REG - Chesnara PLC - Half Yearly Report <Origin Href="QuoteRef">CSN.L</Origin> - Part 2
28/08/2015 07:01
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£21.6m and the net cash generation has
increased by £39.9m as a direct consequence of the acquisition. Over and above the direct and immediate financial benefits
the acquisition creates opportunity to progress further value adding deals in the Dutch market."
Highlights
- Completion of the acquisition of the Waard Group in the Netherlands for E69.9m.
- £21.6m increase in Group Embedded Value.
- £39.9m of additional cash distribution potential created.
- Entry to a third market assessed as having significant further market consolidation potential.
Review six months to 30 June 2015
There has been a general lull in closed block market activity in the UK driven in part by uncertainty resulting from
Solvency II and regulatory developments. Despite the short term hiatus we believe the factors which will drive market
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. In the short term we
have increased our focus on Western Europe, in particular investigating opportunities in the Dutch market following the
acquisition of the Waard Group.
Acquisition of the Waard group
On 19 May 2015 we completed the acquisition of the Waard Group in the Netherlands for E69.9m. To finance the deal we
raised £34.5m of equity through a well supported share placing exercise. The acquisition creates a great opportunity to
enter a new market within which consolidation is in its early stages. The deal was originally assessed positively on all
four elements of our assessment scorecard. The table below illustrates how these actual benefits arose on acquisition:
CASH GENERATIONThe Solvency position on acquisition confirms that significant surplus (c£39.9m) is available for distribution in an orderly fashion over a three year period. EMBEDDED VALUEThe actual discount to embedded value of 29.7% has resulted in an embedded value increment of £21.6m.
STRATEGIC OPPORTUNITYInitial evidence of potential deal opportunities reaffirms our view that Chesnara can benefit from closed book market consolidation. RISK CONSIDERATIONSBusiness, market and regulatory developments during the period support our initial positive assessment of the risk profile of the business.
Acquisition process and approach
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. To
support our proven market presence, we have recently implemented a revised acquisition process framework in order to ensure
we continue to identify and assess all potential value adding deals across our widening geographical markets. Importantly
we have rolled the acquisition process out into the Dutch management team, who have begun to implement the process in the
Dutch market. This ensures we get the benefits of local market knowledge complemented by closed book consolidation
experience and expertise provided by the Chesnara management team.
We assess the financial impact of potential acquisition opportunities by estimating the impact on three financial measures
namely; the cash flow of the Group, the incremental embedded value and the internal rate of return. The financial measures
are assessed under best estimate and stress scenarios.
The measures are considered by the Board, in the context of other non-financial measures including the level of risk and
the degree of strategic fit and opportunity.
Risks associated with this strategic objective
The risk of not effectively delivering this objective is two-fold. Firstly, there is the risk that Chesnara makes no
further acquisitions and secondly there is the risk that we make an inappropriate acquisition that adversely impacts the
financial strength of the Group.
The acquisition of the Waard Group opens a new territory and hence increases our options thereby reducing the risk that no
further value adding deals are done. Also, the broader target market will also reduce the risk of inappropriate
opportunities being progressed on the grounds that better optionality will enable us to identify better fit deals at a more
competitive price. As our acquisition strategy focuses more on non-UK markets we become increasingly exposed to currency
risk. Flexibility over the timing of subsequent capital extractions and dividend flows provide an element of management
control over the Sterling value of cash inflows. We accept the short-term fluctuations in the reporting of embedded value
that can arise.
During recent years we have enhanced our financial deal assessment modelling capabilities which improves the quality of
financial information available to the Board. This strongly mitigates the risk of inappropriate opportunities being
pursued. In addition, the increased financial strength of the Group means that any perceived risk that pressure to do a
deal could result in a departure from the stringent assessment criteria will have reduced.
Acquisition outlook
Despite some short term challenges in the UK due to the uncertainty created by Solvency II and regulatory review
programmes, we remain confident that all the commercial and economic drivers for consolidation remain positive and hence
the market will become more active in due course. In the meantime, the acquisition of the Waard Group will provide
significant potential in the Dutch market. 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.
CHESNARA CULTURE AND VALUES
General business conduct
The principles of the Group's general business conduct are illustrated below:
Conduct business with professionalism and integrity Conduct business with due care, skill and attention Responsible management, with adequate risk management systems
Maintain adequate financial resources
Good business conduct is in many ways a matter of behavioural or cultural practice and principles. Chesnara has always
maintained high standards with regards to ensuring the business is managed on a risk-based, fair and responsible basis. To
further reinforce and embed this culture of responsibility revised Governance procedures and processes ("Governance Map")
have been developed which are due for implementation during the latter half 2015. The Governance Map will ensure
Chesnara's cultural values and good business conduct are effectively applied across the recently enlarged Group. It will
also create consistency of approach and transparency of policy, both of which are fundamental requirements of the Solvency
II regime.
Maintain adequate financial resources
A critical element of good business conduct in a regulated financial services business is the need to maintain adequate
financial resources which in turn is managed by governing our solvency position. In recognition of this, as part of the
day to day conduct of our business we regularly monitor the solvency position of the Group. This demonstrates our
commitment to maintaining a strong, but not excessive, solvency position. This brings a number of benefits, including
supporting:
- one of our key financial management objectives of safeguarding policyholder interests.
- delivering to the dividend expectations of our shareholders.
- potential acquisition opportunities.
- our ability to absorb volatility created by external economic conditions.
Highlights
- The Group shows it continues to be well capitalised, with Group solvency being 271% at 30 June 2015 (284% at 31
December 2014).
- The Waard Group acquisition has had a slightly dilutive effect on the Group solvency position, as expected.
- As expected the Waard Group companies are well capitalised and this will support the orderly transfer of cash to
Chesnara over a three year period.
Regulatory capital:
30 June 2015 31 December 2014
Minimum resource requirement£m Target resource requirement£m Capital resources£m Solvency ratio over minimum Minimum resource requirement£m Target resource requirement£m Capital resources£m Solvency ratio over minimum
Group 81.4 81.4 220.7 271% 79.3 79.3 225.3 284%
CA plc 59.6 94.7 125.7 211% 65.8 102.1 116.1 176%
Movestic Liv 8.6 12.9 35.1 408% 9.3 13.9 34.9 376%
Waard Leven 4.7 9.4 35.9 766% 5.4 10.8 40.4 752%
Waard Welvaren 2.6 5.2 11.0 418% 2.9 5.8 11.9 411%
Waard Schade 1.8 3.5 5.8 330% 2.0 3.9 6.3 324%
Group Solvency (IGD)
- The Board approved target is for Group capital resources to be at least equal to 100% of the capital required by the
Insurance Group Directive (IGD).
- The IGD ratio at 30 June 2015 is 271% (31 December 2014: 284%)
- This represents a surplus of £139.3m (31 December 2014: £146.0m)
- IGD is stated after foreseeable dividends of £8.4m, this being the interim dividend to be paid on 15 October 2015 (31
December 2014: £15.1m, being the final dividend that was paid on 22 May 2015).
- The movement in IGD since 31 December 2014 is a function of the following key items:
- Acquisition of the Waard Group: This has resulted in the equity proceeds from the capital raised in December 2014,
coupled with Chesnara cash resources, being utilised to fund the acquisition. As expected, the IGD has consequently
reduced due to the inclusion of the Waard Group's capital requirements in the IGD calculation.
- The Group regulatory surplus in the period. The Group Regulatory surplus in the first half of 2015 amounted to £6.7m,
before foreign exchange retranslation differences.
- Foreign exchange losses on retranslation. The Group Regulatory Resources have reduced by £3.0m in the period as a
result of the weakening of the Swedish Krona.
- The interim dividend: The Group Regulatory surplus reduces as a result of the proposed interim dividend of £8.4m.
Solo Solvency
CA Plc
- CA plc is the primary operating subsidiary within the UK.
- The Board approved target for CA plc is to hold capital resources that are at least equal to 162.5% of Long Term
Insurance Capital Requirement (LTICR) plus 100% of the Resilience Capital Requirement (RCR).
- CA plc is reporting a solvency ratio of 211% at 30 June 2015 (31 December 2014: 176%), representing a surplus of
£66.1m (31 December 2014: £50.3m) over the regulatory capital requirement. The movement since 31 December 2014 is as a
result of the following factors:
- Regulatory earnings in the period: The regulatory surplus emerging from CA plc amounts to £9.5m. This is broadly in
line with the IFRS post-tax surplus of £15.0m, as reported as set out below. The key difference arises from the way in
which products with guarantees are accounted for between an IFRS and Solvency I basis.
- Reduction in capital requirement: The capital requirement of CA plc is estimated to have reduced by £6.2m in the
period.
PL Ltd
PL Ltd also sits within the UK division. This company being managed such that its capital resources equal its capital
resources requirement. This is following the transfer of its long term business into CA plc on 31 December 2014.
Subsequent to 30 June 2015 PL Ltd was deauthorised. This will release £3.5m of capital that was required to be held at 30
June 2015 due to it still being a regulated company at that date.
Movestic Liv
- Movestic Liv is the principal operation subsidiary in Sweden.
- The Board approved target for Movestic Liv is to hold capital resources that are at least 150% of its capital
resources requirement.
- Movestic Liv has a solvency ratio of 408% at 30 June 2015 (31 December 2014: 376%), representing a surplus of £22.2m
(31 December 2014: £21.0m) over the regulatory capital requirement. The movement since 31 December 2014 is as a result of
the following factors:
- Regulatory earnings in the period: The regulatory surplus emerging from Movestic Liv amounts to SEK 37.5m. In GBP
terms the overall capital resources of Movestic Liv have only marginally increased due to the weakening of Krona in the
period.
- Reduction in capital requirement: The capital requirement of Movestic Liv is estimated to have increased in the
period as a result of the general growth in the business.
The Waard Group
- The Board approved target for the regulated insurance companies within the Waard Group is for each company to hold
capital resources that are at least equal to 200% of the regulatory imposed capital resources requirement.
- Waard Leven is the largest company within the Waard Group, and owns Hollands Welvaren.
- As reported prior to the acquisition, the Waard Group is well capitalised, with Waard Leven reporting a solvency ratio
of 766% at 30 June 2015, compared with 752% at 31 December 2014.
- Whilst the solvency ratio has improved, the solvency margin of Waard Leven in GBP terms, has reduced from £29.7m at
the start of the year to £26.5m at 30 June 2015 due to a depreciation of the Euro against GBP in this period.
When stated in Euro, Waard Leven has generated a regulatory surplus of E1.8m since the start of the year.
Solvency IIThe "dry-run" suggests total Group surplus capital over and above the Solvency Capital Requirement is broadly comparable to the equivalent surplus in a Solvency 1 regime. The move to Solvency II is expected to remove an additional local Swedish solvency requirement, at least in its current form, such that the Solvency II surplus may be more accessible in the future than under the current regime in Sweden. The "dry-run" results include certain assumptions where the final interpretations of the
rules are not confirmed, for example how much deferred tax is recognised in the determination of our capital requirements. The results are based on all Group companies applying the standard formula and assume no transitional arrangements are utilised, but do assume the availability of further data regarding assets and reassurer solvency in the UK together with certain management actions, mainly in Sweden. The management actions relate primarily to the optionality and intent to adjust certain charges under
stress conditions. Based on the above and assuming the regulators require no increase in any additional buffer surplus, we continue to expect a "neutral to marginally positive" Solvency II impact. In the case of the PRA the "no increase in additional surplus" working assumption is based upon recent public statements by the PRA that they do not consider the Insurance Sector to be inherently under-capitalised and that Solvency II is not positioned as having a capital strengthening agenda.
Treatment of customers
UK
Treating customers fairly
We have embedded the principle that we aim to treat all customers fairly within all our people, processes and procedures.
This aim has been shared with and adopted by, all our outsourcing partners. The principle goes beyond the way we answer
telephone calls and deal with the regular service that we provide to our customers. It is also considered when we deal
with complaints from our customers or where we identify an error within our systems that affects customer outcomes.
Complaints
The general low level of complaints received has continued although we continue to receive a number of complaints from
complaint management companies in respect of endowment policies surrendered or lapsed many years ago. The Financial
Ombudsman Service continues to agree with our decision on the majority of complaints referred to them for adjudication.
Policyholder investment funds
The CA plc Investment Committee provides oversight of policyholder funds through regular meetings with the investment
managers. With them we continue to review the funds to ensure the underlying investment mix is the most appropriate for
policyholders. A critical factor that has a bearing on the customer experience is the level of investment return on their
assets. Whilst unit linked customers are naturally directly exposed to the volatility of investment markets outside of
Chesnara's direct influence, it is important that we ensure the investment performance of our policyholder funds is
competitive against market benchmarks. In light of this we are pleased to confirm that our main managed funds have all
out-performed their benchmarks during the 12 months ended 30 June 2015, with the exception of the CWA Balanced Managed
Pension fund, which slightly underperformed against benchmark during this 12 month period.
Sweden
An external survey measuring the brokers' and broker assistants' view of Movestic was conducted during the first half of
2015 and the results confirm the conclusions from 2014. With regards to the treatment of customers, Movestic's complaints
function receives very few customer complaints and cases brought to the Public Complaints Board are very rare.
Netherlands
The Dutch operations implemented a new complaints registration system, in accordance with regulatory requirements. This
resulted in a more accurate registration and more efficient processing of complaints. The number of complaints remains
low. The operations run a Court approved "Customer Compensation Schema", introduced and predominantly paid by the Trustees
of the former shareholder, which proceeds as expected.
Treatment of employees
We recognise that management and staff are at the heart of Chesnara's success. Our continued flexible and supportive
approach has contributed to another period of low staff turnover throughout the Group.
The Movestic approach is characterised by the focus on team efforts. The work environment provides a motivating ground for
developing the business to meet future challenges.
Regarding the recent acquisition of the Waard Group, this has been through a period of significant uncertainty over recent
years following the bankruptcy of its parent company. Throughout this period the staff and management have remained
focussed, professional and loyal. The Waard Group is moving offices in early September, which will contribute to
maintaining good employee satisfaction.
Treatment of investors
As a listed company, clearly one of our core responsibilities is to continue to provide a competitive return to our
shareholders. We are aware that for many of our shareholders continuity of our historically strong dividend performance is
a core requirement. In light of this we are pleased that the financial performance of the Group during the first half of
2015 enables us to increase our interim dividend by 3.0% compared with 2014.
In addition to providing financial returns to our investors we also recognise the importance of engaging with our investors
in an effective way so as to ensure they are appropriately informed about the performance of the company. To this end, we
produce external reports that aim to be as open and informative as is reasonable. We also ensure we are available to meet
with investors and hold ad hoc presentations as appropriate.
Relationship with regulators
UK
As ever in this highly regulated industry there have been a number of new and ongoing initiatives that have led to various
levels of attention and challenge. The commentary below sets out a list of the key activities during the period.
Senior Insurance Managers Regime
As part of the changes required to meet the requirements of Solvency II, the PRA and FCA are making changes to how they
regulate the people who effectively run an insurance company. This change will require changes to governance arrangements
for the company and with individuals taking more personal responsibility. The Company is currently making good progress in
its preparations for these changes.
Legacy review UK
During 2014 CA plc participated in a review by the FCA that looked at legacy investment linked business. This review has
looked at a number of areas including company governance, customer correspondence and policyholder charges. A report on
the findings of this review was expected in the second quarter of 2015, but is now expected during the third quarter.
Independent Governance Committees (IGCs) on pensions
The new governance requirements for Workplace Personal Pension schemes and Occupational Pension schemes has now been
introduced. The company has appointed Pitmans Trustees Limited as its external Governance Advisory Arrangement to oversee
the Workplace Personal Pensions and report on their value for money. The Trustee arrangements for the occupational schemes
are being updated and they will also report on value for money.
Pension changes
The company has updated its processes to comply with the pension changes introduced in April 2015. The company saw an
initial increase in pension enquiries which has now returned to normal levels. Following the changes, the company has
experienced an increase in the number of policyholders electing to take their benefits as a lump sum at retirement.
Pension transfers and early exit charges
In July 2015 HM Treasury issued a consultation on "Pension transfers and early exit charges". In this paper the Government
has stated that it wants to ensure that individuals can access the new flexibilities for pensions "easily, and at
reasonable cost". This consultation includes consideration of any fees and charges that policyholders might incur when
leaving their scheme early, and views are being sought on three options which may be recommended if there is clear evidence
of excessive early exit fees and charges.
PRA visit
As part of its regular monitoring of CA plc the PRA carried out its annual Periodic Summary Meeting. This meeting helps it
understand the business and identify its monitoring requirements over the year.
Sweden
Movestic has a good relationship with the regulator and has an active dialogue with them on business as usual matters in
conjunction with interactions on any specific regulatory affairs. During the first half of 2015 a key focus of the Swedish
FSA has been concerning industry preparations around SII.
Netherlands
During the past few years, the Waard companies maintained intensive contact with the regulators, DNB (Dutch Central Bank)
and AFM (Financial Market Authority). The relationship with the regulators is good. No significant issues were reported or
are outstanding.
Matters emphasised in the first half of 2015 include the post-acquisition governance structure, further implementation of
Solvency II, ORSA and the regulator's survey of unit-linked portfolios.
financial review
The key performance indicators illustrate how effectively we have performed against our three strategic objectives. The
strong net cash generation of £56.7m, together with the significant Embedded Value earnings in the period, is a function of
delivering against both our "Maximising value from the in-force book" and "Acquire Life and Pensions Businesses"
objectives. In addition to this, within the embedded value earnings there is £2.6m of new business profits which, despite
being at a more modest level than previously, reflects our continued commitment to "Enhancing value through new business".
IFRS PRE-TAX PROFIT £30.4M Six months ended 30 June 2014: £27.4M
What is it?
The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to smooth the
recognition of profit arising from written business over the life of insurance and investment contracts.
Why is it important?
IFRS pre-tax 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 pre-tax profit is an indicator of how we are performing against our stated strategic
objective of "maximising value from the in-force book".
Risks
The IFRS pre-tax profit can be affected by a number of our principal risks and uncertainties as set out below. In
particular, volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit.
Highlights
H1 2015 H1 2014
CA 13.9 24.2
S&P 7.5 6.8
Movestic 3.4 2.1
Waard - -
Group & Consolidation adjustments (10.6) (5.7)
Profit on acquisition 16.2 -
Total profit before tax and exceptional items 30.4 27.4
- A day one gain of £16.2m has been recognised on the acquisition of the Waard Group in the Netherlands, representing
the difference between the purchase price and the net assets acquired.
- Linked to the Waard Group acquisition, the Group segment includes a £3.5m foreign exchange translation loss arising
from holding Euros to fund the acquisition.
- Waard Group profit contribution to the half year results is immaterial given proximity of the acquisition to 30 June
2015.
- The CA result is less than the same period in 2014 largely due to 2014 including some one off items, such as the
positive impact of the revised HCL contract and a reserve reduction driven by a change in practice associated with certain
products that can accrue bonus units.
NET CASH GENERATION £56.7M Six months ended 30 June 2014: £15.6M
What is it?
Net cash generation is a measure of how much distributable cash the subsidiaries have generated in the period. The
dominating aspect of cash generation is the change in amounts freely transferable from the operating businesses, taking
into account target statutory solvency requirements which are determined by the Boards of the respective businesses. It
follows that cash generation is not only influenced by the level of surplus arising but also by the level of target
solvency capital.
Why is it important?
Cash generation is a key measure, because it is the net cash flows to Chesnara from its Life and Pensions businesses which
supports 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 in-force book". However, our cash generation is
always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of
the Group.
Risks
The ability of the underlying regulated subsidiaries within the Group to generate cash is affected by a number of our
principal risks and uncertainties as set out below. Whilst cash generation is a function of the regulatory surplus, as
opposed to the IFRS surplus, they are closely aligned, 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. In addition
to this, regulatory change, such as the introduction of Solvency II, can also materially affect the levels of cash
generated by our regulated subsidiaries, both positively or adversely.
Highlights Six months ended 30 June
H1 2015 H1 2014
Total Gross cash generated 15.3 16.0
Exceptional gain on acquisition 39.9 -
Movement in restriction of S&P WP capital 1.5 (0.4)
Net cash generation 56.7 15.6
- Gross cash generation across the Group continues to support our current attractive dividend strategy.
- Net cash generation in 2015 is dominated by the cash surpluses arising from the acquisition of the Waard Group, which
can be used to both support our future dividends and potential acquisitions in the Netherlands.
EEV EARNINGS NET OF TAX £44.9M* Six months ended 30 June 2014: £47.3M
*excluding the positive impact of modelling adjustments of £5.9m
What is it?
In recognition of the longer-term nature of the Group's insurance and investment contracts, supplementary information is
presented in accordance with European Embedded Value 'EEV' principles.
The principal underlying components of the EEV 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.
Why is it important?
By recognising the net present value of expected future cash flows arising from the contracts (in-force value), a different
perspective is provided in the performance of the Group and on the valuation of the business. EEV earnings are an
important KPI as they provide a longer-term measure of the value generated during a period. The EEV earnings of the Group
can be a strong indicator of how we have delivered to our strategic objectives, in particular the new business profits
generated from "enhancing our value through new business in selected markets", coupled with "maximising our value from the
in-force book".
Risks
The EEV earnings of the Group can be affected by a number of factors, including those highlighted within our principal
risks and uncertainties as set out below. In addition to the factors that affect the IFRS pre-tax profit and cash
generation of the Group, the EEV 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 EEV affect our long-term view of the future cash
flows arising from our books of business.
Highlights
H1 2015 H1 2014
New business contribution 2.6 6.2
Operating profit - existing business 12.4 31.0
Economic effects 15.9 21.2
Uncovered business & other group (7.9) (0.7)
Exceptional gain on acquisition 21.6 -
Tax 0.3 (10.4)
Total EEV Earnings 44.9 47.3
- Strong EEV earnings in the period supported by:
- £21.6m gain on acquisition of the Waard Group, offset by the Euro holding foreign exchange loss of £3.5m.
- Continued emergence of economic profits
- Operating profits that are in line with the same period in 2014, after adjustment for the large positive one off items
reported in 2014.
- New business profits from Movestic continue to be delivered, albeit at lower levels than 2014 due to a challenging
market which has witnessed aggressive pricing strategies from competitors.
EEV £441.2M 31 December 2014: £417.2M
What is it?
The European Embedded Value (EEV) of a life insurance company is the present value of future profits, plus adjusted net
asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.
Why is it important?
As the EEV takes into account expected future earnings streams on a discounted basis, EEV 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 embedded value. Analysis of EEV, distinguishing value in-force by segment and by product type,
provides additional insight into the development of the business over time. The EEV 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 new business in selected markets. It ignores the
potential of new business to be written in the future (the franchise value of our Swedish business) and the value of the
Company's ability to acquire further businesses.
Risks
The Embedded 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 (largely due to the proportion of IFRS pre-tax profit generated by Movestic compared
with the other UK businesses) the EEV of the Group can also be materially affected by exchange rate fluctuations. For
example a 10.0% weakening of exchange rates between Swedish Krona / Euro and Sterling would reduce the EEV of the Group by
3.0% and 1.5% respectively, based on the composition of the Group's EEV at 30 June 2015.
Highlights
£m
EEV actual December 2014 417.2
Net of tax profit arising in the period* 23.3
Profit arising on Waard Group acquisition 21.6
Effect of modelling adjustments 5.9
Foreign exchange reserve movement (11.7)
Dividend paid (15.1)
EEV actual June 2015 441.2
*Stated before gain on acquisition of the Waard Group
- Growth in EEV of £24.0m during the period.
- Post-tax EEV earnings have contributed £23.3m, excluding the acquisition profit of the Waard Group.
- Profit of £21.6m arising on acquisition of the Waard Group enhances EEV in the period.
- Foreign exchange losses arising on retranslation of the Movestic business have continued, driven by a further
weakening of the Swedish Krona.
- Dividends paid of £15.1m in the period, being the settlement of the year end 2014 final dividend, reduces the closing
Embedded Value.
IFRS PRE-TAX PROFIT £30.4M SIX MONTHS ENDED 30 JUNE 2014: £27.4M
Executive summary
The IFRS results by business segment reflect the natural dynamics of each line of business. In summary the current
financial model has three major components which can be characterised as: the "stable core", the "variable element", and
the "growth operation". The results and financial dynamics of each segment are analysed further as follows:
Stable core
At the heart of the surplus, and hence cash generation, are the CA and recently added 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 during the year to
date continue to support this objective, with an IFRS pre-tax surplus of £13.9m for CA (six months to 30 June 2014:
£24.2m). The recently acquired Waard Group has not contributed materially to the IFRS pre-tax profit as a result of being
acquired on 19 May 2015.
Further detail of the results of the CA and Waard Group segments can be found below.
Variable element
The S&P component generally brings an element of earnings volatility to the Group, with the results being particularly
sensitive to investment market movements, which can lead to large movements in the reserves that are held for products that
contain guaranteed returns. Despite this potential variability, the results for the first half of 2015 are comparable with
the same period of 2014, with product deductions remaining stable.
Further detail of the results of the S&P segment can be found as set out below.
Growth operation
The long-term financial model of Movestic is based on growth, with levels of new business and transfers 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. The first half of 2015 has seen this growth continue, with funds under management having increased
by 10.5% (on constant exchange rates) since the start of the year.
This growth has contributed to an IFRS profit of £3.4m being reported during the first half 2015, £1.3m higher than in the
same period in 2014. Whilst it is reassuring to see this level of growth, the results for the first half of 2015 have
benefitted from some large fee-rebates, amounting to £1.0m, which, by their nature, are more variable.
The Sterling value of Movestic's results continue to be suppressed by the ongoing weakening in the Swedish Krona against
Sterling, which has seen a 7.5% fall during the first half of 2015.
Further detail of the results of the Movestic segment can be found on as set out below..
IFRS results
The financial dynamics of the Group, as described above, are reflected in the following IFRS results:
Pre-tax IFRS profit Unaudited Six months ended 30 June Year ended 31 December Note
2015 2014 2014
£m £m £m
CA 13.9 24.2 46.7 1
S&P 7.5 6.8 (9.2) 2
Movestic 3.4 2.1 4.9 3
Waard Group - - - 4
Chesnara (7.4) (2.7) (7.6) 5
Consolidation adjustments (3.2) (3.0) (6.0)
Total profit before tax and exceptional items 14.2 27.4 28.8
Profit arising on acquisition 16.2 - - 6
Total profit before tax 30.4 27.4 28.8
Tax (2.1) (4.5) (3.2)
Total profit after tax 28.3 22.9 25.6
Note 1 - The CA segment has reported solid results for the first half of 2015, albeit reduced when compared with the same
period in 2014 due to a number of one off items in 2014 not repeating in the year to date. The result is underpinned by
product deductions, particularly in relation to mortality surpluses. Further detail are included below.
Note 2 - The S&P segment has reported a pre-tax profit in the first half of 2015 that is broadly in line with the same
period in 2014. The result includes a small surplus arising from products with guaranteed returns. The full year result
in 2014 amounted to a loss, driven by the significant reduction in bond yields during the latter half of 2014. Further
details are included below.
Note 3 - The Movestic result has improved when compared with the same period in 2014. This is primarily driven by fees
emerging from the increased levels of assets under management, coupled with some large rebates that were received in the
period. Further details are included below.
Note 4 - The post acquisition IFRS profit of the Waard Group is immaterial due to the close proximity of the acquisition to
30 June 2015.
Note 5 - The Chesnara segment contains the corporate governance costs of the Group. The segment has reported a large
increase in costs compared with the same period in 2014, the majority of which (£3.5m) represents a foreign currency
translation loss arising on holding Euros prior to the completion of the Waard Group acquisition. Some additional one-off
expenses have been incurred in the first half of 2015, such as the cost of additional resources required for final Solvency
II preparations, deal costs associated with the Waard Group acquisition and loss of office payments associated with the
resignation of the previous CEO.
Note 6 - The IFRS pre-tax profits include a day one profit arising on the acquisition of the Waard Group, being the excess
of the fair value of the net assets acquired over the purchase consideration. Further detail behind this can be found on
note 5 of the IFRS Financial Statements as set out below.
The IFRS results by business segment are analysed in more detail below:
CA
CA now includes the results of the PL segment, which was previously reported separately. The segment has reported a profit
of £13.9m for the first six months of 2015 (six months to 30 June 2014: £24.2m). This reduction in profit before tax is
largely driven by non-recurring items affecting the 2014 result that have not been repeated during 2015, further detail of
which has been provided below. The underlying drivers of earnings in the CA segment have continued to hold up well, with
product deductions actually improving when compared with 2014, largely driven by strong mortality surpluses in year to
date.
The table below bridges the IFRS profit for the first half of 2015 compared with the same period in 2014, and illustrates
that, save for the non-recurring items referred to in notes 3 and 4, the results are broadly in line.
Profit before tax movement 30 June 2014 to 30 June 2015 £m Note
June 2014 24.2
Product based deductions 2.9 1
Other effects due to market movements (0.8)
Other (2.1)
Gains and interest on retained surplus (2.7) 2
Adj to Bonus unit reserves (3.4) 4
Impact of new HCL contract (4.2) 3
June 2015 13.9
The key components of the IFRS result for the year are as follows:
Pre-tax IFRS profit Unaudited Six months ended 30 June Year ended 31 December Note
2015 2014 2014
£m £m £m
Product-based charges 16.4 13.5 29.4 1
Administration expenses (5.0) (4.9) (10.5)
Gains and interest on retained surplus (0.2) 2.4 5.7 2
Operating assumption changes 0.2 0.3 0.7
Other effects due to investment market movements 1.2 2.4 10.1
Impact of new HCL contract - 4.2 4.2 3
Complaint costs (0.2) (0.3) (1.4)
Other 1.5 6.6 8.5 4
Total 13.9 24.2 46.7
Note 1 - Product-based charges of £16.4m for the period have increased by £2.9m when compared with the same period in 2014.
The key drivers of this are two-fold; the mortality surplus has increased by £2.3m when compared with the same period in
2014, driven by positive mortality experience, coupled with an increase in tax deductions from policyholder funds, driven
by slightly better equity performance in the funds compared with the same period in 2014.
Note 2 - Profits arising from gains and interest on retained surplus have reduced by £2.6m when compared with the same
period in 2014. This is primarily driven by the impact of a small decrease in bond values as a result of an increase in
bond yields in the first half of the year. The converse dynamic existed in the same period in 2014.
Note 3 - The CA surplus in the first half of 2014 included a £4.2m positive effect of modelling the new HCL contract. No
such item has been reported in the 2015 profit.
Note 4 - During the first half of 2014 the CA result benefitted from a £3.4m one-off item relating to the reserving impact
of a change in practice associated with policies that can accrue bonus units in certain circumstances. No such item is
being reported in the 2015 year to date results. The balance in 2015 relates to a number of small items, including the
small impact of changes in actuarial reserves in the period.
S&P
The S&P segment has posted a pre-tax profit of £7.5m for the year to date, which is broadly in line with the same period in
2014. Whilst the total results are broadly similar period on period, the constituent parts continue to show some
variability. Further analysis has been provided in the tables below.
Profit before tax movement 30 June 2014 to 30 June 2015 £m Note
June 2014 6.8
Impact of new HCL contract 4.2 4
Change in Cost of Guarantees 0.5 3
Other (0.3)
Change in sterling and expense reserves (0.9)
Income on with-profit shareholder funds (2.8) 2
June 2015 7.5
S&P posted a pre-tax IFRS profit of £7.5m for period, the key components of the result being analysed as follows:
Pre-tax IFRS profit Unaudited Six months ended 30 June Year ended 31 December Note
2015 2014 2014
£m £m £m
Product based deductions 8.2 8.3 17.1 1
Administration expenses (4.6) (4.7) (9.7) 1
Income on with-profits shareholder funds 0.4 2.9 6.4 2
Change in cost of guarantees in with-profit funds: 3
Asset valuation movements 3.6 13.5 15.7
Change in yield curve 3.3 (8.5) (23.2)
Lapse experience (1.0) (1.7) (4.0)
Other (2.1) - (6.3)
Total 3.8 3.3 (17.8)
Change in sterling and expense reserves (0.3) 0.5 (0.6)
Impact of new HCL contract - (4.2) (4.2) 4
Other - 0.7 (0.4)
Total 7.5 6.8 (9.2)
Note 1 - Sustained levels of product-based deductions have been delivered as the book runs-off. These are supported by
assets under management, which have remained broadly constant throughout 2014 and into the first half of 2015, closing at
£1,069m. Product deductions exceed administration expenses by £3.6m for the year to 30 June 2015 (six months ended 30 June
2014: £3.6m).
Note 2 - The income on with-profits shareholder funds is a function of investment market performance. The 2015 result to
date has seen the impact of increased bond yields driving down the value of the shareholder holdings in such bonds. During
the first half of 2014 the opposite dynamic applied.
Note 3 - The reserves held for products that contain options and guarantees has reduced since the start of the year,
resulting in a gain of £3.8m in the period. Whilst this is broadly in line with the same period in the prior year, the
drivers of this surplus are different. In particular, the first half of 2015 has witnessed the positive impact of
increasing Government bond yields, compared with a reduction in 2014. In addition to this, the movement in the Cost of
Guarantee reserve during 2015 includes a one-off charge of £2.1m that reflects the impact of updated annuity rates for
deferred annuity policies.
Note 4 - As reported in the 2014 Interim Financial Statements, during the first half of 2014 a £4.2m strain arose as a
result of the effect of modelling the revised HCL contract. This dynamic did not exist in the six months to 30 June 2015.
Movestic
The IFRS pre-tax results of Movestic for the six months amounted to £3.4m, showing an increase of £1.3m when compared with
the same period in 2014. This reported increase is despite a weakening of the Swedish Krona, with average exchange rates
in the first half of 2015 being some 15% weaker than the same period in 2014.
The table below analyses the constituent parts of the pre-tax IFRS profit:
Pre-tax IFRS profit Unaudited Six months ended 30 June Yearended 31 December Note
2015 2014 2013
£m £m £m
Pensions and Savings 2.9 0.6 2.4 1
Risk and Health 0.1 0.5 0.4 2
Other 0.4 1.0 2.1 3
Total profit before tax 3.4 2.1 4.9
Note 1 - The Pensions and Savings segment has grown significantly when compared with the same period in 2014 and is
reporting a profit that is higher than the full year result in 2014. This growth is driven predominantly by the ongoing
growth in funds under management, which generates fee income from policyholders and also performance related rebates from
investment managers. Funds under Management (FuM), which have increased from £1.68bn (SEK 21.94bn) at 31 December 2014 to
£1.86bn (SEK 24.25bn) at 30 June 2015, have grown due to investment returns in the period (the OMX 30 increased by c5% in
the year to date), and premiums from existing and new policies, which amounted to SEK 1.78bn in the period). In addition
to the general growth in FuM, profitability improvements have also arisen due to the SICAV, which was set up during 2014
and has continued to deliver the expected improvements in margins. Whilst the period has experienced some positive fee
rebates, these are, by their nature, more variable.
Note 2 - The Life and Health business has delivered a small profit of £0.1m in the first half of 2015, compared with £0.5m
in the same period in 2014. The Life and Health business typically provides a small contribution to the Group and the
portfolio of policies has remained stable period on period. The key driver for the reduction in profitability is due to
the reduction in interest rates in Sweden during the first half of 2015, which resulted in the longer tail liabilities in
this business unit being discounted less than in previous periods.
Note 3 - The "other" component includes; the results of Movestic's associated company, Modernac; investment income; the
results of Movestic's investment management business and fair value adjustments on the financial reinsurance that Movestic
uses to fund the writing of new Pensions & Savings business. These results have reduced slightly when compared with the
same period in 2014, due to a small reduction in profits arising from Modernac and a slight profit reduction of c£0.2m
emerging from Movestic Kapitalforvältning.
The Waard Group
The Waard Group was acquired on 19 May 2015. As a result of the close proximity of the acquisition date to the period end,
the amount of post acquisition IFRS surplus generated by this segment is not material.
Consolidation adjustments
The adjustments arising on consolidation are analysed below:
Unaudited Six months ended 30 June Year ended 31 December Note
2015 2014 2014
£m £m £m
CA - Amortisation of AVIF (2.5) (2.3) (4.7)
S&P - Amortisation of AVIF (0.3) (0.4) (0.7)
Movestic:
Amortisation of AVIF (1.7) (2.0) (3.9)
Write back of DAC 1.4 1.7 3.3
Total (0.3) (0.3) (0.6)
Waard Group - Amortisation of AVIF (0.1) - - 4
Total (3.2) (3.0) (6.0)
Note 4 - The amortisation of the AVIF for the Waard Group only relates to the six week period post acquisition.
NET CASH GENERATION £56.7M SIX MONTHS ENDED 30 JUNE 2014: £15.6M
"The Group's cash flows are generated principally from the interest earned on capital, the release of excess capital as the
life funds run down, policyholder charges and management fees earned on assets under management."
Highlights
- A significant amount of net cash, amounting to £39.9m, has emerged from the acquisition of the Waard Group, driven by
the strong levels of regulatory surplus in this group.
- Gross cash generation in the UK run-off business of £18.9m in the period is in line with the same period in 2014.
- We are reporting modest levels of cash generation (£3.3m) for Movestic for the first time (see note 3) since its
acquisition in 2009.
- The increase in cash utilised by Chesnara in the period compared with the same period in 2014 is largely due to a
one-off foreign exchange loss of £3.5m in the period, directly associated with the acquisition of the Waard Group.
The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash
flows for distribution to shareholders and for repayment of outstanding debt. Cash flow generation will ultimately
naturally decline over time as the UK and Dutch closed books run-off.
Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders.
However, the S&P segment continues to bring the potential of short-term variability. This arises from the impact of
investment market movements and the cost to shareholders of guarantees within the S&P with-profits funds. Although the
short-term measure of this cost follows the fortunes of investment markets, we manage the risk taking a longer-term
perspective.
Given the recent growth in Movestic it is now generating modest levels of cash, having been cash neutral for a while, and
prior to this requiring periodic cash support from Chesnara.
The Waard Group has delivered a one off large cash generation item due to its strong levels of solvency. It is expected to
generate modest levels of cash in the future as the closed books in this group run off and surpluses emerge.
The following table identifies the source of internal gross and net cash generation within the Group, representing the net
change in funds available to service debt (interest and loan principal repayment) and equity (dividends):
Cash generated from/(utilised by): Unaudited Six months ended 30 June Year ended 31 December Note
2015 2014 2014
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