REG - Chesnara PLC - Final Results <Origin Href="QuoteRef">CSN.L</Origin> - Part 4
31/03/2017 07:06
- Part 4: For the preceding part double click ID:nRSe0943Bc
Key man dependency The nature of the group is such that it relies on a number of key individuals who have particular - The group promotes the sharing of knowledge and expertise to the fullest extent possible.- It periodically reviews and assesses staffing levels, and, where the circumstances of the group justify and permit, will enhance resource to ensure that know how and expertise is more widely embedded.- The group maintains succession plans and remuneration structures which comprise a retention element.- The group complements its internal expertise with established relationships with external specialist partners.
knowledge, experience and know how. The group is, accordingly, exposed to the sudden loss of the
services of these individuals.
Adverse regulatory and legal changes The group operates in jurisdictions which are currently subject to significant change arising from Strong project management disciplines are applied when delivering regulatory change programmes. Chesnara seeks to limit any potential impacts of regulatory change on the business by:- Having processes in place for monitoring changes, to enable timely actions to be taken, as appropriate;- Being a member of the ABI and utilising other means of joint industry representation;- Performing internal reviews of compliance with regulations; and- Utilising external specialist advice and assurance, when appropriate . Chesnara maintains strong relationships with all key regulators including regular and open dialogue about areas of potential change that could affect any of the Chesnara businesses. Through the Risk Management Framework, regulatory risk is monitored and scenario tests are performed to understand the potential impacts of adverse regulatory or legal changes, along with consideration of actions that may be taken to minimise the impact, should they arise.
regulatory and legal requirements. These may either be of a local nature, or of a wider nature,
following from EU-based regulation and law. During 2016 this risk has been compounded by the
increased political uncertainties following the UK referendum to leave the EU and US Presidential
elections, which may lead to further change. Significant issues which have arisen and where there is
continuing uncertainty as to their full impact on the group include:i) the FCA's review of legacy
business and other reviews such as the Asset Management market study; ii) the introduction of a
cap on exit charges on UK pensions business; iii) consultations regarding commission and rebate
income changes in Sweden.iv) the embedding of Solvency II requirements, including Pillar 3
Disclosure implementation; andv) the changes in pensions legislation in April 2015.The group is
therefore exposed to the one-off costs of addressing regulatory change as well as any permanent
increases in the cost base in order to meet enhanced standards. Further, the group is exposed to the
risk of fines or censure in the event that it fails to deliver changes to the required regulatory
standards on a timely basis.
Inconsistent regulation across territories Chesnara currently operates in three regulatory domains and is therefore exposed to inconsistent application of regulatory standards across divisions, such as the imposition of higher Capital Buffers over and above regulatory minimums.Potential consequences of this risk for Chesnara constraining the efficient and fluid use of capital within the group, or creating a non-level playing field with respect to future deal assessments. - Strong and open relationships are maintained with all regulators. Evidence is provided to
regulators that demonstrates consistent stability and control across divisions, achieved through
strong risk management and governance standards.- In extremis, Chesnara could consider the re
-domiciling of subsidiaries or legal restructure of the business.
Availability of future acquisitions Chesnara's inorganic growth strategy is dependent on the availability of attractive future acquisition opportunities. Hence, the business is exposed to the risk of a reduction in the availability of suitable acquisition opportunities in Chesnara's current target markets, for example arising as a result of a change in competition in the consolidation market or from regulatory change influencing the extent of life company strategic restructuring. - Chesnara's financial strength and market reputation for successful execution of transactions
enables the company to adopt a patient and risk-based approach to assessing acquisition opportunities.
- Operating in multi-territories provides some diversification against the risk of changing market
circumstances in one of the territories. - Maintaining strong relationships and reputation as a
"safe hands acquirer" via regular contact with regulators, banks and target companies.
Defective acquisition due diligence Through the execution of acquisitions, Chesnara is exposed to the risk of erosion of value or financial losses arising from risks inherent within businesses or funds acquired which are not adequately priced for or mitigated within the transaction. - Structured board approved risk-based acquisition process including group CRO involvement in due
diligence process.- Management team with significant and proven mergers and acquisitions
experience.- Cautious risk appetite and pricing approach.
Cyber risk Cyber risk is a growing risk affecting all companies, particularly those who are custodians of customer data. The most pertinent risk exposure relates to information security (i.e. protecting business sensitive and personal data) and can arise from failure of internal processes and standards, but increasingly companies are becoming exposed to potential malicious cyber attacks, organisation specific malware designed to exploit vulnerabilities, phishing attacks etc. The extent of Chesnara's exposure to such threats also includes third party service providers.The main potential impacts of this risk include financial losses, inability to perform critical functions, disruption to Policyholder services, loss of sensitive data and corresponding reputational damage or fines. - Information security policy embedded in all key operations and development processes.- Ongoing
specialist external advice, modifications to IT infrastructure and updates as appropriate.- Regular
staff training and attestation of the information security policy- Penetration and vulnerability
testing, including third party service providers.- Chesnara and supplier Business continuity plans
regularly monitored and tested.
Liquidity risk Chesnara and each of its subsidiaries have obligations to make future payments, which are not always known with certainty in terms of timing or amounts, prior to the payment date. This includes primarily the payment of policyholder claims, reinsurance premiums, debt repayments and dividends. The uncertainty of timing and amounts to be paid gives rise to potential liquidity risk, should the funds not be available to make payment. - Chesnara has a liquidity policy in place which includes various controls to manage liquidity risk
such as:- Asset / Liability modelling; - Regular liquidity forecasts; and- Cash projections
to support strategic initiatives such as acquisitions.- Chesnara holds a significant amount of
surplus in highly liquid tier 1 assets such as cash and gilts.
DIRECTORS' REsponsibilities STATEMENT
With regards to this preliminary announcement, the Directors confirm to the best of their knowledge that:
- The financial statements have been prepared in accordance with International Reporting Financial Standards as
adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit for the Company
and the undertakings included in the consolidation as a whole;
- Pursuant to Disclosure and Transparency Rules Chapter 4, the Chairman's Statement and Management Report include a
fair review of the development and performance of the business and the position of the Company and the undertakings
included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced
by the business.
On behalf of the Board
Peter Mason John Deane
Chairman Chief Executive Officer
30 March 2017 30 March 2017
INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON THE PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC
We confirm that we have issued an unqualified opinion on the full financial statements of Chesnara plc.
Our audit report on the full financial statements sets out the following risks of material misstatement which had the
greatest effect on our audit strategy; the allocation of resources in our audit; and directing the efforts of the
engagement team, together with how our audit responded to those risks and the key observations arising from our work:
Accuracy of Save & Prosper Cost of Guarantees
The risk
The assessment of the cost of guarantee reserves for policies written by Save and Prosper is complex and material,
including the use of a stochastic model based on a variety of possible economic scenarios. Historically, the residual cost
to shareholders arising from the cost of guarantees has fluctuated significantly as a result of movements in bond yields
and equity markets with a value of £35.7m at 31 December 2016 (31 December 2015: £37.2m). The value is determined by a
third party actuarial consultant and the directors compare this valuation against an in-house derived estimate using an
approximation model to validate its reasonableness.
How the scope of our audit responded to this risk
We assessed the competence of the actuarial consultant. Such an assessment includes a direct challenge of the actuarial
consultant's working papers and a challenge of the historical accuracy of modelling when compared with actual experience.
We used actuarial specialists within our audit team to challenge the appropriateness of assumptions input into the model
and benchmark against external actuarial data. Sensitivity analysis was also performed to assess potential management bias.
We developed an independent expectation of how the assumptions impact the model and challenged management's explanation and
analysis to support any variations.
We assessed the design and implementation of the internal controls in place to monitor and manage the risks
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