- Part 4: For the preceding part double click ID:nRSb3703Xc
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. - Individual fund mandates may give rise to a degree of diversification of risk and within those funds, hedging techniques are used where appropriate.- Investment management costs fall in line with market falls and hence cost savings partially hedge the impact on income.- There is a wide range of investment funds and managers so that there is no significant concentration of risk.
Fee levels are generally related to the value of funds under management and, as the managed investment funds overall comprise a significant equity content, the Group is
particularly exposed to the impact of significant and prolonged equity market falls, which may lead to policyholders switching to lower-margin, fixed-interest funds.
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 - The Group monitors exchange rate movements and the cost of hedging the currency risk on cash flows when appropriate.
and from the impact on reported IFRS and EEV results which are expressed in Sterling.
Counterparty failure The Group carries significant inherent risk of counterparty failure in respect of:- its fixed interest security portfolio;- cash deposits; and- amounts due - Operation of guidelines which limit the level of exposure to any one counterparty and which impose limits on exposure to credit ratings.- In respect of 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.
from reinsurers.
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 - 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.
(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.
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 - 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.
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 loss as its functions degrade.
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 - The Group promotes the sharing of know how 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.
to the sudden loss of the services of these individuals.
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 The current opinion is that the implementation of Solvency II will strengthen the long-term risk management environment of Chesnara (as is its intention).The Solvency II programme is covered in more detail on the below. The key risks are mitigated as follows:- The utilisation of external specialists to provide quality assurance where required;- Dedicated internal resource; and- Robust programme governance framework.Management continually reviews the potential impact of any prospective regulatory changes.
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 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 businesses; andv) Commission and rebate income changes in Sweden..
Solvency II
"The Solvency II programme has been given a high profile in all Divisions, and the coordinated efforts have ensured that
all the components will be in place to meet the 1 January 2016 implementation deadline."
Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to
establish a revised set of EU-wide capital requirements and risk management standards that will replace the current
solvency requirements. Solvency II's primary objective is to strengthen policyholder protection by aligning capital
requirements more closely with the risk profile of the company. The regime has a three pillar structure, with each pillar
governing a different aspect of the Solvency II requirements and approach. As well as requiring firms to disclose their
capital and risk frameworks, the Directive also asks firms to demonstrate how and where the requirements are embedded in
their wider activities. The implementation date is 1 January 2016 and we remain confident that our SII projects in the UK,
Sweden and the Netherlands Divisions are on target to achieve SII-compliance by this date. Solvency II costs across the
industry are considered to be significant and, for Chesnara, we expect to incur additional implementation costs of up to
£2m during 2015. Our view remains that the introduction of Solvency II will not adversely impact the Group's solvency
position. A summary of our progress and key milestones over the next two years has been provided below:
Pillar one
Pillar one considers the quantitative requirements, including the calculation of technical provisions and the rules
relating to the calculation of two capital thresholds, the Minimum Capital Requirement (MCR) and the Solvency Capital
Requirement (SCR). Under Solvency II there are two prescribed methods for assessing an insurer's SCR; either a Standard
Formula set by the regulator or an Internal Model specific to that insurer and which is subject to regulatory approval.
Chesnara has opted for the Standard Formula approach to calculate the SCR for all three divisions on the grounds that it is
a good fit and appropriate for our businesses at the current time. However, we will continue to monitor our position on
the choice of approach as our businesses evolve. The MCR is calculated as a linear function of specified variables: it
cannot fall below 25%, or exceed 45% of the SCR.
Progress update
All model development for Pillar one is materially complete in all three Divisions and a full "dry-run" for the Solo
entities was successfully carried out in Q2 2015. The Solo "dry-runs" will be consolidated into the Group "dry-run" in Q3
2015. Outputs from these exercises is subject to review and challenge by the respective boards. In December 2014,
following Board review and approval, CA plc provided an assessment of the appropriateness of the Standard Formula for its
business to the PRA. The PRA have provisionally accepted the assessment. For Movestic, this assessment was included as
part of its 2014 Forward Looking Assessment of Own Risk (FLAOR) submission, but no response has yet been received from the
Swedish regulator (SFSA). The Waard Group has been providing the Dutch regulator, DNB, with Pillar one returns for a
number of years and DNB has accepted the Standard Formula as being appropriate for that Division.
Pillar two
Pillar two deals with qualitative governance and supervisory requirements. The governance aspect ensures that each of our
businesses has in place effective strategies and controls to assess and manage the risks it is exposed to and to assess and
maintain its solvency capital based on its own risk profile. The supervision aspect requires us to produce either, an Own
Risk and Solvency Assessment (ORSA) for each subsidiary and one for the Group, or a single Group-wide ORSA. We will be
producing an ORSA for each subsidiary and a Group ORSA. Each ORSA is subject to review and scrutiny by the relevant
regulator who will have the power to impose a higher capital requirement should it find any inadequacies in the approach to
calculating the SCR or in the risk and governance controls in operation. The Group ORSA will be submitted to the PRA, who
are expected to be confirmed as the primary regulator for the Group.
Progress update
Significant progress has been made during Q1/Q2 2015 in the refinement and embedding of Group and Divisional policies and
Corporate Governance Maps, ensuring a platform for a consistent, cohesive governance approach across all of our businesses
will be in place and will be Solvency II-compliant by year end. The Risk Management Function is being enhanced by the
recent recruitment of a Group-wide Chief Risk Officer, who will join us in Q4 2015. The UK and Swedish divisions each
produced a FLAOR (forward-looking assessment of own risks) report based on the own risk and solvency assessment ('ORSA')
principles as required under the preparatory Solvency II guidelines during 2014, and the processes have subsequently been
enhanced in preparation for the production of ORSAs during Q3/Q4 2015. The Waard group submitted an ORSA to the DNB in each
of the past three years, so the Netherlands division already has the ORSA processes embedded in the business.
Pillar three
Pillar three deals with reporting and disclosure, seeking to enhance market discipline on regulated firms by requiring them
to disclose, both publicly and privately, key information that is relevant to market participants. The key reporting
requirements are a Solvency & Financial Condition Report (SFCR) and a Regular Supervisory Report (RSR). The SFCR is for
public disclosure and will follow a prescribed format. The RSR is not public and is only communicated to the relevant
supervisor and, again, will largely follow a prescriptive format. The SFCR and RSR contain both quantitative reports,
including the Pillar one outputs, and narrative reports, including the Pillar two outputs. The SFCR is largely
backward-looking, whereas the RSR report also includes business and operational forecasts, along with comparisons of actual
and forecasts, along with comparisons of actual and forecast results. For instance, the first RSR, to be produced in 2017,
will compare the forecast made in 2015 for 2016 with the actual 2016 results.
Progress update
The development work required to populate the Quantitative Reporting Templates (QRTS) that inform the Pillar three
quantitative reports is materially complete and a "dry-run" exercise to produce the solo QRTs was carried out successfully
in all three divisions in Q2 2015, based on year-end 2014 data. Quarterly QRTs (based on half-year 2015 data) and a
consolidated set of Group QRTs (based on year-end 2014 data) will be produced in Q3/4 2015. The QRTs produced in the
Netherlands division were submitted to the DNB and their feedback has been incorporated in revised reports. External
quality assurance of the "dry-run" QRTs will be sought during Q4 2015. Work is also ongoing to finalise the format and
content of the SFCR and RSR to ensure consistency across the Divisions. We plan to perform a "dry-run" on these reports
during 2016, and the first live reports will be produced during 2017 on 2016 year end data.
Timeline of key Solvency II activities over the next two years:
Period Actions
Q3 2015 - Group Pillar one "dry-run" results complete and approved, and Board appraised.- Group Pillar three Annual QRT "dry-run" outcomes reported and education completed.- Data Governance processes developed and implemented.
Q4 2015 - Validation and documentation of Pillar one processes and results completed.- Pillar three Quarterly QRT "dry-run" completed.- All Policies required for Pillar two Governance developed, approved and embedded.- Solo and Group ORSAs produced and approved by the Board.- Group Risk Management processes and Risk Appetite Statements.
H1 2016 - Solvency II opening balances for year end 2015 produced.- Year-end 2015 "dry-run" complete.- First live Quarterly QRTs produced, for Q1 2016 data.- Draft RSR and SFCR templates completed across all Divisions.
H2 2016 - Draft RSR and SFCR reports produced.- External Quality Assurance for the RSR and SFCR carried out.
H1 2017 - First live Annual QRTs produced, for year end 2016 data.- Live RSR and SFCR reports produced, using year end 2016 data.
CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS
Directors' responsibiliTIES statement
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial
Reporting';
- the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of
important events during the first six months and description of principal risks and uncertainties for the remaining six
months of the year); and
- the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of
related parties' transactions and changes therein).
By order of the Board
Peter Mason John Deane
Chairman Chief Executive Officer
27 August 2015 27 August 2015
Independent Auditor's REVIEW Report to the Members of Chesnara plc
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report
for the six months ended 30 June 2015 which comprises the condensed consolidated statement of comprehensive income, the
condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated
statement of cash flows and related notes 1 to 8. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland)
2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state
to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are
responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by
the European Union. The condensed set of financial statements included in this half-yearly financial report has been
prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European
Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the
half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of
persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial
statements in the half-yearly financial report for the six months ended 30 June 2015 is not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London
United Kingdom
27 August 2015
CONDENSED Consolidated Statement of Comprehensive Income (unaudited)
Unaudited Six months ended 30 June Year ended 31 December
2015 2014 2014
Note £000 £000 £000
Insurance premium revenue 58,078 66,512 128,384
Insurance premium ceded to reinsurers (23,780) (26,507) (51,646)
Net insurance premium revenue 34,298 40,005 76,738
Fee and commission income 33,327 34,873 66,592
Net investment return 182,231 199,312 430,673
Total revenue net of reinsurance payable 249,856 274,190 574,003
Other operating income 11,513 12,467 23,624
Total income net of investment return 261,369 286,657 597,627
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (159,896) (152,612) (303,521)
Net decrease in insurance contract provisions 77,595 67,148 39,676
Reinsurers' share of claims and benefits 21,144 15,412 44,627
Net insurance contract claims and benefits (61,157) (70,052) (219,218)
Change in investment contract liabilities (143,425) (146,117) (267,140)
Reinsurers' share of investment contract liabilities 1,031 647 2,272
Net change in investment contract liabilities (142,394) (145,470) (264,868)
Fees, commission and other acquisition costs (10,512) (11,126) (21,707)
Administrative expenses (19,125) (19,981) (42,494)
Other operating expenses
Charge for amortisation of acquired value of in-force business (4,580) (4,721) (9,281)
Charge for amortisation of acquired value of customer relationships (112) (136) (263)
Other (8,096) (6,487) (8,840)
Total expenses net of change in insurance contract provisions and investment contract liabilities (245,976) (257,973) (566,671)
Total income less expenses 15,393 28,684 30,956
Share of profit of associate 405 608 855
Profit recognised on business combination 5 16,209 - -
Financing costs (1,609) (1,914) (3,008)
Profit before income taxes 4 30,398 27,378 28,803
Income tax expense (2,138) (4,558) (3,228)
Profit for the period 3,4 28,260 22,820 25,575
Foreign exchange translation differences arising on the revaluation of foreign operations (5,366) (4,645) (7,844)
Total comprehensive income for the period 22,894 18,175 17,731
Basic earnings per share (based on profit for the period) 2 22.36p 19.87p 22.10p
Diluted earnings per share (based on profit for the period) 2 22.33p 19.87p 22.08p
The notes and information below form part of these financial statements.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
Unaudited 30 June 31 December
2015 2014 2014
Note £000 £000 £000
Assets
Intangible assets
Deferred acquisition costs 31,986 29,539 31,298
Acquired value of in-force business 72,483 80,313 73,469
Acquired value of customer relationships 948 1,336 1,143
Software assets 3,726 4,348 3,715
Property and equipment 490 610 477
Investment in associates 4,453 4,367 4,388
Investment properties 9,245 5,173 5,520
Reinsurers' share of insurance contract provisions 313,302 356,432 335,936
Amounts deposited with reinsurers 35,455 34,224 35,498
Financial assets
Equity securities at fair value through income 465,350 475,344 475,983
Holdings in collective investment schemes at fair value through income 3,563,740 3,463,411 3,516,424
Debt securities at fair value through income 385,847 344,115 377,193
Policyholders' funds held by the Group 176,267 158,461 164,858
Insurance and other receivables 73,813 47,201 45,360
Prepayments 5,599 5,155 4,821
Derivative financial instruments 2,872 2,424 3,580
Total financial assets 4,673,488 4,496,111 4,588,219
Reinsurers' share of accrued policyholder claims 19,744 12,457 14,722
Income taxes 4,182 1,917 1,962
Cash and cash equivalents 279,813 219,290 241,699
Total assets 4 5,449,315 5,246,117 5,338,046
Liabilities
Insurance contract provisions 2,330,084 2,290,815 2,308,043
Other provisions 3,017 4,052 729
Financial liabilities
Investment contracts at fair value through income 2,408,122 2,337,862 2,389,812
Liabilities relating to policyholders' funds held by the Group 176,267 158,461 164,858
Borrowings 6 87,837 95,220 87,296
Derivative financial instruments 656 525 49
Total financial liabilities 2,672,882 2,592,068 2,642,015
Deferred tax liabilities 10,599 9,392 8,340
Reinsurance payables 8,619 9,978 10,499
Payables related to direct insurance and investment contracts 80,288 47,425 58,789
Deferred income 17,486 7,377 6,974
Income taxes 8,260 10,756 4,168
Other payables 28,503 20,631 18,467
Bank overdrafts 2,897 1,703 1,189
Total liabilities 4 5,162,635 4,994,197 5,059,213
Net assets 286,680 251,920 278,833
Shareholders' equity
Share capital 42,600 42,024 42,600
Share premium 76,523 42,526 76,523
Treasury shares (168) (212) (168)
Other reserves (6,007) 2,558 (641)
Retained earnings 3 173,732 165,024 160,519
Total shareholders' equity 286,680 251,920 278,833
The notes and information below form part of these financial statements.
Approved by the Board of Directors and authorised for issue on 27 August 2015 and signed on its behalf by:
Peter Mason John Deane
Chairman Chief Executive Officer
CONDENSED Consolidated statement of cash flows
(unaudited)
Unaudited Six months ended 30 June Year ended 31 December
2015 2014 2014
£000 £000 £000
Profit for the period 28,260 22,820 25,575
Adjustments for:
Depreciation of property and equipment 89 109 206
Amortisation of deferred acquisition costs 4,695 5,063 9,729
Amortisation of acquired value of in-force business 4,580 4,720 9,281
Amortisation of acquired value of customer relationships 112 136 263
Amortisation of software assets 715 982 1,802
Share based payment 96 - 114
Tax paid 2,138 4,558 3,228
Interest receivable (11,297) (13,270) (26,975)
Dividends receivable (13,867) (13,152) (30,032)
Interest expense 1,609 1,914 3,008
Change in fair value of investment properties (4,400) (2,265) (2,526)
Fair value gains on financial assets (152,542) (170,200) (370,641)
Profit arising on business combination (16,209) - -
Share of profit of associate (404) (608) (855)
Interest received 11,590 13,333 27,346
Dividends received 12,768 5,859 29,835
Increase in intangible assets related to insurance and investment contracts (7,520) (8,354) (16,219)
Changes in operating assets and liabilities:
Decrease in financial assets 37,410 34,128 44,847
Decrease in reinsurers share of insurance contract provisions 20,669 18,885 34,654
Decrease/(increase) in amounts deposited with reinsurers 43 69 (1,205)
(Increase)/decrease in insurance and other receivables (26,802) 4,245 (2,492)
Increase in prepayments (942) (482) (317)
Decrease in insurance contract provisions (84,884) (65,929) (44,940)
Increase in investment contract liabilities 170,875 216,853 369,838
Decrease in provisions (691) (1,290) (4,600)
(Decrease)/increase in reinsurance payables (1,276) (847) 222
Increase in payables related to direct insurance and investment contracts 20,448 639 12,820
Increase/(decrease) in other payables 7,326 (4,928) (7,402)
Cash generated from operations 2,589 52,988 64,564
Income tax paid (1,217) (2,471) (8,839)
Net cash generated from operating activities 1,372 50,517 55,725
Cash flows from investing activities
Business combinations 54,258 - -
Development of software (987) (680) (1,079)
Purchases of property and equipment (126) (81) (224)
Proceeds from the disposal of property and equipment - - 152
Net cash generated from/(utilised by) investing activities 53,145 (761) (1,151)
Cash flows from financing activities
Proceeds from issue of share capital - - 34,573
Proceeds from/(repayment of) borrowings 2,218 2,375 (4,469)
Sale of treasury shares - - 44
Dividends paid (15,143) (13,357) (20,731)
Interest paid (1,377) (1,764) (2,593)
Net cash (utilised by)/generated from financing activities (14,302) (12,746) 6,824
Net increase in cash and cash equivalents 40,215 37,010 61,398
Cash and cash equivalents at beginning of period 240,510 183,136 183,136
Effect of exchange rate changes on cash and cash equivalents (3,809) (2,559) (4,024)
Cash and cash equivalents at end of the period 276,916 217,587 240,510
The notes and information below form part of these financial statements.
CONDENSED consolidated statement of changes in equity
(unaudited)
Unaudited six months ended 30 June 2015
Share capital Share premium Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2015 42,600 76,523 (641) (168) 160,519 278,833
Profit for the period - - - - 28,260 28,260
Dividends paid - - - - (15,143) (15,143)
Foreign exchange translation differences - - (5,366) - - (5,366)
Share based payment - - - - 96 96
Equity shareholders' funds at 30 June 2015 42,600 76,523 (6,007) (168) 173,732 286,680
Unaudited six months ended 30 June 2014
Share capital Share premium Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2014 42,024 42,526 7,203 (212) 155,561 247,102
Profit for the period - - - - 22,820 22,820
Dividends paid - - - - (13,357) (13,357)
Foreign exchange translation differences - - (4,645) - - (4,645)
Equity shareholders' funds at 30 June 2014 42,024 42,526 2,558 (212) 165,024 251,920
Year ended 31 December 2014
Share capital Share premium Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2014 42,024 42,526 7,203 (212) 155,561 247,102
Profit for the year - - - - 25,575 25,575
Dividends paid - - - - (20,731) (20,731)
Foreign exchange translation differences - - (7,844) - - (7,844)
Share based payment - - - - 114 114
Issue of new shares 576 33,971 - - - 34,547
Sale of treasury shares -
- More to follow, for following part double click ID:nRSb3703Xe