as being one of the main contributing factors. Equity performance is less of a consideration for the Dutch division as it does not hold material equity exposures directly and the impact of any equity movements on the small unit linked book is not material to the overall division. Falling swap rates have resulted in an increase in the value of the division's fixed interest investments, although this is offset by increases in liabilities for the term assurance book as a result of lower discount rates driving increases in the current value of future policyholder claims and future maintenance expenses.
From an internal perspective the division has continued to invest in developing its systems, processes and procedures as a result of the combined impact of our acquisition in May last year and the additional reporting requirements that Solvency II has introduced. Since acquisition significant effort has been put into integrating with the Chesnara group and this process has proved very successful. Close working relationships between the group and Dutch division ensure that there is a sound platform for pursuing any future acquisition opportunities that may arise within the Netherlands.
From a customer service perspective the division continues to focus on ensuring that its policyholders are treated fairly. Policyholder complaints continue to remain at low levels.
Financial performance
The division has delivered a half year IFRS result that is slightly ahead of expectations, and the solvency position of the business remains strong. Positive cash generation of GBP5.8m has been seen in the period, although this is driven by a strengthening of the euro against sterling. Further information on solvency and financial performance can be seen below.
Key value drivers
Value emerges primarily as a result of positive mortality experience on its term assurance contracts, close management of the expense base and investment returns. As a result of this one of the key variables affecting value is the number of policies in force, with a higher number resulting in a more efficient allocation of costs and more mortality surplus.
Policy numbers: Annualised policy attrition levels for 2015 and the first half of 2016 remain at a steady level of circa 8% across the total in-force book and are in line with the anticipated book run-off. There has been a high level of run off in the small unit-linked business, although this is expected and not a concern to management.
In-force policies
30 Jun 31 Dec
2016 2015
Term assurance 50,800 52,500
Unemployment and disability 23,000 23,900
Unit-linked 2,700 3,300
Total 76,500 79,700
Policy attrition
30 Jun 31 Dec
2016 2015
Term assurance 6.5% 7.7%
Unemployment and disability 7.8% 4.6%
Unit-linked 33.9% 40.0%
Total 8.0% 8.8%
Expenses: Managing an efficient cost base is a key priority for management. For the first half of the year expenses are slightly higher than expected, although this is mainly in relation to investing in systems and processes. In addition, the cost base of the business is geared up to support the delivery of future acquisitions and as such is not being managed with the sole focus of run off in mind.
Investments: Investment performance is a key driver of value emergence as investments are required to be held by the business to support the payment of policyholder claims. Since being acquired by Chesnara the division has continued to hold a large portion of liquid assets, something that built up under the previous owners. As a result a continued focus of management remains that of considering an optimal investment strategy for the division, balancing the desire for improved return with any associated risk this may bring.
Risks associated with the strategic objective
Insurance risk: The primary risk to the profit and cash emergence is that the positive mortality experience deteriorates significantly and exceeds the assumed rates.
Lapse risk: Increased lapses on cash generative products are also a risk to the delivery of this strategic objective. This risk is managed through close monitoring of persistency levels, service levels that ensure strong customer service standards and our pro-active approach to the renewal process should an alternative product be appropriate.
Expenses risk: There is also a risk that expenditure levels exceed those assumed in reserves and provisions. Expense assumptions are deemed to be realistic and the cost base is well controlled, predictable and within direct management influence.
Regulatory risk: Although regulatory developments are not in themselves a risk to the value emergence, management recognises the long term benefits of robust governance. Regulatory change can impact the cash potential of the business if it directly impacts the cash flows from the products (such as through emerging regulatory best practice) or increases the likelihood of increased book attrition.
Market risk: As with our Swedish division, the group is exposed to foreign currency fluctuations which impacts the sterling value emerging from the Dutch operations.
enhance value through PROFITABLE new business | Sweden
New business profits continue to enhance Movestic's value and support overall fund growth.
Highlights
- New business profit of GBP4.0m (H1 2015: GBP2.4m).
- Increase in new business volumes.
- Product mix changes have resulted in an increase in gross margins from 20% to 21%.
Review of the period
The new business operation in Movestic has continued to deliver a modest contribution to the group, having generated profits of GBP4.0m, as measured on the traditional embedded value basis.
There are a number of factors that affect the success of the new business operation. From an economic perspective we believe that market volatility in the period has continued to have an influence on the attractiveness of more traditional products rather than the unit-linked products sold by Movestic.
Whilst the overall size of the market may have reduced slightly in the period as a result of this dynamic Movestic continues to operate within its target range of 10% to 15% market share.
New products
One way that Movestic seeks to differentiate itself from competitors is to select and develop fund ranges that are attractive to policyholders. Developing the range of funds available remains a key priority of management, and three new "white label" funds were launched during the first half of 2016. Due to these funds being internally developed they tend to receive a higher proportion of the product value chain, thereby improving new business margins.
Trend analysis of new business premium income (GBPm)*
Q1 Q2 Q3 Q4 Q1 Q2
2015 2015 2015 2015 2016 2016
Total 10.8 10.7 11.3 11.8 10.9 13.2
*Historical information has been re-translated using average SEK/GBP rate for the first six months of 2016.
Movestic's share of new unit-linked company paid pension business
H1 2016 H2 2015 H1 2015
Market share 13.7% 11.7% 10.1%
Information technology
An important aspect of the success of the new business proposition is the IT infrastructure in place, and as such Movestic is continuing its investment in its front and back office systems. An efficient and robust IT infrastructure provides many benefits, such as ease of access to policy information by customers, better communication and links with IFAs and partners. In addition this facilitates the ability to issue newly designed products more easily, supports new business pricing routines and can reduce the level of paperwork in the process.
Transfers
A feature of the new business operation is Movestic's relative attractiveness to policyholders looking to transfer their savings from another provider. During the period the ratio of transfers in to transfers out has seen an improvement illustrating the success of a revised transfer business sales strategy.
Profitability
The increase in the level of new business profits in Movestic in the period is a feature of three key themes:
- Gross margins have improved as a result of a change in product mix of the new policies sold in the period;
- Sales volumes are up on the same period in 2015; and
- The period has seen in increase in additional investments being made by existing policyholders.
Risks associated with this strategic objective
- The attractiveness of unit linked products can be influenced by economic conditions especially as some traditional products offer guaranteed returns in uncertain times. That said Swedish investors tend not to adopt an "all or nothing approach" to equity exposure and hence there will always be a certain level of unit linked demand.
- New business volumes are sensitive to the quality of service to the IFA and the end customer. Movestic continues to score highly in internal and external service level assessments.
- New business remains relatively concentrated towards several large IFAs. This is inevitable to some extent but the fact that Movestic continues to increase the breadth of IFA support reduces this concentration risk. Whilst Movestic has further broadened its coverage of the IFA market, the fact remains that a large proportion of new business comes from two large IFA firms thereby creating a level of concentration risk. Movestic continue to score highly when assessed by the main IFA distributors across all elements including, fund range, sustainability and cost.
- The competitive market puts pressure on new sales margins. Movestic's margins have generally held up well although the improved terms offered for the higher margin transfer business is evidence of the pressure on margins. Movestic has redressed the margin balance by successfully focussing on achieving better terms in the fund operation, and by improving sales mix towards the higher margin products.
CAPITAL MANAGEMENT - Solvency II
Managing the group and subsidiaries' capital positions appropriately is a critical part of ensuring we remain true to the group's culture and values, which includes a clear focus on maintaining adequate financial resources. We are well-capitalised at a group and subsidiary level under Solvency II. In applying Solvency II we have not used any elements of the Long Term Guarantee Package, including transitional arrangements.
The group and its subsidiaries manage capital in accordance with their respective capital management policies, which are based on the requirements of our regulators. These policies include the concept of a "management buffer", which is incremental to the regulatory capital.
Chesnara group
Solvency 30 Jun 2016 31 Dec 2015
GBPm GBPm
Total assets less liabilities 403.4 401.6
Ring-fenced fund restriction (5.2) (4.8)
Proposed dividend (8.6) (15.6)
----------- -----------
Own funds 389.6 381.1
Solvency capital requirement 263.4 260.6
Surplus own funds above solvency capital requirement 126.3 120.5
Solvency ratio (post dividend) 148% 146%
Capital requirement including "Management buffer" 289.7 286.7
Surplus above internal capital requirement (includes "management buffer") 99.9 94.5
Movement in assets less liabilities GBPm
31 Dec 2015 401.6
Expected in period 3.9
New Business 1.7
Operating variances 1.9
Operating assumptions (3.4)
Economic impact (6.5)
Non-operating variances (1.8)
Risk margin (7.9)
Taxation 6.1
Dividends (15.6)
Foreign exchange 23.4
------
30 Jun 2016 403.4
------
Movement in SCR GBPm
31 Dec 2015 260.6
Market risk (10.3)
Counterparty (0.4)
Life underwriting 3.9
Health underwriting 0.1
Operational risk 0.2
Diversification (0.5)
Loss absorbing capacity of deferred tax (1.2)
Capital requirement of other financial institutions 0.1
Forex impact 10.9
------
30 Jun 2016 263.4
------
Analysis
- Strong group solvency maintained with small increase in absolute level of surplus.
- Transitional arrangements have not been used.
- Solvency is stated after deducting interim dividend of GBP8.6m.
- Group own funds broadly in line with year end, with reduction in own funds in the UK being offset by growth in Swedish and Dutch divisions.
- Capital requirements increased due to the weakening of sterling against the Swedish krona and the euro, off-set by a reduction in investment related market risk capital requirements.
- The group solvency surplus shows only marginal difference in the impacts of a 25% equity and property stress and a 2% reduction in the yield curve.
Sensitivities Own funds SCR Surplus Solvency ratio % Base valuation 389.6 (263.3) 126.3 148% 25 % reduction in equity and property value (73.2) 41.5 (31.7) (5)% 2% reduction in yield curve (24.1) (5.9) (30.0) (12)%
UK
Solvency 30 Jun 2016 31 Dec 2015
GBPm GBPm
Total assets less liabilities 198.4 203.0
Ring-fenced fund restriction (5.2) (4.8)
Proposed dividend (30.5) (30.5)
----------- -----------
Own funds 162.8 167.7
Solvency capital requirement 118.4 123.8
Surplus own funds above solvency capital requirement 44.4 43.9
Solvency ratio (post dividend) 137% 135%
Capital requirement including "Management buffer" 142.1 148.5
Surplus above internal capital requirement (includes "management buffer") 20.7 19.1
Movement in assets less liabilities GBPm
31 Dec 2015 203.0
Expected in period 1.6
Operating variances 4.6
Operating assumptions (3.1)
Economic impact (3.3)
Non-operating variances (1.1)
Risk margin (5.3)
Taxation 2.0
-----
30 Jun 2016 198.4
-----
Movement in SCR GBPm
31 Dec 2015 123.8
Market risk (6.7)
Counterparty (0.3)
Life underwriting 1.9
Health underwriting (0.4)
Operational risk 0.2
Diversification 0.6
Loss absorbing capacity of deferred tax (0.7)
30 Jun 2016 118.4
-----
Analysis
- Strong solvency maintained despite headwinds from falling bond yields.
- Dividend of GBP30.5m was paid to Chesnara on 20 July 2016.
- Own funds reduction driven by the net impact of economic variances arising from bond value appreciation, off-set by bond yield assumption changes giving rise to an increase in insurance technical provisions, mainly in relation to S&P products with embedded guaranteed returns.
- Capital requirements have decreased in the period and reflect the net impact of:
o Reduced equity and interest market risk related capital requirement.
o Increased life underwriting risk capital as a consequence of yield curve reduction.
- A 2% fall in the yield curve has a greater impact on the division's solvency ratio than a 25% equity and property stress.
Sensitivities Own funds SCR Surplus Solvency ratio % Base valuation 162.8 (118.4) 44.4 137% 25 % reduction in equity and property value (28.0) 15.4 (12.6) (7)% 2% reduction in yield curve (15.4) (3.3) (18.7) (16)%
Sweden
Solvency 30 Jun 2016 31 Dec 2015
GBPm GBPm
Total assets less liabilities 160.8 149.8
Proposed dividend - -
----------- -----------
Own funds 160.8 149.8
Solvency capital requirement 104.5 97.5
Surplus own funds above solvency capital requirement 56.3 52.3
Solvency ratio (post dividend) 154% 154%
Capital requirement including "Management buffer" 125.4 117.0
Surplus capital resources above "Management requirement" 35.4 32.8
Movement in assets less liabilities GBPm
31 Dec 2015 149.8
Expected in period 1.8
New business 1.7
Operating variances (0.7)
Operating assumptions (0.5)
Economic impact (2.3)
Non-operating variances (0.7)
Risk margin (2.7)
Taxation (0.2)
Exchange rates 14.6
-----
30 Jun 2016 160.8
-----
Movement in SCR GBPm
31 Dec 2015 97.5
Market risk (6.6)
Counterparty 0.7
Life underwriting 2.9
Health underwriting 0.6
Operational risk 0.1
Diversification (0.6)
Other sectors 0.1
Forex impact 9.8
-----
30 Jun 2016 104.5
-----
Analysis
- Strong solvency maintained with small increase in absolute level of surplus.
- Own funds increase predominantly driven by exchange rate gains, with the Swedish krona strengthening against sterling by 10% during the period. This has offset the negative impact of investment market returns during the period.
- Capital requirements have increased during the period and reflect the net impact of:
o Exchange rate driven SCR increase; off-set by;
o Equity-driven market risk SCR reduction due to falling equity markets in the period.
- Movestic displays most sensitivity to an equity stress scenario due to its high level of collective investment holdings.
Movement in SCR Own funds SCR Surplus Solvency ratio % Base valuation 160.8 (104.5) 56.3 154% 25 % reduction in equity and property value (46.5) 20.6 (25.9) (16%) 2% reduction in yield curve (7.7) (0.5) (8.2) (9)%
Netherlands
Solvency 30 Jun 2016 31 Dec 2015
GBPm GBPm
Total assets less liabilities 78.8 69.8
Proposed dividend - -
----------- -----------
Own funds 78.8 69.8
Solvency capital requirement 13.5 11.7
Surplus own funds above solvency capital requirement 65.3 58.1
Solvency ratio (post dividend) 584% 597%
Capital requirement including "Management buffer" 23.6 20.4
Surplus capital resources above "Management requirement" 55.2 49.4
Movement in assets less liabilities GBPm
31 Dec 2015 69.6
Expected in period 0.5
Operating variances 0.7
Operating assumptions 0.2
Economic impact (0.8)
Non-operating variances 0.0
Risk margin 0.1
Taxation (0.3)
Forex impact 8.8
-----
30 Jun 2016 78.8
-----
Movement in SCR GBPm
Dec 2015 11.7
Market risk 1.7
Counterparty (0.5)
Life underwriting (0.3)
Health underwriting (0.0)
Operational risk 0.0
Diversification (0.4)
Loss absorbing capacity of deferred tax (0.0)
Forex impact 1.3
-----
Jun 2016 13.5
-----
Analysis
- Strong solvency maintained albeit reduced from the 2015 closing position due to a higher capital requirement.
- Own funds increase as a consequence of the euro strengthening against sterling in the period, offset by declining yield curve driven investment returns.
- Capital requirements increased in the period due to the combined impact of foreign exchange rate movements and market risk increases, arising from a slight shift in investment holdings, moving from cash into collective investment schemes.
- The Waard Group remains fairly insensitive to equity stress due to its underlying asset mix.
Movement in SCR Own funds SCR Surplus Solvency ratio % Base valuation 78.8 (13.5) 65.3 582% 25 % reduction in equity and property value (1.1) 0.3 (0.8) 4% 2% reduction in yield curve (1.9) (1.4) (3.3) (66)%
FINANCIAL REVIEW
The key financial performance indicators below are used by management to assess how we have performed in delivering our three strategic objectives and our core culture and values. The overriding feature of the results of the group in the first half of 2016 is the investment market performance during the period, most notably falling government bond yields in both the UK and Eurozone. In particular this has given rise to losses in the UK on our products with guarantees.
IFRS PRE-TAX PROFIT GBP0.2m (Six months ended 30 June 2015: GBP30.4m)
IFRS TOTAL COMPREHENSIVE INCOME GBP15.7m (Six months ended 30 June 2015: GBP22.9m)
What is it?
The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the profit arising from the longer term insurance and investment contracts over the life of the policy.
Why is it important?
IFRS profit is an indicator of the value that has been generated within the long-term insurance funds of the divisions within the group, and is a key measure used both internally and by our external stakeholders in assessing the performance of the business. IFRS profit is an indicator of how we are performing against our stated strategic objective of "maximising value from the existing business" and can also be impacted by one-off gains arising from delivering against our stated objective of "acquiring life and pensions businesses".
Risks
The IFRS profit can be affected by a number of our principal risks and uncertainties as set out below. In particular, volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit.
Highlights
H1 2016 H1 2015
CA 14.2 13.9
S&P (13.9) 7.5
Movestic 3.6 3.4
Waard 2.0 -
Group & Consolidation adjustments (5.7) (10.7)
Profit on acquisition - 16.2
Taxation 0.2 (2.1)
Forex impact 15.3 (5.4)
Total profit before tax and exceptional items 15.6 22.8
------- -------
- A Brexit-driven set of results.
- IFRS pre-tax profit of GBP0.2m is significantly lower than same period in prior year largely as a result of:
o Loss in S&P segment driven by falling government bond yields in the period;
o Comparative figures include a large one-off gain of GBP16.2m arising on acquisition of the Waard group.
- At a total comprehensive income level the group has reported positive exchange rate gains arising from a weakening sterling against euro and Swedish Krona in the run up to, and post, the EU referendum result.
CASH GENERATION GBP13.6m (Six months ended 30 June 2015: GBP56.7m*)
What is it?
Net cash generation is a measure of how much distributable cash has been generated in the period. Cash generation is driven by the change in amounts freely transferable from the operating businesses, taking into account board-approved solvency buffers that are based on those imposed by our regulators. It follows that cash generation is not only influenced by the level of surplus arising but also by the level of required solvency capital.
Why is it important?
Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we are performing against our stated objective of "maximising value from the existing business". However, our cash generation is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of the group.
Risks
The ability of the underlying regulated subsidiaries within the group to generate cash is affected by a number of our principal risks and uncertainties as set out below. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, they are impacted by similar drivers, and therefore factors such as yields on fixed interest securities and equity and property performance contribute significantly to the level of cash generation within the group.
Highlights
H1 2016
UK 1.5
Sweden 2.5
Netherlands 5.8
Other group activities 3.8
Total 13.6
-------
- Positive cash contributions from all divisions drives total cash generation in the period that continues to support our attractive dividend strategy.
- UK is at the lower end of the range, principally as a result of falling bond yields in the period.
- Movestic and Waard cash generation includes the benefit of positive foreign exchange gains.
* includes one-off cash generation of GBP39.9m arising on the acquisition of the Waard group.
ECONOMIC VALUE (ECV) GBP459.9m (31 December 2015: GBP453.4m)
What is it?
Economic value (EcV) has been introduced in the period by Chesnara as a replacement metric for European Embedded Value. This has been introduced following the introduction of Solvency II at the start of 2016, with EcV being derived from Solvency II own funds. Conceptually EcV is broadly similar to EEV in that both reflect a market-consistent assessment of the value of existing insurance business, plus adjusted net asset value of the non-insurance business within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is an important reference point by which to assess Chesnara's intrinsic value. A life and pensions group may typically be characterised as trading at a discount or premium to its economic value. Analysis of EcV provides additional insight into the development of the business over time.
The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through writing profitable new business. It ignores the potential of new business to be written in the future (the franchise value of our Swedish business) and the value of the company's ability to acquire further businesses.
Risks
The economic value of the group is affected by economic factors such as equity and property markets and yields on fixed interest securities. In addition to this, whilst the other KPIs (which are all "performance measures") remain relatively insensitive to exchange rate movements, the EcV position of the group can be materially affected by exchange rate fluctuations. For example a 10.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group by 3.6% and 1.6% respectively, based on the composition of the group's EcV at 30 June 2016.
Highlights
GBPm
31 Dec 2015 453.4
EcV Earnings (3.5)
Dividends (15.6)
Fx gain 25.6
30 Jun 2016 459.9
------
- Economic value at the end of June 2016 remains broadly in line with the start of the year.
- Negative EcV earnings in the period driven by investment markets, with the UK and Dutch businesses being impacted by bond yield falls and the Swedish business adversely affected by the suppressed equity markets that have been witnessed in the period.
- EcV benefited from large foreign exchange gains that were reported in the period as a result of sterling deprecation.
- The year end dividend of GBP15.6m was paid in May, thereby reducing EcV
ECV EARNINGS NET OF TAX GBP(3.5)m
What is it?
In recognition of the longer-term nature of the group's insurance and investment contracts, supplementary information is presented that provides information on the economic value of our business.
The principal underlying components of the economic value result are:
- The expected return from existing business (being the effect of the unwind of the rates used to discount the value in-force).
- Value added by the writing of new business. - Variations in actual experience from that assumed in the opening valuation. - The impact of restating assumptions underlying the determination of expected cash flows. - The impact of acquisitions.
Why is it important?
By recognising the market-related value of in-force business (in-force value), a different perspective is provided in the performance of the group and on the valuation of the business. Economic value earnings are an important KPI as they provide a longer-term measure of the value generated during a period. The economic value earnings of the group can be a strong indicator of how we have delivered against all three of our core strategic objectives. This includes new business profits generated from writing profitable new business, economic value profit emergence from our existing businesses, and the economic value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties as set out below. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the future cash flows arising from our books of business.
Highlights
GBPm
Operating earnings (0.1)
Economic earnings (5.5)
Other 2.1
Total EcV earnings (3.5)
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- EcV loss of GBP3.5m in the period primarily driven by impact of economic items, predominantly falling bond yields in the UK and Europe.
- The "other items" includes the net impact of risk margin movements and tax items. Included within this is the positive impact of refining our deferred tax modelling amounting to GBP4.2m.
IFRS PRE-TAX PROFIT GBP0.2m (Six months ended 30 June 2015: GBP30.4m)
IFRS TOTAL COMPREHENSIVE INCOME GBP15.7m (Six months ended 30 June 2015: GBP22.9m)
Executive summary
The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major components:
(1) Stable core: At the heart of surplus, and hence cash generation, are the CA and Waard group segments. The requirements of these books are to provide a predictable and stable platform for the financial model and dividend strategy. As closed books, the key is to sustain this income source as effectively as possible. The IFRS results below show that the stable core continues to deliver against these requirements.
(2) Variable element: The S&P component can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements.
(3) Growth operation: The long-term financial model of Movestic is based on growth, with levels of new business and premiums from existing business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:
IFRS profit Unaudited 6 months ended Year ended
Note
30 Jun 2016 30 Jun 2015 31 Dec 2015
GBPm GBPm GBPm
-------------------------------------------------- ------------- ------------ ------------ -------
CA 14.2 13.9 23.9 1
S&P (13.9) 7.5 10.6 2
Movestic 3.6 3.4 6.7 3
Waard Group 2.0 - 0.9 4
Chesnara (2.9) (7.4) (9.5) 5
Consolidation adjustments (2.8) (3.2) (6.4) 6
-------------------------------------------------- ------------- ------------ ------------ -------
Profit before tax and profit on acquisition 0.2 14.2 26.2
Profit arising on acquisition of the Waard group - 16.2 16.6 4
-------------------------------------------------- ------------- ------------ ------------ -------
Profit before tax 0.2 30.4 42.8
Tax 0.2 (2.1) (3.0)
-------------------------------------------------- ------------- ------------ ------------ -------
Profit after tax 0.4 28.3 39.8
Foreign exchange translations differences 15.3 (5.4) (0.2) 7
-------------------------------------------------- ------------- ------------ ------------ -------
Total comprehensive income 15.7 22.9 39.6
-------------------------------------------------- ------------- ------------ ------------ -------
Note 1: The CA segment has reported results for the period in line with the same period in 2015, despite the downward pressure on results arising from falling bond yields in the period and relatively flat equity growth. Further insight is provided in the CA segmental analysis below.
Note 2: The S&P segment has reported a loss for the first half of the year driven by the impact of falling bond yields in the period causing a strain on the insurance provisions held for products that contain guaranteed returns. During the same period in 2015 bond yields increased slightly. Further detail can be found below.
Note 3: The Movestic result has improved slightly when compared with the same period in 2015. This is principally driven by an increase in the profits arising in the asset management business. Further analysis can be found on below.
Note 4: The Waard group was purchased on 19 May 2015 and therefore did not contribute materially to underlying profits. A one-off gain on acquisition of GBP16.6m was recognised in 2015, representing the excess of the net assets acquired over the purchase price. Profit contribution in 2015 was in line with expectations.
Note 5: The Chesnara result represents holding company expenses. 2016 costs are lower than 2015 costs primarily due to a one off foreign currency re-translation loss of GBP3.5m arising from holding euros prior to the completion of the Waard group purchase.
Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets and remain broadly in line with the same period last year.
Note 7: As a result of sterling weakening against both euro and the Swedish krona in the period the IFRS result includes a large foreign exchange gain, off-setting the negative impact that falling bond yields have had on our results in the period.
The IFRS results by business segment are analysed in more detail as follows:
CA
The key components of the IFRS result for CA for the period are as follows:
H1 2016 H1 2015 Note
GBPm GBPm
Product-based charges 7.6 8.3 8
Administration expenses (5.2) (4.8) 8
Experience variances 5.5 7.0 9
Assumption changes (0.7) (1.0) 10
Policyholder tax 3.8 2.8 11
Variation from investment return 9.6 0.4 12
Economic assumption changes (6.4) 1.2 12
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Total 14.2 13.9
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Note 8: Product-based deductions and administrative expenses have remained broadly in line period on period, as would be expected. Charges have remained resilient to policy attrition.
Note 9: Positive experience variances in the period are largely driven by mortality surpluses with a smaller contribution from positive lapse experience. A similar dynamic existed in 2015.
Note 10: No significant changes in assumptions have been made during the period.
Note 11: Policyholder tax represents the net impact of deductions taken from policyholders' funds to settle tax liabilities arising from returns in unit-linked funds and any reserves held to settle such tax. Deductions from policyholders exceeded the reduction in the reserve in the period as a result of favourable movements in fund values, underpinned by the increase seen in gilts and UK equities. There was no such equivalent gilt growth in the same period in 2015, and equity performance in that period was marginally adverse.
Note 12: variation from investment return and economic assumption changes should be considered together. Investment returns in the period are largely as a result of bond yields having fallen significantly across all durations, with 10 year gilt yields falling by 98 basis points. This has given rise to a large increase in the value of bonds that the segment is invested in. However, as a result of falling bond yields in the period the assumption for the estimated future investment return that was made at the start of the year has been reduced. This causes an increase in the value of our insurance liabilities, thereby causing the strain seen above. No such dynamic existed in the prior year equivalent period.
S&P
The key components of the IFRS result for S&P for the period are as follows:
H1 2016 H1 2015 Note
GBPm GBPm
Product-based charges 7.0 7.2 1
Administration expenses (4.6) (4.6) 2
Experience variances (1.6) 0.1 3
Assumption changes (3.8) (0.3) 4
Policyholder tax 1.2 1.1 5
Variation from investment return 17.5 0.5 6
Economic assumption changes (29.6) 3.5
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Total (13.9) 7.5
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Note 1: Product-based deductions and administrative expenses have remained broadly in line period on period, as would be expected. Product deductions have remained resilient to policy attrition.
Note 2: Slightly adverse experience in the period caused by marginally adverse mortality experience.
Note 3: The adverse assumption change in the period is driven by an increase in insurance provisions of GBP3.5m, attributable to assuming a 1% cap on exit fees for those policyholders with pension products who are aged over 55.
Note 4: Policyholder tax represents the net impact of deductions taken from policyholders' funds to settle tax liabilities arising from returns in unit-linked funds and any reserves held to settle such tax. The small positive contribution in the period is primarily the consequence of higher tax deductions due to increases in fund values, supported by gilt value appreciation and modest UK equity growth.
Note 5: Variation from investment returns and economic assumption changes should be considered in conjunction with each other. During the period bond yields have fallen significantly across all durations, with 10 year gilt yields falling by 98 basis points and this has given rise to a large increase in the value of bonds that the segment is invested in. However, falling bond yields have increase the value of our insurance liabilities, to a larger extent than the CA segment. This is because the S&P segment has a number of policies that contain minimum guaranteed returns, and as future investments returns reduce, this causes a strain on the segment's insurance liabilities because both the value and volume of product guarantees increases.
Movestic
The key components of the IFRS result for Movestic for the period are as follows:
H1 2016 H1 2015 Note
GBPm GBPm
Pension and savings 2.1 2.9 6
Life and health 0.4 0.1 7
Movestic Kapital 1.5 0.1 8
Other (0.4) 0.3 9
Total 3.6 3.4
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Note 6: The Pensions & Savings business continues to be the core source of IFRS profit in Movestic. The segment has reported IFRS profits that are slightly lower than in the same period in 2015. The main driver of the reduction is that the prior year included one off investment performance fees of GBP1.0m. In addition to this premium volumes are slightly lower than in the prior year, and investment performance in the first six months was down on last year due to poor performing equity markets in the period, with a knock on impact of slightly reduced asset management charges to policyholders.
Note 7: The Life and Health business has generated a slightly higher profit when compared with the same period in 2015. Underlying profits are broadly in line over each period, with 2016 reporting the benefits of a profit on commission from Modernac, the reinsurance company that Movestic owns 49% of, amounting to GBP0.5m.
Note 8: Movestic Kapital is the Swedish division's internal investment management business. Developing this operation has been a significant area of management focus, with the increase in contribution from this aspect of the division arising from increases in performance fees arising from general growth in the operation.
Note 9: The "Other" component includes: the results of Movestic's associated company, Modernac; investment income and fair value adjustments on the financial reinsurance that Movestic uses to fund the writing of new Pensions & Savings business. There have been no significant fluctuations in the profit contributions that these aspects of the business create.
Waard group
The Waard group has reported a profit of GBP2.0m in the period, slightly up on the profit of GBP0.9m that was reported in the latter half of 2015, post Chesnara acquisition. Profits principally arise from mortality surpluses arising from the Waard group's term assurance policies.
CASH GENERATION GBP13.6m (Six months to 30 June 2015: GBP56.7m)
Cash in the business is generated from increases in the group's surplus funds. Surplus funds represent the excess of assets held over management's internal capital needs, as laid down in each division's and the group management policy. These are based on regulatory capital requirements, with the inclusion of additional "management buffers". The first six months of 2016 is the first period that our cash generation metric has been calculated with reference to Solvency II based capital management policies. Comparatives as reported applied our previous Solvency I based capital policies.
Highlights
- Cash has continued to be generated across the group, with cash generation in the period of GBP13.6m continuing to be of a magnitude that would support our previous levels of dividend.
- Cash generation in the prior period benefitted from a one-off positive contribution of GBP39.9m, arising on the acquisition of the Waard group.
- UK cash continues to be generated despite being hampered by the impact of falling bond yields, which has had an overall negative impact on both own funds and required levels of capital.
- The Swedish and Dutch divisions have reported positive cash development in the period. A contributing factor of this is the positive Swedish krona and euro exchange gains witnessed.
- Other group activities reflects the impact of consolidation routines, specifically movements in capital requirements determined at a group level.
Cash generation for period ended 30 June 2016 (GBPm) Group UK Sweden Netherlands Other group activities ----------------------------------------------------- ------- ----- ------- ----------- ---------------------- Increase/(decrease) in own funds 17.0 (5.0) 10.9 9.0 2.1 Decrease/(increase) in management's internal capital requirement (3.4) 6.5 (8.4) (3.2) 1.7 ------------------------------------------------------ ------- ----- ------- ----------- ---------------------- Cash generation 13.6 1.5 2.5 5.8 3.8
Impact of moving from Solvency I to Solvency II on cash reporting:
- The "day 1" transitional impact on our cash reporting of moving from Solvency I to Solvency II is complex and has various dynamics at play:
- At a divisional level the transition to Solvency II had a modestly positive impact on collective absolute levels of surplus within our divisions, and hence absolute cash potential.
- At a group level incremental solvency capital is required to be held over and above that held in our divisions. This is required to cover the group's exposure to foreign currency fluctuations, driven by our operations in Sweden and the Netherlands, and this offsets the positive capital benefit of having diversified operations. As a result the absolute level of day one surplus at a group level is lower under Solvency II, as reported on page 23 of the 2015 Annual Report & Accounts.
- In the medium term this constraint will not impact cash distribution expectations.
- In the longer term the constraint can be reduced through management actions such as currency hedging. In addition, the process of distributing cash from the non-UK divisions to Chesnara, as is assumed to be the case in the long-term, will reduce the absolute value of the group level capital required to cover this foreign exchange exposure.
ECV EARNINGS GBP(3.5)m *
Economic value earnings are negative for the first six months of the year, driven by the negative impact of falling bond yields in the period.
Analysis of the EcV result in the period by earnings source:
6m to 30 Jun 2016
GBPm
Expected movement in period 4.3
New business 4.0
Operating variances 3.2
Operating assumption changes (8.5)
Other operating variances (3.2)
-----------------
Total operating earnings (0.2)
Economic experience variances 34.2
Economic assumption variances (39.7)
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Total economic earnings (5.5)
Other non-operating variances (1.2)
Risk margin movement (2.9)
Tax 6.3
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Total EcV earnings (3.5)
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Analysis of the EEV result in the year by business segment
6m to 30 Jun 2016 Note
GBPm
UK (5.5) 1
Sweden (3.8) 2
Netherlands 0.6 3
Group and group adjustments (1.1) 4
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EcV earnings before tax (9.8)
------------------
Tax 6.3 5
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EcV earnings after tax (3.5)
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* This is the first period that EcV earnings have been reported. Consequently comparative information has not been presented.
Economic conditions: As with our previously reported EEV metric, the EcV result is sensitive to investment market conditions. Key investment market conditions in the period are as follows:
- The FTSE All share index has increased by 2.1%; - The Swedish OMX all share index has decreased by 6.8%; and - 10 year UK gilt yields have fallen from 2.01% to 1.03%.
Note 1 - UK: Operating earnings of GBP1.6m in the UK business are largely in line with expectations. Economic losses of GBP3.3m have been reported in the period, driven by the impact of falling bond yields on the business, largely through increases in reserves held for policies with guarantees. The risk margin within the UK business has increased by GBP2.7m in the period, largely owing to the impact of falling bond yields on the level at which the risk margin is discounted.
Note 2 - Sweden: The Swedish division has reported a small operating loss in the period, largely driven by the net impact of profits on new business written of GBP4.0m being offset by adverse operating assumption changes of GBP5.3m caused by expense assumption strengthening in the period and a reduction in expected performed fees. A small economic loss of GBP1.4m has been reported, predominantly as a result of marginally negative equity returns in the period. The risk margin held for the Swedish division has increased by GBP1.3m in the period.
Note 3 - Netherlands: The Dutch division has not reported significant movements in its economic value in the period. This is largely because the division's value is not particularly sensitive to investment market movements.
Note 4 - Group: A small loss has been reported in the group component. This largely relates to costs incurred in the period.
Note 5 - Tax: The business is reporting a tax credit of GBP6.3m in the period. This is driven by a combination of deferred tax on the loss in the period in the UK, coupled with a modelling adjustment for deferred tax when compared with the opening period.
ECV GBP459.9m (31 December 2015: GBP453.4m)
The economic value of Chesnara represents the present value of future profits of the existing insurance business, plus the adjusted net asset value of the non-insurance business within the group. EcV is an important reference point by which to assess Chesnara's intrinsic value.
Value movement 1 January 2016 to 30 June 2016
GBPm
EEV 31 Dec 2015 455.2
Adj to EcV (1.8)
------
EcV 31 Dec 2015 453.4
EcV earnings (3.5)
Dividends (15.6)
Fx gain 25.6
EcV 30 Jun 2016 459.9
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EEV adj: The opening EcV of the group is GBP1.8m lower than our previously reported EEV. As expected, the two reporting metrics provide a consistent view of the value of the group.
EcV earnings: Negative EcV earnings in the period driven by investment markets. In particular, the UK and Dutch businesses have been impacted by bond yield falls and the Swedish business has been adversely affected by the suppressed equity markets that have been witnessed in the period.
Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of GBP15.6m were paid during the first half of 2016, being the final dividend from 2015.
FX gain: The EcV of the group benefited from large foreign exchange gains that were reported in the period as a result of sterling deprecation.
EcV to Solvency II
GBPm
Economic value 459.9
Risk margin (37.6)
Contract boundaries (18.9)
Own fund restrictions (5.2)
Dividends (8.6)
Group SII own funds 389.6
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Our reported EcV is based on a Solvency II assessment of the value of the business, but adjusted for certain items where it is deemed that Solvency II does not reflect the commercial value of the business. The above waterfall shows the key difference between EcV and SII, with explanations for each item below.
Risk margin: Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 3% cost of capital.
Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain in-force contracts, despite the high probability of receipt. We therefore make an adjustment to reflect the realistic value of the cash flows under EcV.
Ring-fenced fund restrictions: Solvency II rules require a restriction to be placed on the value of certain ring-fenced funds. These restrictions are reversed for EcV valuation purposes as they are deemed to be temporary in nature.
Dividends: The proposed interim dividend of GBP8.6m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actual paid.
EcV by segment at 30 June 2016
GBPm
UK 230.3
Movestic 183.1
Waard 81.1
Other group activities (34.6)
Group SII Own funds 459.9
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The above table shows that the EcV of the group is diversified across its different markets. In particular, the EcV of the UK and Swedish operations are of similar sizes, showing that we are well-balanced and not over-exposed to one particular geographic market.
Replacement of EEV
During the period we have replaced the previous group valuation metric, European Embedded Value, with a new metric, economic value (EcV). This has been introduced to align our valuation metric with Solvency II, with EcV being derived from the Solvency II balance sheet.
As expected, the new valuation metric gives a broadly similar value of the Chesnara plc group. At 31 December 2015 our previously reported EEV was GBP455.2m, compared with an opening EcV of GBP453.4m.
Our Embedded Value figures have historically been subject to an external audit opinion addressed to the Directors of Chesnara plc. This reflected the significance of the Embedded Value figures and was consistent with industry best practice.
The Economic Value figures are at this stage not subject to audit opinion other than to the extent the general audit opinion of the Financial Statements considers their consistency with the Financial Statements.
External audit requirements regarding Solvency II disclosures remain to be finalised. The expectation is that the Solvency II figures will be subject to external audit from the 2016 year end and as such given the Economic Value figures are derived from the Solvency II balance sheet we expect to extend an audit opinion to the Economic Value disclosures in our full year Report and Accounts.
RISK MANAGEMENT
Managing risk is a key part of our business model. We achieve this by understanding the current and emerging risks to the business, mitigating them where appropriate and ensuring they are appropriately monitored and managed at all times.
Chesnara adopts the "three lines of defence" model across the group taking into account size, nature and complexity, with a single set of risk and governance principles applying consistently across the business, underpinned by board-approved group and divisional governance maps and risk policies.
PRINCIPAL RISKS AND UNCERTAINTIES
Risks and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the ability of the group to meet its core strategic objectives. These currently centre on the intention of the group to treat customers fairly and maintain an attractive dividend profile.
There are a number of potential risks and uncertainties which could have a material impact on performance over the remaining months of the financial year causing material fluctuation in actual results from those expected.
Recent events such as the European Union referendum result has triggered an increase in economic uncertainty and the latest round of FCA consultations have increased the range of potential outcomes faced by the UK division.
The directors, however, do not consider that the principal risks and uncertainties have changed materially since publication of the annual report for the year ended 31 December 2015.
A detailed explanation of the risks faced by Chesnara and how they are mitigated can be found on pages 36 to 39 of the annual report. These risks are summarised in the table below.
RISK IMPACT
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Adverse In the event that actual mortality or morbidity
mortality/ rates are worse than from the assumptions underlying
morbidity/ product pricing and subsequent reserving, less
longevity profit will accrue to the group.
experience
=================== ==========================================================
Adverse If persistency rates are significantly lower
persistency than those assumed in product pricing and subsequent
experience reserving, this will lead to reduced group profitability
in the medium to long-term.
=================== ==========================================================
Expense For the closed UK and Dutch businesses, the group
overruns is exposed to the impact of fixed and semi-fixed
and unsustainable expenses, in conjunction with a diminishing policy
unit base, on profitability. For the Swedish open
cost life and pensions business, the group is exposed
growth to the impact of expense levels varying adversely
from those assumed in product pricing.
=================== ==========================================================
Significant A significant part of the group's income and,
and prolonged therefore, overall profitability derives from
equity fees received in respect of the management of
market policyholder and investor funds. Fee levels are
falls generally proportional to the value of funds
under management and, as the managed investment
funds overall comprise a significant equity content,
the group is exposed to the impact of significant
and prolonged equity market falls, which may
lead to policyholders switching to lower-margin,
fixed-interest funds.
=================== ==========================================================
Adverse Exposure to sterling:Swedish krona and sterling:euro
exchange exchange rate movements arises from actual planned
rate cash flows between Chesnara and its overseas
movements subsidiaries and from the impact on reported
against IFRS, EcV and SII results which are expressed
sterling in sterling.
=================== ==========================================================
Counterparty The group carries significant inherent risk of
failure counterparty failure in respect of:
* its fixed interest security portfolio;
* cash deposits; and
* payments due from reinsurers.
=================== ==========================================================
Adverse The group maintains portfolios of fixed interest
movements securities (i) in order to match its insurance
in yields contract liabilities, in terms of yield and cash
on fixed flow characteristics, and (ii) as an integral
interest part of the investment funds it manages on behalf
securities of policyholders and investors. It is exposed
to mismatch losses arising from a failure to
match its insurance contract liabilities or from
the fact that sharp and discrete fixed interest
yield movements may not be associated fully and
immediately with corresponding changes in actuarial
valuation interest rates.
------------------- ----------------------------------------------------------
Failure The group's UK life and pensions businesses are
of outsourced heavily dependent on outsourced service providers
service to fulfil a significant number of their core
providers functions. In the event of failure by any of
to fulfil the service providers to fulfil their contractual
contractual obligations, in whole or in part, to the requisite
obligations standards specified in the contracts, the group
may suffer losses, poor customer outcomes, or
reputational damage as its functions degrade.
------------------- ----------------------------------------------------------
Key man The nature of the group is such that it relies
dependency on a number of key individuals who have particular
knowledge, experience and know how. The group
is, accordingly, exposed to the sudden loss of
the services of these individuals.
------------------- ----------------------------------------------------------
Adverse The group operates in jurisdictions which are
regulatory currently subject to significant change arising
and legal from regulatory and legal requirements. These
changes may either be of a local nature, or of a wider
nature, following from EU-based regulation and
law. Significant issues which have arisen and
where there is currently uncertainty as to their
full impact on the group include:
i) the FCA's review of legacy business;
ii) the changes in pensions legislation in April
2015; and
iii) HM Treasury's review of exit charges on
pensions business.
------------------- ----------------------------------------------------------
Inconsistent Chesnara currently operates in three regulatory
regulation domains and is therefore exposed to inconsistent
across application of regulatory standards across divisions,
territories such as the imposition of higher capital buffers
over and above regulatory minimums. Potential
consequences of this risk for Chesnara constraining
the efficient and fluid use of capital within
the group, or creating a non-level playing field
with respect to future deal assessments.
------------------- ----------------------------------------------------------
Availability Chesnara's inorganic growth strategy is dependent
of future on the availability of attractive future acquisition
acquisitions opportunities. Hence, the business is exposed
to the risk of a reduction in the availability
of available acquisition opportunities in Chesnara's
current target markets, for example arising as
a result of a change in competition in the consolidation
market or from regulatory change influencing
the extent of life company strategic restructuring.
------------------- ----------------------------------------------------------
Defective Through the execution of acquisitions, Chesnara
acquisition is exposed to the risk of erosion of value or
due diligence financial losses arising from risks inherent
within businesses or funds acquired which are
not adequately priced for or mitigated within
the transaction.
------------------- ----------------------------------------------------------
Cyber Cyber fraud is a growing risk affecting all companies,
fraud particularly in the financial sector.
This risk exposes Chesnara to potential financial
losses and disruption to policyholder services
(and corresponding reputational damage).
------------------- ----------------------------------------------------------
Going concern
The directors have considered the ability of the group to continue on a going concern basis. As such the board has performed an assessment as to whether the group can meet its liabilities as they fall due for a period of at least 12 months from which this half year report has been signed.
In performing this work, the board has considered the current cash position of the group and company, coupled with the group's and company's expected cash generation as highlighted in its most recent business plan, which covers a three year period. The business plan considers the financial projections of the group and its subsidiaries on both a base case and a range of stressed scenarios, covering projected IFRS, EEV and solvency positions. These projections also focus on the cash generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company.
The information set out above indicates a strong Solvency II position as at 30 June 2016 as measured at both the individual regulated life company levels and at the group level. As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to continue trading. The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that any associated credit default risk is low.
The directors have considered the impact of the Brexit vote, and the potential economic uncertainty that this may continue to cause. They can confirm that the stressed scenarios considered in our most recent projections encompass a more extreme range of economic scenarios than it is envisaged the Brexit vote may bring.
In light of this information, the board has concluded that the group and company has adequate resources to continue in operational existence for at least 12 months from the date of approval of this half year report, and as a result the IFRS Financial Statements have been prepared on a going concern basis.
Directors' responsibiliTIES statement
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';
- the 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
- the 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 John Deane Chairman Chief Executive Officer 30 August 2016 30 August 2016
Independent Auditor's REVIEW Report to the Members of Chesnara plc
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cashflows and related notes 1 to 7. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of 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 to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
Edinburgh
United Kingdom
30 August 2016
CONDENSED Consolidated Statement of Comprehensive Income (unaudited)
Unaudited Year ended 31 December
Six months ended
30 June
2016 2015 2015
Note GBP000 GBP000 GBP000
==================================================== ==== ========== ========= ======================
Insurance premium revenue 55,524 58,078 114,749
Insurance premium ceded to reinsurers (22,586) (23,780) (46,811)
==================================================== ==== ========== ========= ======================
Net insurance premium revenue 32,938 34,298 67,938
Fee and commission income 34,769 33,327 66,249
Net investment return 108,657 182,231 148,514
==================================================== ==== ========== ========= ======================
Total revenue net of reinsurance payable 176,364 249,856 282,701
Other operating income 9,397 11,513 18,586
==================================================== ==== ========== ========= ======================
Total income net of investment return 185,761 261,369 301,287
==================================================== ==== ========== ========= ======================
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract
holders (159,552) (159,896) (318,721)
Net increase/(decrease) in insurance contract
provisions (8,485) 77,595 191,850
Reinsurers' share of claims and benefits 34,372 21,144 32,004
========== ========= ======================
Net insurance contract claims and benefits (133,665) (61,157) (94,867)
========== ========= ======================
Change in investment contract liabilities (13,147) (143,425) (100,469)
Reinsurers' share of investment contract liabilities 1,918 1,031 733
========== ========= ======================
Net change in investment contract liabilities (11,229) (142,394) (99,736)
========== ========= ======================
Fees, commission and other acquisition costs (11,050) (10,512) (20,875)
Administrative expenses (20,253) (19,125) (41,301)
Other operating expenses
Charge for amortisation of acquired value of
in-force business (4,645) (4,580) (9,274)
Charge for amortisation of acquired value of
customer relationships (114) (112) (222)
Other (2,911) (8,096) (5,866)
==================================================== ==== ========== ========= ======================
Total expenses net of change in insurance contract
provisions and investment contract liabilities (183,867) (245,976) (272,141)
==================================================== ==== ========== ========= ======================
Total income less expenses 1,894 15,393 29,146
Share of (loss)/profit of associate (428) 405 455
Profit recognised on business combination - 16,209 16,644
Financing costs (1,226) (1,609) (3,457)
==================================================== ==== ========== ========= ======================
Profit before income taxes 4 240 30,398 42,788
Income tax credit/(expense) 237 (2,138) (3,000)
==================================================== ==== ========== ========= ======================
Profit for the period 3,4 477 28,260 39,788
Foreign exchange translation differences arising on
the revaluation of foreign operations 15,188 (5,366) (173)
==================================================== ==== ========== ========= ======================
Total comprehensive income for the period 15,665 22,894 39,615
==================================================== ==== ========== ========= ======================
Basic earnings per share (based on profit for the
period) 2 0.38p 22.36p 31.48p
==================================================== ==== ========== ========= ======================
Diluted earnings per share (based on profit for the
period) 2 0.38p 22.33p 31.41p
==================================================== ==== ========== ========= ======================
The notes and information below form part of these financial statements.
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
Unaudited Year ended
Six months ended 31 December
30 June
2016 2015 2015
Note GBP000 GBP000 GBP000
============================================================== ==== ========== ========= ============
Assets
Intangible assets
Deferred acquisition costs 43,083 31,986 36,061
Acquired value of in-force business 67,753 72,483 68,341
Acquired value of customer relationships 841 948 875
Software assets 7,133 3,726 4,720
Property and equipment 584 490 537
Investment in associates 4,721 4,453 4,707
Investment properties 245 9,245 245
Reinsurers' share of insurance contract provisions 276,304 313,302 282,628
Amounts deposited with reinsurers 34,642 35,455 33,941
Financial assets
Equity securities at fair value through income 479,452 465,350 486,243
Holdings in collective investment schemes at fair value
through income 3,682,362 3,563,740 3,499,355
Debt securities at fair value through income 494,774 385,847 423,754
Policyholders' funds held by the Group 209,073 176,267 189,919
Insurance and other receivables 55,775 73,813 43,674
Prepayments 6,079 5,599 6,565
Derivative financial instruments 3,443 2,872 2,721
========== ========= ============
Total financial assets 4,930,958 4,673,488 4,652,231
========== ========= ============
Reinsurers' share of accrued policyholder claims 21,367 19,744 19,042
Income taxes 1,693 4,182 3,611
Cash and cash equivalents 253,369 279,813 260,863
============================================================== ==== ========== ========= ============
Total assets 4 5,642,693 5,449,315 5,367,802
============================================================== ==== ========== ========= ============
Liabilities
Insurance contract provisions 2,260,524 2,330,084 2,232,083
Other provisions 925 3,017 1,905
Financial liabilities
Investment contracts at fair value through income 2,678,190 2,408,122 2,457,521
Liabilities relating to policyholders' funds held by the
Group 209,073 176,267 189,919
Borrowings 5 83,737 87,837 79,025
Derivative financial instruments 3,884 656 444
========== ========= ============
Total financial liabilities 2,974,884 2,672,882 2,726,909
========== ========= ============
Deferred tax liabilities 7,246 10,599 7,906
Reinsurance payables 6,743 8,619 9,660
Payables related to direct insurance and investment contracts 66,772 80,288 62,284
Deferred income 5,815 17,486 6,212
Income taxes 1,660 8,260 6,328
Other payables 21,203 28,503 18,401
Bank overdrafts 1,509 2,897 952
============================================================== ==== ========== ========= ============ Total liabilities 4 5,347,281 5,162,635 5,072,640 ============================================================== ==== ========== ========= ============ Net assets 295,412 286,680 295,162 ============================================================== ==== ========== ========= ============ Shareholders' equity Share capital 42,600 42,600 42,600 Share premium 76,516 76,523 76,516 Treasury shares (161) (168) (161) Other reserves 14,374 (6,007) (814) Retained earnings 3 162,083 173,732 177,021 ============================================================== ==== ========== ========= ============ Total shareholders' equity 295,412 286,680 295,162 ============================================================== ==== ========== ========= ============
The notes and information below form part of these financial statements.
Approved by the Board of Directors and authorised for issue on 30 August 2016 and signed on its behalf by:
Peter Mason John Deane Chairman Chief Executive Officer
CONDENSED Consolidated statement of cash flows (unaudited)
Unaudited Year ended 31 December
Six months ended
30 June
2016 2015 2015
GBP000 GBP000 GBP000
---------------------------------------------------------------- ---------- --------- ----------------------
Profit for the period 477 28,260 39,788
Adjustments for:
Depreciation of property and equipment 93 89 203
Amortisation of deferred acquisition costs 5,233 4,695 9,251
Amortisation of acquired value of in-force business 4,645 4,580 9,274
Amortisation of acquired value of customer relationships 114 112 222
Amortisation of software assets 549 715 1,346
Share based payment 171 96 212
Tax (recovery)/paid (53) 2,138 2,999
Interest receivable (7,997) (11,297) (24,693)
Dividends receivable (18,076) (13,867) (31,501)
Interest expense 1,226 1,609 3,457
Change in fair value of investment properties - (4,400) (4,277)
Fair value gains on financial assets (203,005) (152,542) (87,934)
Profit arising on business combination - (16,209) (16,644)
Share of loss/(profit) of associate 428 (404) (455)
Interest received 8,096 11,590 (14,759)
Dividends received 16,897 12,768 24,458
(Increase)/decrease in intangible assets related to insurance
and investment contracts (8,848) (7,520) 31,532
Changes in operating assets and liabilities:
Decrease in financial assets 140,550 37,410 62,365
Decrease in reinsurers share of insurance contract provisions 9,400 20,669 54,253
(Increase)/decrease in amounts deposited with reinsurers (701) 43 1,557
(Increase)/decrease in insurance and other receivables (9,589) (26,802) 1,754
Decrease/(increase) in prepayments 902 (942) (1,710)
Increase/(decrease) in insurance contract provisions 7,584 (84,884) (201,453)
Increase in investment contract liabilities 46,916 170,875 149,011
Decrease in provisions (1,125) (691) (1,893)
Decrease in reinsurance payables (3,581) (1,276) (578)
Increase in payables related to direct insurance and investment
contracts 3,233 20,448 1,708
Increase/(decrease) in other payables 4,978 7,326 (1,630)
---------------------------------------------------------------- ---------- --------- ----------------------
Cash generated from operations (1,483) 2,589 5,863
Income tax paid (3,498) (1,217) (4,248)
---------------------------------------------------------------- ---------- --------- ----------------------
Net cash generated from/(utilised by) operating activities (4,981) 1,372 1,615
---------------------------------------------------------------- ---------- --------- ----------------------
Cash flows from investing activities
Business combinations - 54,258 54,258
Development of software (2,404) (987) (2,418)
Purchases of property and equipment (84) (126) (265)
Proceeds from the disposal of property and equipment - - -
---------------------------------------------------------------- ---------- --------- ----------------------
Net cash generated from/(utilised by) investing activities (2,488) 53,145 51,575
---------------------------------------------------------------- ---------- --------- ----------------------
Cash flows from financing activities
Proceeds from/(repayment of) borrowings 1,950 2,218 (7,815)
Dividends paid (15,586) (15,143) (23,498)
Interest paid (1,166) (1,377) (3,382)
---------------------------------------------------------------- ---------- --------- ----------------------
Net cash generated from/(utilised by) financing activities (14,802) (14,302) (34,695)
---------------------------------------------------------------- ---------- --------- ----------------------
Net (decrease)/increase in cash and cash equivalents (22,271) 40,215 18,495
Cash and cash equivalents at beginning of period 259,911 240,510 240,510
Effect of exchange rate changes on cash and cash equivalents 14,220 (3,809) 906
================================================================ ========== ========= ======================
Cash and cash equivalents at end of the period 251,860 276,916 259,911
================================================================ ========== ========= ======================
The notes and information below form part of these financial statements.
CONDENSED consolidated statement of changes in equity(unaudited)
Unaudited six months
ended 30 June 2016
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 1 January
2016 42,600 76,516 (814) (161) 177,021 295,162
Profit for the period - - - - 477 477
Dividends paid - - - - (15,586) (15,586)
Foreign exchange
translation
differences - - 15,188 - - 15,188
Share based payment - - - - 171 171
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 30 June
2016 42,600 76,516 14,374 (161) 162,083 295,142
===================== ============= ============= ============== =============== ================= ========
Unaudited six months
ended 30 June 2015
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 1 January
2015 42,600 76,523 (641) (168) 160,519 278,833
Profit for the period - - - - 28,260 28,260
Dividends paid - - - - (15,143) (15,143)
Foreign exchange
translation
differences - - (5,366) - - (5,366)
Share based payment - - - - 96 96
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 30 June
2015 42,600 76,523 (6,007) (168) 173,732 286,680
===================== ============= ============= ============== =============== ================= ========
Year ended 31
December 2015
Share capital Share premium Other reserves Treasury shares Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 1 January
2015 42,600 76,523 (641) (168) 160,519 278,833
Profit for the year - - - - 39,788 39,788
Dividends paid - - - - (23,498) (23,498)
Foreign exchange
translation
differences - - (173) - - (173)
Share based payment - - - - 212 212
Sale of treasury
shares - (7) - 7 - -
===================== ============= ============= ============== =============== ================= ========
Equity shareholders'
funds at 31 December
2015 42,600 76,516 (814) (161) 177,021 295,162
===================== ============= ============= ============== =============== ================= ========
The notes and information below form part of these financial statements.
notes to the CONDENSED consolidated financial statements (unaudited)
1 Basis of preparation
This condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed set of consolidated financial statements has been prepared applying the accounting policies and presentation which were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2015.
The Group's published consolidated financial statements for the year ended 31 December 2015 were prepared in accordance with IFRS as adopted by the EU. Any judgements and estimates applied in the condensed set of financial statements are consistent with those applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2015.
The financial information shown in these interim financial statements is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.
The comparative figures for the financial year ended 31 December 2015 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statements under section 498(2) or (3) of the Companies Act 2006.
2 Earnings per share
Earnings per share are based on the following:
Unaudited Year ended 31 December
Six months ended
30 June
2016 2015 2015
============================================================ =========== =========== ======================
Profit for the period attributable to shareholders (GBP000) 477 28,260 39,788
Weighted average number of ordinary shares 126,404,892 126,398,396 126,401,635
Basic earnings per share 0.38p 22.36p 31.48p
Diluted earnings per share 0.38p 22.33p 31.41p
The weighted average number of ordinary shares in respect of the six months ended 30 June 2016 is based upon 126,552,427 shares in issue, less 147,535 own shares held in treasury.
The six months ended 30 June 2015 is based upon 126,552,427 shares in issue, less 154,031 own shares held in treasury at the beginning of the period, and 126,552,427 shares in issue less 154,031 own shares held in treasury at the end of the period.
The weighted average number of ordinary shares in respect of the years ended 31 December 2015 is based upon 126,552,427 shares in issue less 147,535 own shares held in treasury.
There were 525,648 share options outstanding at 30 June 2016 (30 June 2015: 180,765). Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2016. There were 271,000 share options outstanding as at 31 December 2015.
3 Retained earnings
Unaudited
Six months ended
30 June Year ended 31 December
2016 2015 2015
GBP000 GBP000 GBP000
================================================================ ========== ========= ======================
Retained earnings attributable to equity holders of the parent
company comprise:
Balance at 1 January 177,021 160,519 160,519
Profit for the period 477 28,260 39,788
Share based payment 171 96 212
Dividends:
Final approved and paid for 2014 - (15,143) (15,143)
Interim approved and paid for 2015 - - (8,355)
Final approved and paid for 2015 (15,586) - -
================================================================ ========== ========= ======================
Balance at period end 162,083 173,732 177,021
================================================================ ========== ========= ======================
The interim dividend in respect of 2015, approved and paid in 2015 was paid at the rate of 6.61p per share.
The final dividend in respect of 2015, approved and paid in 2016, was paid at the rate of 12.33p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2015 was made at the rate of 18.94p per share.
An interim dividend of 6.80p per share in respect of the year ending 31 December 2016 payable on14 October 2016 to equity shareholders of the Parent Company registered at the close of business on 9 September 2016, the dividend record date, was approved by the Directors after the balance sheet date. The resulting dividend of GBP8.6m has not been provided for in these financial statements and there are no income tax consequences.
The following table summarises dividends per share in respect of the six month period ended 30 June 2016 and the year ended 31 December 2015:
Six months ended Year ended 31
30 June 2016 December 2015
p p
======================== ================ =============
Interim - approved/paid 6.80 6.61
Final - proposed/paid - 12.33
======================== ================ =============
Total 6.80 18.94
======================== ================ =============
4 Operating segments
The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc.
The segments of the Group as at 30 June 2016 comprise:
CA: This segment is part of the Group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the Group's principal UK operating subsidiary, and City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. This segment also contains the business of Protection Life, which was purchased on 28 November 2013. Following the Part VII transfer on 31 December 2014 of the long-term business of Protection Life Company Limited into Countrywide Assured plc, the business of Protection Life (PL) is now reported within the CA segment, effective from 1 January 2015. Previously PL was reported as a separate segment. Comparative information has been restated to reflect this change. CA is responsible for conducting unit-linked and non-linked business.
S&P: This segment, which was acquired on 20 December 2010, comprises the business of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited. It is responsible for conducting both unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk, as described in Note 6 'Management of financial risk' in the Chesnara plc 2014 Annual Report and Accounts. On 31 December 2011 the whole of the business of this segment was transferred to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000.
Movestic: This segment comprises the Group's Swedish life and pensions business, Movestic Livförsäkring AB ('Movestic') and its subsidiary and associated companies, which are open to new business and which are responsible for conducting both unit-linked and non-linked business.
Waard Group: This segment represents the Group's Dutch life and general insurance business, which was acquired on 19 May 2015 and comprises the three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Tadas Verzekering. The Waard Group's policy base is predominantly made up of term life policies, although also includes unit-linked policies and some non-life policies, covering risks such as occupational disability and unemployment.
Other Group Activities: The functions performed by the parent company, Chesnara plc, are defined under the operating segment analysis as Other Group Activities. Also included therein are consolidation and elimination adjustments.
The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The Group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the Group. There were no changes to the measurement basis for segment profit during the six months ended 30 June 2016.
(i) Segmental income statement for the six months ended 30 June 2016
Other Group
CA S&P UK Total Movestic Waard Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Net insurance
premium revenue 21,730 2,622 24,352 7,118 1,468 - 32,938
Fee and commission
income 14,431 1,326 15,757 19,000 12 - 34,769
Net investment
return 92,909 43,364 136,273 (29,550) 1,822 112 108,657
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Total revenue (net
of reinsurance
payable) 129,070 47,312 176,382 (3,432) 3,302 112 176,364
Other operating
income 1,224 5,141 6,365 2,553 479 - 9,397
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Segmental
income/(expenses) 130,294 52,453 182,747 (879) 3,781 112 185,761
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Net insurance
contract claims and
benefits incurred (68,903) (61,287) (130,190) (3,851) 376 - (133,665)
Net change in
investment contract
liabilities (40,343) (467) (40,810) 29,581 - - (11,229)
Fees, commission and
other acquisition
costs (870) (14) (884) (11,581) (157) - (12,622)
Administrative
expenses:
Amortisation
charge on
software assets - - - (1,340) - - (1,340)
Depreciation
charge on
property and
equipment (22) - (22) (180) - - (202)
Other (5,283) (4,607) (9,890) (4,909) (1,734) (2,178) (18,711)
Operating expenses (603) - (603) (2,308) - - (2,911)
Financing costs - (1) (1) (403) - (822) (1,226)
Share of profit from
associates - - - (428) - - (428)
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Profit/(loss) before
tax and
consolidation
adjustments 14,270 (13,923) 347 3,702 2,266 (2,888) 3,427
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Other operating
expenses:
Charge for
amortisation of
acquired value of
in-force business (2,324) (302) (2,626) (1,725) (294) - (4,645)
Charge for
amortisation of
acquired value of
customer
relationships - - - (114) - - (114)
Fees, commission
and other
acquisition costs - - - 1,572 - - 1,572
-------------------- -------- -------- ---------- ---------- ------------- --------------- ---------
Segmental income
less expenses 11,946 (14,225) (2,279) 3,435 1,972 (2,888) 240
Profit/loss before
tax 11,946 (14,225) (2,279) 3,435 1,972 (2,888) 240
Income tax
(expense)/credit 144 (333) (684) 1,110 237
-------- -------- ---------- ---------- ------------- --------------- ---------
(Loss)/profit after
tax (2,135) 3,102 1,288 (1,778) 477
---------- ---------- ------------- --------------- ---------
(ii) Segmental balance sheet as at 30 June 2016
CA S&P Movestic Waard Group Other Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
====================== =========== =========== =========== ============= ====================== ===========
Total assets 1,835,090 1,187,101 2,380,344 204,527 35,631 5,642,693
Total liabilities (1,715,423) (1,145,106) (2,307,514) (125,701) (53,537) (5,347,281)
====================== =========== =========== =========== ============= ====================== ===========
Net assets 119,667 41,995 72,830 78,826 (17,906) 295,412
====================== =========== =========== =========== ============= ====================== ===========
Investment in
associates - - 4,721 - - 4,721
====================== =========== =========== =========== ============= ====================== ===========
Additions to
non-current assets - - 11,894 7 - 11,901
====================== =========== =========== =========== ============= ====================== ===========
(iii) Segmental income statement for the six months ended 30 June 2015 (re-stated)*
Other Group
CA S&P UK Total Movestic Waard Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
==================== ======== ======== ========== ========== ============ ============ =========
Net insurance premium
revenue 24,548 2,871 27,419 6,716 163 - 34,298
Fee and commission income 15,160 1,225 16,385 16,940 2 - 33,327
Net investment return 26,519 28,191 54,710 129,068 (1,780) 233 182,231
========================== ======== ======== ========== ========== ============ ============ =========
Total revenue (net of
reinsurance payable) 66,227 32,287 98,514 152,724 (1,615) 233 249,856
Other operating income 1,411 5,792 7,203 3,943 367 - 11,513
========================== ======== ======== ========== ========== ============ ============ =========
Segmental
income/(expenses) 67,638 38,079 105,717 156,667 (1,248) 233 261,369
========================== ======== ======== ========== ========== ============ ============ =========
Net insurance contract
claims and benefits
incurred (33,938) (24,912) (58,850) (3,357) 1,050 - (61,157)
Net change in investment
contract liabilities (12,781) (771) (13,552) (128,842) - - (142,394)
Fees, commission and
other acquisition
(iv) costs (1,038) (11) (1,049) (10,808) (9) - (11,866)
Administrative
expenses:
Amortisation charge on
software assets - - - (2,188) - - (2,188)
Depreciation charge on
property and equipment (22) - (22) (187) - - (209)
Other (5,214) (4,922) (10,136) (3,594) 267 (3,265) (16,728)
Operating expenses (652) (6) (658) (3,913) 7 (3,532) (8,096)
Financing costs - (1) (1) (687) - (921) (1,609)
Share of profit from
associates - - - 405 - - 405
-------------------------- -------- -------- ---------- ---------- ------------ ------------ ---------
Profit/(loss) before tax
and consolidation
adjustments 13,993 7,456 21,449 3,496 67 (7,485) 17,527
-------------------------- -------- -------- ---------- ---------- ------------ ------------ ---------
Other operating
expenses:
Charge for amortisation
of acquired value of
in-force business (2,495) (330) (2,825) (1,661) (94) - (4,580)
Charge for amortisation
of acquired value of
customer relationships - - - (112) - - (112)
Fees, commission and
other acquisition costs - - - 1,354 - - 1,354
-------------------------- -------- -------- ---------- ---------- ------------ ------------ ---------
Segmental income less
expenses 11,498 7,126 18,624 3,077 (27) (7,485) 14,189
- - - - - 16,209 16,209
Profit/(loss) before tax 11,498 7,126 18,624 3,077 (27) 8,724 30,398
Income tax
(expense)/credit (3,628) (14) (12) 1,516 (2,138)
-------- -------- ---------- ---------- ------------ ------------ ---------
Profit/(loss) after tax 14,996 3,063 (39) 10,240 28,260
---------- ---------- ------------ ------------ ---------
(v) Segmental balance sheet as at 30 June 2015 (re-stated)*
Other Group
CA S&P Movestic Waard Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
================= =========== =========== =========== ============= ================= ===========
Total assets 1,903,488 1,227,757 2,048,599 194,583 74,888 5,449,315
Total liabilities (1,803,562) (1,174,449) (1,991,196) (127,288) (66,140) (5,162,635)
================= =========== =========== =========== ============= ================= ===========
Net assets 99,926 53,308 57,403 67,295 8,748 286,680
================= =========== =========== =========== ============= ================= ===========
Investment in
associates - - 4,453 - - 4,453
================= =========== =========== =========== ============= ================= ===========
Additions to
non-current
assets - 26 8,607 26 - 8,659
----------------- ----------- ----------- ----------- ------------- ----------------- -----------
* CA includes Protection Life Company Limited (previously shown separately).
Segmental income statement for the year ended 31 December 2015
Other Group
CA S&P UK Total Movestic Waard Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Net insurance
premium revenue 47,880 5,413 53,293 13,515 1,130 - 67,938
Fee and commission
income 30,216 2,513 32,729 33,502 18 - 66,249
Net investment
return 24,539 37,605 62,144 87,163 (1,238) 445 148,514
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Total revenue (net
of reinsurance
payable) 102,635 45,531 148,166 134,180 (90) 445 282,701
Other operating
income 2,854 11,331 14,185 4,399 2 - 18,586
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Segmental
income/(expenses) 105,489 56,862 162,351 138,579 (88) 445 301,287
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Net insurance
contract claims and
benefits incurred (54,093) (37,282) (91,375) (6,079) 2,587 - (94,867)
Net change in
investment contract
liabilities (13,240) 641 (12,599) (87,137) - - (99,736)
Fees, commission and
other acquisition
costs (1,986) (21) (2,007) (21,864) 83 - (23,788)
Administrative
expenses:
Amortisation
charge on
software assets - - - (1,340) - - (1,340)
Depreciation
charge on
property and
equipment (22) - (22) (180) - - (202)
Other (10,691) (9,628) (20,319) (9,884) (1,715) (7,841) (39,759)
Operating expenses (1,501) - (1,501) (4,481) - - (5,982)
Financing costs - - - (1,340) - (2,116) (3,456)
Share of profit from
associates - - - 455 - - 455
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Profit before tax
and consolidation
adjustments 23,956 10,572 34,528 6,729 867 (9,512) 32,612
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Other operating
expenses:
Charge for
amortisation of
acquired value of
in-force business (4,975) (661) (5,636) (3,282) (356) - (9,274)
Charge for
amortisation of
acquired value of
customer
relationships - - - (107) - - (107)
Fees, commission
and other
acquisition costs - - - 2,913 - - 2,913
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Segmental income
less expenses 18,981 9,911 28,892 6,253 511 (9,512) 26,144
Profit arising on
business
combinations - - - - - 16,644 16,644
-------------------- -------- -------- ---------- ---------- ------------- ---------------- --------
Profit before tax 18,981 9,911 28,892 6,253 511 7,132 42,788
Income tax
(expense)/credit (4,139) (14) (124) 1,277 (3,000)
-------- -------- ---------- ---------- ------------- ---------------- --------
Profit after tax 24,753 6,239 387 8,409 39,788
---------- ---------- ------------- ---------------- --------
(vi) Segmental balance sheet as at 31 December 2015
Other Group
CA S&P Movestic Waard Group Activities Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
================= =========== =========== =========== ============= ================= ===========
Total assets 1,809,494 1,181,272 2,134,143 188,993 53,900 5,367,802
Total liabilities (1,702,363) (1,125,113) (2,070,860) (120,216) (54,088) (5,072,640)
================= =========== =========== =========== ============= ================= ===========
Net assets 107,131 56,159 63,283 68,777 (188) 295,162
================= =========== =========== =========== ============= ================= ===========
Investment in
associates - - 4,707 - - 4,707
================= =========== =========== =========== ============= ================= ===========
Additions to
non-current
assets - 26 17,368 73 - 17,467
================= =========== =========== =========== ============= ================= ===========
.
5 Borrowings
Unaudited
30 June 31 December
2016 2015 2015
GBP000 GBP000 GBP000
================================================ =========== ====== ===========
Bank loan 52,580 64,431 52,522
Amount due in relation to financial reinsurance 31,157 23,406 26,503
================================================ =========== ====== ===========
Total 83,737 87,837 79,025
================================================ =========== ====== ===========
The bank loan subsisting at 30 June 2016 comprises the following:
- on 7 October 2013 tranche one of a new facility was drawn down, amounting to GBP30.0m. This facility is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. To date, GBP10.4m of the debt has been repaid.
- on 27 November 2013 tranche two of the new loan facility was drawn down, amounting to GBP31.0m. As with tranche one, this facility is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. To date, GBP10.6m of the debt has been repaid.
- on 27 November 2013 a short-term loan of GBP12.8m was drawn down. This was originally repayable in full on 27 May 2015. During 2014, the repayment date of the loan was extended to December 2018. The outstanding principal on the loan bears interest at a rate of 2.75 percentage points above the London Inter-Bank Offer Rate.
The fair value of the bank loan at 30 June 2016 was GBP52,800,000 (31 December 2015: GBP52,800,000).
The fair value of amounts due in relation to financial reinsurance was GBP31,736,000 (31 December 2015: GBP26,879,000).
Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.
6 Financial instruments fair value disclosures
The table below shows the determination of the fair value of financial assets and financial liabilities according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1). However, where such information is not available, the Group applies valuation techniques to measure such instruments. These valuation techniques make use of market-observable data for all significant inputs where possible (Level 2), but, in some cases it may be necessary to estimate other than market-observable data within a valuation model for significant inputs (Level 3).
The Group held the following financial instruments at fair value at 30 June 2016. There have not been any transfers of assets or liabilities between levels of the fair value hierarchy. There are no non-recurring fair value measurements.
Fair value
measurement at
30 June 2016
using
Level
Level 1 Level 2 3 Total
Financial
Assets GBP000 GBP000 GBP000 GBP000
=============== ========= ========= ====== =========
Equities
Listed 479,452 - - 479,452
Holdings in collective investment schemes 3,682,362 - - 3,682,362
Debt securities
- fixed rate
Government Bonds 375,822 - - 375,822
Listed 93,916 - - 93,916
Debt securities - floating rate
Listed 3,432 21,604 - 25,036
========= ========= ====== =========
Total debt securities 473,170 21,604 - 494,774
========= ========= ====== =========
Policyholders' funds held by the group 209,073 - - 209,073
Derivative financial instruments 125 3,318 - 3,443
=============================================================================== ========= ========= ====== =========
Total 4,844,182 24,922 - 4,869,104
=============================================================================== ========= ========= ====== =========
Current 2,347,461
Non-current 2,521,643
=============================================================================== ========= ========= ====== =========
Total 4,869,104
=============================================================================== ========= ========= ====== =========
Financial
liabilities
=============== ========= ========= ====== =========
Investment
contracts at
fair value
? through income - 2,678,190 - 2,678,190
Liabilities related to policyholders' funds held by the group 209,073 - - 209,073 Derivative financial instruments 3,740 144 - 3,884 =============================================================================== ========= ========= ====== ========= Total 212,813 2,678,334 - 2,891,147 =============================================================================== ========= ========= ====== =========
Included within Holdings in collective investment schemes are amounts held with JPMorgan Life Limited through a reinsurance arrangement, under which the Group has reassured certain unit-linked liabilities. The contract does not transfer significant insurance risk and is accounted for as Holdings in collective investment schemes, representing the substance of the arrangement in place. These amounts have been classified as level 2 in the above hierarchy table as the reinsurance contract itself is not quoted but is valued using market-observable data.
The debt securities classified as Level 2 are structured bond-type or non-standard debt products, held by our newly acquired Dutch subsidiaries, for which there is no active market. These products were structured such that the principal amount invested was protected by high security assets, with the returns being linked to underlying pools of riskier, higher-return assets. At acquisition and the balance sheet date, the underlying assets supporting the coupon had under performed such that no coupon is being paid, resulting in these assets all now behaving like zero coupon bonds.
These assets are valued using counterparty or broker quotes and are periodically validated against third-party models.
These assets have been classified as Level 2 because the third-party valuation models include observable inputs to the valuation of these assets, including counterparty default spreads, yield curve swaps and foreign exchange swaps.
Within derivative financial instruments is a financial reinsurance embedded derivative related to our Movestic operation. The Group has entered into a reinsurance contract with a third party that has a section that is deemed to transfer significant insurance risk and a section that is deemed not to transfer significant insurance risk. The element of the contract that does not transfer significant insurance risk has two components and has been accounted for as a financial liability at amortised cost and an embedded derivative asset at fair value.
The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being determined by reference to market interest rate at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination hierarchy set out above.
The Investment contract liabilities in Level 2 of the valuation hierarchy represent the fair value of non-linked and guaranteed income and growth bonds liabilities valued using established actuarial techniques utilising market observable data for all significant inputs, such as investment yields.
Except as detailed in the following table, the Directors consider that the carrying value amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements are approximately equal to their fair values:
Carrying amount Fair value
30 June 30 June 31 December 30 June 30 June 31 December
2016 2015 2015 2016 2015 2015
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
======================= ======= ======= =========== ======= ======= ===========
Financial liabilities:
Borrowings 83,737 87,837 79,025 84,536 88,744 79,679
Borrowings consist of bank loans and an amount due in relation to financial reinsurance.
The fair value of the bank loans are taken as the principal outstanding at the balance sheet date.
The amount due in relation to financial reinsurance is fair valued with reference to market interest rates at the balance sheet date.
There were no transfers between levels 1, 2 and 3 during the period.
The Group holds no Level 3 liabilities as at the balance sheet date.
7 Approval of consolidated report for the six months ended 30 June 2016
This condensed consolidated report was approved by the Board of Directors on 30 August 2016. A copy of the report will be available to the public at the Company's registered office, 2nd Floor, Building 4, West Strand Business Park, West Strand Road, Preston, PR1 8UY and at www.chesnara.co.uk.
ADDITIONAL INFORMATION
BOARD OF DIRECTORS
PETER MASON: CHAIRMAN MIKE EVANS: SENIOR INDEPENT
NON-EXECUTIVE DIRECTOR
Non-executive Chairman of Appointment to the Board:
the Board, Peter is responsible Appointed to the Chesnara
for the leadership of the plc Board in March 2013.
Board, setting the agenda Mike became Senior Independent
and ensuring the Board's Director in May 2013.
effectiveness on all aspects
of its role. Committee membership: Nomination
and Governance, Audit &
Appointment to the Board: Risk and Remuneration.
Appointed to the Board in
March 2004 and as Chairman Current directorships/business
in January 2009. interests:
* Hargreaves Lansdown plc, Chairman
Committee membership: Nomination
& Governance (Chairman) and
a member of the Remuneration * Zoopla Property Group plc, Chairman
Committee. Peter attends
the Audit & Risk Committee
by invitation. * Chesnara Holdings BV
Current directorships/business
interests: * Countrywide Assured plc
* Chairman of Movestic Livförsäkring AB
* Chairman of Chesnara Holdings BV
* Chairman of Countrywide Assured plc
* Non-executive Director of Countrywide Assured Life
Holdings Limited
PETER WRIGHT: NON-EXECUTIVE VERONICA OAK: NON-EXECUTIVE
DIRECTOR AND CHAIRMAN OF DIRECTOR, CHAIRMAN OF THE
THE AUDIT & RISK COMMITTEE REMUNERATION COMMITTEE
Appointment to the Board: Appointment to the Board:
Appointed to the Chesnara Appointed to the Chesnara
plc Board and as Chairman plc Board in January 2013.
of the Audit & Risk Committee
in January 2009. Committee membership: Nomination
& Governance, Audit & Risk,
Committee membership: Audit and Remuneration.
& Risk and Nomination & Governance.
Current directorships/business
Current directorships/business interests:
interests: * Hanley Economic Building Society, NED
* Chairman of the With-Profits Committee Countrywide
Assured plc
* With-Profits Committee, Countrywide Assured plc
* Countrywide Assured plc
* Countrywide Assured plc
* Investment and Life Assurance Group Limited
* Sanlam UK Limited and Sanlam Investments Holdings UK
Limited, NED.
DAVID BRAND: NON-EXECUTIVE JANE DALE: NON-EXECUTIVE
DIRECTOR DIRECTOR
Appointment to the Board: Appointment to the Board:
Appointed to the Chesnara Appointed to the Chesnara
plc Board and the Board of plc Board and the Board
Movestic Livförsäkring of Countrywide Assured plc
AB in January 2013. in May 2016.
Committee membership: Nomination Committee membership: Nomination
& Governance, Audit & Risk, & Governance and Audit &
and Remuneration. Risk
Current directorships/business Current directorships/business
interests: interests:
* Exeter Friendly Society, Chairman of the Investmen * Countrywide Assured plc
t
Committee
* BHSF Group Limited - Chairman
* Movestic Livförsäkring AB, Chair of the
Audit & Risk Committee * British Gas Services Limited
* Countrywide Assured plc
JOHN DEANE: CHIEF EXECUTIVE DAVID RIMMINGTON: GROUP
FINANCE DIRECTOR
Appointment to the Board: Appointment to the Board:
Appointed as Chief Executive Appointed as Group Finance
in January 2015. Director with effect from
Career, skills and experience: May 2013.
John is a qualified Actuary
and has over 30 years experience Career, skills and experience:
in the life assurance industry. David trained as a chartered
John joined Century Life, accountant with KPMG, has
a closed book acquisition more than 17 years' experience
company in 1993. As CEO, in financial management
he oversaw the creation of within the life assurance
the outsourcing company Adepta and banking sectors and
in 2000. He joined Old Mutual has had a significant role
plc in 2003 becoming their in a number of major acquisitions
Corporate Development Director and business integrations.
later that year. In 2007 Prior to joining Chesnara
he joined the Board of Royal plc in 2011 as Associate
London with responsibility Finance Director, David
for its open businesses in held a number of financial
the UK, Ireland and Isle management positions within
of Man. the Royal London Group including
6 years as Head of Group
Management Reporting.
FRANK HUGHES: BUSINESS SERVICES
DIRECTOR
Appointment to the Board:
Appointed as an executive
director in March 2004.
Career, skills and experience:
Frank joined Countrywide
Assured plc in November 1992
as an IT Project Manager
and was appointed to the
CA board as IT Director in
May 2002 and to the Chesnara
board as Business Services
Director in May 2004. He
has 27 years' experience
in the life assurance industry
gained in CA and Chesnara
and also with Royal Life,
Norwich Union and CMG.
financial calendar
31 August 2016
Interim results for the six months ending 30 June 2016 announced.
8 September 2016
Ex dividend date.
9 September 2016
Interim dividend record date.
14 October 2016
Interim dividend payment date.
31 March 2017
Results for the year ending 31 December 2016 announced.
KEY CONTACTS
Registered and Head Office
2(nd) Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
Tel: 01772 972050
Fax: 01772 482244
www.chesnara.co.uk
Legal Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
100 Barbirolli Square
Manchester
M2 3AB
Auditor
Deloitte LLP
Chartered Accountants and Statutory Auditor
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2DB
Registrars
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Stockbrokers
Panmure Gordon
One New Change
London
EC4M 9AF
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8(th) Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds TSB Bank plc
3(rd) Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
145 Leadenhall Street
London
EC3V 4QT
Corporate Advisors
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
GLOSSARY
ABI Association of British Insurers - represents the collective interests of the UK's insurance
industry.
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches between assets
and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for measuring the annual
equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
Directors or Board The directors of the Company as at the date of this document whose names are set out on pages
44 and 45 of this document.
DPF Discretionary Participation Feature - a contractual right under an insurance contract to
receive,
as a supplement to guaranteed benefits, additional benefits whose amount or timing is
contractually
at the discretion of the issuer.
Dutch business Waard Group, consisting of Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V.
and Tadas Verzekeringen B.V.
EEV European Embedded Value.
EcV Economic Value, representing adjusted Solvency II own funds.
FCA Financial Conduct Authority.
FI Finansinspektionen, being the Swedish Financial Supervisory Authority.
Form of proxy The form of proxy relating to the General Meeting being sent to Shareholders with this
document.
FSMA The Financial Services and Markets Act 2000 of England and Wales, as amended.
Gross cash generation This represents the operational cash that has been generated in the period. The cash generating
capacity of the Group is largely a function of the movement in the solvency position of the
insurance subsidiaries within the Group, and takes account of the buffers that management
has set to hold over and above the solvency requirements imposed by our regulators.
Group The Company and its existing subsidiary undertakings.
Guardian Guardian Assurance plc.
HCL HCL Insurance BPO Services Limited.
IFRS International Financial Reporting Standards.
IFA Independent Financial Adviser.
KPI Key performance indicator.
London Stock Exchange London Stock Exchange plc.
LTI Long-Term Incentive Scheme - a reward system designed to incentivise employees' long-term
performance.
Movestic Movestic Livförsäkring AB.
Modernac Modernac SA, an associated company which is 49% owned by Movestic.
Net cash generation This represents the cash that has become available for distribution to shareholders during
the period. It builds on "gross cash generation" and makes adjustments for items (either
positive
or negative) that affect the availability of cash for distribution. For example, capital
releases
arising from capital restructuring and one-off cash generation from acquisitions.
Official List The Official List of the Financial Conduct Authority.
Ordinary shares Ordinary shares of five pence each in the capital of the Company.
ORSA Own Risk and Solvency Assessment.
PRA Prudential Regulation Authority.
PL Protection Life Company Limited.
QRT Quantitative Reporting Template.
RCR Risk Capital Requirement - additional amounts of capital required to be held for regulatory
purposes as a result of two stress tests.
Resolution The resolution set out in the notice of General Meeting set out in this document.
RMF Risk Management Framework.
SCR Solvency Capital Requirement, representing the amount of capital required to be held under
Solvency II.
Shareholder(s) Holder(s) of Ordinary Shares.
Solvency II A fundamental review of the capital adequacy regime for the European insurance industry.
Solvency
II aims to establish a set of EU-wide capital requirements and risk management standards that
will replace the current Solvency I requirements.
STI Short-Term Incentive Scheme - a reward system designed to incentivise employees' short-term
performance.
Swedish Business Movestic and its subsidiaries and associated companies.
S&P Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
TCF Treating Customers Fairly - a central PRA principle that aims to ensure an efficient and
effective
market and thereby help policyholders achieve a fair deal.
TSR Total Shareholder Return, measured with reference to both dividends and capital growth.
UK Business CA, S&P, CALH and PL.
VIF Value of In-force business.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR WGUMARUPQGQU
(END) Dow Jones Newswires
August 31, 2016 02:00 ET (06:00 GMT)
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