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CSN Chesnara Plc

263.00
1.00 (0.38%)
28 Mar 2024 - Closed
Delayed by 15 minutes
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
  1.00 0.38% 263.00 262.00 266.00 269.00 261.50 264.50 409,327 16:35:14
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Life Insurance -1.11B -98.33M -0.6537 -4.05 398.64M

Chesnara PLC Final Results (0943B)

31/03/2017 7:00am

UK Regulatory


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TIDMCSN

RNS Number : 0943B

Chesnara PLC

31 March 2017

Chesnara plc

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

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

Financial Highlights

-- Economic Value (EcV) of GBP602.6m (Note 1 Note 2) (31 December 2015: GBP453.4m). Growth of 33% during the year, which includes the impact of the equity raise (see note 2), earnings in the year and foreign exchange gains. Excluding the equity raise the EcV of the group has grown by 18%.

-- Economic Value earnings net of tax of GBP72.5m (31 December 2015: GBP57.5m). Growth achieved through a combination of strong operating earnings, new business growth in Sweden and economic earnings.

-- Movestic EcV new business contribution of GBP11.7m (31 December 2015: GBP5.7m). Improvements due to the combined impact of increased market share and higher average gross margins result in record new business profits.

-- Total group cash generation of GBP85.4m (Note 2) (Note 3) (31 December 2015: GBP82.4m). Total cash generation includes the impact of the equity raise (see note 2), whilst 2015 includes GBP39.9m gained on the acquisition of Waard Group.

-- Total group cash generation (excluding the impact of equity raise) GBP36.5m (Note 2) (Note 3) (31 December 2015: GBP50.9m). UK cash generation remains in line with expectations but is lower than last year in part due to an increase in capital requirements driven by growing asset values. Movestic has reported a modest negative cash generation result as a consequence of continuing to invest in its new business operation. Waard has made a positive contribution of GBP15.7m which includes one-off gains from asset disposals and a foreign exchange gain.

-- IFRS profit before tax of GBP40.7m (31 December 2015: GBP42.8m). A strong result delivered for the current period despite the adverse impact of a reduction in yield curves during the year. The prior year result includes a gain of GBP16.6m recognised on the acquisition of the Waard Group.

-- IFRS Total Comprehensive Income of GBP55.4m (31 December 2015: GBP39.6m). The current period includes a foreign exchange gain of GBP20.1m compared to a corresponding loss of GBP0.2m in 2015.

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

-- Group solvency ratio (excluding the impact of equity raise) of 144% (Note 2) (31 December 2015: 146%).

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

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

Strategic delivery highlights

-- Announcement of the acquisition of Legal and General Nederland. In November we announced the acquisition of LGN for a price of EUR160m at a discount to Economic Value of approximately 33%. The deal offers potential for phased, orderly extraction of excess capital and is expected to create an Economic Value gain of cGBP56m on completion. The DNB have confirmed their non-objection to the acquisition which is expected to complete in the week commencing 3 April 2017.

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

John Deane, Chief Executive said:

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

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

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

Note 1 Transition of our valuation methodology from Embedded Value reporting to Economic Value reporting has resulted in a small decrease in the valuation of Chesnara by GBP1.7m. Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced funds. We consider the Solvency II rules understate the commercial value of these items. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin is significantly higher than under Embedded Value.

Note 2 During 2016 we announced the acquisition of Legal and General Nederland which will complete in 2017. In respect of this we raised GBP70m of equity in the year. The full positive impact of the acquisition will be recognised on completion in the 2017 results.

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

The Board approved this statement on 30 March 2017.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

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

Notes to Editors

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

CA plc is a UK life assurance subsidiary that is closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for 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).

 
               FORWARD-LOOKING STATEMENTS 
 This document may contain forward-looking statements 
  with respect to certain of the plans and current 
  expectations relating to the future financial 
  condition, business performance and results of 
  Chesnara plc. By their nature, all forward-looking 
  statements involve risk and uncertainty because 
  they relate to future events and circumstances 
  that are beyond the control of Chesnara plc including, 
  amongst other things, UK domestic, Swedish domestic, 
  Dutch domestic and global economic and business 
  conditions, market-related risks such as fluctuations 
  in interest rates, currency exchange rates, inflation, 
  deflation, the impact of competition, changes 
  in customer preferences, delays in implementing 
  proposals, the timing, impact and other uncertainties 
  of future acquisitions or other combinations 
  within relevant industries, the policies and 
  actions of regulatory authorities, the impact 
  of tax or other legislation and other regulations 
  in the jurisdictions in which Chesnara plc and 
  its subsidiaries operate. As a result, Chesnara 
  plc's actual future condition, business performance 
  and results may differ materially from the plans, 
  goals and expectations expressed or implied in 
  these forward-looking statements. 
-------------------------------------------------------- 
 
 
                         NOTE ON TERMINOLOGY 
 The principal reporting segments of the group 
  are: 
 
  CA, which comprises the original business of 
  Countrywide Assured plc, the group's original 
  UK operating subsidiary; City of Westminster 
  Assurance Company Limited, which was acquired 
  by the group in 2005, the long-term business 
  of which was transferred to Countrywide Assured 
  plc during 2006; and Protection Life Company 
  Limited which was acquired by the group in 2013, 
  the long-term business of which was transferred 
  into Countrywide Assured plc in 2014; 
 
  S&P, which was acquired on 20 December 2010. 
  This business was transferred from Save & Prosper 
  Insurance Limited and Save & Prosper Pensions 
  Limited to Countrywide Assured plc on 31 December; 
 
  Movestic, which was purchased on 23 July 2009 
  and comprises the group's Swedish business, Movestic 
  Livförsäkring AB and its subsidiary 
  and associated companies; 
 
  The Waard Group, which was acquired on 19 May 
  2015 and comprises three insurance companies; 
  Waard Leven N.V., Hollands Welvaren Leven N.V. 
  and Waard Schade N.V.; and a service company, 
  Tadas Verzekering; and 
 
  Other group activities; which represents the 
  functions performed by the parent company, Chesnara 
  plc. Also included in this segment are consolidation 
  adjustments. 
 
 
  In this preliminary announcement: 
  (i) The CA & S&P segments may also be collectively 
  referred to as the 'UK Business'; 
  (ii) The Movestic segment may also be referred 
  to as the 'Swedish Business'; 
  (iii) The Waard Group segment may also be referred 
  to as the 'Dutch Buisness'; 
  (iv) 'CA plc' refers to the legal entity Countrywide 
  Assured plc, which includes the long term business 
  of CA, CWA, S&P and PL; 
  (v) 'CWA' refers to the long-term of City of 
  Westminster Assurance Company Limited, subsidies 
  to Countrywide Assured plc; 
  (vi) 'S&P' refers collectively to Save & Prosper 
  Insurance Limited and Save & Prosper Pensions 
  Limited, which subsidies to Countrywide Assurance 
  plc; 
  (vii) 'PL' refers to the long term business that 
  was, prior to Part VII transfer into CA plc on 
  31 December 2015, reported in Protection Life 
  Company Limited and was reported as a separate 
  segment for IFRS reporting purposes; 
  (viii) 'PL Ltd' refers to the legal entity Protection 
  Life Company Limited; 
  (ix) 'Movestic' may also refer to Movestic Livförsäkring 
  AB, as the context implies; 
  (x) 'Acquisition of Waard Group' refers to the 
  purchase of the Waard Group, based in the Netherlands 
  on 19 May 2015; and 
  (xi) 'LGN' or 'Legal and General Nederland' refers 
  to the legal entity Legal & General Nederland 
  Levensverzekering Maatschappij N.V, which Chesnara 
  announced its intention to acquire in November 
  2016. 
-------------------------------------------------------------------- 
 

2016 HIGHLIGHTS

FINANCIAL

IFRS

IFRS PRE-TAX PROFIT GBP40.7M 2015 GBP42.8M*

*includes gain on acquisition of Waard Group of GBP16.6m.

IFRS TOTAL COMPREHENSIVE INCOME GBP55.4M 2015 GBP39.6M

Includes foreign exchange gain of GBP20.1m (GBP0.2m foreign exchange loss for year ended 31 December 2015).

SOLVENCY

GROUP SOLVENCY 158% 2015 146%

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

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

ECONOMIC VALUE

ECONOMIC VALUE Note 1 GBP602.6M 2015 GBP453.4M

Movement in the year is stated after dividend distributions of GBP24.2m in the year and includes the impact of LGN equity raise.

ECONOMIC VALUE EARNINGS GBP72.5M 2015 GBP57.5M

Excludes impact of LGN equity raise (year ended 31 December 2015 GBP57.5m is on an EEV basis).

MOVESTIC NEW BUSINESS PROFIT GBP11.7M 2015 GBP5.7M

CASH GENERATION

TOTAL GROUP CASH GENERATION GBP85.4M* 2015 GBP82.4M**

* includes impact of LGN equity raise

** includes cash on acquisition of Waard Group

DIVISIONAL CASH GENERATION GBP34.3M 2015 GBP50.9M

GROUP CASH GENERATION EXCLUDING THE IMPACT OF EQUITY RAISED DURING THE YEAR Note 1 GBP36.5M

Note 1: ACQUISITION OF LEGAL AND GENERAL NEDERLAND

During 2016 we announced the acquisition of Legal and General Nederland which will complete in 2017. We raised GBP70m of equity in the year. In the interest of balance, we have included additional Solvency and Cash Generation metrics which show the results excluding the impact of equity raised. The full positive impact of the acquisition will be recognised on completion in the 2017 results.

OPERATIONAL AND STRATEGIC

DIVID

FULL YEAR DIVID INCREASE

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

ACQUISITIONS

ANNOUNCEMENT OF LEGAL AND GENERAL NEDERLAND ACQUISITION

Announcement of purchase of Dutch business for agreed price of EUR160m, expected to complete in 2017.

ECONOMIC BACKDROP

EQUITY GROWTH, FALLING BOND YIELDS, WEAKENING STERLING

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

MOVESTIC DIVID

FIRST DIVID PAID TO CHESNARA

Several years of growth have generated sufficient Solvency II surplus for Movestic to declare its maiden dividend of GBP2.7m (30mSEK).

SOLVENCY

SOLVENCY II DELIVERED

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

Notes

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

CHAIRMAN'S STATEMENT

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

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

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

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

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

 
 MAXIMISE VALUE FROM EXISTING            ACQUIRE LIFE AND PENSIONS BUSINESSES     ENHANCE VALUE THROUGH PROFITABLE NEW 
 BUSINESS                                                                         BUSINESS 
18.2% growth in group Economic Value    Acquisition of Legal and General         Record new business profits from 
Note 1.                                 Nederland at an expected 33% discount    Movestic of GBP11.7m. 
                                        to Economic Value, 
Note 1 - Excludes the impact of         creating an expected positive 
equity raised and costs incurred for    Economic Value impact of cGBP56m on 
the acquisition of L&G                  completion in 2017. 
Nederland. 
 

Maximise value from existing business

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

During the year our operating divisions have generated GBP34.3m of cash.

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

The UK's cash generation, given the turbulent political backdrop and in a period of low and declining yields, is reassuring. Also, the declaration of an inaugural dividend from Movestic of GBP2.7m and a positive cash contribution from the Waard Group are encouraging developments with regards to supporting the Chesnara dividend strategy.

Acquire life and pensions businesses

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

In November 2016 we announced our intended acquisition of Legal and General's Dutch Life subsidiary. The acquisition scored highly against our established assessment criteria and at a 33% discount to Economic Value is expected to add approximately GBP56m of value on completion in 2017. The deal is funded by a mix of new equity, additional debt and investment of some of our existing own funds. The support from existing and new investors for the GBP70m of new equity is testament to the attractiveness of the acquisition. The business is generally recognised as being a high quality operation as illustrated by the fact LGN have been awarded prestigious best insurers award in 2016. As a profitable and well capitalised business, we expect that as we integrate the business into the group it will contribute to ongoing cash generation and value growth through efficient management of the existing book and from writing profitable new business.

Enhance value through profitable new business

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

RECORD LEVELS OF NEW BUSINESS PROFIT FROM MOVESTIC OF GBP11.7M.

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

Solvency II

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

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

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

Regulation

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

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

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

Investment proposition

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

2.9% INCREASE IN FULL YEAR DIVID

People

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

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

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

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

Governance and risk management

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

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

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

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

Outlook and Brexit

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

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

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

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

Peter Mason

Chairman

30 March 2017

BUSINESS REVIEW

|

OVERVIEW OF STRATEGY

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

 
   MAXIMISE VALUE FROM       ACQUIRE LIFE AND 
    EXISTING BUSINESS        PENSION BUSINESSES                ENHANCE VALUE THROUGH 
                                                              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 
---------------------------------------------------------------------------------------------- 
 
 

BUSINESS REVIEW | UK

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

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

GENERAL

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

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

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

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

INITIATIVES AND PROGRESS IN 2016

   -       Positive performance in equity markets contributes to growth in value of the UK division. 
   -       Falling bond yields have put downward pressure on value in the year. 

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

   -       Our outsourcers and investment managers have delivered in line with plans and budgets. 
   -       Cash of GBP21.3m has been generated by the division. 

- The overall economic value of the division, before the impact of dividend distributions, has increased by GBP38m during the year.

   -       Positive mortality and morbidity experience. 

PRIORITIES IN 2017

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

   -       Continued focus on managing the cost base. 

KPIs UP TO 2016

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

 
 GBPm                     2012    2013    2014    2015    2016 
----------------------  ------  ------  ------  ------  ------ 
 
 EEV / EcV               311.1   297.3   271.8   232.2   239.6 
 Cumulative dividends        -    40.0    88.0   153.0   183.5 
----------------------  ------  ------  ------  ------  ------ 
 Total                   311.1   337.3   359.8   385.2   423.1 
----------------------  ------  ------  ------  ------  ------ 
 
 

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

CASH GENERATION:

 
 GBPm               2012   2013   2014   2015   2016 
-----------------  -----  -----  -----  -----  ----- 
 
 Cash generation    34.7   54.1   50.9   42.5   21.3 
 
 

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

CUSTOMER OUTCOMES

GENERAL

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

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

INITIATIVES AND PROGRESS IN 2016

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

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

   -       Establishment of customer committee to further embed customer focus. 

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

- Preparations for implementation of the 1% exit fee cap on all pension products where the policyholder is over 55. The financial impact of this fee cap amounts to approximately GBP3.5m and has been fully reflected in the 2016 financial results.

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

PRIORITIES IN 2017

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

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

o Embedding our newly created customer committee.

o Delivery of enhanced product review framework.

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

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

KPIs UP TO 2016

POLICYHOLDER FUND PERFORMANCE (ANNUAL RETURN)

 
                                                2016  2015 
CA Pension Managed                             17.2%  1.9% 
CWA Balanced Managed Pension                   15.8%  1.7% 
S&P Managed Pension                            14.2%  4.7% 
Benchmark - ABI Mixed Inv 40%-85% shares       13.4%  2.4% 
 

GOVERNANCE

GENERAL

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

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

INITIATIVES AND PROGRESS IN 2016

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

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

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

   -       Solid delivery of outsourced services. 

PRIORITIES IN 2017

   -       Continue to embed and develop the risk management framework. 

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

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

KPIs UP TO 2016

DIVISIONAL SOLVENCY RATIO:

2016: 151%*

2015: 135%

* stated before the impact of the proposed year end 2016 dividend of GBP30.0m, the fulfilment of which remains subject to completion of a 'no objection' process with the PRA. After this proposed dividend our closing 2016 solvency ratio is 128%.

BUSINESS REVIEW | SWEDEN

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

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

GENERAL

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

INITIATIVES AND PROGRESS IN 2016

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

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

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

   -       Optimising fee income by developing SICAV, white label funds and, Movestic funds. 
   -       Inaugural dividend declared of 30mSEK. 

PRIORITIES IN 2017

   -       Continue to generate positive client cash flows by: 

o maintaining lapse levels at 2016 levels.

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

   -       Identify management actions to optimise the capital requirement. 
   -       Provide a sustainable and predictable dividend to Chesnara plc. 

KPIs UP TO 2016

GROWTH IN ASSETS UNDER MANAGEMENT

 
 GBPbn                 2012   2013   2014   2015   2016 
--------------------  -----  -----  -----  -----  ----- 
 
 Total assets under 
  management            1.3    1.6    2.0    2.2    2.5 
 
 

IFRS PROFIT

 
 GBPm           2012   2013   2014   2015   2016 
-------------  -----  -----  -----  -----  ----- 
 
 IFRS profit     0.8    2.0    3.7    7.5    9.2 
 
 

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

 
 GBPm          2012    2013    2014    2015    2016 
-----------  ------  ------  ------  ------  ------ 
 
 EEV / EcV    100.5   120.0   149.0   188.5   226.0 
 
 

CUSTOMER OUTCOMES

GENERAL

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

INITIATIVES AND PROGRESS IN 2016

   -       Fund range development including improved sustainability rating. 
   -       Competitive unit linked fund returns. 
   -       Reduced lapse rates. 
   -       Operational and fund performance improvements result in improved IFA assessment ratings. 

PRIORITIES IN 2017

   -       Fund range development in line with customer and market requirements. 
   -       Deliver competitive unit linked fund returns. 

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

KPIs UP TO 2016

BROKER ASSESSMENT RATING (OUT OF 5)

 
           2012   2013   2014   2015   2016 
--------  -----  -----  -----  -----  ----- 
 
 Rating     3.1    3.6    3.6    3.7    3.8 
 
 

2016 POLICYHOLDER AVERAGE INVESTMENT RETURN:

7.5%

(Swedish stock market 5.8%)

GOVERNANCE

GENERAL

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

INITIATIVES AND PROGRESS IN 2016

   -       Full compliance with Solvency II reporting requirements. 
   -       Deepened understanding and analysis of Solvency II dynamics. 
   -       Enhancement of Governance and Risk Management framework, including ORSA and risk reporting. 
   -       CEO announced his intention to retire during 2017 and replacement appointed. 

PRIORITIES IN 2017

   -       Manage a smooth transition to the new CEO. 
   -       Produce Solvency II annual and narrative reports. 

KPIs UP TO 2016

DIVISIONAL SOLVENCY RATIO:

2016: 142%*

2015: 155%

* stated before the impact of the proposed year end 2016 dividend of GBP2.7m. After this proposed dividend the closing 2016 solvency ratio is 140%.

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

PROFITABLE NEW BUSINESS

GENERAL

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

INITIATIVES AND PROGRESS IN 2016

   -       Record new business profits of GBP11.7m. 

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

   -       Market shares within target range. 
   -       Increases in average gross margins. 

PRIORITIES IN 2017

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

   -       Continue to target higher margin transfer business. 

KPIs UP TO 2016

OCCUPATIONAL PENSION MARKET SHARE %

 
 %               2012   2013   2014   2015   2016 
--------------  -----  -----  -----  -----  ----- 
 
 Market share     8.1   13.7   12.6   11.7   13.2 
 
 

NEW BUSINESS PROFIT

 
 GBPm                   2012   2013   2014   2015   2016 
---------------------  -----  -----  -----  -----  ----- 
 
 New business profit     2.4    6.3    8.7    6.3   11.7 
 
 

BUSINESS REVIEW | NETHERLANDS

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

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

GENERAL

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

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

2016 UPDATE

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

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

2017 PRIORITIES

   -       Continue to generate cash flows and release capital by: 

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

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

o insource certain activities to reduce cost.

o cooperating with our new sister business in the Netherlands.

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

CUSTOMER OUTCOMES

GENERAL

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

2016 UPDATE

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

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

2017 PRIORITIES

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

GOVERNANCE

GENERAL

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

2016 UPDATE

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

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

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

2017 PRIORITIES

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

BUSINESS REVIEW | acquire life and pensions businesses

We announced the acquisition of Legal and General Nederland for cash consideration of EUR160m in November, which at the time of writing, is nearing completion. The acquisition is very much in line with our strategy and confirms our belief that the acquisition of the Waard Group in the Netherlands in 2015 would bring further market consolidation opportunities. The deal not only provides immediate financial benefits (which, other than the equity raise, are not included in our 2016 results) but creates sufficient scale and presence to progress further value adding deals in the Dutch market.

HIGHLIGHTS OF LGN ACQUISITION

   -       Purchase price of EUR160m 
   -       33% discount to economic value 
   -       Potential for phased, orderly extraction of excess capital 
   -       Attractive risk profile well aligned to our existing risk appetite 

ACQUISITION OF LEGAL AND GENERAL NEDERLAND

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

OVERVIEW OF LEGAL AND GENERAL NEDERLAND

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

   -       EUR239.3m EcV 
   -       219% solvency ratio 
   -       170,600 policies 
   -       EUR2.2bn AUM 
   -       147 employees 

Figures stated as at 30 June 2016

THE INVESTMENT CASE

CASH GENERATION

   -       Significant cash generation is expected from the business 

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

VALUE ENHANCEMENT

   -       33% discount to Economic Value 
   -       cGBP56m increase in Economic Value (excluding equity raise) expected on completion. 

CUSTOMER OUTCOMES

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

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

RISK APPETITE

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

DEAL STRUCTURE AND FUNDING

The deal is financed through an efficient funding model which includes GBP70m of equity, cGBP52m of incremental debt and cGBP23m of Chesnara's own cash.

ACQUISITION OUTLOOK

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

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

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

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

CAPITAL MANAGEMENT - Solvency II

WHAT IS SOLVENCY AND CAPITAL SURPLUS?

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

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

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

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

SOLVENCY SURPLUS TO CASH GENERATION

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

MORE ABOUT OWN FUNDS

WHAT ARE OWN FUNDS?

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

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

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

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

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

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

HOW DO OWN FUNDS CHANGE?

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

MORE ABOUT THE CAPITAL REQUIREMENT

WHAT IS CAPITAL REQUIREMENT?

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

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

 
 GBPm                                         2016 
------------------------------------------  ------ 
 
 Total market risk                           245.8 
 Counterparty default risk                    35.0 
 Total life underwriting risk                140.4 
 Total health underwriting risk               19.9 
 Capital requirement for other subsidiary      0.4 
 Operational risk                              8.0 
 SCR                                         449.5 
 
 

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

There are three levels of capital requirement:

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

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

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

HOW DOES THE SCR CHANGE?

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

CHESNARA GROUP SOLVENCY METRICS

 
 GBPm                2016          2016   2015 
                             (excl. LGN 
                               impact*) 
------------------  -----  ------------  ----- 
 
 Own funds            505           443    381 
 SCR                  321           309    260 
 Solvency surplus     185           135    121 
 Solvency ratio %    158%          144%   146% 
 
 

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

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

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

CHESNARA GROUP

ANALYSIS

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

- Dividends: The solvency position is stated after deducting GBP19.0m proposed dividend (31 December 2015: GBP15.6m).

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

- SCR: The SCR has increased by GBP61.0m in the year. This is largely due to increases in the division's SCRs, depreciation of sterling against the Euro and SEK and additional market risk SCR being held for the equity capital raise.

SOLVENCY POSITION

 
 GBPm                         2016          2016   2015 
                                      (excl. LGN 
                                        impact*) 
---------------------------  -----  ------------  ----- 
 
 Own funds (post dividend)     505           443    381 
 SCR                           321           309    260 
 Buffer                         32            31     26 
 Surplus                       153           104     95 
 Solvency ratio %             158%          144%   146% 
 
 

SENSITIVITIES

 
 Impact (GBPm)    1% fall in     10% fall 
                      yields    in equity 
                                   values 
---------------  -----------  ----------- 
 
 Own funds            (12.8)       (27.5) 
 SCR                     1.7       (22.5) 
 Surplus              (14.5)        (5.0) 
 
 

UK

ANALYSIS

   -       Surplus: GBP11m above board's capital management policy. 

- Dividends: The solvency position is stated after deducting GBP30.0m proposed dividend (31 December 2015: GBP30.5m). The dividend remains subject to completion of a 'no objection' process with the PRA.

- Own funds: Positive growth before dividends of GBP28m, driven by positive equity markets and positive experience variance, predominantly mortality and morbidity.

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

SOLVENCY POSITION

 
 GBPm                         2016   2015 
---------------------------  -----  ----- 
 
 Own funds (post dividend)     166    168 
 SCR                           130    124 
 Buffer                         26     25 
 Surplus                        11     19 
 Solvency ratio %             128%   135% 
 
 

SENSITIVITIES

 
 Impact (GBPm)    1% fall in     10% fall 
                      yields    in equity 
                                   values 
---------------  -----------  ----------- 
 
 Own funds             (7.2)        (8.5) 
 SCR                     0.8       (11.1) 
 Surplus               (8.0)          2.6 
 
 

SWEDEN

ANALYSIS

   -       Surplus: GBP27m above the board's capital management policy. 

- Dividends: The solvency position is stated after deducting GBP2.7m proposed dividend (31 December 2015: GBPnil).

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

- SCR: Increase is largely due to increased market risk capital being held due to equity growth in year and higher currency stress. In addition, refined modelling for capital required for mass lapse risk has resulted in a cGBP5.0m increase in the SCR/

SOLVENCY POSITION

 
 GBPm                         2016   2015* 
---------------------------  -----  ------ 
 
 Own funds (post dividend)     190     168 
 SCR                           136     109 
 Buffer                         27      22 
 Surplus                        27      37 
 Solvency ratio %             140%    154% 
 

*Restated using 31 Dec 2016 exchange rates

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

SENSITIVITIES

 
 Impact (GBPm)    1% fall in     10% fall 
                      yields    in equity 
                                   values 
---------------  -----------  ----------- 
 
 Own funds             (3.9)       (15.2) 
 SCR                     0.2        (8.2) 
 Surplus               (4.2)        (7.0) 
 
 

NETHERLANDS

ANALYSIS

   -       Surplus:  GBP62m above the board's capital management policy. 

- Dividends: No dividends are planned to be paid out of the Dutch division (31 December 2015: GBPnil). However, a dividend of cGBP31m is planned to be paid by the insurance companies within the division to the Dutch holding company to part-fund the acquisition of LGN.

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

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

SOLVENCY POSITION

 
 GBPm                         2016   2015* 
---------------------------  -----  ------ 
 
 Own funds (post dividend)      87      82 
 SCR                            12      14 
 Buffer                         12      14 
 Surplus                        62      54 
 Solvency ratio %             712%    597% 
 

*Restated using 31 Dec 2016 exchange rates

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

SENSITIVITIES

 
 Impact (GBPm)    1% fall in     10% fall 
                      yields    in equity 
                                   values 
---------------  -----------  ----------- 
 
 Own funds             (0.2)        (0.5) 
 SCR                     0.4        (0.2) 
 Surplus               (0.6)        (0.3) 
 
 

FINANCIAL REVIEW

The key performance indicators below are a reflection of how we have performed in delivering our three strategic objectives and our core culture and values. 2016 has seen cash generation, before the impact of the LGN acquisition, which exceeds the full year dividend, IFRS profits in line with last year and robust EcV earnings, resulting in a closing EcV of GBP602.6m.

SUMMARY OF EACH KPI:

IFRS

PRE-TAX PROFIT: GBP40.7M (2015: GBP42.8M)

TOTAL COMPREHENSIVE INCOME: GBP55.4M (2015: GBP39.6M)

What is it?

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

Why is it important?

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

Highlights

 
 GBPm                       2016     2015 
-----------------------  -------  ------- 
 
 CA                         28.4     23.9 
 S&P                        14.3     10.6 
 Movestic                    8.7      6.7 
 Waard                       6.2      0.9 
 Group & consol adj.      (16.9)   (15.9) 
 Profit on acquisition         -     16.6 
 Taxation                  (5.4)    (3.0) 
 Forex impact               20.1    (0.2) 
-----------------------  -------  ------- 
 Total                      55.4     39.6 
 
   -       Strong pre-tax results across all segments. 

- IFRS pre-tax profit of GBP40.7m broadly in line with prior year. The prior year result included a one off gain of GBP16.6m relating to the acquisition of the Waard group and therefore the underlying result has improved by 53%.

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

- Total comprehensive income includes a large foreign exchange gain of GBP20.1m (2015: GBP0.2m loss) relating to sterling's depreciation against both the euro and Swedish krona.

Risks

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

CASH GENERATION

GROUP CASH GENERATION GBP85.4M (2015: GBP82.4M*)

DIVISIONAL CASH GENERATION GBP34.3M (2015: GBP50.9M*)

What is it?

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

Why is it important?

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

Highlights

 
 GBPm                                         2016 
------------------------------------------  ------ 
 
 UK                                           21.3 
 Sweden                                      (2.7) 
 Netherlands                                  15.7 
------------------------------------------  ------ 
 Divisional cash generation                   34.3 
 Other group activities                        2.2 
------------------------------------------  ------ 
 Total cash generation (excl. LGN impact)     36.5 
 Impact of LGN                                48.9 
------------------------------------------  ------ 
 Total group cash generation                  85.4 
------------------------------------------  ------ 
 
 

Divisional cash

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

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

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

Total cash generation

- At a group level this includes the positive impact of the new equity capital that was raised to part-fund the LGN acquisition, due to complete in 2017. This has had a significant temporary positive benefit on our cash generation in the period. The temporary impact includes a positive GBP70m from the equity raise offset by GBP7.9m of one-off costs and GBP13.2m associated increase in capital requirement.

* includes one-off cash generation of GBP39.9m arising on the acquisition of the Waard group.

Risks

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

ECONOMIC VALUE (EcV)

GBP602.6M (2015: GBP453.4M)

What is it?

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

Why is it important?

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

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

Highlights

 
 GBPm 
----------------  ------- 
 
 2015 Group EcV     453.4 
 EcV earnings        72.5 
 Equity raise        66.9 
 Dividends         (24.2) 
 Forex gain          34.0 
 2016 Group EcV     602.6 
----------------  ------- 
 
 

- Economic value at the end of the year exceeds GBP600m for the first time, having increased by GBP149m since the start of the year.

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

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

Risks

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

ECV EARNINGS NET OF TAX

GBP72.5M (2015: GBP57.5M*)

* comparative is measured on an EEV basis

What is it?

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

The principal underlying components of the economic value result are:

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

   -       Value added by the writing of new business. 
   -       Variations in actual experience from that assumed in the opening valuation. 
   -       The impact of restating assumptions underlying the determination of expected cash flows. 
   -       The impact of acquisitions. 

Why is it important?

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

Highlights

 
 GBPm                   2016 
--------------------  ------ 
 
 Operating earnings     33.8 
 Economic earnings      39.6 
 Other                 (1.1) 
 Total EcV earnings     72.5 
--------------------  ------ 
 
 

- EcV earnings of GBP72.5m in the year, driven by a combination of strong operating and economic earnings.

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

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

Risks

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

IFRS PRE-TAX PROFIT

GBP40.7M (2015: GBP42.8M)

IFRS TOTAL COMPREHENSIVE INCOME

GBP55.4M (2015: GBP39.6M)

Executive summary

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

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

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

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

IFRS results

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

 
                                               2016   2015 
                                               GBPm   GBPm  Note 
============================================  =====  =====  ==== 
CA                                             28.4   23.9     1 
S&P                                            14.3   10.6     2 
Movestic                                        8.7    6.7     3 
Waard Group                                     6.2    0.9     4 
Chesnara                                      (9.7)  (9.5)     5 
Consolidation adjustments                     (7.2)  (6.4)     6 
============================================  =====  =====  ==== 
Profit before tax and profit on acquisition    40.7   26.2 
Profit on acquisition of the Waard Group          -   16.6     4 
============================================  =====  =====  ==== 
Profit before tax                              40.7   42.8 
Tax                                           (5.4)  (3.0) 
============================================  =====  =====  ==== 
Profit after tax                               35.3   39.8 
Foreign exchange translation differences       20.1  (0.2)     7 
============================================  =====  =====  ==== 
Total comprehensive income                     55.4   39.6 
============================================  =====  =====  ==== 
 
 
                                               2016   2015 
                                               GBPm   GBPm  Note 
============================================  =====  =====  ==== 
Operating profit                               34.9   16.6     8 
Economic profit                                 5.8    9.6     9 
Profit before tax and profit on acquisition    40.7   26.2 
Profit on acquisition of the Waard Group          -   16.6     4 
============================================  =====  =====  ==== 
Profit before tax                              40.7   42.8 
Tax                                           (5.4)  (3.0) 
============================================  =====  =====  ==== 
Profit after tax                               35.3   39.8 
Foreign exchange translation differences       20.1  (0.2)     7 
============================================  =====  =====  ==== 
Total comprehensive income                     55.4   39.6 
============================================  =====  =====  ==== 
 

Note 1: The CA segment has reported results for the period in excess of those in 2015. Positive mortality experience has resulted in a positive change in mortality assumptions being reflected in the results. Modest economic profits of cGBP2m have been reported, reflecting the impact of positive equity markets, offset by a fall in yields in the year.

Note 2: The S&P segment has reported an increase in profits on the prior year. Positive economic profits of cGBP4m arise from the net impact of positive equity markets offset by falling bond yields. Positive assumption changes of cGBP5m include the positive impact of lapse assumption changes and a change in annuity pricing assumptions, offset by a GBP3.5m charge in relation to the 1% exit fee cap on all policies where the policyholder is over 55.

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

Note 4: The Waard Group has reported a significant growth in profit compared with the prior year. In part this is because the prior year results are only for the short post-acquisition period. In addition the 2016 result has benefitted from the investment in a mortgage portfolio and the sale of other investments during the year. The group was purchased on 19 May 2015 and a one-off gain on acquisition of GBP16.6m was recognised in 2015.

Note 5: The Chesnara result represents holding company expenses, with 2016 costs being broadly in line with 2015. The current year includes one off expenses of GBP3.8m relating to the acquisition of LGN. The prior year includes 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 in line with prior year.

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

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

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

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

TOTAL GROUP CASH GENERATION

GBP85.4M (2015: GBP82.4M)

DIVISIONAL CASH GENERATION

GBP34.3M (2015: GBP50.9M)

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

Highlights

 
 31 Dec 2016                 Movement           Movement     Forex   Cash generated 
                                   in    in management's 
                                                 capital 
  (GBPm)                    own funds        requirement    impact 
------------------------  -----------  -----------------  --------  --------------- 
 
  UK                             28.7              (7.4)         -             21.3 
 Sweden                          23.5             (29.9)       3.7            (2.7) 
 Netherlands                      5.0                2.1       8.5             15.7 
------------------------  -----------  -----------------  --------  --------------- 
 Divisional cash                 57.2             (35.1)      12.2             34.3 
 Other group activities           1.5                0.7         -              2.2 
------------------------  -----------  -----------------  --------  --------------- 
 Group cash pre LGN 
  equity raise                   58.8             (34.4)      12.2             36.5 
 Impact of LGN equity 
  raise                          62.1             (13.2)         -             48.9 
------------------------  -----------  -----------------  --------  --------------- 
 Total group cash               120.9             (47.6)      12.2             85.4 
------------------------  -----------  -----------------  --------  --------------- 
 

UK

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

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

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

SWEDEN

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

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

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

NETHERLANDS

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

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

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

GROUP

- Cash has continued to be generated across the group, with total cash generation in the period of GBP85.4m. This includes the impact of the equity raise and associated costs for the LGN acquisition.

- Adjusting for this the group has generated GBP36.5m of cash which continues to be of a magnitude that would support our levels of dividend.

- Cash generation in the prior period benefitted from a one-off positive contribution of GBP39.9m, arising on the acquisition of the Waard group.

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

OTHER GROUP ACTIVITIES

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

- Movement in own funds of GBP1.5m is largely as a result of group level expenses being offset by a tax credit in the year.

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

EcV EARNINGS

GBP72.5M (2015: GBP57.5M)

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

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

 
 
                                  31 Dec 2016 
                                         GBPm 
==============================  ============= 
Expected movement in period               6.0 
New business                             11.9 
Operating variances                      22.7 
Operating assumption changes              0.6 
Other operating variances               (7.3) 
==============================  ============= 
Total operating earnings                 33.9 
Economic experience variances            77.9 
Economic assumption changes            (38.3) 
==============================  ============= 
Total economic earnings                  39.6 
Other non-operating variances             0.8 
Risk margin movement                    (3.8) 
Tax                                       2.0 
Total EcV earnings                       72.5 
==============================  ============= 
 

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

 
                                             Note 
                                31 Dec 2016 
                                       GBPm 
============================  =============  ==== 
UK                                     42.2     1 
Sweden                                 30.8     2 
Netherlands                             5.9     3 
Group and group adjustments           (8.4)     4 
============================  =============  ==== 
EcV earnings before tax                70.5 
Tax                                     2.0     5 
============================  =============  ==== 
EcV earnings after tax                 72.5 
============================  =============  ==== 
 

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

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

   -       The FTSE All share index has increased by 12.5%; 
   -       The Swedish OMX all share index has increased by 6.6%; and 
   -       10 year UK gilt yields have fallen from 2.01% to 1.28%. 

Note 1 - UK: The UK reported significant pre tax earnings of GBP42.2m for the period. Operating earnings of GBP25.2m demonstrate the strength and robustness of the underlying business. The result was supported by favourable movements in relation to assumptions on mortality and guaranteed policies. Economic profits of GBP20.5m were driven by positive equity market growth. This was partially offset by the negative impact of yield curve reductions across the year and resultant increase in risk margin.

Note 2 - Sweden: The Swedish division has reported a large EcV movement in the year. Operating earnings of GBP16.6m were underpinned by strong new business performance, owing to transfer volumes and increased average policy premiums. Substantial operating earnings on the in force business are offset by a negative movement in operating assumptions, predominantly relating to lower than expected fund rebates. An economic profit of GBP13.9m was also reported, driven by the recovery of equity markets in the latter stages of 2016. Following challenging conditions experienced in the first six months of the year, 2016 closed with a considerable total annual return of 7.6% achieved for the portfolio.

Note 3 - Netherlands: The Dutch division has reported earnings of GBP5.9m in the period. This is primarily all economic earnings supported by the disposal of CDO investments and returns generated on the property portfolio investment, following a decline in yield curve rates witnessed in the year.

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

Note 5 - Tax: The business is reporting a tax credit of GBP2.0m in the period. This is driven by a combination of deferred tax on the loss in the period relating to group level activities, coupled with a modelling adjustment for deferred tax when compared with the opening period.

EcV

GBP602.6M (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 Jan 2016 to 31 Dec 2016:

 
 GBPm 
----------------  ------- 
 
 2015 Group EcV     453.4 
 EcV earnings        72.5 
 Equity raise        66.9 
 Dividends         (24.2) 
 Forex gain          34.0 
 2016 Group EcV     602.6 
----------------  ------- 
 
 

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

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

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of GBP24.2m were paid during the 2016, being the final dividend from 2015 and interim 2016 dividend.

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

EcV by segment at 31 Dec 2016:

 
 GBPm 
------------------------  ------ 
 
 UK                        239.6 
 Sweden                    225.4 
 Netherlands                88.4 
 Other group activities     49.3 
========================  ====== 
 2016 Group EcV            602.6 
 
 

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

EcV to Solvency II:

 
 GBPm 
------------------------  ------- 
 
 2016 Group EcV             602.6 
 Risk margin               (40.6) 
 Contract boundaries       (27.0) 
 Own funds restrictions    (10.6) 
 Dividends                 (19.0) 
 2016 SII own funds         505.4 
------------------------  ------- 
 
 

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

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

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

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

Dividends: The proposed final dividend of GBP19.0m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

Replacement of EEV:

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

As expected, the new valuation metric gives a broadly similar value of the Chesnara plc group. At 31 December 2015 our previously reported EEV was 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 cover Solvency II disclosures and as such given the Economic Value figures are derived from the Solvency II balance sheet the Economic Value figures benefit from a degree of external audit comfort.

FINANCIAL management

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

SUMMARY:

OBJECTIVES

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

   -       Maintain solvency targets 
   -       Meet the dividend expectations of shareholders 
   -       Optimise the gearing ratio to ensure an efficient capital base 

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

   -       Maintain the group as a going concern 

HOW WE DELIVER TO OUR OBJECTIVES

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

   1.      Monitor and control risk & solvency 
   2.      Longer-term projections 
   3.      Responsible investment management 

OUTCOMES

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

   1.             SOLVENCY: 

Group solvency ratio: 158%

   2.             SHAREHOLDER RETURNS 

2016 TSR 15.7%

2016 dividend yield 6.1%

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

   3.             CAPITAL STRUCTURE 

Gearing ratio of 13.4%

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

   4.             LIQUIDITY AND POLICYHOLDER RETURNS 

Policyholders' reasonable expectations maintained.

Asset liability matching framework operated effectively in the year.

Sufficient liquidity in the Chesnara holding company.

   5.             MAINTAIN THE GROUP AS A GOING CONCERN 

Group remains a going concern

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

1. Capital structure

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

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

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

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

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

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

   -       size of the acquisition; 
   -       current cash resources of the group; 
   -       current gearing ratio and the board's risk tolerance limits for additional debt; 

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

   -       future financial commitments; and 
   -       regulatory rules. 

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

2. Maintain the group as a going concern

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

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

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

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

3. Longer term viability statement

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

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

   i.              Equity market declines 
   ii.             Reduction in yield curves 
   iii.            Adverse mortality and lapse experience 
   iv.            Adverse expense experiences 
   v.             Reduced new business volumes 
   vi.            Adverse exchange rate experience 

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

RISK MANAGEMENT

PRINCIPAL RISKS AND UNCERTAINTIES

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

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

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

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

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

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

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

 
  PRINCIPAL RISKS AND UNCERTAINTIES 
  Risk                   Impact                                         Control 
  =====================  =============================================  ============================================================== 
  Adverse mortality /    In the event that actual mortality or 
  morbidity / longevity  morbidity rates vary from the assumptions        *    Effective underwriting techniques and reinsurance 
  experience             underlying                                            programmes. 
                         product pricing and subsequent reserving, 
                         more or less profit will accrue to the group. 
                                                                          *    Regular investigations, and industry analysis, to 
                                                                               support best estimate assumptions and identify 
                                                                               trends. 
 
 
                                                                          *    The option on certain contracts to vary premium rates 
                                                                               in the light of actual experience, subject to fair 
                                                                               treatment of customers. 
 
 
                                                                          *    Partial risk diversification in that the group has a 
                                                                               portfolio of annuity contracts where the benefits 
                                                                               cease on death. 
  =====================  =============================================  ============================================================== 
  Adverse persistency    If persistency is significantly lower than 
  experience             that assumed in product pricing and              *    Active investment management to ensure competitive 
                         subsequent                                            policyholder investment funds. 
                         reserving, this will lead to reduced group 
                         profitability in the medium to long-term. 
                         Further,                                         *    Stringent management of customer service delivery and 
                         for parts of the business such as Movestic,           adherence to principles of treating customers fairly. 
                         where retention is too a degree dependent on 
                         Broker 
                         relationships, the business is exposed to        *    Product distributor relationship management 
                         losses arising from "mass lapse" events.              processes. 
 
 
                                                                          *    Close monitoring of persistency levels across all 
                                                                               groups of business to support best estimate 
                                                                               assumptions and identify trends. 
 
 
                                                                          *    Movestic seeks to maintain good relationships with 
                                                                               Brokers. This is independently measured via yearly 
                                                                               external surveys that considers Broker's attitude 
                                                                               towards different insurers. 
 
 
                                                                          *    Movestic has clawback arrangements with Brokers. 
  =====================  =============================================  ============================================================== 
  Expense overruns and   For the closed UK and Dutch businesses, the 
  unsustainable unit     group is exposed to the impact on                *    For the UK business the group pursues a strategy of 
  cost growth            profitability                                         outsourcing functions with charging structures such 
                         of fixed and semi-fixed expenses, in                  that the policy administration cost is more aligned 
                         conjunction with a diminishing policy base.           to the book's run off profile. 
                         For the Swedish 
                         open life and pensions business, the group is 
                         exposed to the impact of expense levels          *    The Swedish operations assume growth through new 
                         varying                                               business such that the general unit cost trend is 
                         adversely from those assumed in product               positive. 
                         pricing. 
 
                                                                          *    The Dutch business pursues a low cost-base strategy 
                                                                               using a designated service company. The cost base is 
                                                                               supported by service income from third party 
                                                                               customers. 
 
 
                                                                          *    For all three divisions, the group maintains a strict 
                                                                               regime of budgetary control. 
 
 
                                                                          *    In the mid/longer term inorganic growth through 
                                                                               acquisitions is expected to result in cost synergies 
                                                                               and sharing of fixed overheads. 
  =====================  =============================================  ============================================================== 
  Significant and        A significant part of the company's income 
  prolonged reduction    and, therefore, overall profitability derives      *    Wide range of investment funds and managers to avoid 
  in the market value    from                                                    significant concentrations of risk 
  of asset holdings      fees received in respect of the 
                         management of policyholder and investor 
                         funds. Fee levels are generally proportional       *    Individual fund mandates are intended to give rise to 
                         to the                                                  a degree of diversification of risk. 
                         value of funds under management and any 
                         material fall in their value will impact on 
                         future                                             *    Established investment governance framework to 
                         income. In addition, for with profits                   provide review and oversight of external fund 
                         products with guarantees, a sustained fall in           managers, and monitor adherence to investment policy 
                         the market 
                         value of assets can increase the cost of 
                         meeting the guaranteed benefits.                   *    Operation of controls which limit the level of 
                         The most material risk is equity risk, as               exposure to any single counterparty and impose limits 
                         overall investment funds comprise a                     on exposure by credit rating. 
                         significant 
                         equity content. However, material market 
                         risks also exist if there is a sustained fall      *    Certain investment management costs are also 
                         in                                                      proportional to fund values thereby reduce in the 
                         the value of fixed interest holdings, a fall            event of market falls and hence some cost savings 
                         in the value of property holdings and                   arise partially offsetting the impact on income. 
                         exchange 
                         rate risk in respect of overseas investments 
                         held by policyholders. 
                         Income levels may also reduce if 
                         policyholders switch from equity based funds 
                         to lower margin, 
                         fixed interest funds, as a consequence of a 
                         material fall in the market value of 
                         equities. 
  =====================  =============================================  ============================================================== 
  Adverse exchange rate  Exposure to adverse sterling:swedish krona 
  movements against      and sterling:euro exchange rate movements        *    The group monitors exchange rate movements and would 
  Sterling               (sterling                                             consider the cost/benefit of hedging the currency 
                         appreciating) arises from cash flows between          risk on cash flows when appropriate. 
                         Chesnara and its overseas subsidiaries and 
                         from 
                         the impact on reported IFRS and EcV results      *    The impact of any adverse currency movements can be 
                         which are expressed in Sterling.                      reduced by timely movement of cash flows from 
                                                                               subsidiaries to group, if appropriate given various 
                                                                               other applicable criteria for transfers. 
  =====================  =============================================  ============================================================== 
  Counterparty          The group carries significant inherent risk of 
  failure               counterparty failure in respect of:                *    Operation of guidelines which limit the level of 
                         *    its fixed interest security portfolio;            exposure to any single counterparty and which impose 
                                                                                limits on exposure to credit ratings. 
 
                         *    cash deposits; and 
                                                                           *    In respect of a significant exposure to one major 
                                                                                reinsurer, Reassure (formerly known as Guardian), the 
                         *    payments due from reinsurers.                     group has a floating charge over the reinsurer's 
                                                                                related investment assets, which ranks the group 
                                                                                equally with Reassure 's policyholders. 
  ===================  ===============================================  ============================================================== 
  Adverse movements    The group maintains portfolios of fixed 
  in yields on fixed   interest securities (i) in order to match its       *    The group maintains rigorous matching programmes to 
  interest securities  insurance                                                ensure that exposure to mismatching is minimised. 
                       contract liabilities, in terms of yield and 
                       cash flow characteristics, and (ii) as an 
                       integral                                            *    Active investment management such that, where 
                       part of the investment funds it manages on               appropriate, asset mixes will be changed to mitigate 
                       behalf of policyholders and investors. It is             the potential adverse impact of a decline in bond 
                       exposed                                                  yields. 
                       to mismatch losses arising from a failure to 
                       match its insurance contract liabilities or 
                       from 
                       the fact that sharp and discrete fixed interest 
                       yield movements may not be associated fully 
                       and immediately with corresponding changes in 
                       liability valuation interest rates. 
  ===================  ===============================================  ============================================================== 
  Failure of           The group's UK life and pensions businesses are 
  outsourced service   heavily dependent on outsourced service             *    Rigorous service level measures and management 
  providers to fulfil  providers                                                information flows under its contractual arrangements. 
  contractual          to fulfil a significant number of their core 
  obligations          functions. In the event of failure by any of 
                       the service providers to fulfil their               *    Continuing and close oversight of the performance of 
                       contractual obligations, in whole or in part,            all service providers. 
                       to the 
                       requisite standards specified in the contracts, 
                       the group may suffer losses, poor customer          *    The supplier relationship management approach is 
                       outcomes, or reputational damage as its                  conducive to ensuring the outsource arrangements 
                       functions degrade.                                       deliver to their obligations. 
 
 
                                                                           *    Ongoing monitoring and testing of business continuity 
                                                                                plans and financial assessments of outsourced service 
                                                                                providers. 
 
 
                                                                           *    Under the terms of the contractual arrangements the 
                                                                                group may impose penalties and/or exercise step-in 
                                                                                rights in the event of specified adverse 
                                                                                circumstances. 
  ===================  ===============================================  ============================================================== 
  Key man dependency   The nature of the group is such that it relies 
                       on a number of key individuals who have             *    The group promotes the sharing of knowledge and 
                       particular                                               expertise to the fullest extent possible. 
                       knowledge, experience and know how. The group 
                       is, accordingly, exposed to the sudden loss 
                       of the services of these individuals.               *    It periodically reviews and assesses staffing levels, 
                                                                                and, where the circumstances of the group justify and 
                                                                                permit, will enhance resource to ensure that know how 
                                                                                and expertise is more widely embedded. 
 
 
                                                                           *    The group maintains succession plans and remuneration 
                                                                                structures which comprise a retention element. 
 
 
                                                                           *    The group complements its internal expertise with 
                                                                                established relationships with external specialist 
                                                                                partners. 
  ===================  ===============================================  ============================================================== 
  Adverse regulatory   The group operates in jurisdictions which are    Strong project management disciplines are applied when 
  and legal changes    currently subject to significant change arising  delivering regulatory change programmes. 
                       from regulatory and legal requirements. These 
                       may either be of a local nature, or of a wider   Chesnara seeks to limit any potential impacts of regulatory 
                       nature, following from EU-based regulation and   change on the business by: 
                       law. During 2016 this risk has been compounded    *    Having processes in place for monitoring changes, to 
                       by the increased political uncertainties               enable timely actions to be taken, as appropriate; 
                       following the UK referendum to leave the EU and 
                       US 
                       Presidential elections, which may lead to         *    Being a member of the ABI and utilising other means 
                       further change. Significant issues which have          of joint industry representation; 
                       arisen 
                       and where there is continuing uncertainty as to 
                       their full impact on the group include:           *    Performing internal reviews of compliance with 
                       i) the FCA's review of legacy business and             regulations; and 
                       other reviews such as the Asset Management 
                       market 
                       study;                                            *    Utilising external specialist advice and assurance, 
                       ii) the introduction of a cap on exit charges          when appropriate . 
                       on UK pensions business; 
                       iii) consultations regarding commission and 
                       rebate income changes in Sweden. 
                       iv) the embedding of Solvency II requirements,   Chesnara maintains strong relationships with all key 
                       including Pillar 3 Disclosure implementation;    regulators including regular and open 
                       and                                              dialogue about areas of potential change that could affect any 
                       v) the changes in pensions legislation in April  of the Chesnara businesses. 
                       2015. 
                       The group is therefore exposed to the one-off    Through the Risk Management Framework, regulatory risk is 
                       costs of addressing regulatory change as well    monitored and scenario tests are 
                       as any permanent increases in the cost base in   performed to understand the potential impacts of adverse 
                       order to meet enhanced standards. Further,       regulatory or legal changes, along 
                       the group is exposed to the risk of fines or     with consideration of actions that may be taken to minimise 
                       censure in the event that it fails to deliver    the impact, should they arise. 
                       changes to the required regulatory standards on 
                       a timely basis. 
  ===================  ===============================================  ============================================================== 
Inconsistent           Chesnara currently operates in three regulatory 
regulation across      domains and is therefore exposed to                 *    Strong and open relationships are maintained with all 
territories            inconsistent                                             regulators. Evidence is provided to regulators that 
                       application of regulatory standards across               demonstrates consistent stability and control across 
                       divisions, such as the imposition of higher              divisions, achieved through strong risk management 
                       Capital                                                  and governance standards. 
                       Buffers over and above regulatory minimums. 
                       Potential consequences of this risk for 
                       Chesnara constraining the efficient and fluid       *    In extremis, Chesnara could consider the 
                       use                                                      re-domiciling of subsidiaries or legal restructure of 
                       of capital within the group, or creating a               the business. 
                       non-level playing field with respect to future 
                       deal assessments. 
=====================  ===============================================  ============================================================== 
Availability of        Chesnara's inorganic growth strategy is 
future acquisitions    dependent on the availability of attractive         *    Chesnara's financial strength and market reputation 
                       future                                                   for successful execution of transactions enables the 
                       acquisition opportunities. Hence, the business           company to adopt a patient and risk-based approach to 
                       is exposed to the risk of a reduction in the             assessing acquisition opportunities. 
                       availability of suitable acquisition 
                       opportunities in Chesnara's current target 
                       markets, for                                        *    Operating in multi-territories provides some 
                       example arising as a result of a change in               diversification against the risk of changing market 
                       competition in the consolidation market or from          circumstances in one of the territories. 
                       regulatory change influencing the extent of 
                       life company strategic restructuring. 
                                                                           *    Maintaining strong relationships and reputation as a 
                                                                                "safe hands acquirer" via regular contact with 
                                                                                regulators, banks and target companies. 
=====================  ===============================================  ============================================================== 
Defective acquisition  Through the execution of acquisitions, Chesnara 
due diligence          is exposed to the risk of erosion of value          *    Structured board approved risk-based acquisition 
                       or financial losses arising from risks inherent          process including group CRO involvement in due 
                       within businesses or funds acquired which                diligence process. 
                       are not adequately priced for or mitigated 
                       within the transaction. 
                                                                           *    Management team with significant and proven mergers 
                                                                                and acquisitions experience. 
 
 
                                                                           *    Cautious risk appetite and pricing approach. 
=====================  ===============================================  ============================================================== 
Cyber risk             Cyber risk is a growing risk affecting all 
                       companies, particularly those who are                  *    Information security policy embedded in all key 
                       custodians                                                  operations and development processes. 
                       of customer data. The most pertinent risk 
                       exposure relates to information security (i.e. 
                       protecting                                             *    Ongoing specialist external advice, modifications t 
                       business sensitive and personal data) and can         o 
                       arise from failure of internal processes and                IT infrastructure and updates as appropriate. 
                       standards, but increasingly companies are 
                       becoming exposed to potential malicious cyber 
                       attacks,                                               *    Regular staff training and attestation of the 
                       organisation specific malware designed to                   information security policy 
                       exploit vulnerabilities, phishing attacks etc. 
                       The 
                       extent of Chesnara's exposure to such threats          *    Penetration and vulnerability testing, including 
                       also includes third party service providers.                third party service providers. 
                       The main potential impacts of this risk include 
                       financial losses, inability to perform critical 
                       functions, disruption to Policyholder services,        *    Chesnara and supplier Business continuity plans 
                       loss of sensitive data and corresponding                    regularly monitored and tested. 
                       reputational 
                       damage or fines. 
=====================  ===============================================  ============================================================== 
Liquidity risk         Chesnara and each of its subsidiaries have 
                       obligations to make future payments, which are      *    Chesnara has a liquidity policy in place which 
                       not always known with certainty in terms of              includes various controls to manage liquidity risk 
                       timing or amounts, prior to the payment date.            such as: 
                       This includes primarily the payment of 
                       policyholder claims, reinsurance premiums, debt 
                       repayments                                          *    Asset / Liability modelling; 
                       and dividends. The uncertainty of timing and 
                       amounts to be paid gives rise to potential 
                       liquidity                                           *    Regular liquidity forecasts; and 
                       risk, should the funds not be available to make 
                       payment. 
                                                                           *    Cash projections to support strategic initiatives 
                                                                                such as acquisitions. 
 
 
                                                                           *    Chesnara holds a significant amount of surplus in 
                                                                                highly liquid tier 1 assets such as cash and gilts. 
=====================  ===============================================  ============================================================== 
 
 
 

DIRECTORS' REsponsibilities STATEMENT

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

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

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

On behalf of the Board

   Peter Mason                         John Deane 
   Chairman                              Chief Executive Officer 
   30 March 2017                     30 March 2017 

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

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

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

Accuracy of Save & Prosper Cost of Guarantees

The risk

The assessment of the cost of guarantee reserves for policies written by Save and Prosper is complex and material, including the use of a stochastic model based on a variety of possible economic scenarios. Historically, the residual cost to shareholders arising from the cost of guarantees has fluctuated significantly as a result of movements in bond yields and equity markets with a value of GBP35.7m at 31 December 2016 (31 December 2015: GBP37.2m). The value is determined by a third party actuarial consultant and the directors compare this valuation against an in-house derived estimate using an approximation model to validate its reasonableness.

How the scope of our audit responded to this risk

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

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

Key observations

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

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

The risk

At 31 December 2016 the Group carried an intangible asset for the PtL AVIF of GBP11.6m (31 December 2015: GBP15.0m).

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

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

How the scope of our audit responded to this risk

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

   -      the mechanical accuracy of the net present value calculation; 

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

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

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

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

Key observations

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

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

The risk

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

How the scope of our audit responded to this risk

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

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

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

Key observations

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

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

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

Deloitte LLP

Chartered Accountants and Statutory Auditor

CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
Year ended 31 December                                                                               2016       2015 
                                                                                                   GBP000     GBP000 
----------------------------------------------------------------------------------------------  ---------  --------- 
Insurance premium revenue                                                                         109,450    114,749 
Insurance premium ceded to reinsurers                                                            (44,900)   (46,811) 
----------------------------------------------------------------------------------------------  ---------  --------- 
Net insurance premium revenue                                                                      64,550     67,938 
Fee and commission income                                                                          72,932     66,249 
Net investment return                                                                             515,681    148,514 
----------------------------------------------------------------------------------------------  ---------  --------- 
Total revenue net of reinsurance payable                                                          653,163    282,701 
Other operating income                                                                             17,614     18,586 
----------------------------------------------------------------------------------------------  ---------  --------- 
Total income net of investment return                                                             670,777    301,287 
----------------------------------------------------------------------------------------------  ---------  --------- 
Insurance contract claims and benefits incurred 
 Claims and benefits paid to insurance contract holders                                         (346,117)  (318,721) 
 Net increase in insurance contract provisions                                                     11,392    191,850 
 Reinsurers' share of claims and benefits                                                          62,364     32,004 
                                                                                                ---------  --------- 
Net insurance contract claims and benefits                                                      (272,361)   (94,867) 
                                                                                                ---------  --------- 
Change in investment contract liabilities                                                       (274,724)  (100,469) 
Reinsurers' share of investment contract liabilities                                                5,617        733 
                                                                                                ---------  --------- 
Net change in investment contract liabilities                                                   (269,107)   (99,736) 
                                                                                                ---------  --------- 
Fees, commission and other acquisition costs                                                     (23,838)   (20,875) 
Administrative expenses                                                                          (46,615)   (41,301) 
Other operating expenses 
 Charge for amortisation of acquired value of in-force business                                  (10,419)    (9,274) 
 Charge for amortisation of acquired value of customer relationships                                (236)      (222) 
 Other                                                                                            (4,394)    (5,866) 
----------------------------------------------------------------------------------------------  ---------  --------- 
Total expenses net of change in insurance contract provisions and investment contract 
 liabilities                                                                                    (626,970)  (272,141) 
----------------------------------------------------------------------------------------------  ---------  --------- 
Total income less expenses                                                                         43,807     29,146 
Share of profit of associate                                                                          150        455 
Profit recognised on business combination                                                               -     16,644 
Financing costs                                                                                   (3,272)    (3,457) 
----------------------------------------------------------------------------------------------  ---------  --------- 
Profit before income taxes                                                                         40,685     42,788 
Income tax expense                                                                                (5,405)    (3,000) 
Profit for the year                                                                                35,280     39,788 
Foreign exchange translation differences arising on the revaluation of foreign operations          20,114      (173) 
----------------------------------------------------------------------------------------------  ---------  --------- 
Total comprehensive income for the year                                                            55,394     39,615 
----------------------------------------------------------------------------------------------  ---------  --------- 
Basic earnings per share (based on profit for the year)                                            27.67p     31.48p 
----------------------------------------------------------------------------------------------  ---------  --------- 
Diluted earnings per share (based on profit for the year)                                          27.56p     31.41p 
----------------------------------------------------------------------------------------------  ---------  --------- 
 
 

CONSOLIDATED BALANCE SHEET

 
31 December                                                                      2016       2015 
                                                                               GBP000     GBP000 
--------------------------------------------------------------------------  ---------  --------- 
Assets 
Intangible assets 
 Deferred acquisition costs                                                    48,318     36,061 
 Acquired value of in-force business                                           62,943     68,341 
 Acquired value of customer relationships                                         736        875 
 Software assets                                                                6,560      4,720 
Property and equipment                                                            519        537 
Investment in associates                                                        5,433      4,707 
Investment properties                                                             245        245 
Reinsurers' share of insurance contract provisions                            254,859    282,628 
Amounts deposited with reinsurers                                              37,437     33,941 
Financial assets 
   Equity securities at fair value through income                             485,165    486,243 
   Holdings in collective investment schemes at fair value through income   4,104,602  3,499,355 
   Debt securities at fair value through income                               474,091    423,754 
   Policyholders' funds held by the Group                                     229,397    189,919 
   Mortgage loan portfolio                                                     54,756 
   Insurance and other receivables                                             39,646     43,674 
   Prepayments                                                                  5,271      6,565 
   Derivative financial instruments                                             2,773      2,721 
                                                                            ---------  --------- 
Total financial assets                                                      5,395,701  4,652,231 
                                                                            ---------  --------- 
Reinsurers' share of accrued policyholder claims                               19,307     19,042 
Income taxes                                                                    3,352      3,611 
Cash and cash equivalents                                                     260,353    260,863 
--------------------------------------------------------------------------  ---------  --------- 
Total assets                                                                6,095,763  5,367,802 
--------------------------------------------------------------------------  ---------  --------- 
Liabilities 
Insurance contract provisions                                               2,242,446  2,232,083 
Other provisions                                                                  823      1,905 
Financial liabilities 
   Investment contracts at fair value through income                        3,028,269  2,457,521 
   Liabilities relating to policyholders' funds held by the Group             229,397    189,919 
   Borrowings                                                                  86,843     79,025 
   Derivative financial instruments                                             1,348        444 
                                                                            ---------  --------- 
Total financial liabilities                                                 3,345,857  2,726,909 
                                                                            ---------  --------- 
Deferred tax liabilities                                                        5,420      7,906 
Reinsurance payables                                                            6,899      9,660 
Payables related to direct insurance and investment contracts                  61,416     62,284 
Deferred income                                                                 5,438      6,212 
Income taxes                                                                    8,624      6,328 
Other payables                                                                 23,657     18,401 
Bank overdrafts                                                                 1,622        952 
--------------------------------------------------------------------------  ---------  --------- 
Total liabilities                                                           5,702,202  5,072,640 
--------------------------------------------------------------------------  ---------  --------- 
Net assets                                                                    393,561    295,162 
--------------------------------------------------------------------------  ---------  --------- 
Shareholders' equity 
Share capital                                                                  43,766     42,600 
Share premium                                                                 142,058     76,516 
Treasury shares                                                                 (161)      (161) 
Other reserves                                                                 19,300      (814) 
Retained earnings                                                             188,598    177,021 
--------------------------------------------------------------------------  ---------  --------- 
Total shareholders' equity                                                    393,561    295,162 
--------------------------------------------------------------------------  ---------  --------- 
 

CONSOLIDATED STATEMENT OF CASH FLOWS

 
Year ended 31 December                                                               2016       2015 
                                                                                   GBP000     GBP000 
------------------------------------------------------------------------------  ---------  --------- 
Profit for the year                                                                35,280     39,788 
Adjustments for: 
 Depreciation of property and equipment                                               173        203 
 Amortisation of deferred acquisition costs                                        12,162      9,251 
 Amortisation of acquired value of in-force business                                6,797      9,274 
 Amortisation of acquired value of customer relationships                             172        222 
 Amortisation of software assets                                                      794      1,346 
 Share based payment                                                                  623        212 
 Tax paid                                                                           5,405      2,999 
 Interest receivable                                                             (20,882)   (24,693) 
 Dividends receivable                                                            (30,209)   (31,501) 
  Interest expense                                                                  3,272      3,457 
  Change in fair value of investment properties                                         -    (4,277) 
  Fair value gains on financial assets                                          (205,870)   (87,934) 
  Profit arising on business combination                                                -   (16,644) 
  Share of profit of associate                                                      (150)      (455) 
  Increase in intangible assets related to insurance and investment contracts    (16,448)   (14,759) 
Interest received                                                                  20,281     24,458 
Dividends received                                                                 29,446     31,532 
Changes in operating assets and liabilities: 
 Decrease in financial assets                                                   (280,333)     62,365 
 Decrease in reinsurers share of insurance contract provisions                     34,177     54,253 
 Increase/(decrease) in amounts deposited with reinsurers                         (3,496)      1,557 
 Increase/(decrease) in insurance and other receivables                            10,294      1,754 
 Increase in prepayments                                                            1,795    (1,710) 
 Decrease in insurance contract provisions                                       (16,530)  (201,453) 
 Increase in investment contract liabilities                                      362,641    149,011 
 Decrease in provisions                                                           (1,306)    (1,893) 
 (Decrease)/increase in reinsurance payables                                      (3,660)      (578) 
 Increase in payables related to direct insurance and investment contracts        (2,114)      1,708 
 Decrease in other payables                                                         2,808    (1,630) 
------------------------------------------------------------------------------  ---------  --------- 
Net cash generated from operations                                               (54,878)      5,863 
Income tax paid                                                                   (4,709)    (4,248) 
------------------------------------------------------------------------------  ---------  --------- 
Net cash generated from operating activities                                     (59,587)      1,615 
------------------------------------------------------------------------------  ---------  --------- 
Cash flows from investing activities 
Acquisition of subsidiary, net of cash acquired                                         -     54,258 
Development of software                                                           (3,502)    (2,418) 
Purchases of property and equipment                                                   948      (265) 
Net cash generated from/( utilised by) investing activities                       (2,554)     51,575 
------------------------------------------------------------------------------  ---------  --------- 
Cash flows from financing activities                                               66,708 
Proceeds from issue of share capital                                                4,268          - 
Proceeds from borrowings                                                                -          - 
Repayment of borrowings                                                                      (7,815) 
Dividends paid                                                                   (24,181)   (23,498) 
Interest paid                                                                     (3,095)    (3,382) 
------------------------------------------------------------------------------  ---------  --------- 
Net cash (utilised by)/generated from financing activities                         43,700   (34,695) 
------------------------------------------------------------------------------  ---------  --------- 
Net increase in net cash and cash equivalents                                    (18,441)     18,495 
Net cash and cash equivalents at beginning of year                                259,911    240,510 
Effect of exchange rate changes on net cash and cash equivalents                   17,261        906 
------------------------------------------------------------------------------  ---------  --------- 
Net cash and cash equivalents at end of the year                                  258,731    259,911 
------------------------------------------------------------------------------  ---------  --------- 
 

Note: Net cash and cash equivalents includes overdrafts.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 
Year ended 31 December 
2016 
                            Share capital  Share premium  Other reserves  Treasury shares  Retained earnings     Total 
                                   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 year                     -              -               -                -             35,280    35,280 
Dividends paid                          -              -               -                -           (24,181)  (24,181) 
Foreign exchange 
 translation differences                -              -          20,114                -                  -    20,114 
Share based payment                     -              -               -                -                478       478 
Issue of new shares                 1,166         65,542               -                -                  -    66,708 
--------------------------  -------------  -------------  --------------  ---------------  -----------------  -------- 
Equity shareholders' funds 
 at 31 December 2016               43,766        142,058          19,300            (161)            188,598   393,561 
--------------------------  -------------  -------------  --------------  ---------------  -----------------  -------- 
 
 
Year ended 31 December 
2015 
                            Share capital  Share premium  Other reserves  Treasury shares  Retained earnings     Total 
                                   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 
--------------------------  -------------  -------------  --------------  ---------------  -----------------  -------- 
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

   1.   Basis of presentation 

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

   2.   Significant accounting policies 

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

   3.   Operating segments 

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

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

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

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

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

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

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

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

   (i)   Segmental income statement for the year ended 31 December 2016 
 
 
 
                               CA        S&P    UK Total    Movestic    Waard Group  Other Group Activities      Total 
                           GBP000     GBP000      GBP000      GBP000         GBP000                  GBP000     GBP000 
----------------------  ---------  ---------  ----------  ----------  -------------  ----------------------  --------- 
Net insurance premium 
 revenue                   42,103      4,886      46,989      14,903          2,658                       -     64,550 
Fee and commission 
 income                    29,000      2,610      31,610      41,296             26                       -     72,932 
Net investment return     206,748    131,155     337,903     169,130          8,464                     184    515,681 
----------------------  ---------  ---------  ----------  ----------  -------------  ----------------------  --------- 
Total revenue (net of 
 reinsurance payable)     277,851    138,651     416,502     225,329         11,148                     184    653,163 
Other operating income      2,568     10,792      13,360       3,751            503                       -     17,614 
----------------------  ---------  ---------  ----------  ----------  -------------  ----------------------  --------- 
Segmental 
 income/(expenses)        280,419    149,443     429,862     229,080         11,651                     184    670,777 
----------------------  ---------  ---------  ----------  ----------  -------------  ----------------------  --------- 
Net insurance contract 
 claims and benefits 
 incurred               (139,748)  (123,454)   (263,202)     (7,695)        (1,464)                       -  (272,361) 
Net change in 
 investment contract 
 liabilities             (98,393)    (2,206)   (100,599)   (168,508)              -                       -  (269,107) 
Fees, commission and 
 other acquisition 
 costs                    (1,641)       (23)     (1,664)    (25,089)          (330)                       -   (27,083) 
Administrative 
expenses: 
  Amortisation charge 
   on software assets           -          -           -     (1,243)              -                       -    (1,243) 
  Depreciation charge 
   on property and 
   equipment                    -          -           -       (197)              -                       -      (197) 
  Other                  (11,017)    (9,443)    (20,460)    (12,800)        (3,664)                 (8,251)   (45,175) 
Operating expenses        (1,203)        (1)     (1,204)     (3,209)              -                      19    (4,394) 
Financing costs                 -        (2)         (2)     (1,629)              -                 (1,641)    (3,272) 
Share of profit from 
 associates                     -          -           -         150              -                       -        150 
----------------------  ---------  ---------  ----------  ----------  -------------  ----------------------  --------- 
Profit before tax and 
 consolidation 
 adjustments               28,417     14,314      42,731       8,860          6,193                 (9,689)     48,095 
----------------------  ---------  ---------  ----------  ----------  -------------  ----------------------  --------- 
Other operating 
expenses: 
  Charge for 
   amortisation of 
   acquired value of 
   in-force business      (5,643)      (604)     (6,247)     (3,554)          (618)                       -   (10,419) 
  Charge for 
   amortisation of 
   acquired value of 
   customer 
   relationships                -          -           -       (236)              -                       -      (236) 
  Fees, commission and 
   other acquisition 
   costs                        -          -           -       3,245              -                       -      3,245 
Segmental income less 
 expenses                  22,774     13,710      36,484       8,315          5,575                 (9,689)     40,685 
Profit before tax          22,774     13,710      36,484       8,315          5,575                 (9,689)     40,685 
                        ---------  --------- 
Income tax 
 (expense)/credit                                (6,663)         (7)        (1,721)                   2,986    (5,405) 
Profit after tax                                  29,821       8,308          3,854                 (6,703)     35,280 
                                              ----------  ----------  -------------  ----------------------  --------- 
 

(ii) Segmental balance sheet as at 31 December 2016

 
 
                                      CA          S&P     Movestic    Waard Group  Other Group Activities        Total 
                                  GBP000       GBP000       GBP000         GBP000                  GBP000       GBP000 
---------------------------  -----------  -----------  -----------  -------------  ----------------------  ----------- 
Total assets                   1,829,944    1,217,546    2,718,156        207,160                 122,957    6,095,763 
Total liabilities            (1,728,019)  (1,155,556)  (2,638,490)      (122,655)                (57,482)  (5,702,202) 
---------------------------  -----------  -----------  -----------  -------------  ----------------------  ----------- 
Net assets                       101,925       61,990       79,666         84,505                  65,475      393,561 
---------------------------  -----------  -----------  -----------  -------------  ----------------------  ----------- 
Investment in associates               -            -        5,433              -                       -        5,433 
---------------------------  -----------  -----------  -----------  -------------  ----------------------  ----------- 
Additions to non-current 
 assets                                -            -       11,894              -                       -       11,894 
---------------------------  -----------  -----------  -----------  -------------  ----------------------  ----------- 
 

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

 
 
 
                                 CA       S&P    UK Total    Movestic    Waard Group  Other Group Activities     Total 
                             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 
                                               ----------  ----------  -------------  ----------------------  -------- 
 

(iv) Segmental balance sheet as at 31 December 2015

 
 
                                      CA          S&P     Movestic    Waard Group  Other 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 
---------------------------  -----------  -----------  -----------  -------------  ----------------------  ----------- 
 
   4.   Borrowings 
 
31 December 
                                                     2016     2015 
                                                   GBP000   GBP000 
                                                  -------  ------- 
Bank loan                                          52,697   52,522 
Amount due in relation to financial reinsurance    34,146   26,503 
                                                  -------  ------- 
Total                                              86,843   79,025 
                                                  -------  ------- 
 
Current                                            61,471   18,448 
Non-current                                        25,372   60,577 
                                                  -------  ------- 
Total                                              86,843   79,025 
                                                  -------  ------- 
 

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

- on 7 October 2013 tranche one of a loan facility was drawn down, amounting to 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. During the year, GBP6.05.m was repayable, but the amount was deferred due pending arrangement of the new loan facility to part fund the LGN acquisitions.

- on 27 November 2013 tranche two of the loan facility was drawn down, amounting to 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. During the year, GBP6.05.m was repayable, but the amount was deferred due pending arrangement of the new loan facility to part fund the LGN acquisitions.

- on 27 November 2013 a short-term loan of GBP12.8m was drawn down. This was originally repayable in full on 27 May 2015. During 2014, the repayment date of this loan has been extended to December 2018. The outstanding principal on the loan bears interest at a rate of 2.75 percentage points above the London Inter-Bank Offer Rate.

The fair value of the bank loan at 31 December 2016 was GBP52,800,000 (31 December 2015: GBP52,800,000).

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

The fair value of amounts due in relation to financial reinsurance was GBP34,396,000 (31 December 2015: GBP26,879,000). The fair value of other borrowings is not materially different from their carrying value.

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

   5.   Earnings per share 
 
Year ended 31 December                                             2016         2015 
 
Profit for the year attributable to shareholders (GBP000)        35,280       39,788 
Weighted average number of ordinary shares                  127,488,681  126,401,635 
Basic earnings per share                                         27.67p       31.48p 
Diluted earnings per share                                       27.56p       31.41p 
 

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

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

   6.   Retained earnings 
 
Year ended 31 December 
                                                                                       2016      2015 
                                                                                     GBP000    GBP000 
                                                                                   --------  -------- 
Retained earnings attributable to equity holders of the parent company comprise: 
Balance at 1 January                                                                177,021   160,519 
Profit for the year                                                                  35,280    39,788 
Share based payment                                                                     478       212 
Dividends 
  Final approved and paid for 2013                                                        -         - 
  Interim approved and paid for 2014                                                      -         - 
  Final approved and paid for 2014                                                 (15,586)  (15,143) 
  Interim approved and paid for 2015                                                (8,595)   (8,355) 
                                                                                   --------  -------- 
Balance at 31 December                                                              188,598   177,021 
                                                                                   --------  -------- 
 

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

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

A final dividend of 12.69p per share in respect of the year ended 31 December 2016 payable on 24 May 2017 to equity shareholders of the parent company registered at the close of business on 18 April 2017, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final dividend of GBP19.0m has not been provided for in these financial statements and there are no income tax consequences.

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

 
Year ended 31 December 
                               2016   2015 
                                  p      p 
                              -----  ----- 
Interim - approved and paid    6.80   6.61 
Final - proposed/paid         12.69  12.33 
                              -----  ----- 
Total                         19.49  18.94 
                              -----  ----- 
 
   7.   Related parties 
   (a)    Identity of related parties 

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

The company has related party relationships with:

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

(ii) its subsidiary companies;

(iii) its associated company;

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

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

   (b)    Related party transactions 

(i) Transactions with key management personnel.

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

 
                                  2016     2015 
                                GBP000   GBP000 
-----------------------------  -------  ------- 
Short-term employee benefits     1,849    1,713 
Post-employment benefits            84       71 
Total                            1,933    1,784 
-----------------------------  -------  ------- 
 

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

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

 
                                                                              2016     2015 
                                                                            GBP000   GBP000 
-------------------------------------------------------------------------  -------  ------- 
Annual bonus scheme (included in the short-term employee benefits above)       521      495 
-------------------------------------------------------------------------  -------  ------- 
 

These amounts have been included in Accrued Expenses.

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

(ii) Transactions with subsidiaries

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

 
Year ended 31 December 
                            2016     2015 
                          GBP000   GBP000 
-----------------------  -------  ------- 
Recovery of expenses       3,470    3,054 
-----------------------  -------  ------- 
 

(iii) Transactions with associate

Movestic Livförsäkring AB and its associate Modernac SA

 
Year ended 31 December 
                                                  2016     2015 
                                                GBP000   GBP000 
---------------------------------------------  -------  ------- 
Reinsurance premiums paid                      (9,245)  (8,456) 
Reinsurance recoveries received                  4,983    4,200 
Reinsurance commission received                  1,761    1,570 
---------------------------------------------  -------  ------- 
                                               (2,501)  (2,686) 
---------------------------------------------  -------  ------- 
Amounts outstanding as at balance sheet date   (3,570)  (5,321) 
---------------------------------------------  -------  ------- 
 

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

 
                                       2016                                                2015 
                         Amounts owed by           Amounts owed to           Amounts owed by           Amounts owed to 
                               associate                 associate                 associate                 associate 
                                  GBP000                    GBP000                    GBP000                    GBP000 
--------------  ------------------------  ------------------------  ------------------------  ------------------------ 
Modernac S.A.                          -                     3,570                         -                     5,321 
--------------  ------------------------  ------------------------  ------------------------  ------------------------ 
 

These amounts have been included in other payables.

(iv) Transactions with persons related to key management personnel

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

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

In the year an amount of GBP11,830 was paid by the company to Clare Rimmington for web-site related consultancy services. In addition, an amount of GBP65,610 was paid to Trisha Hughes for business consultancy services. These amounts have been included in administration expenses.

   8.   Post balance sheet event 

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

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

Consideration:

The headline consideration for the Acquisition is EUR160 million, to be paid in cash. The Acquisition consideration is proposed to be financed by a combination of a Firm Placing and Placing and Open Offer to raise in aggregate approximately GBP70 million (before expenses), New Debt Facilities totalling GBP100.2 million (GBP40 million and EUR71 million), which replace an existing debt facility of GBP52.8 million and raises GBP47.4 million of incremental debt and the balance from Chesnara's existing cash resources. In addition to the headline consideration, deferred capital related consideration will accrue from 1 October 2016 to the date of completion of the Acquisition, which is expected to occur during the first quarter of 2017. The company has calculated the maximum interest payable to be EUR2.3 million.

Key metrics:

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

- EUR219.8 million of Solvency II own funds;

- EUR2.2 billion of funds under management;

- Approximately 170,600 policies;

- Solvency ratio of 219 per cent; and

- IFRS net assets of EUR138.6 million.

GLOSSARY

 
 AGM                     Annual General Meeting. 
 ALM                     Asset Liability Management - management of risks that arise due to mismatches between assets 
                          and liabilities. 
 APE                     Annual Premium Equivalent - an industry wide measure that is used for measuring the annual 
                          equivalent of regular and single premium policies. 
 CA                      Countrywide Assured plc. 
 CALH                    Countrywide Assured Life Holdings Limited and its subsidiary companies. 
 Own Funds               Own Funds - in accordance with the UK's regulatory regime for insurers it is the sum of the 
                         individual capital resources for each of the regulated related undertakings less the 
                         book-value 
                         of investments by the company in those capital resources. 
 SCR                     In accordance with the UK's regulatory regime for insurers it is the sum of individual 
                         capital 
                         resource requirements for the insurer and each of its regulated undertakings 
 Directors or Board      The directors of the company as at the date of this document whose names are set out above. 
 DNB                     De Nederlandsche Bank is the central bank of the Netherlands and is the regulator of our 
                         Dutch 
                         subsidiary, 
 DPF                     Discretionary Participation Feature - A contractual right under an insurance contract to 
                         receive, 
                         as a supplement to guaranteed benefits, additional benefits whose amount or timing is 
                         contractually 
                         at the discretion of the issuer. 
 Dutch Business          Waard Group, consisting of Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V. 
                          and Tadas Verzekeringen B.V. 
 EcV                     Economic Value. 
 FCA                     Financial Conduct Authority. 
 FI                      Finansinspektionen, being the Swedish Financial Supervisory Authority. 
 Form of Proxy           The form of proxy relating to the General Meeting being sent to Shareholders with this 
                         document. 
 FSMA                    The Financial Services and Markets Act 2000 of England and Wales, as amended. 
 Group Own Funds         In accordance with the UK's regulatory regime for insurers it is the sum of the individual 
                         capital resources for each of the regulated related undertakings less the book-value of 
                         investments 
                         by the group in those capital resources. 
 Group SCR               In accordance with the UK's regulatory regime for insurers it is the sum of individual 
                         capital 
                         resource requirements for the insurer and each of its regulated undertakings. 
 Cash Generation         This represents the operational cash that has been generated in the period. The cash 
                         generating 
                         capacity of the group is largely a function of the movement in the solvency position of the 
                         insurance subsidiaries within the group, and takes account of the buffers that management 
                         has set to hold over and above the solvency requirements imposed by our regulators. 
 Group                   The company and its existing subsidiary undertakings. 
 HCL                     HCL Insurance BPO Services Limited. 
 IFRS                    International Financial Reporting Standards. 
 IFA                     Independent Financial Adviser. 
 KPI                     Key performance indicator. 
 LGN                     LGN or Legal and General Nederland refers to the legal entity Legal & General Nederland 
                         Levensverzekering 
                         Maatschappij N.V, which Chesnara announced its intention to acquire in November 2016. 
 London Stock Exchange   London Stock Exchange plc. 
 LTI                     Long-Term Incentive Scheme - A reward system designed to incentivise executive directors' 
                          long-term performance. 
 Movestic                Movestic Livförsäkring AB. 
 Modernac                Modernac SA, an associated company which is 49% owned by Movestic. 
 Official List           The Official List of the Financial Conduct Authority. 
 Ordinary Shares         Ordinary shares of five pence each in the capital of the company. 
 ORSA                    Own Risk and Solvency Assessment. 
 PRA                     Prudential Regulation Authority. 
 QRT                     Quantitative Reporting Template. 
 ReAssure                ReAssure Limited. 
 Resolution              The resolution set out in the notice of General Meeting set out in this document. 
 RMF                     Risk Management Framework. 
 Shareholder(s)          Holder(s) of Ordinary Shares. 
 Solvency II             A fundamental review of the capital adequacy regime for the European insurance industry. 
                         Solvency 
                         II aims to establish a set of EU-wide capital requirements and risk management standards and 
                         has replaced the Solvency I requirements. 
 STI                     Short-Term Incentive Scheme - A reward system designed to incentivise executive directors' 
                          short-term performance. 
 Swedish Business        Movestic and its subsidiaries and associated companies. 
 S&P                     Save & Prosper Insurance Limited and Save & Prosper Pensions Limited. 
 TCF                     Treating Customers Fairly - a central PRA principle that aims to ensure an efficient and 
                         effective 
                         market and thereby help policyholders achieve fair outcomes. 
 TSR                     Total Shareholder Return, measured with reference to both dividends and capital growth. 
 UK or United Kingdom    The United Kingdom of Great Britain and Northern Ireland. 
 UK Business             CA, S&P and CALH. 
 

This information is provided by RNS

The company news service from the London Stock Exchange

END

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(END) Dow Jones Newswires

March 31, 2017 02:00 ET (06:00 GMT)

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