REG - Chesnara PLC - Half Yearly Report <Origin Href="QuoteRef">CSN.L</Origin> - Part 2
29/10/2014 16:08
- Part 2: For the preceding part double click ID:nRSc2947Qa
continued growth during 2014 is particularly pleasing
and slightly surpasses management's original expectations. The re-engineered processes have coped well with the sharp
increase in new business volumes.
The business continues to benefit from changes to the senior management structure together with the transfer of certain
IFA-critical processes to Stockholm to support the acquisition and marketing proposition.
There is a positive management environment which means that staff are well motivated and there is a strong collective sense
of commitment to continue with improvements required to fully recover and consolidate its market position. The Group
Chairman made a statement in the 2013 Annual Report & Accounts that "I expect Movestic, now that it has re-established its
strong market position, to continue to make a significant contribution to the Embedded Value of the Group from its new
business operations in the future".
The total new business profit for the six months to 30 June 2014 of £5.8m validates the above explanation, having increased
to a level, that on an annualised basis, implies the Movestic new business operation is becoming an increasingly relevant
component of the Group's appraisal value.
New business premium income
New sales in the unit-linked business have shown substantial growth in six months to 30 June 2014, with a 27.6% increase
compared to six months to 30 June 2013. A key driver of this is the recovery in IFA sentiment towards Movestic following
the significant improvements in service levels when compared with prior periods. Although the monthly trend is upwards we
expect future new business growth to continue at a more modest growth rate following the significant recovery.
New business markets, as ever, remain challenging. Whilst some companies have continued to offer traditional investment
products which have a lower risk profile and contain guarantees (which we believe to be unsustainable) we have started to
see some movement to equity-linked products as a consequence of strong market performance. Further momentum in this area
would have a positive impact on future new business potential.
Trend analysis of new business premium income (£m)
Q12013 Q22013 Q32013 Q42013 Q1 2014 Q2 2014
Total 13.1 15.5 14.3 17.6 18.7 17.9
Six monthsto 30 June 2014 Six monthsto 30 June 2013
New business premium income (£m) 36.5 28.6
Market share
Movestic operates in a mature market with low levels of overall growth. The new business market share statistics, both for
the company-paid business and total business, show that Movestic continues to write a significant portion of new business
in this sector, and continues to be within the top five suppliers in the core unit-linked company-paid pension market.
During the first six months Movestic had a 14.2% share of the unit-linked company-paid market and 8.5% of the total
market.
As can be seen from the tables below, Movestic's market share of total business and company-paid business for the first six
months of 2014 has exceeded the same period in 2013, although they have reduced slightly when compared with the latter half
of 2013. A flattening of Movestic's market share has been expected, with recent increases being attributable to Movestic
having resolved historic systems issues.
Trend analysis of Movestic's share of new business
H12013 H22013 H12014
Total business 7.1% 8.9% 8.5%
Unit-linked company-paid business (excluding 'tick the box' market) 12.4% 15.1% 14.2%
Movestic's share of new unit-linked company paid pension business year on year (total business only)
(excluding 'tick the box' market)
H12014 H12013
New business premium income (£m) 8.5% 7.1%
Development of innovative product concepts
The trend within the company-paid insurance solutions market in Sweden is to look for overall concepts where the pension
plan is complemented by risk insurance products to cover the entire need of companies and their employees. Movestic's full
range offering within both pension and risk products makes it possible to create such concepts and smaller variations to
existing risk products packaged together with competitive pension plans can provide the adapted solutions the market asks
for.
A differentiating feature of Movestic is the carefully selected fund range which over time has proven to perform very well
compared to similar offerings. The work to further develop and improve the fund range is continually given high priority.
Risks associated with the strategic objective
Economic conditions in Sweden have remained stable and have proved to be relatively immune to economic pressures
experienced across the rest of Europe. However, there remains a general sense of uncertainty that has led to consumers
preferring more traditional investment products to equity-based unit-linked investments. Recent improvements in confidence
and good equity market performance has led to a shift to equities and Movestic remains committed to the unit-linked market.
We believe that as equity market confidence continues to recover and that as the traditional investment offerings become
less sustainable for providers, there will be a gradual shift back towards unit-linked investments. New business volumes
remain sensitive to market preferences and continued IFA support.
New business remains relatively concentrated towards several large IFA's. This is inevitable to some extent, however, the
fact that Movestic has extended the breadth of IFA support in the period, has reduced the concentration risk to some
extent. The competitive market puts pressure on new sales margins and even though Movestic's margins have held up well,
these external pressures have led to management focussing on achieving better terms in the fund operation.
acquire life and pensions businesses
The focus during the first half of 2014 has been on integrating Protection Life into the Chesnara Group to ensure we
deliver value in accordance with the assumptions upon which the deal was assessed. Much effort has been spent on the
operational migration to HCL and the Part VII transfer both of which are progressing in line with plan and within budget.
Highlights
· PL surplus has emerged at a slightly higher level than expected.
· Part VII transfer progressing in line with plan.
· Operational migration progressing to plan and budget.
· General increase in acquisition market activity in the sector.
Review of the period
There has been a general increase in general market activity in the UK and across Europe. The activity is due to a number
of factors including larger financial organisations wishing to re-focus on core activities and the desire to release
capital or generate funds from potentially capital intensive Life and Pension businesses. Chesnara continues to be made
aware of opportunities and has progressed to various stages dependent on our view of how well the opportunities align to
our assessment criteria. It is encouraging that Chesnara continues to be invited to consider many of the known
opportunities which reflects well on our presence and credibility in the market. We remain optimistic that our reputation,
operational capability and financial strength positions us well to take advantage of the improved market activity in due
course.
Acquisition process and approach
Chesnara is an established Life and Pensions consolidator with a proven track record. This together with a good network of
contacts in the adviser community, who understand the Chesnara acquisition model and are mindful of our good reputation
with the regulator, ensure we are aware of most viable opportunities in the UK and many opportunities in Europe.
We assess the financial impact of potential acquisition opportunities by estimating the impact on three financial measures
namely; the cash flow of the Group, the incremental embedded value and the internal rate of return. The financial measures
are assessed under best estimate and stress scenarios.
The measures are considered by the Board and Audit & Risk Committee, in the context of other non-financial measures
including the level of risk, the degree of strategic fit and the opportunity of alternative acquisitions.
We engage specialists to support stringent due diligence procedures and the actual acquisition process.
Risks associated with the strategic objective
The risk of not effectively delivering this objective is two-fold. Firstly, there is the risk that Chesnara makes no
further acquisitions and secondly there is the risk that we make an inappropriate acquisition that adversely impacts the
financial strength of the Group. The general increase in market activity together with the momentum created by the
Protection Life acquisition suggests that the risk of no further value adding acquisitions has actually somewhat reduced
over the past six months.
The Protection Life deal does not mean that other opportunities cannot be fully progressed should they become available.
During recent years and through the Protection Life assessment process, we have enhanced our financial projection modelling
capabilities which improves the quality of financial information available to the Board. This strongly mitigates the risk
of inappropriate opportunities being pursued. In addition, the increased financial strength of the Group means that any
perceived risk that pressure to do a deal could result in a departure from the stringent assessment criteria will have
reduced.
Acquisition outlook
We continue to see a reasonable flow of possible acquisition opportunities and assess them appropriately. The general
market background is positive with, in particular, the now firm implementation date for Solvency II, leading portfolio
holders and owners to review their strategic options.
maintain strong solvency position - UK & SWEDEN
We have continued to deliver to our strategic objective of maintaining a strong solvency position, with Group solvency
being 192% at 30 June 2014.
Highlights
· Group solvency continues to be strong at 192% (31 December 2013: 194%). This is stated after a proposed interim
dividend of £7.4m.
· The combined surpluses of the regulated entities in the Group of £19.6m in the period has more than offset the
proposed interim dividend of £7.4m, although full recognition of this surplus has not been seen in the Group Solvency due
to IGD surplus restriction rules, which had an adverse impact of £14.6m in the period.
· Solvency ratios at a regulated entity level have all improved since 31 December 2013, and remain well in excess of
Board- imposed targets.
Objectives
One of the Group's key strategic objectives is to maintain a strong, but not excessive, solvency position. This brings a
number of benefits, including supporting:
· one of our key financial management objectives of safeguarding policyholder interests.
· delivering to the dividend expectations of our shareholders.
· potential acquisition opportunities.
· our ability to absorb volatility created by external economic conditions.
Regulatory capital:
30 June 2014 31 December 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 80.3 80.3 154.3 192 81.9 81.9 158.7 194
CA plc 45.0 68.1 112.3 250 44.1 67.2 96.4 218
PL 24.3 36.5 42.7 176 25.2 37.8 39.2 156
Movestic 9.7 14.5 33.8 350 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 - 150% of the 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 30
June 2014 is 192% (31 December 2013: 194%) with the surplus having moved from £76.8m at 31 December 2013 to £74.0m at 30
June 2014. IGD is stated after foreseeable dividends of £7.4m (31 December 2013: £13.4m). The movement in IGD since the
year end is a function of the following key items:
· The Group surplus in the six months to 30 June 2014
The combined surplus of the regulated entities within the Group has been strong in the first six months of 2014, amounting
to £19.6m. This has been offset by an increase in the temporary surplus restriction on CA plc, as required when applying
the rules for calculating Group Solvency, amounting to £14.6m in the period. This, coupled with the impact of the 2014
interim dividend of £7.4m, has resulted in a slight reduction in Group regulatory assets compared with 31 December 2013.
· Reduction in Group capital resources requirement
The Group capital resources requirement at 31 December 2013 amounted to £81.9m. This has reduced to £80.3m at 30 June
2014, representing a small positive benefit to the Group IGD at 30 June 2014.
Solo solvency
The Board sets internal solvency targets for each of its regulated subsidiaries, which have remained unchanged when
compared with the year end. The table above shows that the solvency positions of each regulated subsidiary continue to
exceed the internal targets imposed by the Board:
· CA plc solvency has moved from 218% at 31 December 2013 to 250% at 30 June 2014. The year end solvency position is
stated after proposed dividends of £48.0m that were paid during the first six months of 2014. No further dividends have
been proposed in the period, with the increase in the ratio being attributable to the strong regulatory surplus of £16.0m
in the period.
· Protection Life solvencyis 175% at 30 June 2014. The movement when compared to 31 December 2013 is driven by the
surplus in the first six months of the year, amounting to £3.2m. The solvency ratio has improved from 156% at 31 December
2013 as a result of the surplus in the period, coupled with a small reduction in the solvency capital requirement. No
dividends have been paid by Protection Life during the period.
· Movestic had a solvency ratio of 338% at 30 June 2014. Whilst it has a very strong solvency ratio, there are
additional asset and liability matching rules that are imposed by the Swedish FI which means that Movestic does not
currently pay dividends to Chesnara.
Solvency II
The introduction of Solvency II will change the capital requirements of both the Group and its regulated subsidiaries. The
final impact of Solvency II continues to be uncertain although we expect the Group impact to be manageable. Solvency II
may also result in the Board re-assessing the internal targets imposed on each regulated entity. Further detail over the
status of our Solvency II programme is reported below.
adopt good regulatory practice at all times - UK & SWEDEN
Chesnara continues to operate to high regulatory standards in both its day to day operations and its acquisition activity.
UK
· Regulation and legal
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 period.
· PRA
The PRA, a subsidiary of the Bank of England, focuses on prudential supervision. To assist its supervisory work we have
responded in a timely manner to its regular and one off requests for information, for example on Solvency II.
· FCA
The FCA's focus is conduct and consumer protection. To assist its supervisory work we have responded in a timely manner to
its various requests for information. It is noted that the FCA has announced that it is to undertake a review of the
market's practice in relation to legacy business.
· Solvency II
Good progress is being made towards the implementation date of 1 January 2016. Work on all three pillars broadly on track
to hit the required interim and full timetable required by the regulator. Further information on our Solvency II project is
provided below.
· Pension Changes
In his Budget announcement on 19 March, the Chancellor of the Exchequer announced significant changes which will affect
pensions and the annuity market. CA plc and Protection Life do not have a significant exposure to annuities (having around
6,000 such arrangements) and has not sought to write such business for a number of years. Although we do have far more
pensions policies (around 169,000) we are currently monitoring the regulatory changes in this area and do not expect any
immediate and significant change to affect this book or its value.
· Treating Customers Fairly (TCF)
We have continued to monitor performance against, and to continue the development of, our TCF measures. The results are
discussed, where relevant, with our outsourcing partners and are reviewed by senior management and reported to the CA plc
Board. No issues of significance have arisen.
· Complaints
There has been a general downward trend in the overall volume of complaints received although we continue to receive a
steady 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
it 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.
SWEDEN
· Solvency II
Activity during the first half of 2014 has included ensuring full alignment of the Swedish Solvency II project to the wider
Group project in terms of approach, governance and timetable. At a local level the project is progressing in line with
plan and the work is on track to hit the interim and full timetable requirements of both local and UK group regulations.
· Commission
Discussions regarding the payment of commission in the future continue between political parties, the regulators, companies
and consumer organisations. Management's expectation is for limited change, possibly the cessation of initial commission,
which would not have a significant impact on the Movestic business model.
· Pensions portability
The debate on the proposal to increase portability of pensions continues in Sweden. As Movestic offers full right to
transfer already, the risk for us can be described as the risk of no change. An increased right to transfer would be
beneficial to Movestic as a part of the market that is now closed would become possible to approach.
financial review
The Group's key financial performance indicators as at 30 June 2014 and for the six months ended on that date demonstrate
the financial performance and strength of the Group as a whole. A summary of these is shown and further analysis is
provided in the following sections:
Summary of each KPI
IFRS pre-tax profit £27.4m
(Six months to 30 June 2013: £21.8m)
What is it?
The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the
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 objectives
to "maximise value from the in-force book" and "maintain a strong solvency position".
Highlights
· IFRS pre-tax profit of £27.4m shows a 25.7% improvement compared with the prior half year of £21.8m.
· The new HCL contract has had a neutral effect on the overall IFRS pre-tax result, due to these costs having already
been reflected in the 31 December 2013 valuation.
· The UK businesses have continued to deliver resilient product deductions. In addition to this, investment market
conditions in the period have provided a further positive impact both to shareholder net assets and by causing a reduction
in the reserves held for products with guarantees.
· The CA result has benefited from a one off reserving gain of £3.4m following a review of the practice associated with
awarding bonus units on certain policies.
· There was a £1.1m improvement in the Movestic result when compared with the same period in 2013.
Risks
The IFRS profit can be affected by a number of our principal risks and uncertainties as set out below. In particular,
equity and property markets and movements in yields on fixed interest securities can contribute significantly to the
result, both positively and adversely.
Net cash generation £15.6m
(Six months to 30 June 2013: £9.9m)
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
support Chesnara's dividend capacity. Cash generation can be a strong indicator of how we are performing against our
stated objective of "maximising value from the in-force book", although this KPI can also be negatively affected by our
stated objective of "maintaining a strong solvency position".
Highlights
· At £14.9m cash generation in CA has been very strong (six months to 30 June 2013: £4.2m).
· S&P has contributed £0.1m of operational cash generation in six months to 30 June 2014 compared with £20.3m for six
months to 30 June 2013. The reduction arises from a more muted surplus in the period arising from subdued market
conditions. The operational cash generation in the first half of 2013 was, however, not distributable, as this arose in an
S&P fund containing transfer restrictions.
· PL has generated cash of £4.0m, driven by the surplus in the period, coupled with the reduction in the capital
resources requirement since 31 December 2013. This offsets against the net cash utilised of £11.5m during 2013 following
the acquisition of PL. A further cash benefit is expected to arise following the planned Part VII transfer into CA plc
during 2014.
· Movestic has required no capital support during the period (2013: £nil).
Risks
The ability of the underlying regulated subsidiaries within the Group to generate cash is affected by a number of our
principal risks and uncertainties as set out below. Whilst cash generation is a function of the regulatory surplus, as
opposed to the IFRS surplus, they are closely aligned, and therefore factors such as yields on fixed interest securities
and equity and property performance contribute significantly to the level of cash generation within the Group. In addition
to this, regulatory change, such as the introduction of Solvency II can also materially affect the ability of the regulated
subsidiaries to generate cash.
EEV earnings, net of tax £47.3m
(Six months to 30 June 2013: £35.4m, excluding modelling adjustments of £0.8m in 2013).
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
· Significant economic profit of £21.2m (six months to 30 June 2013: £33.1m).
· Significant increase in operating profit to £37.2m (six months to 30 June 2013: £4.8m).
· The operating profit of £37.2m includes a one-off benefit of £17.3m arising due to reassessment of certain
policyholder liabilities in the CWA book of business.
· Movestic has generated an EEV profit before tax of £17.5m, which compares favourably to the same period in 2013 of
£7.3m.
· Movestic has generated a new business contribution of £5.8m in the period (six months to 30 June 2013: £2.3m).
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 £400.3m
(31 December 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 market capitalisation. 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.
Highlights
· Group EEV exceeds £400m for the first time in the Group's history, with the movement since year end being £23.9m.
· The movement in EEV of £23.9m since 31 December 2013 reflects the following:
· Profit before tax of £47.3m, of which £37.2m has arisen from operating activities.
· The impact of the 2013 year end dividend of £13.4m that was paid in the period.
· The impact of a weakening of Swedish Krona against Sterling, which has contributed to a £10.0m decrease in embedded
value in the period.
· There were no model enhancements reported for the period (year ended 31 December 2013: £4.1m).
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% weakening of exchange rates between Swedish Krona and Sterling would reduce
the EEV of the Group by 3%, based on the composition of the Group's EEV at 30 June 2014.
Further analysis of each KPI
ifrs pre-tax profit £27.4m
(Six months to 30 June 2013: £21.8m )
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
The stable core is comprised of the CA and PL segments, both of which are UK run-off businesses.
The requirements of the CA and PL books are to provide a predictable and stable platform for the financial model and
dividend strategy. As closed books, the key is to sustain this income source as effectively as possible. The IFRS results
for the six months to 30 June 2014 are underpinned by a core generation of surplus, albeit the results for the period also
reflect the impact of a number of one-off positive items, most notably the modelling of the signed HCL contract coupled
with the positive impact arising from refined modelling surrounding policies that attract bonus units. Assets under
management within the CA segment have moved from £2,331m at 31 December 2013 to £2,305m at 30 June 2014, representing a 1%
reduction since year end.
Further detail of the results of the CA and PL segments can be found below.
Variable element
The S&P component has traditionally brought an element of earnings volatility to the Group, with the results being
particularly sensitive to investment market movements. The result for the first half of 2014 has not been significantly
impacted by the effect of market movements, with the effect of reducing bond yields being broadly offset by corresponding
asset growth. In light of this the S&P surplus is significantly lower than the equivalent period in 2013, which did
benefit from positive investment market movements in that period.
The S&P result is also lower than the same period in 2013 as a result of the impact of modelling the new HCL contract,
which was agreed during the first half of the year, with a corresponding benefit being reported in the CA result, as
described above.
Core product based deductions continue to remain strong, and consistent, being £8.3m for the period (2013: £8.3m).
Growth operation
Movestic has posted an IFRS profit of £2.1m during the period (2013: £1.0m). The long-term financial model 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. Funds under management have increased to over SEK
20bn for the first time, representing an increase of 14% (on constant exchange rates) since 31 December 2013.
IFRS results
The financial dynamics of the Group, as described above, are reflected in the following IFRS results:
Unaudited Six months ended 30 June Year ended 31 December Note
2014 2013 2013
£m £m £m
CA 20.2 6.8 25.0 1
S&P 6.8 17.2 36.4 2
PL 4.0 - 0.2 3
Movestic 2.1 1.0 2.6
Chesnara (2.7) (1.2) (4.9) 4
Consolidation adjustments (3.0) (2.0) (1.5) 5
Total profit before tax and exceptional items 27.4 21.8 57.8
Profit arising from PL acquisition - - 2.8 6
Total profit before tax 27.4 21.8 60.6
Tax (4.5) (4.6) (11.2)
Total profit after tax 22.9 17.2 49.4
Note 1 - The CA result of £20.2m is £13.4m higher than the same period in 2013. Further detail behind the factors
influencing the movement in surplus are included below.
Note 2 - The S&P pre tax profit of £6.8m for the first half of 2014 is £10.4m lower than the equivalent period in 2013.
Further detail behind the drivers of this are included below.
Note 3 - The Group results include a full six months of the Protection Life business, which was acquired on 28 November
2013. Further detail behind this result is included below.
Note 4 - The Chesnara result primarily represents holding company expenses. The loss is higher than the equivalent period
in 2013, driven by higher administrative expenses, primarily in relation to Solvency II and the Part VII transfer of PL
into CA plc.
Note 5 - Consolidation adjustments relate to items such as the amortisation of intangible assets that were recognised on
previous acquisitions. More detail is provided below.
Note 6 - The Group profit before tax for the year ended 31 December 2013 was stated after recognition of a £2.8m gain
arising as a result of the purchase of Protection Life. During the first half of 2014 no areas have been identified that
would require adjustment to this gain.
Consolidation adjustments
The adjustments arising on consolidation are analysed below:
Unaudited Six months ended 30 June Year ended 31 December Note
2014 2013 2013
£m £m £m
CA - Amortisation of AVIF (1.1) (1.1) (2.2)
S&P - Amortisation of AVIF (0.4) (0.4) (0.8)
PL - Amortisation of AVIF (1.2) - (0.2)
Movestic:
Amortisation of AVIF (2.0) (2.2) (4.4)
Write back of DAC 1.7 1.7 6.1 1
Total (0.3) (0.5) 1.7
Total (3.0) (2.0) (1.5)
Note 1 - Included within consolidation adjustments for the year ended 31 December 2013 is an item in relation to Movestic
that reverses the amortisation charge on DAC relating to policies that were written prior to Chesnara ownership. This
adjustment included an additional charge that was booked as a result of some refinements made to the DAC amortisation
model. No further refinements have been made during the first six months of 2014.
The IFRS results by business segment are analysed in more detail as follows:
CA
The segment has delivered a strong surplus when compared with the same period in 2013. This is primarily driven by items
such as the impact of the renegotiation of the HCL contract being lower than the provision made at 31 December 2013 (and
equal and opposite item can be seen in the S&P segment) and a one-off reserving benefit arising from a change in practice
to capture the behaviour of certain groups of policies that contain bonus unit clauses, offset by a natural volatility in
mortality and morbidity surplus period on period.
Profit before tax movement, six months ended 30 June 2013 to 30 June 2014
£m Note
June 2013 6.8
Impact of new HCL contract 4.2 3
Other effects due to market movements 6.2 5
Adjustment to Bonus Unit Reserves 3.4 4
Other 3.2
Product based deductions (3.6) 2
June 2014 20.2
The key components of the 2014 IFRS result for the period are summarised as follows:
Pre-tax IFRS profit Unaudited Six months ended 30 June Year ended 31 December Note
2014 2013 2013
£m £m £m
Product-based deductions 10.8 14.4 28.7 2
Administration expenses (3.9) (4.8) (7.0) 2
Gains and interest on retained surplus 2.4 1.8 3.5
Operating assumption changes 0.3 - (1.7)
Other effects due to investment market movements 2.0 (4.2) 3.3
Impact of new HCL contract 4.2 - - 3
Complaint costs (0.3) (0.6) (1.5)
Other 4.7 0.2 (0.3) 4
Total 20.2 6.8 25.0
Note 2 - Product-based deductions and returns on retained surplus remain significantly in excess of recurring
administration expenses. The total level of product-based deductions has decreased when compared with the same period in
2013, primarily due to reduced mortality and morbidity surplus in the period.
Note 3 - The CA surplus includes the effect of modelling the new HCL contract which, as explained in the Business Review,
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 £4.7m of "other" items. This predominantly relates to a one off item arising
from the reserving impact associated with a change in practice associated with policies that can accrue bonus units in
certain circumstances.
Note 5 - The result in the period has benefited from the positive impact of investment market conditions, primarily driven
by asset growth. This has resulted in a swing compared with the same period in 2013, which witnessed a reduction in asset
values.
S&P
The S&P pre-tax profit has moved compared with the equivalent period in 2013 as follows:
Profit before tax movement, six months ended 30 June 2013 to 30 June 2014
£m Note
June 2013 17.2
Income on with profit shareholder funds 5.1
Other 1.3
Change in sterling and expense reserves (2.9)
Impact of new HCL contract (4.2) 4
Change in Cost of Guarantees (9.7) 3
June 2014 6.8
S&P posted a pre-tax IFRS profit of £6.8m for first six months of 2014, the key components of the result being:
Pre-tax IFRS profit Unaudited Six months ended 30 June Year ended 31 December Note
2014 2013 2013
£m £m £m
Product based deductions 8.3 8.3 17.1 1
Administration expenses (4.7) (5.0) (9.9) 1
Income on with-profits shareholder funds 2.9 (2.2) (0.4) 2
Change in cost of guarantees in with-profit funds: 3
Asset valuation movements 13.5 4.0 8.6
Change in yield curve (8.5) 10.2 19.9
Lapse experience (1.7) (1.7) (3.7)
Other - 0.5 (0.4)
Total 3.3 13.0 24.4
Change in sterling and expense reserves 0.5 3.4 5.4
Impact of new HCL contract (4.2) - - 4
Other 0.7 (0.3) (0.2)
Total 6.8 17.2 36.4
Note 1 - Product-based deductions have held up well as the book runs-off. These are supported by assets under management,
which have moved from £1,113m to £1,126m in the first six months of the year. Product deductions exceed administration
expenses by £3.6m and £3.3m in the first six months of 2014 and 2013 respectively.
Note 2 - The income on with-profits shareholder funds is driven by investment market performance, and includes the impact
of asset valuation movements in the period. During the first half of 2014 the S&P shareholder fund assets have increased
in value.
Note 3 - The S&P segment's results are influenced by the impact of changes in the reserves that are held to cover the
guarantees that exist within certain S&P products, with these reserves being sensitive to market conditions. During the
first half of 2014 the overall impact of the reserve movements on the result is relatively modest, being a £3.3m net
surplus, compared with a £13.0m surplus in the same period of 2013. The net movement in the period is net of an adverse
impact of £8.5m arising from a reduction on bond yields since the end of 2013, off-set by the positive impact of asset
valuation movements, including both bonds and equities.
Note 4 -The £4.2m strain that can be seen during the first half of 2014 is as a result of the effect of modelling the
revised HCL contract. Whilst this has not impacted the overall Group results, as described in the Business Review, 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 purchase of PL was completed on 28 November 2013, with the first half of 2014 being the first full six month period
that includes its results. The PL segment has delivered a pre-tax IFRS result of £4.0m in the first six months of the
year, slightly exceeding plan. The majority of the surplus has arisen from margin release as the book runs off.
Movestic
Pre-tax IFRS profit Unaudited Six months ended 30 June Yearended 31 December Note
2014 2013 2013
£m £m £m
Pensions and Savings, before impact of DAC model change 0.6 0.8 2.2 1
Risk and Health 0.5 0.8 2.2 2
Other 1.0 (0.6) 1.2 3
Total profit before impact of DAC model change 2.1 1.0 5.6
Impact of DAC model change - - (3.0) 4
Total profit before tax 2.1 1.0 2.6
Note 1 - The Pensions and Savings business model is directly dependent upon fees and rebates earned on funds under
management (FUM). The average FUM has increased when compared with the same period in 2013, resulting in a £1.5m (14.2%)
increase in fee and rebate income. This is offset by a £1.8m (19.8%) increase in expenses and brokerage fees, much of
which is the consequence of increased levels of new business, leaving the result being broadly flat compared with the same
period in 2013.
Note 2 - The Risk and Health business, although not the core target growth operation, is significant to the Movestic
financial and operating model. Unlike the longer-term Pension and Savings business the Risk and Health business tends to
be cash generative in the short-term, thereby providing a source of internal funding. The Risk & Health business is
operationally significant due to the size of the book, there being 388,000 short-term policies in-force as at 30 June 2014
(31 December 2013: 395,000), which generated £18.7m of gross premiums in the period (six months to 30 June 2013: £20.1m).
Note 3 - The "Other" component includes the results of the associate, Modernac, Movestic investment income and the impact
of fair value adjustments to the Financial Reinsurance liability. The key driver of the movement in this component is the
financial reinsurance fair value adjustment, which has generated a small loss of £0.2m for the period compared with a £1.2m
loss for six months to 30 June 2013. This movement is predominately a consequence of investment market conditions.
Note 4 - During 2013 a review of the amortisation model that was used for spreading the costs of acquiring new policies was
performed. As a result of this review the model was updated to provide more granular information and has resulted in the
requirement, for certain policies underwritten in certain years, to shorten the period over which these costs are spread.
This resulted in a one-off accelerated DAC charge of £3.0m. A large proportion of this DAC amortisation charge related to
polices that were in-force when Movestic was purchased by Chesnara, and therefore the Group IFRS result only reflected
£0.3m of this charge, this being the element of the charge that relates to policies that were written post acquisition.
This is because the DAC at acquisition was written off as part of the acquisition accounting process, having been replaced
by an intangible AVIF asset. No such further refinements were required during the six months to 30 June 2014.
NET cash generation £15.6m
(Six months to 30 June 2013 £9.9m)
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.
This information illustrates that gross and net cash generation within the Group continues to be robust. Key aspects
underpinning the outcome are:
HIGHLIGHTS
· Gross cash generation of £19.0m in the UK run-off businesses (excluding Chesnara parent company cash utilisation) in
the period is broadly comparable with the same period in 2013 of £24.5m.
· Net cash generation has not been impacted by restrictions in the S&P with profit funds to the same extent as the same
period in 2013.
· No funding was required for Movestic in the first six months of 2014 (six months to 30 June 2013: £nil).
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 cash generation in 2014
has remained broadly in line with the same period in 2013 at a total UK level, although the individual segments within the
UK business have displayed variability in 2014 when compared with the same period in 2013.
In particular, CA has generated £14.9m of cash in the period compared with £4.2m in the same period in 2013. This is
primarily a function of the variability of the regulatory surplus over the periods, which has broadly followed the IFRS
surplus in the same period.
S&P has generated £0.1m of cash in 2014 compared with £20.3m, demonstrating the ongoing short term variability in this
segment. As for the CA business, cash generation is largely a function of the level of regulatory surplus generated in a
period, and this broadly tracks the IFRS surplus. The S&P surplus is significantly influenced by the impact of changes in
reserves for products which contain guaranteed minimum return clauses. This reserve movement was relatively muted in the
first six months of 2014, compared with a large release in the same period in 2013, driven by favourable investment
markets.
The below table identifies the source of internal net cash generation within the Group, representing the net change in
funds available to service debt and equity:
Cash generated from/(utilised by): Unaudited Six months ended 30 June Year ended 31 December Note
2014 2013 2013
£m £m £m
CA
Surplus and profits arising in the period 15.9 4.3 20.4
Change in target capital requirement (1.0) (0.1) 3.2
S&P
Surplus and profits arising in the period 0.2 20.7 25.1
Change in target capital requirement 0.1 0.3 4.3
Decrease in policyholder funds cover for target capital requirement (0.2) (0.7) (0.5)
PL
Surplus and profits arising in the period 3.2 - 0.2
Change in target capital requirement 0.8 - 1.4
Movestic
Additional capital contributions - - -
Chesnara
Cash utilised by operations (3.0) (2.6) (4.4)
Total gross cash generation 16.0 21.9 49.7
Items affecting ability to distribute cash
PL capital injection - - (13.1) 1
Release of capital from S&P WP fund - - 15.5 2
Restricted surplus in S&P WP fund (0.4) (12.0) (15.4) 2
Net cash generation available for distribution 15.6 9.9 36.7 3
Items affecting the cash available for distribution:
Note 1 - PL was acquired at a solvency level lower than the Board's target requirement. An immediate capital injection was
made during the year ended 31 December 2013 to resolve this. No such further injection was, or is expected to be required
in 2014.
Note 2 - An element of the statutory surplus in the period 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 the year ended 31 December 2013 resulting in a £15.5m capital release.
Note 3 - 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 £47.3m
(Six months to 30 June 2013: £35.4m)
EEV result
Summary
There is a strong EEV profit of £47.3m for the first six months of 2014, which is £11.9m higher than the same period in
2013. The principal driver of this increase is from significant positive operating assumption changes that have been
recognised in the period, coupled with positive new business results arising from the Movestic segment, both of which have
contributed
- More to follow, for following part double click ID:nRSc2947QcRecent news on Chesnara
See all newsREG - Chesnara PLC - Director/PDMR Shareholding
AnnouncementREG - Chesnara PLC - Block listing Interim Review
AnnouncementREG - Chesnara PLC - Notice of AGM
AnnouncementREG - Chesnara PLC - Director/PDMR Shareholding
AnnouncementREG - Chesnara PLC - Directorate Change
Announcement