REG - Chesnara PLC - Half Yearly Report <Origin Href="QuoteRef">CSN.L</Origin> - Part 3
29/10/2014 16:08
- Part 3: For the preceding part double click ID:nRSc2947Qb
to an operating profit of £37.2m, compared with £4.8m in the same period in 2013. The positive operating
assumption changes have principally been recognised in the CA segment. Experience variances also compare favourably with
2013, primarily because the Movestic segment is no longer reporting an experience loss, which amounted to £4.7m in 2013, in
part due to continued adverse lapse experience at that time. It is positive news that this experience has not been
witnessed during 2014.
A significant proportion of the operating profit is also directly related to investment market movements. The return on
shareholder net worth profit of £4.0m represents a swing of £6.3m compared with the loss of £2.3m reported in the first six
months of 2013, primarily due to increasing bond values during the period.
In addition to the strong operating profit, the results have also benefited from noteworthy economic experience and
assumption profits in the period, principally driven by asset growth in the period.
The following tables analyse the Group EEV earnings after-tax by source and by business segment:
Profit after tax movement
Six months ended 30 June 2013 to six months ended 30 June 2014
£m
June 2013 35.4
CA 21.2
Movestic 10.2
PL 3.1
Chesnara (1.6)
Tax (8.1)
S&P (12.9)
June 2014 47.3
Analysis of the EEV result in the period by business segment
Unaudited Six months ended 30 June Year ended 31 December
2014 2013 2013
£m £m £m
CA 33.3 12.1 24.5
S&P 6.6 19.5 42.7
PL 3.1 - 0.1
Movestic 17.5 7.3 15.5
Chesnara (2.8) (1.2) (5.1)
Profit before tax and gain on acquisition 57.7 37.7 77.7
Gain on acquisition of Protection Life - - 12.3
Profit before tax 57.7 37.7 90.0
Tax (10.4) (2.3) (7.3)
Profit after tax 47.3 35.4 82.7
Key items affecting the EEV results by segment:
CA - The key drivers of the increase in the EEV result to £33.3m (2013: £12.1m) are the operating assumption changes in the
period, namely the £17.3m surplus arising from the modelling impact of the change in practice associated with policies that
can accrue bonus units in certain circumstances and the £4.2m surplus arising on the modelling of the new HCL contract.
S&P - The S&P result of £6.6m is £12.9m lower than the same period in 2013. This is primarily due to the loss of £4.2m
arising from the modelling of the new HCL contract (included within operating assumption changes) coupled with a lower
reduction in the cost of guarantee reserves of circa £9m.
PL - The PL segment was purchased on 28 November 2013 and therefore was not included in the comparative 2013 results.
Movestic - This segment's reported profit of £17.5m is £10.2m higher than the equivalent period in 2013. Circa £3m of this
is as a result of broadly comparable equity market conditions applying to a larger book of business than in the same period
in 2013. A further £3.5m is as a result of the increase in new business profits, with the remainder relating to more
favourable experience variances, largely due to the corresponding period in 2013 including the negative impact of adverse
lapse experience.
Chesnara - 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.
Analysis of the EEV result in the period by earnings source
Unaudited Six months ended 30 June Year ended 31 December
2014 2013 2013
£m £m £m
New business contribution 6.2 2.8 7.9
Return from in-force business
Expected return 3.9 2.6 5.5
Experience variances 6.0 1.5 5.8
Operating assumption changes 17.1 0.2 (10.0)
Return on shareholder net worth 4.0 (2.3) (0.3)
Operating profit of covered business 37.2 4.8 8.9
Variation from longer term investment return 25.8 20.8 54.7
Effect of economic assumption changes (4.6) 12.3 16.4
Profit on covered business before tax and gain on acquisition 58.4 37.9 80.0
Tax (10.3) (2.5) (7.6)
Profit on covered business after tax and before gain on acquisition 48.1 35.4 72.4
Gain on acquisition of Protection Life - - 12.3
Uncovered business and other group activities (0.7) (0.1) (2.3)
Tax on uncovered business (0.1) 0.1 0.3
Profit after tax 47.3 35.4 82.7
Analysis by earnings source can be found below.
Economic conditions
The EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a profit of
£21.2m in the period compared with a profit of £33.1m for 2013. The results are sensitive to both equity markets and bond
yields (further sensitivity analysis is provided in Note 7 of EEV Supplementary Information). Since the 2013 year end UK
bond yields have fallen, UK equities have remained broadly flat with Swedish equity markets having performed strongly.
Further detail by segment has been provided below:
Economic experience and assumption changes Unaudited Six months ended 30 June Year ended 31 December
2014 2013 2013
£m £m £m
CA 6.2 6.5 18.7
S&P 4.6 18.1 33.9
PL 0.2 - -
Movestic 10.2 8.5 18.5
Total 21.2 33.1 71.1
The S&P, CA and PL segments have all experienced asset growth in the period, primarily in respect of bonds. Off-setting
this growth is the adverse economic assumption impact as a result of a fall in the bond yield curve in the period.
The Movestic segment has witnessed more material economic experience gains in the first six months of the year, primarily
as a result of the performance of Swedish equities. The EEV results of Movestic are sensitive to such equity movements due
to its core income stream being dependent upon management charges levied on funds under management, which are primarily
equity-based.
New business contribution
The new business contribution relates primarily to the Movestic Pensions and Savings business. Movestic also writes Risk
and Health policies, but due to its more short-term nature the Risk and Health business is reported as uncovered business
and therefore does not contribute to the new business result. The Movestic contribution is £5.8m (2013: £2.3m), of which
£1.7m (2013: £0.9m) relates to the value of premium increments received on existing policies. Profits on "new contract"
business of £4.1m, compared with the six months to 30 June 2013 equivalent of £1.4m, showing that the new business growth
strategy continues to trend in the right direction.
Experience variances
Unaudited Six months ended 30 June Year ended 31 December
2014 2013 2013
£m £m £m
CA 2.5 3.2 7.6
S&P 1.8 3.0 4.7
PL 1.1 - -
Movestic 0.6 (4.7) (6.5)
Total 6.0 1.5 5.8
For the CA, S&P and PL segments there is no one dominating factor driving the experience variances in the period, with the
combined positive experience of £5.4m arising from various smaller items such as lapse, mortality and expenses experience.
For Movestic the experience impact in the period is small. This compares with a more prominent adverse experience in the
corresponding period in 2013, driven by a combination of adverse lapse experience and expense and commission overruns.
Operating assumption changes
Unaudited Six months ended 30 June Year ended 31 December
2014 2013 2013
£m £m £m
CA 22.7 1.2 (4.3)
S&P (3.1) 0.8 4.5
PL 1.4 - -
Movestic (3.9) (1.8) (10.2)
Total 17.1 0.2 (10.0)
The CA segment reflects a large operating assumption change item of £22.7m in the period. This is primarily as a result of
a one off positive item of £17.3m arising as a result of a change in the way that the embedded value model calculates the
expected cash flows arising from policies that accrue bonus units. The EEV impact of this assumption change is higher than
IFRS due to the positive impact on the VIF, an asset that is not recognised for IFRS reporting purposes. In addition to
this the CA segment has benefited from the positive impact of the new HCL contract, amounting to £4.2m. An equal an
opposite effect can be seen in the S&P segment.
The S&P segment has reported a negative operation assumption change in the period. As referred to above, the main item
that contributes to this a £4.2m strain arising from the modelling of the new HCL outsource contract.
The PL segment has reported a small economic assumption change in the period, driven by the impact of changes to the
valuation interest rate.
Movestic has reported an operating assumption change loss of £3.9m in the period. Of this, the most prominent item amounts
to c£2.0m, driven by expected behavioural changes by customers with private pension policies as a result of proposed tax
legislation changes in Sweden. The remaining operating assumption loss is made of a number of smaller assumption items
such as maintenance expenses and fund rebates.
Uncovered business and other group activities
Unaudited Six months ended 30 June Year ended 31 December
2014 2013 2013
£m £m £m
Chesnara (2.7) (1.2) (5.0)
Movestic 2.1 1.1 2.7
Total (0.6) (0.1) (2.3)
The result includes Chesnara parent company costs relating to corporate governance and business development, not
attributable to the covered business. The expenses in the first half of 2014 are higher than the steady state cost base
largely as a result of expenditure on items such as the Part VII transfer of PL into CA plc coupled with ongoing Solvency
II costs.
The Movestic result has increased slightly when compared with the same period in 2013, primarily as a result of an increase
in the results of Modernac, Movestic's associated company.
european embedded value £400.3m
(31 December 2013: £376.4m)
EEV movement 31 December 2013 to 30 June 2014:
£m
EEV 31 Dec 2013 376.4
Net of tax profit arising in the period 47.3
Foreign exchange reserve movement (10.0)
Dividend paid (13.4)
EEV 30 Jun 2014 400.3
EEV movement 30 June 2013 to 31 December 2013:
£m
EEV 30 Jun 2013 337.4
Net of tax profit arising in the period 35.0
Exceptional surplus on acquisition 12.3
Effect of modelling adjustments 3.2
Foreign exchange reserve movement (4.3)
Dividend paid (7.2)
EEV 31 Dec 2013 376.4
EEV movement 31 December 2012 to 30 June 2013:
£m
EEV 31 Dec 2012 311.1
Net of tax profit arising in the period 35.4
Effect of modelling adjustments 0.9
Foreign exchange reserve movement 2.9
Dividend paid (12.9)
EEV 30 Jun 2013 337.4
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;
· Exceptional items, such as:
§ the surplus arising on the acquisition of Protection Life; and
§ Modelling adjustments;
· Foreign exchange movements arising from retranslating the EEV of Movestic into Sterling; and
· Dividends that are paid in the period.
More detail behind each of these components has been provided below:
Net of tax profit
The EEV profit of £47.3m arising during the period is analysed in more detail within the preceding section.
Exceptional surplus on acquisition
The purchase of Protection Life resulted in a surplus arising on acquisition of £12.3m during the period from 1 July 2013
to 31 December 2013. The surplus arose because the EEV of Protection Life at the acquisition date amounted to £51.6m,
which is £12.3m higher than the purchase price of £39.3m.
Effect of modelling adjustments
Six months ended 30 June 2014
There were no modelling adjustments in the period.
Six months ended 31 December 2013
Modelling adjustments during the period were as follows:
Positive modelling adjustments of £3.2m related entirely to the Movestic business. These arose due to refinements being
made to the way in which modelling of commission was performed.
Six months ended 30 June 2013
The modelling adjustments that were reported during the first six months of 2013 were entirely in relation to Movestic
following completion of a review by an external consultancy.
Foreign exchange reserve movements
The £10.0m foreign exchange reserve movement during the six months to 30 June 2014 has arisen as a result of a weakening of
the Swedish Krona against Sterling by 7.4%.
Dividends paid
Dividends of £13.4m were paid during the first six months of 2014, being the final dividend from 2013.
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.
EEV - Value in force (VIF) and adjusted shareholder net worth (SNW)(£m)
30 Jun 2014 31 Dec 2013 30 Jun 2013
VIF 279.3 262.2 226.3
SNW 121.0 114.2 111.1
Total EEV 400.3 376.4 337.4
Analysis of VIF at 30 June 2014 - £279.3m
£m
Movestic 143.1
CA 74.7
S&P 36.7
PL 24.8
Total 279.3
Analysis of EEV at 30 June 2014 - £400.3m
£m
Movestic 124.0
CA 132.7
S&P 82.1
PL 67.2
Other Group Activities (5.7)
Total 400.3
In the above segmental analysis any outstanding debt in relation to the S&P and PL acquisitions is included in "Other Group
Activities".
HIGHLIGHTS
· There is a good balance in EEV across the core business segments, with the UK businesses representing the majority
(70.0%) of the total EEV, which includes Protection Life which was purchased during the prior year. The value in-force
component is dominated by the Swedish business which represents 51.0% of the total Group VIF.
· There is a significant level of product diversification within the VIF. When adjusted to recognise the impact of the
S&P cost of guarantees which are predominantly pension contract related, 63.6% of the total product level value in-force
relates to pension contracts, 24.0% to protection business and 9.7% to endowments.
Analysis of VIF by policy type
The tables below set out the value of in-force business by major product line at each period end. Analysis of the
composition of the VIF by business and major product category provides a useful insight into the commercial dynamics
underpinning the value of Chesnara.
30 June 2014 (unaudited) Number of policies Value of in-force business
CA S&P PL Movestic Total CA S&P PL Movestic Total
000's 000's 000's 000's 000's £m £m £m £m £m
Endowment 31 4 - 11 46 22.2 3.4 - 8.2 33.8
Protection 38 4 141 - 183 44.9 3.5 34.7 - 83.1
Annuities 6 - - - 6 5.7 1.0 - - 6.7
Pensions 43 120 - 85 248 41.5 46.1 - 143.3 230.9
Other 3 11 - - 14 4.1 5.1 - - 9.2
Total at product level 121 139 141 96 497 118.4 59.1 34.7 151.5 363.7
Valuation adjustments:
Holding company expenses (6.4) (3.2) - (8.3) (17.9)
Other (15.7) (16.8) - - (32.5)
Cost of capital/frictional costs (0.9) (2.4) (3.6) (0.1) (7.0)
Value in-force pre-tax 95.4 36.7 31.1 143.1 306.3
Taxation (20.7) - (6.3) - (27.0)
Value in-force post-tax 74.7 36.7 24.8 143.1 279.3
30 June 2013 (unaudited) Number of policies Value of in-force business
CA S&P PL Movestic Total CA S&P PL Movestic Total
000's 000's 000's 000's 000's £m £m £m £m £m
Endowment 36 5 - 11 52 26.0 2.8 - 7.9 36.7
Protection 41 5 - - 46 49.3 3.8 - - 53.1
Annuities 6 - - - 6 7.4 1.0 - - 8.4
Pensions 45 125 - 80 250 33.8 44.0 - 135.7 213.5
Other 3 11 - - 14 3.8 4.1 - - 7.9
Total at product level 131 146 - 91 368 120.3 55.7 - 143.6 319.6
Valuation adjustments:
Holding company expenses (6.7) (3.0) - (7.6) (17.3)
Other (21.1) (32.0) - - (53.1)
Cost of capital/frictional costs (1.0) (2.7) - (0.1) (3.8)
Value in-force pre-tax 91.5 18.0 - 135.9 245.4
Taxation (19.1) - - - (19.1)
Value in-force post-tax 72.4 18.0 - 135.9 226.3
31 December 2013 Number of policies Value of in-force business
CA S&P PL Movestic Total CA S&P PL Movestic Total
000's 000's 000's 000's 000's £m £m £m £m £m
Endowment 34 4 - 11 49 24.1 2.9 - 8.0 35.0
Protection 40 4 146 - 190 46.2 3.9 36.0 - 86.1
Annuities 6 - - - 6 4.0 1.1 - - 5.1
Pensions 44 123 - 82 249 29.7 44.6 - 140.0 214.3
Other 3 11 - - 14 3.9 4.9 - - 8.8
Total at product level 127 142 146 93 508 107.9 57.4 36.0 148.0 349.3
Valuation adjustments:
Holding company expenses (6.5) (3.4) - (8.9) (18.8)
Other (16.5) (21.2) - - (37.7)
Cost of capital/frictional costs (1.0) (2.3) (4.0) (0.1) (7.4)
Value in-force pre-tax 83.9 30.5 32.0 139.0 285.4
Taxation (16.7) - (6.5) - (23.2)
Value in-force post-tax 67.2 30.5 25.5 139.0 262.2
The value-in-force represents the discounted value of the future surpluses arising from the insurance and investment
contracts in-force at each respective period end. The future surpluses are calculated by using realistic assumptions for
each component of the cash flows.
Holding company expenses are apportioned across the segments pro-rata to the total product-based VIF.
'Other' valuation adjustments in CA principally comprise expenses for managing policies which are not attributed at product
level. In S&P they represent the estimated cost of guarantees to with-profits policyholders.
Taxation in the value-in-force is modelled on a combined CA and S&P basis and, in the analysis above, is attributed wholly
to the CA segment.
financial management
The Group's financial management framework is designed to provide security for all stakeholders, while meeting the
expectations of policyholders and shareholders.
The following illustrates the aims, approach and outcomes from the financial management framework:
OBJECTIVES
The Group's financial management framework is designed to provide security for all stakeholders, while meeting the
expectations of policyholders, shareholders and regulators. Accordingly we:
1. Maintain solvency targets
2. Meet the dividend expectations of shareholders
3. Optimise the gearing ratio to ensure an efficient capital base
4. Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors
5. Maintain the Group as a going concern.
how we deliver to our objectives
In order to meet our obligations we employ and undertake a number of methods. These are centred on:
1. Monitor and control risk & solvency
2. Project key financial variables
3. Responsible investment management
outcomes
Key outcomes from our financial management process, in terms of meeting our objectives are set out below:
1. SOLVENCY - Group Solvency Ratio of 192% (31 December 2013: 194%)
2. SHAREHOLDER RETURNS - 2014 TSR; Increase interim dividend; Share price remains broadly neutral; Impressive medium
term TSR driven by capital value growth and the established attractive dividend yield
3. CAPITAL STRUCTURE - Gearing ratio of 29.1% (31 December 2013: 29.6%) (This does not include the financial
reinsurance that is held within the Swedish business).
4. LIQUIDITY AND POLICYHOLDER RETURNS - Competitive fund performance; Policyholders' realistic expectations
maintained.
5. MAINTAIN THE GROUP AS A GOING CONCERN - Group remains a going concern
How we Deliver our Financial Management Objectives
1. Monitor & Control RISK & SoLVENCY
The Board sets internal solvency targets that are based on solvency requirements imposed by our regulators. The targets
are set with the intention of balancing the requirements of both our shareholders and policyholders.
i) a Pillar 1 calculation, which compares regulatory capital resource requirements, based on the characteristics of
the in-force life business, with an associated measure of capital as prescribed by regulation; and
ii) a Pillar 2 calculation which compares a risk-based assessment of solvency capital with an associated measure of
capital based on a realistic assessment of insurance liabilities; and
iii) the amount of required regulatory solvency capital is then determined by the method which gives rise to the lower
excess of regulatory capital over requirements.
These calculations are monitored continuously.
2. LONGER-TERM PROJECTIONS
Long term projections are performed covering, as a minimum:
i) Segmental earnings and surplus arising in the long-term insurance funds;
ii) Chesnara holding company cash flows;
iii) Regulatory solvency and capital resources and requirements; and
iv) European embedded value.
The projections are prepared for a base case, using latest board-approved assumptions, and for various individual and
multiple economic and non-economic sensitivities.
In addition:
Financial condition reports are prepared on an annual basis which includes assessments of the ability of the business to
withstand key adverse events, including increased rates of policy lapse, expense overruns and unfavourable market
conditions.
Reverse stress testing techniques are employed which assess events and circumstances which would cause the business to
become unviable. In this context, unviable is defined as the point at which the market loses confidence in the firm being
able to carry out its normal business activities.
3. RESPONSIBLE INVESTMENT Management
Investment management
We aim to promote customer retention by pursuing good relative investment performance across both our UK and Swedish
businesses.
We use third party investment managers in both the UK and Sweden. They are charged with operating within pre-determined
guidelines which are set having regard to the nature of the fund and to contractual obligations to policyholders. For the
with-profits funds these are also in accordance with the published Principles and Practices of Financial Management. In
Sweden a larger number of fund managers are used, which are subject to very stringent initial selection and ongoing
monitoring criteria.
A conservative approach to the investment of shareholders' funds is also adopted within the Group.
OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES
Key outcomes from our financial management process, in terms of meeting our objectives are set out below:
1. Solvency
The solvency and regulatory capital of the Group and its regulated subsidiaries is monitored continually. Further detail
of the year end solvency positions has been summarised in the Business Review section of these financial statements.
2. Shareholder returns
The Board's primary aim is to provide an attractive dividend flow to its shareholders. With Movestic in its growth phase,
shareholder dividend flows are currently generated by the UK run-off businesses within CA plc, by way of the emergence of
surpluses in, and transfer of surpluses from, its long-term insurance funds to shareholder funds and by the return on
shareholder net assets.
Dividend flows from CA plc and Protection Life to Chesnara are utilised in the first instance for the repayment and
servicing of debt, coupled with bearing central corporate governance costs which cannot be fairly attributed to the
long-term insurance funds, and which arise largely in connection with Chesnara's obligations as a listed company.
Returns to shareholders can be assessed by reference to many measures including the actual share price, the yields on the
shares and the comparison of total market capital to embedded value. Looking back over a four and a half year period the
EEV per share has increased from 258.7p at 31 December 2009 to 348.5p at 30 June 2014, which compares with the share price
increasing from 191.1p to 320.5p over the same period. This shows that the share price, when stated as a percentage of
EEV, has increased from 73.9% at 31 December 2009 to 92.1% at 30 June 2014. Full year dividends over this same period have
increased from 16.4p per share in 2010 to 17.88p per share in 2013.
During the year to date, up to 22 August 2014 the share price has reduced slightly, closing at 318.5p, having moved from
321.8p at the start of the year.
3. Capital structure
The Group's UK operations are financed through a combination of retained earnings and bank debt, with the current emergence
of surplus in the UK life businesses.
These flows are used:
i) to repay our debt obligations;
ii) to support dividend distributions to shareholders; and
iii) to support the medium-term requirements of Movestic to meet regulatory solvency capital requirements as it
expands.
The acquisition of S&P in December 2010 for £63.5m was accomplished by way of debt: equity financing broadly in a ratio of
2:1. This introduced a modest level of gearing to the structure of Group financing.
The acquisition of PL in November 2013 for £39.3m was funded using a combination of debt and existing cash resources. The
process for raising the debt to fund the purchase of PL also gave rise to a restructuring of the existing facilities that
were initially arranged to fund the purchase of S&P. The result is that, at 30 June 2014 bank borrowings amount to £73.2m,
which is being repaid over a five year term.
The purchase of Movestic was financed by internal cash resources. On an ongoing basis the Movestic business is financed by
a combination of external financial reinsurance arrangements and capital contributions from Chesnara.
With respect to acquisitions the Group seeks to finance these through a suitable mix of debt and equity, within the
constraints imposed by the operation of regulatory rules over the level of debt finance which may be borne by Insurance
Groups without breaching solvency requirements.
Other factors which may place a demand on capital resources in the future include the costs of unavoidable large scale
systems developments such as those which may be involved with changing regulatory requirements. To the extent that ongoing
administration of the UK life businesses is performed within the terms of its third-party outsourcing agreements, the Group
is sheltered, to a degree, from these development costs as they are likely to be on a shared basis.
4. Liquidity and policyholder returns
Key aspects of policyholder fund performance in respect of the UK Business and in respect of the Swedish Business are set
out in the Business Review.
The current profile and mix of investment asset holdings between fixed-interest securities and cash deposits is such that
realisations to meet obligations to third parties and to support dividend distributions can be made in an orderly and
efficient way.
5. Maintain the Group as a going concern
The Group's cash flow position, together with the return on financial assets in the parent company, supports the ability to
trade in the short term. Accordingly, the underlying solvency position of the UK life business and their ongoing ability
to generate surpluses which support cash transfers to shareholders' funds is critical to the ongoing ability of the Group
to continue trading and to meet its obligations as they fall due.
The information set out in 'Solvency and Regulatory Capital" above indicates a strong solvency position as at 30 June 2014
as measured at both the individual regulated life company levels in both the UK and Sweden and at the Group level. In
addition, in respect of the UK business, the financial condition report and reverse stress testing assessments indicate
that it is able to withstand the impact of adverse scenarios, including the effect of significant investment market falls,
while the business's outsourcing arrangements protect it from significant expense overruns.
Notwithstanding that the Group is well capitalised, the current financial and economic environment continues to present
specific threats to its short-term cash flow position and it is appropriate to assess other relevant factors. In the first
instance, the Group does not rely on the renewal or extension of bank facilities to continue trading - indeed, as
indicated, its day to day operations are cash generative. The Group does, however, rely on cash flow from the maturity or
sale of fixed interest securities which match certain obligations to policyholders: in the current economic environment
there remains a continuing risk of bond default, particularly in respect of financial institutions. 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 reassurers. We monitor their financial position and are satisfied that any
associated credit default risk is low. It is noteworthy that we have negligible exposure to Euro-denominated sovereign
debt.
Our expectation is that, notwithstanding the risks set out above, the Group will continue to generate surplus in its UK
long-term businesses sufficient to meet its debt obligations as they fall due, to continue to pursue an attractive dividend
policy and to meet the short-term financing requirements of Movestic. The Directors therefore confirm that the IFRS
Financial Statements have been prepared on the Going Concern basis.
risk management
Risk management processes
Overlaying all the day-to-day and development activity we undertake is a focused risk management culture and regime.
In both the UK and Swedish businesses we maintain processes for identifying, evaluating and managing the significant risks
faced by the Group, which are regularly reviewed by the Group Audit & Risk Committee. Our risk processes have regard to
the significance of risks, the likelihood of their occurrence and take account of existing controls and the cost of
mitigating them. The processes are designed to manage rather than eliminate risk and, as such, provide reasonable, but not
absolute, assurance against loss.
At the subsidiary level in the UK businesses we maintain, in accordance with the regulatory requirements of the PRA and
FCA, a risk and responsibility regime. Accordingly, the identification, assessment and control of risk are firmly embedded
within the organisation and the procedures for the monitoring and updating of risk are robust. As part of this we have a
Risk Committee in CA plc, which comprises solely of Non-executive Directors. This Committee receives quarterly updates of
the key risk registers, as maintained by the senior management, for review and challenge. The Committee reports directly
to the CA plc Board which also reviews reports from the compliance and internal audit functions. The Risk Committee
reports are also reviewed by the Chesnara Audit & Risk Committee on a quarterly basis. Since its acquisition similar
arrangements have been established for Protection Life. The key risk registers have been designed to complement the
production of Individual Capital Assessments, which we are required to submit to the PRA on request and maintain on an
ongoing basis. We categorise all risks against the following relevant categories - insurance, market, credit, liquidity,
operational and Group - and identify potential exposures and the necessary capital requirements accordingly.
In the Swedish business, at the Movestic subsidiary level, there is full compliance with the regulatory requirement in that
its Board and Managing Director have responsibility for ensuring that the management of the organisation is characterised
by sound internal control, which is responsive to internal and external risks and changes in them. The Board has
responsibility for ensuring that there is an internal control risk function, which is charged with (i) ensuring that there
is information which provides a comprehensive and objective representation of the risks within the organisation and (ii)
proposing changes in processes and documentation regarding risk management. These obligations are evidenced by regular
compliance, internal audit, general risk and financial risk reports to the Movestic Board. The latter is supplemented by
quarterly returns to the Swedish regulator, Finansinspektionen, which set out estimated capital requirements in respect of
insurance, market, credit, liquidity, currency and operational risks.
Risk management processes are enhanced by stress and scenario testing, which evaluates the impact on the Group of certain
adverse events occurring separately or in combination. There is a strong correlation between these adverse events and the
risks identified in 'principal risks and uncertainties' below. The outcome of this testing provides context against which
the Group can assess whether any changes to its risk management processes are required.
Group and subsidiary auditors regularly report to management on identified control weaknesses together with suggested
improvements.
In accordance with the need to comply with the requirements of Solvency II on an EU-wide basis, we are currently reviewing
and upgrading our risk management processes, so that Group-wide they will be enhanced in a uniform and consistent manner,
embracing:
· articulation of risk appetite statements, following from documented strategic objectives;
· formulation and monitoring of associated risk metrics;
· risk identification and assessment;
· calculation of risk-based capital; and
· the embedding of risk management processes so that they are at the forefront of, and underpin, strategic and
operating decisions.
These developments have continued during 2014.
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 policy.
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;
ii) notwithstanding this, the Group has a material segment, which comprises an open life and pensions business
operating in a foreign jurisdiction; 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 following identifies the principal risks and uncertainties, together with a description of their actual or potential
impact and of the way in which the Group seeks to control the specific insurance and financial risks it faces.
PRINCIPAL RISKS AND UNCERTAINTIES
Risk Impact Control
Adverse mortality / morbidity / longevity experience To the extent that actual mortality or morbidity rates vary from the assumptions underlying product pricing, so 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 diversification in that the Group has a portfolio of annuity contracts where the benefits cease on death.
Adverse persistency experience Persistency rates significantly lower than those assumed will lead to reduced Group profitability in the medium to long-term. · In closed life and pensions books, persistency rates tend to improve over time due to policyholder/investor inertia.· Active investment management to ensure
competitive policyholder investment funds.· Outsourcer service levels ensure strong customer service standards.· Proactive customer retention processes.
Expense overruns and unsustainable unit cost growth For the closed UK life and pensions businesses, the Group is exposed to the impact of fixed and semi-fixed expenses, in conjunction with a diminishing policy base, on profitability. For the Swedish open life and pensions business, the Group is exposed to the impact of expense levels varying adversely from those assumed in product pricing. · For the UK businesses, the Group pursues a strategy of outsourcing functions with charging structures such that the cost is sensitive to book run off to the fullest
extent possible.· The Swedish operations assume growth through new business such that the general unit cost trend is positive.· For both the UK and Swedish
businesses, the Group maintains a strict regime of budgetary control.
Significant and prolonged equity and property market falls A significant part of the Group's income and, therefore, overall profitability derives from fees received in respect of the management of policyholder and investor funds. Fee levels are generally related to the value of funds under management and, as the managed investment funds overall comprise a significant equity and property content, the Group is particularly exposed to the impact of significant and prolonged equity market falls, which may lead to policyholders switching to lower-margin, fixed-interest · Individual fund mandates may give rise to a degree of diversification of risk and within those funds, hedging techniques are used where appropriate.· Investment
funds. management costs fall in line with market falls and hence cost savings partially hedge the impact on income.· There is a wide range of investment funds and managers
so that there is no significant concentration of risk.
Adverse Sterling: Swedish Krona exchange rate movements Exposure to adverse Sterling:Swedish Krona exchange rate movements arises from actual planned cash flows between the Swedish subsidiary and its UK parent company and from the impact on reported IFRS and EEV results which are expressed in Sterling. · The Group monitors exchange rate movements and the cost of hedging the currency risk on cash flows when appropriate.
Adverse movements in yields on fixed interest securities The Group maintains portfolios of fixed interest securities (i) in order to match its insurance contract liabilities, in terms of yield and cash flow characteristics, and (ii) as an integral part of the investment funds it manages on behalf of policyholders and investors. It is exposed to mismatch losses arising from a failure to match its insurance contract liabilities or from the fact that sharp and discrete fixed interest yield movements may not be associated fully and immediately with corresponding changes · The Group maintains rigorous matching programmes to ensure that exposure to mismatching is minimised.· Active investment management such that, where
in actuarial valuation interest rates. appropriate, asset mixes will be changed to mitigate the potential adverse impact on declines in bond yields.
Counterparty failure The Group carries significant inherent risk of counterparty failure in respect of:· its fixed interest security portfolio;· cash deposits; and· amounts due from reinsurers. · Operation of guidelines which limit the level of exposure to any one counterparty and which impose limits on exposure to credit ratings.· In respect of exposure
to one major reinsurer, Guardian Assurance Limited ('Guardian'), the Group has a floating charge over the reinsurer's related investment assets, which ranks the Group
equally with Guardian's policyholders.
Failure of outsourced service providers to fulfil contractual obligations The Group's UK life and pensions businesses are heavily dependent on outsourced service providers to fulfil a significant number of their core functions. In the event of failure by either or both service providers to fulfil their contractual obligations, in whole or in part, to the requisite standards specified in the contracts, the Group may suffer loss as its functions degrade. · Rigorous service level measures and management information flows under its contractual arrangements.· Continuing and close oversight of the performance of both
- More to follow, for following part double click ID:nRSc2947QdRecent 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