- Part 3: For the preceding part double click ID:nRSe6231Tb
diversification in that the Group has a portfolio of annuity contracts where the benefits cease on death.
Adverse persistency experience If persistency rates are significantly lower than those assumed in product pricing and subsequent reserving, this will lead to reduced Group profitability in the medium to long-term. - Active investment management to ensure competitive policyholder investment funds.- Stringent customer service management information ensures Management is aware of
any customer servicing issues, with any issues being tracked and followed up.- Product distributor relationship management processes.- Close monitoring of persistency
levels across all groups of business.
Expense overruns and unsustainable unit cost growth For the closed UK and Dutch businesses, the Group is exposed to the impact of fixed and semi-fixed expenses, in conjunction with a diminishing policy base, on profitability. For the Swedish open life and pensions business, the Group is exposed to the impact of expense levels varying adversely from those assumed in product pricing. - For the UK business the Group pursues a strategy of outsourcing functions with charging structures such that the policy administration cost is aligned to book run off
to the fullest extent possible.- The Swedish operations assume growth through new business such that the general unit cost trend is positive.- The Dutch business
pursues a low cost-base strategy using a designated service company. The cost base is supported by service income from third party customers.- For all three divisions,
the Group maintains a strict regime of budgetary control.
Significant and prolonged equity market falls A significant part of the Group's income and, therefore, overall profitability derives from fees received in respect of the management of policyholder and investor funds. Fee levels are generally proportional to the value of funds under management and, as the managed investment funds overall comprise a significant equity content, the Group is exposed to the impact of significant and prolonged equity market falls, which may lead to policyholders switching to lower-margin, fixed-interest funds. - Individual fund mandates are intended to give rise to a degree of diversification of risk.- Certain investment management costs are also proportional to fund values
thereby reduce in the event of market falls and hence some cost savings arise partially hedging the impact on income.- There is a wide range of investment funds and
managers so that there is no significant concentration of risk.- In the Movestic business, management options include the ability to increase charges in the
circumstances of a material fall in assets under management.
Adverse exchange rate movements against Sterling Exposure to adverse Sterling:Swedish Krona and Sterling:Euro exchange rate movements arises from actual planned cash flows between Chesnara and its overseas subsidiaries and from the impact on reported IFRS and EEV results which are expressed in Sterling. - The Group monitors exchange rate movements and the cost of hedging the currency risk on cash flows when appropriate.- The impact of any adverse currency movements can
be reduced by timing the cash flows from subsidiaries to Group, if appropriate given various other applicable criteria for transfers.
Counterparty failure The Group carries significant inherent risk of counterparty failure in respect of:- its fixed interest security portfolio;- cash deposits; and- payments due from reinsurers. - Operation of guidelines which limit the level of exposure to any single counterparty and which impose limits on exposure to credit ratings.- In respect of a
significant exposure to one major reinsurer, Guardian Assurance Limited ('Guardian'), the Group has a floating charge over the reinsurer's related investment assets,
which ranks the Group equally with Guardian's policyholders.
Adverse movements in yields on fixed interest securities The Group maintains portfolios of fixed interest securities (i) in order to match its insurance contract liabilities, in terms of yield and cash flow characteristics, and (ii) as an integral part of the investment funds it manages on behalf of policyholders and investors. It is exposed to mismatch losses arising from a failure to match its insurance contract liabilities or from the fact that sharp and discrete fixed interest yield movements may not be associated fully and immediately with corresponding changes in actuarial valuation interest rates. - The Group maintains rigorous matching programmes to ensure that exposure to mismatching is minimised.- Active investment management such that, where appropriate,
asset mixes will be changed to mitigate the potential adverse impact on declines in bond yields.
Failure of outsourced service providers to fulfil contractual obligations The Group's UK life and pensions businesses are heavily dependent on outsourced service providers to fulfil a significant number of their core functions. In the event of failure by any of the service providers to fulfil their contractual obligations, in whole or in part, to the requisite standards specified in the contracts, the Group may suffer losses, poor customer outcomes, or reputational damage as its functions degrade. - Rigorous service level measures and management information flows under its contractual arrangements.- Continuing and close oversight of the performance of all service
providers.- The supplier relationship management approach is conducive to ensuring the outsource arrangements deliver to their obligations.- Under the terms of the
contractual arrangements the Group may impose penalties and/or exercise step-in rights in the event of specified adverse circumstances.
Key man dependency The nature of the Group is such that it relies on a number of key individuals who have particular knowledge, experience and know how. The Group is, accordingly, exposed to the sudden loss of the services of these individuals. - The Group promotes the sharing of knowledge and expertise to the fullest extent possible.- It periodically reviews and assesses staffing levels, and, where the
circumstances of the Group justify and permit, will enhance resource to ensure that know how and expertise is more widely embedded.- The Group maintains succession plans
and remuneration structures which comprise a retention element.- The Group complements its internal expertise with established relationships with external specialist
partners.
Adverse regulatory and legal changes The Group operates in jurisdictions which are currently subject to significant change arising from regulatory and legal requirements. These may either be of a local nature, or of a wider nature, following from EU-based regulation and law. Significant issues which have arisen and where there is currently uncertainty as to their full impact on the Group include:i) the implementation and embedding of Solvency II requirements;ii) the FCA's review of legacy business; iii) the changes in pensions legislation in April 2015;iv) HM Treasury's review of exit charges on pensions business; andv) Commission and rebate income changes in Sweden. Strong project management disciplines are applied when delivering regulatory change programmes. Chesnara seeks to limit any potential impacts of Regulatory change on the
business by:- Having processes in place for monitoring changes, to enable timely actions to be taken, as appropriate- Being a member of the ABI and other means of joint
industry representation- Performing internal reviews of compliance with regulations- Utilising external specialist advice, when appropriate, including Assurance
Chesnara maintains strong relationships with all key regulators including regular and open dialogue about areas of potential change that could affect any of the Chesnara
businesses. Through the Risk Management Framework, regulatory risk is monitored and scenario tests are performed to understand the potential impacts of adverse regulatory
or legal changes, along with consideration of actions that may be taken to minimise the impact, should they arise.
Inconsistent regulation across territories Chesnara currently operates in three regulatory domains and is therefore exposed to inconsistent application of regulatory standards across divisions, such as the imposition of higher Capital Buffers over and above regulatory minimums.Potential consequences of this risk for Chesnara constraining the efficient and fluid use of capital within the Group, or creating a non-level playing field with respect to future deal assessments. - Strong and open relationships are maintained with all regulators. Evidence is provided to Regulators that demonstrates consistent stability and control across
Divisions, achieved through strong risk management and governance standards.- In extremis, Chesnara could consider the re-domiciling of subsidiaries or legal restructure
of the business.
Availability of future acquisitions Chesnara's inorganic growth strategy is dependent on the availability of attractive future acquisition opportunities. Hence, the business is exposed to the risk of a reduction in the availability of available acquisition opportunities in Chesnara's current target markets, for example arising as a result of a change in competition in the consolidation market or from regulatory change influencing the extent of life company strategic restructuring. - Chesnara's financial strength and market reputation for successful execution of transactions enables the company to adopt a patient and risk-based approach to
assessing acquisition opportunities.- Operating in multi-territories provides some diversification against the risk of changing market circumstances in one of the
territories. - Maintaining strong relationships and reputation as "safe hands acquirer" via regular contact with regulators, banks and target companies.
Defective acquisition due diligence Through the execution of acquisitions, Chesnara is exposed to the risk of erosion of value or financial losses arising from risks inherent within businesses or funds acquired which are not adequately priced for or mitigated within the transaction. - Structured Board approved risk-based acquisition process including CRO involvement in due diligence process.- Management team with significant and proven mergers and
acquisitions experience.- Cautious risk appetite and pricing approach.
Cyber fraud Cyber fraud is a growing risk affecting all companies, particularly in the financial sector.This risk exposes Chesnara to potential financial losses and disruption to Policyholder services (and corresponding reputational damage). - Ongoing specialist external advice, modifications to IT infrastructure and updates as appropriate.- Penetration and vulnerability testing.
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;
- The EEV supplementary information has been prepared in accordance with the EEV Principles; and
- 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 2016 30 March 2016
INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON THE PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC
We confirm that we have issued an unqualified opinion on the full financial statements of Chesnara plc.
We also confirm that we have issued an unqualified opinion on the EEV Basis Supplementary Information of Chesnara plc. Our
audit report on the EEV Basis Supplementary Information should be read in conjunction with the full financial statements
prepared on an IFRS basis.
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:
1. Save and Prosper cost of Guarantees;
2. Valuation of the Protection Life acquired in-force business intangible;
3. Credit adjustment to the valuation rate of interest; and
4. Waard acquisition.
1) Save and 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. The carrying value of the
liability within the IFRS financial statements has fluctuated significantly over the last 3 years, and has a value of
£37.2m at 31 December 2015 (31 December 2014: £34.6m). The value is determined by a third party actuarial consultant and he
directors compare this valuation against an in-house derived estimate using an approximation model to validate its
reasonableness.
See the 'S&P Pre-tax IFRS profit' section of the Financial Review for disclosure of the charge to income for the current
and prior year and narrative of the driver underpinning this movement.
How the scope of our audit responded to the risk
We have 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 have assessed the design and implementation of the internal controls in place to monitor and manage the risks associated
with the cost of guarantee reserve.
2) Valuation of the Protection Life acquired in-force business intangible
The risk
At 31 December 2015 the group carries an intangible asset for the Protection Life acquired in-force business of £15.0m (31
December 2014: £17.6m). Following a review of available headroom, the key risk has been focussed on the Protection Life
acquired in-force business intangible from the Movestic acquired in-force business intangible in the previous year.
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 arising from the pre-acquisition policies acquired in past business
combinations. The key assumptions are persistency rates, discount rates and economic assumptions. In performing the
impairment review management has used a variety of discount rates (4%, 5%, 6% and 7%).
How the scope of our audit responded to the risk
We evaluated the recoverability of the Protection Life acquired in-force business intangible asset by reviewing and
challenging:
- the mechanical accuracy of the net present value calculation;
- the cash flows within the model to ensure 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 tested the design and implementation of the controls over the impairment test performed by management to assess the
suitability of the carrying value of the intangible asset.
3) Credit adjustment to the valuation rate of interest
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 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 the risk
We evaluated the appropriateness of the principal assumptions relating to the credit risk element of the valuation rate of
interest 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 consistency.
We have 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.
4) Waard acquisition
The risk
The acquisition of the Waard Group required the exercise of judgment on the identification and valuation of the assets and
liabilities acquired. The key judgments included the calculation of future cash flows arising from the Waard Group and the
discount rate applied in adjusting these cash flows to a present value measurement. These judgements have a material impact
on the financial position and result for the year.
A profit of £16.6m was recognised along with an intangible asset of £5.5m representing the acquired in-force business,
which will be amortised over the life of the business. A profit on acquisition was recognised due to the deal being a
"bargain purchase" given the owner of the Waard Group was subject to bankruptcy proceedings in the Netherlands during the
deal negotiation and completion.
See Note 3 for the accounting policy adopted by management, the consideration of significant accounting judgment and the
disclosure of the acquired in-force business intangible.
How the scope of our audit responded to the risk
We supervised audit procedures on the acquired Balance Sheet, including an independent valuation of a sample of derivative
contracts held within the Balance Sheet and other investment balances.
We challenged the methodology applied to the underlying cash flows used to calculate the acquired in-force business
intangible asset, and the judgments made by management. Specifically we recalculated an independent discount rate based on
observable inputs to assess whether the rate used by management was reasonable. We used actuarial specialists within our
audit team to challenge the appropriateness of assumptions used with reference to the actual experience observed within the
book.
We assessed and challenged the completeness and accuracy of adjustments made in the consolidation process by independent
recalculation. This included adjustments made to bring the Waard reporting in line with the group accounting policies, and
any consolidation adjustments made.
We obtained and challenged the acquisition hindsight review performed by Management in the post-acquisition period against
the performance of the acquired business.
We have evaluated the design and implementation of the internal controls in place around the Waard acquisition. Such
controls included Board approval of the assumptions used and approval of the acquisition accounting workings.
These matters were addressed in the context of our audit of the full 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 audit report on the full 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 liability for our audit report on the EEV
Basis Supplementary Information is to the company directors in accordance with our engagement letter. Our audit work on the
full financial statements and on the EEV Basis Supplementary Information has been undertaken so that we might state to the
company's members and directors 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 2015 2014
£000 £000
Insurance premium revenue 114,749 128,384
Insurance premium ceded to reinsurers (46,811) (51,646)
Net insurance premium revenue 67,938 76,738
Fee and commission income 66,249 66,592
Net investment return 148,514 430,673
Total revenue net of reinsurance payable 282,701 574,003
Other operating income 18,586 23,624
Total income net of investment return 301,287 597,627
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (318,721) (303,521)
Net increase in insurance contract provisions 191,850 39,676
Reinsurers' share of claims and benefits 32,004 44,627
Net insurance contract claims and benefits (94,867) (219,218)
Change in investment contract liabilities (100,469) (267,140)
Reinsurers' share of investment contract liabilities 733 2,272
Net change in investment contract liabilities (99,736) (264,868)
Fees, commission and other acquisition costs (20,875) (21,707)
Administrative expenses (41,301) (42,494)
Other operating expenses
Charge for amortisation of acquired value of in-force business (9,274) (9,281)
Charge for amortisation of acquired value of customer relationships (222) (263)
Other (5,866) (8,840)
Total expenses net of change in insurance contract provisions and investment contract liabilities (272,141) (566,671)
Total income less expenses 29,146 30,956
Share of profit of associate 455 855
Profit recognised on business combination 16,644 -
Financing costs (3,457) (3,008)
Profit before income taxes 42,788 28,803
Income tax expense (3,000) (3,228)
Profit for the year 39,788 25,575
Foreign exchange translation differences arising on the revaluation of foreign operations (173) (7,844)
Total comprehensive income for the year 39,615 17,731
Basic earnings per share (based on profit for the year) 31.48p 22.10p
Diluted earnings per share (based on profit for the year) 31.41p 22.08p
CONSOLIDATED BALANCE SHEET
31 December 2015 2014
£000 £000
Assets
Intangible assets
Deferred acquisition costs 36,061 31,298
Acquired value of in-force business 68,341 73,469
Acquired value of customer relationships 875 1,143
Software assets 4,720 3,715
Property and equipment 537 477
Investment in associates 4,707 4,388
Investment properties 245 5,520
Reinsurers' share of insurance contract provisions 282,628 335,936
Amounts deposited with reinsurers 33,941 35,498
Financial assets
Equity securities at fair value through income 486,243 475,983
Holdings in collective investment schemes at fair value through income 3,499,355 3,516,424
Debt securities at fair value through income 423,754 377,193
Policyholders' funds held by the Group 189,919 164,858
Insurance and other receivables 43,674 45,360
Prepayments 6,565 4,821
Derivative financial instruments 2,721 3,580
Total financial assets 4,652,231 4,588,219
Reinsurers' share of accrued policyholder claims 19,042 14,722
Income taxes 3,611 1,962
Cash and cash equivalents 260,863 241,699
Total assets 5,367,802 5,338,046
Liabilities
Insurance contract provisions 2,232,083 2,308,043
Other provisions 1,905 729
Financial liabilities
Investment contracts at fair value through income 2,457,521 2,389,812
Liabilities relating to policyholders' funds held by the Group 189,919 164,858
Borrowings 79,025 87,296
Derivative financial instruments 444 49
Total financial liabilities 2,726,909 2,642,015
Deferred tax liabilities 7,906 8,340
Reinsurance payables 9,660 10,499
Payables related to direct insurance and investment contracts 62,284 58,789
Deferred income 6,212 6,974
Income taxes 6,328 4,168
Other payables 18,401 18,467
Bank overdrafts 952 1,189
Total liabilities 5,072,640 5,059,213
Net assets 295,162 278,833
Shareholders' equity
Share capital 42,600 42,600
Share premium 76,516 76,523
Treasury shares (161) (168)
Other reserves (814) (641)
Retained earnings 177,021 160,519
Total shareholders' equity 295,162 278,833
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2015 2014
£000 £000
Profit for the year 39,788 25,575
Adjustments for:
Depreciation of property and equipment 203 206
Amortisation of deferred acquisition costs 9,251 9,729
Amortisation of acquired value of in-force business 9,274 9,281
Amortisation of acquired value of customer relationships 222 263
Amortisation of software assets 1,346 1,802
Share based payment 212 114
Tax paid 2,999 3,228
Interest receivable (24,693) (26,975)
Dividends receivable (31,501) (30,032)
Interest expense 3,457 3,008
Change in fair value of investment properties (4,277) (2,526)
Fair value gains on financial assets (87,934) (370,641)
Profit arising on business combination (16,644) -
Share of profit of associate (455) (855)
Increase in intangible assets related to insurance and investment contracts (14,759) (16,219)
Interest received 24,458 27,346
Dividends received 31,532 29,835
Changes in operating assets and liabilities:
Decrease in financial assets 62,365 44,847
Decrease in reinsurers share of insurance contract provisions 54,253 34,654
Increase/(decrease) in amounts deposited with reinsurers 1,557 (1,205)
Increase/(decrease) in insurance and other receivables 1,754 (2,492)
Increase in prepayments (1,710) (317)
- More to follow, for following part double click ID:nRSe6231Td