REG - Chesnara PLC - Final Results <Origin Href="QuoteRef">CSN.L</Origin> - Part 2
31/03/2016 07:06
- Part 2: For the preceding part double click ID:nRSe6231Ta
focussing on achieving better terms in the fund operation.
Trend analysis of new business premium income (£m)
Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015
Total 16.6 17.0 11.2 12.3 14.6 15.4 10.6 13.7
Movestic's share of new unit-linked company paid pension business
2015 2014
Market share 11.7% 12.5%
CAPITAL MANAGEMENT - Solvency I and Solvency II
"Managing the Group and subsidiaries' capital positions appropriately is a critical part of ensuring we remain true to the
Group's Culture and Values, which includes a clear focus on maintaining adequate financial resources. We are
well-capitalised at a Group and subsidiary level under both Solvency I and Solvency II. In applying Solvency II we have
not used any elements of the Long Term Guarantee Package, including transitional arrangements."
The Group and its subsidiaries manage capital in accordance with their respective capital management policies, which are
based on the requirements of our Regulators. These policies introduce the concept of a "management buffer", which is
incremental to the Regulatory capital requirements.
The tables below show a summary of the solvency position of the Group and its principal subsidiaries under Solvency I,
along with a comparison to the year end unaudited Solvency II position.
Chesnara Group
31 Dec 2014 (SI)£m 31 Dec 2015 (SI)£m 31 Dec 2015 (SII)£m
Total capital resources/own funds (pre-dividend) 240.4 251.9 396.7
Proposed dividend (15.1) (15.6) (15.6)
Total capital resources/own funds (post-dividend) 225.3 236.3 381.1
Capital requirement/Solvency capital requirement 79.3 77.5 260.6
Surplus capital resources above capital requirement 146.0 158.8 120.5
Solvency Ratio (post dividend) 284% 305% 146%
Capital requirement including "Management buffer" 79.3 77.5 286.7
Surplus capital resources above "Management requirement" 146.0 158.8 94.4
Movement in Solvency I (2014 to 2015)
- Capital resources of the Group have grown over the year as surplus has emerged from the life insurance companies
within each division.
Impact of applying Solvency II
- Capital resources have increased, with this being driven by the policyholder reserves reducing as a result of them
including an estimate of future surpluses expected to emerge from the in-force book, something that was not included in
Solvency I.
- For the Group capital requirement calculation, under Solvency I no capital requirements were included for
non-regulated non-insurance companies. Under Solvency II all companies in the Group are required to be treated as if they
were insurance companies. This, as well as the generally higher levels of capital requirements under Solvency II, have led
to the increase.
- The Group remains well capitalised under Solvency II.
CA plc (UK)
31 Dec 2014 (SI)£m 31 Dec 2015 (SI)£m 31 Dec 2015 (SII)£m
Total capital resources/own funds (pre-dividend) 181.2 148.3 198.2
Proposed dividend (65.0) (30.5) (30.5)
Total capital resources/own funds (post-dividend) 116.2 117.8 167.7
Capital requirement/Solvency capital requirement 65.8 58.0 123.8
Surplus capital resources above capital requirement 50.4 59.8 43.9
Solvency Ratio (post dividend) 177% 203% 135%
Capital requirement including "Management buffer" 102.1 91.5 148.5
Surplus capital resources above "Management requirement" 14.1 26.3 19.1
Movement in Solvency I (2014 to 2015)
- Capital resources increased from £116m (post dividend) to £148m (pre-dividend), representing an increase of £32m,
broadly in line with IFRS result. This includes £3.5m of assets transferred from Protection Life following its
deauthorisation.
- The proposed dividend is subject to a "no objection" process with the PRA.
Impact of applying Solvency II
- The increase in capital resources is largely due to reduction in technical provisions, which now includes an
estimate of expected future profits. This has the biggest impact on unit-linked products.
- Capital requirements are more risk-based and reflect the increased capital resources position of the company.
- CA plc remains well-capitalised under SII. Although the solvency ratio reduces under Solvency II, the absolute
surplus levels above the "management buffer" remain broadly in line with Solvency I.
Movestic Liv (Sweden)
31 Dec 2014 (SI)£m 31 Dec 2015 (SI)£m 31 Dec 2015 (SII)£m
Total capital resources/own funds (pre-dividend) 34.9 39.5 149.8
Proposed dividend - - -
Total capital resources/own funds (post-dividend) 34.9 39.5 149.8
Capital requirement/Solvency capital requirement 9.3 9.0 91.9
Surplus capital resources above capital requirement 25.6 30.5 57.9
Solvency Ratio (post dividend) 376% 439% 163%
Capital requirement including "Management buffer" 13.9 13.5 110.3
Surplus capital resources above "Management requirement" 21.0 26.0 39.5
Movement in Solvency I (2014 to 2015)
- Capital resources have increased over the year as a result of surplus generation, off-set by the slight weakening of
SEK over the year.
Impact of applying Solvency II
- The large increase in capital resources (own funds) is largely due to a reduction in technical provisions, which now
includes an estimate of expected future profits.
- Capital requirements are now more risk-based and reflect the increased capital resources position of the company.
- Movestic is better-capitalised in absolute terms under SII compared with SI, although the solvency ratio reduces due
to the increase of both "own funds" and SCR.
Waard Leven (Netherlands)
31 Dec 2014 (SI)£m 31 Dec 2015 (SI)£m 31 Dec 2015 (SII)£m
Total capital resources/own funds (pre-dividend) 41.1 40.9 52.6
Proposed dividend - - -
Total capital resources/own funds (post-dividend) 41.1 40.9 52.6
Capital requirement/Solvency capital requirement 5.4 4.7 10.9
Surplus capital resources above capital requirement 35.7 36.3 41.6
Solvency Ratio (post dividend) 761% 879% 480%
Capital requirement including "Management buffer" 10.8 9.3 19.2
Surplus capital resources above "Management requirement" 30.3 31.6 33.4
Movement in Solvency I (2014 to 2015)
- Modest surplus has emerged from Waard Leven in the year, as expected.
- For GBP reporting purposes, this is not seen in the above tables due to the Euro weakening against GBP during 2015.
Impact of applying Solvency II
- The transition to Solvency II is less marked for Waard Leven than for the other life companies within the Group.
This is primarily because the policy base is largely made up of term assurance products, which are less impacted by SII.
- Waard Leven remains well-capitalised under SII.
FINANCIAL REVIEW
The key performance indicators below are a reflection of how we have performed in delivering our three strategic objectives
and our core culture and values. 2015 has seen strong net cash generation of £82.4m, together with the robust Embedded
Value earnings in the year, resulting in a closing EEV of £455.2m.
Summary of each KPI
IFRS PRE-TAX PROFIT £42.8M (2014: £28.8M)
What is it?
The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the
profit arising from the longer term insurance and investment contracts over the life of the policy.
Why is it important?
IFRS 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" and can also be impacted by one-off gains arising from delivering
against our stated objective of "acquiring life and pensions businesses".
Highlights
Year ended 31 December 2015£m 2014£m
CA 23.9 46.7
S&P 10.6 (9.2)
Movestic 6.7 4.9
Waard Group 0.9 -
Group & Consolidation adjustments (15.9) (13.6)
Profit on acquisition 16.6 -
Total profit before tax and exceptional items 42.8 28.8
- A day one gain of £16.6m has been recognised on the acquisition of the Waard Group in the Netherlands, representing
the excess of the IFRS net assets acquired over the purchase price.
- 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 post acquisition profit is small, but in line with expectations at the time of the acquisition. The
Waard Group is not expected to generate significant IFRS profits.
- The CA result is less than the same period in 2014 largely due to 2014 including some one off items not repeated in
2015.
- The S&P segment has reported a profit in 2015 compared with a loss in 2014. The 2014 loss was largely driven by
reducing government gilt yields in that year, something that has not been witnessed in 2015.
- Movestic has continued to deliver growth in its IFRS results.
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.
NET CASH GENERATION £82.4M (2014: £71.1M)
What is it?
Net cash generation is a measure of how much distributable cash has been generated in the period. The dominating aspect of
cash generation is the change in amounts freely transferable from the operating businesses, taking into account
Board-approved solvency buffers that are based on those imposed by our Regulators. It follows that cash generation is not
only influenced by the level of surplus arising but also by the level of required 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
support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we
are performing against our stated objective of "maximising value from the 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 2015£m 2014£m
Total Gross cash generated 44.2 42.6
Synergistic effects of Part VII transfer 2.9 27.4
Exceptional cash on Waard acquisition 39.9 -
Movement in restriction of S&P WP capital (4.6) 1.1
Net cash generation 82.4 71.1
- 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.
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 under
Solvency I, as opposed to the IFRS surplus, they are generally 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 future periods our cash generation metric will be calculated with reference to Solvency II. This
cash metric is expected to display sensitivities to the same economic factors referred to above.
EEV EARNINGS, NET OF TAX £57.5M* (2014: £44.2M)
*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.
- The impact of acquisitions.
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 against all three of our core strategic objectives. This includes new
business profits generated from writing profitable new business, EEV profit emergence from our existing businesses, and the
EEV impact of acquisitions.
Highlights
2015 £m 2014£m
New business contribution 6.1 9.7
Operating profit - existing business 25.4 27.8
Economic effects 11.5 24.6
Uncovered business & other group (10.4) (7.4)
Exceptional gain on acquisition 21.3 -
Tax 3.6 (10.5)
Profit after tax 57.5 44.2
- Strong EEV earnings in the year supported by:
o £21.3m gain on acquisition of the Waard Group, offset by the Euro holding foreign exchange loss of £3.5m.
o Continued emergence of economic profits, although these are lower than in 2014.
o Operating profits that are in line with 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.
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.
EEV £455.2M (31 DECEMBER 2014: £417.2M)
What is it?
The European Embedded Value (EEV) of a life insurance company represents the present value of future profits of the
existing insurance business, plus adjusted net asset value of the non-insurance business within the Group. It is often
used to compare values of different life insurance companies.
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 writing profitable new business. It ignores the
potential of new business to be written in the future (the franchise value of our Swedish business) and the value of the
Company's ability to acquire further businesses.
Highlights
£m
EEV actual 2014 417.2
Net of tax profit arising in the year 36.2
Profit on acquisition 21.3
Effect of modelling adjustment 5.9
Foreign exchange and other reserve movements (1.9)
Dividend paid (23.5)
EEV actual 2015 455.2
- Closing EEV is £38m higher than at the start of the year.
- Post-tax EEV earnings have contributed £36.2m, excluding the acquisition profit of the Waard Group.
- Profit of £21.3m arising on acquisition of the Waard Group, representing the excess of the EEV acquired over the
purchase price, enhances EEV in the year.
- Small foreign exchange losses arising on retranslation of the Swedish and Dutch businesses.
- Dividends paid of £23.5m in the year, being the payment of the year end 2014 final dividend and the 2015 interim
dividend.
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, the EEV position of the Group can be materially affected by exchange rate
fluctuations. For example a 10.0% weakening of the Swedish Krona and Euro against Sterling would reduce the EEV of the
Group by 3.2% and 1.5% respectively, based on the composition of the Group's EEV at 31 December 2015.
Further detail for each KPI
IFRS PRE-TAX PROFIT £42.8M (2014: £28.8M)
Executive summary
The Group IFRS results reflect the natural dynamics of the segments of the Group, which can be characterised in three major
components:
Stable core
At the heart of surplus, and hence cash generation, are the CA and Waard Group segments. The requirements of these books
are to provide a predictable and stable platform for the financial model and dividend strategy. As a closed book, the key
is to sustain this income source as effectively as possible. The IFRS results below show that the stable core continues to
deliver against these requirements.
Variable element
The S&P component can bring an element of short-term earnings volatility to the Group, with the results being particularly
sensitive to investment market movements.
Growth operation
The long-term financial model of Movestic is based on growth, with levels of new business and premiums from existing
business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under
management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:
Year ended 31 December 2015£m 2014£m Note
CA 23.9 46.7 1
S&P 10.6 (9.2) 2
Movestic 6.7 4.9 3
Waard Group 0.9 4
Chesnara (9.5) (7.6) 5
Consolidation adjustments (6.4) (6.0) 6
Profit before tax and profit on acquisition 26.2 28.8
Profit on acquisition of the Waard Group 16.6 - 4
Profit before tax 42.8 28.8
Tax (3.0) (3.2)
Profit after tax 39.8 25.6
Note 1 - The CA segment has reported good results for the year, albeit reduced compared with 2014. The reduction is
primarily due to 2014 including some one off items, coupled with more suppressed market conditions in 2015. Further
insight is provided in the CA segmental analysis below.
Note 2 - The S&P segment has reported a profit for the year compared with a loss in 2014. The principal driver of this
swing is that the 2014 results included a large loss arising from an increase in the reserves held for products with
guarantees driven by a significant reduction in government gilt yields during that year. Further detail can be found
below.
Note 3 - The Movestic result has improved when compared with 2014, principally arising from the Pensions & Savings division
which continues to grow, resulting in growing fee income. Further analysis can be found below.
Note 4 - The Waard Group acquisition completed on 19 May 2015 and therefore the IFRS results only include just over seven
months of profit. The acquisition resulted in the recognition of a one-off gain of £16.6m, representing the excess of the
net assets acquired over the purchase price.
Note 5 - The Chesnara result represents holding company expenses. 2015 costs are higher than 2014 primarily due to a one
off foreign currency re-translation loss of £3.5m arising from holding Euros prior to the completion of the Waard Group
purchase.
Note 6 - Consolidation adjustments relate to items such as the amortisation of intangible assets and remain broadly in line
year on year.
The IFRS results by business segment are analysed in more detail as follows:
CA
The key components of the IFRS result for CA for the year are as follows.
2015£m 2014 £m Note
Product-based deductions 28.8 29.4 7
Administration expenses (10.6) (10.5) 7
Returns on retained surplus 0.3 5.7 8
Reserve changes, including those due to market movements 4.3 14.1 9
Impact of new HCL contract - 4.2 10
Other 1.1 3.8
Total 23.9 46.7
Note 7 - Product-based deductions and administrative expenses have remained broadly in line year on year, as would be
expected. Charges have remained resilient to policy attrition and continue to significantly exceed administration
expenses.
Note 8 - Retained surpluses are held in low-risk Government gilts. During 2015 the gilt index has remained broadly flat,
resulting in small returns, whereas higher returns were seen in 2014 due to gilt value appreciation during that year.
Note 9 - Policyholder reserves have reduced by £4.8m during the year. The movement in these reserves is the result of an
actuarial basis assessment, where all key judgments affecting the reserves are set. There is no dominating feature of the
2015 basis assessment, with the net impact in reserves being positive during 2015. 2014 witnessed a higher reserve
reduction in the year, primarily due to economic impacts.
Note 10 - During 2014 a key outsourcing contract was re-negotiated, resulting in a positive benefit to the CA segment. No
such dynamics existed this year.
S&P
The key components of the IFRS result for S&P for the year are as follows:
2015£m 2014 £m Note
Product based deductions 16.5 17.1 1
Administration expenses (9.6) (9.7) 1
Income on S&P shareholder funds 0.1 6.4 2
Change in cost of guarantees in with-profit funds: (2.2) (17.8) 3
Change in sterling and expense reserves 5.8 (0.6) 4
Impact of new HCL contract - (4.2) 5
Other - (0.4)
Total 10.6 (9.2)
Note 1 - Product-based deductions and administrative expenses have remained broadly in line year on year, as would be
expected. Product deductions have remained resilient to policy attrition.
Note 2 - Shareholder funds are invested in low-risk Government gilts. During 2015 the gilt index has remained broadly
flat, resulting in small returns, whereas higher returns were seen in 2014 due to gilt value appreciation during that
year.
Note 3 - One of the main drivers of the S&P surplus in any one year is the movement in the reserves held for products with
guarantees, which are sensitive to both equity and gilt markets. During 2014 reductions in gilt yields gave rise to a
large increase in such reserves, resulting in a large loss. For 2015 the gilt yields and equity markets closed broadly in
line with the start of the year.
Note 4 - During 2015 modelling refinements have been made to align the way in which expenses are modelled across the UK
business. This has contributed to the positive reserve movements during the year.
Note 5 - During 2014 a key outsourcing contract was re-negotiated, resulting in a strain arising in the S&P segment. No
such dynamics existed this year.
Movestic
The key components of the IFRS result for Movestic for the year are as follows:
2015£m 2014£m Note
Pensions and Savings 5.9 2.4 6
Risk and Health 1.0 0.4 7
Other (0.2) 2.1 8
Total profit 6.7 4.9
Note 6 - The Pensions & Savings business continues to be the core source of IFRS profit in Movestic. The segment has
reported strong results growth, with 2015 IFRS profits amounting to £5.9m. Good performance in the year is driven by two
key factors. Firstly, policyholder fee income has increased year on year, arising from growth in funds under management.
Secondly, improvements in the fund operation have resulted in increased performance fee rebates in the year, largely due to
"white-labelling" initiatives and renegotiations with certain fund managers.
Note 7 - The Risk and Health business has generated a profit in the year amounting to £1.0m. The loss ratios in the year
have remained stable, and premium income has remained broadly the same year on year. Policy numbers for this book have
remained at just over 380,000 for both 2015 and 2014.
Note 8 - 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 for the small loss of £0.2m in 2015 compared
with a profit of £2.1m in 2014 is as a result of a number of small factors. In particular, the fund business, Movestic
Kapital delivered profits of £0.1m during 2015 compared with £0.8m in 2014, largely because 2014 included some one off
income. In addition there has been a swing of some £0.4m due to lower investment returns on shareholder assets, largely
due to the negative interest rate environment in Sweden.
Waard Group
The Waard Group has reported a small profit of £0.9m since acquisition reflecting the natural emergence of surplus in the
business. Surpluses principally arise from mortality surpluses arising from the Waard Group's term assurance policies.
CASH GENERATION £82.4M (2014: £71.1M)
"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.
Cash generation is a function of the Group's and each Division's capital management policies, in that we only report cash
as being available for distribution if it exceeds the Board-approved capital requirement included within these policies.
Capital management policies are set with reference to the regulatory capital requirements with the inclusion of a
"management buffer". For 2015 the cash generation that we have reported is calculated with reference to our Solvency I
capital management policies. For future periods cash generation will be reported with reference to our capital management
policies based on Solvency II."
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 £42.5m is broadly in line with the same period in 2014.
- We are reporting modest levels of cash generation of £5.1m for Movestic for the first time since its acquisition in
2009.
Year ended 31 DecemberCash generated from/(utilised by): 2015£m 2014£m Note
CA
Cash generation in the year 21.4 46.5
S&P
Cash generation in the year 21.1 4.4
UK gross cash generation 42.5 50.9 1
Movestic
Underlying cash generation in year 5.6 - 2
Foreign exchange movements (0.5) - 2
Waard Group
Underlying cash generation in year 4.0 - 3
Foreign exchange movements 1.0 - 3
Chesnara
Cash utilised by operations (8.4) (8.3)
Total gross cash generation 44.2 42.6
Items affecting ability to distribute cash
Synergistic effects of Part VII transfer 2.9 27.4 4
Cash generated on acquisition of the Waard Group 39.9 - 3
Movement in restricted surplus in S&P WP fund (4.6) 1.1
Net cash generation available for distribution 82.4 71.1 5
Items affecting the cash available for distribution:
Note 1 - Cash generation for the UK business has continued to be strong following a good year in 2014. Statutory surplus
has continued to emerge well from both UK segments (£32.0m) and this, coupled with the decrease in our capital management
requirements as the books run off (£10.5m) have driven our cash generation in the year.
Note 2 - We are reporting cash generation for Movestic for the first time since it was acquired during 2009. Cash
generation of £5.6m represents surplus generation of £5.7m, off-set by an increase in our capital requirements of £0.1m. A
small foreign exchange loss in the year has reduced the value of the surplus cash available for distribution.
Note 3 - The acquisition of the Waard Group has delivered a significant one off cash generation item, amounting to £39.9m,
driven by the strong levels of regulatory surplus in this group. Post acquisition the Waard Group has reported a small
amount of cash generation, as expected. A small foreign exchange gain has also been reported, due to a slight
strengthening of the Euro against Sterling post acquisition.
Note 4 - During 2015 Protection Life Company Limited has been deauthorised as a regulated entity as it no longer carries on
insurance activities, following the Part VII transfer of the business into CA plc on 31 December 2014. As a result this
has released a further £2.9m of available capital across the Group.
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 £57.5M* (2014: £44.2M)
*EXCLUDING THE POSITIVE IMPACT OF MODELLING ADJUSTMENTS OF £5.9M
"EEV profits have emerged across all three insurance divisions of the Group, with Movestic having delivered a significant
proportion of this. The EEV results include a one-off profit of £21.3m arising from the acquisition of the Waard Group."
The following tables analyse the Group EEV earnings after-tax by source and by business segment:
Analysis of the EEV result in the year by earnings source
2015£m 2014£m
New business contribution 6.1 9.7
Return from in-force business
Expected return 6.3 7.1
Experience variances 10.8 0.6
Operating assumption changes 8.3 11.0
Return on shareholder net worth - 9.1
Operating profit of covered business 31.5 37.5
Variation from longer term investment return 12.2 32.0
Effect of economic assumption changes (0.7) (7.5)
Profit on covered business before tax and gain on acquisition 43.0 62.0
Tax 2.7 (12.2)
Profit on covered business after tax and before gain on acquisition 45.7 49.8
Gain on acquisition of the Waard Group 21.3 -
Uncovered business and other group activities (10.4) (7.3)
Tax on uncovered business 0.9 1.7
Profit after tax 57.5 44.2
Analysis of the EEV result in the year by business segment
2015 £m 2014£m Note
CA 10.8 49.1 1
S&P 7.7 (14.2) 2
Movestic 22.7 27.5 3
Waard Group 0.9 - 4
Chesnara (9.5) (7.7) 5
Profit before tax and gain on acquisition 32.6 54.7
Gain on acquisition of the Waard Group 21.3 - 4
Profit before tax 53.9 54.7
Tax 3.6 (10.5) 6
Profit after tax 57.5 44.2
Economic conditions
The EEV result is sensitive to investment market conditions. The 2015 EEV results include a positive contribution as a
result of investment markets, especially with regards to Movestic, although this is much less marked across the Group than
the positive experience in 2014. Key investment market conditions are as follows:
- The FTSE All share index has decreased by 2.5% during 2015, compared with falling by 2.1% in 2014.
- The Swedish OMX all share index has increased by 6.6% during the year compared with a 11.9% increase in the prior
year.
- 10 year UK gilt yields have increased by 21 points in 2015 compared with a reduction of 120 points in 2014.
Note 1 - CA: The CA segment result of £10.8m is driven by positive experience variances of £6.9m offset by adverse
operating assumption changes of £2.5m. Economic-related results have contributed an additional £2.4m to the result. The
£6.9m of positive experience variances is primarily made up of £4.8m of positive lapse experience coupled with £2.1m of
reserve releases. Adverse operating assumption changes includes the impact of adverse expense assumption changes off-set
by positive mortality assumption changes.
Note 2 - S&P: The S&P segment result of £7.7m is driven by £2.5m of positive experience variances and £5.1m of positive
operating assumption changes. The positive experience variances are largely as a result of positive lapse experiences in
the year. Operating assumption changes are the net of a number of items, but primarily relate to the net impact of
updating our expense modelling for new assumptions and aligning the expense modelling with the rest of the UK business.
Note 3 - Movestic: Movestic has contributed significantly to the Group EEV earnings in the year with a £22.7m segmental
result (2014: £27.5m). The following factors are the key drivers of the result:
- New business profits of £5.7m: New business profits have reduced compared with last year's result of £8.9m. The
key reason for the reduction compared with 2014 is due to very strong competition in the first half of the year from more
traditional life insurance companies who were offering very attractive policyholder returns. Such market offerings have
now become much less commonplace. This resulted in volume and margin pressure to the business, although market share has
improved during the latter half of 2015.
- Economic profits of £9.4m: Equity markets have continued to perform well in Sweden during 2015, building on strong
returns in 2014, and this has resulted in the strong economic profits in the year.
- Positive operating assumption changes of £5.7m: Two key factors have contributed to net positive operating
assumption changes:
o Expenses - assumptions have been strengthened during 2015 to recognise the cost of the current business process
improvements project, coupled with a strengthening of maintenance cost assumptions. The net impact of this a cost strain
of £8.4m.
o Performance fee rebate income - as a result of improvements in fee rebates during the year the assumptions have been
aligned to recent performance, resulting in a positive impact of £18.4m.
Note 4 - Waard Group: The Waard Group has reported a small profit in the post acquisition period. Overall the Waard Group
is not expected to be a significant generator of future EEV surplus. As a result of the acquisition of the Waard Group a
gain of £21.3m has been recognised, representing the excess of the Embedded Value acquired over the consideration paid.
Note 5 - Chesnara: The Chesnara result represents holding company expenses. 2015 costs are higher than 2014 primarily due
to a one off foreign currency re-translation loss of £3.5m arising from holding Euros prior to the completion of the Waard
Group purchase.
Note 6 - Tax: The combined EEV tax credit of £3.6m can be broken down into a current tax charge of £4.7m off-set by a
deferred tax credit of £8.3m. The deferred tax component represents the movement in deferred tax on the value of in-force
policies during the year, with a credit arising as a result of the VIF reduction in the year coupled with the impact of
some modelling refinements.
EUROPEAN EMBEDDED VALUE £455.2M (2014: £417.2M)
Summary
The EEV of the Chesnara Group represents the present value of the estimated future profits of the Group plus an adjusted
net asset value. Movements between different periods are a function of the following components:
- Net of tax profit arising in the period, pre exceptional items;
- One-off items, such as:
o the impact of raising new equity;
o the surpluses arising on acquisitions; and
o modelling adjustments;
- Foreign exchange movements arising from retranslating the EEV of Movestic and the Waard Group into Sterling; and
- Dividends that are paid during the year.
More detail behind each of these components has been provided below:
EEV movement 31 December 2014 to 31 December 2015
£m
EEV 2014 417.2
Net of tax profit arising in the year* 36.2
Profit on acquisition 21.3
Effect of modelling adjustments 5.9
Foreign exchange and other reserve movements (1.9)
Dividend paid (23.5)
EEV 2015 455.2
* stated before exceptional items
EEV movement 31 December 2013 to 31 December 2014
£m
EEV 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 2014 417.2
Net of tax profit
The EEV profit arising during the year is analysed in more detail within the preceding section.
Profit on acquisition
The purchase of the Waard Group has resulted in the recognition of a "day 1" profit of £21.3m. The profit arose because
the EEV of the Waard Group at the acquisition date amounted to £71.4m, which is £21.3m higher than the purchase price of
£50.1m.
Effect of modelling adjustments
During the year an adjustment of £5.9m has been reported relating to a tax error in the EEV model which resulted in the tax
charge in the EEV model being overstated at 31 December 2014. This has been corrected in the year.
Foreign exchange reserve movements
The £1.9m loss reported as a foreign exchange reserve movement during 2015 has arisen as a result of a small depreciation
of the Swedish Krona against Sterling during 2015. This compares with a 14% depreciation during 2014. Included within the
exchange reserve movement loss is a small profit arising from the slight appreciation of the Euro against GBP since the
acquisition of the Waard Group.
Dividends paid
Dividends of £23.5m were paid during 2015, being the final dividend from 2014 of £15.1m and the interim dividend from 2015
of £8.4m.
Equity raised for acquisition
During 2014 we announced the acquisition of the Waard Group in the Netherlands. To finance the deal we raised £34.5m of
equity through a well supported share placing exercise.
Analysis of EEV
The information below provides some further analysis of the EEV of the Group, both in terms of the split between different
operating segments and also the split between the adjusted shareholder net worth and the value of the in-force (VIF)
business. The adjusted shareholder net worth represents the IFRS net worth of the Group, but adjusted for items that are
measured differently under EEV measurement rules and the VIF represents Management's best estimate of the present value of
the future profits that will arise out of each book of business.
Analysis of EEV between VIF and shareholder net worth (SNW) (£m)
2015£m 2014£m
VIF 264.8 243.7
SNW 190.4 173.5
Total EEV 455.2 417.2
The VIF component of £264.8m consists of 61% in relation to the Swedish business, 35% UK and 4% the Netherlands.
Analysis of EEV by segment
2015£m 2014£m
Movestic 147.1 128.4
CA 171.8 210.5
S&P 62.1 61.3
Waard 74.1 -
Other Group Activities 0.1 17.0
Total 455.2 417.2
There is a good balance in EEV across the Group with the UK business representing the majority (51%) of the total EEV
(2014: 65%). In the above segmental analysis any outstanding debt in relation to the S&P and PL acquisitions is included in
"Other Group Activities".
Analysis of VIF by policy type
2015£m 2014£m
Endowment 30.3 31.4
Protection 78.5 71.4
Annuities 3.4 5.2
Pensions 234.2 223.9
Other 5.5 6.4
Valuation Adj. (86.7) (94.6)
Total 265.2 243.7
89% of the Group VIF is attributable to pensions products. These are typically products that are in their savings phase,
with the VIF representing the best estimate of the future cash flows expected to be earned by the Group from these
products.
'Valuation adjustments' in the above table comprise items that are not attributed at product level, such as certain
expenses and the cost of guarantees to with-profits policyholders in the S&P business.
Analysis of policy numbers by policy type
2015'000s 2014'000s
Endowment 42 42
Protection 214 176
Annuities 6 6
Pensions 236 240
Other 11 12
Total 509 476
The increase in protection products is as a result of the Waard Group acquisition during the year.
Policy numbers above only reflect those that are included in our EEV calculations ("covered business"). As a result, these
tables do not include 379,000 (2014: 382,000) Life & Health policies in the Swedish division and 24,000 unemployment and
disability policies in the Dutch division.
FINANCIAL MANAGEMENT
"The Group's financial management framework is designed to provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders, and regulators."
Objectives:
1. Maintain solvency targets - Group Solvency Ratio: Solvency I: 305% & Solvency II: 146%
2. Meet the dividend expectations of shareholders - 2015 TSR 4.1% 2015 dividend yield 5.7%. Based on share price as at
31 December 2015 of 335.00p and full year 2015 dividend of 18.94p.
3. Optimise the gearing ratio to ensure an efficient capital base - The Group is funded by a combination of share
capital, retained earnings and debt finance, with the debt gearing (excluding financial reinsurance in Sweden) being 17.8%
at 31 December 2015 (23.1% at 31 December 2014). The level of debt that the Board is prepared to take on is driven by the
Group's "Debt and leverage policy" which incorporates the Board's risk appetite in this area. Over time, the level of
gearing within the Group will change, and is a function of:
- funding requirements for future acquisitions (i.e. debt, equity and internal financial resources); and
- repayment of existing debt that was used to fund previous acquisitions.
As referred to above, acquisitions are funded through a combination of debt, equity and internal cash resources. The
ratios of these three funding methods vary on a deal-by-deal basis and are driven by a number of factors including, but not
limited to:
- size of the acquisition;
- current cash resources of the Group;
- current gearing ratio and the Board's risk tolerance limits for additional debt;
- expected cash generation profile and funding requirements of the existing subsidiaries and potential
acquisition;
- future financial commitments; and
- regulatory rules.
In addition to the above, Movestic uses a financial reinsurance arrangement to fund its new business operation.
4. Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors -
Policyholders' reasonable expectations maintained. Asset liability matching framework operated effectively in the year.
Sufficient liquidity in the Chesnara holding company.
5. Maintain the Group as a going concern - The Directors have considered the ability of the Group to continue on a
going concern basis. As such the Board has performed an assessment as to whether the Group can meet its liabilities as
they fall due for a period of at least 12 months.
In performing this work, the Board has considered the current cash position of the Group and Company, coupled with the
Group's and Company's expected cash generation as highlighted in its recent business plan, which covers a three year
period. The business plan considers the financial projections of the Group and its subsidiaries on both a base case and a
range of stressed scenarios, covering projected IFRS, EEV and solvency positions. These projections also focus on the cash
generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these
cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company.
The information set out above indicates a strong Solvency II position as at 31 December 2015 as measured at both the
individual regulated life company levels and at the Group level. As well as being well-capitalised the Group also has a
healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal
or extension of bank facilities to continue trading. The Group's subsidiaries do, however, rely on cash flows from the
maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the
risk of bond default. In order to manage this risk we ensure that our bond portfolio is actively monitored and well
diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial
position and are satisfied that any associated credit default risk is low.
In light of this information, the Board has concluded that the Group and Company has a reasonable expectation that the
Group and Company have adequate resources to continue in operational existence for the foreseeable future, and the 2015
Group Financial Statements have continued to be prepared on a going concern basis.
Longer term viability statement
In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Directors have assessed
the prospect of the Company over a longer period than the twelve months required by the going concern provision. The Board
conducted this review for a period of three years because the Group's business plan covers a three year period and includes
an assessment of Group cash generation and Group solvency margins over that time period.
The Group business plan considers the Group's cash flows, the Group's ability to remain above target solvency levels and
other key financial measures over the period, assuming continuation of the Group's established dividend payment strategy.
These metrics are subject to scenario analysis representing the principal risks to which the Group is most sensitive, both
individually and in unison. Where appropriate this analysis is carried out to evaluate the potential impact of adverse
economic and other experience effects, including, but not limited to:
i) Equity market declines
ii) Reduction in yield curves
iii) Adverse mortality and lapse experience
iv) Adverse expense experiences
v) Reduced new business volumes
vi) Adverse exchange rate experience
Based on the results of this analysis, the Directors have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the three year period of their assessment.
RISK MANAGEMENT
PRINCIPAL RISKS AND UNCERTAINTIES
Risks and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the
ability of the Group to meet its core strategic objectives. These currently centre on the intention of the Group to
maintain an attractive dividend profile.
The specific principal risks and uncertainties subsisting within the Group are determined by the fact that:
i) the Group's core operations centre on the run-off of closed life and pensions businesses in the UK and the
Netherlands;
ii) notwithstanding this, the Group has a material segment, which comprises an open life and pensions business; and
iii) these businesses are subject to local regulation, which significantly influences the amount of capital which they
are required to retain and which may otherwise constrain the conduct of business.
The below table identifies the principal risks and uncertainties of the Group and what controls are in place to mitigate or
manage their impact. It has been drawn together following a robust assessment performed by the Directors of the principal
risks facing the company, including those that would threaten its business model, future performance, solvency or
liquidity. These have been updated to reflect the risks of the Waard Group, and it is worth noting that they have remained
materially unchanged as a result of this update since those reported in the 2014 Annual Report & Accounts.
Risk Impact Control
Adverse mortality / morbidity / longevity experience In the event that actual mortality or morbidity rates vary from the assumptions underlying product pricing and subsequent reserving, more or less profit will accrue to the Group. - Effective underwriting techniques and reinsurance programmes.- Option on certain contracts to vary premium rates in the light of actual experience.- Partial risk
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