REG - Chesnara PLC - Final Results <Origin Href="QuoteRef">CSN.L</Origin> - Part 2
31/03/2015 07:40
- Part 2: For the preceding part double click ID:nRSe9226Ia
been seen in 2014.
Regulatory capital at 31 December 2014
2014 2013
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 79.3 79.3 225.3 284 81.9 81.9 158.7 194
CA plc 65.8 102.1 116.1 176 44.1 67.2 96.4 218
PL Ltd 2.9 2.9 3.5 121 25.2 37.8 39.2 156
Movestic 9.3 13.9 34.9 376 11.2 16.8 34.8 311
Notes:
· The percentages in the table above represent the excess of the capital resources over the minimum regulatory
capital resources requirement.
· The target capital requirements stated above are based on the Board's internal minimum targets, and are set as
follows:
o Group - 100% of minimum regulatory capital resources requirement
o CA plc - 162.5% of the minimum long-term insurance capital requirement plus 100% of the resilience capital requirement
o PL Ltd - the European minimum long-term insurance capital requirement
o Movestic - 150% of the capital resources requirement
Group solvency (IGD)
The IGD represents the solvency of the Group, and is calculated using requirements imposed by the PRA. The IGD ratio at 31
December 2014 is 284% (2013: 194%) with the surplus having moved from £76.8m at 31 December 2013 to £145.6m at 31 December
2014. IGD is stated after the final dividend of £15.1m (2013: £13.4m). The movement in IGD this year is a function of the
following key items:
· Equity share raising; £34.5m was raised from a share placing for the acquisition of Waard Group.
· The Group regulatory surplus in the year. The Group Regulatory surplus in 2014 has been strong, amounting to
£44.5m. This has resulted in a significant benefit to the IGD, outweighing the impact of the 2014 total dividend of £22.5m
(interim dividend of £7.4m plus the proposed final 2014 dividend of £15.1m).
Solo solvency
The Board sets internal solvency targets for each of its regulated subsidiaries, which have remained unchanged when
compared with the prior year. The graph above shows that the solvency positions of each regulated subsidiary continue to
exceed the internal targets imposed by the Board:
· CA plc solvency has reduced from 218% to176%, with the surplus over the requirement reducing from £52.3m to
£50.3m. This is stated after proposed dividends of £65.0m (2013: £48.0m), thereby showing that strong solvency is still
being achieved whilst delivering strong cash flows to the Chesnara parent company. The position at 31 December 2014
includes the impact of the Part VII transfer from PL into CA plc.
· PL Ltd solvency is 128% at 31 December 2014. The reduction when compared to the prior year is a result of the
successful Part VII transfer of PL into CA plc. The remaining capital is due to be transferred in 2015 following
de-regulation of PL Ltd.
· Movestic had a solvency ratio of 376% at 31 December 2014. Whilst it has a very strong solvency ratio, Movestic
does not currently pay dividends to Chesnara due to an additional liquidity constraint that is imposed by the Swedish
regulator.
Solvency II
The introduction of Solvency II on 1 January 2016 will change the capital position of both the Group and its regulated
subsidiaries. The final impact of Solvency II continues to be uncertain although we expect the Group will not be adversely
impacted. Solvency II may also result in the Board re-assessing the internal targets imposed on each regulated entity.
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 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 policyholder outcomes.
· Complaints
The general downward trend in the overall volume 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
Through the auspices of the CA plc Investment Committee we have continued our 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 2014.
Sweden
Movestic has received high scores in external surveys conducted within the insurance industry in Sweden. Furthermore and
in relation to the size of the operations, Movestic's complaints function receives very few customer complaints and cases
brought to the Public Complaints Board are very rare. The Swedish Consumer Agency has recently completed a review
regarding marketing of funds. The review of Movestic's information and marketing activities was closed without remarks.
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 year of low staff turnover throughout the Group.
The Waard Group 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. Chesnara
are keen that our new Dutch colleagues are rewarded for their professionalism and loyalty by being positively involved in
our future plans for the development of the Waard Group.
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 2014 enables us to
increase our full year dividend by 2.9% compared to 2013. The 2014 full year dividend of 18.4p per share represents a
yield of 5.4% (based on the share price as at 31 December 2014 of 339.25p per share). Total shareholder returns over a 5
year and 1 year period are competitive in comparison to the FTSE 350 higher yield index.
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 Report and Accounts 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.
The ongoing investor satisfaction is evidenced by the support received for the recent equity raise required to enable the
Group's acquisition in the Dutch market.
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. It is pleasing to report that none of these have given rise to significant issues. The
commentary below sets out a list of the key activities during the year.
· Legacy review UK
During the year CA plc has 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 is expected in the second quarter of 2015.
· Independent Governance Committees (IGCs) on pensions
The government has announced that there will be new requirements for the governance of both Workplace Personal Pension
schemes and Occupational Pension schemes. The company has taken external legal advice on the impact of these changes and
will be ensuring that the governance of these schemes going forward meets the requirements of the regulations and
legislation. The changes are likely to result in the appointment of an external Governance Advisory Arrangement to oversee
the Workplace Personal Pensions and report on their value for money whilst the Trustee arrangements for the occupational
schemes will need to be reviewed and they will also need to report on value for money.
· Pension changes
The government has passed legislation that has changed the pensions rules with effect from April 2015 to allow
policyholders to take their retirement benefits in a variety of ways, including as a lump sum. In order to comply with
these new rules it has been necessary to update our systems and correspondence with customers. Following its introduction
in April there is an expectation that there will be a peak in demand for this new benefit, we have therefore planned
additional resources to meet this expected demand.
· 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 an active dialogue with the regulator on business as usual matters, in conjunction with interactions on any
specific regulatory affairs. The relationship with the regulator is good and no complaints or concerns have been expressed
regarding Movestic's operations.
Netherlands
We have forged an encouraging initial relationship with the Dutch regulator (DNB) which builds upon a strong pre-existing
relationship between the existing Waard Group management team and the DNB. The Declaration of No Objection (DNO)
application, which the regulator is required to give before the transaction can complete, is pending at the point of
issuing these Report & Accounts.
FINANCIAL REVIEW
The key performance indicators illustrate how effectively we have delivered against our three strategic objectives. The
strong net cash generation of £71.1m together with the significant embedded value earnings in the year clearly demonstrates
how effectively we continue to deliver against our core objective of "maximising value from the in-force book'. Within the
embedded value earnings there is a £9.7m new business profit item which reflects the positive performance against our
objective to "Enhance value through new business". Finally, whilst not recognised in any of the 2014 figures, the
impending acquisition of the Waard Group is forecast to have a positive impact on all of the financial measures in 2015,
continuing to deliver our objective to add value by acquiring Life and Pension businesses.
Summary of each KPI
IFRS pre-tax profit £28.8m (2013: £60.6m)
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?
For businesses in run-off the reported profit is closely aligned with, and a strong indicator of, the emergence of surplus
arising within the long-term insurance funds of those businesses. The emergence of surplus supports the payments of
dividends from the regulated insurance businesses to Chesnara plc, which in turn enables the payment of dividends to our
shareholders. IFRS pre-tax profit is a strong indicator of how we are performing against our stated strategic objective of
"maximising value from the in-force book".
Highlights
Year ended 31 December 2014£m 2013£m
CA 41.2 25.0
S&P (9.2) 36.4
PL 5.5 0.2
Movestic 4.9 2.6
Group & Consolidation adjustments (13.6) (6.4)
Profit on acquisition - 2.8
Total profit before tax and exceptional items 28.8 60.6
· Overall reduction of £31.8m in IFRS pre tax profit is driven by a £45.6m adverse swing in S&P result.
· S&P loss in the year is driven by reducing bond yields, which has resulted in the requirement to increase reserves
held for policies with options and guarantees.
· This loss is off-set by a strong CA segment result, which has provided an expected hedge against this dynamic, with
bond yields having had a positive impact.
· Movestic result is stronger than the prior year.
Risks
The IFRS profit can be affected by a number of our principal risks and uncertainties as set out on pages 45 to 46 of the
2014 Annual Report & Accounts. In particular, a significant reduction in Government bond yields during 2014 has had a
material effect on the IFRS pre-tax profit in the year. Equity and property markets in the UK have been broadly flat
during 2014, but had a more marked impact on the 2013 results, following strong performance in that year.
Net cash generation £71.1m (2013: £36.7m)
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.
Highlights
Year ended 31 December 2014£m 2013£m
Total Gross cash generated 42.6 49.7
Synergistic effects of Part VII transfer 27.4 -
Release of Capital from S&P WP funds - 15.5
Exceptional cash capitalisation PL - (13.1)
Movement in restriction of S&P WP capital 1.1 (15.4)
Net cash generation 71.1 36.7
· Gross cash generation across the Group continues to be strong, driven by strong and stable UK cash generation.
· Net cash generation is supported by the Part VII transfer of PL into CA plc on 31 December 2014.
· The cash generated during 2014, coupled with the strong parent company cash position of £80.1m at 31 December 2014
and the expected cash generative nature of the Waard Group acquisition leaves us in a good position to continue our
attractive dividend policy and acquisition strategy.
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 on pages 45 to 46 of the 2014 Annual Report & Accounts. 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, both positively or adversely, generated by our regulated subsidiaries.
EEV earnings, net of tax £44.2m (2013: £82.7m excluding modelling adjustments of £4.1m)
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".
Highlights
2014 £m 2013£m
New business contribution 9.7 7.9
Operating profit - existing business 27.8 1.0
Economic effects 24.6 71.1
Uncovered business & other group (7.4) (2.3)
Exceptional gain on acquisition - 12.3
Tax (10.5) (7.3)
Profit after tax 44.2 82.7
· Although a reduction year on year, the EEV result for 2014 remains a positive indicator of the growth of the
business.
· Economic items continue to contribute a significant portion of the overall EEV result, albeit at lower levels than
in 2013.
Risks
The EEV earnings of the Group can be affected by a number of factors, including those highlighted within our principle
risks and uncertainties as set out on pages 45 to 46 of the 2014 Annual Report & Accounts. 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.
EEV £417.2m (2013: £376.4m)
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.
Highlights
£m
EEV actual 2013 376.4
Net of tax profit arising in the year* 44.2
Equity raised for Waard Group acquisition 34.6
Foreign exchange reserve movement (17.3)
Dividend paid (20.7)
EEV actual 2014 417.2
· Group EEV has increased by £40.8m, or 11% during the year.
· Post-tax EEV earnings have contributed £44.2m of the movement.
· The equity raise of £34.5m during Q4 2014 has added to the EEV. This is being used to acquire the Waard Group
during 2015.
· Off-setting the above positive movement is a foreign exchange loss of £17.3m on the re-translation of the Movestic
EEV, as a result of the weakening of the Swedish Krona against Sterling during the year, coupled with the reduction in EEV
arising from dividends paid in the year.
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 between
Swedish Krona and Sterling. For example a 10.0% weakening of exchange rates between Swedish Krona and Sterling would
reduce the EEV of the Group by 3.0%, based on the composition of the Group's EEV at 31 December 2014.
Further analysis of each KPI
IFRS PRE-TAX PROFIT £28.8m (2013: £60.6m)
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 surplus, and hence cash generation, are the CA and PL segments. The requirements of these books are to
provide a predictable and stable platform for the financial model and dividend strategy. As a closed book, the key is to
sustain this income source as effectively as possible. The IFRS results during the year support this objective, with a
strong IFRS pre-tax surplus of £41.2m for CA (2013: £25.0m) and a PL pre-tax surplus of £5.5m. Assets under management
within the CA segment, a key driver of surplus, have reduced from £1,736m at the start of the year to £1,702m at 31
December 2014. Whilst this represents a 2% reduction during the year, the reduction is less than the policy attrition
levels in the year, despite slightly negative equity markets.
Variable element
The S&P component brings an element of earnings volatility to the Group, with the results being particularly sensitive to
investment market movements. This is illustrated by a material increase in the reserve for costs of guarantees since the
start of the year of £17.8m in 2014. During 2013 the S&P segment included a surplus arising from movements in reserves for
products with guarantees of £24.4m thereby representing a year on year adverse swing of some £42.2m.
Product based deductions continue to remain strong, at £17.1m (2013: £17.1m).
Growth operation
The long-term financial model of Movestic is based on growth, with levels of new business being targeted to more than
offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee
income. There has been an increase in funds under management of 23.5% (on constant exchange rates) since 31 December
2013.
As a result the underlying IFRS profit after adjusting for non-recurring items (the deferred acquisition cost charge in
2013 of £3.0m and the Modernac profit of £1.2m) has increased from £4.4m to £4.9m, or 11.4%.
The 2014 Movestic results have also been supressed, to some extent, by the deterioration in strength of the Swedish Krona
against Sterling, which has witnessed a 13.9% fall during 2014.
Further detail of the results of the Movestic segment can be found below.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:
Year ended 31 December 2014£m 2013£m Note
CA 41.2 25.0 1
S&P (9.2) 36.4 2
PL 5.5 0.2 3
Movestic 4.9 2.6 4
Chesnara (7.6) (4.9) 5
Consolidation adjustments (6.0) (1.5) 6
Total profit before tax and exceptional items 28.8 57.8
Profit arising from PL acquisition - 2.8 7
Total profit before tax 28.8 60.6
Tax (3.2) (11.2)
Total profit after tax 25.6 49.4
Note 1 - The CA segment has reported strong results for 2014. This is largely driven by the positive impact of reserve changes, driven by both economic and non-economic factors. Further detail is provided below.
Note 2 - The S&P segment has reported a pre-tax loss in the year, largely as a result of a strain arising from an increase in reserves required for products with options and guarantees. These reserves are sensitive to market movements, in particular the reduction in bond yields during 2014.
Note 3 - The 2014 results include a full year of the PL business. For 2013 the results that were reported were for the period post acquisition, being 28 November 2013.
Note 4 - The Movestic result has improved when compared with 2013. The 2013 result was adversely impacted by a one-off deferred acquisition cost charge that has not been repeated in 2014. Further detail of the results of the Movestic segment can be found below.
Note 5 - The Chesnara result represents holding company expenses. 2014 costs are higher than 2013 primarily due to the costs associated with the Part VII transfer of PL into CA plc. Both 2014 and 2013 included costs associated with acquisition activity, being PL Ltd and the Waard Group respectively.
Note 6 - Consolidation adjustments relate to items such as the amortisation of intangible assets. More detail is provided below.
Note 7 - The 2013 Group profit before tax was stated after recognition of a £2.8m gain arising as a result of the purchase of PL Ltd. There have been no adjustments to this during 2014.
The IFRS results by business segment are analysed in more detail as follows:
CA
The CA segment has reported a strong result for the year. This is driven predominantly by product deductions and the
positive impact of reserve changes in the year. The table below bridges the IFRS profit for 2013 and 2014 and shows that
the movement in surplus is driven by the aforementioned positive impact of reserve reductions in the year.
Profit before tax movement, year ended 31 December 2013 to year ended 31 December 2014
£m Note
December 2013 25.0
Reserve changes including those related to market movements 11.0 2
Impact of new HCL contract 4.2 3
Other 2.8
Operating assumption changes 2.4
Gains and interest on retained surplus 1.3
Product charges - variable (4.9) 1
Core product charges (0.6) 1
December 2014 41.2
The key components of the IFRS result for the year are summarised as follows:
Pre-tax IFRS profit 2014£m 2013 £m Note
Product-based deductions 23.2 28.7 1
Administration expenses (8.4) (7.0) 1
Returns on retained surplus 4.8 3.5 1
Operating assumption changes 0.7 (1.7)
Reserve changes, including those due to market movements 14.3 3.3 2
Impact of new HCL contract 4.2 - 3
Complaint costs (1.4) (1.5)
Other 3.8 (0.3) 4
Total 41.2 25.0
Note 1- Product-based charges and returns on retained surplus remain significantly in excess of recurring administration expenses. The level of product-based charges in 2014 has reduced when compared with 2013; the core charges have remained stable year on year (2014: £17.3m, 2013: £17.9m), although the variable product charges have reduced from £10.8m to £5.9m. This is caused by a reduction in mortality and morbidity charges as a result of higher than expected mortality experience during the year.
Note 2- The surplus in 2014 has arisen due to a number of items, with the two main ones being a positive movement in tax reserves of c£4m and an economic surplus of c£6.0m, driven by reducing Government bond yields in the year. This compares with the prior year where tax reserves were strengthened by c£2m.
Note 3- The CA surplus includes the effect of modelling the new HCL contract which, as explained in the Business Review above, has not had a financial impact on the overall UK results in the period. This has, however, contributed a surplus of £4.2m to the CA result, with an equal and opposite impact being seen in the S&P segment results, which are analysed below.
Note 4- The CA result in the period includes £3.8m of "other" items. This predominantly (£3.4m) relates to a one off item arising from the reserving impact of a change in practice associated with policies that can accrue bonus units in certain circumstances.
S&P
The S&P segment has posted a pre-tax loss for the year, compared with a profit in the prior year. The change in
profitability can be highlighted by the following table:
Profit before tax movement, year ended 31 December 2013 to year ended 31 December 2014
£m Note
December 2013 36.4
Income on with-profit shareholder funds 6.8
Change in Cost of Guarantees (42.2) 3
Change in sterling and expense reserves (6.0) 4
Other Product based deductions and impact of new HCL contract (4.2) 5
December 2014 (9.2)
S&P posted a pre-tax IFRS profit of £9.2m for year, the key components of the result being:
Pre-tax IFRS profit 2014£m 2013 £m Note
Product based deductions 17.1 17.1 1
Administration expenses (9.7) (9.9) 1
Income on with-profits shareholder funds 6.4 (0.4) 2
Change in cost of guarantees in with-profit funds: 3
Investment market movements 15.7 8.6
Change in yield curve (23.2) 19.9
Lapse experience (4.0) (3.7)
Other (6.3) (0.4)
Total (17.8) 24.4
Change in sterling and expense reserves (0.6) 5.4 4
Impact of new HCL contract (4.2) - 5
Other (0.4) (0.2)
Total (9.2) 36.4
Note 1 - Product-based deductions continue to hold up as the book runs-off. These are supported by assets under management, which have remained broadly constant year on year, having moved from £1,113m at the start of the year to £1,146m at 31 December 2014. Product deductions exceed administration expenses by £7.4m and £7.2m in 2014 and 2013 respectively.
Note 2 - The income on with-profits shareholder funds is driven by investment market performance. The 2014 result has benefited significantly from the impact of increases in the capital value of government bonds during the year. Such a dynamic did not exist in the 2013 financial year.
Note 3 - During 2014 the S&P segment has reported a strain of £17.8m arising from its policies that contain options and guarantees. The strain has arisen primarily due to the significant reduction in government bond yields that has been witnessed in 2014, most notably during the last quarter of the year. Whilst equity values can also affect the reserves that are required for these policies, the fact that equity performance has been only slightly negative in 2014 has resulted in no significant changes in
the reserves required. Included within the change in the costs of guarantees is a lapse experience loss of £4.0m, driven by observed lapses being slightly less than assumed at the start of the year.
Note 4 - Sterling and expense reserves are sensitive to both the expense base and to investment market movements. As investment markets improve, the level of sterling reserves (which provide against situations where future policy-based revenue does not cover future administration costs) reduces. 2013 witnessed a surplus emerging as a result of this dynamic, whereas equity market movements in 2014 have been more muted, resulting in no significant changes required to sterling reserves in the year.
Note 5 - As reported in the half year 2014 results there is a £4.2m strain that has arisen as a result of the effect of modelling the revised HCL contract. Whilst this has not impacted the overall Group results, the effect can be seen in the individual segments, with the CA segment reflecting a benefit of the same magnitude in its surplus.
PL
The PL segment has contributed a pre-tax IFRS surplus of £5.5m during 2014 compared with £0.2m during 2013. The main
reason for the increase year on year is that PL Ltd was purchased in November 2013, and therefore the earnings as reported
in 2013 only reflect the earnings of the business subsequent to Chesnara's ownership, and consequently the contribution in
2013 was not material.
The main contributor to the pre-tax IFRS profit in 2014 is the expected release of the prudence margins within the
reserving basis, relating to mortality, persistency and investment returns from the book, amounting to £5.3m. Experience
surpluses, representing the difference between the expected releases of margins and the actuarial experience, were not
material in the period. Administration expenses of £2.1m, representing the ongoing costs of administering the PL book of
business were incurred in the year. These costs are in line with the expectations that were derived from our due diligence
process, prior to completing the acquisition on 28 November 2013.
Movestic
The IFRS pre-tax results of Movestic, before the impact of DAC model changes of £(3.0)m (see note 4 below) and a
non-recurring profit share of £1.2m (see note 2 below), both of which occurred during 2013, have increased slightly year on
year, from £4.4m in 2013 to £4.9m in 2014. The table below analyses the constituent parts of the pre-tax IFRS profit:
Pre-tax IFRS profit 2014£m 2013£m Note
Pensions and Savings, before impact of DAC model change 2.4 2.2 1
Risk and Health 0.4 2.2 2
Other 2.1 1.2 3
Total profit before impact of DAC model change 4.9 5.6
Impact of DAC model change - (3.0) 4
Total profit before tax 4.9 2.6
Note 1- The Pensions & Savings business generates value through fee income that it receives from policyholders (management charges) and investment managers (fee rebates). These fees are a function of Assets under Management (AuM), which have grown from SEK 17.7bn at 31 December 2013 to SEK 21.9bn at 31 December 2014, representing growth of 23% during the year. This has led to fee and income growth of 15%, excluding the impact of exchange rates. The corresponding cost base (being brokerage costs and
internal costs) has increased at broadly the same rate, resulting in a small growth in profit.
Note 2 - The Risk and Health business has generated a small profit in the year, amounting to £0.4m (SEK 4.8m), compared with a profit of £2.2m (SEK 22.5m) during 2013. The size of the business has remained broadly the same year on year, with net earned premiums, after reinsurance, of £15.6m (SEK 175.9m) in 2014 versus £16.7m (SEK 170.1m) in 2013. The number of policies in force at 31 December 2014 was 382,000, compared with 362,000 at 31 December 2013. The key drivers of the reduction in profit in this
business are a slight increase in the net loss ratio in the year coupled with 2013 including the recognition of a one-off profit share of £1.2m that was not repeated in 2014.
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. The key reason that the result of this segment has increased when compared to the prior year is due to a swing in fair value adjustment on financial reinsurance, which was a loss of c£0.9m in 2013, versus a
small fair value profit of c£0.3m in 2014.
Note 4 - During the prior year a one-off accelerated deferred acquisition costs charge was reported following a review of the amortisation profile of deferred acquisition costs. There was no such adjustment this year.
Consolidation adjustments
The adjustments arising on consolidation are analysed below:
Year ended 31 December 2014£m 2013£m Note
CA - Amortisation of AVIF (2.3) (2.2)
S&P - Amortisation of AVIF (0.7) (0.8)
PL - Amortisation of AVIF (2.4) (0.2) 5
Movestic:
Amortisation of AVIF (3.9) (4.4)
Write back of DAC 3.3 6.1 6
Total (0.6) 1.7
Total (6.0) (1.5)
Note 5 - As PL Ltd was purchased on 28 November 2013 the amortisation charge associated with the "value in force" intangible asset that was recognised on acquisition was small. The 2014 financial year includes a full year charge. The "value in force" intangible asset is being amortised over its estimated useful economic life.
Note 6 - Included within consolidation adjustments is an item in relation to Movestic that reverses the amortisation charge on DAC relating to policies that were written prior to Chesnara ownership. During 2013 this adjustment increased compared with previous years due to the additional charge that was booked as a result of the refinements made to the DAC amortisation model. See note 4 above for further details. For 2014 this consolidation adjustment is back in line with previous years.
Cash generation £71.1m (2013: £36.7m)
"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."
The information below illustrates that gross and net cash generation within the Group continues to be robust. Key aspects
underpinning the outcome are:
Highlights
· Gross cash generation in the UK run-off businesses has decreased by £4.0m in the year compared with 2013, largely
due to the net impact of a large decrease in bond yields in the year.
· Net cash generation has benefitted from capital efficiencies of £27.4m arising from the Part VII transfer of PL
into CA plc.
· In 2013 the acquisition of PL Ltd had a short-term adverse impact on net cash generation as a result of a day one
capital injection being required to increase the capital resources to 150% of the minimum regulatory capital requirement.
As can be seen from the table below, £7.1m of cash has been generated by PL in its first full year, coupled with the
synergistic impact of the Part VII transfer.
· Movestic required no additional funding during 2014 (2013: £nil).
· The increase in cash utilised by Chesnara in the year is due to a combination of, costs associated with PL Part
VII transfer, as well as initial transaction costs in relation to the acquisition of 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 businesses run-off. Despite this natural downward pressure gross cash generation in
2014 held up well when compared with 2013.
Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders.
However, the S&P segment continues to demonstrate short-term volatility. 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.
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):
Year ended 31 DecemberCash generated from/(utilised by): 2014£m 2013£m Note
CA
Regulatory surplus arising in the year 39.5 20.4
Change in target capital requirement (0.1) 3.2
S&P
Regulatory surplus arising in the year 3.7 25.1 1
Change in target capital requirement (0.8) 4.3
Increase/(decrease) in policyholder funds cover for target capital requirement 1.5 (0.5)
PL
Regulatory surplus arising in the year 4.3 0.2
Change in target capital requirement 2.8 1.4
Movestic
Additional capital contributions - -
Chesnara
Cash utilised by operations (8.3) (4.4)
Total gross cash generation 42.6 49.7
Items affecting ability to distribute cash
Synergistic effects of Part VII transfer 27.4 - 2
PL capital injection - (13.1) 3
Release of capital from S&P WP fund - 15.5 4
Restricted surplus in S&P WP fund 1.1 (15.4) 4
Net cash generation available for distribution 71.1 36.7 5
Items affecting the cash available for distribution:
Note 1 - The S&P regulatory surplus is significantly lower than 2013 due to the impact of reducing Government bond yields in year. The regulatory profit in 2014 compares with a loss on an IFRS basis. This difference is due to differing valuation bases, largely in respect of products that contain options and guarantees.
Note 2 - The Part VII transfer of the PL business into CA plc on 31 December 2014 has released £27.4m of cash that would otherwise have been unavailable. There is a further £3.5m of capital that will be released in 2015 when the company is de-regulated.
Note 3 - In 2013, PL was acquired at a solvency level lower than the target requirement. An immediate capital injection was made which had a one-off negative impact on cash available for distribution. This short term cash strain has been reversed during 2014 as a result of the cash benefit of the Part VII transfer, as highlighted above.
Note 4 - An element of the statutory surplus in the year emerges in the S&P WP fund. In the absence of management action the majority of the surplus is not available for distribution and the net cash generated recognises this restriction. Periodically Chesnara, with regulatory approval, can apply a waiver to release some of the previously restricted surplus within S&P. This process was undertaken during 2013 resulting in a £15.5m capital release.
Note 5 - The net cash generation KPI is a useful indicator of the dividend paying capacity of the Group's regulated subsidiaries. This is monitored closely by Management as cash generated by the Group's regulated subsidiaries is used by the Chesnara Parent Company for corporate transactions such as the servicing of debt, payments of dividends and the funding of future acquisitions. It should be noted that this KPI is quite distinct from the Group's Cash Flow Statement as included in the Group's IFRS
Financial Statements, which is intended to reflect the movement in cash held by Chesnara and its subsidiaries but does not reflect that most of the subsidiary cash balances are held in regulated insurance funds and are therefore not available for use by the Parent Company.
EEV earnings £44.2m (2013: £82.7m excluding modelling adjustments)
Summary
2014 has delivered a significant EEV result for the Group, with a strong operating profit supplemented by value emerging
from the impact of economic conditions. The 2014 result is, however, lower when compared with the prior year, largely due
to the significant profits arising from investment and economic conditions in 2013 not being repeated to the same level
during 2014. Whilst we have reported an overall economic profit during the year, it is not as strong as 2013, largely due
to UK equity performance being slightly negative in 2014, coupled with a significant reduction in UK Government bond
yields. Swedish equities have performed slightly better than the UK, although their impact on the UK results is slightly
diminished by the weakening of the Krona against Sterling in the year.
Off-setting the reduced economic profits in the year are strong operating profits on covered business, amounting to £37.5m
(2013: £8.9m). Further detail has been provided below, although the key drivers are an increase in shareholder returns on
net worth, which is driven by UK Government bond value appreciation in the year, coupled with c£12m of positive operating
assumption changes, largely in the CA segment (see further detail below).
The following tables analyse the Group EEV earnings after-tax by source and by business segment:
Profit after tax movement
Year ended 31 December 2013 to year ended 31 December 2014
£m
Actual 2013 82.7
CA 25.4
Movestic 12.0
S&P (56.9)
Profit on purchase of PL Ltd (12.3)
Tax (3.2)
Chesnara (2.5)
PL (1.0)
Actual 2014 44.2
Analysis of the EEV result in the year by business segment
2014 £m 2013£m
CA 50.0 24.5
S&P (14.2) 42.7
PL (0.9) 0.1
Movestic 27.5 15.5
Chesnara (7.7) (5.1)
Profit before tax and gain on acquisition 54.7 77.7
Gain on acquisition of PL Ltd - 12.3
Profit before tax 54.7 90.0
Tax (10.5) (7.3)
Profit after tax 44.2 82.7
Analysis of the EEV result in the year by earnings source
2014£m 2013£m
New business contribution 9.7 7.9
Return from in-force business
Expected return 7.1 5.5
Experience variances 0.6 5.8
Operating assumption changes 11.0 (10.0)
Return on shareholder net worth 9.1 (0.3)
Operating profit of covered business 37.5 8.9
Variation from longer term investment return 32.0 54.7
Effect of economic assumption changes (7.4) 16.4
Profit on covered business before tax and gain on acquisition 62.0 80.0
Tax (12.2) (7.6)
Profit on covered business after tax and before gain on acquisition 49.8 72.4
Gain on acquisition of PL Ltd - 12.3
Uncovered business and other group activities (7.3) (2.3)
Tax on uncovered business 1.7 0.3
Profit after tax 44.2 82.7
Economic conditions
The EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a profit of
£24.6m in 2014 compared with a profit of £71.1m in the prior year. Key economic condition highlights are as follows:
· The FTSE All share has fallen by 2.1% during 2014, compared with a rise of 16.7% in 2013.
· The Swedish OMX all share has increased by 11.9% during the year, compared with a 23.2% increase in the prior
year.
· 10 year gilt yields have reduced by 1.2% in year, compared with an increase of 1.26% in 2013.
These conditions have led to a large reduction in the EEV economic profits during the year. The following table analyses
the economic conditions impact by segment:
Economic experience and assumption changes 2014 £m 2013£m
CA
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