REG - Chesnara PLC - Final Results <Origin Href="QuoteRef">CSN.L</Origin> - Part 2
31/03/2017 07:06
- Part 2: For the preceding part double click ID:nRSe0943Ba
applied
when making dividend decisions.
Solvency capital requirement: Amount of capital required to withstand a 1 in 200 event. The SCR acts as an intervention
point for supervisory action including cancellation or the deferral of distributions to investors.
Min capital requirement: The MCR is between 45% and 25% of the SCR. At this point Chesnara would need to submit a recovery
plan which if not effective within 3 months may result in authorisation being withdrawn.
HOW DOES THE SCR CHANGE?
Given the largest component of Chesnara's SCR is market risk, changes in investment mix or changes in the overall value of
our assets has the greatest impact on the SCR. For example, equity assets require more capital than low risk bonds. Also,
positive investment growth in general creates an increase in SCR. Book run-off will tend to reduce SCR but new business
will result in an increase.
CHESNARA GROUP SOLVENCY METRICS
£m 2016 2016(excl. LGN impact*) 2015
Own funds 505 443 381
SCR 321 309 260
Solvency surplus 185 135 121
Solvency ratio % 158% 144% 146%
*Excluding impact of equity raised for LGN acquisition and associated costs
Managing the group and subsidiaries' capital positions appropriately is a critical part of ensuring we remain true to the
group's culture and values.
We are well capitalised at both a group and subsidiary level, and we have not used any elements of the long term guarantee
package.
CHESNARA GROUP
ANALYSIS
- Surplus: The solvency position of the group remains strong, at 158%. On a like for like basis, after removing the
impact of the capital raise and associated costs for the acquisition of LGN, the ratio is 144%.
- Dividends: The solvency position is stated after deducting £19.0m proposed dividend (31 December 2015: £15.6m).
- Own funds: The increase in own funds is principally driven by the impact of the equity raise to fund the LGN
acquisition and the own funds generation in the group's divisions.
- SCR: The SCR has increased by £61.0m in the year. This is largely due to increases in the division's SCRs,
depreciation of sterling against the Euro and SEK and additional market risk SCR being held for the equity capital raise.
SOLVENCY POSITION
£m 2016 2016(excl. LGN impact*) 2015
Own funds (post dividend) 505 443 381
SCR 321 309 260
Buffer 32 31 26
Surplus 153 104 95
Solvency ratio % 158% 144% 146%
SENSITIVITIES
Impact (£m) 1% fall in yields 10% fall in equity values
Own funds (12.8) (27.5)
SCR 1.7 (22.5)
Surplus (14.5) (5.0)
UK
ANALYSIS
- Surplus: £11m above board's capital management policy.
- Dividends: The solvency position is stated after deducting £30.0m proposed dividend (31 December 2015: £30.5m).
The dividend remains subject to completion of a 'no objection' process with the PRA.
- Own funds: Positive growth before dividends of £28m, driven by positive equity markets and positive experience
variance, predominantly mortality and morbidity.
- SCR: Slight increase in year driven largely by higher market risk capital being held largely due to equity growth
and spread risk due to investment portfolio changes.
SOLVENCY POSITION
£m 2016 2015
Own funds (post dividend) 166 168
SCR 130 124
Buffer 26 25
Surplus 11 19
Solvency ratio % 128% 135%
SENSITIVITIES
Impact (£m) 1% fall in yields 10% fall in equity values
Own funds (7.2) (8.5)
SCR 0.8 (11.1)
Surplus (8.0) 2.6
SWEDEN
ANALYSIS
- Surplus: £27m above the board's capital management policy.
- Dividends: The solvency position is stated after deducting £2.7m proposed dividend (31 December 2015: £nil).
- Own funds: Growth largely driven by positive economic experience due to positive equity markets coupled with
positive operating experience on in force policies.
- SCR: Increase is largely due to increased market risk capital being held due to equity growth in year and higher
currency stress. In addition, refined modelling for capital required for mass lapse risk has resulted in a c£5.0m increase
in the SCR/
SOLVENCY POSITION
£m 2016 2015*
Own funds (post dividend) 190 168
SCR 136 109
Buffer 27 22
Surplus 27 37
Solvency ratio % 140% 154%
*Restated using 31 Dec 2016 exchange rates
The table above presents a divisional view of the solvency position, which is different to the reported position of the
individual insurance company(ies) within the division.
SENSITIVITIES
Impact (£m) 1% fall in yields 10% fall in equity values
Own funds (3.9) (15.2)
SCR 0.2 (8.2)
Surplus (4.2) (7.0)
NETHERLANDS
ANALYSIS
- Surplus: £62m above the board's capital management policy.
- Dividends: No dividends are planned to be paid out of the Dutch division (31 December 2015: £nil). However, a
dividend of c£31m is planned to be paid by the insurance companies within the division to the Dutch holding company to
part-fund the acquisition of LGN.
- Own funds: Increase driven by positive impact of lapse assumption changes and economic experience due to yield
curve reductions, off-set by the negative impact of updating expense modelling assumptions.
- SCR: Overall reduction over the year. Movement includes an increase in SCR due to the investment in a mortgage
portfolio, offset by SCR reductions arising from the sale of two CDO assets and a "life insurance risk" SCR reduction as a
result of a new reinsurance treaty.
SOLVENCY POSITION
£m 2016 2015*
Own funds (post dividend) 87 82
SCR 12 14
Buffer 12 14
Surplus 62 54
Solvency ratio % 712% 597%
*Restated using 31 Dec 2016 exchange rates
The table above presents a divisional view of the solvency position, which is different to the reported position of the
individual insurance company(ies) within the division.
SENSITIVITIES
Impact (£m) 1% fall in yields 10% fall in equity values
Own funds (0.2) (0.5)
SCR 0.4 (0.2)
Surplus (0.6) (0.3)
FINANCIAL REVIEW
The key performance indicators below are a reflection of how we have performed in delivering our three strategic objectives
and our core culture and values. 2016 has seen cash generation, before the impact of the LGN acquisition, which exceeds
the full year dividend, IFRS profits in line with last year and robust EcV earnings, resulting in a closing EcV of
£602.6m.
SUMMARY OF EACH KPI:
IFRS
PRE-TAX PROFIT: £40.7M (2015: £42.8M)
TOTAL COMPREHENSIVE INCOME: £55.4M (2015: £39.6M)
What is it?
The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the
profit arising from the longer term insurance and investment contracts over the life of the policy.
Why is it important?
IFRS profit is an indicator of the value that has been generated within the long-term insurance funds of the divisions
within the group, and is a key measure used both internally and by our external stakeholders in assessing the performance
of the business. IFRS profit is an indicator of how we are performing against our stated strategic objective of
"maximising value from the existing business" and can also be impacted by one-off gains arising from delivering against our
stated objective of "acquiring life and pensions businesses".
Highlights
£m 2016 2015
CA 28.4 23.9
S&P 14.3 10.6
Movestic 8.7 6.7
Waard 6.2 0.9
Group & consol adj. (16.9) (15.9)
Profit on acquisition - 16.6
Taxation (5.4) (3.0)
Forex impact 20.1 (0.2)
Total 55.4 39.6
- Strong pre-tax results across all segments.
- IFRS pre-tax profit of £40.7m broadly in line with prior year. The prior year result included a one off gain of
£16.6m relating to the acquisition of the Waard group and therefore the underlying result has improved by 53%.
- All segments have delivered results ahead of 2015, supported by positive equity markets during the year.
- Total comprehensive income includes a large foreign exchange gain of £20.1m (2015: £0.2m loss) relating to
sterling's depreciation against both the euro and Swedish krona.
Risks
The IFRS profit can be affected by a number of our principal risks and uncertainties. In particular, volatility in equity
markets and bond yields can result in volatility in the IFRS pre-tax profit, and foreign currency fluctuations can affect
total comprehensive income.
CASH GENERATION
GROUP CASH GENERATION £85.4M (2015: £82.4M*)
DIVISIONAL CASH GENERATION £34.3M (2015: £50.9M*)
What is it?
Cash generation is a measure of how much distributable cash has been generated in the period. Cash generation is driven by
the change in solvency surplus in the period, taking into account board-approved capital management policies.
Why is it important?
Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which
support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we
are performing against our stated objective of "maximising value from the existing business". However, our cash generation
is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities
of the group.
Highlights
£m 2016
UK 21.3
Sweden (2.7)
Netherlands 15.7
Divisional cash generation 34.3
Other group activities 2.2
Total cash generation (excl. LGN impact) 36.5
Impact of LGN 48.9
Total group cash generation 85.4
Divisional cash
- Positive cash contributions from UK and Netherlands, with Netherlands cash generation being a function of exchange
rate gains.
- Overall divisional cash generation is lower than last year largely due to a reduction in the UK.
- This is off-set by small negative generation in Sweden as we continue to invest in our new business operations.
Total cash generation
- At a group level this includes the positive impact of the new equity capital that was raised to part-fund the LGN
acquisition, due to complete in 2017. This has had a significant temporary positive benefit on our cash generation in the
period. The temporary impact includes a positive £70m from the equity raise offset by £7.9m of one-off costs and £13.2m
associated increase in capital requirement.
* includes one-off cash generation of £39.9m arising on the acquisition of the Waard group.
Risks
The ability of the underlying regulated subsidiaries within the group to generate cash is affected by a number of our
principal risks and uncertainties. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS
surplus, they are impacted by similar drivers, and therefore factors such as yields on fixed interest securities and equity
and property performance contribute significantly to the level of cash generation within the group.
ECONOMIC VALUE (EcV)
£602.6M (2015: £453.4M)
What is it?
Economic value (EcV) has been introduced in the year by Chesnara as a replacement metric for European Embedded Value. This
has been introduced following the introduction of Solvency II at the start of 2016, with EcV being derived from Solvency II
own funds. Conceptually EcV is broadly similar to EEV in that both reflect a market-consistent assessment of the value of
existing insurance business, plus adjusted net asset value of the non-insurance business within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is
an important reference point by which to assess Chesnara's intrinsic value. A life and pensions group may typically be
characterised as trading at a discount or premium to its economic value. Analysis of EcV provides additional insight into
the development of the business over time.
The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic
objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through
writing profitable new business. It ignores the potential of new business to be written in the future (the franchise value
of our Swedish business) and the value of the company's ability to acquire further businesses.
Highlights
£m
2015 Group EcV 453.4
EcV earnings 72.5
Equity raise 66.9
Dividends (24.2)
Forex gain 34.0
2016 Group EcV 602.6
- Economic value at the end of the year exceeds £600m for the first time, having increased by £149m since the start
of the year.
- Growth includes impact of equity raise and associated costs to fund the LGN acquisition in 2016, expected to
complete in 2017. A further EcV gain is expected to arise on acquisition.
- Strong earnings and large foreign exchange gains contribute to the overall growth in the year.
Risks
The economic value of the group is affected by economic factors such as equity and property markets and yields on fixed
interest securities. In addition to this, whilst the other KPIs (which are all "performance measures") remain relatively
insensitive to exchange rate movements, the EcV position of the group can be materially affected by exchange rate
fluctuations. For example a 10.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the
group by 3.4% and 1.3% respectively, based on the composition of the group's EcV at 31 December 2016.
ECV EARNINGS NET OF TAX
£72.5M (2015: £57.5M*)
* comparative is measured on an EEV basis
What is it?
In recognition of the longer-term nature of the group's insurance and investment contracts, supplementary information is
presented that provides information on the economic value of our business.
The principal underlying components of the economic value result are:
- The expected return from existing business (being the effect of the unwind of the rates used to discount the value
in-force).
- Value added by the writing of new business.
- Variations in actual experience from that assumed in the opening valuation.
- The impact of restating assumptions underlying the determination of expected cash flows.
- The impact of acquisitions.
Why is it important?
By recognising the market-related value of in-force business (in-force value), a different perspective is provided in the
performance of the group and on the valuation of the business. Economic value earnings are an important KPI as they
provide a longer-term measure of the value generated during a period. The economic value earnings of the group can be a
strong indicator of how we have delivered against all three of our core strategic objectives. This includes new business
profits generated from writing profitable new business, economic value profit emergence from our existing businesses, and
the economic value impact of acquisitions.
Highlights
£m 2016
Operating earnings 33.8
Economic earnings 39.6
Other (1.1)
Total EcV earnings 72.5
- EcV earnings of £72.5m in the year, driven by a combination of strong operating and economic earnings.
- Strong operating earnings driven by new business profits in Sweden and positive operating experience items on in
force polices.
- Economic earnings primarily driven by strong equity performance across Europe.
Risks
The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal
risks and uncertainties as set out on pages 39 to 41. In addition to the factors that affect the IFRS pre-tax profit and
cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and
persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the
future cash flows arising from our books of business.
IFRS PRE-TAX PROFIT
£40.7M (2015: £42.8M)
IFRS TOTAL COMPREHENSIVE INCOME
£55.4M (2015: £39.6M)
Executive summary
The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major
components:
Stable core: At the heart of surplus, and hence cash generation, are the CA and Waard group segments. The requirements of
these books are to provide a predictable and stable platform for the financial model and dividend strategy. As closed
books, the key is to sustain this income source as effectively as possible. The IFRS results below show that the stable
core continues to deliver against these requirements.
Variable element: The S&P component can bring an element of short-term earnings volatility to the group, with the results
being particularly sensitive to investment market movements.
Growth operation: The long-term financial model of Movestic is based on growth, with levels of new business and premiums
from existing business being targeted to more than offset the impact of policy attrition, leading to a general increase in
assets under management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:
2016 2015
£m £m Note
CA 28.4 23.9 1
S&P 14.3 10.6 2
Movestic 8.7 6.7 3
Waard Group 6.2 0.9 4
Chesnara (9.7) (9.5) 5
Consolidation adjustments (7.2) (6.4) 6
Profit before tax and profit on acquisition 40.7 26.2
Profit on acquisition of the Waard Group - 16.6 4
Profit before tax 40.7 42.8
Tax (5.4) (3.0)
Profit after tax 35.3 39.8
Foreign exchange translation differences 20.1 (0.2) 7
Total comprehensive income 55.4 39.6
2016 2015
£m £m Note
Operating profit 34.9 16.6 8
Economic profit 5.8 9.6 9
Profit before tax and profit on acquisition 40.7 26.2
Profit on acquisition of the Waard Group - 16.6 4
Profit before tax 40.7 42.8
Tax (5.4) (3.0)
Profit after tax 35.3 39.8
Foreign exchange translation differences 20.1 (0.2) 7
Total comprehensive income 55.4 39.6
Note 1: The CA segment has reported results for the period in excess of those in 2015. Positive mortality experience has
resulted in a positive change in mortality assumptions being reflected in the results. Modest economic profits of c£2m
have been reported, reflecting the impact of positive equity markets, offset by a fall in yields in the year.
Note 2: The S&P segment has reported an increase in profits on the prior year. Positive economic profits of c£4m arise
from the net impact of positive equity markets offset by falling bond yields. Positive assumption changes of c£5m include
the positive impact of lapse assumption changes and a change in annuity pricing assumptions, offset by a £3.5m charge in
relation to the 1% exit fee cap on all policies where the policyholder is over 55.
Note 3: Movestic has reported its most successful result since its acquisition in 2009. This is principally driven by
strong growth in assets under management and increased premium volumes, coupled with positive performance fees in the
investment management side of the business.
Note 4: The Waard Group has reported a significant growth in profit compared with the prior year. In part this is because
the prior year results are only for the short post-acquisition period. In addition the 2016 result has benefitted from the
investment in a mortgage portfolio and the sale of other investments during the year. The group was purchased on 19 May
2015 and a one-off gain on acquisition of £16.6m was recognised in 2015.
Note 5: The Chesnara result represents holding company expenses, with 2016 costs being broadly in line with 2015. The
current year includes one off expenses of £3.8m relating to the acquisition of LGN. The prior year includes a one off
foreign currency re-translation loss of £3.5m arising from holding euros prior to the completion of the Waard Group
purchase.
Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets and remain in line with
prior year.
Note 7: As a result of sterling weakening against both the euro and Swedish krona in the period the IFRS result includes a
large foreign exchange gain.
Note 8: The operating result demonstrates the strength and stability of the underlying business, driving the generation of
profit. Product based income and favourable movements in operating experience and assumption changes, specifically
mortality, have supported performance in the UK. Strong premium growth and favourable movement in transfers contribute to
the Movestic operating result, whilst the Waard result benefitted from the investment in a mortgage portfolio.
Note 9: Economic profit represents the components of the earnings that are directly driven by movements in economic
variables, e.g. the impact of yield movements on the cost of guarantees reserves. During 2016 the economic profit is
generally driven by the net impact of positive equity markets, offset by falling bond yields in the year.
Note: Movestic and Waard Group economic surplus is not readily determinable. While there is an element of movement due to
economic conditions, they are immaterial in comparison to non-economic items, therefore all surplus is treated as derived
from operating activities.
TOTAL GROUP CASH GENERATION
£85.4M (2015: £82.4M)
DIVISIONAL CASH GENERATION
£34.3M (2015: £50.9M)
Cash in the business is generated from increases in the group's surplus funds. Surplus funds represent the excess of
assets held over management's internal capital needs, as in the capital management policies across the group. These are
based on regulatory capital requirements, with the inclusion of additional "management buffers". This year is the first
period that our cash generation metric has been calculated with reference to capital management policies based on Solvency
II. Comparatives as reported applied our previous Solvency I based capital policies.
Highlights
31 Dec 2016 (£m) Movement in own funds Movement in management's capital requirement Forex impact Cash generated
UK 28.7 (7.4) - 21.3
Sweden 23.5 (29.9) 3.7 (2.7)
Netherlands 5.0 2.1 8.5 15.7
Divisional cash 57.2 (35.1) 12.2 34.3
Other group activities 1.5 0.7 - 2.2
Group cash pre LGN equity raise 58.8 (34.4) 12.2 36.5
Impact of LGN equity raise 62.1 (13.2) - 48.9
Total group cash 120.9 (47.6) 12.2 85.4
UK
- The UK continues to generate levels of cash in line with plans despite being hampered by falling bond yields in the
year.
- Own funds growth is the main driver of cash generation in the UK, which has benefitted from favourable equity
markets and positive mortality and morbidity experience.
- Off-setting this is an increase in required capital, principally due to additional market risk capital being held
due to higher equity growth and a change in investment mix in the year.
SWEDEN
- Sweden has a negative cash generation in 2016 despite positive Swedish krona exchange gains against sterling.
- Own funds have benefited from equity returns driving growth in assets under management, whilst premium volume
growth has also contributed to the increase in surplus.
- Under Solvency II regulations the movement in the equity market has also had an adverse impact of the level of
capital the business is required to hold, driving the increase in management capital requirement. In addition the increase
in required capital includes a one off capital increase for "mass lapse" risk due to a modelling change during the year.
NETHERLANDS
- The Netherlands continued the solid cash generation witnessed throughout the year with positive underlying
movements in both own funds and capital requirements.
- Growth in own funds has benefited from returns generated from the mortgage portfolio investment and also the sale
of other investments.
- Euro exchange gains against sterling however remain fundamental to the final result.
GROUP
- Cash has continued to be generated across the group, with total cash generation in the period of £85.4m. This
includes the impact of the equity raise and associated costs for the LGN acquisition.
- Adjusting for this the group has generated £36.5m of cash which continues to be of a magnitude that would support
our levels of dividend.
- Cash generation in the prior period benefitted from a one-off positive contribution of £39.9m, arising on the
acquisition of the Waard group.
- Other group activities also reflected the residual group expenses and the impact of consolidation routines,
specifically movements in capital requirements determined at a group level.
OTHER GROUP ACTIVITIES
- Other group activities include Chesnara holding company activities coupled with consolidation adjustments.
- Movement in own funds of £1.5m is largely as a result of group level expenses being offset by a tax credit in the
year.
- From a capital requirements perspective, this is driven by movements in required capital at a Chesnara holding
company level coupled with consolidation adjustments. At a Chesnara holding company level capital is principally required
to be held for the market risk associated with the Movestic and Waard Group equity holdings.
EcV EARNINGS
£72.5M (2015: £57.5M)
Despite the level of variability in investment markets over the year, with falling bond yields, significant sterling
depreciation and volatile yet growing equity markets, the group has reported significant EcV earnings in the period
reflecting the resilience and diversity of the business.
Analysis of the EcV result in the period by earnings source:
31 Dec 2016£m
Expected movement in period 6.0
New business 11.9
Operating variances 22.7
Operating assumption changes 0.6
Other operating variances (7.3)
Total operating earnings 33.9
Economic experience variances 77.9
Economic assumption changes (38.3)
Total economic earnings 39.6
Other non-operating variances 0.8
Risk margin movement (3.8)
Tax 2.0
Total EcV earnings 72.5
Analysis of the EcV result in the year by business segment:
31 Dec 2016£m Note
UK 42.2 1
Sweden 30.8 2
Netherlands 5.9 3
Group and group adjustments (8.4) 4
EcV earnings before tax 70.5
Tax 2.0 5
EcV earnings after tax 72.5
* This is the first period that EcV earnings have been reported. Consequently comparative information has not been
presented.
Economic conditions: As with our previously reported EEV metric, the EcV result is sensitive to investment market
conditions. Key investment market conditions in the period are as follows:
- The FTSE All share index has increased by 12.5%;
- The Swedish OMX all share index has increased by 6.6%; and
- 10 year UK gilt yields have fallen from 2.01% to 1.28%.
Note 1 - UK: The UK reported significant pre tax earnings of £42.2m for the period. Operating earnings of £25.2m
demonstrate the strength and robustness of the underlying business. The result was supported by favourable movements in
relation to assumptions on mortality and guaranteed policies. Economic profits of £20.5m were driven by positive equity
market growth. This was partially offset by the negative impact of yield curve reductions across the year and resultant
increase in risk margin.
Note 2 - Sweden: The Swedish division has reported a large EcV movement in the year. Operating earnings of £16.6m were
underpinned by strong new business performance, owing to transfer volumes and increased average policy premiums.
Substantial operating earnings on the in force business are offset by a negative movement in operating assumptions,
predominantly relating to lower than expected fund rebates. An economic profit of £13.9m was also reported, driven by the
recovery of equity markets in the latter stages of 2016. Following challenging conditions experienced in the first six
months of the year, 2016 closed with a considerable total annual return of 7.6% achieved for the portfolio.
Note 3 - Netherlands: The Dutch division has reported earnings of £5.9m in the period. This is primarily all economic
earnings supported by the disposal of CDO investments and returns generated on the property portfolio investment, following
a decline in yield curve rates witnessed in the year.
Note 4 - Group: A loss has been reported in the group component. This is includes the impact of costs incurred in relation
to LGN and also underlying group level expenses and consolidation activities.
Note 5 - Tax: The business is reporting a tax credit of £2.0m in the period. This is driven by a combination of deferred
tax on the loss in the period relating to group level activities, coupled with a modelling adjustment for deferred tax when
compared with the opening period.
EcV
£602.6M (2015: £453.4M)
The economic value of Chesnara represents the present value of future profits of the existing insurance business, plus the
adjusted net asset value of the non-insurance business within the group. EcV is an important reference point by which to
assess Chesnara's intrinsic value.
Value movement: 1 Jan 2016 to 31 Dec 2016:
£m
2015 Group EcV 453.4
EcV earnings 72.5
Equity raise 66.9
Dividends (24.2)
Forex gain 34.0
2016 Group EcV 602.6
EcV earnings: Positive EcV earnings have been reported in the year, a result of strong operating profits and positive
economic profits, driven by the net impact of equity market growth in the year offset by falling bond yields.
Equity raise: In December 2016 the group announced that new equity had been raised with the intention to purchase LGN,
which is expected to complete during 2017. Consequently the growth in EcV reflects the proceeds of the equity raise.
Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £24.2m were paid during
the 2016, being the final dividend from 2015 and interim 2016 dividend.
FX gain: The EcV of the group benefited from large foreign exchange gains that were reported in the period as a result of
sterling deprecation against both the euro and Swedish krona.
EcV by segment at 31 Dec 2016:
£m
UK 239.6
Sweden 225.4
Netherlands 88.4
Other group activities 49.3
2016 Group EcV 602.6
The above graph shows that the EcV of the group is diversified across its different markets. In particular, the EcV of the
UK and Swedish operations are of similar sizes, showing that we are well-balanced and not over-exposed to one particular
geographic market.
EcV to Solvency II:
£m
2016 Group EcV 602.6
Risk margin (40.6)
Contract boundaries (27.0)
Own funds restrictions (10.6)
Dividends (19.0)
2016 SII own funds 505.4
Our reported EcV is based on a Solvency II assessment of the value of the business, but adjusted for certain items where it
is deemed that Solvency II does not reflect the commercial value of the business. The above waterfall shows the key
difference between EcV and SII, with explanations for each item below.
Risk margin: Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a
liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV
valuation purposes from being based on a 6% cost of capital to a 3% cost of capital.
Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain in-force
contracts, despite the high probability of receipt. We therefore make an adjustment to reflect the realistic value of the
cash flows under EcV.
Ring-fenced fund restrictions: Solvency II rules require a restriction to be placed on the value of certain ring-fenced
funds. These restrictions are reversed for EcV valuation purposes as they are deemed to be temporary in nature.
Dividends: The proposed final dividend of £19.0m is recognised for SII regulatory reporting purposes. It is not
recognised within EcV until it is actually paid.
Replacement of EEV:
During the period we have replaced the previous group valuation metric, European Embedded Value, with a new metric,
economic value (EcV). This has been introduced to align our valuation metric with Solvency II, with EcV being derived from
the Solvency II balance sheet.
As expected, the new valuation metric gives a broadly similar value of the Chesnara plc group. At 31 December 2015 our
previously reported EEV was £455.2m, compared with an opening EcV of £453.4m.
Our Embedded Value figures have historically been subject to an external audit opinion addressed to the directors of
Chesnara plc. This reflected the significance of the Embedded Value figures and was consistent with industry best
practice.
The Economic Value figures are at this stage not subject to audit opinion other than to the extent the general audit
opinion of the Financial Statements considers their consistency with the Financial Statements.
External audit requirements cover Solvency II disclosures and as such given the Economic Value figures are derived from the
Solvency II balance sheet the Economic Value figures benefit from a degree of external audit comfort.
FINANCIAL management
The group's financial management framework is designed to provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators.
SUMMARY:
OBJECTIVES
The group's financial management framework is designed to provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators. Accordingly we aim to:
- Maintain solvency targets
- Meet the dividend expectations of shareholders
- Optimise the gearing ratio to ensure an efficient capital base
- Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors
- Maintain the group as a going concern
HOW WE DELIVER TO OUR OBJECTIVES
In order to meet our obligations we employ and undertake a number of methods. These are centred on:
1. Monitor and control risk & solvency
2. Longer-term projections
3. Responsible investment management
OUTCOMES
Key outcomes from our financial management process, in terms of meeting our objectives, are set out below:
1. SOLVENCY:
Group solvency ratio: 158%
2. SHAREHOLDER RETURNS
2016 TSR 15.7%
2016 dividend yield 6.1%
Based on average 2016 share price and full year 2016 dividend of 19.49p.
3. CAPITAL STRUCTURE
Gearing ratio of 13.4%
This does not include the financial reinsurance within the Swedish business.
4. LIQUIDITY AND POLICYHOLDER RETURNS
Policyholders' reasonable expectations maintained.
Asset liability matching framework operated effectively in the year.
Sufficient liquidity in the Chesnara holding company.
5. MAINTAIN THE GROUP AS A GOING CONCERN
Group remains a going concern
OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES
1. Capital structure
The group is funded by a combination of share capital, retained earnings and debt finance, with the debt gearing (excluding
financial reinsurance in Sweden) being 13.4% at 31 December 2016 (17.8% at 31 December 2015).
The level of debt that the board is prepared to take on is driven by the group's "Debt and leverage policy" which
incorporates the board's risk appetite in this area.
Over time, the level of gearing within the group will change, and is a function of:
- funding requirements for future acquisitions (i.e. debt, equity and internal financial resources); and
- repayment of existing debt that was used to fund previous acquisitions.
As referred to above, acquisitions are funded through a combination of debt, equity and internal cash resources. The
ratios of these three funding methods vary on a deal-by-deal basis and are driven by a number of factors including, but not
limited to:
- size of the acquisition;
- current cash resources of the group;
- current gearing ratio and the board's risk tolerance limits for additional debt;
- expected cash generation profile and funding requirements of the existing subsidiaries and potential acquisition;
- future financial commitments; and
- regulatory rules.
In addition to the above, Movestic uses a financial reinsurance arrangement to fund its new business operation.
2. Maintain the group as a going concern
The directors have considered the ability of the group to continue on a going concern basis. As such the board has
performed an assessment as to whether the group can meet its liabilities as they fall due for a period of at least twelve
months from which the Report & Accounts have been signed.
In performing this work, the board has considered the current cash position of the group and company, coupled with the
group's and company's expected cash generation as highlighted in its recent business plan, which covers a three year
period. The business plan considers the financial projections of the group and its subsidiaries on both a base case and a
range of stressed scenarios, covering projected IFRS, EcV and solvency. These projections also focus on the cash
generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these
cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company.
The information set out above indicates a strong solvency position as at 31 December 2016 as measured at both the
divisional and group levels. As well as being well-capitalised the group also has a healthy level of cash reserves to be
able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to
continue trading. The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest
securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to
manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Other significant
counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that
any associated credit default risk is low.
In light of the above information, the board has concluded that the group and company has a reasonable expectation that the
group and company have adequate resources to continue in operational existence for the foreseeable future, and, as stated
in the Directors Report on page 82, the Financial Statements have continued to be prepared on a going concern basis.
3. Longer term viability statement
In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the directors have assessed
the prospect of the company over a longer period than the twelve months required by the going concern provision. The board
conducted this review for a period of three years because the group's business plan covers a three year period and includes
an assessment of group cash generation and group solvency margins over that time period.
The group business plan considers the group's cash flows, the group's ability to remain above target solvency levels and
other key financial measures over the period, assuming continuation of the group's established dividend payment strategy.
These metrics are subject to scenario analysis representing the principal risks to which the group is most sensitive, both
individually and in unison. Where appropriate this analysis is carried out to evaluate the potential impact of adverse
economic and other experience effects, including, but not limited to:
i. Equity market declines
ii. Reduction in yield curves
iii. Adverse mortality and lapse experience
iv. Adverse expense experiences
v. Reduced new business volumes
vi. Adverse exchange rate experience
Based on the results of this analysis, the directors have a reasonable expectation that the company will be able to
continue in operation and meet its liabilities as they fall due over the three year period of their assessment.
RISK MANAGEMENT
PRINCIPAL RISKS AND UNCERTAINTIES
Risks and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the
ability of the group to meet its core strategic objectives. These currently centre on the intention of the group to
maintain an attractive dividend profile whilst delivering good service and fair outcomes for our customers.
The group Audit and Risk Committee reviews (A&RC), challenges and approves the group Executive Committee's assessment of
the group's Principal Risks and the adequacy of the controls in place to manage those risks on a quarterly basis. The
assessment is based on pre-defined criteria for what constitutes a Principal Risk, and corresponding materiality levels,
which is subject to annual review and approval by the group A&RC.
The specific principal risks and uncertainties are determined taking into account of the following:
i) the group's core operations centre on the run-off of closed life and pensions businesses in the UK and the
Netherlands;
ii) notwithstanding this, the group has a material segment, which comprises an open life and pensions business;
and
iii) these businesses are subject to local regulation, which significantly influences the amount of capital
which they are required to retain and which may otherwise constrain the conduct of business.
The following table outlines the Principal Risks and Uncertainties of the group and the controls in place to mitigate or
manage their impact. It has been drawn together following regular assessment performed by the Audit and Risk Committee of
the Principal Risks facing the company, including those that would threaten its business model, future performance,
solvency or liquidity. These have remained largely unchanged from those reported in the 2015 Annual Report & Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
Risk Impact Control
Adverse mortality / morbidity / longevity experience In the event that actual mortality or morbidity rates vary from the assumptions underlying product - Effective underwriting techniques and reinsurance programmes.- Regular investigations, and industry analysis, to support best estimate assumptions and identify trends.- The option on certain contracts to vary premium rates in the light of actual experience, subject to fair treatment of customers.- Partial risk diversification in that the group has a portfolio of annuity contracts where the benefits cease on death.
pricing and subsequent reserving, more or less profit will accrue to the group.
Adverse persistency experience If persistency is significantly lower than that assumed in product pricing and subsequent reserving, - Active investment management to ensure competitive policyholder investment funds.- Stringent management of customer service delivery and adherence to principles of treating customers fairly.- Product distributor relationship management processes.- Close monitoring of persistency levels across all groups of business to support best estimate assumptions and identify trends.- Movestic seeks to maintain good relationships with Brokers. This is independently measured via yearly external surveys that considers Broker's attitude towards different insurers.- Movestic has clawback arrangements with Brokers.
this will lead to reduced group profitability in the medium to long-term. Further, for parts of the
business such as Movestic, where retention
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