Chesnara Annual Report 2012

Plain-text annual report

— Annual Report and Accounts 2012 SECTION A OVERVIEW & STRATEGY 06 07—09 10 11—13 14 15 2012 Highlights Chairman’s Statement Our Vision and Strategy Strategic Objectives The Chesnara Business Business Model SECTION B PERFORMANCE 18—25 26—37 38—41 42—44 45 Chief Executive’s Review Financial Review Financial Management Risk Management Focus on Solvency II SECTION C GOVERNANCE Governance Overview from the Chairman Board of Directors Board Proﬁle Corporate Governance Report 48 49 50 51—55 56—60 Directors’ Remuneration Report Audit & Risk Committee Report 61—62 63 Corporate and Social Responsibility Statement 64—65 Directors’ Report SECTION D IFRS FINANCIAL STATEMENTS 68 69 71 72 73 74 75 76 77 78—149 Notes to the Consolidated Financial Statements Directors’ Responsibility Statement Independent Auditor’s Report to the Members of Chesnara plc Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Cash Flows Company Statement of Cash Flows Consolidated Statement of Changes in Equity Company Statement of Changes in Equity SECTION E EEV SUPPLEMENTARY INFORMATION 152 153 154 155 156—169 Notes to the EEV Supplementary Information Directors’ Responsibility Statement Independent Auditor’s Report Summarised EEV Consolidated Income Statement Summarised EEV Consolidated Balance Sheet SECTION F ADDITIONAL INFORMATION Financial Calendar Key Contacts 172 173 174—177 Notice of Annual General Meeting 178—180 Explanatory Notes to the Notice of Annual General Meeting SECTION A OVERVIEW & STR ATEGY FORWARD-LOOKING STATEMENTS FORWARD-LOOKING STATEMENTS This document may contain forward-looking statements with respect to certain of the plans and current expectations 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(cid:88)(cid:81)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:72)(cid:89)(cid:68)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3) (cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:82)(cid:85)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:79)(cid:72)(cid:74)(cid:76)(cid:86)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) and other regulations in the jurisdictions in which Chesnara 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(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:15)(cid:3)(cid:74)(cid:82)(cid:68)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) expressed or implied in these forward-looking statements. 02 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION A OVERVIEW & STR ATEGY NOTE ON TERMINOLOGY NOTE ON TERMINOLOGY (cid:36)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:79)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:27)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3) the principal reporting segments of the Group are: CA(cid:3) S&P (cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:88)(cid:81)(cid:87)(cid:85)(cid:92)(cid:90)(cid:76)(cid:71)(cid:72)(cid:3)(cid:36)(cid:86)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:83)(cid:79)(cid:70)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:183)(cid:86)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:56)(cid:46)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:76)(cid:87)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3)(cid:58)(cid:72)(cid:86)(cid:87)(cid:80)(cid:76)(cid:81)(cid:86)(cid:87)(cid:72)(cid:85)(cid:3)(cid:36)(cid:86)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:47)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3) (cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:19)(cid:24)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) of which was transferred to Countrywide Assured plc during 2006; (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:21)(cid:19)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:19)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:183)(cid:86)(cid:3)(cid:56)(cid:46)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3) transferred from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide Assured (cid:83)(cid:79)(cid:70)(cid:3)(cid:82)(cid:81)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:3)(cid:57)(cid:44)(cid:44)(cid:3) of the Financial Services and Markets Act 2000 (referred (cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:71)(cid:82)(cid:70)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:182)(cid:87)(cid:75)(cid:72)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:3)(cid:57)(cid:44)(cid:44)(cid:3)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:183)(cid:12)(cid:30)(cid:3)(cid:68)(cid:81)(cid:71) Movestic (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:183)(cid:86)(cid:3)(cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3) (cid:47)(cid:76)(cid:89)(cid:73)(cid:124)(cid:85)(cid:86)(cid:108)(cid:78)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:36)(cid:37)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:17) In this Report and Accounts: i. The CA and S&P segments may also be collectively referred to as the ‘UK Business’; ii. The Movestic segment may also be referred to as the ‘Swedish Business’; iii. ‘CA’ may also refer to Countrywide Assured plc, as the context implies; iv. ‘CWA’ refers to City of Westminster Assurance Company Limited or to its long-term business funds transferred to Countrywide Assured plc; v. ‘S&P’ may also refer collectively to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, as the context implies. Where it is necessary to distinguish reference to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, or to the businesses subsisting in those companies prior to the transfer referred to above, they are designated ‘SPI’ and ‘SPP’ respectively; and vi. ‘Movestic’ may also refer to Movestic Livförsäkring AB, as the context implies. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 03 04 CHESNARA |(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:9)(cid:3)(cid:36)(cid:38)(cid:38)(cid:50)(cid:56)(cid:49)(cid:55)(cid:54)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21) SECTION A OVERVIEW & STRATEGY IN THIS SECTION 06 2012 Highlights 07—09 Chairman’s Statement 10 11—13 Strategic Objectives 14 15 The Chesnara Business Business Model Our Vision and Strategy CHESNARA |(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:9)(cid:3)(cid:36)(cid:38)(cid:38)(cid:50)(cid:56)(cid:49)(cid:55)(cid:54)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21) (cid:19)(cid:24) SECTION A OVERVIEW & STR ATEGY Notes 1. (cid:55)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:82)(cid:88)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:183)(cid:86)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) (cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:183)(cid:86)(cid:3)(cid:53)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) (cid:53)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:86)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3) (cid:84)(cid:88)(cid:82)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3) the impact of consolidation adjustments relating to the amortisation of acquired value in force (VIF(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3) arising on the acquisition of Movestic. These consolidation adjustments are (cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:86)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:21)(cid:27)(cid:17) 2. (cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:192)(cid:81)(cid:72)(cid:71)(cid:3) as the net amount of the following items: i. The change in the excess of actual regulatory capital resource over target capital resource in respect of the CA and S&P operating segments to the (cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:71)(cid:76)(cid:86)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3) to shareholder funds is not restricted; ii. (cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3) to the Movestic operating segment; and iii. (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:51)(cid:68)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) operations. Details of target capital resource (cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:3)(cid:82)(cid:88)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:22)(cid:20)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:44)(cid:41)(cid:53)(cid:54)(cid:3) (cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17) Throughout the Report and Accounts the following symbols are used to help distinguish between the various ﬁnancial and non ﬁnancial measures reported: IFRS Cash generation EEV EEV earnings Solvency Dividend Part VII Operational performance Compliance New business market share (cid:21)(cid:19)(cid:20)(cid:21)(cid:3)(cid:43)(cid:44)(cid:42)(cid:43)(cid:47)(cid:44)(cid:42)(cid:43)(cid:55)(cid:54) FINANCIAL 9% INCREASE IN IFRS PRE-TAX PROFIT Increase in IFRS pre-tax proﬁt to £24.5m excluding exceptional item (2011: £22.4m). Financial Review Page 28 (cid:38)(cid:36)(cid:54)(cid:43)(cid:3)(cid:42)(cid:40)(cid:49)(cid:40)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:3)(cid:133)(cid:23)(cid:20)(cid:17)(cid:19)(cid:48)(cid:3)Note 2 Net cash generated during 2012 of £41.0m (2011: £31.4m). Cash Generation Page 32 (cid:40)(cid:40)(cid:57)(cid:3)(cid:44)(cid:49)(cid:38)(cid:53)(cid:40)(cid:36)(cid:54)(cid:40)(cid:3)(cid:50)(cid:41)(cid:3)(cid:133)(cid:20)(cid:25)(cid:17)(cid:25)(cid:48) Increase in EEV from £294.5m to £311.1m after recognising the impact of £19.5m dividend distributions. Financial Review Page 35 (cid:40)(cid:40)(cid:57)(cid:3)(cid:50)(cid:51)(cid:40)(cid:53)(cid:36)(cid:55)(cid:44)(cid:49)(cid:42)(cid:3)(cid:51)(cid:53)(cid:50)(cid:41)(cid:44)(cid:55)(cid:3)(cid:133)(cid:20)(cid:28)(cid:17)(cid:19)(cid:48) Pre-tax EEV operating proﬁt increased to £19.0m from £15.3m. Financial Review Page 33 GROUP SOLVENCY 244% Strong Insurance Group Directive solvency cover of 244% (2011: 198%). Financial Management Page 40 FINAL DIVIDEND INCREASED BY 3% Proposed ﬁnal dividend increased by 3% to 11.25p per share. OPER ATIONAL PART VII TRANSFER Final stages of the S&P Part VII Transfer programme completed releasing £7m of capital. S&P INTEGRATION S&P fully integrated into the UK business. STRONG OUTSOURCER PERFORMANCE All administration and asset management par tners have out-performed their respective targets and benchmarks. MOVESTIC SERVICE IMPROVEMENTS Process re-engineering programme successfully mitigated the servicing problems experienced in 2011 and into 2012. GOOD COMPLIANCE RECORD Good regulatory compliance record continues. NEW BUSINESS MARKET SHARE Recovery in new business market share in the core Movestic unit-linked pensions target market during the second half of 2012. 06 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 (cid:38)(cid:43)(cid:36)(cid:44)(cid:53)(cid:48)(cid:36)(cid:49)(cid:183)(cid:54)(cid:3)(cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55) SECTION A OVERVIEW & STR ATEGY Continued strong operational performance in the UK, together with encouraging signs that Movestic is through the worst of (cid:77)(cid:88)(cid:87)(cid:3)(cid:86)(cid:73)(cid:71)(cid:73)(cid:82)(cid:88)(cid:3)(cid:83)(cid:84)(cid:73)(cid:86)(cid:69)(cid:88)(cid:77)(cid:82)(cid:75)(cid:3)(cid:72)(cid:77)(cid:74)(cid:189)(cid:71)(cid:89)(cid:80)(cid:88)(cid:77)(cid:73)(cid:87)(cid:16)(cid:3) when combined with the generally favourable investment market conditions during the year, means we end 201(cid:22)(cid:3)(cid:77)(cid:82)(cid:3)(cid:75)(cid:83)(cid:83)(cid:72)(cid:3)(cid:189)(cid:82)(cid:69)(cid:82)(cid:71)(cid:77)(cid:69)(cid:80)(cid:3) shape and well positioned to continue to deliver value to our stakeholders. Peter Mason Chairman CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 07 SECTION A OVERVIEW & STR ATEGY (cid:38)(cid:43)(cid:36)(cid:44)(cid:53)(cid:48)(cid:36)(cid:49)(cid:183)(cid:54)(cid:3)(cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55) (CONTINUED(cid:12) Chesnara has delivered a strong set of ﬁnancial results, beneﬁting in part from generally favourable investment market conditions during the year. – During the year we have undertaken a full independent review of our UK Internal Audit function and will implement the relevant recommendations. Whilst we have beneﬁted from investment markets performance during 2012, the Board remains mindful that the ﬁnancial strength, and hence dividend paying capacity of the Group, remains sensitive to economic conditions outside of its direct control and, as such, the management of market risk remains a key priority. The Chesnara Group has a relatively low risk and transparent investment model as a direct result of our long-established values which put responsible risk management at the heart of all decisions we make. During 2012 we have continued to enhance our management of market risk, in particular through improvements in the management of our asset and liability matching position and through the continuing development of long-term projection models. Whilst the 2012 results illustrate the signiﬁcant levels of cash generation available in favourable economic conditions, we remain vigilant to the fact that continued market recovery, growth and stability cannot be taken for granted. The ongoing improvements in our management of market risk gives me signiﬁcant comfort regarding the ability of the Group to weather any future adverse investment market conditions that may arise. Risk management and Solvency II We have continued to progress the Solvency II programme such that I remain conﬁdent that we will be in a position to adhere to statutory requirements and timeframes ultimately agreed by both European and UK Regulators. (cid:55)(cid:75)(cid:68)(cid:87)(cid:3)(cid:86)(cid:68)(cid:76)(cid:71)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:79)(cid:86)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:44)(cid:44)(cid:3) (cid:76)(cid:80)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:73)(cid:85)(cid:68)(cid:80)(cid:72)(cid:90)(cid:82)(cid:85)(cid:78)(cid:15)(cid:3) (cid:76)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:80)(cid:92)(cid:3)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:73)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:38)(cid:75)(cid:72)(cid:86)(cid:81)(cid:68)(cid:85)(cid:68)(cid:3)(cid:68)(cid:79)(cid:85)(cid:72)(cid:68)(cid:71)(cid:92)(cid:3) (cid:72)(cid:80)(cid:69)(cid:85)(cid:68)(cid:70)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:79)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:44)(cid:44)(cid:17)(cid:3)(cid:53)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:79)(cid:72)(cid:15)(cid:3) (cid:85)(cid:76)(cid:86)(cid:78)(cid:16)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:70)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:88)(cid:79)(cid:87)(cid:88)(cid:85)(cid:72)(cid:17) – Within Movestic we have begun the roll-out of the most appropriate elements of the well-established and effective UK risk management framework. Financial results IFRS On the IFRS basis, we have achieved a pre-tax proﬁt of £24.5m, excluding an exceptional item, for the year ended 31 December 2012. This compares with a pre-tax proﬁt of £22.4m for the year ended 31 December 2011. Pre-tax proﬁt of £33.1m (2011: £33.2m) from the UK closed books which are in run-off, have remained resilient to policy attrition. The pre-tax contribution from CA at £18.5m has declined from the £25.7m contribution posted in 2011, although the core product-based surpluses which underpin long-term proﬁt emergence have held up well. Conversely pre-tax contribution of £14.6m from the more volatile S&P business has improved signiﬁcantly compared with the 2011 contribution of £7.5m, primarily reﬂecting more beneﬁcial investment market conditions. Further, there is a £1.0m improvement in Movestic pre-tax proﬁt which has increased from £0.4m to £1.4m. The IFRS results are analysed in more detail within the “Financial Review” section on page 28. EEV On the EEV basis of reporting, excluding the effect of modelling adjustments, we have posted a proﬁt after tax of £31.2m compared with a loss after tax of £(29.8)m for the year ended 31 December 2011. Investment market factors directly account for a year-on-year improvement of £70.9m. During 2012 economic related proﬁts were £21.5m (2011: £(49.4)m loss). The underlying operating result has improved by £3.7m to £19m in 2012 (2011: £15.3m). The EEV results are analysed in more detail within the “Financial Review” section on page 33. Cash generation and solvency The capacity of the Group to pursue its dividend policy relies on the continuing generation of cash in the UK businesses. During 2012 net cash generation within the Group was £41m. This healthy outcome reﬂects a proposed dividend of £40m from CA to Chesnara and is reinforced by a strong CA post-dividend solvency ratio of 199% as at 31 December 2012. The associated Group Solvency ratio was also strong at 244%. Regardless of the Solvency II regulatory requirements, we continue to develop our internal risk-based management model: Dividend – The Board has approved the development of a risk-based business planning model, to be fully implemented by 2014. – The first phase of risk-based projection modelling has been developed, with outputs used by the Board during 2012. Further enhancements are under development. – Asset and liability matching is actively monitored and assessed throughout the year with investment changes implemented to ensure the most appropriate level of market risk for all stakeholders. The proposed full year (cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:133)(cid:20)(cid:28)(cid:17)(cid:28)(cid:80)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:76)(cid:86)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3) the level of cash generated (cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:15)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) the continuation of our attractive dividend policy. (See cash generation analysis on page 32). 08 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION A OVERVIEW & STR ATEGY Existing business development S&P During the year we have completed the ﬁnal stages of the integration of S&P. The S&P regulated entities have been de-authorised, thereby releasing £7m of capital and giving rise to a corresponding cash generation. We have also ﬁnalised the transfer of operational and governance responsibilities into the core Chesnara head ofﬁce structure, thereby ensuring consistent practice and generating cost synergies. Movestic Without question Movestic has been through a difﬁcult period, partly due to market conditions but also due to internal systems and administration process deﬁciencies. The difﬁculties clearly had an adverse impact on the business during 2011 and through much of 2012. The servicing proposition failings resulted in a loss of IFA support with a direct impact on the main business performance indicators, namely new business growth and in-force book retention. Against this backdrop I am encouraged by signs of recovery in the Movestic business as evidenced by the recent improvements in several measures, including investment performance, improved lapse rates and improvements in new business volumes in the last quarter of 2012. Although the recent (cid:71)(cid:76)(cid:73)(cid:192)(cid:70)(cid:88)(cid:79)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:75)(cid:68)(cid:71)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:71)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:3) impact on the Movestic (cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3) (cid:80)(cid:76)(cid:87)(cid:76)(cid:74)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) Swedish equity market (cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) with an improved level of management direction and (cid:73)(cid:82)(cid:70)(cid:88)(cid:86)(cid:15)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:86)(cid:3) of staff motivation and the early indication of a recovery (cid:76)(cid:81)(cid:3)(cid:44)(cid:41)(cid:36)(cid:3)(cid:70)(cid:82)(cid:81)(cid:192)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:86)(cid:3) (cid:44)(cid:3)(cid:68)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:76)(cid:81)(cid:74)(cid:79)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:192)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3) that Movestic is in a good position to generate the (cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3)(cid:68)(cid:71)(cid:71)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3) the Chesnara Group. Corporate governance and Board effectiveness We note the continuing dialogue relating to the corporate governance of publicly-listed companies and I provide further comment in my overview on page 48. We continually assess and challenge the effectiveness of the Board and of the Senior Management team. It is a long established view that the expertise of the Board and Senior Management team is a core strength of the Chesnara business model but that said, we always look to strengthen the team where possible. I am pleased to, therefore, report the appointment of three new Non-executive Directors who will add to the general effectiveness and diversity of the Board. The appointments of Veronica France, David Brand and Mike Evans are consequent upon the planned departure of Mike Gordon, our current Senior Independent Director, and Terry Marris, who will have both served full nine-year terms and, therefore, in accordance with accepted corporate governance guidelines, are standing down. I would like to record the Group’s, and my own personal, thanks to each of them for the notable contribution they have made to the development and success of Chesnara and, indeed, to their signiﬁcant service to Countrywide Assured plc before it was demerged into Chesnara in 2004. I also wish to express sincere thanks to Ken Romney who steps down as Finance Director of Chesnara at the forthcoming Annual General Meeting. Not only has Ken been Finance Director of Chesnara since its inception in 2004, he has also been a loyal servant of Countrywide Assured since 1989 having been appointed as Finance Director to the Board of CA in 1997. Ken has been integral in the development of Chesnara and contributed signiﬁcantly to its success. Further assessment of Board effectiveness is included in section C on page 50. People and business partners The fact that we end the year in good shape and well positioned for the future is largely due to the skill and dedication of our people and those within our outsource partners. All UK administration and asset management partners have out-performed their respective targets and benchmarks which is testament to their expertise and continued commitment. The Swedish business has been through a challenging year and that we are now in a signiﬁcantly stronger position than 12 months ago is largely due to the drive, dedication and positive outlook of our Swedish colleagues. As always the Chesnara Head Ofﬁce governance team continues to ensure the Group maintains and develops governance procedures that deliver a sound level of regulatory control across the business. Outlook Investment markets recovered during 2012 and this has continued into the early months of 2013. However, we do not take market recovery or stability for granted and our ﬁnancial and capital management procedures will continue to recognise the risk of continued poor, or indeed worsening, economic conditions. The modelling of our business indicates continued healthy cash generation and a solvency capital surplus in both base and realistic adverse scenarios in the short to medium term. Peter Mason Chairman 27 March 2013 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 09 SECTION A OVERVIEW & STR ATEGY MISSION OUR VISION & STRATEGY (cid:50)(cid:88)(cid:85)(cid:3)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:80)(cid:68)(cid:91)(cid:76)(cid:80)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3) returns to policyholders. Underpinning everything we do is a desire to maintain regulatory and legal compliance. Meeting these aims is achieved through attracting and retaining highly talented people who not only (cid:69)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:86)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:75)(cid:76)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:15)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3) also have a passion for improving outcomes for our customers and (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:17)(cid:3)(cid:36)(cid:79)(cid:79)(cid:3)(cid:80)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:72)(cid:86)(cid:81)(cid:68)(cid:85)(cid:68)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3) (cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:17) VISION (cid:55)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:69)(cid:82)(cid:82)(cid:78)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:46)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:58)(cid:72)(cid:86)(cid:87)(cid:72)(cid:85)(cid:81)(cid:3) Europe through: (cid:178)(cid:3)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:72)(cid:71)(cid:3)(cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:69)(cid:82)(cid:82)(cid:78)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17) – Further acquisitions where they meet stringent assessment criteria. – Realisation of increasing economies of scale. – Continued delivery of competitive returns to shareholders and policyholders. While we focus on delivering value to shareholders primarily through dividend streams arising from strong cash generation as the UK life (cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:69)(cid:82)(cid:82)(cid:78)(cid:86)(cid:3)(cid:85)(cid:88)(cid:81)(cid:3)(cid:82)(cid:73)(cid:73)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:81)(cid:3) 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(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:83)(cid:76)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:71)(cid:72)(cid:70)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:36)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3) 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(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:86)(cid:82)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) values and principles of management wholly align with strategic (cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:72)(cid:86)(cid:81)(cid:68)(cid:85)(cid:68)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:17)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:76)(cid:70)(cid:3)(cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:79)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) evidenced on the following pages. STR ATEGIC OBJECTIVES (cid:20)(cid:19) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION A OVERVIEW & STR ATEGY STRATEGIC OBJECTIVES MAXIMISE VALUE FROM THE IN-FORCE BOOK Why is this of strategic importance? Chesnara is primarily a “closed book” operation and as such generating surplus and cash from the existing in-force books is at the heart of its investment proposition. How do we deliver this strategic objective? We proactively manage continuing ﬁnancial exposures: – Signiﬁcant ﬁnancial exposures in life and pensions portfolios typically arise in the areas of onerous policy options and guarantees and of compensation claims for past misselling of products. The Group’s portfolios have, historically had very little exposure to the impact of investment market performance on options and guarantees. However, just over 29% of the policies managed by S&P, which was acquired in December 2010, contain guarantees to policyholders and therefore the Group’s exposure has increased. Furthermore, the Group continues to have exposure to market falls by way of the impact on policyholders’ linked funds, from which surplus is generated. We seek to minimise this exposure by regular review of investment asset holdings and by adjusting investment manager guidelines where appropriate and within the boundaries of our obligations to policyholders. We operate in a manner that ensures policy attrition is as low as possible, as this is a key determinant of our future proﬁtability and of the level and longevity of the emergence of surplus, which underpins our dividend-paying capacity. We will continue to invest in a service proposition that ensures a high level of customer satisfaction. We continue to maintain a focus on the retention of policies where it is in the interest of customers to continue with their arrangements. We continue to manage investment performance so as to provide a competitive level of return to our policyholders. The CA funds are primarily managed by Schroder Investment Management Limited while the CWA funds continue to be managed by Irish Life Investment Managers Limited. The S&P funds are managed by JPMorgan Asset Management (UK) Ltd in order to maintain continuity for policyholders. We meet formally with fund managers on a quarterly basis to assess past performance and future strategy. The Movestic funds are managed by a carefully selected range of fund managers who have strong performance records in the relevant sector. Performance is monitored very closely and regular meetings are held with fund managers. Should under performance continue then an alternative manager is sourced and appointed to manage the relevant assets. Where a new market niche or speciﬁc opportunity is identiﬁed new funds may also be added. We adopt a business operating model which ensures unit expenses remain appropriate for the scale of the in-force book. – UK operations are predominantly outsourced, with contract charging structures that ensure a signiﬁcant element of the cost base is variable with run off of the business. – Acquisitions are integrated into the Chesnara Group in a manner to ensure optimum operational and ﬁnancial synergies. Risks associated with this strategic objective – Sustained adverse investment market conditions undermine our ability to manage ﬁnancial risks inherent in the in-force portfolio. – Despite the effective cost management model, in the absence of further acquisitions or management action, there remains a risk that unit costs will increase in the long-term. – A number of factors including economic recession, adverse investment performance and a deterioration in customer servicing standards could lead to an increase in policy attrition. ACQUIRE LIFE AND PENSIONS BUSINESSES Why is this of strategic importance? – As with any business, it is important that we use our capital efﬁciently to provide optimum return to shareholders. – As a primarily “closed book” operation, further acquisitions can maintain and increase the Group’s cash ﬂow and operational economies of scale. How do we deliver this strategic objective? Ultimately we rely on acquisition opportunities being available in the market. To maximise our opportunities we have extended our target market beyond the UK, to include Western Europe. We actively engage with various investment bank advisers (including Canaccord Genuity Limited on a retained basis) to ensure we are aware of acquisition opportunities. We extend our network to cover opportunities in the UK and Western Europe. We will leverage our proven track record in the consolidation market. Past experience suggests we maintain a high degree of credibility with regulators, policyholders, lenders and shareholders. All prior acquisitions have been delivered with no adverse impact in terms of treating customers fairly, regulatory standing or our reputation in the life and pensions consolidation market. We will not pursue opportunities which do not meet very stringent assessment criteria. Risks associated with this strategic objective – If Chesnara makes no further acquisitions there will be a potential strain on the per policy unit costs of the existing business. – Any departure from the current, stringent acquisition assessment criteria and due diligence procedures could result in an acquisition that, under certain stress scenarios, adversely impacts the ﬁnancial strength of the Group. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 (cid:20)(cid:20) SECTION A OVERVIEW & STR ATEGY ENHANCED VALUE THROUGH NEW MAINTAIN A STRONG SOLVENCY POSITION BUSINESS IN SELECTED MARKETS Why is this of strategic importance? – The Chesnara business model primarily focuses on “closed book” consolidation. However, where acquisitions offer the potential to write new business at an adequate return on capital we will continue to invest in the new business operations so as to maximise value for the Group. – Maintaining a ﬂexible position regarding the willingness to remain open to new business will potentially increase the number of acquisition targets and indeed our attractiveness to such targets. How do we deliver this strategic objective? Currently the only part of the Chesnara Group writing material levels of new business is Movestic, our Swedish business. Movestic has a new business operation that delivers a positive new business contribution. There are detailed business plans in place that aim to increase new business proﬁts through a combination of new product launches and improvements to operational effectiveness. Local and group management receive management information to enable a continuous assessment of the performance to ensure being open to new business continues to enhance value. Why is this of strategic importance? Adequate solvency capital: – Protects against volatility particularly due to external economic conditions outside management control. – Ensures compliance with regulatory requirements. – Supports potential acquisition opportunities. – Supports ongoing dividend capability. How do we deliver this strategic objective? We ensure the Board is furnished with high quality information regarding the solvency position. This includes information regarding the actual solvency position together with the projection of solvency under stress scenarios. The management team tracks the performance of the key factors known to impact the solvency position. Trigger points are set and documented such that management action will be instigated should any of the key trigger points be reached. The setting and review of trigger points is an integral component of the Group’s risk appetite model. Potential acquisitions are assessed by taking a prudent view on not only the short-term impact on the Group’s Solvency position but also on the potential risk to long-term solvency. Risks associated with this strategic objective – New business volumes fall below levels required to ensure Risks associated with this strategic objective sufﬁcient return on the acquisition cost base. – Sustained adverse economic conditions outside of risk appetite – Product margins fall to unsustainable levels due to factors including; market price pressures, reduced investment growth, increased policy lapse rates and increasing maintenance unit costs. tolerances will erode the solvency surplus. – Changes in legal or regulatory requirements e.g. Solvency II. (cid:20)(cid:21) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION A OVERVIEW & STR ATEGY Deliver value to stakeholders on a responsible and balanced basis Underlying the fulﬁlment of strategic objectives is the core value shared by the Board and Management Team of recognising responsibilities to all stakeholders on a balanced basis. Often decisions are required that may have conﬂicting impacts on the different stakeholders. Maintaining a balanced view across the stakeholder groups is critical to ensuring management continue to make decisions that will beneﬁt all stakeholders in the longer term. The general governance framework ensures controls and procedures are in place to protect all stakeholders. ADOPT GOOD REGULATORY PR ACTICE AT ALL TIMES Why is this of strategic importance? Chesnara management fully recognises the beneﬁts to both shareholders and policyholders of adherence to good regulatory practice. We comply not because the regulations insist but because the rules clearly reﬂect good, responsible business management and governance. How do we deliver this strategic objective? We maintain a strong internal risk management culture and regime throughout the Group and we maintain systems and controls which satisfy regulatory requirements at all levels. The UK and Swedish life assurance and pensions industries are both highly regulated, in terms of the conduct of business operations and of ﬁnancial reporting. We place particular emphasis on managing our regulatory compliance through a proactive and prudent approach and on maintaining a positive relationship with our principal regulators, the Financial Services Authority (‘FSA’) and the Finansinspektionen (‘FI’). Accordingly, signiﬁcant effort is directed towards ensuring that the operations are effectively managed in terms of conduct of business regulations and of prudential solvency requirements and towards the signiﬁcant change that is required in the business to implement Solvency II and to ensure continuing compliance with its requirements. We have developed a strong Governance core at the heart of the Chesnara operating model, which exists within a robust and effective Corporate Governance framework. – All governance roles, with direct impact on regulatory compliance, are carried out by people with signiﬁcant industry experience. – The level of investment in the Governance team is fully reﬂective of the Board’s recognition and understanding of the implications and challenges of effective adherence to all regulatory best practice. – The Chesnara culture ensures other objectives do not conﬂict with the objective of adopting good regulatory practice at all times. Risks associated with this strategic objective The key risk relating to regulatory compliance is that rules and regulations are poorly understood or implemented. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 (cid:20)(cid:22) SECTION A OVERVIEW & STR ATEGY THE CHESNARA BUSINESS The history of the development of (cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:72)(cid:86)(cid:81)(cid:68)(cid:85)(cid:68)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3) a description of the characteristics (cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3)(cid:76)(cid:79)(cid:79)(cid:88)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3) how we have endeavoured to achieve (cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:76)(cid:70)(cid:3)(cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:82)(cid:90)(cid:3) we have created the platform for their ongoing realisation. The higher proportion of pensions policies in the successive acquisitions made by Chesnara has progressively increased the overall longevity of its run-off portfolio, while diversifying the long-term policy base. At 31 December 2012, the Group had 258,000 pension policies and 119,000 life policies in force. Chesnara continues to seek to participate in the consolidation of life (cid:68)(cid:86)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3) in the UK and Western Europe. We primarily target acquisitions with a value of between £50m and £200m, although other opportunities are considered. All opportunities are assessed against a number of key criteria including size, risk (including actual or potential product and ﬁnancial liabilities), discount to embedded value, capital requirements and the pattern and quality of predicted proﬁt emergence. Our strategic approach, however, remains that such potential acquisitions should not detract signiﬁcantly from, and should contribute to the primary aim of delivering an attractive dividend yield, although opportunities which present a signiﬁcant value uplift or growth opportunity will also be evaluated. History (2004 – 2012) Chesnara listed on the London Stock Exchange, following its acquisition of CA on the latter’s demerger from Countrywide plc, a large estate agency group. CA is a substantially closed UK Life and Pensions business whose portfolio predominantly comprises unit-linked endowment and protection policies. Chesnara acquired CWA from Irish Life and Permanent plc for a consideration of £47.8m, funded principally by a mixture of debt and new equity capital. CWA is also a substantially closed UK Life and Pensions business. Its portfolio, which is also predominantly unit-linked, comprises endowments, protection and pensions policies. The long-term business of CWA was transferred to CA under the provisions of Part VII of the Financial Services and Markets Act 2000 (‘FSMA’), thereby realising signiﬁcant ﬁnancial and operational synergies. Chesnara acquired Movestic Liv, an open predominantly unit-linked Swedish Life and Pensions business, for £20m at a signiﬁcant discount to its embedded value. Subsequently a new subsidiary, Movestic Kapitalförvaltning was established to separate out fund selection and management activities from Movestic Liv and to develop these services in the wider marketplace. Movestic acquired the in-force business, personnel, expertise and systems of Aspis Försäkrings Liv AB, a small Swedish life and health insurer, thereby complementing Movestic’s existing focus on pensions and savings contracts. Chesnara acquired SPI and its subsidiary, SPP, from JPMorgan Asset Management Limited for a consideration of £63.5m, funded by a mixture of debt and new equity capital. SPI and SPP are also closed UK Life and Pensions businesses whose portfolios predominantly comprise pensions policies (both unit-linked and with-proﬁts), endowments (some with-proﬁts) and protection policies. The long-term business funds and part of the shareholder funds of SPI and SPP were transferred to CA under the provisions of Part VII of FSMA, thereby realising signiﬁcant ﬁnancial and operational synergies. SPI and SPP were de-authorised from conducting activities regulated under the provisions of the Financial Services and Markets Act 2000, thereby releasing £7m of solvency capital. 04 05 06 09 10 11 12 (cid:20)(cid:23) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION A OVERVIEW & STR ATEGY Sweden – The primary focus of the Swedish business is to grow market share in the company-paid and individual pensions market, whilst developing further proﬁtable business in other areas, in particular in the risk and health market. Writing new business requires funding to support the initial costs incurred: this is provided by way of external ﬁnancial reinsurance or cash contributions from Chesnara. As the in-force business portfolio grows in scale the income generated by it eventually allows the business to self-fund and become a net generator of cash. Movestic is targeted to reach this pivotal point over the next two years. – In Sweden, as the Movestic book is open and in a growth phase, we retain a broader-based management and operational team. Rather than outsource core functions, we believe that it is important that the drive and team ethic of Movestic is preserved as they seek to grow proﬁtable market share in our target markets. Whilst Movestic manages the selection of appropriate investment funds, investment decisions are made solely by the fund managers. BUSINESS MODEL Business model The following sets out the key operating characteristics of the Chesnara business: Chesnara plc and the UK business activities are based in Preston, Lancashire, while Movestic is based in Stockholm in Sweden. Chesnara has 20 full-time equivalent employees in its corporate governance team in the UK. In Sweden, the headcount is 127. UK – The primary focus of the UK business is the efﬁcient run-off of their existing life and pensions portfolios. This gives rise to the emergence of surplus which supports our primary aim of delivering an attractive long-term dividend yield to our shareholders. By the very nature of the life business assets, the surplus arising will deplete over time as the policies mature, expire or are the subject of a claim. – In the UK we maintain a small professional corporate governance team who are responsible for both the regulatory and operational requirements of the listed entity Chesnara and those of the UK business. Our team in the UK is intentionally small and focused in the interests of keeping the overall expense base tight. It has the capability to manage the UK business and to assess acquisition opportunities, but it is supplemented from time to time by temporary resource if justiﬁed by operational or strategic demands. – The operating model of our UK business is directed towards maintaining shareholder value by outsourcing all support activities to professional specialists. This typically embraces policy administration, systems, accounting and investment management and reduces the impact of potential ﬁxed and semi-ﬁxed cost issues which would otherwise occur as the income streams arising from a declining in-force portfolio diminish. By securing long-term contracts to support these activities we aim to enhance the variability of the expense base with the size of the in-force policy portfolio. This also leads to the avoidance of the full weight of systems development costs, as these will, where possible, be shared with other users of the outsourcers’ platforms. – Oversight of the outsourced functions is a signiﬁcant part of the responsibility of the central governance team. The maintenance of service and performance standards, and thereby the core interests of shareholders and policyholders, is maintained through a strict regime of service level agreements and through continuous monitoring of performance. This is reinforced by adherence to the principles and practice of treating customers fairly. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 (cid:20)(cid:24) (cid:20)(cid:25) CHESNARA |(cid:3)(cid:36)(cid:49)(cid:49)(cid:56)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:51)(cid:50)(cid:53)(cid:55)(cid:3)(cid:9)(cid:3)(cid:36)(cid:38)(cid:38)(cid:50)(cid:56)(cid:49)(cid:55)(cid:54)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21) SECTION B PERFORMANCE IN THIS SECTION 18—25 Chief Executive’s Review 26—37 Financial Review 38—41 Financial Management 42—44 Risk Management 45 Focus on Solvency II CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 17 SECTION B PERFORMANCE CHIEF EXECUTIVE’S REVIEW HIGHLIGHTS Business review – Growth in IFRS pre-tax proﬁt, excluding exceptional item, to £24.5m (2011: £22.4m). – Despite operational performance issues, Movestic has delivered growth in IFRS pre-tax proﬁt to £1.4m (2011: £0.4m). – Cash generation and Group solvency remain strong. – Signiﬁcant progress made to resolve Movestic servicing issues with a gradual recovery in IFA support. – Increase in Group EEV by £16.6m after recognition of dividend payments of £19.5m. – 3.6% increase in total group funds under management. – Strong investment performance in both the UK and Sweden. (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:83)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3) £24.5m* 2011: £22.4m *Excluding exceptional item Group EEV net of tax result* £31.3m 2011: £(29.8)m loss *Excluding modelling adjustments Insurance Group Directive Solvency 244% 2011: 198% Financial First and foremost I am extremely pleased with the levels of earnings on both the IFRS and EEV bases. The UK IFRS result underpins cash generation and cash transfers to the Chesnara parent company. As was the case in 2011, the level of cash generation in the UK is more than (cid:86)(cid:88)(cid:73)(cid:192)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) continuation of our attractive dividend strategy. In addition, Movestic has required no further capital support during the year following a capital injection of £5.3m in 2011. The total cumulative cash generated at Chesnara Group level for 2011 and 2012 of £72.4m is equivalent to 188% of total dividends during the same period. 41.0 21.5 19.5 31.4 12.4 19.0 Excess cash Dividend payable 2012 2011 Net cash generation (£m) The surplus cash generation will have a positive effect in terms of ensuring we are able to sustain our dividend strategy through any potential short-term reductions in IFRS earnings. 18 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE UK Operational performance levels for the UK business remain strong with all administration and asset management partners out- performing their respective targets and benchmarks. This positive performance has contributed towards a modest increase in total UK funds under management during the year. The revised outsource contract with HCL, who provide administration, ﬁnance and actuarial services for the S&P and CA books remains unsigned. Whilst this creates a degree of uncertainty which is not ideal, it is important to recognise that the level of inherent risk to the business model is considered to be relatively low. In the short-term, HCL retain contractual responsibility for servicing the CA book for a further 2 years and the existing S&P arrangement is on a rolling 2 years basis. In addition, in the medium to long-term, several realistic alternatives exist, all of which are not considered to have any detrimental impact on either operational effectiveness or the cost base. Sweden The performance issues in Movestic, namely the deterioration in service levels which resulted in a loss of IFA support, have been well documented in previous reports. In light of the challenges (cid:73)(cid:68)(cid:70)(cid:72)(cid:71)(cid:15)(cid:3)(cid:44)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3) attention to the Movestic business during the year. I am encouraged by the immediate positive impact the new Movestic Chief Executive, Lars Norstrand, has had on both the operational effectiveness and on the recovery of support from the IFA community. Lars has overseen a process re-engineering programme that has successfully mitigated the service level deﬁciencies experienced during 2011 and into 2012. The positive impact of this will be further embedded through improvements to the operating structure, whereby certain processes critical to IFAs are being centralised into Stockholm, where they will beneﬁt from the positive management environment. Despite the signiﬁcant recent improvements, Movestic has more to do to fully recover and consolidate its market position. The business foundations are signiﬁcantly stronger than last year and from this improved base I am conﬁdent that Movestic can begin to deliver longer-term ﬁnancial beneﬁts to the Chesnara Group. Outlook The Group continues to investigate further acquisition opportunities and we will progress these where we see value and a clear strategic fit. We remain open-minded as to location in the UK and Western Europe and, as ever, we will continue to apply our strict ﬁnancial and risk criteria when we assess them. Whilst growth through acquisition remains a key strategic objective, projections do indicate that the Group remains able to deliver its core objectives, in the medium term, without any further acquisitions. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 19 SECTION B PERFORMANCE CHIEF EXECUTIVE’S REVIEW UK BUSINESS REVIEW Key performance indicators IFRS proﬁt before tax, excluding exceptional item £33.1m 2011: £33.2m Cash transfer to Chesnara Parent Company £40mNote 1 2011: £44m Note 2 Good operational performance together with a positive investment market impact, result in (cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3) in terms of IFRS and EEV earnings, cash transfers to Chesnara and CA solvency. Note 1 – includes £7m arising on the de-authorisation of the S&P regulated entities. HIGHLIGHTS Note 2 – includes the effect of distributions from surplus funds arising on the acquisition of S&P in 2010. – Pre-tax IFRS proﬁt of £33.1m (2011: £33.2m) excluding exceptional item. – £35.4m increase in EEV, excluding impact of dividend payments. – £41.6m cash generation (2011: £38.8m). – Increase in CA solvency ratio to 199% (2011: 183%). – Core product-based deductions remain resilient to book run-off. – Successful de-authorisation of the S&P regulated entities, thereby releasing £7.0m of capital. – Full operational integration of S&P into the Chesnara Group has enabled the closure of the S&P London ofﬁce with signiﬁcant operational cost savings. – Good regulatory compliance record continues. Review of the year This year has been focused on four areas – management of investment assets, regulatory compliance, ﬁnalising the integration of S&P into the UK business and ensuring we continue to provide a high quality service to policyholders in terms of administration service levels and investment return. Management of assets The acquisition of S&P, as signalled at the time of the acquisition, results in an increased level of earnings volatility for the UK business. S&P has a sizeable proportion of its product base that provides guaranteed returns. The probability of guarantees being of value to policyholders increases when the value of assets held to match the policy liabilities falls. To mitigate this risk, assets held by shareholders to provide security for these guarantees are invested in cash and long bonds. Consequently , our results are vulnerable to (a) falls in equity and property values, which impact assets backing policyholder liabilities; and (b) falls in bond yields, which impact the cost of providing guarantees. EEV result net of tax Note 3 £22.8m (cid:84)(cid:86)(cid:83)(cid:189)(cid:88) 2011: £(10.9)m loss Note 3 – excluding impact of modelling adjustments. Annual policy attrition rate There is no suggestion of a sustained worsening trend and the 2012 attrition rates align closely with the 2010 ﬁgures. The rate of run-off is inﬂuenced by maturities which can vary from year to year based on the original policy inception year. The increase in attrition rate corresponds to an absolute increase in policy exits of c4,000 policies. 8.2% 7.3% 6.7% 5.8% 7.4% 6.5% 2 1 0 2 1 1 0 2 2 1 0 2 1 1 0 2 2 1 0 2 1 1 0 2 CA S&P Total UK Fund performance Relative outperformance in the unit-linked funds helps promote policy retention and, when positive, increases the embedded value of the Group as future management charges received will be of a higher magnitude. 10.9% 11.4% 11.5% 9.9% 2011 2012 -3.7% -5.6% -5.5% -5.0% CA Pension Managed CWA Balanced Managed Pension S&P Managed Pension Benchmark – ABI mixed inv 40% - 85% shares 20 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE Integration of S&P As a ﬁnal stage of the integration of S&P, the two S&P companies were de-authorised resulting in an additional cash generation of £7m. The full operational integration of the S&P processes and procedures has been completed during the year which has enabled the closure of the S&P London ofﬁce. This has resulted in annualised cost savings of c£0.4m. 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 Board. No issues of signiﬁcance have arisen. Policyholder service and investment return Our administration and asset management outsource partners have all performed well in the year and exceeded service level arrangements and relevant benchmarks. Two initiatives with our outsourcing partners are worthy of mention. Firstly, in the ﬁrst quarter of 2012 we completed, with HCL, the ﬁnal phase of the offshoring project. To date, the quality of service and speed of turnaround have exceeded expectations. Secondly, building on our experience with HCL we initiated, with Capita, a retention program, whereby we offer information to customers intending to discontinue their policies, which has provided a signiﬁcant return on our investment whilst providing policyholders with an improved service. 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. We are pleased to report that none of these has given rise to signiﬁcant issues and below I set out a list of the key activities and a little background. Solvency II – A signiﬁcant and increasing amount of work means that our progress remained in line with our plans. We were able to ascertain that, based on QIS 5 calculations together with further Pillar I analysis, no increase in solvency capital is likely to be required. It has become increasingly clear that the original implementation date of 1 January 2014 has been postponed. However, in the expectation that interim measures will be introduced, we are continuing to develop the key aspects of the prospective regulations as they stand. Further information on our Solvency II project is provided on page 45. FSA – We received the formal feedback from the FSA’s ARROW visit, which took place in the ﬁnal quarter of 2011, in April of 2012. The Risk Mitigation Plan contained a handful of issues which have been attended to. In addition we maintain our commitment to maintaining a compliant operating model and a good relationship with our regulator. ABI retirement code – The ABI issued a code which changes the way in which policyholders who are vesting their pensions are advised of their options with particular regard given to the notiﬁcation of the availability of better-value annuities from other providers. We have successfully introduced all the measures the code requires. Gender neutral rates – We considered in some detail whether we should implement gender neutral rates or limit policyholder ﬂexibility such that gender neutral rates would not be required. In the event we decided on the latter route in the knowledge that we would remove some of the discretionary policy changes we had previously allowed. This decision has led to the closure of the small in-house sales and retention team which will lead to annual savings of c£0.2m. The retention capability of the former sales team work has been transferred to our outsourcing partner. Complaints – On the underlying business, complaints have remained at reasonable levels with no discernible change in the number of complaints referred to the Financial Ombudsman or the percentage of such referred complaints being successful. However, the absolute number of complaints has risen primarily due to Complaints Management companies submitting complaints to us alleging that we missold Payment Protection Insurance (PPI). Although we have never sold PPI policies and, therefore, cannot have any possible liability, we are still required to open a complaint ﬁle and formally respond. New life tax regime – A new regime pertaining to the taxation of Life Assurance companies came into effect at the end of the year. We have thoroughly planned for its implementation and developed appropriate models to calculate current and future liabilities. These show no signiﬁcant changes to current levels of taxation. There is, however, a signiﬁcant beneﬁt on the IFRS basis of £6.1m relating to the recognition of brought forward pension losses. Retail Distribution Review (RDR) – Although signiﬁcant in the wider market this regulation, which essentially moves IFA’s to a fee-charging model by banning commission by providers, has little effect on our closed books of business. Some minor system and correspondence changes were necessary which were completed within required timescales. Policyholder investment funds – Through the auspices of the CA Investment Committee we have continued our oversight of policyholder funds through regular meetings with the investment managers. There have been a number of reviews and developments during the year in order to ensure the underlying investment mix is the most appropriate for policyholders. Measures undertaken include reviewing the investment mandates for the ex-S&P With-proﬁt Funds, higher indexation for the ex-CWA Managed Funds and agreeing a programme to move the ex-S&P Pension Property Fund from direct investment to collective funds over an eighteen-month period to avoid any potential liquidity issues that could arise due to the natural decline in the size of the fund. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 21 SECTION B PERFORMANCE CHIEF EXECUTIVE’S REVIEW UK BUSINESS REVIEW (CONTINUED) Cash generation Cash generation remains strong. This is due in the main to core product-based surpluses remaining resilient. (cid:55)(cid:75)(cid:72)(cid:3)(cid:54)(cid:9)(cid:51)(cid:3)(cid:69)(cid:82)(cid:82)(cid:78)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3) contribution of £26.6m to cash generation in 2012. This is consistent with the fact that the S&P surplus is sensitive to investment market performance which was generally favourable during 2012. 2012 cash generation includes a £7m exceptional item relating to the de-authorisation of S&P residual companies. Whilst this level of S&P cash generation is welcomed, it is recognised that cash releases from S&P may be volatile. We do not see this as a particular issue, as S&P was acquired as a medium to long-term underpin to the stronger, shorter-term cash generation from CA and CWA. Unit-linked funds under management The continuing level of unit-linked funds under management is an indicator of the ongoing level of proﬁtability of the UK businesses as fund-related charges are an important component of proﬁt. The movement in the value of unit-linked funds under management is driven by: i) performance of the funds across UK equities, international equities, property and ﬁxed interest securities; ii) received and invested premiums; and iii) policies closed, due to surrender, transfer or claim. The combined impact of these three drivers has resulted in an increase in Unit-linked Funds under Management from £2,190m at the end of 2011 to £2,221m at the end of 2012. Unit costs A key area of focus for the UK business is the management of expenses incurred in servicing the in-force life and pensions policy base. In particular we seek, through outsourcing arrangements, to maximise the proportion of costs which vary with policy volume. Renewal costs, excluding the impact of the expected revisions to the HCL contract, have reduced by £1.2m (6%) compared with 2011. The impact of higher expected HCL charges in accordance with the proposed new arrangements has, however, resulted in a £1.5m increase in the cost base. The net cost increase, together with a 7% reduction in total policy count, results in an increase in unit cost to £47.40 per policy compared with £39.41 per policy in 2011. Management remain mindful of the risk of increasing unit costs in a closed-book business and continuing actions will be taken to manage the issue as effectively as possible. Recent examples include the closure of our internal sales team and the closure of our London ofﬁce towards the end of 2012. The positive impact of these actions will be reﬂected in the 2013 results. 22 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 CHIEF EXECUTIVE’S REVIEW SWEDISH BUSINESS REVIEW Key performance indicators IFRS pre-tax proﬁt* £1.4m 2011: £0.4m * Excluding amortisation of intangibles EEV result net of tax* £12.7m (cid:84)(cid:86)(cid:83)(cid:189)(cid:88) 2011: £17m loss * Excluding modelling adjustments Funds under management £1,361m 2011: £1,220m The value of funds under management is a key reference point for establishing the ongoing proﬁt- earning capacity of the business, as fees are received based on those values. Funds under management increased despite the operational difﬁculties and their impact on new business volumes and policy attrition. SECTION B PERFORMANCE During the year the recent servicing problems have been addressed and there are encouraging signs of a return of IFA support. HIGHLIGHTS – Increase in IFRS pre-tax proﬁt to £1.4m (2011: £0.4m) before amortisation of intangibles. – Funds under management and solvency ratio resilient to operational difﬁculties. – Positive EEV development, despite a strengthening of lapse assumptions. – Process re-engineering programme has successfully mitigated the servicing problems experienced in 2011 and into 2012. – Appointment of new Chief Executive with previous knowledge of the Movestic business and strong reputation within the IFA community. – Lapse rates and new business levels show demonstrable signs of recovery during the ﬁnal quarter of 2012 following a relatively poor performance earlier in the year. – Gradual recovery in new business market share throughout the year. Premiums (£m) 223 194 261 232 Review of the year 38 38 Risk & health Total Pensions & savings 2012 2011 Premium income, in the form of new business and continuing premiums into existing contracts, is key to the success of Movestic. Policy attrition combined with a reduction in new business volumes during the year has resulted in the reduction in total premiums earned. KPIs continue on page 25. Financial results While the Swedish business has been through a difﬁcult period it is encouraging to see that the core ﬁnancial dynamics of the business have proved resilient. In particular, given that the revenue model is largely dependent on the level of unit-linked funds under management it is pleasing to report that these have increased by 12% during 2012. Further, the solvency position is strong and cash generation is positive, resulting in Movestic requiring no additional capital support from Chesnara during the year (2011: £5.3m). Earnings on both an IFRS and EEV basis have improved compared with 2011. Having moved into proﬁt for the ﬁrst time in 2011, the IFRS result has improved further in 2012 with £1.4m pre-tax proﬁt for the year (2011: £0.4m). 2012 EEV net-of-tax earnings of £12.7m compare favourably with a predominantly investment market driven loss of £17m in 2011. Business review The priority during 2012 has been to address the servicing problems that emerged during 2011 as a result of a system migration. Signiﬁcant progress has been made, and our current assessment is that the servicing proposition is now “ﬁt for purpose”. Work continues to ensure we continue to improve the service offering such that, again, it becomes a positive differentiator alongside our investment proposition. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 23 SECTION B PERFORMANCE CHIEF EXECUTIVE’S REVIEW SWEDISH BUSINESS REVIEW (CONTINUED) New business New business volumes have fallen by 20% compared with 2011. From our contact with the IFA community we fully understand the reasons for this decline. The current sentiment is that IFAs recognise that Movestic has addressed its servicing problems and there has been a recovery in levels of support and conﬁdence. This is evident in the recovery of new business volumes during the ﬁnal quarter of 2012. New business premium income (£m) 2012 10.8 10.0 9.9 7.2 Q1 Q2 Q3 Q4 The improvement during the ﬁnal quarter partly reﬂects the seasonality of the business (Q3 is traditionally a low sales period) but the level of shortfall of 10% against the ﬁnal quarter of 2011 is signiﬁcantly less marked than for the ﬁrst three quarters. Clearly, we require new business volumes to recover to levels at least comparable with those experienced prior to the operational issues, but even at the reduced new business levels during 2012, Movestic has generated a modest EEV new business proﬁt of £2.6m (including the value of increments to existing policies). Policy attrition Policy attrition has been higher than expected during the year. Again, as with the New Business results, the reasons are well understood and positive management action has been taken. Quarterly analysis illustrates the positive impact of this on the most signiﬁcant attrition measures: Paid-up and transfer rates 2012 24% 20% 5% 5% 14% 12% 7% 4% Q1 Q2 Q3 Q4 Lapses/paid-ups (pensions and endowments) Transfers (pensions) The pension transfer rates during the ﬁnal quarter of 2012 represent the lowest levels since Q1 2010. Fund performance The relative fund performance measure adopted within the KPI’s on the following page focuses on the number of funds under or over performing their relevant indices. An alternative and well established fund performance measure, produced by a respected industry magazine, compares the value of savers’ average fund holdings. This measure best reﬂects the investment performance from a policyholder perspective. Movestic’s fund range had the best performance over the period 2005 to 2010 and the second best performance for the period 2006 to 2011. The results for periods ended 31 December 2012 are not published until later in 2013. Outlook We believe that the Swedish business has substantially overcome its operating difﬁculties and has proved relatively resilient. The management team has remained focused and positive throughout and organisational changes initiated by the new Chief Executive further promote a positive outlook. Movestic has seen a gradual recovery in its market share of the company-paid pension market during the second half of 2012, which supports the observation of a gradual recovery in IFA conﬁdence, as a result of service level improvements and the focus of the senior management team. Share of unit-linked pensions market 2012 7.8% 8.7% 5.1% 5.6% H1 H2 Total business Company-paid business With a motivated workforce and signiﬁcantly improved servicing processes, we are conﬁdent that these initial signs of a recovery in IFA support will continue throughout 2013. Economic conditions in Sweden have remained sound and it has proved to be relatively immune to economic pressures experienced across the rest of Europe. However, there remains a general sense of uncertainty that has resulted in consumer preference for more traditional investment products than for equity-based unit-linked investments. Movestic remains committed to the unit-linked market and believes that, in time, as equity market conﬁdence recovers and that as the traditional investment offerings become less sustainable for providers, there will be a general shift back towards unit-linked investments. 24 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE Movestic KPIs (continued) New business premium income New business markets have remained difﬁcult. In particular, the unit-linked market has been less strong than the market for more traditional investment products which have a lower risk proﬁle and continue to offer guarantees, which we believe to be unsustainable. This external factor, when combined with the reduction in average market share, is reﬂected in the reduction in total new business premium income in 2012. New business premium income (£m) 47.3 37.9 2012 2011 Fund performance The increase in the number of funds out-performing their indices is a testament to our investment and fund selection strategy. One of Movestic’s key differentiators is its approach to selecting the funds available to investors. Rather than adopt mainstream funds, which, in Sweden, are those predominantly managed by subsidiaries of banks which also have life assurance subsidiaries, we select a limited number of funds from a wide range of independent fund managers. The funds selected are, in general, actively managed funds with a value approach. The performance of all funds is closely monitored and regular contact is made with managers to ensure that the underlying reason for fund performance, whether positive or negative, is fully understood. Funds that do not perform favourably compared to the relevant index are wholly replaced if there are no acceptable strategies for improvement. During the year further funds were added to ﬁll perceived gaps in the range. Relative fund performance 2012 2011 Under-performed against the relevant index Outperformed against the relevant index No relevant index New business market share Movestic’s primary target market is unit-linked pensions business and, within that, company-paid contribution business. The servicing issues during 2011 which continued into 2012 have resulted in a loss of average market share compared with 2011. This performance should be seen in the context of some of the traditional product providers having undertaken campaigns to move customers to ‘new’ unit-linked policies to address the challenges inherent in traditional guaranteed return products. Total unit-linked pension business market share (excluding ‘tick the box’ market) 5.3% 6.0% 2012 2011 Annual policy attrition rate The longer that insurance and investment contracts remain in force, the more proﬁt accrues to the business. Different policy product types will be subject to surrender, transfer or lapse to varying extents. We have continued with relatively high rates of attrition throughout much of 2012, although quarterly analysis does show a marked improvement in the most dominant category (pension transfers) during the second half of the year. Although the endowment surrender rate is relatively high this only affects a small proportion of the in-force book. Annual policy attrition rate. Twelve months ended 31 December 19.6% 14.7% 17.6% 16.2% 5.4% 5.3% Surrenders (Endowments) Transfers (Pensions) Lapses/paid-ups (Pensions and endowments) 2012 2011 The percentages for surrenders and transfers are based on the capital amount surrendered or transferred, divided by the amount of capital potentially transferable. For lapses, they are the annual premium of lapsed policies, divided by the total annual premium in force at the start of the year. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 25 SECTION B PERFORMANCE FINANCIAL REVIEW (cid:55)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:183)(cid:86)(cid:3)(cid:78)(cid:72)(cid:92)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3) at 31 December 2012 and for the year ended on that (cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:71)(cid:72)(cid:80)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) strength of the Group as a whole. A summary of these is shown below and further analysis is provided in the following sections: (cid:45)(cid:42)(cid:54)(cid:55)(cid:3)(cid:84)(cid:86)(cid:73)(cid:17)(cid:88)(cid:69)(cid:92) (cid:84)(cid:86)(cid:83)(cid:189)(cid:88)(cid:16)(cid:3)(cid:73)(cid:92)(cid:71)(cid:80)(cid:89)(cid:72)(cid:77)(cid:82)(cid:75)(cid:3) (cid:73)(cid:92)(cid:71)(cid:73)(cid:84)(cid:88)(cid:77)(cid:83)(cid:82)(cid:69)(cid:80)(cid:3) (cid:77)(cid:88)(cid:73)(cid:81)(cid:3)(cid:134)24.5m 2011: £22.4m The presentation of the results in accordance with International Finance Reporting Standards (IFRS) aims to smooth the recognition of proﬁt arising from written business over the life of insurance and investment contracts. For businesses in run-off the reported proﬁt is closely aligned with, and a strong indicator of, the emergence of surpluses arising within the long-term insurance funds of those businesses. Highlights – IFRS pre-tax proﬁt of £24.5m, shows a 9.4% improvement from the prior year of £22.4m, excluding exceptional item. – Pre-tax proﬁt from the core CA closed book remain signiﬁcant albeit at a reduced level compared with 2011 (2012: £18.5m; 2011: £25.7m). The reduction is predominately due to some speciﬁc investment market movements, with the core underlying product-based surplus remaining resilient to book run off. – The 2012 result includes a £14.6m pre-tax proﬁt arising in the S&P business. This compares favourably with the 2011 pre-tax proﬁt of £7.5m which beneﬁted from the Part VII Transfer, including the recognition of a £12.4m proﬁt, arising from the alignment of actuarial assumptions. – There was a £1.0m improvement in the Movestic pre-tax result. (cid:39)(cid:69)(cid:87)(cid:76)(cid:3)(cid:75)(cid:73)(cid:82)(cid:73)(cid:86)(cid:69)(cid:88)(cid:77)(cid:83)(cid:82)(cid:3) £41m 2011: £31.4m Cash generation is a key measure, because it is the net cash ﬂows to the Chesnara parent company from its Life and Pensions businesses which support Chesnara’s dividend capacity. 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. Highlights – At £15m, cash generation in CA continues to be strong (2011: £23.0m). – S&P has generated £19.6m cash in 2012 from the underlying business compared with £3.4m in 2011. – In addition, there is an exceptional cash release of £7m arising from the de-authorisation of the S&P regulated entities. This adds to the favourable synergistic effects of £12.4m arising from the Part VII Transfer during 2011. – Movestic has required no capital support during 2012 (2011: £5.3m). 26 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE (cid:41)(cid:41)(cid:58)(cid:3)(cid:73)(cid:69)(cid:86)(cid:82)(cid:77)(cid:82)(cid:75)(cid:87)(cid:16)(cid:3) (cid:82)(cid:73)(cid:88)(cid:3)(cid:83)(cid:74)(cid:3)(cid:88)(cid:69)(cid:92)* £31(cid:18)(cid:22)(cid:81)(cid:3)(cid:84)(cid:86)(cid:83)(cid:189)(cid:88) 2011: £(29.8)m loss *Excluding modelling adjustments of £3.6m in 2012 (2011: £(10.3)m) EEV £311.1m 2011: £294.5m 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. 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. The principal underlying components of the EEV result are: i) The expected return from existing business (being the effect of the unwind of the rates used to discount the value in force); ii) Value added by the writing of new business; iii) Variations in actual experience from that assumed As it 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. Highlights – £36.1m increase in EEV before recognition of dividend payments. – Modelling adjustments generate a £3.6m increase in EEV (2011: £(10.3)m reduction). – Good balance of EEV across the operating segments. in the opening valuation; and – Good product diversiﬁcation within the value in-force. iv) The impact of restating assumptions underlying the determination of expected cash ﬂows. Highlights – Signiﬁcant economic proﬁt of £21.5m (2011: £(49.4)m loss). – Increase in operating proﬁt to £19.1m (2011: £15.3m). – Movestic has generated a £12.7m EEV proﬁt despite a signiﬁcant strengthening of lapse assumptions. – Notwithstanding a reduction in new business volumes, the Movestic new business operation continues to a make a positive contribution to earnings. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 27 SECTION B PERFORMANCE FINANCIAL REVIEW (cid:45)(cid:42)(cid:54)(cid:55)(cid:3)(cid:84)(cid:86)(cid:73)(cid:17)(cid:88)(cid:69)(cid:92)(cid:3)(cid:84)(cid:86)(cid:83)(cid:189)(cid:88)(cid:16)(cid:3) (cid:73)(cid:92)(cid:71)(cid:80)(cid:89)(cid:72)(cid:77)(cid:82)(cid:75)(cid:3)(cid:73)(cid:92)(cid:71)(cid:73)(cid:84)(cid:88)(cid:77)(cid:83)(cid:82)(cid:69)(cid:80)(cid:3)(cid:77)(cid:88)(cid:73)(cid:81) £24.5m 2011: £22.4m Executive summary The IFRS results by business segment reﬂect the natural dynamics of each line of business. In summary the current ﬁnancial model has three major components which can be characterised as: the “stable core”, the “variable element”, and the “growth operation”. The results and ﬁnancial dynamics of each segment are analysed further as follows: Stable core At the heart of surplus, and hence cash generation, is the CA non-proﬁt business which is in run off. The requirement of this book is to provide a predictable and stable platform for the ﬁnancial model and dividend strategy. As a closed book, the key is to sustain this income source as effectively as possible. The IFRS results during 2012 support this objective, with product-based deductions of £26.3m continuing to emerge in a predictable fashion and at a level that compares favourably against the prior-year equivalent of £25.8m. This level of product-based deductions has underpinned CA’s ability to generate a signiﬁcant level of IFRS pre-tax proﬁt at £18.5m. Variable element S&P has introduced an element of IFRS earnings volatility to the Group, as illustrated by the cost of policy guarantees, which are sensitive to movements in investment markets and lapse rates. Investment market conditions during 2012 have had a net favourable impact of £2.5m: this has, however, been offset by the £3.3m adverse impact of lower lapse experience, as a greater number of policies are estimated to rank for guarantee payments. Investment returns of £6.3m on shareholder assets within the with-proﬁts funds compensated for this increased cost, giving rise to an overall net favourable with-proﬁts result of £3.6m. This compares with a loss of £3.3m in 2011, excluding the effect of a change in the valuation interest rate. Growth operation Although, at its current scale, Movestic has posted a small and increased IFRS proﬁt, the long-term ﬁnancial model is based on growth. Levels of new business are targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence management fee income. Despite the difﬁcult operating conditions referred to in the Swedish Business Review section, the 2012 results show a 12% increase in funds under management. Year ended 31 December 2012 £m 2011 £m Note CA S&P Movestic Chesnara Consolidation adjustments Total proﬁt before tax and exceptional item Exceptional item Total proﬁt before tax Tax 18.5 14.6 1.4 (5.8 ) (4.2 ) 24.5 (4.8 ) 19.7 8.2 25.7 7.5 0.4 (5.5 ) (5.7 ) 22.4 – 22.4 3.3 Total proﬁt after tax 27.9 25.7 1 1 & 2 Note 1 – As explained in Note 7 to the IFRS ﬁnancial statements, an exceptional item of £4.8m relating to the reclassiﬁcation of policyholder tax liabilities within the S&P segment has been charged to IFRS proﬁts. There is a corresponding deferred tax release to income tax of £4.8m included in the tax item above. The net of tax impact of these adjustments, which were made to align the treatment within the S&P segment with that within the CA segment, is accordingly £nil. Note 2 – As explained in Note 18 to the IFRS ﬁnancial statements the changes in the Life and Pensions tax regime has resulted in a deferred tax credit during 2012 of £6.1m. The adjustments arising on consolidation are analysed below: Year ended 31 December CA – Amortisation of AVIF S&P – Amortisation of AVIF Movestic Amortisation of AVIF Write back of DAC Total 2012 £m 2011 £m (2.8 ) (0.8 ) (4.0 ) 3.4 (0.6 ) (3.6 ) (1.0 ) (4.4 ) 3.3 (1.1 ) Total (4.2 ) (5.7 ) 28 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE The IFRS results by business segment are analysed in more detail as follows: The key components of the 2012 IFRS result are summarised as follows: CA Despite a slight increase in product-based deductions, the core source of IFRS earnings, the overall CA IFRS result has declined compared with 2011. There are a number of complex aspects to the IFRS result but the primary drivers of the decline in proﬁt from 2011 to 2012 are illustrated as follows: Proﬁt before tax movement Year ended 31 December 2011 to 2012 (£m) 2.1 1.9 25.7 2.4 5.0 18.5 2012 2011 Expense assumption changes (Note 1) Other Complaint costs (Note 2) Effects due to invest- ment market movements (Note 3) 2011 Negative movements Positive movements 2012 Note 1 – During 2011 we agreed, in principle, commercial terms for extending the outsourcing contract with HCL with the new terms resulting in an increase in expense assumptions recognised in 2011. This adjustment does not replicate in 2012. Note 2 – The level of complaints costs incurred has remained relatively constant year on year at c£0.8m. During 2011 there was a general reduction in complaints reserves over and above the impact of claims paid. During 2012 further review of potential future Mortgage Endowment mis-selling costs was undertaken, due to higher complaints volumes arising from an increase in claims management company activity, which resulted in a small £1.3m increase in the reserves. Note 3 – The impact of investment market conditions is relatively muted for the CA book. However, during 2012, the cumulative impact of a number of different investment-related items was adverse as compared with 2011 when the impact, dominated by mismatch proﬁts, was positive. Pre-tax IFRS proﬁt 2012 £m 2011 £m Note Product-based deductions Gains and interest on retained surplus Administration expenses Other effects due to investment market movements Expense assumption changes (HCL) Complaint costs Other 26.3 25.8 5.4 (9.1 ) 6.2 (8.6 ) (1.7 ) 3.3 – (2.3 ) (0.1 ) (2.1 ) 0.1 1.0 Total 18.5 25.7 1 1 1 2 3 Note 1 – Product-based deductions and returns on retained surplus remain signiﬁcantly in excess of recurring administration expenses. The total level of product-based deductions has increased despite the run-off of the book, reﬂecting an increase in mortality surplus and the positive impact of investment capital growth on funds under management, on which fees are based. Note 2 – The impact of investment market conditions is generally relatively muted for the CA book compared with the value of the other key components. However, during 2012, the cumulative impact of a number of different investment-related items was slightly adverse compared with 2011 when the impact, dominated by mismatch proﬁts, was positive. As a general observation, the investment market-driven result, although less signiﬁcant, tends to hedge against investment market impacts in S&P. Note 3 – 2012 complaints costs include the impact of strengthening the mortgage endowment misselling complaints reserve and ,as such, is not expected to recur at this level. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 29 SECTION B PERFORMANCE FINANCIAL REVIEW IFRS PRE-TAX EARNINGS, EXCLUDING EXCEPTIONAL ITEM (CONTINUED) S&P The S&P pre-tax proﬁt has increased signiﬁcantly compared with 2011: Proﬁt before tax movement 2011 to 2012 (£m) 3.1 2.5 1.0 12.4 3.8 9.1 7.5 2011 Change in sterling and expense reserves (Note 5) Income on with- proﬁt shareholder funds (Note 2) Change in cost of guarantees in with proﬁts- funds (Note 3) Other Product- based deductions (Note 1) Change in valuation interest rate (Note 4) 14.6 2012 2011 Negative movement Positive movement 2012 S&P posted a pre-tax IFRS proﬁt of £14.6m for 2012, the key components of the result being: Pre-tax IFRS proﬁt 2012 2011 £m £m £m £m Note Product-based deductions Administration expenses Income on with-proﬁts shareholder funds Change in cost of guarantees in with-proﬁt funds Investment market movements Change in yield curve Lapse experience Change in valuation interest rate Other Total Change in sterling and expense reserves Other 16.9 (11.0 ) 6.3 15.9 (11.7 ) 2.5 9.0 (6.5 ) (3.3 ) – (1.9 ) 5.1 (10.3 ) – 12.4 (0.6 ) (2.7 ) 3.9 1.2 6.6 (5.2 ) (0.6 ) Total proﬁt before exceptional item and tax 14.6 7.5 1 1 2 3 4 5 Note 1 – Product deductions have held up well as the book runs off, aided to some extent by the impact of capital growth on funds under management. Product deductions exceed administration expenses by £5.9m and £4.2m in 2012 and 2011 respectively. Note 2 – The income on with-proﬁts shareholder funds is driven by investment market performance which has been signiﬁcantly more favourable in 2012. Note 3 – During 2012 there was a £2.7m increase in the cost of guarantees compared with a £5.8m increase in 2011, excluding the impact of £12.4m relating to an alignment in actuarial assumptions (see Note 4 below). The 2012 movement includes a £5.2m increase due to non-investment market items, principally reﬂecting a change in lapse assumptions. The investment market-related component during 2012 gave rise to a net reduction in cost of guarantees, of £2.5m. The corresponding investment market component in 2011 gave rise to an increase in the cost of guarantees of £5.2m, thereby illustrating the underlying sensitivity to investment markets. Note 4 – A change in actuarial assumptions, to align them with those adopted for CA fund, as a result of the Part VII Transfer, resulted in the recognition of proﬁt of £12.4m in 2011. The pre-existing S&P methodology was to reduce valuation interest rates to a level which eliminated the need for a resilience capital reserve. Note 5 – Sterling and expense reserves are sensitive to both the expense base and to investment market movements. As investment markets improve, the level of sterling reserves (which provide against situations where future policy-based revenue does not cover future administration costs) reduces. The proﬁt of £3.9m in 2012 is predominantly driven by investment market movements, whereas the loss of £5.2m in 2011 principally reﬂects the impact of a change in expense assumptions, resulting from the agreement in principle, of higher expense levels, following the prospective extension of the outsourcing contract with HCL. 30 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE Movestic Pre-tax IFRS proﬁt Pensions and savings Risk and health Other 2012 £m 2011 £m Note (0.3 ) 0.9 0.8 (1.5 ) 2.3 (0.4 ) 1 2 3 Total proﬁt before tax 1.4 0.4 Note 1 – The Pensions and Savings business model is directly dependent upon fees and rebates earned on funds under management (FUM). Total FUM average has increased slightly during the year resulting in a £1.8m (9%) increase in fee and rebate income. This is partly offset by a £0.6m (6%) increase in internal costs. 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. Further, the Risk and Health business is operationally signiﬁcant due to the size of the book, there being 404,000 short-term policies in force as at 31 December 2012, which generated £36m of gross annual premiums. The reduction in pre-tax proﬁt compared with 2011 is principally due to a 15% (£0.8m) increase in claims net of reinsurance and an 11% (£0.6m) increase in brokerage costs. 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 Modernac and Movestic investment income results have improved by £1.3m and £0.4m respectively year on year, while the ﬁnancial reinsurance fair value adjustment has reduced by £0.4m. All of these movements are predominately a consequence of investment market conditions. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 31 SECTION B PERFORMANCE FINANCIAL REVIEW (cid:39)(cid:69)(cid:87)(cid:76)(cid:3)(cid:75)(cid:73)(cid:82)(cid:73)(cid:86)(cid:69)(cid:88)(cid:77)(cid:83)(cid:82) £41.0m 2011: £31.4m (cid:55)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:183)(cid:86)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) 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 funds under management. Net cash generation within the Group continues to be robust. Key aspects underpinning the outcome are: HIGHLIGHTS – Net cash generation in the UK run-off businesses, supporting a £40m dividend to the parent company, has increased by some £8m year on year, driven by more favourable investment markets. – A further signiﬁcant beneﬁt of £7m has arisen from the Part VII Transfer , following the de-authorisation of the S&P companies. – There has been a pause in the Movestic funding requirements, although these are anticipated to resume at a modest level in 2013. The following identiﬁes the source of internal net cash generation within the Group, representing the net change in funds available to service debt (interest and loan principal repayment) and equity (dividends): Year ended 31 December Cash generated from/(utilised by): 2012 £m 2011 £m CA Surplus and proﬁts arising in the year Change in target capital requirement 13.3 1.7 21.8 1.2 S&P Surplus and proﬁts arising in the year Change in target capital requirement (Decrease)/increase in policyholder funds cover for target capital requirement 14.5 5.4 14.5 (11.8 ) (0.3 ) 0.7 Synergistic effects of Part VII transfer 7.0 12.4 Movestic Additional capital contributions Chesnara Cash utilised by operations – (5.3 ) (0.6 ) (2.1 ) Net cash generation 41.0 31.4 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 naturally decline over time as the UK business run off. Although investment returns are less predictable, a signiﬁcant portion of the investment risk is borne by policyholders. However, the acquisition of S&P, while extending the longevity of cash generation within the Group, has introduced an element of volatility over shorter periods. This arises from the impact of investment market movements on the cost to shareholders of guarantees within the S&P with proﬁts-funds. Although the short-term measure of this cost follows the fortunes of investment markets, we proactively manage the risk taking a longer-term perspective. 32 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 FINANCIAL REVIEW EEV (cid:73)(cid:69)(cid:86)(cid:82)(cid:77)(cid:82)(cid:75)(cid:87), (cid:73)(cid:92)(cid:71)(cid:80)(cid:89)(cid:72)(cid:77)(cid:82)(cid:75)(cid:3)(cid:73)(cid:92)(cid:71)(cid:73)(cid:84)(cid:88)(cid:77)(cid:83)(cid:82)(cid:69)(cid:80)(cid:3)(cid:77)(cid:88)(cid:73)(cid:81) £31.(cid:22)(cid:81)(cid:3)(cid:84)(cid:86)(cid:83)(cid:189)(cid:88) 2011: £(29.8)(cid:81)(cid:3)(cid:80)(cid:83)(cid:87)(cid:87) SECTION B PERFORMANCE EEV result Analysis of the EEV result in the year by earnings source Summary The headline EEV result for the year has improved signiﬁcantly over 2011. The majority of the improvement relates directly to investment market conditions. In 2011 investment markets generally performed worse than assumed, resulting in a signiﬁcant EEV loss, whereas in 2012, a recovery in equity markets and a modest reduction in bond yields have resulted in a signiﬁcant corresponding proﬁt. The operating result, upon which management has the most direct and immediate inﬂuence, represents a signiﬁcant proportion of the total earnings during 2012. Total operating proﬁt has improved by £3.8m from £15.3m in 2011 to £19.1m. A signiﬁcant proportion of this is the return on shareholder net worth, which at £7.9m has also beneﬁted from favourable investment market conditions. The following tables analyse the Group EEV earnings after-tax by source and by business segment: Proﬁt after tax movement. 2011 to 2012 (£m) 30.3 (2.6) (12.0) 31.2 39.0 (29.8) 6.3 2011 CA S&P Movestic Chesnara Tax 2012 2011 Negative movement Positive movement 2012 Analysis of the EEV result in the year by business segment CA S&P Movestic Chesnara Total pre-tax proﬁt/(loss) Tax 2012 £m 2011 £m 13.1 15.7 13.0 (5.7 ) 6.8 (23.3 ) (17.3 ) (3.1 ) 36.1 (4.9 ) (36.9 ) 7.1 Proﬁt/(loss) after tax 31.2 (29.8 ) New business contribution Return from in-force business Expected return Experience variances Operating assumption changes Return on shareholder net worth 2012 £m 2011 £m 2.9 4.4 5.8 0.4 2.0 7.9 10.2 (0.8 ) (2.6 ) 4.1 Operating proﬁt of covered business Variation from longer term investment return Effect of economic assumption changes 19.0 15.3 28.0 (6.5 ) (16.9 ) (32.5 ) Proﬁt/(loss) on covered business before tax Tax Proﬁt/(loss) on covered business after tax Uncovered business and other Group activities Tax on uncovered business 40.6 (6.0 ) (34.1 ) 5.6 34.5 (28.5 ) (4.4 ) 1.1 (2.8 ) 1.5 Proﬁt/(loss) after tax 31.2 (29.8 ) Economic conditions As indicated above, the EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a proﬁt of £21.5m in 2012 compared with a loss of £49.4m in 2011. During 2011 there was a general decline in equity markets and bond yields and the result is sensitive to both these factors (further sensitivity analysis is provided in Note 7 of EEV Supplementary Information). Although bond yields continued to decline during 2012, the level of reduction was signiﬁcantly less than in 2011 and this was more than offset by a relatively strong recovery in equity markets. The impact of these effects on each operating segment is illustrated below: Economic expense and assumption changes CA S&P Movestic Total 2012 £m 2011 £m 4.7 8.3 8.5 (5.7 ) (25.5 ) (18.2 ) 21.5 (49.4 ) The S&P proﬁt in 2012 includes an experience proﬁt of £11m offset in part by a £2.7m assumption loss. The experience proﬁt largely arises from equity and bond capital growth of £7.2m and £3.3m respectively. The assumption loss is primarily due to the £3.3m impact of a reduction in our assumed level of the risk-free rate of return. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 33 SECTION B PERFORMANCE FINANCIAL REVIEW EEV EARNINGS (CONTINUED) The Movestic business is sensitive to movements in equity markets (predominantly Swedish) due to its core income stream being dependent upon management charges levied on funds under management, which are primarily equity- based. The S&P result is sensitive to equity and bond market movements, principally through the impact on the cost of guarantees. Whereas in 2011 there was a signiﬁcant decline in both equity values and ﬁxed-interest investment returns, there has been a modest equity market recovery in 2012, offset by a continuing downward drift in bond yields. The CA result is relatively less sensitive to investment market movements. 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 hence does not contribute to the new business result. The Movestic contribution is £2.6m, of which £2.4m relates to the value of premium increments received on existing policies. Proﬁts on “new contract” business of £0.2m, has declined signiﬁcantly compared with the 2011 equivalent of £3.1m. The reduction is due to a 20% reduction in new business volumes following from the servicing issues arising during a 2011 systems migration (see Swedish Business Review on page 23). Experience variances CA S&P Movestic Total 2012 £m 2011 £m 5.2 3.1 (7.9 ) 5.2 (0.2 ) (5.8 ) 0.4 (0.8 ) The CA favourable variances relate to policy persistency and mortality experience being better than assumed. The S&P favourable variances in 2012 relate principally to policyholder tax deductions of £1.9m and better than assumed expense and lapse experience of £1m and £1.1m respectively. The Movestic loss of £7.9m is primarily due to adverse lapse experience during the year, as was the case in 2011. In recognition of the level of continuing level of adverse experience, lapse assumptions have been strengthened, the impact of which is included in the operating assumption changes in the analysis below: Operating assumption changes CA S&P Movestic Total 2012 £m 2011 £m (0.3 ) (2.9 ) 5.2 1.7 (0.9 ) (3.4 ) 2.0 (2.6 ) The S&P result reﬂects a loss of £3.7m following a change in lapse assumptions. Policies are expected to run-off at a slower rate than previously assumed and for a book carrying guarantees this has a negative impact as more policies are anticipated to rank for guarantee payments. This is partially offset by a proﬁt resulting from a reduction in future expenses assumptions. Adverse Movestic lapse experience has continued through 2012 and the long-term assumptions have been strengthened accordingly, with a total adverse impact of £7.9m. This is more than offset by positive assumption changes relating to broker and fund manager rebates totalling some £13m. In 2011 no corresponding lapse assumption changes were considered appropriate at that time due to the introduction of new retention initiatives. Tax During 2012 the EEV tax model has been updated to fully reﬂect proposed changes in the UK Life and Pension tax regime. The 2011 tax credit of £7.1m includes the positive impact of tax synergies arising on the Part VII transfer of S&P into CA. Uncovered business and other group activities. Uncovered business and other group activities 2012 £m 2011 £m Chesnara Movestic Total (5.7 ) 1.3 (3.1 ) 0.3 (4.4 ) (2.8 ) The result includes Chesnara parent company costs relating to corporate governance and business development, not attributable to the covered business. The year-on-year increase is primarily due to a £2.5m increase in a provision to cover future contractual property costs associated with the Group Head Ofﬁce. The Movestic result is impacted by: i) Risk and Health results; This business is less long-term in nature and hence is not modelled as covered business. Proﬁt has reduced by £1.3m compared with 2011, primarily due to a 15% (£0.8m) increase in claims net of reinsurance and a 11% (£0.6m) increase in brokerage costs. ii) Proﬁt from the Modernac associate, which has increased by £1.4m compared with 2011. iii) Valuation adjustments for the Movestic ﬁnancial reinsurance arrangements. The 2012 adjustment is £0.3m compared with a negative adjustment of £1.9m in 2011, largely reﬂecting investment market movements. 34 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 FINANCIAL REVIEW (cid:41)(cid:89)(cid:86)(cid:83)(cid:84)(cid:73)(cid:69)(cid:82)(cid:3)(cid:41)(cid:81)(cid:70)(cid:73)(cid:72)(cid:72)(cid:73)(cid:72)(cid:3)(cid:58)(cid:69)(cid:80)(cid:89)(cid:73)(cid:3)(EEV) £311.1m 2011: £294.5m SECTION B PERFORMANCE EEV movement 2011 to 2012 (£m) 31.2 3.6 1.3 19.5 294.5 Net of tax proﬁt The EEV proﬁt arising during the year is analysed in more detail within the preceding section. 311.1 Effect of modelling adjustments Modelling adjustments during the year ended 31 December 2012 give rise to a net increase in EEV of £3.6m, comprising: EEV 2011 Net of tax proﬁt arising in the year Effect of modelling adjustments Foreign exchange reserve movement Dividends paid EEV 2012 EEV 2011 Negative movement Positive movement EEV 2012 EEV movement 2010 to 2011 (£m) 354.6 29.8 10.3 1.0 19.0 294.5 EEV 2010 Net of tax loss arising in the year Effect of modelling adjustments Foreign exchange reserve movement Dividends paid EEV 2011 EEV 2010 Negative movement Positive movement EEV 2011 Movestic During 2012, there has been a continued focus on ensuring that the Movestic EEV model is robust. The process, which has included independent review, has identiﬁed the following: i) levels of commission claw-back within the future cash ﬂow projections were overstated by £7.9m; and ii) several enhancements to policy fee cash ﬂow estimates and data input routines have been identiﬁed with a total net adverse impact of £1.1m. UK The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed to the use of a full yield curve. This approximation was reported in the EEV assumptions section 4(a) of the Supplementary Information within the 2011 Report and Accounts. As at 31 December 2012 the models have been enhanced to recognise differing rates of return across the different durations of the yield curve resulting in a net of tax increase of £12.6m. Modelling adjustment during the year ended 31 December 2011 gave rise to a reduction of EEV of £(10.3)m comprising: Movestic i) an improvement was introduced into the Movestic modelling system in respect of projected fee income from investment contracts where the fee is premium based, such contracts hitherto not being differentiated and this resulted in an increase in embedded value of £2.7m; and ii) modelling errors were detected relating to certain parameters and discounting periods speciﬁed at inception of a new model and the correction of these gave rise to a reduction in embedded value of £12.4m. UK S&P model enhancements gave rise to a further £0.6m reduction in EEV. Foreign exchange reserve movements The £1.3m foreign exchange reserve movement in 2012 is the impact of a 1% strengthening of the Swedish Krona against Sterling during the year, following its depreciation of 1% during 2011. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 35 SECTION B PERFORMANCE FINANCIAL REVIEW EUROPEAN EMBEDDED VALUE (CONTINUED) EEV – Value in force (VIF) and adjusted shareholder net worth (SNW) (£m at year end) 354.6 265.4 294.5 311.1 199.6 210.0 89.2 94.9 101.1 2010 2011 2012 Total EEV VIF SNW HIGHLIGHTS – There is a good balance in EEV across the core business segments although the UK businesses represent the majority (59%) of the total EEV. Conversely the value in-force component is dominated by the Swedish business which represents 59% 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, 60% of the total product level value in-force relates to pension contracts, 19% to protection business and 17% to endowments. Analysis of 2012 VIF – £210.0m 124.5 67.0 18.5 Movestic CA S&P 36 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE 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. Number of policies CA 000’s S&P Movestic 000’s 000’s Total 000’s CA 000’s S&P Movestic 000’s 000’s Total 000’s 31 December 2012 31 December 2011 Endowment Protection Annuities Pensions Other Total 39 43 6 46 3 5 5 – 128 12 137 150 12 – – 78 – 90 56 48 6 252 15 44 48 6 49 4 6 6 – 136 14 377 151 162 14 – – 77 – 91 Value of in-force business Endowment Protection Annuities Pensions Other Total at product level Holding company expenses Other Cost of capital/frictional costs Value in-force pre-tax Taxation 31 December 2012 31 December 2011 CA £m 27.7 49.2 7.8 33.6 3.2 121.5 (7.0 ) (28.6 ) (1.1 ) 84.8 (17.8 ) S&P Movestic £m £m 3.8 3.7 0.9 55.0 3.3 66.7 (3.9 ) (41.8 ) (2.4 ) 18.6 – 8.1 – – 124.2 – 132.3 (7.7 ) – (0.1 ) 124.5 – Total £m 39.6 52.9 8.7 212.8 6.5 320.5 (18.6 ) (70.4 ) (3.6 ) 227.9 (17.8 ) CA £m 29.7 46.2 (0.8 ) 30.7 2.2 108.0 (5.4 ) (27.8 ) (1.2 ) 73.6 (12.9 ) S&P Movestic £m £m 4.3 3.9 1.0 52.4 4.1 65.7 (3.3 ) (41.7 ) (3.2 ) 17.5 – 9.7 – – 118.2 – 127.9 (6.4 ) – (0.1 ) 121.4 – 64 54 6 262 18 404 Total £m 43.7 50.1 0.2 201.3 6.3 301.6 (15.1 ) (69.5 ) (4.5 ) 212.5 (12.9 ) Value in force post-tax 67.0 18.6 124.5 210.1 60.7 17.5 121.4 199.6 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. The total holding company expense adjustment was, prior to 2012, allocated to the CA segment. The 2011 comparatives have been re-presented in accordance with the new allocation methodology. The total increase in the value of holding company expenses reﬂects an enhancement to the proﬁle assumed for how the costs run-off into the future. ’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. From 31 December 2011, following the Part VII Transfer, 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. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 37 SECTION B PERFORMANCE FINANCIAL MANAGEMENT OBJECTIVES (cid:55)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:183)(cid:86)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders and shareholders. Accordingly it: i) safeguards policyholders’ interests by meeting regulatory requirements established by the regulators of the insurance markets in which the Group’s regulated companies operate, while not retaining unnecessary excess capital; ii) seeks to meet the dividend expectations of shareholders and to optimise the gearing ratio to ensure an efﬁcient capital base; iii) ensures there is sufﬁcient liquidity to meet obligations to policyholders, debt ﬁnanciers and creditors as they fall due; and iv) maintains the Group as a going concern so that it continues to provide returns and to meet obligations to shareholders. CAPITAL STRUCTURE AND CASH FLOWS The Group’s UK operations are ordinarily ﬁnanced through retained earnings and through the current emergence of surplus in the UK life businesses. Movestic 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. 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. 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. The Group’s longer-term cash ﬂow cycle continues to be characterised by the strong inﬂow to shareholders’ funds of transfers from the long-term insurance funds of CA, which is supported by the emergence of surplus within those funds. These ﬂows are used: i) to repay our debt obligations as set out in Note 35 of the IFRS of these ﬁnancial statements; 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. METHODS In order to meet our obligations we employ and undertake a number of methods. These are centred on: i) regulatory solvency capital resource and capital requirements analysis, where the relevant Boards set minimum targets for solvency capital resources; ii) longer-term projections of key ﬁnancial variables, including the regulatory solvency calculations set out in (i); and iii) the setting of policies and investment manager guidelines for the investment of policyholder and shareholder funds. Regulatory solvency capital resources and requirements The operation of the UK, Swedish and EU regulatory regimes with respect to solvency capital requirements at the individual regulated company and Group level together with details of minimum target solvency ratios are set out in Note 31 of the IFRS ﬁnancial statements (‘Capital Management’). Targets are established at a level which aims to balance policyholder and shareholder interests. A higher target affords a greater degree of protection to policyholders, but constrains the level of cash generated and transferable by the UK businesses, which are in run-off, and absorbed by Movestic which is in a development phase. In respect of the UK businesses statutory regulations require: 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. 38 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE Longer-term projections On a six monthly basis, longer-term projections are prepared on a Group basis embracing: i) Segmental earnings and surplus arising in the long-term insurance funds; ii) Chesnara company cash ﬂows; iii) Regulatory solvency and capital resources and requirements on a regulated individual entity basis and on a consolidated Group basis; and iv) European embedded value. The projections are prepared for a base case and for various sensitivities; the base case follows the latest assumptions approved by the respective boards, regarding: i) the calculation of actuarial liabilities for longer-term insurance contracts; and ii) cash ﬂows within the embedded value calculation. The sensitivities which are prepared include the impact of movements in: i) equity, property and bond markets; ii) variations in anticipated new business volumes in the Swedish business; and iii) adverse movements in the Sterling: Swedish Krona exchange rate. In addition: – Financial condition reports are prepared on an annual basis which include 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 combined CA and S&P 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. Investment management An element of meeting policyholders’ expectations and thereby, promoting customer retention is the pursuit of good relative investment performance in the policyholder funds. The CA funds are primarily managed by Schroder Investment Management Limited while the CWA funds continue to be managed by Irish Life Investment Managers Limited and the S&P funds continue to be managed by JPMorgan Asset Management (UK) Ltd. We meet formally with fund managers on a quarterly basis to assess past performance and future strategy. Investment guidelines for investment fund managers are established for each fund 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. Movestic funds are managed by a carefully selected range of fund managers who have strong performance records in the relevant sector. Performance is monitored very closely and regular meetings are held with fund managers. Should under performance continue then an alternative manager is sourced and appointed to manage the relevant assets. Where a new market niche or speciﬁc opportunity is identiﬁed new funds may also be added. The CA Board continues to have a conservative approach to the investment of shareholders’ funds in the UK life businesses, which underpins our strong solvency position. For the UK businesses, where the greater part of shareholders’ funds subsist, this approach targets the investment of 100% of available funds in cash and ﬁxed interest securities. In the light of recent volatility in ﬁnancial markets, particular attention is given to the mix and spread of these investments to ensure that we are not unduly exposed to particular sectors and that our counterparty limits are strictly adhered to. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 39 SECTION B PERFORMANCE FINANCIAL MANAGEMENT (CONTINUED) OUTCOMES Key outcomes from our ﬁnancial management process, in terms of meeting our objectives are set out below: Solvency and regulatory capital For the whole of the periods presented below the Pillar 1 calculation for the UK business, as described above, gave rise to the lower measure of excess capital. The statutory solvency position of the individual businesses may accordingly be summarised as: CA Pre proposed dividend to Chesnara Post proposed dividend to Chesnara S&P Movestic Group (Consolidated EU Insurance Groups Directive basis post proposed dividend) i) The positions as at 31 December 2011 and 31 December 2012 reﬂect the impact of the Part VII Transfer, as a result of which CA includes the transfer of all the long-term business funds and certain of the shareholder funds of S&P. ii) The amounts reported as S&P as at 31 December 2011 accordingly represent residual S&P shareholder funds which were retained to cover the minimum EU regulatory capital resource requirements for regulated entities. The S&P companies were de-authorised during 2012 thereby removing the need for them to maintain regulatory capital resources. iii) Excess capital is determined by the minimum regulatory capital resource targets set by the respective boards, except for the Group solvency ratio for which no target is set above the regulatory minimum of 100%. Reliance is placed instead on the efﬁcacy of targets set at the subsidiary level. iv) The Movestic Board has set a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of assets, to be fully admissible, is to be held in the form of cash. The operation of this requirement may, from time to time, act as the operative constraint in determining the level of additional funding requirements, thereby causing Movestic’s solvency ratio to rise above what it would otherwise have been, had the form of assets matching capital resources not been a constraint. 31 December 2012 31 December 2011 Solvency ratio % Excess Solvency ratio capital % £m Excess capital £m 279 199 n/a 280 64.6 24.6 n/a 15.1 259 183 115 245 67.0 23.0 0.9 11.4 244 90.4 198 75.4 The information provided in respect of CA and the Group illustrates: – robust protection for policyholders; and – a favourable position from which Chesnara, which relies on dividend distributions from CA, continues to service its loan commitments and to pursue and attractive dividend policy. The information in respect of Movestic also illustrates robust policyholder protection and provides the context in which Chesnara makes further capital contributions as the business expands. 40 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE Returns to shareholders The Board’s primary aim is to continue to provide an attractive dividend (cid:193)(cid:82)(cid:90)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) within the context of the emergence of surplus in the UK businesses. Returns to shareholders are underpinned by the emergence of surpluses in, and transfer of surpluses from, long-term insurance funds to shareholder funds and by the return on shareholder net assets representing shareholder net equity. These realisations are utilised in the ﬁrst instance for the repayment and servicing of debt. The surpluses arise from the realisation of in-force value of UK businesses, which are in run-off. The return on shareholder net assets is determined by the Group’s investment policy. Shareholder funds bear 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. Following the announcement of the acquisition of S&P on 20 December 2010 up to mid-March 2011, the share price steadily strengthened so that it was consistently trading within a range of 240p to 260p per share. Based on total proposed dividends for 2010 of 16.4p per share, this implied a yield of between 6.3% and 6.8%, with the shares trading at a discount of between 13% to 19% to the latest published embedded value of £354.6m at 31 December 2010. Over the period from mid-March 2011 to mid-November 2011 the share price declined steadily from a high in the range of 255p to 260p per share to a low in the range of 160p to 165p per share. This fall was largely driven by the decline in global investment markets and followed the fortunes of the life insurance sector as a whole. However, the share price from mid-November 2011 to mid-March 2012, ﬂuctuated within a range of 165p to 186p and did not reﬂect the upturn in the sector as a whole. Based on total proposed dividends for 2011 of 16.85p per share this implied a yield of between 9.1% and 10.2% with the shares trading at a discount of between 29% and 36% to EEV as at 31 December 2011. Over the period from mid-March to mid-July 2012 the share price showed no consistent sustained movement although it did dip to a two year low of 155p in April. From mid-July 2012 to late-March 2013 the share price has steadily strengthened reaching a high of 233p. From mid-February through to late-March 2013 the price has stabilised within a range of 217p to 233p per share. Based on the total proposed dividends for 2012 of 17.35p per share this implies a yield of between 8.0% and 7.5% with the shares trading at a discount of between 19.8% and 13.9% to EEV as at 31 December 2012. Returns to policyholders Key aspects of policyholder fund performance in respect of the UK Business are set out on page 20 and in respect of the Swedish Business on page 23. Liquidity 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. Going concern The Group’s cash ﬂow position described on page 32, 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 31 December 2012 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 normal 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. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 41 SECTION B PERFORMANCE 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 FSA, 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 established a Risk Committee in CA, 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 Board which also reviews reports from the compliance and internal audit functions. CA risks are summarised and reviewed by the Chesnara Audit & Risk Committee on a quarterly basis. The key risk registers have been designed to complement the production of Individual Capital Assessments, which we are required to submit to the FSA 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 subsidiary Movestic 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 continued through 2012 and are planned to be completed during 2014. Principal risks and uncertainties Risk 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. 42 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE (cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:192)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:88)(cid:81)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3) a description of their actual or potential impact and of the way in which the (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:86)(cid:72)(cid:72)(cid:78)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:192)(cid:70)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3) (cid:86)(cid:72)(cid:87)(cid:3)(cid:82)(cid:88)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:24)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:25)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3) (cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:16)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:192)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:17)(cid:3) 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. Adverse persistency experience Persistency rates signiﬁcantly lower than those assumed will lead to reduced Group proﬁtability in the medium to long-term. Expense overruns and unsustainable unit cost growth Signiﬁcant and prolonged equity and property market falls 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. 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 funds. – 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. – 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. – 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. – Individual fund mandates may give rise to a degree of diversiﬁcation of risk and within those funds, hedging techniques are used where appropriate. – Investment 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. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 43 SECTION B PERFORMANCE Risk Impact Control Adverse movements in yields on ﬁxed interest securities Adverse Sterling: Swedish Krona exchange rate movements Counterparty failure 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 in actuarial valuation interest rates. 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 maintains rigorous matching programmes to ensure that exposure to mismatching is minimised. – Active investment management such that, where appropriate, asset mixes will be changed to mitigate the potential adverse impact on declines in bond yields. – The Group monitors exchange rate movements and the cost of hedging the currency risk on cash ﬂows when appropriate. 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 fulﬁll contractual obligations The Group’s UK life and pensions businesses are heavily dependent on outsourced service providers to fulﬁll a signiﬁcant number of their core functions. In the event of failure by either or both service providers to fulﬁll 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 service providers. – The supplier relationship management approach is conducive to ensuring the outsource arrangements deliver obligations. – Under the terms of the contractual arrangements the Group may impose penalties and/or exercise step-in rights in the event of speciﬁed adverse circumstances. Key man dependency Adverse regulatory and legal changes The nature of the Group is such that, for both its Group-level functions and for its UK life and pensions operations, it relies on a small, professional team. There is, therefore, inevitably a concentration of experience and know how within particular key individuals and the Group is, accordingly, exposed to the sudden loss of the services of these individuals. – The Group promotes the sharing of know how 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. The Group operates in jurisdictions which are currently subject to signiﬁcant change arising from regulatory and legal requirements. These may either be of a local nature, or of a wider nature, following from EU-based regulation and law. Signiﬁcant issues which have arisen and where there is currently uncertainty as to their full impact on the Group include: i) the implementation of Solvency II requirements; and The current opinion is that the implementation of Solvency II will strengthen the long-term risk management environment of Chesnara (as is its intention). The Solvency II programme is covered in more detail on the following page. The key risks are mitigated as follows: – Proposed appointment of external specialist Quality Assurance partner; – Dedicated internal resource; and – Robust programme governance framework. Management continually reviews the potential impact of any ii) potential change in the regulatory prospective regulatory changes. environment in Sweden. 44 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION B PERFORMANCE FOCUS ON SOLVENCY 11 Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. Solvency II’s primary objective is to strengthen policyholder protection by aligning capital requirements more closely with the risk proﬁle of the company. The regime has a three pillar structure, with each pillar governing a different aspect of the Solvency II requirements and approach. As well as requiring ﬁrms to disclose their capital and risk frameworks, the Directive also asks ﬁrms to demonstrate how and where the requirements are embedded in their wider activities. The planned implementation date of 1 January 2014 is now widely accepted as not being achievable, with 1 January 2016 anticipated to be the likely new date, though this has yet to be formalised. However, it is expected that, during 2013, guidelines for interim measures will be issued, which will require ﬁrms to develop and implement various aspects of Solvency II in the lead up to the revised implementation date. Chesnara’s approach Pillar one Pillar 1 considers the quantitative requirements of the system, including the calculation of technical provisions and the rules relating to the calculation of the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR). Under Solvency II there are two prescribed methods for assessing an insurer’s SCR; either a Standard Formula set by the regulator or an Internal Model speciﬁc to that insurer and which is subject to regulatory approval. Chesnara has opted for the Standard Formula approach for both CA and Movestic on the grounds that it is a good ﬁt and appropriate for its businesses at the current time. However, we will continue to monitor our position on the choice of approach as our businesses evolve. Progress update The majority of the Pillar 1 development is now complete and the work to produce the Pillar 1 results for the CA and Movestic businesses will be undertaken during Q1 2013 and reported to the respective boards in Q1 and Q2 2013. We also expect to produce consolidated Pillar 1 results for the Group during Q2 2013. A decision will be taken in Q2 2013 as to whether any further Pillar 1 development is required. Pillar two Pillar 2 deals with two main areas: ﬁrstly, that our businesses have in place effective strategies and controls to assess and manage the risks it is exposed to and to assess and maintain its solvency capital based on its own risk proﬁle and, secondly, that its strategies, controls and assessment of its solvency capital are subject to supervisory review. This pillar requires us to produce either, an Own Risk and Solvency Assessment (ORSA) for each subsidiary and one for the Group or a single Group-wide ORSA. We will be producing an ORSA for each subsidiary and the Group ORSA. Each ORSA is subject to review and scrutiny by the relevant regulator who will have the power to impose a higher capital requirement should it ﬁnd any inadequacies in the approach to calculating the SCR or in the risk and governance controls in operation. Progress update Work is ongoing to enhance our Solvency II-compliant approach to risk management, business planning, projections, stress testing and solvency assessment. Work has also continued on drafting the various policies required under Solvency II and these are at various stages of development. We await clarity on the revised timetable and interim requirements before ﬁrming up on future plans. Pillar three Pillar 3 seeks to enhance market discipline on regulated ﬁrms by requiring them to disclose publicly key information that is relevant to market participants. As such, in choosing which information should be selected for disclosure under Pillar 3, supervisors will be guided by the actual needs of market participants rather than by their own information needs. The key reporting requirements are a Solvency & Financial Condition Report (SFCR) and a Regular Supervisory Report (RSR). The SFCR is for public disclosure and will follow a prescribed format. The RSR is not public and is only communicated to the relevant supervisor and, again, will largely follow a prescriptive format. Progress update To date, the main focus of Pillar 3 development has been on the analysis of the Quantitative Reporting Templates (QRTs). This work will identify the source of the data required for populating the QRTs and estimate the development work required to deliver the completed QRTs. The analysis is due to be completed at the end of Q1 2013. We await clarity on the revised timetable and interim requirements before ﬁrming up on future plans. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 45 46 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE IN THIS SECTION Governance Overview from the Chairman Board of Directors Board Proﬁle 48 49 50 51—55 Corporate Governance Report 56—60 Directors’ Remuneration Report 61—62 Audit & Risk Committee Report 63 64—65 Directors’ Report Corporate and Social Responsibility Statement CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 47 SECTION C GOVERNANCE GOVERNANCE OVERVIEW FROM THE CHAIRMAN This section of the Annual Report and Accounts provides me with the opportunity to comment on aspects of the management of the Company through 2012, with particular focus on how we are developing, or propose to develop, our Corporate Governance framework. Pages 6 to 13 provide an overview of the Company’s strategic objectives and of the risks to fulﬁlment of those objectives. Our Business Model is outlined on page 14. We employ various techniques in promoting fulﬁlment of our strategic objectives and in providing a suitable context for operational decision-making, including longer-term proﬁt, cash ﬂow and solvency projections for base case assumptions and for various stress scenarios. These lie at the heart of our management of the Company and are underpinned by sound Corporate Governance practices. We judge the effectiveness of our Corporate Governance practices and procedures, and assess the need for speciﬁc enhancement, according to the extent to which they provide assurance as to our ability to meet our strategic objectives and to manage operational challenges. The Board makes decisions on whether changes to current practice are required based on guidance, best practice in the industry and the particular circumstances of the Company. In forming our judgements we consider the intention behind recommended practices. Although Chesnara is not a FTSE 350 Company, we also explicitly consider the requirements for FTSE 350 Companies, such as annual re-election of directors. We noted the publication of the revised UK Corporate Governance Code by the FRC in September 2012 and reviewed the revisions against our existing practices, noting where changes would be required for the 2013 reporting year. The speciﬁc areas of development of our Corporate Governance practices and procedures during 2012 were: Board diversity – As planned, a formal policy has been developed with regard to Board diversity. Consideration of this policy formed part of the selection process for the new Non-executive Directors. Board effectiveness – A questionnaire approach was followed in 2012. Given the planned and agreed changes to Board composition we have decided to review the effectiveness of our current methodology and the value of its ﬁndings with that which may be provided by external evaluation. Annual re-election of Directors – This is not a formal requirement for the Company in view of its size. As mentioned previously, consideration was given to providing for the annual re-election of Non-executive Directors with effect from 2013. However, the signiﬁcant changes to the Board membership have resulted in the majority of Non-executive Directors being subject to election in 2013 so we plan to introduce annual re-election of Non-executive Directors with effect from 2014. We do not plan to extend this requirement to Executive Directors. UK stewardship code – We believe that this code issued by the Financial Reporting Council, together with subsequent clarifying changes are an important aspect of governance and we regularly discuss, with our fund managers, their approach to active management with the companies in which our portfolios are invested. The following sections set out in more detail our Corporate Governance arrangements and the extent of our compliance with the provisions of the UK Corporate Governance Code. An overview of the activities of the Remuneration Committee is set out on page 56 and of the Audit & Risk Committee on page 61. Peter Mason Chairman 27 March 2013 48 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE BOARD OF DIRECTORS Peter Mason was appointed as Chairman of Chesnara plc and Chairman of the Nomination Committee on 1 January 2009. He was re-appointed as a member of the Remuneration and Audit & Risk Committees with effect from 22 December 2009 and was appointed as Chairman of Movestic Livförsäkring AB with effect from 23 July 2009. He is currently the Investment Director and Actuary of Neville James Group, an investment management company. He was admitted as a Fellow of the Institute of Actuaries in 1979. Graham Kettleborough is the Chief Executive of Chesnara plc. He joined Countrywide Assured plc in July 2000 with responsibility for marketing and business development and was appointed as Managing Director and to the Board in July 2002. He was appointed as a Non-executive Director of Movestic Livförsäkring AB and as Chairman of Movestic Kapitalförvaltning AB with effect from 23 July 2009. Prior to joining Countrywide Assured plc, he was Head of Servicing and a Director of the Pension Trustee Company at Scottish Provident. He has lifetime experience in the ﬁnancial services industry, primarily in customer service, marketing, product and business development, gained with Scottish Provident, Proliﬁc Life, City of Westminster Assurance and Target Life. Ken Romney is the Finance Director of Chesnara plc. He joined Countrywide Assured plc in 1989 and became a member of the Board in 1997. He has worked in the life assurance industry for the last 28 years. He was Chief Accountant at Laurentian Life (formerly Imperial Trident) up to 1987 and was Financial Controller at Sentinel Life between 1987 and 1989. He worked for Price Waterhouse in their audit division until 1983 in both the UK and South Africa. He is a Fellow of the Institute of Chartered Accountants in England and Wales. Frank Hughes is the Business Services Director of Chesnara plc. He joined Countrywide Assured plc in November 1992 as an IT Project Manager and was appointed to the Board as IT Director in May 2002. He has 26 years’ experience in the life assurance industry gained with Royal Life, Norwich Union and CMG. Mike Gordon is an Independent Non-executive Director of Chesnara plc and is Chairman of the Remuneration Committee. He was appointed as Senior Independent Non-executive Director of Chesnara plc on 1 January 2009. He also serves on the Audit & Risk Committee and the Nomination Committee and was appointed as a Non-executive Director of Movestic Livförsäkring AB with effect from 23 July 2009. He spent 12 years as Group Sales Director of Skandia Life Assurance Holdings. Terry Marris is an Independent Non-executive Director of Chesnara plc and serves on the Audit & Risk Committee, the Remuneration Committee and the Nomination Committee. He joined Countrywide Assured Group plc in 1992 and was Managing Director of Countrywide Assured plc until July 2002. Previous roles included senior management positions at Lloyds Bank and General Accident. Peter Wright is an Independent Non-executive Director who was appointed to the Chesnara plc Board on 1 January 2009. At the same date he was appointed as Chairman of the Audit & Risk Committee and as a member of the Remuneration Committee. He was appointed as a member of the Nomination Committee with effect from 9 July 2009. He retired as a Principal of Towers Perrin on 1 January 2008 and is a former Vice President of the Institute of Actuaries, having been admitted as a Fellow in 1979. He is Chairman of the Risk Committee and of the With-proﬁts Committee of Countrywide Assured plc. Veronica France is an Independent Non-executive Director who was appointed to the Chesnara plc Board on 16 January 2013. She serves on the Nomination, Remuneration and Audit & Risk Committees and will chair the Remuneration Committee when Mike Gordon steps down on 17 May 2013. She also serves on the Countrywide Assured Risk Committee and With-proﬁts Committee. She is currently a Non-executive Director of Family Assurance where she sits on their Risk and Audit and Nominations Committees and chairs their Remuneration Committee. Since 1992 Veronica has run her own ﬁnancial services consultancy business advising on strategy, business development, product development and related activities. Veronica was Chairman of the trade body, the Investment and Life Assurance Group in 2002/3 and served on its Management Committee for over ten years before stepping down in 2010. David Brand is an Independent Non-executive Director who was appointed to the Chesnara plc Board and the Board of Movestic Livförsäkring AB with effect from 16 January 2013. He serves on the Nomination, Remuneration Committee and Audit & Risk Committees. He is a qualiﬁed actuary who, prior to his retirement in June 2012, had worked for the Hannover Re Group in the UK, acting as the Managing Director of the UK life reinsurance subsidiary since 2003. David had been with the company since 1988, and a Director since 1990. During his career David has also held various roles with the Institute of Actuaries, including being a member of Council and he also served on the ABI Health Committee from 2006 to 2012. Mike Evans is an Independent Non-executive Director who was appointed to the Chesnara plc Board on 4 March 2013. He serves on the Audit & Risk, Nomination and Remuneration Committees . Mike will become Senior Independent Director on the retirement of Mike Gordon on 17 May 2013. He is currently Non-executive Chairman of Hargreaves Lansdown plc, a FTSE 100 listed company, a position he has held since 2009. He originally joined the Hargreaves Lansdown Board as a Non-executive Director in 2006 and has served on their Nominations, Remuneration and Audit Committees. Mike is also a Non-executive Director of CBRE Global Investors Group (UK) and a member of the advisory board of Spectrum Corporate Finance. Mike is a qualiﬁed actuary and served in a number of director-level positions within Skandia UK between 1991 and 2006. David Rimmington is to replace Ken Romney as Group Finance Director with effect from 17 May 2013, subject to approval at the AGM. He trained as a chartered accountant with KPMG, has more than 17 years’ experience in ﬁnancial management within the life assurance and banking sectors and has had a signiﬁcant role in a number of major acquisitions and business integrations. Prior to joining Chesnara plc in 2011 as Associate Finance Director David held a number of ﬁnancial management positions within the Royal London Group including 6 years as Head of Group Management Reporting. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 49 SECTION C GOVERNANCE BOARD PROFILE In its assessment of the effectiveness of the Board Chesnara includes consideration of the core competencies required to govern the Group and deliver strategic objectives. This part of the assessment focuses on ensuring the appropriate breadth and depth of competencies and experience. A competency matrix is deﬁned for the Board which is aligned to the strategic objectives set out on pages 10 to 13. Each Board member is assessed and scored against the core competencies and cumulative scores provide a competency proﬁle for the Board as a whole, as set out below. The proﬁle is used to ensure that the Board as a whole possesses an appropriate skills and experience base for effective governance of the Group. The chart below compares the position as at 31 December 2011 with the expected Board composition following the changes in Non-executive Directors and the change in Group Finance Director which are subject to approval at the AGM on 17 May 2013. Highlights of the current proﬁle and including changes compared with 2011 are: – In general the proposed Board changes tend to have a positive impact on the lower-ranking competency measures at the expense of a slight adverse impact on the very high ranking measures, thereby creating a general improvement in the balance of the overall Board competency proﬁle. – In particular, the fact that members with a long established involvement with Chesnara plc are to be replaced, will have an inevitable temporary adverse impact on the Chesnara Company knowledge measure. This is more than compensated for by the general improvement in the level of Investment Management, Operational Management and other competencies. – The changes result in a short-term reduction in the overall level of knowledge of the Swedish business. Induction programmes and ongoing familiarisation are expected to have a positive impact such that any deterioration will be of a transitional nature. Notwithstanding this, the level of knowledge of the Swedish Insurance market is adequate to enable effective Board oversight of the Swedish business for which the deeper specialist knowledge is devolved to the local Board and executive management team. A B C D E F G H I J K 2011 2012 A Chesnara Company Knowledge B Industry Knowledge – UK C Industry Knowledge – Sweden D Governance – Actuarial E Governance – Financial F Audit & Risk Management G Investment Management H M&A and Business Development I Commercial Management J Operational Change Management K Operational Management 50 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE CORPORATE GOVERNANCE REPORT The Directors are committed to achieving a high standard of corporate governance including compliance with the principles and practices of the UK Corporate Governance Code (the ‘Code’), as published by the Financial Reporting Council in June 2010 and updated in September 2012. The following statement, together with the Directors’ Remuneration Report on pages 56 to 60 and the Audit & Risk Committee Report on pages 61 to 62 describes how the principles set out in the Code have been applied by the Company and details the Company’s compliance with the Code’s provisions for the year ended 31 December 2012. During the year under review the UK life and pensions businesses of the Group subsisted in one UK subsidiary company being Countrywide Assured plc. Compliance with the Code The Company has complied throughout the year with all of the relevant provisions of the Code. The Board For the year ended 31 December 2012, the Board comprised a Non-executive Chairman, three other Non-executive Directors and three Executive Directors, each of whom served throughout the period under review. Since the end of the year, there have been changes to the Board membership with more changes planned with effect from the Annual General Meeting on 17 May 2013. Two new Non-executive Directors, Veronica France and David Brand, were appointed to the Board with effect from 16 January 2013. A further Non-executive Director, Mike Evans was appointed to the Board on 4 March 2013. Two of the existing Non-executive Directors, Mike Gordon and Terry Marris have announced their intention to step down from the Board with effect from 17 May 2013, the date of the Annual General Meeting. Mike Gordon is currently chairman of the Remuneration Committee and that role will be assumed by Veronica France from 17 May 2013. Mike Evans will assume the role of Senior Independent Director when Mike Gordon steps down on 17 May 2013. In addition, it has been announced that Ken Romney will step down from the Board and will leave the Company on 17 May 2013, with David Rimmington to be appointed to the Board as Finance Director from that date. Biographical details of all current and proposed Directors are given on page 49 and a Board Proﬁle, which assesses the core competencies required to meet strategic objectives, is provided on page 50. The Board, which plans to meet eight times during the year, has a schedule, which it reviews annually, of matters reserved for its consideration and approval. These matters include: – setting corporate strategy; – approving the annual budget and medium-term projections; – reviewing operational and ﬁnancial performance; – approving acquisitions, investments and capital expenditure; – reviewing the Group’s system of ﬁnancial and business controls and risk management and setting risk appetite parameters; – approving appointments to the Board and to its Committees; – appointment of the Company Secretary; and – approval of policies relating to Directors’ remuneration. In addition: i) the Directors of the Company are also the Directors of Countrywide Assured plc (‘CA’), in which the UK-based life and pensions business of the Group subsists. Under FSA Prudential Regulation the Directors of CA have responsibility for maintenance and projections of solvency and for assessment of capital requirements, based on risk assessments, and for establishing the level of long-term business provisions, including the adoption of appropriate assumptions; ii) three Directors of the Company, being Messrs Mason, Kettleborough and Brand, are also Directors of Movestic Livförsäkring AB (‘Movestic’), the principal subsidiary company in which the Swedish-based life and pensions business of the Group subsists. Under regulation by Finansinspektionen, the Directors of Movestic have responsibility for ensuring that Movestic complies with regulatory solvency requirements. Mike Gordon will step down from the Movestic Board when he leaves the Chesnara Board on 17 May 2013. The responsibilities that the Board has delegated to the respective Executive Management teams, of the UK and Swedish businesses include: the implementation of the strategies and policies of the Group as determined by the Board; monitoring of operational and ﬁnancial results against plans and budget; prioritising the allocation of capital, technical and human resources and developing and managing risk management systems. The roles of the Chairman and Chief Executive The division of responsibilities between the Chairman of the Board, Peter Mason, and the Chief Executive, Graham Kettleborough, is clearly deﬁned and has been approved by the Board. The Chairman leads the Board in the determination of its strategy and in the achievement of its objectives and is responsible for organising the business of the Board, ensuring its effectiveness and setting its agenda. The Chairman has no day-to-day involvement in the management of the Group. The Chief Executive has direct charge of the Group on a day-to-day basis and is accountable to the Board for the ﬁnancial and operational performance of the Group. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 51 SECTION C GOVERNANCE CORPORATE GOVERNANCE REPORT (CONTINUED) Senior Independent Director The Board has designated Mike Gordon as Senior Independent Director. He is available to meet shareholders on request and to ensure that the Board is aware of shareholder concerns not resolved through the existing mechanisms for shareholder communication. Mike will be stepping down from the Board on 17 May 2013 and, with effect from that date, Mike Evans will assume the role of Senior Independent Director. Directors and Directors’ independence The Board considers that Peter Mason was independent on his appointment as Chairman on 1 January 2009. In making this determination, the Board has carefully considered the fact that he is also a Non-executive Director of Countrywide Assured plc, a position which he has held since 1 October 1990, and a Non-executive Director of Countrywide Assured Life Holdings Limited (‘CALHL’), the parent company of Countrywide Assured plc, a position he has held since 18 November 1991. The Board considers that all Non-executive Directors are independent. In making this determination, the Board has carefully considered the following speciﬁc matters: i) Terry Marris had, within ﬁve years of his appointment, been an employee of a subsidiary company within the Group, which was acquired by the Company on 24 May 2004. He also held the position of Managing Director of Countrywide Assured plc, the principal operating life assurance subsidiary of the group prior to the acquisition of CA by the Company. He resigned these positions in July 2002; and ii) Peter Wright had, within the last three years prior to his appointment, held regulatory actuarial roles at Countrywide Assured plc and had otherwise provided actuarially-based consultancy advice, all such services being provided under an agreement with his employer at the time, Tillinghast Towers Perrin. There were no comparable matters to consider in respect of Mike Gordon, Veronica France, David Brand or Mike Evans. With regard to Peter Mason and Terry Marris, the Board considers that the characteristics, aims and mode of operation of the relevant activities of the Company are sufﬁciently different from those prevailing when they held the relevant positions, that the judgement and independence of mind exercised on behalf of the Company are not adversely affected or circumscribed. The Board is of the view that their considerable speciﬁc experience and knowledge in the business of the Group outweighs any residual risk in the historical relationships described above. With regard to Peter Wright, the nature of the services he provided, being subject either to FSA regulation or to professional standards and guidance prescribed or issued variously by the Institute of Actuaries or by the Financial Reporting Council Board of Actuarial Standards, was such that he was required to maintain a vigorous independence of mind and to prepare recommendations in accordance with the highest professional standards. The Board is satisﬁed that the overall balance of the Board continues to provide signiﬁcant independence of mind and judgement and further considers that, taking the Board as a whole, the Independent Directors are of sufﬁcient calibre and number that their views carry signiﬁcant weight in the Company’s decision making. The changes in Board membership are seen as a further enhancement of the Board’s skills, diversity and experience and formal induction and training have been provided to new Non-executive Directors to ensure the Board continues to operate effectively. The Directors are given access to independent professional advice, at the Company’s expense, when the Directors deem it necessary, in order for them to carry out their responsibilities. Details of the Chairman’s professional commitments are included in his biography on page 49. The Board is satisﬁed that these are not such as to interfere with his performance, which is based around a commitment of between ﬁfty and sixty hours in any three-month period. Professional development The Directors were advised, on their appointment, of their legal and other duties and obligations as Directors of a listed Company. This has been supplemented by the adoption and circulation to each Director of a written Code of Conduct, covering all aspects of the speciﬁc operation of Corporate Governance standards and of policies and procedures within the Group. Throughout their period in ofﬁce, the Directors have, through the conduct of business at scheduled Board meetings, been continually updated on the Group’s business and on the competitive and regulatory environment in which it operates. Through their membership of the CA Board all of the Directors who served during the period under review have considerable knowledge and experience of the UK-based businesses of the Chesnara plc Group. Similarly, Messrs Mason, Kettleborough, Brand and Gordon, through their membership of the Movestic Board, have considerable knowledge and experience of the Swedish-based business of the Group. Information Regular reports and information are circulated to the Directors in a timely manner in preparation for Board and Committee meetings. As stated above, the Company’s Directors are also variously members of the Boards of CA and Movestic. These Boards hold scheduled quarterly meetings, which are serviced by detailed regular reports and information, which cover all of the key areas relevant to the direction and operation of that subsidiary including: For CA: – Earnings report; – Report from the Actuarial Function Holder and With-proﬁts Actuary; – Compliance report; – Investment report; and – Outsourcing reports. CA monitors risk management procedures, including the identiﬁcation, measurement and control of risk through the ofﬁces of a Risk Committee. This committee is accountable to and reports to its Board on a quarterly basis. 52 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE In addition, annual reports are produced which cover an assessment of the capital requirements of the life assurance subsidiary, its ﬁnancial condition and a review of risk management and internal control systems. comparisons. Individual Director assessments were supplemented by discussions between the Chairman and each Director on a one-to-one basis. For Movestic: – Earnings report; – Operating reports, including sales and fund performance; – Financial risk report; – General risk report, including an estimate of risk-based capital, in accordance with Swedish regulatory requirements; – Compliance report; and – Report on subsidiaries and the associated company. In addition, Movestic is required to submit to the Chesnara Audit & Risk Committee a quarterly risk report, an annual report on risk management and internal control systems and all internal audit reports. On a monthly basis, the Directors receive summary high level information, relating to total Group operations, prepared by the Group Chief Executive, which enables them to maintain continuing oversight of the Group’s and management’s performance against objectives. In addition to these structured processes, the papers are supplemented by information which the Directors require from time to time in connection with major events and developments, where critical views and judgements are required of Board members outside the normal reporting cycle. Performance evaluation During the period under review the Chairman undertook a formal performance evaluation of the Board, of individual Directors and of the Audit & Risk, Remuneration and Nomination Committees. To that end he devised a series of questionnaires to provide a framework for the evaluation process and to provide a means of making year-on-year In addition, and using similar methods to those described above, the Non-executive Directors, led by the Senior Independent Director, met to conduct a performance evaluation of the Chairman. The Company Secretariat facilitated the process to ensure that the performance evaluations were conducted in a timely and objective manner while the Head of Internal Audit, reporting to the Chairman of the Group Audit & Risk Committee, monitors the assessment and follow through of the issues arising in the evaluation process. As stated previously the Board will be reviewing its approach to the evaluation of Board effectiveness during 2013. Company Secretary The Company Secretary is responsible for advising the Board, through the Chairman, on all governance matters. For the period under review, Mary Fishwick held the position of Company Secretary. The Directors have access to the advice and services of the Company Secretary. Board committees The Board has established the committees set out below to assist in the execution of its duties. Each of these committees operates according to written terms of reference and the Chairman of each committee reports to the Board. The constitution and terms of reference of each committee are reviewed at least annually to ensure that the committees are operating effectively and that any changes considered necessary are recommended to the Board for approval. During the year the terms of reference of all the committees were reviewed and changes made, where required, to reﬂect updated guidance on corporate governance. The terms of reference of each committee are available on the Company’s website at www.chesnara.co.uk or, upon request, from the Company Secretary. The attendance record of each of the Directors at scheduled Board and Committee meetings for the period under review is: Peter Mason – Non-executive Chairman Terry Marris – Non-executive Director Mike Gordon – Non-executive Director Peter Wright – Non-executive Director Graham Kettleborough – Executive Director Ken Romney – Executive Director Frank Hughes – Executive Director Veronica France – Non-executive Director (appointed 16/1/13) David Brand – Non-executive Director (appointed 16/1/13) Scheduled Board Nomination Committee Remuneration Committee Audit & Risk Committee 8 (8 ) 8 (8 ) 6 (8 ) 8 (8 ) 8 (8 ) 8 (8 ) 8 (8 ) 1(1 ) 1(1 ) 2 (2 ) 2 (2 ) 2 (2 ) 2 (2 ) n/a n/a n/a 0(0 ) 0(0 ) 2 (2 ) 2 (2 ) 2 (2 ) 2 (2 ) n/a n/a n/a 0(0 ) 0(0 ) 6 (6 ) 6 (6 ) 5 (6 ) 6 (6 ) n/a n/a n/a 1(1 ) 1(1 ) The ﬁgures in brackets indicate the maximum number of meetings in the period during which the individual was a Board or Committee member. The information above relates to the period from 1 February 2012 to 31 January 2013 and, therefore, excludes Mike Evans who was appointed on 4 March 2013. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 53 SECTION C GOVERNANCE CORPORATE GOVERNANCE REPORT (CONTINUED) Nomination Committee During the whole of the period under review, the Nomination Committee comprised Peter Mason who also served as Chairman of the Committee, Terry Marris, Mike Gordon and Peter Wright. David Brand and Veronica France joined the Committee on 16 January 2013 and Mike Evans joined the Committee on 4 March 2013. The Committee considers the mix of skills and experience that the Board requires and seeks the appointment of Directors to ensure that the Board is effective in discharging its responsibilities. During the period, the Committee met four times. The two scheduled meetings considered the continuing mix of skills and experience of the Directors, whilst the two extra meetings considered proposed changes to the Directorate. Remuneration Committee Full details of the composition and work of the Remuneration Committee are provided in the Directors’ Remuneration Report on pages 56 to 60. Audit & Risk Committee Full details of the composition and work of the Audit & Risk Committee are provided in the Audit & Risk Committee Report on pages 61 to 62. Auditor independence and objectivity The external Auditor, Deloitte LLP and its associates, provide some non-audit services primarily in the provision of taxation and regulatory advice and in relation to corporate transactions that may arise from time to time. In order to ensure that auditor objectivity and independence are safeguarded, the following procedures have been put in place: Audit-related services These relate to formalities such as shareholder and other circulars, regulatory reports and work on acquisitions. This is work that the external Auditor performs in its capacity as Auditor, where the nature of the work is closely allied to that on the audit of the annual ﬁnancial statements. Accordingly, this work will be undertaken by the external Auditor unless unusual circumstances apply. Tax advice The external Auditor will be used when particularly relevant and all other signiﬁcant tax advice will be put out to tender. General advice The external Auditor will be invited to tender, provided that both parties are satisﬁed that the nature of the contract will not present a threat to the independence of the Auditor. These safeguards have been approved by the Audit & Risk Committee and it is intended that they will be reviewed when required in the light of internal developments or of changes in the external circumstances of the Company. The Auditor reports to both the Directors and the Audit & Risk Committee with regard to compliance with professional and regulatory requirements and best practice. Details of the fees paid to the external Auditor, and its associates, for both audit and non-audit services during the year are provided in Note 15 to the ﬁnancial statements. Relations with shareholders The Chief Executive, Graham Kettleborough, and the Finance Director, Ken Romney, meet with institutional shareholders on a regular basis and are available for additional meetings when required. Should they consider it appropriate, institutional shareholders are able to meet with the Chairman, the Senior Independent Director and any other Director. The Chairman is responsible for ensuring that appropriate channels of communication are established between the Chief Executive and the Finance Director on the one part and the shareholders on the other and is responsible for ensuring that the views of shareholders are known to the Board. This includes twice yearly feedback prepared by the Group’s brokers on meetings the Executive Directors have held with institutional shareholders. Annual and interim reports are distributed to other parties who may have an interest in the Group’s performance and those reports, together with a wide range of information of interest to existing and potential shareholders, are made available on the Company’s website, www.chesnara.co.uk 54 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE Regular meetings are also held with industry analysts and commentators so that they are better informed in formulating opinions and making judgements on the Group’s performance. – the Movestic Board and Chief Executive have responsibility for ensuring that the organisation and management of the operation are characterised by sound internal control, which is responsive to internal and external risks and to changes in them; – the Movestic Board has responsibility for the satisfactory management and control of risks through the speciﬁcation of internal procedures; and – there is an explicit risk control function, which is supported by compliance and internal control functions. Private investors are encouraged to attend the Annual General Meeting (‘AGM’) at which the opportunity is provided to ask questions on each proposed resolution. The Chairmen of the Board Committees will be available to answer such questions as appropriate. Details of the resolutions to be proposed at the AGM on 17 May 2013 can be found in the notice of the meeting on pages 174 to 177. Internal control The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. In establishing the system of internal control, the Directors have regard to the signiﬁcance of relevant risks, the likelihood of risks occurring and the costs of mitigating risks. It is, therefore, designed to manage rather than eliminate the risks which might prevent the Company meeting its objectives and, accordingly, only provides reasonable, but not absolute, assurance against the risk of material misstatement or loss. In accordance with ‘Internal Control: Guidance for Directors on the Combined Code’ (The ‘Turnbull Guidance’) the Board conﬁrms that there is an ongoing process for identifying, evaluating and managing the signiﬁcant risks faced by the Group, that this process has been in place for the year under review and up to the date of approval of the Annual Report and Accounts, and that the process is regularly reviewed by the Board and accords with the guidance. In accordance with the regulatory requirements of the FSA, CA has established and maintained a risk and responsibility regime. This ensures that the identiﬁcation, assessment and control of risk are ﬁrmly embedded within the organisation and that there are procedures for monitoring and update of the same. The CA Risk Management function reviews and reports quarterly on this regime to the CA Board. The Group also maintains a Key Risk Register which ensures that there is identiﬁcation, assessment and control of the signiﬁcant risks subsisting within the Company, CA and Movestic. The maintenance of the key risk registers is the responsibility of executive management, who respectively report on them quarterly to the CA Risk Committee and to each Chesnara Audit & Risk Committee meeting. In accordance with the requirements of the Swedish regulator, the Finansinspektionen, Movestic has also established and maintained a risk and responsibility regime, which requires inter alia that: As an integral part of this regime Movestic also maintains a detailed risk register, which identiﬁes, monitors and assesses risk by appropriate classiﬁcation of risk. As stated above, all of the Chesnara Directors are also members of the CA Board and the Company thereby has effective oversight of the maintenance and effectiveness of controls subsisting within CA. Regarding Movestic, such oversight is exercised by way of the membership of at least three of the Chesnara Directors of the Movestic Board, together with quarterly reporting by Movestic to the Chesnara Audit & Risk Committee. In addition, the Chesnara Board conﬁrms that it has undertaken a formal annual review of the effectiveness of the system of internal control for the year ended 31 December 2012, and that it has taken account of material developments between that date and the date of approval of the Annual Report and Accounts. The Board conﬁrms that these reviews took account of reports by the internal audit functions on the operation of controls, internal ﬁnancial controls, and management assurance on the maintenance of controls and reports from the external Auditor on matters identiﬁed in the course of statutory audit work. The Board also conﬁrms the continuing appropriateness of the maintenance of a Group Internal Audit Function, which reports to the Chairman of the Audit & Risk Committee. Going concern The Directors’ Statement on Going Concern is included in the Directors’ Report on page 65. Directors The present Directors of the Company and their biographical details are set out on page 49. The Directors beneﬁted from qualifying third party indemnity provisions in place during the years ended 31 December 2011 and 31 December 2012 and the period to 27 March 2013. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 55 SECTION C GOVERNANCE DIRECTORS’ REMUNERATION REPORT The Remuneration Committee The Remuneration Committee (the ‘Committee’) determines the overall pay policy and the remuneration packages and service contracts of the Executive Directors of the Company, including the operation of bonus schemes. It also monitors the remuneration of other senior employees within the Chesnara Group. During the period under review the Committee comprised of the Non-executive Directors: Mike Gordon (who also acted as Chairman), Peter Wright, Terry Marris and Peter Mason, who is Chairman of the Group. The Company Secretary, Mary Fishwick, acts as Secretary to the Committee, and provides advice on legal and regulatory issues relating to remuneration policy. At the request of the Committee, Graham Kettleborough, the Chief Executive, also attends and makes recommendations to the Committee regarding changes to the remuneration packages of individual Directors (excluding himself) or to policy generally. Such recommendations are discussed by the Committee and adopted or amended as it sees ﬁt. No Executive Director is present at any part of the Committee meeting at which his own remuneration or contractual terms are being discussed. The membership and terms of reference of the Committee are reviewed at least annually and the terms of reference are available on the Company’s website at www.chesnara.co.uk or, upon request, from the Company Secretary. Details of the number of meetings held and the attendance can be found in the Corporate Governance Report on page 53. Veronica France and David Brand joined the Committee on their appointment as Directors of the Group on 16 January 2013. Mike Evans joined the Committee on his appointment as a Director of the Group on 4 March 2013. Mike Gordon and Terry Marris will be leaving the Group, and the Committee, on 17 May 2013 at which time Veronica France will become Chairman of the Remuneration Committee. The Committee also receives updates on pay and employment conditions applying to other Group employees: these are taken into consideration when setting Executive Directors’ remuneration, consistent with the Group’s general aim of seeking to reward all employees fairly according to the nature of their role, their performance and market forces. The Company has in place the Annual Bonus Scheme and the 2012 Long-Term Incentive Plan, which are designed to incentivise and retain the Executive Directors. These bonus schemes, which are cash-based, reward the achievement of corporate targets and are therefore aligned with the delivery of value to shareholders. Neither the beneﬁts under the Annual Bonus Scheme nor those under the 2012 Long-Term Incentive Plan are pensionable. The Committee may award other discretionary bonuses to the Executive Directors where it considers extraordinary value has been created or signiﬁcant achievement has occurred. In addition, the Company has established frameworks for approved and unapproved discretionary Share Option Plans, neither of which have been utilised to date. A Sharesave Plan was launched to all UK employees of the Group, including Executive Directors, in October 2011. The Committee has made no changes to the terms of the Annual Bonus Scheme or the Long-Term Incentive Plan. Details of these are provided on the following pages. Remuneration policy The Committee aims to set remuneration at an appropriate level to attract, retain and motivate executives of the necessary calibre. An annual review of remuneration is undertaken to ensure reward levels are appropriate to the duties and responsibilities of the roles with (cid:68)(cid:3)(cid:86)(cid:88)(cid:76)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:192)(cid:91)(cid:72)(cid:71)(cid:3) and variable elements of overall reward. In determining salary levels due regard is given to external (cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:82)(cid:87)(cid:75)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) services sector companies and listed companies of similar size. During the period under review the Committee benchmarked the Chief Executive’s beneﬁts package against industry peers and listed companies with a similar market capitalisation with the assistance of New Bridge Street, a leading beneﬁts consultancy. The review led, from 1 January 2013, to an increase of £30,000 per annum to the Chief Executive’s salary and, in order to retain relativity, an increase in the Business Services Director’s salary of £20,000 per annum. Pension contributions and other associated beneﬁts increased in line with the adjustment to basic salary. The Committee is satisﬁed that these revised levels of beneﬁt are deserved and suitably rewarding whilst noting that they remain below the average when compared to both industry and market peers. 56 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE Bonus Schemes Annual Bonus Scheme The Annual Bonus Scheme is designed to incentivise the Executive Directors. The overall maximum award is limited to 100% of basic salary in the year to which the reward relates. Furthermore there is an overall cap which applies to reward under this scheme and beneﬁt derived from the Long-Term Incentive Plan where, together, the total reward is subject to the same cap of 100% of basic salary. The Annual Bonus Scheme is based on Group performance and was designed to ensure that Executive Directors’ awards were closely aligned to shareholders’ interests on this element of the scheme. It was, therefore, based upon the level of achievement of budgeted IFRS pre-tax proﬁt. These arrangements can be summarised as follows: Element Award Group performance IFRS pre-tax proﬁt: Less than 75% of budget Nil (increasing on a straight- line basis up to 100%) 2012 Long-Term Incentive Plan The 2012 Long-Term Incentive Plan was designed as a long-term cash-based incentive for Executive Directors. As the business is predominantly a run-off proposition the Remuneration Committee remains of the opinion that a cash-based scheme is the most appropriate form of reward. The 2012 Long-Term Incentive Plan for Executive Directors was designed to align Executive Director reward with shareholder value and dividend experience. The scheme: i) is based on achievement of Group Embedded Value target at the end of 2014; ii) reﬂects the share price performance, as related to the Group Embedded Value, during the three year period after allowing for dividend payments; iii) rewards on a sliding scale from 0% of basic annual salary on achievement of 75% of target to 21.05% of basic annual salary on achievement of target, continuing on a straight-line basis if target is exceeded; and iv) together with the annual bonus, generated in respect of 2012, would normally be capped, on award, at 100% of 2012 basic salary. At 100% of budget 15.79% of basic salary At or greater than 100% of budget Increases on a straight- line basis The table below summarises potential long-term incentive plan awards made to Executive Directors for each of the relevant plans covered by this report. Potential award under the 2012 Scheme £71,292 £nil £43,698 Graham Kettleborough Ken Romney Frank Hughes The 2011 LTIP scheme resulted in no awards. The table below sets out the details of the awards made to the Executive Directors under the scheme in 2012. Annual Bonus Scheme – awards made in respect of year ended 31 December 2012 The target for awards is based on IFRS pre-tax proﬁt with certain adjustments. The target proﬁt on this basis was set out at £16.407m. The result, on an equivalent adjusted basis, was £29.532m. This represents an achievement of 178.89% of the target. Consequently the awards are: Graham Kettleborough Ken Romney Frank Hughes Total £’s 190,419 129,683 116,716 436,818 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 57 SECTION C GOVERNANCE DIRECTORS’ REMUNERATION REPORT (CONTINUED) The 2013 Long-Term Incentive Plan The 2013 Long-Term Incentive Plan for Executive Directors follows the format of the 2012 Plan and is designed to align Executive Director reward with shareholder value and dividend experience. It will: i) be based on achievement of Group Embedded Value target at the end of 2015; ii) reﬂect the share price performance, as related to the Group Embedded Value, during the three year period after allowing for dividend payments; iii) reward on a sliding scale from 0% of basic annual salary on achievement of 75% of target to 21.05% of basic annual salary on achievement of target, continuing on a straight-line basis if target is exceeded; and iv) together with the annual bonus, generated in respect of 2013, be normally capped, on award, at 100% of 2013 basic salary. Discretionary bonus The exceptional proﬁt arising from the purchase of Movestic in 2009 was excluded from the calculation of bonus under both the Annual Bonus Scheme and the Long-term Incentive Plan in that year. The Remuneration Committee decided that extraordinary value had been created as a result of the transaction and awarded discretionary bonuses to the Executive Directors. Half of the award was paid at the end of 2009 and the remaining half, which was accrued for, became payable on 31 December 2012 subject to the Embedded Value of Movestic being higher on 31 December 2012 than on 31 December 2009 after allowing for capital contributions made by the Group to Movestic. This condition has been satisﬁed and therefore the following bonuses become payable: Graham Kettleborough Ken Romney Frank Hughes The bonuses are non-pensionable. £’s 75,000 50,000 25,000 Movestic A scheme based on the increase in Movestic’s Embedded Value (excluding any capital contributions from the Group) was implemented for a limited number of senior managers within Movestic. Forty per cent of the award is paid at the end of the year in which it is earned with the remaining 60% being deferred for three years. Awards made under this scheme in 2012 were: Lars Nordstrand Anna Schöld Per Friman SEK 712,000 356,000 178,000 No awards were made under this scheme in respect of 2011. Share options The Board has established frameworks for approved and unapproved discretionary Share Option Plans which may, at the discretion of the Committee, be utilised for granting options to Executive Directors and other employees. During 2012 no such options were granted. The Group made an offering under a Sharesave Plan to all UK employees of the Group in October 2011 following approval of the scheme by shareholders at the 2011 Annual General Meeting. Service contracts The Executive Directors, who were all appointed on 1 March 2004, have service contracts with a rolling twelve-month notice period. On appointment to the Finance Director role and the Board, David Rimmington will have a service contract with a rolling 12 month notice period. Compensation on termination of service contracts will be decided on a case-by-case basis having regard to the particular circumstances. Pension policy The Executive Directors beneﬁt from employer contributions to either the Chesnara plc Stakeholder Scheme or their personal SIPP arrangements at rates agreed by the Remuneration Committee. Employer contributions to the respective schemes are detailed on page 60. Other beneﬁts Executive Directors’ remuneration also includes non- pensionable beneﬁts in kind by way of a fully-expensed company car, life assurance and private medical insurance. Non-executive Directors The remuneration of the Non-executive Directors is determined by the Board as a whole in accordance with the Articles of Association. Non-executive Directors do not have service contracts with the Company, neither are they eligible for bonuses, pensions or participation in Company share option schemes. The dates of expiry of their terms of appointment are: Date of expiry of term of appointment Peter Mason Mike Gordon Terry Marris Peter Wright Veronica France David Brand Mike Evans 31 October 2014 30 April 2014 1 March 2016 31 December 2014 15 January 2016 15 January 2016 3 March 2016 Mike Gordon and Terry Marris are retiring as Non-executive Directors on 17 May 2013. Resolutions proposing the election of Veronica France, David Brand and Mike Evans will be tabled at the forthcoming AGM. Executive Directors Ken Romney is retiring as Finance Director and from the Board, on 17 May 2013. A resolution proposing the election of David Rimmington to the Board will be tabled at the AGM. On appointment David will become the Finance Director. Frank Hughes, an Executive Director, retires by rotation at the end of the forthcoming AGM, at which a resolution proposing his re-election will be tabled. 58 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE Directorate The Directors who served during the year were: Directors’ interests in shares Directors’ interests in the ordinary shares of Chesnara plc were as set out below (number of shares): Chairman Peter Mason Non-executive Directors Terry Marris Mike Gordon Peter Wright Executive Directors Graham Kettleborough Ken Romney Frank Hughes After the AGM the proposed Directorate will be: Chairman Peter Mason Non-executive Directors Mike Evans Peter Wright Veronica France David Brand Executive Directors Graham Kettleborough David Rimmington Frank Hughes Performance graph 31 December 2012 31 December 2011 Non- Beneﬁcial beneﬁcial Beneﬁcial beneﬁcial Non- Peter Mason Terry Marris Mike Gordon Peter Wright Graham Kettleborough Ken Romney Frank Hughes 19,768 57,615 – 70,000 68,100 79,476 5,832 – – – – – – – 19,768 57,708 – 70,000 58,100 70,476 5,832 – – – – – – – The newly appointed Non-executive Directors namely Veronica France, David Brand and Mike Evans have no beneﬁcial holdings in the ordinary shares of Chesnara plc as at 27 March 2013. There were no changes in the Directors’ shareholdings in Chesnara plc between 31 December 2012 and 27 March 2013. Directors’ Remuneration The Auditors are required to report on this and the remaining sections of the Remuneration Report. Total Directors’ remuneration for the year ended 31 December 2012 is shown below with comparative ﬁgures for the year ended 31 December 2011. Year ended 31 December Aggregate emoluments: Fees to Non-executive Directors Emoluments to Executive Directors Company contributions to pension schemes Total 2012 £000 2011 £000 225 1,132 225 745 136 132 1,493 1,102 Chesnara FTSE Life Insurance (rebased) 250 200 150 100 50 0 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 The above graph shows a comparison of the Company’s total shareholder return (‘TSR’) performance against the FTSE Life Insurance sector index. The Company considers this to be the most appropriate index, given that its activities are centred on life insurance. The graph has been prepared in accordance with section 421(2) of the Companies Act 2006. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 59 SECTION C GOVERNANCE DIRECTORS’ REMUNERATION REPORT (CONTINUED) The following table, which has been prepared in accordance with regulatory requirements, sets out the constituents of Directors’ emoluments for the year ended 31 December 2012: Executive Directors Graham Kettleborough Ken Romney Frank Hughes Total Executive Directors Non-executive Directors Peter Mason Terry Marris Mike Gordon Peter Wright Total Non-executive Directors Salaries and fees £000 Deferred bonuses £000 Bonuses £000 Beneﬁts £000 272 190 150 190 130 117 612 437 24 – 15 39 18 12 14 44 1,132 Total 2012 £000 504 332 296 Salaries and fees £000 Deferred bonuses £000 Bonuses £000 Beneﬁts £000 90 40 45 50 225 – – – – – – – – – – – – – – – Total 2012 £000 90 40 45 50 225 Total 837 437 39 44 1,357 Total 2011 £000 329 229 187 745 Total 2011 £000 90 40 45 50 225 970 The following table sets out each Executive Director’s pension beneﬁts for the years ended 31 December 2012 and 31 December 2011. Company contributions to Directors’ pensions arrangements 2012 £000 2011 £000 Graham Kettleborough Ken Romney Frank Hughes Total 49 42 45 47 41 44 136 132 A Salary Sacriﬁce scheme, which allows salary to be foregone in place of beneﬁts, was introduced in July 2007. As a result, contributions formerly made by Executive Directors are now made by the Group and deducted from Directors’ salaries. The pension arrangements for the Executive Directors are set out on page 58. No pension contributions were made by companies within the Chesnara plc Group from 1 January 2011 to 31 December 2012 in respect of any of the Non-executive Directors. Compensation Ken Romney will cease to be a director on 17 May 2013. Subject to the terms of a Compromise Agreement made on 21 November 2012, on cessation of his employment he will receive the sum of £125,233 representing pay in lieu of notice (salary and contractual beneﬁts). In addition, the Remuneration Committee has agreed a further £75,000 as compensation for the early termination of his employment. The Remuneration Committee has exercised its discretion to permit Ken Romney to receive performance-vested Long Term Incentive Plan and acquisition-related payments of £155,110 as he will have served for the majority of the deferral period, which expires at the end of 2013. Ken Romney was eligible for the annual bonus for 2012 on the same terms as the other Executive Directors, but no LTIP award was made to him in 2012. He will not be eligible to participate in the Company’s Annual Bonus Scheme for 2013, the Company’s LTIP for 2013 or any other bonus, LTIP, share or other incentive scheme for the remainder of his employment. A discretionary award of £41,601 has, however, been agreed in lieu of a 2012 LTIP award. Payment of the sums stated in the previous two paragraphs is subject to certain transitional personal performance obligations being achieved to the satisfaction of the Board. Directors’ share options No options were granted in respect of any Chesnara plc Share Option Scheme between 1 January 2013 and 27 March 2013, nor were there any options outstanding as at 31 December 2011, 31 December 2012 or 27 March 2013. Approved by the Board of Directors on 27 March 2013 and signed on its behalf by: Peter Mason Graham Kettleborough 60 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE AUDIT & RISK COMMITTEE REPORT The Audit & Risk Committee continues to bring to (cid:69)(cid:72)(cid:68)(cid:85)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:88)(cid:79)(cid:192)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) and in exercising judgement in critical areas. Role and composition During the year ended 31 December 2012 the Audit & Risk Committee comprised Peter Wright (Chairman), Mike Gordon and Terry Marris, as independent Non-executive Directors and Peter Mason (Group Chairman). Veronica France and David Brand were appointed as independent Non-executive Directors to the Committee on 16 January 2013. Similarly Mike Evans was appointed to the Committee on 4 March 2013. On invitation, the Chief Executive, the Finance Director, the Business Services Director (whose role includes risk reporting), the Head of UK Internal Audit, the consulting ﬁrm which provides internal audit services to Movestic and the external Auditor attends meetings to assist the Committee in the fulﬁlment of its duties. The Committee met six times during the year ended 31 December 2012. The role of the Audit & Risk Committee includes assisting the Board in discharging its duties and responsibilities for ﬁnancial reporting, corporate governance and internal control. The scope of its responsibilities also includes focus on risk and risk management: accordingly it also assists the Board in fulﬁlling its obligations in this regard. The Committee is also responsible for making recommendations to the Board in relation to the appointment, re-appointment and removal of the external Auditor. The Committee’s duties include keeping under review the scope and results of the audit work, its cost effectiveness and the independence and objectivity of the external Auditor. Activity During the period under review, the Audit & Risk Committee discharged its responsibilities by: – reviewing the Group’s draft Financial Statements prior to Board approval and reviewing the external Auditor’s detailed reports thereon, in respect of the half year ended 30 June 2012 and the year ended 31 December 2012; – reviewing the appropriateness of the Group’s accounting policies; – reviewing the provision of supplementary reporting of ﬁnancial information in accordance with European Embedded Value principles, including the methodology undertaken and the assumptions adopted; – reviewing and approving the audit fee estimates and reviewing and approving the audit and non-audit fees, in conjunction with an assessment of external Auditor performance; – reviewing the external Auditor plan for the audit of the Group’s ﬁnancial statements which included an assessment of key risks and conﬁrmation of Auditor independence; – reviewing and approving internal audit plans for the internal audit of the Group’s internal controls, embracing operating, ﬁnancial and business controls; – reviewing an annual report on the Group’s systems of risk management and internal control and their effectiveness and reporting to the Board on the results of the review; – reviewing regular reports from the internal audit functions; – assessing internal audit effectiveness, by way of a review performed by independent consultants and by consideration of suggestions for improvement contained therein; – reviewing the internal audit arrangements for, and approving the change in external consultants providing internal audit services to Movestic; – meeting the Head of UK Internal Audit without an Executive Director or a member of the Company’s senior management being present; – reviewing quarterly reports by Executive Management on the identiﬁcation, evaluation and management of key risks, embracing the Company, CA and Movestic; – meeting the external Auditor without an Executive Director or a member of the Company’s senior management being present; – reviewing the nature and volume of non-audit services provided by the external Auditor to ensure that a balance is maintained between objectivity and value added; and – reviewing the Group’s policies and procedures relating to fraud, whistle-blowing and employment of ex-employees of the external Auditor. In addition to the above, Committee members have detailed knowledge of CA’s risk management processes by virtue of their common membership of the CA Risk Committee, which reports to the CA Board, CA being subject to the FSA Risk and Responsibility regime. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 61 SECTION C GOVERNANCE Key issues During the period under review the following issues have arisen, which have required careful consideration and exercise of judgement by the Committee: The allowance for persistency in the EEV results This should be the expected long-term mean level over the run-off of the existing portfolios and have regard to current experience. In respect of the UK businesses, current experience may be unduly favourable as a long-term average, because some deterioration may arise from the impact on retention of gender-neutral pricing introduced on 21 December 2012 and because of the possible impact of lower rates of investment return, to be adopted in 2014, in connection with illustrative projections sent to policyholders. In respect of the Swedish business, lapse and transfer rates continued, over 2012, to exceed the long-term assumptions set at the end of 2011. The monitoring of the experience was reﬁned over 2012 and, in addition to making assumptions more responsive to duration-in-force, they have generally been strengthened. Nevertheless, in some cases the new assumptions remain below recent experience, as the view is taken that changes in product design and management focus on persistency, together with an improvement in IFA sentiment towards Movestic, will bring lapse and transfer rates down. The determination of long-term projections of expenses In respect of the UK businesses, some of the outsourcing agreements have been subject to renegotiation and the prospective impact of this has been anticipated when setting the EEV assumptions. There is also an impact on the determination of insurance contract provisions reported under IFRS and on the determination of actuarial reserving for statutory solvency purposes, although both to a lesser degree. In respect of the Swedish business, new business is currently at a level below that supported by the business infrastructure and this has resulted in judgements having to be made regarding the allocation of expenses between those related to acquisition and those related to ongoing maintenance for EEV reporting purposes. Cost of S&P with-proﬁts guarantees for IFRS reporting purposes The method used to provide for the cost of guarantees to S&P with-proﬁts policyholders for IFRS reporting purposes has the aim of establishing the liability on a less prudent basis than the unrealistic method required for statutory solvency assessment, while still being more prudent than the market-consistent basis applied to EEV reporting. During 2012 it was recognised that the method hitherto selected to achieve this, while producing, since the date of acquisition of S&P on 20 December 2010, a result between the upper and lower limits set out above, may not always do so. As a consequence, it was decided to adopt a method of establishing the liability for IFRS reporting purposes at 110% of the cost of guarantees determined for EEV reporting, which closely replicated the positions established in previous reporting periods using the former method. Subsequently, the former method, had it still been used, would have resulted in an IFRS liability lower than that recognised for EEV reporting. Further information in respect of this item can be found in Note 32 to the IFRS ﬁnancial statements, ‘Insurance contract provisions’. Classiﬁcation of policyholder surplus in the S&P with-proﬁts funds for IFRS reporting purposes As permitted under IFRS4, the Group classiﬁed the excess of policyholder assets over policyholder liabilities with the S&P funds as unallocated divisible surplus in the IFRS Consolidated Balance Sheet. However, the Committee, in recognition of the fact that such surplus is not capable of allocation to shareholders funds at any time, has determined that such excess is more properly classiﬁed within insurance contract provisions. Accordingly, as described in Note 2(d) the Group has changed its accounting policy with regard to the classiﬁcation of policyholder surplus in the S&P with-proﬁt funds. Classiﬁcation of S&P policyholders liabilities to taxation Following the transfer, on 31 December 2011, of the whole of the business of the S&P operating segment to Countrywide Assured plc under the provisions of the Financial Services and Markets Act 2000, S&P policyholder liabilities to taxation have, with effect from 1 January 2012, been re-classiﬁed within the IFRS Consolidated Balance Sheet from deferred tax liabilities to insurance contract provisions. It was decided that it was appropriate to make this change to more appropriately reﬂect the tax-paying position of the combined businesses. Further information on this re-classiﬁcation is presented in Note 7 to the IFRS ﬁnancial statements, ‘Exceptional item. Determination of reportable segments The segments which are reportable in accordance with IFRS 8 ‘Operating Segments’ were reviewed during the year and it was concluded that it was appropriate to continue, for the time being, to present, in the IFRS ﬁnancial statements, two reportable segments for the UK Business, being CA and S&P and that the EEV Supplementary Information should also continue to present similar segmentation. This decision was heavily inﬂuenced by the existence of a material volume of with-proﬁts business within the S&P segment, the performance of which is closely monitored by the Board. Determination of onerous contract provision The Company has a lease arrangement until mid-2019 in respect of its Head Ofﬁce at Harbour House, Preston, of which it now occupies only a small proportion. A provision of £1.5m was established as at 31 December 2011 in respect of the potential net cost of vacant space over the remaining term of the lease, based on the excess of the estimated future stream of future contractual costs over anticipated sub-lease income. Two tenants have now served notice of discontinuance of sub-lease arrangements, so that from early 2013 a signiﬁcantly smaller proportion of the building is sub-let. The company has received advice from a local ﬁrm of property consultants and, based on careful consideration of this, has signiﬁcantly increased the related provision to £3.8m as at 31 December 2012, further details of which are provided in Note 36 to the IFRS ﬁnancial statements, ‘Onerous contract provisions’. Going concern assumptions The Committee continues to review the periodic reports relating to the continuing appropriateness of preparing Group ﬁnancial statements on a going concern basis, and gives particular attention to the integrity of the underlying assumptions and to the appropriateness of the different stress scenarios which test the assumptions. 62 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 CORPORATE AND SOCIAL RESPONSIBILITY STATEMENT SECTION C GOVERNANCE Social, environmental and ethical issues Chesnara aims to be sensitive to the cultural, social and economic needs of our local community and endeavours to protect and preserve the environment where it operates. To support this we allow each of our UK employees two days release on full pay each year where they can support a local charity project of their choice. We seek to be honest and fair in our relationships with our customers and provide the standards of products and services that have been agreed. Being primarily ofﬁce-based ﬁnancial services companies, the Directors believe that the Group’s activities do not materially contribute to pollution or cause material damage to the environment. However, the Group takes all practicable steps to minimise its effects on the environment and encourages its employees to conserve energy, minimise waste and recycle work materials. Chesnara takes its responsibilities for social and environmental issues seriously and recognises the importance of developing and maintaining high standards. We do not, however, consider that these aspects are critical to the achievement of our strategic aims or that they should form any signiﬁcant element of remuneration or reward. Equal opportunities Chesnara is committed to a policy of equal opportunity in employment and it will continue to select, recruit, train and promote the best candidates based on suitability for the role and treat all employees and applicants fairly regardless of race, age, gender, marital status, ethnic origin, religious beliefs, sexual orientation or disability. Chesnara will ensure that no employee suffers harassment or intimidation. Disabled employees Chesnara will provide employment for disabled persons wherever the requirements of the business allow and if applications for employment are received from suitable applicants. If existing employees become disabled, every reasonable effort will be made to achieve continuity of employment. Health, safety and welfare at work Chesnara places great importance on the health, safety and welfare of its employees. Relevant policies, standards and procedures are reviewed on a regular basis to ensure that any hazards or material risks are removed or reduced to minimise or, where possible, exclude the possibility of accident or injury to employees or visitors. The policies, standards and procedures are communicated to employees through contracts of employment, the staff handbook and employee brieﬁngs and all employees have a duty to exercise responsibility and do everything possible to prevent injury to themselves and others. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 63 SECTION C GOVERNANCE DIRECTORS’ REPORT Chesnara plc — Company No. 4947166 The Directors present their report and the audited consolidated accounts of Chesnara plc (‘Chesnara’) for the year ended 31 December 2012. The Corporate Governance Report on pages 51 to 55 forms part of the Directors’ Report. Business review The information which fulﬁlls the Companies Act requirements for a Business Review can be found in the following sections: Requirements/reference Strategic aims and how we achieve our strategic aims The Our Vision and Strategy section on pages 10 to 13. Principal risks and uncertainties The Risk Management section on pages 42 to 44. Performance and development during the year and position at the end of the year Likely future developments Financial and non-ﬁnancial KPIs The Chief Executive’s Review on pages 18 to 25, the Financial Review on pages 26 to 37 and the Financial Management section on pages 38 to 41. Environmental, employee and social community matters The Corporate and Social Responsibility Statement on page 63. Results and dividends The Group consolidated statement of comprehensive income for the year ended 31 December 2012, prepared in accordance with International Financial Reporting Standards and set out on page 58, shows: Proﬁt for year attributable to shareholders 2012 £000 2011 £000 27,941 25,665 An interim dividend of 6.10p per ordinary share was paid by Chesnara on 15 October 2012. The Board recommends payment of a ﬁnal dividend of 11.25p per ordinary share on 22 May 2013 to shareholders on the register at the close of business on 12 April 2013. Directors The present Directors of the Company and their biographical details are set out on page 49. Peter Mason, Mike Gordon, Terry Marris, Peter Wright, Graham Kettleborough, Ken Romney and Frank Hughes all served for the period from 1 January 2012 to 31 December 2012. Since the end of the year, there have been changes to the Board membership with further changes planned with effect from the Annual General Meeting on 17 May 2013. Two new Non-executive Directors, Veronica France and David Brand, were appointed to the Board with effect from 16 January 2013. A further Non-executive Director, Mike Evans was appointed to the Board on 4 March 2013. Two of the existing Non-executive Directors, Mike Gordon and Terry Marris have announced their intention to step down from the Board with effect from 17 May 2013, the date of the Annual General Meeting. Mike Gordon is currently Chairman of the Remuneration Committee and Senior Independent Director. From 17 May 2013, the role of Chairman of the Remuneration Committee will be assumed by Veronica France and the role of Senior Independent Director will be assumed by Mike Evans. Furthermore, Ken Romney, currently Finance Director, will also stand down at the Annual General Meeting and David Rimmington will be appointed to the Board and will assume the role from that date. The Non-executive Directors who served in 2012 and will serve in 2013 as Chairmen and members of the Nominations and Audit & Risk Committees of the Board are set out in the Corporate Governance Report and Audit & Risk Committee reports respectively on pages 51 to 55 and 61 to 62. Information in respect of the Chairman and members of the Remuneration Committee and in respect of Directors’ service contracts is included in the Remuneration Report on pages 56 to 60, which also includes details of Directors’ interests in shares and share options. Pursuant to the Articles of Association, Frank Hughes will retire by rotation at the Annual General Meeting and, being eligible, offers himself for re-election. His service contract with the Company is of no more than one year’s duration. In addition, no Director had any material interest in any signiﬁcant contract with the Company or with any of the subsidiary companies during the year. The Directors beneﬁted from qualifying third party indemnity provisions in place during the years ended 31 December 2011 and 31 December 2012 and the period to 27 March 2013. 64 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION C GOVERNANCE Substantial shareholdings The following substantial interests in the Company’s ordinary share capital at 31 December 2012 have been notiﬁed to the Company: Name of substantial shareholder Total number of ordinary shares held Percentage of the issued share capital as at 31 December 2012 Artemis Investment Management LLP Amerprise Financial, Inc. (Threadneedle Asset Management) Henderson Global Investors Limited Standard Life Investments Limited Legal and General Group Norges Bank Hermes Equity Ownership Services 12,845,608 12,741,529 5,730,537 4,172,345 4,130,698 3,434,374 3,401,096 11.18 11.09 4.98 3.63 3.60 2.99 2.96 There have been changes to the position since 31 December 2012 and the revised holding is shown below. No other person holds a notiﬁable interest in the issued share capital of the Company. Name of substantial shareholder Total number of ordinary shares held Percentage of the issued share capital as at 27 March 2013 Henderson Global Investors Limited 5,798,306 5.04 Disclosure of information to Auditor The Directors who held ofﬁce at the date of approval of this Directors’ Report conﬁrm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditor is unaware; and each Director has taken all the steps that he ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information. This information is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Auditor A resolution for the re-appointment of Deloitte LLP as Auditor of the Company is to be proposed at the forthcoming Annual General Meeting. Approved by the Board on 27 March 2013 and signed on its behalf by: Ken Romney Director There were no signiﬁcant contracts with substantial shareholders during the year. Charitable donations and political contributions Charitable donations made by Group companies during the year ended 31 December 2012 were £nil (2011: £nil). No political contributions were made during the year ended 31 December 2012 (2011: £nil). Employees The average number of employees during the year was 148 (2011: 156). Creditors payment policy It is Chesnara’s policy to pay creditors in accordance with the CBI Better Practice Payment Code (available at www.payontime.co.uk) on supplier payments. The number of creditor days outstanding at 31 December 2012, based on the consolidated ﬁnancial statements, was 11 for the Group (31 December 2011: 6) and for the Company 31 (31 December 2011: 28). Going concern statement After making appropriate enquiries, the Directors conﬁrm that they are satisﬁed that the Company and the Group have adequate resources to continue in business for the foreseeable future. Accordingly, they continue to adopt the going concern basis in the preparation of the ﬁnancial statements as stated in Note 2(c) to the ﬁnancial statements. Detailed analysis of relevant risks and other factors is included within the Risk Management section on pages 42 to 44, within the Financial Management Section on pages 38 to 41 and within Notes 5 and 6 to the IFRS ﬁnancial statements. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 65 66 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS IN THIS SECTION 68 69 —70 71 72 73 74 75 76 77 78—149 Notes to the Consolidated Financial Statements Directors’ Responsibilities Statement Independent Auditor’s Report to the Members of Chesnara plc Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Cash Flows Company Statement of Cash Flows Consolidated Statement of Changes in Equity Company Statement of Changes in Equity CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 67 SECTION D IFRS FINANCIAL STATEMENTS DIRECTORS’ RESPONSIBILITIES STATEMENT Directors’ responsibilities statement in respect of the Financial Statements The directors are responsible for preparing the Annual Report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the directors are required to prepare the group ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the parent company ﬁnancial statements under IFRSs as adopted by the EU. Under company law the directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the company and of the proﬁt or loss of the company for that period. In preparing these ﬁnancial statements, International Accounting Standard 1 requires that directors: – properly select and apply accounting policies; – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; – provide additional disclosures when compliance with the speciﬁc requirements in IFRSs are insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and – make an assessment of the company’s ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Responsibility statement We conﬁrm that to the best of our knowledge: – the ﬁnancial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the company and the undertakings included in the consolidation taken as a whole; and – the management report, which is incorporated into the directors’ report, includes 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 that they face. By order of the Board Chairman Peter Mason 27 March 2013 Chief Executive Ofﬁcer Graham Kettleborough 27 March 2013 68 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC We have audited the ﬁnancial statements of Chesnara plc for the year ended 31 December 2012 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated and Company Statements of Cash Flows, the Consolidated and Company Statements of Changes in Equity and the related Notes 1 to 53. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as regards the parent company ﬁnancial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the ﬁnancial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufﬁcient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on ﬁnancial statements In our opinion: – the ﬁnancial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2012 and of the group’s proﬁt for the year then ended; – the group ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; – the parent company ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group ﬁnancial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: – the part of the Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and – the information given in the Directors’ Report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 69 SECTION D IFRS FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED) Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent company ﬁnancial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of directors’ remuneration speciﬁed by law are not made; or – we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: – the directors’ statement, contained within the Directors’ Report, in relation to going concern; – the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code speciﬁed for our review; and – certain elements of the report to shareholders by the Board on directors’ remuneration. David Heaton (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Manchester United Kingdom 27 March 2013 70 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Consolidated Statement of Comprehensive Income for the year ended 31 December 2012 SECTION D IFRS FINANCIAL STATEMENTS Year ended 31 December Insurance premium revenue Insurance premium ceded to reinsurers Net insurance premium revenue Fee and commission income Net investment return Total revenue net of reinsurance payable Other operating income Total income net of investment return (cid:44)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71) (cid:38)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) Net (increase)/decrease in insurance contract provisions (cid:53)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) (cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) Change in investment contract liabilities Reinsurers’ share of investment contract liabilities Net change in investment contract liabilities Fees, commission and other acquisition costs Administrative expenses Other operating expenses (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Charge for amortisation of acquired value of in-force business Charge for amortisation of acquired value of customer relationships Other Total expenses net of change in insurance contract provisions and investment contract liabilities (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Total income less expenses (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3) Exceptional item (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87) Financing costs (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86) Income tax credit Before exceptional item Exceptional item After exceptional item (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92) Foreign exchange translation differences arising on the revaluation of foreign operations Total comprehensive income for the year (cid:37)(cid:68)(cid:86)(cid:76)(cid:70)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:11)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:12)(cid:3)(cid:3)(cid:3) (cid:39)(cid:76)(cid:79)(cid:88)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:11)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:12)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The notes and information on pages 78 to 149 form part of these ﬁnancial statements. Note 9 10 11 12 12 12 (cid:3)(cid:3) 13 13 14 15 16 16 16 24 7 17 18 7 8 (cid:23)(cid:27)(cid:3)(cid:3) (cid:23)(cid:27)(cid:3)(cid:3) 2012 £000 115,520 (35,336 ) 80,184 66,658 332,053 478,895 19,645 2011 £000 121,976 (34,970 ) 87,006 67,863 (192,402 ) (37,533 ) 21,782 498,540 (15,751 ) (272,479 ) (20,732 ) 47,865 (245,346 ) (156,663 ) 2,810 (153,853 ) (17,967 ) (37,029 ) (7,863 ) (391 ) (9,205 ) (267,691 ) 204,864 17,401 (45,426 ) 164,166 (1,500 ) 162,666 (17,276 ) (38,798 ) (9,032 ) (758 ) (9,664 ) (471,654 ) 41,712 26,886 1,244 (4,778 ) 23,352 (3,670 ) 25,961 (152 ) – 25,809 (3,388 ) 19,682 22,421 3,481 4,778 8,259 27,941 741 3,244 – 3,244 25,665 (738 ) 28,682 24,927 (cid:21)(cid:23)(cid:17)(cid:22)(cid:22)(cid:3)(cid:83)(cid:3) (cid:21)(cid:23)(cid:17)(cid:22)(cid:22)(cid:3)(cid:83)(cid:3) (cid:21)(cid:21)(cid:17)(cid:22)(cid:24)(cid:3)(cid:83) (cid:21)(cid:21)(cid:17)(cid:22)(cid:24)(cid:3)(cid:83) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 71 SECTION D IFRS FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET Consolidated Balance Sheet at 31 December 2012 31 December Assets Intangible assets Deferred acquisition costs Acquired value of in-force business Acquired value of customer relationships Software assets Property and equipment Investment in associates Investment properties Deferred tax assets Reinsurers’ share of insurance contract provisions Amounts deposited with reinsurers Financial assets (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Equity securities at fair value through income Holdings in collective investment schemes at fair value through income Debt securities at fair value through income Policyholders’ funds held by the Group Insurance and other receivables Prepayments (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) Reinsurers’ share of accrued policyholder claims Income taxes Cash and cash equivalents Total assets Liabilities Insurance contract provisions Other provisions Financial liabilities Investment contracts at fair value through income Liabilities relating to policyholders’ funds held by the Group Borrowings (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Deferred tax liabilities Reinsurance payables Payables related to direct insurance and investment contracts Deferred income Income taxes Other payables Bank overdrafts (cid:3)(cid:3) (cid:3)(cid:3) Total liabilities Net assets (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) Share capital Share premium Treasury shares Other reserves Retained earnings (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) 2012 £000 2011 (*restated) £000 22,555 76,118 1,884 5,712 369 2,902 100,167 2,295 278,692 30,245 427,303 3,009,799 363,377 61,171 24,313 3,160 3,095 (cid:22)(cid:15)(cid:27)(cid:28)(cid:21)(cid:15)(cid:21)(cid:20)(cid:27)(cid:3)(cid:3) 4,489 4,299 228,676 19,720 83,346 2,255 6,744 385 1,613 132,128 – 263,792 28,031 404,431 2,917,935 330,610 49,080 30,799 3,234 10,308 (cid:22)(cid:15)(cid:26)(cid:23)(cid:25)(cid:15)(cid:22)(cid:28)(cid:26) 4,667 6,956 195,920 4,650,621 4,491,954 2,207,078 5,161 2,190,939 2,811 2,022,314 61,171 48,324 286 (cid:21)(cid:15)(cid:20)(cid:22)(cid:21)(cid:15)(cid:19)(cid:28)(cid:24)(cid:3)(cid:3) 5,894 16,610 38,894 8,884 – 17,057 602 1,876,463 49,080 54,753 144 (cid:20)(cid:15)(cid:28)(cid:27)(cid:19)(cid:15)(cid:23)(cid:23)(cid:19) 15,390 16,336 40,651 10,000 947 24,417 834 Note 19 20 21 22 23 24 25 37 32 33 26 26 26 26 26/27 26/27 26/28 (cid:3)(cid:3) 39 29 30 32 36 33 34 35 28 (cid:3)(cid:3) 37 38 39 40 41 42 30 4,432,275 4,282,765 8 218,346 209,189 43 43 44 45 46 42,024 42,523 (217 ) 7,719 126,297 42,024 42,523 (217 ) 6,978 117,881 218,346 209,189 The notes and information on pages 78 to 149 form part of these ﬁnancial statements. *See Note 2(d) for an explanation of the restatement of the Consolidated Balance Sheet as at 31 December 2011. Approved by the Board of Directors on 27 March 2013 and signed on its behalf by: Peter Mason Graham Kettleborough 72 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 COMPANY BALANCE SHEET Company Balance Sheet at 31 December 2012 31 December Assets Non-current assets Financial assets Investment in subsidiaries Current assets Receivables and prepayments Income taxes Cash and cash equivalents Total current assets Total assets Current liabilities Borrowings Other provisions Other payables Total current liabilities Non-current liabilities Borrowings Other provisions Total non-current liabilities Total liabilities Net assets (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) Share capital Share premium Treasury shares Other reserves Retained earnings SECTION D IFRS FINANCIAL STATEMENTS Note 2012 £000 2011 £000 26 146,699 146,699 27 29 30 35 36 42 35 36 43 43 44 45 46 585 1,394 32,412 296 1,197 15,637 34,391 17,130 181,090 163,829 7,844 399 2,725 10,968 21,818 3,405 5,819 176 2,087 8,082 29,667 1,324 25,223 30,991 36,191 39,073 144,899 124,756 5,752 42,523 (217 ) 50 96,791 5,752 42,523 (217 ) 50 76,648 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:20)(cid:23)(cid:23)(cid:15)(cid:27)(cid:28)(cid:28)(cid:3)(cid:3) (cid:20)(cid:21)(cid:23)(cid:15)(cid:26)(cid:24)(cid:25) The notes and information on pages 78 to 149 form part of these ﬁnancial statements. The ﬁnancial statements of Chesnara plc (registered number 4947166) were approved by the Board of Directors on 27 March 2013 and signed on its behalf by: Peter Mason Graham Kettleborough CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 73 SECTION D IFRS FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS Consolidated Statement of Cash Flows for the year ended 31 December 2012 Year ended 31 December (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85) Adjustments for: Depreciation of property and equipment Amortisation of deferred acquisition costs Amortisation of acquired value of in-force business Amortisation of acquired value of customer relationships Amortisation of software assets Tax recovery Interest receivable Dividends receivable Interest expense Change in fair value of investment properties (cid:41)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:11)(cid:74)(cid:68)(cid:76)(cid:81)(cid:86)(cid:12)(cid:18)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) Gain on sale of property and equipment (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:11)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:12)(cid:18)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) Interest received Dividends received Increase in intangible assets related to insurance and investment contracts Changes in operating assets and liabilities (cid:3)(cid:3) (cid:3)(cid:3) (cid:39)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) (cid:3)(cid:3) (Increase)/decrease in reinsurers share of insurance contract provisions (Increase)/decrease in amounts deposited with reinsurers Decrease in insurance and other receivables Decrease in prepayments Decrease in assets held for sale Decrease in liabilities held for sale Increase/(decrease) in insurance contract provisions Increase/(decrease) in investment contract liabilities Increase in provisions Increase/(decrease) in reinsurance payables (Decrease)/increase in payables related to direct insurance and investment contracts (Decrease)/increase in other payables Cash generated from operations Income tax paid Net cash generated from operating activities (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) Development of software (Purchases)/disposals of property and equipment Net cash utilised by investing activities (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) Repayment of borrowings Dividends paid Interest paid (cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Cash and cash equivalents at beginning of period Effect of exchange rate changes on cash and cash equivalents (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 2011 £000 27,941 25,665 128 7,657 7,864 391 2,188 (8,259 ) (25,961 ) (46,774 ) 3,670 5,650 (254,457 ) (2 ) (1,244 ) 26,357 46,738 (10,255 ) (cid:20)(cid:23)(cid:24)(cid:15)(cid:28)(cid:26)(cid:20)(cid:3)(cid:3) (14,138 ) (2,214 ) 402 96 – – 15,271 140,360 2,336 88 (1,795 ) (3,251 ) 64,758 (1,152 ) 219 7,339 9,032 758 1,968 (3,244 ) (28,632 ) (40,261 ) 3,388 (4,233 ) 272,517 – 152 27,874 40,350 (12,642 ) (cid:23)(cid:23)(cid:15)(cid:25)(cid:28)(cid:26) 15,442 2,233 2,967 659 380 (380 ) (212,424 ) (115,100 ) 989 (5,859 ) 4,981 5,719 44,554 (9,119 ) 63,606 35,435 (1,094) (109) (1,968 ) 63 (1,203) (1,905 ) (6,406 ) (19,525 ) (3,949 ) (7,510 ) (19,007 ) (3,625 ) (29,880 ) (30,142 ) (cid:22)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) 195,086 465 (cid:22)(cid:15)(cid:22)(cid:27)(cid:27) 191,980 (282 ) (cid:21)(cid:21)(cid:27)(cid:15)(cid:19)(cid:26)(cid:23)(cid:3)(cid:3) (cid:20)(cid:28)(cid:24)(cid:15)(cid:19)(cid:27)(cid:25) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The notes and information on pages 78 to 149 form part of these ﬁnancial statements. 74 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 2011 £000 COMPANY STATEMENT OF CASH FLOWS Company Statement of Cash Flows for the year ended 31 December 2012 Year ended 31 December (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) Adjustments for: Tax recovery Interest expense Dividends received from subsidiary company Changes in operating assets and liabilities Increase in loans and receivables Decrease/(increase) in prepayments Increase in provisions Increase in other payables Tax received Cash utilised by operations (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) Capital contributions paid to subsidiary Dividends received from subsidiary company Net cash generated from investing activities (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) Repayment of borrowings Dividends paid Interest paid (cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:18)(cid:11)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:12)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:22)(cid:28)(cid:15)(cid:25)(cid:25)(cid:27)(cid:3)(cid:3) (cid:21)(cid:20)(cid:15)(cid:25)(cid:22)(cid:23) (1,420 ) 1,218 (44,000 ) (310 ) 21 2,304 669 1,223 (1,197 ) 1,419 (26,002 ) (41 ) (12 ) 1,500 87 543 (627 ) (2,069 ) – 44,000 (5,265 ) 26,002 44,000 20,737 (6,000 ) (19,524 ) (1,074 ) (4,000 ) (19,007 ) (1,222 ) (26,598 ) (24,229 ) (cid:20)(cid:25)(cid:15)(cid:26)(cid:26)(cid:24)(cid:3)(cid:3) (cid:20)(cid:24)(cid:15)(cid:25)(cid:22)(cid:26)(cid:3)(cid:3) (5,561 ) (cid:21)(cid:20)(cid:15)(cid:20)(cid:28)(cid:27) (cid:22)(cid:21)(cid:15)(cid:23)(cid:20)(cid:21)(cid:3)(cid:3) (cid:20)(cid:24)(cid:15)(cid:25)(cid:22)(cid:26) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The notes and information on pages 78 to 149 form part of these ﬁnancial statements. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 75 SECTION D IFRS FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Consolidated Statement of Changes in Equity for the year ended 31 December 2012 Year ended 31 December 2012 (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:3) Dividends paid (Note 46) Foreign exchange translation differences (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3) Year ended 31 December 2011 (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) Dividends paid (Note 46) Foreign exchange translation differences (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Share capital £000 (cid:23)(cid:21)(cid:15)(cid:19)(cid:21)(cid:23)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – – Share capital £000 (cid:23)(cid:21)(cid:15)(cid:19)(cid:21)(cid:23)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – – Share premium £000 Other reserves £000 Treasury shares £000 Retained earnings £000 (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – – (cid:25)(cid:15)(cid:28)(cid:26)(cid:27)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – 741 117,881 (cid:21)(cid:26)(cid:15)(cid:28)(cid:23)(cid:20)(cid:3)(cid:3) (19,525 ) – (cid:23)(cid:21)(cid:15)(cid:19)(cid:21)(cid:23)(cid:3)(cid:3) (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) (cid:26)(cid:15)(cid:26)(cid:20)(cid:28)(cid:3)(cid:3) 126,297 218,346 Share premium £000 Other reserves £000 Treasury shares £000 Retained earnings £000 (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – – (cid:26)(cid:15)(cid:26)(cid:20)(cid:25)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – (738 ) 111,223 (cid:21)(cid:24)(cid:15)(cid:25)(cid:25)(cid:24)(cid:3)(cid:3) (19,007 ) – (cid:23)(cid:21)(cid:15)(cid:19)(cid:21)(cid:23)(cid:3)(cid:3) (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) (cid:25)(cid:15)(cid:28)(cid:26)(cid:27)(cid:3)(cid:3) 117,881 209,189 Total £000 209,189 (cid:21)(cid:26)(cid:15)(cid:28)(cid:23)(cid:20)(cid:3) (19,525 ) 741 Total £000 203,269 (cid:21)(cid:24)(cid:15)(cid:25)(cid:25)(cid:24) (19,007 ) (738 ) (217 ) (cid:178)(cid:3)(cid:3) – – (217 ) (217 ) (cid:178)(cid:3)(cid:3) – – (217 ) The notes and information on pages 78 to 149 form part of these ﬁnancial statements. 76 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS COMPANY STATEMENT OF CHANGES IN EQUITY Company Statement of Changes in Equity for the year ended 31 December 2012 Year ended 31 December 2012 (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3) income and expenses Dividends paid (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3) Year ended 31 December 2011 (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3) income and expenses Dividends paid (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Share capital £000 Share premium £000 Other reserves £000 Treasury shares £000 Retained earnings £000 Total £000 (cid:24)(cid:15)(cid:26)(cid:24)(cid:21)(cid:3)(cid:3) (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3)(cid:3) – – – – (cid:24)(cid:15)(cid:26)(cid:24)(cid:21)(cid:3)(cid:3) (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) (cid:24)(cid:19)(cid:3)(cid:3) – – (cid:24)(cid:19)(cid:3)(cid:3) (217 ) 76,648 124,756 – – 39,668 (19,525 ) 39,668 (19,525 ) (217 ) 96,791 144,899 Share capital £000 Share premium £000 Other reserves £000 Treasury shares £000 Retained earnings £000 Total £000 (cid:24)(cid:15)(cid:26)(cid:24)(cid:21)(cid:3)(cid:3) (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) – – – – (cid:24)(cid:15)(cid:26)(cid:24)(cid:21)(cid:3)(cid:3) (cid:23)(cid:21)(cid:15)(cid:24)(cid:21)(cid:22)(cid:3)(cid:3) (cid:24)(cid:19)(cid:3)(cid:3) – – (cid:24)(cid:19)(cid:3)(cid:3) (217 ) 74,021 122,129 – – 21,634 (19,007 ) 21,634 (19,007 ) (217 ) 76,648 124,756 The notes and information on pages 78 to 149 form part of these ﬁnancial statements. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 77 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 General information Chesnara plc (Registered Number 4947166) (the Company) is a limited liability company incorporated and domiciled in England and Wales and has a primary listing on the London Stock Exchange. The address of the registered ofﬁce is Harbour House, Portway, Preston, PR2 2PR, UK. The Company and its subsidiaries, together forming the Group, comprise UK and Swedish life and pensions businesses. The UK businesses, which comprise the CA and S&P segments described in Note 8, the activities of which are performed entirely in the UK, underwrite life risks such as those associated with death, disability and health and provide a portfolio of investment contracts for the savings and retirement needs of customers through asset management. They are substantially closed to new business, such that new insurance contracts are only issued to existing customers, dependent on their changing needs. New investment contracts relate to the sale of Guaranteed Growth and Guaranteed Income Bonds by CA. The Swedish business, which comprises the Movestic segment, described in Note 8, the activities of which are performed predominantly in Sweden, underwrites life, accident and health risks and provides a portfolio of investment contracts. It is open to new business, securing distribution of its products principally through independent ﬁnancial advisers. These ﬁnancial statements are presented in pounds sterling, which is the functional currency of the Parent Company. Foreign operations are included in accordance with the policies set out in Note 2. The ﬁnancial statements were authorised for issue by the Directors on 27 March 2013. 2 Signiﬁcant accounting policies In the information which follows distinction is made, where necessary, in respect of the applicability of certain policies, or as to their clariﬁcation: (i) as between the UK businesses and the Swedish business, which comprises the Movestic segment; and (ii) as between the CA and S&P segments of the UK businesses. (a) Statement of compliance The consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (`IFRSs’) as adopted by the European Union (‘Adopted IFRSs’) and therefore comply with Article 4 of the EU IAS Regulation. Both the Parent Company ﬁnancial statements and the Group ﬁnancial statements have been prepared and approved by the Directors in accordance with Adopted IFRSs. The Group has applied, for the ﬁrst time, IAS24 (revised) Related Party Disclosures, effective for accounting periods beginning on or after January 1 2011. Its application has not led to any changes in Group accounting policies. At the date of authorisation of these ﬁnancial statements the following Standards and Interpretations, which are applicable to the Group and which have not been applied in these ﬁnancial statements, were in issue but not yet effective (and in some cases have not been adopted by the EU): Title Annual Improvements to IFRSs IFRS 7 (amended December 2011) IFRS 9 IFRS 10 IFRS 10, IFRS 12 and IAS 27 (amended October 2012) IFRS 11 IFRS 12 IFRS 13 IAS 1 (amended June 2011) IAS 12 (amended December 2010) IAS 19 (revised June 2011) IAS 27 (revised May 2011) IAS 28 (revised May 2011) IAS 32 (amended December 2011) Subject 2009-2011 Cycle Disclosures – Offsetting Financial Assets and Financial Liabilities Financial Instruments Consolidated Financial Statements Investment Entities Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement Presentation of Items of Other Comprehensive Income Deferred Tax: Recovery of Underlying Assets Employee Beneﬁts Separate Financial Statements Investments in Associates and Joint Ventures Offsetting Financial Assets and Financial Liabilities The Directors do not expect that the adoption of the standards listed above will have a material impact on the ﬁnancial statements of the Group in future periods, except as follows: – IFRS 7 (amended) will increase the disclosure requirements where netting arrangements are in place for ﬁnancial assets and ﬁnancial liabilities; – IFRS 9 will impact both the measurement and disclosures of Financial Instruments; – IFRS 12 will impact the disclosures of interests Chesnara plc has in other entities; and – IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures. Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed. In publishing the Parent Company ﬁnancial statements together with the Group ﬁnancial statements the Company has taken advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved ﬁnancial statements. The Parent Company proﬁt for the year has been disclosed in Note 46. 78 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (b) Basis of consolidation The consolidated ﬁnancial statements incorporate the ﬁnancial statements of the Company and of entities controlled by the Company (its subsidiaries), made up to 31 December each year. Control is achieved where the Company has the power to govern the ﬁnancial and operating policies of an investee entity so as to obtain beneﬁts from its activities. The Parent Company ﬁnancial statements present information about the Company as a separate entity and not about its group. Non-controlling interests in the net assets of consolidated subsidiaries are identiﬁed separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interest’s share of changes in equity since the date of the combination. Proﬁt or loss and each component of other comprehensive income are attributed to the Company and to the non-controlling interests. Total comprehensive income is attributed to the Company shareholders and to the non-controlling interests even if this results in the non-controlling interests having a deﬁcit balance. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal. Where necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. (c) Basis of preparation The Consolidated and Parent Company ﬁnancial statements have been prepared on a going concern basis. The Directors believe that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the Directors have taken into consideration the points as set out in the Financial Management section under the heading ‘Going Concern’. The ﬁnancial statements are presented in pounds sterling, rounded to the nearest thousand and are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative ﬁnancial instruments, ﬁnancial instruments at fair value through income, assets and liabilities held for sale, investment property and investment contract liabilities at fair value through income. Assets and liabilities are presented on a current and non-current basis in the notes to the ﬁnancial statements. If assets are expected to be recovered and liabilities expected to be settled within a year, they are classiﬁed as current. If they are expected to be recovered or settled in more than one year, they are classiﬁed as non-current. The preparation of ﬁnancial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. Judgements made by management in the process of applying the Group’s accounting policies that have a signiﬁcant effect on the ﬁnancial statements and estimates with a signiﬁcant risk of material adjustment in the next year are set out in Note 3. The accounting policies set out below, unless otherwise stated, have been applied consistently to all years presented in these consolidated ﬁnancial statements. These ﬁnancial statements have also been prepared in accordance with the disclosure provisions of FRS 27 ‘Life Assurance’, which was issued by the UK’s Accounting Standards Board (ASB) in December 2004. FRS 27 adds to the requirements of IFRS but does not vary them in any way. (d) Change in accounting policy As at 31 December 2012 the Group has changed its accounting policy with respect to the treatment of any excess of policyholder assets over policyholder liabilities within the S&P with-proﬁts funds. Up to that date it had opted, as permitted under IFRS 4, to record such unallocated surplus as a liability within a separate unallocated divisible surplus account. However, in recognition of the fact that such surplus has been determined not to be capable of allocation to shareholders at any time, the Group has, with effect from that date, opted to classify such surplus as an insurance contract provision. Accordingly, the Consolidated Balance Sheet as at 31 December 2011 has been re-stated to reﬂect the re-classiﬁcation of the previously-reported unallocated divisible surplus of £6,254,000 within insurance contract provisions. The corresponding re-classiﬁcation being £83,000 as at 31 December 2010 is not material, and therefore further comparatives are not presented. No associated re-classiﬁcations or adjustments are required in the Consolidated Statement of Comprehensive Income, the consolidated statement of cash ﬂows or the consolidated statement of changes in equity. The following table highlights the impact of this change in accounting policy on the 2011 comparative information: 31 December 2011 Insurance contract provisions Unallocated divisible surplus Total liabilities Net assets As previously presented Adjustment As restated £000 £000 £000 (2,184,685 ) (6,254 ) (4,282,765 ) 209,189 (6,254 ) 6,254 – – (2,190,939 ) – (4,282,765 ) 209,189 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 79 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (e) Business combinations The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Expenses directly attributable to the acquisition are expensed as incurred. The acquiree’s identiﬁable assets, liabilities, and contingent liabilities, which meet the conditions for recognition under IFRS 3, are measured initially at their fair values at the acquisition date. Gains arising on a bargain purchase, where the net fair value of the identiﬁable assets, liabilities and contingent liabilities of the acquiree exceeds the cost of acquisition, is recognised in proﬁt or loss at the acquisition date. The non-controlling interest in the acquiree is initially measured at the non-controlling interest’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (f) Investments in associates An associate is an entity over which the Group is in a position to exercise signiﬁcant inﬂuence, but not control or joint control, through participation in the ﬁnancial and operating policy decisions of the investee. Signiﬁcant inﬂuence is the power to participate in the ﬁnancial and operating policy decisions of the investee, but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these ﬁnancial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Where a Group company transacts with an associate of the Group, proﬁts and losses are eliminated to the extent of the Group’s interest in the associate. Losses may provide evidence of an impairment of assets transferred, in which case appropriate provision is made for impairment. (g) Foreign currencies The individual ﬁnancial statements of each Group company are presented in the currency of the primary economic environment in which it operates, being its functional currency. For the purpose of these consolidated ﬁnancial statements, the results and ﬁnancial position of each Group company are expressed in pounds sterling, which is the functional currency of the Parent Company and the presentation currency of the consolidated ﬁnancial statements. In preparing the ﬁnancial statements of the individual companies, transactions in currencies other than the entity’s functional currency, being foreign currencies, are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities which are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value, which are denominated in foreign currencies, are translated at the rates prevailing when the fair value was determined. Exchange differences are recognised in proﬁt or loss in the period in which they arise, except when they relate to items for which gains and losses are recognised in equity. For the purpose of presenting consolidated ﬁnancial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates ﬂuctuate signiﬁcantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classiﬁed as equity and are recognised in the Group’s foreign currency translation reserve. Such translation differences are recognised as income or as expense in the period in which the operation is disposed of. Transactions relating to business combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date. (h) Product classiﬁcation The Group’s products are classiﬁed at inception as either insurance or investment contracts for accounting purposes. Insurance contracts are contracts which transfer signiﬁcant insurance risk and remain as insurance contracts until all rights and obligations are extinguished or expire. They may also transfer ﬁnancial risk. Investment contracts are contracts which carry ﬁnancial risk, with no signiﬁcant insurance risk. Where contracts contain both insurance and investment components and the investment components can be measured reliably, the contracts are unbundled and the components are separately accounted for as insurance contracts and investment contracts respectively. In some insurance contracts and investment contracts the ﬁnancial risk is borne by the policyholders. Such contracts are usually unit-linked contracts. With-proﬁts contracts, which subsist only within the UK businesses, all contain a discretionary participation feature (‘‘DPF’’) which entitles the holder to receive, as a supplement to guaranteed beneﬁts, additional beneﬁts or bonuses, which may be a signiﬁcant portion of the total contractual beneﬁts. In respect of S&P the amount and timing of such contractual beneﬁts are at the discretion of the Group and are contractually based on realised and/or unrealised investment returns on a speciﬁed pool of assets held by the Group. The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary beneﬁts are based and within which the Group may exercise its discretion as to the quantum and timing of their payment to contract holders. In respect of CA all such contracts are wholly reinsured with Guardian Assurance Limited (‘Guardian’), and the amount or timing of the additional payments are contractually at the discretion of the reinsurer and are contractually based on: (i) the performance of a speciﬁed pool of contracts or a speciﬁed type of contract; (ii) realised and/or unrealised investment returns on a speciﬁed pool of assets held by the reinsurer; or (iii) the proﬁt or loss of the reinsurer. All contracts with discretionary participation features are classiﬁed as insurance contracts. 80 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (i) Insurance contracts There are fundamental differences between the nature of the insurance contracts subsisting in the UK and Swedish businesses, including inter alia contract longevity: the related product characteristics are set out for the separate UK and Swedish businesses in Note 5. As a consequence, the alignment of income and expense recognition with the underlying assumption of risk leads to the adoption of separate accounting policies appropriate to each business, as follows: UK businesses (i) Premiums Premiums are accounted for when due, or in the case of unit-linked insurance contracts, when the liability is recognised, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due. (ii) Claims and beneﬁts Claims are accounted for in the accounting period in which they are due or notiﬁed. Surrenders are accounted for in the accounting period in which they are paid. Claims include policyholder bonuses allocated in anticipation of a bonus declaration. Reinsurance recoveries are accounted for in the same period as the related claim. (iii) Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. They are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At 31 December each year, such costs that are deferred to future years are reviewed to ensure they do not exceed available future margins. Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred. (iv) Measurement of insurance contract provisions Insurance contract provisions are measured using accounting policies having regard to the principles laid down in Council Directive 2002/83/EC. Insurance contract provisions are determined following an annual actuarial investigation of the long-term funds and are calculated initially on a statutory solvency basis in order to comply with the reporting requirements of the Prudential Sourcebook for Insurers. This valuation is then adjusted to remove certain contingency reserves and to remove excess prudence from other reserves. In accordance with this, the provisions are calculated on the basis of current information, using the speciﬁc valuation methods set out below. Unit-linked provisions are measured by reference to the value of the underlying net asset value of the Group’s unitised investment funds, determined on a bid value basis, at the balance sheet date. For immediate annuities in payment the provision is calculated as the discounted value of the expected future annuity payments under the policies, allowing for mortality, including projected improvements in future mortality, interest rates and expenses. For certain temporary annuities in payment no allowance for mortality has been made. In respect of S&P, for those classes of non-linked business with a discretionary participation feature, a gross premium method has been used to value the liability, whereby expected income and costs have been projected, allowing for mortality, interest rates and expenses. For the other classes of non-linked business the provision is calculated on a net premium basis, being the level of premium consistent with a premium stream, the discounted value of which, at the outset of the policy, would be sufﬁcient to cover exactly the discounted value of the original guaranteed beneﬁts at maturity, or at death if earlier, on the valuation basis. The provision is then calculated by subtracting the present value of future net premiums from the present value of the beneﬁts guaranteed at maturity, or death if earlier, as a result of events up to the balance sheet date. Negative provisions do not arise under the net premium method, which makes no allowances for voluntary discontinuances by policyholders, and which only implicitly allows for future policy maintenance costs. In respect of CA for those classes of non-linked and unit-linked business where policyholders participate in proﬁts the liability is wholly reassured to Guardian. The liability is calculated on a net premium basis, but is then increased to the realistic liability as a result of the liability adequacy test. Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash ﬂows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identiﬁed, an additional provision is made and the Group recognises the deﬁciency in income for the year. Insurance contract provisions can never be deﬁnitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Swedish business – life (i) Premiums Premiums are accounted for when received, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due. (ii) Claims and beneﬁts Claims are accounted for in the accounting period in which they are due or notiﬁed. Reinsurance recoveries are accounted for in the same period as the related claim. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 81 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (iii) Acquisition costs Acquisition costs comprise expenditure incurred arising from the completion of insurance contracts. They are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At the end of each year, such costs that are deferred to future years are reviewed to ensure they do not exceed available future margins. Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred. (iv) Measurement of insurance contract provisions Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claim provisions are not discounted other than for income protection and waiver of premium beneﬁts, where payments may be made for a considerable period of time. All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the ﬁnal outcome will prove to be different from the original liability established. Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash ﬂows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identiﬁed, an additional provision is made and the deﬁciency in income for the year is recognised. Swedish business – non-life (i) Premiums Written premiums for non-life (general) insurance business comprise the premiums on contracts incepting in the ﬁnancial year. Written premiums are stated gross of commission payable to intermediaries and exclusive of taxes and duties paid on premiums. Unearned premiums are those proportions of the premium which relate to periods of risk after the balance sheet date. Unearned premiums are calculated on a straight-line basis according to the duration of the policy underwritten. (ii) Acquisition costs Acquisition costs, which represent commission payable, incurred in writing written premiums, are deferred and amortised over the period in which the related premiums are earned. (iii) Claims Claims incurred Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions for claims incurred but not yet reported and related expenses, together with any adjustments to claims from previous years. Outstanding claims provisions Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claims provisions are not discounted. Provisions are calculated gross of any reinsurance recoveries. All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the ﬁnal outcome will prove to be different from the original liability established. The estimation of outstanding claims provisions is described in Note 32. (j) Investment contracts (i) Amounts collected Amounts collected on investment contracts, which primarily involve the transfer of ﬁnancial risk such as long-term savings contracts, are accounted for using deposit accounting, under which the amounts collected, less any initial fees deducted, are credited directly to the balance sheet as an adjustment to the liability to the investor. (ii) Amounts deposited with reinsurers Amounts deposited with reinsurers under reinsurance arrangements, which primarily involve the transfer of ﬁnancial risk, are entered directly to the balance sheet as amounts deposited with reinsurers. These assets are designated on initial recognition as at fair value through income. (iii) Beneﬁts For investment contracts, beneﬁts paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid. 82 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (iv) Acquisition costs Acquisition costs relating to investment contracts comprise directly attributable incremental acquisition costs, which vary with, and are related to, securing new contracts, and are recognised as an asset to the extent that they represent the contractual right to beneﬁt from the provision of investment management services. The asset is presented as a deferred acquisition cost asset and is amortised over the expected term of the contract, as the fees relating to the provision of the services are recognised. All other costs are recognised as expenses when incurred. (v) Liabilities All investment contract liabilities are designated on initial recognition as held at fair value through income. The Group has designated investment contract liabilities at fair value through income as this more closely reﬂects the basis on which the businesses are managed. The ﬁnancial liability in respect of unit-linked contracts is measured by reference to the value of the underlying net asset value of the unitised investment funds, determined on a bid value, at the balance sheet date. For the UK businesses, deferred tax on unrealised capital gains and for the Swedish business a yield tax in respect of an estimate of the investment return on the underlying investments in the unitised funds are also reﬂected in the measurement of the respective unit-linked liabilities. In respect of the UK businesses guaranteed income and guaranteed growth bond liabilities and other investment contract liabilities are managed together with related investment assets on a fair value basis as part of the documented risk management strategy. The fair value of other investment contracts is measured by discounting current estimates of all contractual cash ﬂows that are expected to arise under contracts. (k) Reinsurance The Group cedes reinsurance in the normal course of business for the purpose of avoiding the retention of undue concentration of risk on any one life, policyholder or loss event (for example multiple losses under a Group Life contract). Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets, liabilities, income and expenses from the related insurance contracts because the reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. Only rights under contracts that give rise to a signiﬁcant transfer of insurance risk are accounted for as reinsurance assets, which comprise amounts due from insurance companies for paid and unpaid losses and ceded life policy beneﬁts. Rights under contracts that do not transfer signiﬁcant insurance risk are accounted for as ﬁnancial instruments and are presented as amounts deposited with reinsurers. The net premiums payable to a reinsurer may be more or less than the reinsurance assets recognised by the Group in respect of the reinsurance cover purchased. Any gain or loss is recognised in the income statement in the period in which the reinsurance premiums are payable. Rights under reinsurance contracts comprising the reinsurers’ share of insurance contract provisions and accrued policyholder claims are estimated in a manner that is consistent with the measurement of the provisions held in respect of the related insurance contracts and in accordance with the terms of the reinsurance contract. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Impairment losses reduce the carrying value of the related reinsurance assets to their recoverable amount and are recognised as an expense in the income statement. The Group enters into certain ﬁnancing arrangements, which are established in the form of a reinsurance contract, but which are substantively in the form of a ﬁnancial instrument. Such arrangements are classiﬁed and presented as borrowings within ﬁnancial liabilities. (l) Fee and commission income Fees charged for investment management services provided in connection with investment contracts are recognised as revenue as the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned. For both insurance and investment contracts, initial fees, annual management charges and contract administration charges are recognised as revenue on an accruals basis. Surrender charges are recognised as a reduction to policyholder claims and beneﬁts incurred when the surrender beneﬁts are paid. Beneﬁt-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity beneﬁts are recognised as revenue on an accruals basis. For insurance and investment contracts, commissions received or receivable which do not require the Group to render further services are recognised as revenue by the Group on the effective commencement or renewal dates of the related contract. However, when it is probable that the Group will be required to render further services during the life of the contract, the commission, or part thereof, is deferred and recognised as revenue over the period in which services are rendered. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 83 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (m) Investment income Investment income comprises income from ﬁnancial assets and rental income from investment properties. Income from ﬁnancial assets comprises dividend and interest income, net fair value gains and losses (both unrealised and realised) in respect of ﬁnancial assets classiﬁed as fair value through income, and realised gains on ﬁnancial assets classiﬁed as loans and receivables. Dividends are accrued on an ex-dividend basis. Interest received and receivable in respect of interest-bearing ﬁnancial assets classiﬁed as at fair value through income is included in net fair value gains and losses. For loans and receivables and cash and cash equivalents interest income is calculated using the effective interest method. Rental income from investment properties under operating leases is recognised in the income statement on a straight-line basis over the term of each lease. Lease incentives are recognised in the income statement as an integral part of the total lease income. (n) Expenses (i) Operating lease payments Leases where a signiﬁcant proportion of the risks and rewards of ownership is retained by the lessor are classiﬁed as operating leases. Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. (ii) Financing costs Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the effective interest rate method. (o) Income taxes Income tax on the proﬁt or loss for the year comprises current and deferred tax and is recognised in the income statement. Tax that relates directly to transactions reﬂected within equity is also presented within equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁts will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax beneﬁt will be realised. (iii) Policyholders’ fund yield tax Certain of the Group’s policyholders within the Swedish business are subject to a Swedish yield tax which is calculated based on an estimate of the investment return on underlying investments within their unitised funds. The Group is under an obligation to deduct the yield tax from the policyholders’ unitised funds and to remit these deductions to the tax authorities. The remittance of this tax payment is included in other operating expenses as it does not comprise a tax charge on Group proﬁts. (p) Acquired value of in-force business Acquired in-force insurance and investment contracts arising from business combinations are measured at fair value at the time of acquisition. The difference between the fair value of insurance contracts and the liability measured in accordance with the Group’s accounting policies for the contracts is recorded as acquired present value of in-force business. Present value of in-force business is carried gross of tax and is amortised against income on a time proﬁle which, it is intended, will broadly match the proﬁle of the underlying emergence of surplus as anticipated at the time of acquisition. The present value of in-force insurance contracts is tested for recoverability/impairment as part of the liability adequacy test. The present value of in-force investment contracts is stated at cost less accumulated amortisation and impairment losses. The initial cost is deemed to be the fair value of the contractual customer relationships acquired. The acquired present value of the in-force investment contracts is carried gross of tax and is amortised against income on a time proﬁle which, it is intended, will broadly match the proﬁle of the underlying emergence of proﬁt from the contracts. The recoverable amount is estimated at each balance sheet date. If the recoverable amount is less than the carrying amount, an impairment loss is recognised in the income statement and the carrying amount is reduced to its recoverable amount. (q) Acquired value of customer relationships The acquired value of customer relationships arising from business combinations is measured at fair value at the time of acquisition. This comprises the discounted cash ﬂows relating to new insurance and investment contracts which are expected to arise from existing customer relationships. These are carried gross of tax, are amortised in accordance with the expected emergence of proﬁt from the new contracts and are tested periodically for recoverability. 84 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (r) Software assets An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met: (i) an asset is created that can be identiﬁed; (ii) it is probable that the asset created will generate future economic beneﬁts; and (iii) the development costs of the asset can be measured reliably. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Software assets, including internally developed software, are amortised on a straight-line basis over their estimated useful life, which typically varies between 3 and 5 years. (s) Property and equipment Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of the property and equipment on the following basis: Computers and similar equipment 3 years Fixtures and other equipment 5 years Assets held under ﬁnance leases are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the relevant lease. (t) Investment property Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. On initial recognition investment properties are measured at cost including attributable transaction costs, and are subsequently measured at fair value. Independent external valuers, having an appropriate recognised professional qualiﬁcation and recent experience in the location and category of property being valued, value the portfolio every twelve months. The fair values reﬂect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (m). (u) Financial assets Investments in subsidiaries are carried in the Company balance sheet at cost less impairment. Financial assets are classiﬁed into different categories depending on the type of asset and the purpose for which it is acquired. Currently two different categories of ﬁnancial assets are used: ‘ﬁnancial assets at fair value through income’ and ‘loans and receivables’. Financial assets classiﬁed as at fair value through income comprise ﬁnancial assets designated as such on initial recognition and derivative ﬁnancial instruments. All ﬁnancial assets held for investment purposes other than derivative ﬁnancial instruments are designated as at fair value through income on initial recognition since they are managed, and their performance is evaluated, on a fair value basis in accordance with documented investment and risk management strategies. This designation is also applied to the Group’s investment contracts, since the investment contract liabilities are managed together with the investment assets on a fair value basis as part of the documented risk management strategy. Purchases and sales of ‘regular way’ ﬁnancial assets are recognised on the trade date, which is when the Group commits to purchase, or sell, the assets. All ﬁnancial assets are initially measured at fair value plus, in the case of ﬁnancial assets not classiﬁed as at fair value through income, transaction costs that are directly attributable to their acquisition. Subsequent to initial recognition, ﬁnancial assets classiﬁed as at fair value through income are measured at their fair value without any deduction for transaction costs that may be incurred on their disposal. The fair values of ﬁnancial assets quoted in an active market are their bid prices at the balance sheet date. Financial assets classiﬁed as loans and receivables are stated at amortised cost less impairment losses. A provision for the impairment of loans and receivables is established when there is objective evidence that the Group will not be able to collect all the amounts due according to the original contract terms after the date of the initial recognition of the asset and when the impact on the estimated cash ﬂows of the ﬁnancial asset can be reliably measured. Financial assets classiﬁed as prepayments are held at cost and are amortised over the relevant time period. Financial assets not recognised at fair value through income are regularly reviewed for objective evidence of impairment. In determining whether objective evidence exists, the Group considers, among other factors, the ﬁnancial stability of the counterparty, current market conditions and fair value volatility. Financial assets are derecognised when contractual rights to receive cash ﬂows from the ﬁnancial assets expire, or where the ﬁnancial assets have been transferred together with substantially all the risks and rewards of ownership. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 85 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (v) Derivative ﬁnancial instruments Derivative ﬁnancial instruments are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in proﬁt or loss. Hedge accounting has not been applied. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Embedded derivatives which are not closely related to their host contracts and which meet the deﬁnition of a derivative are separated and fair valued through income. (w) Policyholders’ funds held by the group and liabilities relating to policyholders’ funds held by the group Policyholders’ funds held by the Group and liabilities relating to policyholders’ funds held by the Group are recognised at fair value. (i) Policyholders’ funds held by the Group The policyholders’ funds held by the Group represent the assets associated with an Investment product in the Swedish business, where the assets are held on behalf of the policyholder and where all the risks and rewards associated with the assets are the policyholders’ not the Group’s. The policyholders’ funds held by the Group are held for investment purposes on behalf of the policyholders and are designated as at fair value through income. The fair values of the policyholders’ funds held by the Group are the accumulation of the bid prices of the underlying assets at the balance sheet date. Transactions in these ﬁnancial assets are recognised on the trade date, which is when the Group commits (on behalf of the policyholder) to purchase, or sell the assets. (ii) Liabilities relating to policyholders’ funds held by the Group The liability relating to policyholders’ funds held by the Group represents the liability that matches the asset policyholders’ funds held by the Group. As stated previously, the risk and rewards associated with the investment product (and its underlying assets and matching liability) lie with the policyholders, not the Group. (x) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is deﬁned as having a short maturity of three months or less at their acquisition. (y) Assets held for sale and liabilities held for sale Assets and liabilities are classiﬁed as held for sale if their carrying amount is to be recovered principally through a sale transaction that is highly likely to complete within one year from the date of classiﬁcation, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value and are classiﬁed separately from other assets in the balance sheet. Assets and liabilities are not netted. In the period where a non-current asset or disposal group is recognised for the ﬁrst time, the balance sheet for the comparative prior period is not restated. (z) Impairment The carrying amounts of the Group’s assets other than reinsurance assets (refer to (k) above) and assets which are carried at fair value are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets’ recoverable amount is estimated in order to determine the extent of the impairment loss, if any. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount and impairment losses are recognised in the income statement. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money. Impairment losses are reversed through the income statement if there is a change in the estimates used to determine the recoverable amount. Such losses are reversed only to the extent that the assets’ carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation where applicable, if no impairment loss had been recognised. (aa) Provisions Provisions are recognised when the Group has a present, legal or constructive obligation as a result of past events such that it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. The Group recognises provisions for onerous contracts when the expected beneﬁts to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. 86 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (bb) Borrowings Borrowings are recognised initially at fair value, less transaction costs, and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised in the income statement on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a ﬁnancial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts future cash payments through the expected life of the ﬁnancial liability. (cc) Employee beneﬁts (i) Pension obligations UK businesses Group companies operate deﬁned contribution pension schemes, which are funded through payments to insurance companies, to which Group companies pay ﬁxed contributions. There are no legal or constructive obligations on Group companies to pay further contributions if the fund does not hold sufﬁcient assets to pay employee beneﬁts relating to service in current and prior periods. Accordingly, Group companies have no further payment obligations once the contributions have been paid. Contributions to deﬁned contribution pension schemes are recognised in the income statement when due. Swedish business The Group participates in a combined deﬁned beneﬁt and deﬁned contribution scheme for the beneﬁt of its employees. However, the scheme is a multi-employer scheme, with the associated assets and liabilities maintained on a pooled basis. There is limited information available to the Group to allow it to account for the scheme as a deﬁned beneﬁt scheme and, in accordance with IAS19 Employee Beneﬁts, it is, therefore, accounted for as a deﬁned contribution scheme. Contributions paid to the scheme are recognised in the income statement when due. (ii) Bonus plans The Group recognises a liability and an expense for bonuses based on a formula that takes into consideration the proﬁt attributable to the Company’s shareholders after certain adjustments. The expense is recognised in the income statement on an accruals basis. (dd) Share capital and shares held in treasury (i) Share capital Shares are classiﬁed as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments, as consideration for the acquisition of a business, are included in the cost of acquisition. (ii) Shares held in treasury Where the Company purchases its own equity share capital, the consideration paid, including directly attributable costs, is deducted from total shareholders’ equity and shown separately as `treasury shares’ until they are cancelled. Where such shares are subsequently sold, any consideration received is credited to the share premium account. (ee) Dividends Dividend distributions to the Company’s shareholders are recognised in the period in which the dividends are paid, and, for the ﬁnal dividend, when approved by the Company’s shareholders at the annual general meeting. (ff) Other payables and payables related to direct insurance and investment contracts Insurance and investment contract payables and other payables are recognised when due and are measured on initial recognition at the fair value of the consideration paid. Subsequent to initial recognition, payables are measured at amortised cost using the effective interest rate method. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 87 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3 Critical accounting judgements and key sources of estimation and certainty. The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities and also makes critical accounting judgements in applying the Group’s accounting policies. Such estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The more critical areas, where accounting estimates and judgements are made, are set out below. Each item identiﬁes the business segments, as described in Note 8, to which it is relevant. (a) Classiﬁcation of long-term contracts (CA, S&P and Movestic) The Group has exercised judgement in its classiﬁcation of long-term business as between insurance and investment contracts, which fall to be accounted for differently in accordance with the policies set out in Note 2 Signiﬁcant Accounting Policies. Insurance contracts are those where signiﬁcant risk is transferred to the Group under the contract and judgement is applied in assessing whether the risk so transferred is signiﬁcant, especially with regard to pensions contracts, which are predominantly, but not exclusively, created for investment purposes. (b) Acquired value of in-force business (CA, S&P and Movestic) The Group applies accounting estimates and judgements in determining the fair value, amortisation and recoverability of acquired in-force business relating to insurance and investment contracts. In the initial determination of the acquired value of in-force business, the Group uses actuarial models to determine the expected net cash ﬂows (on a discounted basis) of the policies acquired. The key assumptions applied in the models are driven by the expected behaviour of policyholders on termination rates, expenses of management and age of individual contract holders as well as global estimates of investment growth, based on recent experience at the date of acquisition. The assumptions applied within the models are considered against historical experience of each of the relevant factors. No amendments are made for any changes that may arise as a result of changes in operational procedures or customer interaction as a result of ownership by Chesnara. The acquired value of in-force business has been amortised on a basis that reﬂects the expected proﬁt stream arising from the business acquired at the date of acquisition. Acquired value of in-force business is tested for recoverability by reference to expected future income and expense levels. Such impairment testing requires a degree of estimation and judgement. In particular the value is sensitive to the rate at which future cashﬂows are discounted and to the rates of return on invested assets. Analysis shows that no impairment adjustments are required for a realistic range of discount rates ranging from those used in the EEV models to a higher and more onerous estimate based on the Weighted Average Cost of Capital (WACC) for Chesnara. The rates used for the purpose of the impairment testing were 8%, 10% and 12%. As at 31 December 2012, the carrying value of acquired in-force business, net of amortisation, was £14.6m in respect of CA (as at 31 December 2011: £17.5m), £7.2m in respect of S&P (as at 31 December 2011: £8.1m) and £54.3m in respect of Movestic (as at 31 December 2011: £57.8m). (c) Deferred acquisition costs and deferred income – investment contracts (CA and Movestic) The Group applies judgement in deciding the amount of direct costs that are incurred in acquiring the rights to provide investment management services in connection with the issue of investment contracts. Judgement is also applied in establishing the amortisation of the assets representing these contractual rights and the recognition of initial fees received in respect of these contracts. The assets are amortised over the expected lifetime of the investment management service contracts and deferred income, where applicable, is amortised over the expected period over which it is earned. Estimates are applied in determining the lifetime of the investment management service contracts and in determining the recoverability of the contractual rights assets by reference to expected future income and expense levels. This test for recoverability is performed using best estimates of future cash ﬂows, using a market consistent estimate of future investment returns. As at 31 December 2012, the carrying values of deferred acquisition costs, net of amortisation, and of deferred income, in respect of CA, were £5.1m and £8.9m respectively (as at 31 December 2011: £5.7m and £10.0m respectively). The impact on the above numbers of a one year movement in the estimated lifetime of the management services contract or amortisation period is not material. As at 31 December 2012, the carrying values of deferred acquisition costs, net of amortisation, in respect of Movestic, was £17.5m (as at 31 December 2011: £14.0m). An increase in the length of the amortisation period by one year would have increased proﬁt before tax for the year ended 31 December 2012 by £0.5m and shareholders’ equity as at 31 December 2012 by £0.5m. (d) Fair value of ﬁnancial assets and unit-linked investments (CA, S&P and Movestic) Fair value measurement has been adopted to reduce volatility in reported earnings in the income statement as the liabilities so determined are measured in a way which is consistent with the fair value of the underlying invested ﬁnancial assets. Fair value is the amount for which an asset could be exchanged, or a liability settled, between willing, knowledgeable parties in an arm’s length transaction. Fair values are determined by reference to observable market prices where available and reliable. 88 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (e) Estimates of future beneﬁts payments arising from long-term insurance contracts (CA and S&P) The Group makes estimates of the expected number of deaths for each of the years that it is exposed to risk. These estimates are based on either standard mortality tables or reinsurers’ rate tables as appropriate, adjusted to reﬂect the Group’s own experience. For contracts without ﬁxed terms the Group has assumed that it will be able to increase charges to policyholders in future years, in line with emerging mortality experience. The Group has offered guaranteed annuity options within certain contracts. Estimates have been made of the number of contract holders who will exercise these options, in order to measure their value. Changes in investment conditions could result in signiﬁcantly more contract holders exercising their options than the Group has assumed in determining the liabilities arising from these contracts. The Group makes estimates of future deaths, voluntary contract terminations, investment returns and administration expenses at the inception of long-term insurance contracts with ﬁxed and guaranteed terms. These estimates, which are reconsidered annually, form the assumptions used to calculate the liabilities arising from these contracts. When assessing assumptions relating to future investment returns the Group makes estimates of the impact of defaults on the related ﬁnancial assets. The estimates are reassessed annually. The assumptions used to establish insurance contract liabilities and appropriate sensitivities relating to variations in critical assumptions are disclosed in Note 32. (f) Contracts which contain discretionary participation features (S&P) All S&P with-proﬁts contracts contain a discretionary participation feature (‘DPF’) which entitles the holder to receive, as a supplement to guaranteed beneﬁts, additional beneﬁts or bonuses: – that may be a signiﬁcant portion of the total contractual beneﬁts; – whose amount or timing is contractually at the discretion of the Group; and – that are contractually based on realised and/or unrealised investment returns on a speciﬁed pool of assets held by the Group. The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary beneﬁts are based and within which the Group may exercise its discretion as to the quantum and timing of their payment to contract holders. As at 31 December 2012, the carrying value of insurance contract liabilities which contain S&P discretionary participation features was £346.7m (31 December 2011: £347.2m re-stated). As stated in Note 32 ‘Insurance contract provisions’, the cost to shareholders of guarantees in respect of S&P contracts with discretionary participation features is estimated, based on a constant margin of 10% above a market-consistent evaluation of such costs. An increase in the margin to 20% would reduce proﬁt before tax for the year ended 31 December 2012, by £4.2m and shareholder equity as at 31 December 2012 by £3.2m. (g) Insurance claim reserves (Movestic) Provisions are determined by management based on experience of claims settled and on statistical models which require certain assumptions to be made regarding the timing, incidence and amount of claims. In order to calculate the total provision required, the historical development of claims is analysed using statistical methodology to extrapolate, within acceptable parameters, the value of outstanding claims. For more recent underwriting years the provisions will make more use of techniques that incorporate expected loss ratios. As underwriting years mature, the reserves are increasingly driven by methods based on actual claims experience. The data used for statistical modelling is internally generated. Actual claims experience may differ from the historical pattern on which the estimate is based and the cost of individual claims may exceed that assumed. Liabilities carried in respect of waiver of premium and income protection policies are sensitive to the Group’s assessment of the length of period in which beneﬁts will be paid to policyholders (which can be signiﬁcant). Estimates are made based on the sex, age and occupation of the claimant as well as the length of time the claimant has been claiming on the policy. As at 31 December 2012, the carrying value of the insurance claim reserves, gross of reinsurance, was £68.6m (as at 31 December 2011: £63.8m). The key sensitivities in respect of insurance claim reserves are considered in Note 32. (h) Insurance claim reserves – reinsurance recoverable (Movestic) A signiﬁcant proportion of the insurance claims arising within Movestic are ceded to reinsurers. In preparing the ﬁnancial statements the Directors have made an assessment as to whether claims ceded to reinsurers are recoverable. As at 31 December 2012, such claims ceded to reinsurers and reﬂected on the balance sheet were £46.2m (31 December 2011: £43.1m). The application of a 10 per cent bad debt provision on the reinsurance balance would reduce 2012 proﬁt before tax by £4.6m and shareholders’ equity by £3.4m. (i) Accounting for pension plans (Movestic) The Group participates in a deﬁned beneﬁt pension scheme on behalf of its Swedish employees. The scheme is a multi-employer plan to which a number of third party employers also contribute. The underlying assets and liabilities of the scheme are pooled and are not allocated between the contributing employers. As a result, information is not available to account for the scheme as a deﬁned beneﬁt scheme and the Group has accounted for the scheme as a deﬁned contribution scheme. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 89 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4 Exchange rates The Group’s principal overseas operations during the year were located within Sweden. The results and cash ﬂows of these operations have been translated into sterling at an average rate for the year of £1 = SEK 10.7326. Assets and liabilities have been translated at the year end rate of £1 = SEK10.5247. Total foreign currency exchange rate movements for the year-ended 31 December 2012 resulted in a gain recognised in the Consolidated Statement of Comprehensive Income of £741,000 (year ended 31 December 2011: £738,000 loss). 5 Management of insurance risk The Group’s management of insurance risk is a critical aspect of its business. The primary insurance activity carried out by the Group comprises the assumption of the risk of loss from persons that are directly subject to the risk. Such risks in general relate to life, accident, health and ﬁnancial perils that may arise from an insurable event. As such, the Group is exposed to the uncertainty surrounding the timing and severity of claims under the related contracts. The principal risk is that the frequency and severity of claims is adverse to that expected. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. Insured events are, by their nature, random, and the actual number and size of events during any one year may vary from those estimated using established statistical techniques. The risk under assurance policies is partly naturally hedged by risks under annuity policies where the exposure is to the risk of longevity. The Group manages its insurance risk through adoption of underwriting strategies, the aim of which is to avoid the assumption of undue concentration of risk, approval procedures for new products, pricing guidelines and adoption of reinsurance strategies, the aim of which is to reinforce the underwriting strategy by avoiding the retention of undue concentration of risk on any one life. Notwithstanding that the Group pursues common overarching objectives and employs similar techniques in managing these risks, the disparate characteristics of the products and of the market and regulatory environments of the UK and Swedish businesses are such that insurance risk is managed separately for the separate businesses. Accordingly, the information which follows differentiates these businesses. The UK businesses, which are substantially closed to new business, comprise the CA and S&P segments and these are further differentiated in the information provided below, where necessary. The Swedish business, which is open to new business, comprises the Movestic segment. UK businesses Terms and conditions of insurance contracts The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash ﬂows arising from insurance contracts are set out in the product analyses below, which give an assessment of the main products of the UK businesses and of the ways in which the associated risks are managed. (cid:54)(cid:88)(cid:80)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:18)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:80)(cid:3)(cid:178)(cid:3)(cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72) 31 December Long-term unit-linked without DPF (sums assured) Long-term non-linked without DPF (sums assured) (cid:44)(cid:80)(cid:80)(cid:72)(cid:71)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:178)(cid:3)(cid:38)(cid:36)(cid:3)(cid:11)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:80)(cid:12)(cid:3) (cid:39)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:39)(cid:51)(cid:41)(cid:3)(cid:178)(cid:3)(cid:54)(cid:9)(cid:51)(cid:3)(cid:11)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:80)(cid:12)(cid:3) Long-term with DPF – CA (sums assured) Long-term with DPF – S&P (sums assured) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Gross £000 3,847,002 133,566 (cid:25)(cid:15)(cid:21)(cid:21)(cid:23)(cid:3)(cid:3) (cid:21)(cid:15)(cid:24)(cid:28)(cid:28)(cid:3)(cid:3) 56,441 434,750 2012 2011 Net £000 Gross £000 2,942,430 119,713 (cid:25)(cid:15)(cid:20)(cid:21)(cid:19)(cid:3)(cid:3) (cid:21)(cid:15)(cid:24)(cid:28)(cid:28)(cid:3)(cid:3) 120 416,760 4,237,926 154,062 (cid:25)(cid:15)(cid:19)(cid:19)(cid:26)(cid:3)(cid:3) (cid:21)(cid:15)(cid:27)(cid:28)(cid:22)(cid:3)(cid:3) 59,855 462,186 Net £000 3,220,375 137,227 (cid:24)(cid:15)(cid:27)(cid:24)(cid:25) (cid:21)(cid:15)(cid:27)(cid:28)(cid:22) 120 439,175 90 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS Long-term unit-linked and non-linked insurance contracts – without discretionary participation features Product features The UK businesses have written both unit-linked and non-linked contracts, which include death and morbidity beneﬁts on a whole life, endowment and term assurance basis. In addition there are immediate annuities primarily written from vesting pensions. For contracts where death is the insured risk, the most signiﬁcant factors that could increase risk are epidemics (such as AIDS, SARS or a ﬂu pandemic) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier or more claims than expected. Management of risks Unit-linked insurance contracts are contracts where charges are made for insurance risk and administration charges and the primary purpose of which is to provide an investment return to policyholders. In addition, the policyholder is insured against death and serious injury. Unit-linked contracts operate by investing the policyholders’ premiums into pooled investment funds of the UK businesses, the policyholders’ share of the fund being represented by units. The beneﬁt is payable on death, or maturity if earlier, the amount payable on death being subject to a guaranteed minimum amount. For these contracts, all of the investment risk is borne by the policyholder as investment performance directly affects the value of the unit fund and hence the beneﬁts payable. Therefore, there is exposure to insurance risk only insofar as the value of the unit-linked fund is lower than the guaranteed minimum death beneﬁt. For a material portion of the business, the charges taken for mortality and morbidity costs are reviewable, which allows the company to mitigate some of its insurance risk. Non-linked business contains three distinct groups of products: (i) A number of products representing approximately 2% of sums assured, provide ﬁxed and guaranteed beneﬁts and have ﬁxed future premiums. For these there are no mitigating terms and conditions that reduce the insurance risk accepted. (ii) Immediate annuities provide regular income payments generally during the outstanding life of the policyholder, and in some cases that of a surviving spouse or partner. In certain cases payments may be guaranteed for a minimum period. These expose the business to longevity risk, though to some extent this provides a hedge to the mortality risk taken on other products. (iii) For the remainder of the business, which is operated on a quasi-linked basis, charges are made for mortality risk on a monthly basis and these charges may be altered based on mortality experience, thereby minimising the exposure to mortality risk. In the light of charges made for insurance risk and administration services and of the investment performance of the assets notionally backing these contracts, the premium payable may be altered at regular intervals. A number of these contracts also include Permanent Health Insurance (PHI) beneﬁts which have reviewable charges, which may be altered based on morbidity experience, thereby minimising the exposure to morbidity risk. Delays in implementing increases in charges and market or regulatory restraints over the extent of the increases may reduce this mitigating effect. Reinsurance is used extensively on the business described above to mitigate concentrations of insurance risk. The insurance risk is further managed through pricing, product design and, for non-linked and quasi-linked contracts, appropriate investment strategy. Concentration of insurance risk Through the use of reinsurance exposures to material insurance risks on individual cases are avoided, with 97% of the business having retained sums assured of less than £250,000. Long-term insurance contracts – with discretionary participation features – CA Product features CA historically wrote with-proﬁts business in the UK, where the policyholder beneﬁts comprise a guaranteed sum assured payable on death or at maturity, to which may be added a discretionary annual bonus and a discretionary terminal bonus. Management of risks This business is wholly reassured to Guardian and hence the only risk retained by CA for this business is the risk of default by the reinsurer. This risk is detailed in the Credit Risk Management section of Note 6. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 91 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Long-term insurance contracts – with discretionary participation features – S&P Product features At retirement the with-proﬁts deferred annuity contracts provide for guaranteed minimum pensions and the with-proﬁts endowments provide for guaranteed minimum lump sums. With-proﬁts whole of life policies guarantee a minimum amount payable on death. The guaranteed annuities or lump sums represent investment returns on contributions mainly at 5% p.a. A terminal bonus may be paid at maturity or retirement, and on death, depending on the investment performance of the with-proﬁts policyholder assets when the policyholder receives the higher of the asset share and the minimum guaranteed amount. The asset share is based on the contributions invested plus an allocation of investment return less costs and expenses. In accordance with the Principles and Practices of Financial Management for its with-proﬁts business S&P may make a deduction of up to 1.5% per annum from the asset shares of with-proﬁts policyholders to meet the future cost of guarantees. The amount deducted remains part of the assets in the with-proﬁts policyholder funds. The size of the deduction is reassessed at least annually. In the event of a policyholder choosing to transfer out, the amount payable is not guaranteed and is based on the asset share. Management of risks For life endowment and whole of life policies mortality risk is material. This risk is mitigated to some extent by the use of reinsurance. The risk is to increases in mortality rates, which are most likely to be from epidemics (such as AIDS, SARS or a ﬂu pandemic) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier or more claims than expected. For deferred annuity contracts, the risk is to improving mortality. The risk is managed through the initial pricing, and technical provisions are assessed allowing for future mortality improvements based on industry available information on mortality experience. Concentration of insurance risk Through the use of reinsurance exposures to material insurance risks on individual cases are avoided, with 99.0% of the business having retained sums of less than £250,000. Other risks on insurance contracts Apart from ﬁnancial risks relating to the ﬁnancial assets, which support life assurance contracts, as set out in Note 6, there are other signiﬁcant types of risk pertaining to life insurance contracts written by the UK businesses, as follows: Expense risk The strategy of the UK businesses is to outsource all operational activities to third party administrators in order to reduce the signiﬁcant expense inefﬁciencies that would arise with ﬁxed and semi-ﬁxed costs on a diminishing policy base. There are, however, risks associated with the use of outsourcing. In particular, there will be a need in future to renegotiate the terms of the outsourcing arrangements as the existing agreements expire. There is also a risk that, at some point in the future, third party administrators could default on their obligations. The UK businesses monitor the ﬁnancial soundness of third party administrators and have retained step-in rights on the more signiﬁcant of these agreements. There are also contractual arrangements in place which provide for ﬁnancial penalties in the event of default by the administration service provider. Mortgage endowment misselling complaints The UK businesses have experienced a signiﬁcant level of complaints from mortgage endowment policyholders since their ﬁrst regulatory mailing programme in 2000. In response to this, the UK businesses hold mortgage endowment complaints redress provisions. The UK businesses continue to monitor closely, among other factors, the volume of complaints and the value of compensation paid to policyholders in order to assess the continuing adequacy of the provisions. There remains however a residual risk that at some point in future the levels of complaints received may prove to be higher than those anticipated within the provision. Persistency risk Persistency risk is the risk that the investor cancels the contract or discontinues paying new premiums into the contract, thereby exposing the UK businesses to a loss resulting from an adverse movement in the actual experience compared to that expected in the product pricing. Although changes in the levels of persistency would not adversely affect the result in the short-term they would reduce future proﬁts available from the contract. 92 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS Assumptions and sensitivities The assumptions and sensitivities relating to insurance contract provisions for the UK businesses are set out in Note 32 Insurance Contract Provisions. Swedish business The terms and conditions of insurance contracts which have a material effect on the amount, timing and uncertainty of future cash ﬂows arising from insurance contracts are set out in the product analyses below, which give an assessment of the main products of Movestic and of the ways in which the associated risks are managed. The breakdown of the insurance products of Movestic, by gross and net premiums written and by claims outstanding, which reﬂects the scale of business written, is as follows: Premiums Year ended 31 December Group Sweden Norway Individual Death Waiver of premium Income protection Claims outstanding As at 31 December Group Sweden Norway Individual Death Waiver of premium Income protection Before reinsurance 2011 2012 £000 £000 After reinsurance 2011 £000 2012 £000 20,369 2,378 3,127 3,096 10,266 17,947 2,252 3,463 3,166 11,557 7,704 282 1,512 906 6,009 6,845 251 1,363 902 7,645 39,236 38,385 16,413 17,006 Before reinsurance 2011 2012 £000 £000 After reinsurance 2011 £000 2012 £000 24,214 4,474 1,604 6,007 32,282 21,360 4,760 1,350 4,965 31,347 5,445 679 678 1,739 13,869 5,194 743 820 1,304 12,656 68,581 63,782 22,410 20,717 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 93 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Terms and conditions Product features – Group Contracts Group Contracts insure policyholders in respect of death with the option to include additional accident and disability beneﬁts. Policyholders may also include their spouse and children (up to the age of 25) on the policy. Policies are sold in both Sweden and Norway and all sales are intermediated. Group Contracts sold in Sweden allow the policyholder to choose the sum assured level. Contracts sold in Norway have sum assured levels that are normally determined by the policyholders’ employer and apply to all members of that company scheme. The Swedish product provides a maximum coverage of insured beneﬁts up to 40 times a base amount (as at 31 December 2012 SEK 44,000 being approximately £4,181) although most policies are between 6 to 15 times the base amount. The Norwegian product provides a maximum coverage of insured beneﬁts up to 80 times a base amount (as at 31 December 2012 NOK 82,122, being approximately £9,102) although most policies are between 5 to 10 times the base amount. All contracts are for an annual period and premium payments are made usually on either an annual or quarterly basis. Product features – Individual Contracts In relation to Individual Contracts, Movestic writes contracts, which include death and morbidity beneﬁts on term assurance with disability, waiver of premium and income protection options. Policies are sold in Sweden and all sales are intermediated. In relation to the income protection and the waiver of premium beneﬁts within the Individual Contracts, the monthly beneﬁts upon a claim may be payable to the policyholders over a long period up to their retirement. The contracts have been unbundled as between insurance and investment contracts. Risk in respect of investment contracts is described in Note 6. All insurance contracts are for an annual period and payments are made on a monthly basis. Management of risk The main risk associated with the Group and Individual Contracts is the frequency of claims (for either death or accident or sickness). Claims experience can be variable, with the main factors being the age, sex and occupation of the policyholder. In addition, for the Group Contracts, Movestic is exposed to a single loss event that covers a number of employees of an organisation. The key risks are managed through appropriate product design and pricing of the policies to ensure that the potential cost to Movestic of these events (and associated expenses of underwriting and administration) are reﬂected in the price charged to the policyholder. Key controls implemented include a deﬁned pricing structure based on the characteristics of the policyholder and the regular review of management information on the type and frequency of accidents. Group Contracts are issued on an annual basis which means that Movestic’s exposure runs for a period of 12 months, after which Movestic has the option to decline to renew or can increase the price on renewal. Individual Contracts are long-term contracts but Movestic has the option to review the premiums on an annual basis. For both the Group and Individual Contracts, between 30% to 90% of the premiums and claims relating to this product are ceded to a reinsurer which reduces the overall insurance risk exposure to Movestic. The policies and products from the Aspis acquisition are reinsured for approximately 80% of the claims amount. In addition, for the majority of the Group Contracts, the loss arising from a single event to multiple employees is reinsured. The reinsurance provides indemnity for a single loss between SEK 5m (approximately £0.5m) and SEK 140m (approximately £13.3m). Concentration of insurance risk Concentration of insurance risk is determined by reference to beneﬁts assured for Individual Contracts and by estimated maximum loss for Group Contracts. Regarding beneﬁts assured for individual contracts, the combined effect of reinsurance and the fact that the vast majority of the total beneﬁt assured relates to numerous small value contracts, limit the level of concentration risk. Through the use of reinsurance exposures to material insurance risks on individual cases are avoided, with 99.8% of the business having retained sums assured of less than £250,000. In respect of Group Contracts, the business is exposed to multiple employees of the same organisation being involved in a single loss event. Movestic estimates that its largest such exposures arise in Norway, where the Group Contracts sold tend to cover all employees within that organisation (whereas in Sweden employees may opt in to the Group Contract). Movestic forecasts that its maximum loss would be approximately SEK 44m (approximately £4.2m) gross of reinsurance and SEK 5m (approximately £0.5m) after reinsurance. Assumptions and sensitivities for Group Contract and Individual Contract insurance contract provisions Information relating to insurance contract provisions assumptions and sensitivities for the Swedish business is set out in Note 32 Insurance Contract Provisions. 94 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS 6 Management of ﬁnancial risk The Group is exposed to a range of ﬁnancial risks, principally through its insurance contracts, ﬁnancial assets, including assets representing shareholder assets, ﬁnancial liabilities, including investment contracts and borrowings, and its reinsurance assets. In particular, the key ﬁnancial risk is that, in the long-term, proceeds from ﬁnancial assets are not sufﬁcient to fund the obligations arising from its insurance and investment contracts and borrowings. The most important components of this ﬁnancial risk are market risk (interest rate risk, equity and property price risk, foreign currency exchange risk and liquidity risk), and credit risk, including the risk of reinsurer default. Further, the Group has signiﬁcant foreign currency exchange rate risk in relation to movements between the Swedish Krona and Sterling arising from its ownership of Movestic. The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash ﬂows arising from insurance contracts are set out in Note 5. The terms and conditions of investment contracts that have a material effect on the amount, timing and uncertainty of future cash ﬂows arising from investment contracts are as follows: The Group provides three types of investment contract: unit-linked savings, unit-linked pensions predominantly written in the UK and Sweden and guaranteed income and growth bonds predominantly written in the UK. (i) Unit-linked savings are single or regular premium contracts, with the premiums invested in a pooled investment fund, where the policyholder’s investment is represented by units or trust accounts where the policyholder decides where to invest. On certain contracts there is a small additional beneﬁt payable on death which is deemed not to transfer signiﬁcant insurance risk to the business for these contracts. The beneﬁts payable at maturity or surrender of the contracts are the underlying value of the investment in the unit-linked funds or trust accounts, less surrender penalties where applicable. (ii) Unit-linked pensions are single or regular premium contracts with features similar to unit-linked savings contracts. Beneﬁts are payable on transfer, retirement or death. (iii) Guaranteed income bonds are mainly single premium contracts for a ﬁxed term offering ﬁxed-income payments plus a return of capital at maturity. A guaranteed growth bond offers no income, but a higher guaranteed payment at maturity date. Market risk management (i) General The Group businesses manage their market risks within asset liability matching (ALM) frameworks that have been developed to achieve long-term investment returns at least equal to their obligations under insurance and investment contracts, with minimal risk. Within the ALM frameworks the businesses periodically produce reports at legal entity and asset and liability class level, which are circulated to the businesses’ key management. The principal technique of the ALM frameworks is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of beneﬁts payable to policyholders, with separate portfolios of assets being maintained for each distinct class of liability. For unit-linked contracts the Group’s objective is to match the liabilities, both insurance and investment contract liabilities, with units in the assets of the funds to which the value of the liabilities is linked, such that the policyholder bears the market risk. This minimises the impact of market risks on these contracts, such that the remaining primary exposure to market risk is the risk of volatility in asset-related fees due to the impact of interest rate, equity price and foreign currency movements on the fair value of the unit-linked assets, on which asset-related fees are based. For non unit-linked business, the Group’s objective is to match the timing of cash ﬂows from insurance and investment contract liabilities with the timing of cash ﬂows from assets subject to identical or similar risks. By matching the cash ﬂows of liabilities with those of suitable assets, market risk is managed effectively, whilst liquidity risk is minimised. These processes to manage the risks, which the Group has not changed from previous periods, ensure that the Group is able to meet its obligations under its contractual liabilities as they fall due. With respect to S&P there is signiﬁcant additional risk insofar as investment returns on policyholder with-proﬁts assets supporting the with-proﬁts business may result in insufﬁcient policyholder assets to meet contractual obligations to with-proﬁts policyholders, because of the impact of contract guarantees, as explained further below. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 95 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The notes below explain how market risks are managed using the categories utilised in the businesses’ ALM (Asset Liability Matching) frameworks. In particular, the ALM frameworks require the management of interest risk, equity price risk, and liquidity risk at the portfolio level, so that the appropriate risks for each portfolio may be managed in an effective way. The following tables reconcile the classes and portfolios used in the businesses’ ALM frameworks to relevant items in the consolidated balance sheet and are followed by a portfolio-by-portfolio description of the nature of the related market risk and how that risk is managed. 31 December 2012 (cid:3) Assets Investment in associates Property and equipment Reinsurers’ share of insurance contract provisions Amounts deposited with reinsurers Investment properties Deferred tax asset Financial assets Equity securities at fair value through income Holdings in collective investment schemes at fair value through income Debt securities at fair value through income Insurance and other receivables Prepayments (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) Reinsurers’ share of accrued policyholder claims Income taxes Cash and cash equivalents Total assets Liabilities Insurance contract provisions Financial liabilities Investment contracts Borrowings (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Provisions Deferred tax liabilities Reinsurance payables Payables related to direct insurance and investment contracts Other payables Bank overdraft (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Unit-linked (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:3) (cid:3)(cid:3) £000 Insurance * contracts Annuities in Guaranteed bonds payment (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:39)(cid:51)(cid:41)(cid:3) £000 £000 £000 – – 131,266 30,245 77,338 2,186 427,294 2,619,000 151,201 12,758 137 (cid:22)(cid:20)(cid:19)(cid:3)(cid:3) (cid:22)(cid:15)(cid:21)(cid:20)(cid:19)(cid:15)(cid:26)(cid:19)(cid:19)(cid:3)(cid:3) 3,806 – 99,253 – – 102,237 – 22,349 – 2 313,497 61,652 855 – (cid:21)(cid:19)(cid:25)(cid:3)(cid:3) (cid:22)(cid:26)(cid:25)(cid:15)(cid:21)(cid:20)(cid:21)(cid:3)(cid:3) – – 4,039 – – – – – – – – 112,943 – – (cid:178)(cid:3)(cid:3) (cid:20)(cid:20)(cid:21)(cid:15)(cid:28)(cid:23)(cid:22)(cid:3)(cid:3) – – 164 – – – – – – – – 1,512 89 – (cid:178)(cid:3)(cid:3) (cid:20)(cid:15)(cid:25)(cid:19)(cid:20)(cid:3)(cid:3) – – 337 Other non-linked contracts and other shareholder funds £000 2,902 369 45,189 – 480 109 Total £000 2,902 369 278,692 30,245 100,167 2,295 7 427,303 77,302 36,069 10,611 3,023 (cid:21)(cid:15)(cid:24)(cid:26)(cid:28)(cid:3)(cid:3) (cid:20)(cid:21)(cid:28)(cid:15)(cid:24)(cid:28)(cid:20)(cid:3)(cid:3) 683 4,299 124,883 3,009,799 363,377 24,313 3,160 (cid:22)(cid:15)(cid:19)(cid:28)(cid:24)(cid:3) (cid:22)(cid:15)(cid:27)(cid:22)(cid:20)(cid:15)(cid:19)(cid:23)(cid:26) 4,489 4,299 228,676 3,554,794 504,837 113,107 1,938 308,505 4,483,181 1,506,770 453,421 113,107 – 133,780 2,207,078 2,012,983 – (cid:21)(cid:26)(cid:27)(cid:3)(cid:3) (cid:21)(cid:15)(cid:19)(cid:20)(cid:22)(cid:15)(cid:21)(cid:25)(cid:20)(cid:3)(cid:3) 4 – 1,422 23,405 3,874 10 – – (cid:27)(cid:3)(cid:3) (cid:27)(cid:3)(cid:3) – – – 4,204 565 – – – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – – – – – – 1,790 – (cid:178)(cid:3)(cid:3) (cid:20)(cid:15)(cid:26)(cid:28)(cid:19)(cid:3)(cid:3) – – – 148 – – 7,541 48,324 (cid:178)(cid:3)(cid:3) (cid:24)(cid:24)(cid:15)(cid:27)(cid:25)(cid:24)(cid:3)(cid:3) 5,157 5,894 15,188 11,137 12,618 592 2,022,314 48,324 (cid:21)(cid:27)(cid:25)(cid:3) (cid:21)(cid:15)(cid:19)(cid:26)(cid:19)(cid:15)(cid:28)(cid:21)(cid:23) 5,161 5,894 16,610 38,894 17,057 602 Total liabilities 3,548,746 458,198 113,107 1,938 240,231 4,362,220 *Insurance contract with DPF include shareholder funds within the S&P with-proﬁts funds. 96 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS 31 December 2011 (cid:3) Unit-linked (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:3) (cid:3)(cid:3) £000 Other non-linked contracts Insurance * and other contracts Annuities in Guaranteed shareholder funds (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:39)(cid:51)(cid:41)(cid:3) £000 £000 payment £000 bonds £000 Assets Investment in associates Property and equipment Reinsurers’ share of insurance contract provisions Amounts deposited with reinsurers Investment properties Financial assets Equity securities at fair value through income Holdings in collective investment schemes at fair value through income Debt securities at fair value through income Insurance and other receivables Prepayments (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) Reinsurers’ share of accrued policyholder claims Income taxes Cash and cash equivalents Total assets Liabilities Insurance contract provisions Financial liabilities Investment contracts Borrowings (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Provisions Deferred tax liabilities Reinsurance payables Payables related to direct insurance and investment contracts Income taxes Other payables Bank overdraft (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) – – 123,750 28,031 102,459 404,423 2,522,243 113,243 9,092 39 (cid:25)(cid:15)(cid:27)(cid:23)(cid:24)(cid:3)(cid:3) (cid:22)(cid:15)(cid:19)(cid:24)(cid:24)(cid:15)(cid:27)(cid:27)(cid:24)(cid:3)(cid:3) – – 73,498 – – 92,780 – 29,219 2 292,802 70,481 1,318 – (cid:23)(cid:26)(cid:3)(cid:3) (cid:22)(cid:25)(cid:23)(cid:15)(cid:25)(cid:24)(cid:19)(cid:3)(cid:3) – – 1,235 – – – – – – – 105,516 – – (cid:178)(cid:3)(cid:3) (cid:20)(cid:19)(cid:24)(cid:15)(cid:24)(cid:20)(cid:25)(cid:3)(cid:3) – – 587 – – – – – – – 2,758 141 – (cid:178)(cid:3)(cid:3) (cid:21)(cid:15)(cid:27)(cid:28)(cid:28)(cid:3)(cid:3) – – 664 Total £000 1,613 385 263,792 28,031 132,128 1,613 385 47,262 – 450 6 404,431 102,890 38,612 20,248 3,195 (cid:22)(cid:15)(cid:23)(cid:20)(cid:25)(cid:3)(cid:3) (cid:20)(cid:25)(cid:27)(cid:15)(cid:22)(cid:25)(cid:26)(cid:3)(cid:3) 4,667 6,956 119,936 2,917,935 330,610 30,799 3,234 (cid:20)(cid:19)(cid:15)(cid:22)(cid:19)(cid:27)(cid:3) (cid:22)(cid:15)(cid:25)(cid:28)(cid:26)(cid:15)(cid:22)(cid:20)(cid:26)(cid:3) 4,667 6,956 195,920 3,383,623 487,884 106,103 3,563 349,636 4,330,809 1,510,734 444,146 106,103 – 129,956 2,190,939 1,865,860 – (cid:28)(cid:21)(cid:3)(cid:3) (cid:20)(cid:15)(cid:27)(cid:25)(cid:24)(cid:15)(cid:28)(cid:24)(cid:21)(cid:3)(cid:3) – (686 ) – 4,394 – 3,114 115 – – (cid:24)(cid:21)(cid:3)(cid:3) (cid:24)(cid:21)(cid:3)(cid:3) – (1,358 ) – 290 – 1,048 – – – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – – – – – – – 3,020 – (cid:178)(cid:3)(cid:3) (cid:22)(cid:15)(cid:19)(cid:21)(cid:19)(cid:3)(cid:3) – (1) – 554 – – – 7,583 54,753 (cid:178)(cid:3)(cid:3) (cid:25)(cid:21)(cid:15)(cid:22)(cid:22)(cid:25)(cid:3)(cid:3) 2,811 14,729 16,336 35,413 947 20,255 719 1,876,463 54,753 (cid:20)(cid:23)(cid:23)(cid:3) (cid:20)(cid:15)(cid:28)(cid:22)(cid:20)(cid:15)(cid:22)(cid:25)(cid:19)(cid:3) 2,811 15,390 16,336 40,651 947 24,417 834 Total liabilities 3,383,623 446,894 106,103 3,563 283,502 4,223,685 *Insurance contract with DPF include shareholder funds within the S&P with-proﬁts funds. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 97 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unit-linked contracts For unit-linked contracts, which may be insurance or investment contracts, the Group matches the ﬁnancial liabilities, with units in the ﬁnancial assets of the funds to which the value of the liabilities is linked, such that the policyholders bear the principal market risk (being interest rate, equity price and foreign currency risks) and credit risk. Accordingly, this approach results in the Group having no signiﬁcant direct market or credit risk on these contracts. Its primary exposure to market risk is the risk of volatility in asset-related fees due to the impact of interest rate, equity price and foreign exchange rate movements on the fair value of the assets held in the linked funds, on which asset-related fees are based. There is residual exposure to market risk on certain unit-linked contracts where the Group provides to policyholders guarantees as to fund performance or additional beneﬁts which are not dependent on fund performance. This exposure is mitigated to the extent that the Group matches the obligations with suitable ﬁnancial assets external to the unit-linked funds, such that the residual exposure is not considered to be material. Insurance contracts with discretionary participation features Insurance contracts with discretionary participation features subsist entirely within the UK businesses in the form of with-proﬁts policies. For the CA business, where the policyholder beneﬁts comprise a discretionary annual bonus and a discretionary terminal bonus, the with-proﬁts business is wholly reinsured to Guardian and hence there is no market risk for this class of business. Policyholders have the option, for a small element of the with-proﬁts business, to invest a portion of their investment in unit-linked funds as an alternative to the with-proﬁts fund. In this case, a portion of the business is retained, with the management of ﬁnancial risks of this portion being the same as described under ‘Unit-linked Contracts’ above. For the S&P business the primary investment objective of the with-proﬁts policyholder funds is that the guaranteed minimum beneﬁts of the with-proﬁts policyholders should be met entirely from the policyholder funds. The secondary investment objective is, where possible, to provide a surplus in excess of the guaranteed minimum beneﬁts. The entire surplus in the policyholder fund accrues to the with-proﬁts policyholders. Any deﬁcit in the policyholder fund is ultimately borne by shareholders. Therefore the Group has a signiﬁcant exposure to market risk in relation to with-proﬁts business should the with-proﬁts policyholder assets be unable to fully meet the cost of guarantees. To achieve the investment objectives, the funds may invest in a range of asset classes including property, equities, ﬁxed interest securities, convertibles, cash and derivatives, both in UK and overseas investments. Such exposure may be achieved by investment in collective investment schemes (including such schemes with total or absolute return objectives or which include investments in commodities). Investment guidelines restrict the level of exposure for certain asset categories. In respect of derivatives, these may only be used for the purposes of reduction of investment risks and efﬁcient portfolio management. Annuities in payment These are contracts which pay guaranteed ﬁnancial beneﬁts, generally monthly, for the lifetime of the policyholder, and in some cases of their spouse. The ﬁnancial component of these contracts is a guaranteed ﬁxed interest rate: accordingly the Group’s primary ﬁnancial risk on these contracts is the risk that interest income and capital redemptions from the ﬁxed interest debt securities backing the liabilities are insufﬁcient to fund the beneﬁts payable. The Group manages the interest rate risk by matching closely new contracts written with ﬁxed interest debt securities of a suitable duration and quality. Regular monitoring of the interest rate risk is carried out by analysis of expected cash ﬂows from the ﬁnancial assets held with those for the liabilities, which are determined by means of projecting expected cash ﬂows from the contracts using prudent estimates of mortality. Guaranteed bonds These contracts are for a ﬁxed term with ﬁnancial beneﬁts that are ﬁxed and guaranteed at the inception of the contract. The Group manages its market risk on these products, by closely matching contracts written with ﬁxed interest debt securities of a suitable duration and quality. Accordingly, the Group’s primary ﬁnancial risk is the risk that interest income and capital redemptions from the ﬁnancial assets backing the liabilities are insufﬁcient to fund the guaranteed beneﬁts payable. Regular monitoring of the interest rate risk is carried out by analysis of expected cash ﬂows from the ﬁnancial assets held with those for the liabilities, which are determined assuming all contracts continue until their expected maturity date. This analysis also enables the Group to control its liquidity risk for this portfolio. 98 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS Other non-linked contracts and shareholder funds These categories, in which market risk is borne by shareholders, consist of non-linked insurance contracts without DPF and of net shareholder assets representing shareholders’ equity. The Group manages market risks by setting investment guidelines which restrict market exposures. Non-linked contracts without DPF include contracts which pay guaranteed beneﬁts on death or other insured events, the terms being ﬁxed at the inception of the contract. Exposure to market price risk is minimised by generally investing in ﬁxed-interest debt securities, while interest rate risk is generally managed by closely matching contracts written with ﬁnancial assets of suitable yield and duration. To the extent that the Group is unable to fully match its interest rate risk, it makes provision in respect of assumed shortfalls on guaranteed returns to policyholders. Shareholder funds at both Group parent company and operating subsidiary level, in accordance with corporate objectives and, in some instances, in accordance with local statutory solvency requirements, are invested in order to protect capital and to minimise market and credit risk: Accordingly they are generally invested in assets of a shorter-term liquid nature, which gives rise to the risk of lower returns on these investments due to changes in short-term interest rates. (ii) Liquidity risk Liquidity risk is the risk that adequate liquid funds are not available to settle liabilities as they fall due and is managed by forecasting cash requirements and by adjusting investment management strategies to meet those requirements. Liquidity risk is generally mitigated by holding sufﬁcient investments which are readily marketable in sufﬁciently short timeframes to allow the settlement of liabilities as they fall due. Where liabilities are backed by less marketable assets, for example investment properties, there are provisions in contractual terms which allow deferral of redemptions in times of adverse market conditions. The Group’s substantial holdings of money market assets also serves to reduce liquidity risk. The tables below present a maturity analysis of the Group’s liabilities, showing balance sheet carrying value and distinguishing between investment contracts and insurance contracts and other liabilities. 31 December 2012 (cid:3) Carrying values and cash (cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:29)(cid:3) Insurance contract liabilities Unit-linked CA S&P Annuities in payment Other non-linked Investment contract liabilities Unit-linked Guaranteed bonds Other Other liabilities Carrying value (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 0-5 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:11)(cid:88)(cid:81)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:71)(cid:12) 10-15 years 5-10 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 15-20 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) >20 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) Total (cid:133)(cid:19)(cid:19)(cid:19) 1,506,770 106,715 346,706 113,107 133,780 2,012,983 1,790 7,541 132,828 1,506,770 106,715 104,576 26,883 57,916 2,012,983 1,790 7,541 132,828 – – 75,335 24,031 9,182 – – – – – – 88,223 20,837 4,988 – – – – – – 71,820 17,353 3,187 – – – – – – 40,650 28,818 1,873 – – – – 1,506,770 106,715 380,604 117,922 77,146 2,012,983 1,790 7,5415 132,828 4,362,220 3,958,002 108,548 114,048 92,360 71,341 4,344,299 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 99 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 31 December 2011 (cid:3) Carrying values and cash (cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:29)(cid:3) Insurance contract liabilities Unit-linked With DPF CA S&P Annuities in payment Other non-linked Investment contract liabilities Unit-linked Guaranteed bonds Other Other liabilities Carrying value (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 0-5 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) (cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3)(cid:11)(cid:88)(cid:81)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:71)(cid:12) 10-15 years 5-10 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 15-20 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) >20 years (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) Total (cid:133)(cid:19)(cid:19)(cid:19) 1,510,734 1,510,734 – – – – 1,510,734 96,977 347,169 106,103 129,956 1,865,860 3,020 7,583 156,283 96,977 114,762 27,394 48,683 1,865,860 3,020 7,583 152,875 – 75,125 25,082 41,309 – – – 3,409 – 84,821 22,375 6,842 – – – – – 76,667 19,316 6,232 – – – – – 47,291 55,371 13,899 – – – – 96,977 398,666 149,538 116,965 1,865,860 3,020 7,583 156,284 4,223,685 3,827,888 144,925 114,038 102,215 116,561 4,305,627 The maturity analysis for unit-linked insurance and investment contracts presents all the liabilities as due in the earliest period in the table because they are repayable or transferable on demand. Insurance contracts with DPF (with-proﬁts business) can be surrendered before maturity for a cash amount speciﬁed in contractual terms and conditions. Accordingly, a maturity analysis based on the earliest contractual repayment date would present all the liabilities as due in the earliest period of the table because this option can be exercised immediately by all policyholders. As stated above, CA insurance contracts with DPF are wholly reinsured to Guardian and hence, in practice, there is no liquidity risk, the only risk retained for this business being the risk of default by the reinsurer, which is detailed under ‘Credit Risk Management’ below. The maturity analysis in respect of the S&P segment of the business, however, is presented on an estimated basis, in accordance with the anticipated maturity proﬁle and on estimates of mortality. (iii) Currency risk Currency risk is the risk that the fair value or future cash ﬂows of an asset or liability will change as a result of movements in foreign exchange rates. The Group’s exposure to currency risk is minimised to the extent that the risk on investments denominated in foreign currencies which back unit-linked investment and insurance contracts is borne by policyholders. It is, however, exposed to currency risk through: (i) its investment in Movestic, the assets and liabilities of which are principally denominated in Swedish Krona; (ii) the trading operations of Movestic, which include the underwriting of insurance contracts in Norway giving rise to some exposure to the Norwegian Krone: as the Swedish business reinsures 90 per cent of the risk and has some assets denominated in the same currencies as the foreign insurance liabilities, most of the foreign currency exchange rate risk on these operations is eliminated; and (iii) Movestic’s part ownership of Modernac SA, an associated company, the assets and liabilities of which are denominated in Euros. The Group’s currency risk through its ownership of Movestic is reﬂected in: (i) foreign exchange translation differences arising on the translation into sterling and consolidation of Movestic’s ﬁnancial statements; and (ii) the impact of adverse exchange rate movements on cash ﬂows between Chesnara plc and Movestic: in the short-term these relate to capital contributions made to Movestic to support its regulatory solvency capital resource requirements as it develops, while, in the medium-term there is the prospect of cash ﬂows from Movestic to Chesnara by way of dividend payments. The risk on cash ﬂows is managed by closely monitoring exchange rate movements and buying forward foreign exchange contracts, where deemed appropriate. 100 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 The following tables set out the Group’s exposure to assets and liabilities denominated in foreign currencies, expressed in sterling, at the respective balance sheet date: SECTION D IFRS FINANCIAL STATEMENTS 31 December (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:46)(cid:85)(cid:82)(cid:81)(cid:68) Assets Liabilities Net assets (cid:49)(cid:82)(cid:85)(cid:90)(cid:72)(cid:74)(cid:76)(cid:68)(cid:81)(cid:3)(cid:46)(cid:85)(cid:82)(cid:81)(cid:72) Assets Liabilities Net liabilities Euro Assets Liabilities Net assets 2012 £000 2011 £000 1,515,969 1,475,561 1,376,552 1,337,831 40,408 38,721 4,164 4,526 (362 ) 1,275 33 1,242 4,690 4,762 (72 ) 896 – 896 (iv) Sensitivities The table below shows the impact of movements in market risk variables identiﬁed above on proﬁt before tax for the year under review and on shareholder equity as at the balance sheet date. The variables are: (i) a 10% increase and decrease in the value of assets backing unit-linked insurance and investment contract liabilities (ii) a 10% increase and decrease in equity and property values (iii) a 100 basis point increase and decrease in per annum market rates of interest (iv) a 10% favourable and adverse movement in foreign currency exchange rates As explained above, market risks relating to assets backing unit-linked insurance and investment contract liabilities are borne by policyholders, while there is shareholder exposure to volatility in asset-related fees due to the impact of interest rate, equity price and foreign exchange rate movements on the fair value of the assets held in the linked funds, on which asset-related fees are based. Accordingly, the sensitivities to these risks are presented as generic sensitivities to unit-linked asset movements. Variation in/arising from (cid:3) (cid:3) (cid:20)(cid:19)(cid:19)(cid:3)(cid:69)(cid:83)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3) 100 bp decrease in market rates of interest (cid:20)(cid:19)(cid:8)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3) 10% decrease in equity and property prices (cid:20)(cid:19)(cid:8)(cid:3)(cid:73)(cid:68)(cid:89)(cid:82)(cid:88)(cid:85)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:54)(cid:40)(cid:46)(cid:29)(cid:3)(cid:86)(cid:87)(cid:72)(cid:85)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3) 10% adverse movement in SEK: sterling exchange rate *Not material (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 2011 (cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:183)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:183) (cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) (cid:3)(cid:3) £m (cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:3) £m (cid:87)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:87)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:20)(cid:27)(cid:17)(cid:25)(cid:3)(cid:3) ((cid:21)(cid:22)(cid:17)(cid:26)(cid:3)) (cid:20)(cid:19)(cid:17)(cid:25)(cid:3)(cid:3) ((cid:20)(cid:19)(cid:17)(cid:25)(cid:3)) (cid:19)(cid:17)(cid:21)(cid:3)(cid:3) ((cid:19)(cid:17)(cid:20)(cid:3)) (cid:20)(cid:23)(cid:17)(cid:20)(cid:3)(cid:3) ((cid:20)(cid:27)(cid:17)(cid:19)(cid:3)) (cid:27)(cid:17)(cid:20)(cid:3)(cid:3) ((cid:27)(cid:17)(cid:20)(cid:3)) (cid:23)(cid:17)(cid:24)(cid:3)(cid:3) ((cid:22)(cid:17)(cid:26)(cid:3))(cid:3) (cid:23)(cid:17)(cid:23)(cid:3)(cid:3) ((cid:26)(cid:17)(cid:27)(cid:3)) (cid:20)(cid:24)(cid:17)(cid:28)(cid:3)(cid:3) ((cid:20)(cid:24)(cid:17)(cid:28)(cid:3)) (cid:178)(cid:3)(cid:13)(cid:3) (cid:178)(cid:3)(cid:13)(cid:3) (cid:22)(cid:17)(cid:27) ((cid:25)(cid:17)(cid:21)(cid:3)) (cid:20)(cid:21)(cid:17)(cid:20) ((cid:20)(cid:21)(cid:17)(cid:20)(cid:3)) (cid:23)(cid:17)(cid:22) ((cid:22)(cid:17)(cid:24)(cid:3)) As explained in Note 32(c) on page 130 the method of estimating the cost of guarantees to policyholders in respect of the S&P with-proﬁts funds has been changed. An effect of this change has been to make the results and ﬁnancial position of the Group more sensitive to variations in market rates of interest. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 101 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Credit risk management The Group has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Group is exposed to credit risk are: – Counterparty risk with respect to debt securities and cash deposits; – Reinsurers’ share of insurance liabilities; – Amounts deposited with reinsurers in relation to investment contracts; – Amounts due from reinsurers in respect of claims already paid; and – Insurance and other receivables. In addition there will be some exposures to individual policyholders, on amounts due on insurance contracts. These are tightly controlled, with contracts being terminated or beneﬁts amended if amounts owed are outstanding for more than a speciﬁed period of time, so that there is no signiﬁcant risk to the results of the businesses. The Group businesses structure the levels of credit risk they accept by placing limits on their exposure to a single counterparty, or group of counterparties. Such risks are subject to at least an annual review, while watch lists are maintained for exposures requiring additional review. Although the businesses hold a signiﬁcant proportion of their ﬁnancial assets in debt securities and cash deposits the risk of default on these is mitigated to the extent that any losses arising in respect of unit-linked assets backing the insurance and investment contracts which the businesses issue, would effectively be passed on to policyholders and investors through the unit-linked funds backing the insurance and investment contracts. Reinsurance is used to manage insurance risk in the businesses. This does not, however, discharge the businesses’ liability as primary insurers. If a reinsurer fails to pay a claim for any reason, the businesses remain liable for the payment to the policyholder. In respect of Movestic, the current guidelines state that re-insurance should only be effected with counterparties with a credit rating from Standard & Poor’s of A or higher, except for the reinsurer which is an associate of Movestic: this credit risk is managed by Movestic being represented on the Board of the reinsurer and, therefore, being able to inﬂuence its strategy and operational decisions. The creditworthiness of major reinsurers is considered on an annual basis by reviewing their ﬁnancial strength. The following table presents the assets of the Group which are subject to credit risk and a reconciliation to the balance sheet carrying value of each item: 31 December Holdings in collective investment schemes Debt securities Cash and cash equivalents (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Reinsurers’ share of insurance contract liabilities Amounts deposited with reinsurers Insurance and other receivables Reinsurers’ share of accrued policyholder claims Income taxes 2012 Balance 2011 Amount not subject to credit risk £000 Amount subject to credit risk £000 sheet Amount not subject to credit risk £000 carrying value £000 Amount subject to credit risk £000 (cid:3)(cid:3) 3,008,808 139,513 86,446 (cid:21)(cid:15)(cid:27)(cid:27)(cid:28)(cid:3)(cid:3) – – 20,620 – – 991 223,864 142,230 (cid:21)(cid:19)(cid:25)(cid:3)(cid:3) 278,692 30,245 3,693 4,489 4,299 3,009,799 363,377 228,676 (cid:22)(cid:15)(cid:19)(cid:28)(cid:24)(cid:3)(cid:3) 278,692 30,245 24,313 4,489 4,299 2,792,748 110,342 83,572 (cid:20)(cid:19)(cid:15)(cid:21)(cid:25)(cid:20)(cid:3)(cid:3) – – 15,121 – – 125,187 220,268 112,348 (cid:23)(cid:26)(cid:3)(cid:3) 263,792 28,031 15,678 4,667 6,956 Balance sheet carrying value £000 2,917,935 330,610 195,920 (cid:20)(cid:19)(cid:15)(cid:22)(cid:19)(cid:27) 263,792 28,031 30,799 4,667 6,956 Total 3,258,276 688,709 3,946,985 3,012,044 776,974 3,789,018 Holdings in collective investment schemes are, in principle, not subject to credit risk, as, given the nature of the ﬁnancial instruments, they do not directly expose the Group to credit risk. However, classiﬁed within holdings in collective investment schemes is an amount of £990,000 (31 December 2011: £97,738,000), as presented above, invested under an investment contract arrangement with JPMorgan Life Limited (JPML). This counterparty exposure to JPML is off-set by a counterparty exposure that JPML has to S&P of £3m (31 December 2011: £13m) under an investment contract arrangement held by JPML with S&P. The exposure has reduced materially following agreement with JPML to substantially recapture the business, so as to reduce credit risk. 102 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS Under these investment contract arrangements the respective amounts are onward invested in the collective investment schemes maintained by the respective counterparty. The remaining amounts presented above as not being subject to credit risk represent unit-linked assets where the risk is borne by the holders of unit-linked insurance and investment contracts, except for (i) reinsurers’ share of insurers’ contract provisions and (ii) amounts deposited with reinsurers in respect of investment contracts, where the risk of default is borne by shareholders. Assets held to cover Insurance contracts with DPF, held within a segregated with-proﬁts fund, are included as being subject to credit risk, as such risk will be borne by shareholders where default would result in there being insufﬁcient with-proﬁts policyholder assets to fund minimum guaranteed obligations. However, in normal circumstances (where the asset share is in excess of the minimum guaranteed amount) substantially all the credit risk remains with policyholders. The Group’s exposure to credit risk is summarised as: (cid:36)(cid:3)(cid:3) £000 (cid:37)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:36)(cid:3)(cid:3) £000 (cid:56)(cid:81)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:3) £000 Credit rating (cid:3) As at 31 December 2012 Reinsurers share of insurance contract liabilities Holdings in collective investment schemes Amounts deposited with reinsurers Debt securities at fair value through income Insurance and other receivables Reinsurers share of accrued policyholder claims (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Income taxes Cash and cash equivalents Total As at 31 December 2011 Reinsurers share of insurance contract liabilities Holdings in collective investment schemes Amounts deposited with reinsurers Debt securities at fair value through income Insurance and other receivables Reinsurers share of accrued policyholder claims (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Income taxes Cash and cash equivalents (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:36)(cid:36)(cid:36)(cid:3)(cid:3) £000 – – – 218,002 1,536 – (cid:178)(cid:3)(cid:3) – 21,024 (cid:36)(cid:36)(cid:3)(cid:3) £000 38,084 – – 2,006 – 632 (cid:178)(cid:3)(cid:3) – 47,362 (3,496 ) 991 – 2,611 – 203 (cid:21)(cid:19)(cid:25)(cid:3)(cid:3) – 73,838 240,562 88,084 74,353 – – – 216,878 – – (cid:178)(cid:3)(cid:3) – – 36,213 – – 1,044 – 1,482 (cid:178)(cid:3)(cid:3) – 33,071 (3,762 ) 97,738 – 1,129 – 496 (cid:23)(cid:26)(cid:3)(cid:3) – 73,117 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 278,692 991 30,245 223,864 3,693 4,489 (cid:21)(cid:19)(cid:25) 4,299 142,230 244,104 – 30,245 1,245 2,157 3,654 (cid:178)(cid:3)(cid:3) 4,299 6 285,710 688,709 231,341 27,449 28,031 1,217 15,678 2,689 (cid:178)(cid:3)(cid:3) 6,956 542 263,792 125,187 28,031 220,268 15,678 4,667 (cid:23)(cid:26) 6,956 112,348 – – – – – – (cid:178)(cid:3)(cid:3) – – (cid:178) – – – – – – (cid:178)(cid:3)(cid:3) – 5,618 Total 216,878 71,810 168,765 5,618 313,903 776,974 Included within unrated reinsurers’ share of insurance contract provisions and unrated amounts deposited with reinsurers, in respect of investment contracts is a total signiﬁcant exposure of £251.4m as at 31 December 2012 (31 December 2011: £237.4m) to Guardian, which does not have a published credit rating. Of this amount £207m (31 December 2011: £202.9m) is in respect of currently guaranteed beneﬁts. This counterparty exposure was mitigated during 2006 when Guardian granted to CA a ﬂoating charge over related investment assets, which ranks that company equally with Guardian policyholders. In order to monitor the ongoing creditworthiness of Guardian, CA reviews the ﬁnancial statements and regulatory returns submitted by Guardian to the FSA on an annual basis. No credit limits were exceeded during the year ended 31 December 2012. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 103 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Financial assets that are past due or impaired In 2008, a cash deposit with Kaupthing Singer & Friedlander (‘KSF’) was written down by its full amount of £1,091,000 as a result of KSF entering administration. During 2012, further interim distributions totalling £141,331 (2011: £108,716) were made from the administrators in respect of the deposit. There are no other Group ﬁnancial assets that are impaired, would otherwise be past due, or impaired, whose terms have been negotiated or past due but not impaired. The Group has no signiﬁcant exposure to Euro–denominated sovereign debt as at 31 December 2012. 7 Exceptional item Following the transfer, on 31 December 2011, of the whole of the business of the S&P operating segment to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000, S&P policyholder liabilities to taxation have, with effect from 1 January 2012, been re-classiﬁed within the Consolidated Balance Sheet from deferred tax liabilities to insurance contract provisions. The purpose of this is to align the classiﬁcation with that adopted by the CA operating segment. As a consequence there is: (i) as at 1 January 2012 a reduction of £4.8m in deferred tax liabilities and an equal and opposite increase of £4.8m in insurance contract provisions; and (ii) in the Condensed Consolidated Statement of Comprehensive Income a pre-tax charge of £4.8m and a deferred tax release to income tax of £4.8m, both of these amounts being presented as exceptional items, by virtue of their size and incidence. The net-of-tax result in the Condensed Consolidated Statement of Comprehensive Income attributable to these exceptional items is, accordingly, £nil. 8 Operating segments The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc. The segments of the Group as at 31 December 2012 comprise: CA This segment is part of the Group’s UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the Group’s principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. It is responsible for conducting unit-linked and non-linked business. S&P This segment, which was acquired on 20 December 2010, is the balance of the Group’s UK life insurance and pensions run-off portfolio and comprises the business of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited. It is responsible for conducting both unit-linked and non-linked business, including a with-proﬁts portfolio, which carries signiﬁcant additional market risk, as described in Note 6 ‘Management of ﬁnancial risk’. On 31 December 2011 the whole of the business of this segment was transferred to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000. Movestic This segment comprises the Group’s Swedish life and pensions business, Movestic Livförsäkring AB (‘Movestic’) and its subsidiary and associated companies, which are open to new business and which are responsible for conducting both unit-linked and non-linked business. Other Group Activities The functions performed by the parent company, Chesnara plc, are deﬁned under the operating segment analysis as Other Group Activities. Also included therein are consolidation and elimination adjustments. There were no changes to the basis of segmentation during the year ended 31 December 2012. The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The Group evaluates performance of operating segments on the basis of the proﬁt before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the Group. There were no changes to the measurement basis for segment proﬁt during the year ended 31 December 2012. 104 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (i) Segmental income statement for the year ended 31 December 2012 Year ended 31 December (cid:3) Net Insurance premium revenue Fee and commission income Net investment return Total revenue (net of reinsurance payable) Other operating income Segmental income (cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) Net change in investment contract liabilities Fees, commission and other acquisition costs Administrative expenses Amortisation charge on software assets Depreciation charge on property and equipment Other Other operating expenses (cid:3)(cid:3) (cid:3)(cid:3) Charge for amortisation of acquired value of in-force business Charge for amortisation of acquired value of customer relationships Other (cid:38)(cid:36)(cid:3)(cid:3) £000 54,785 35,191 128,009 217,985 3,484 (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:56)(cid:46)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 8,987 2,776 105,936 63,772 37,967 233,945 16,412 28,691 97,846 117,699 11,114 335,684 14,598 142,949 5,047 Other Group (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 – – 262 262 – (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 80,184 66,658 332,053 478,895 19,645 221,469 128,813 350,282 147,996 262 498,540 (140,502 ) (52,679 ) (947 ) – (22 ) (8,105 ) (2,892 ) – (625 ) (97,787 ) (4,134 ) (62 ) – – (11,000 ) (852 ) – (1,212 ) (238,289 ) (56,813 ) (1,009 ) – (22 ) (19,105 ) (3,744 ) – (1,837 ) (7,057 ) (97,040 ) (16,958 ) (2,188 ) (187 ) (13,053 ) (4,119 ) (391 ) (5,046 ) – – – – – (2,474 ) – – (2,322 ) (245,346 ) (153,853 ) (17,967 ) (2,188 ) (209 ) (34,632 ) (7,863 ) (391 ) (9,205 ) Segmental expenses (205,772 ) (115,047 ) (320,819 ) (146,039 ) (4,796 ) (471,654 ) Segmental income less expenses (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:3) Exceptional item (cid:54)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3) Financing costs (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3) Income tax credit/(expense) Income tax credit/(expense) – before exceptional item Exceptional item After exceptional item (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 15,697 (cid:178)(cid:3)(cid:3) – (cid:20)(cid:24)(cid:15)(cid:25)(cid:28)(cid:26)(cid:3)(cid:3) – 13,766 (cid:178)(cid:3)(cid:3) (4,778 ) (cid:27)(cid:15)(cid:28)(cid:27)(cid:27)(cid:3)(cid:3) (1 ) 29,463 (cid:178)(cid:3)(cid:3) (4,778 ) (cid:21)(cid:23)(cid:15)(cid:25)(cid:27)(cid:24)(cid:3)(cid:3) (1 ) (cid:20)(cid:24)(cid:15)(cid:25)(cid:28)(cid:26)(cid:3)(cid:3) (cid:27)(cid:15)(cid:28)(cid:27)(cid:26)(cid:3)(cid:3) (cid:21)(cid:23)(cid:15)(cid:25)(cid:27)(cid:23)(cid:3)(cid:3) 2,384 4,778 7,162 (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:3)(cid:3) (cid:22)(cid:20)(cid:15)(cid:27)(cid:23)(cid:25)(cid:3)(cid:3) 1,957 (cid:20)(cid:15)(cid:21)(cid:23)(cid:23)(cid:3)(cid:3) – (cid:22)(cid:15)(cid:21)(cid:19)(cid:20)(cid:3)(cid:3) (2,451 ) (cid:26)(cid:24)(cid:19)(cid:3)(cid:3) (323 ) – (323 ) (cid:23)(cid:21)(cid:26)(cid:3)(cid:3) (4,534 ) (cid:178)(cid:3)(cid:3) – (4,534 ) (1,218 ) 26,886 (cid:20)(cid:15)(cid:21)(cid:23)(cid:23) (4,778 ) 23,352 (3,670 ) (5,752 ) 19,682 1,420 – 1,420 3,481 4,778 8,259 (4,332 ) 27,941 (ii) Segmental balance sheet as at 31 December 2012 31 December (cid:3) Total assets Total liabilities Net assets/(liabilities) Investments in associates Additions to segment non-current assets (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 Other Group (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 1,815,021 1,266,946 1,534,263 34,391 4,650,621 1,728,523 1,191,376 1,476,185 36,191 4,432,275 86,498 75,570 58,078 (1,800 ) 218,346 – 230 – – 2,902 11,353 – – 2,902 11,583 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 105 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (iii) Segmental income statement for the year ended 31 December 2011 Year ended 31 December (cid:3) Net insurance premium revenue Fee and commission income Net investment return Total revenue (net of reinsurance payable) Other operating income Segmental income (cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) Net change in investment contract liabilities Fees, commission and other acquisition costs Administrative expenses Amortisation charge on software assets Depreciation on property and equipment Other Other operating expenses (cid:3)(cid:3) (cid:3)(cid:3) Charge for amortisation of acquired value of in-force business Charge for amortisation of acquired value of customer relationships Other (cid:38)(cid:36)(cid:3)(cid:3) £000 59,561 37,675 (19,009 ) 78,227 3,584 (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:56)(cid:46)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 10,440 2,768 (21,685 ) (8,477 ) 11,702 70,001 40,443 (40,694 ) 69,750 15,286 17,005 27,420 (151,938 ) (107,513 ) 6,446 81,811 3,225 85,036 (101,067 ) (56,981 ) 11,731 (1,293 ) – (18 ) (8,716 ) (3,640 ) – (729 ) 18,063 (963 ) (63 ) – – (11,687 ) (964 ) – (1,087 ) (38,918 ) 10,768 (1,356 ) – (18 ) (20,403 ) (4,604 ) – (1,816 ) (6,508 ) 151,898 (15,920 ) (1,979 ) (278 ) (13,085 ) (4,428 ) (758 ) (6,457 ) Other Group (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 – – 230 230 50 280 – – – – – (3,035 ) – – (1,391 ) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 87,006 67,863 (192,402 ) (37,533 ) 21,782 (15,751 ) (45,426 ) 162,666 (17,276 ) (1,979 ) (296 ) (36,523 ) (9,032 ) (758 ) (9,664 ) Segmental expenses (59,646 ) 3,299 (56,347 ) 102,485 (4,426 ) 41,712 Segmental income less expenses Share of loss of associate (cid:54)(cid:72)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3) Financing costs (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3) Income tax credit 22,165 – (cid:21)(cid:21)(cid:15)(cid:20)(cid:25)(cid:24)(cid:3)(cid:3) – 6,524 – (cid:25)(cid:15)(cid:24)(cid:21)(cid:23)(cid:3)(cid:3) (12 ) (cid:21)(cid:21)(cid:15)(cid:20)(cid:25)(cid:24)(cid:3)(cid:3) (cid:25)(cid:15)(cid:24)(cid:20)(cid:21)(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 28,689 – (cid:21)(cid:27)(cid:15)(cid:25)(cid:27)(cid:28)(cid:3)(cid:3) (12 ) (cid:21)(cid:27)(cid:15)(cid:25)(cid:26)(cid:26)(cid:3)(cid:3) 1,772 (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:3)(cid:3) (cid:22)(cid:19)(cid:15)(cid:23)(cid:23)(cid:28)(cid:3)(cid:3) 1,418 (152 ) (cid:20)(cid:15)(cid:21)(cid:25)(cid:25)(cid:3)(cid:3) (1,957 ) (691 ) 275 (416 ) (4,146 ) – (4,146 ) (1,419 ) (5,565 ) 1,197 25,961 (152 ) 25,809 (3,388 ) 22,421 3,244 (4,368 ) 25,665 (iv) Segmental balance sheet as at 31 December 2011 31 December (cid:3) Total assets Total liabilities Net assets/(liabilities) Investments in associates Additions to segment non-current assets (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 Other Group (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 1,774,864 1,304,209 1,395,751 17,130 4,491,954 1,689,378 1,215,473 1,338,841 39,073 4,282,765 85,486 88,736 56,910 (21,943 ) 209,189 – 6 – – 1,613 14,653 – – 1,613 14,659 106 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 9 Fees and commission income Year ended 31 December (cid:41)(cid:72)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3) Policy-based fees Fund management-based fees (cid:37)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:16)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:73)(cid:72)(cid:72)(cid:86)(cid:3) Change in deferred income – gross Change in deferred income – reinsurer’s share Total fee income Commission income (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) SECTION D IFRS FINANCIAL STATEMENTS 2012 (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 14,143 25,324 (cid:21)(cid:20)(cid:15)(cid:25)(cid:20)(cid:23)(cid:3)(cid:3) 1,116 (45 ) 62,152 4,506 2011 (cid:133)(cid:19)(cid:19)(cid:19) 12,776 26,258 (cid:21)(cid:21)(cid:15)(cid:25)(cid:21)(cid:25) 1,647 (47 ) 63,260 4,603 Total fee and commission income 66,658 67,863 10 Net investment return Year ended 31 December Dividend income Interest income Rental income from investment properties Net fair value gains and losses Equity securities designated as at fair value through income on initial recognition Debt securities designated as at fair value through income on initial recognition (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:3)(cid:3) Investment properties (cid:3)(cid:3) Net investment return (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 46,774 25,961 7,612 224,848 29,609 (cid:21)(cid:15)(cid:27)(cid:28)(cid:28)(cid:3)(cid:3) (5,650 ) 2011 £000 40,261 28,632 8,108 (326,014 ) 53,332 (954 ) 4,233 332,053 (192,402 ) Net fair value gains and losses in respect of holdings in collective investment schemes are included in the line that is most appropriate taking into account the nature of the underlying investments. No amounts included in net fair value gains and losses of ﬁnancial instruments were estimated using a valuation technique (year ended 31 December 2011: £nil). 11 Other operating income Year ended 31 December Release of unused provisions Recharge of shared property services to tenants Administration fees charged to reinsurers Professional indemnity insurance recoveries Investment management fee rebate HMRC interest on tax refund Charges to policyholder funds for yield tax Other Total other operating income All of the income streams setout in Notes 9,10 and 11 equate to revenue as deﬁned by IAS 18. 2012 £000 629 – 95 52 13,483 – 5,046 340 2011 £000 390 457 103 173 14,120 9 6,428 102 19,645 21,782 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 107 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12 Insurance contract claims and beneﬁts Year ended 31 December (cid:38)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) Net increase/(decrease) in insurance contract provisions (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3) Recoveries from reinsurers (cid:3)(cid:3) (cid:3)(cid:3) (cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:21)(cid:26)(cid:21)(cid:15)(cid:23)(cid:26)(cid:28)(cid:3)(cid:3) 20,732 (cid:21)(cid:28)(cid:22)(cid:15)(cid:21)(cid:20)(cid:20)(cid:3)(cid:3) (47,865 ) 2011 £000 (cid:21)(cid:25)(cid:26)(cid:15)(cid:25)(cid:28)(cid:20) (204,864 ) (cid:25)(cid:21)(cid:15)(cid:27)(cid:21)(cid:26) (17,401 ) (cid:21)(cid:23)(cid:24)(cid:15)(cid:22)(cid:23)(cid:25)(cid:3)(cid:3) (cid:23)(cid:24)(cid:15)(cid:23)(cid:21)(cid:25) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 13 Change in investment contract liabilities Year ended 31 December Net changes in the fair value of investment contracts designated on initial recognition as fair value through income Net changes in the fair value of policyholders’ funds held by the Group designated on initial recognition as fair value through income Reinsurers’ share Net increase/(decrease) in investment contract liabilities Investment contract beneﬁts comprise beneﬁts accruing to holders of investment contracts issued by the Group. 14 Fees, commission and other acquisition costs Year ended 31 December Directly expensed costs Insurance contracts Commission New business and renewal costs Investment contracts Commission New business and renewal costs Additions to deferred acquisition costs Insurance contracts Investment contracts – gross Amortisation of deferred acquisition costs Insurance contracts Investment contracts-gross Investment contracts-reinsurance Total 15 Administrative expenses Year ended 31 December Personnel-related costs (Note 47) Investment management fees Amortisation charge on software assets Depreciation charge on property and equipment Costs paid to third-party administrators Other goods and services Total 2012 £000 114,468 42,195 (2,810 ) 2011 £000 (169,281 ) 5,115 1,500 153,853 (162,666 ) 2012 £000 2011 £000 5,806 4,357 7,579 2,851 (5,654 ) (4,604 ) 5,991 1,667 (26 ) 6,037 2,654 10,457 3,444 (5,881 ) (6,747 ) 5,665 1,674 (27 ) 17,967 17,276 2012 £000 12,910 9,848 2,188 209 8,201 3,673 2011 £000 12,772 11,859 1,979 296 8,436 3,456 37,029 38,798 Included in Other Goods and Services above are the following amounts payable to the Auditor and its associates, exclusive of VAT. 108 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 Year ended 31 December Fees payable to the Company’s Auditor for the audit of the company’s annual accounts Fees payable to the Company’s Auditor and its associates for other services to the group: (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The audit of the Company’s subsidiaries pursuant to legislation (cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:16)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:13)(cid:3)(cid:3) (cid:3)(cid:3) Taxation compliance services All other services Total * Includes the audit regulatory returns submitted to the UK regulator. 16 Other operating expenses Year ended 31 December SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 94 386 (cid:20)(cid:28)(cid:21)(cid:3)(cid:3) 27 18 717 2011 £000 78 360 (cid:20)(cid:27)(cid:22) 44 16 681 2012 £000 2011 £000 (cid:38)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:16)(cid:73)(cid:82)(cid:85)(cid:70)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:26)(cid:15)(cid:27)(cid:25)(cid:22)(cid:3)(cid:3) (cid:28)(cid:15)(cid:19)(cid:22)(cid:21) (cid:38)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:3)(AVCR) 391 758 Other Increase in other provisions Direct operating expenses of investment properties Revenue-generating properties Non revenue-generating properties Recovery of cash deposit Payment of yield tax relating to policyholder funds Akademiker impairment charge Other Total 2,546 1,212 233 (141 ) 5,046 – 309 1,531 1,162 154 (109 ) 6,428 29 469 9,205 9,664 The recovery of cash deposit represents interim distributions received from the administrators of Kaupthing Singer & Friedlander relating to a cash deposit, previously written down and charged to operating expenses. 17 Financing costs Year ended 31 December Interest expense on bank borrowings (cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) Other interest (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 1,219 (cid:21)(cid:15)(cid:22)(cid:20)(cid:22)(cid:3)(cid:3) 138 2011 £000 1,426 (cid:20)(cid:15)(cid:28)(cid:24)(cid:26) 5 (cid:22)(cid:15)(cid:25)(cid:26)(cid:19)(cid:3)(cid:3) (cid:22)(cid:15)(cid:22)(cid:27)(cid:27) Interest expense on bank borrowings is calculated using the effective interest method and is the total interest expense for ﬁnancial liabilities that are not designated at fair value through income. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 109 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18 Income tax credit before exceptional item (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:86)(cid:29) Year ended 31 December CA, S&P and Other Group Activities – net credit Movestic – net (expense)/credit Total net credit CA, S&P and Other Group Activities Year ended 31 December Current tax expense Current year Overseas tax Adjustment to prior years Net expense Deferred tax credit Origination and reversal of temporary differences excluding exceptional item Total income tax credit (cid:53)(cid:72)(cid:70)(cid:82)(cid:81)(cid:70)(cid:76)(cid:79)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91) Year ended 31 December (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:3)(cid:3) (cid:3)(cid:3) (cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:82)(cid:80)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:23)(cid:17)(cid:24)(cid:8)(cid:3)(cid:11)(cid:21)(cid:19)(cid:20)(cid:20)(cid:29)(cid:3)(cid:21)(cid:25)(cid:17)(cid:24)(cid:8)(cid:12)(cid:3) Permanent difference arising on Part VII Transfer Other permanent differences (cid:40)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:56)(cid:46)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86) Offset of franked investment income Variation in rate of tax on amortisation of acquired in-force value Impact of new life tax regime Other (Over)/under provided in previous years Total income tax credit (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 3,804 (323 ) 2011 £000 2,969 275 3,481 3,244 2012 £000 (2,939 ) (582 ) (29 ) (3,550 ) 7,354 3,804 2011 £000 (2,160 ) (587 ) 592 (2,155 ) 5,124 2,969 2012 £000 2011 £000 (cid:21)(cid:22)(cid:15)(cid:26)(cid:20)(cid:19)(cid:3)(cid:3) (cid:21)(cid:22)(cid:15)(cid:20)(cid:20)(cid:21) (5,809 ) – (70 ) 3,525 389 6,129 (331 ) (29 ) (6,125 ) 4,146 (270 ) 2,667 619 – 1,340 592 3,804 2,969 The permanent difference arising on the Part VII Transfer relates to a duty of fairness reserve allowed for tax purposes in the transferred S&P business, not now expected to reverse. A new regime for the taxation of life assurance companies in the UK was introduced with effect from 1 January 2013. The new regime bases the taxable trading proﬁt on IFRS proﬁts rather than on FSA return surplus generated as under the previous rules and also treats pension business separately from life assurance business. Whilst this change does not impact the 2012 current tax charge, it has created a signiﬁcant recovery in the deferred tax charge as the pension losses in the UK life company will be of value going forward whereas no value was ascribed to them under the previous regime. In addition, as part of the transition to the new regime, accumulated historical proﬁts as at 31 December 2012 are compared between the two bases and any taxable difference is brought into charge over the next ten years. This transitional adjustment has created a deferred tax charge as at 31 December 2012, partially offsetting the pension related recovery noted here. 110 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70) Year ended 31 December Current tax credit Current year expense Adjustment to prior years Net credits Deferred tax (expense)/credit Origination and reversal of temporary differences Total income tax (expense)/credit (cid:53)(cid:72)(cid:70)(cid:82)(cid:81)(cid:70)(cid:76)(cid:79)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91) Year ended 31 December (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) (cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:82)(cid:80)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:25)(cid:17)(cid:22)(cid:8)(cid:3) Non-taxable income in relation to unit-linked business Non-taxable fair value adjustment Impact of different tax rate for subsidiaries Permanent differences Unrecognised tax recoverable Non-deductible expenses Overprovided in prior years Total income tax (expense)/credit 19 Deferred acquisition costs Year ended 31 December (cid:3) (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Additions arising from new business Amortisation charged to income Foreign exchange translation difference (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3) Current Non-current (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 2011 £000 – – – (323 ) (323 ) 2012 £000 (cid:26)(cid:24)(cid:19)(cid:3)(cid:3) (197 ) 655 (215 ) (41 ) (179 ) (309 ) (37 ) – (323 ) (15 ) 289 274 1 275 2011 £000 (691 ) 182 195 (293 ) 5 (8 ) – (95 ) 289 275 2012 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 19,720 10,255 (7,658 ) 238 2011 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 14,659 12,642 (7,339 ) (242 ) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:24)(cid:15)(cid:26)(cid:21)(cid:24)(cid:3)(cid:3) – (667 ) – (cid:24)(cid:15)(cid:19)(cid:24)(cid:27)(cid:3)(cid:3) 578 4,480 (cid:24)(cid:15)(cid:19)(cid:24)(cid:27)(cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 13,995 10,255 (6,991 ) 238 – – – – (cid:178)(cid:3)(cid:3) – – (cid:178)(cid:3)(cid:3) (cid:20)(cid:26)(cid:15)(cid:23)(cid:28)(cid:26)(cid:3)(cid:3) (cid:21)(cid:21)(cid:15)(cid:24)(cid:24)(cid:24)(cid:3)(cid:3) (cid:20)(cid:28)(cid:15)(cid:26)(cid:21)(cid:19) 1,574 15,923 2,152 20,403 1,911 17,809 (cid:20)(cid:26)(cid:15)(cid:23)(cid:28)(cid:26)(cid:3)(cid:3) (cid:21)(cid:21)(cid:15)(cid:24)(cid:24)(cid:24)(cid:3)(cid:3) (cid:20)(cid:28)(cid:15)(cid:26)(cid:21)(cid:19) The amortisation charged to income is recognised in Fees, Commission and Other Acquisition Costs (see Note 14). CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 111 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20 Acquired value of in-force business (AVIF) Cost 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) Foreign exchange translation difference Balance at 31 December Amortisation and impairment losses (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) Amortisation for the year Foreign exchange translation difference Balance at 31 December Carrying amounts (cid:36)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) At 31 December Current Non-current Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The amortisation is charged to income and is recognised in Other Operating Expenses (see Note 16). 21 Acquired value of customer relationships (AVCR) Cost 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) Foreign exchange translation difference Balance at 31 December Amortisation and impairment losses (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) Amortisation for the year Foreign exchange translation difference Balance at 31 December Carrying amounts (cid:36)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) At 31 December Current Non-current Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 2011 £000 (cid:20)(cid:21)(cid:26)(cid:15)(cid:28)(cid:19)(cid:26)(cid:3)(cid:3) 872 (cid:20)(cid:21)(cid:27)(cid:15)(cid:26)(cid:26)(cid:26) (870 ) 128,779 127,907 (cid:23)(cid:23)(cid:15)(cid:24)(cid:25)(cid:20)(cid:3)(cid:3) 7,863 237 (cid:22)(cid:24)(cid:15)(cid:26)(cid:22)(cid:20) 9,032 (202 ) 52,661 44,561 (cid:3)(cid:3) (cid:27)(cid:22)(cid:15)(cid:22)(cid:23)(cid:25)(cid:3)(cid:3) (cid:28)(cid:22)(cid:15)(cid:19)(cid:23)(cid:25) 76,118 83,346 7,228 68,890 8,620 74,726 76,118 83,346 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:23)(cid:15)(cid:20)(cid:20)(cid:22)(cid:3)(cid:3) 51 2011 £000 (cid:23)(cid:15)(cid:20)(cid:25)(cid:23) (51 ) 4,164 4,113 (cid:20)(cid:15)(cid:27)(cid:24)(cid:27)(cid:3)(cid:3) 391 31 (cid:20)(cid:15)(cid:20)(cid:22)(cid:21) 758 (32 ) 2,280 1,858 (cid:21)(cid:15)(cid:21)(cid:24)(cid:24)(cid:3)(cid:3) 1,884 291 1,593 (cid:22)(cid:15)(cid:19)(cid:22)(cid:21) 2,255 139 2,116 1,884 2,255 The amortisation period of AVCR is based on the underlying returns on the policies expected to be written as a result of customer relationships. The amortisation is charged to income and is recognised in Other Operating Expenses (see Note 16). 112 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 22 Software assets Cost 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Additions Disposals Foreign exchange translation difference Balance at 31 December Amortisation and impairment losses (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Amortisation charge for the year Disposals Foreign exchange translation difference Balance at 31 December Carrying amounts at 31 December Current Non-current Total 23 Property and equipment Cost 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Additions Disposals Foreign exchange translation difference Balance at 31 December Amortisation and impairment losses (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Depreciation charge for the year Disposals Foreign exchange translation difference Balance at 31 December Carrying amounts at 31 December Current Non-current Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) SECTION D IFRS FINANCIAL STATEMENTS (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:20)(cid:20)(cid:15)(cid:21)(cid:21)(cid:28)(cid:3)(cid:3) 1,094 – 160 2011 £000 (cid:28)(cid:15)(cid:23)(cid:21)(cid:20) 1,968 (1 ) (159 ) 12,483 11,229 (cid:23)(cid:15)(cid:23)(cid:27)(cid:24)(cid:3)(cid:3) 2,188 – 98 6,771 5,712 2,349 3,363 (cid:21)(cid:15)(cid:24)(cid:28)(cid:21) 1,979 (11 ) (75 ) 4,485 6,744 1,922 4,822 5,712 6,744 2012 £000 (cid:20)(cid:15)(cid:21)(cid:23)(cid:28)(cid:3)(cid:3) 235 (123 ) 12 2011 £000 (cid:20)(cid:15)(cid:22)(cid:21)(cid:26) 49 (113 ) (14 ) 1,373 1,249 (cid:27)(cid:25)(cid:23)(cid:3)(cid:3) 209 (82 ) 13 1,004 369 138 231 369 (cid:25)(cid:24)(cid:25) 296 (77 ) (11 ) 864 385 209 176 385 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 113 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 24 Investment in associate Cost 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3) Foreign exchange translation difference Balance at 31 December (cid:3) Associates at 100% (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70)(cid:3)(cid:54)(cid:17)(cid:36)(cid:17)(cid:3) Total 31 December 2012 (cid:3) (cid:3) Associates at 49% (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70)(cid:3)(cid:54)(cid:17)(cid:36)(cid:17)(cid:3) Total 31 December 2012 25 Investment properties 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Additions Properties acquired Disposals Fair value adjustments Balance at 31 December Current Non-current Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:20)(cid:15)(cid:25)(cid:20)(cid:22)(cid:3)(cid:3) (cid:20)(cid:15)(cid:21)(cid:23)(cid:23)(cid:3)(cid:3) 45 2011 £000 (cid:20)(cid:15)(cid:26)(cid:27)(cid:22) (152 ) (18 ) 2,902 1,613 (cid:36)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:3) £000 (cid:47)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:53)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:51)(cid:85)(cid:82)(cid:192)(cid:87) £000 (cid:21)(cid:25)(cid:15)(cid:22)(cid:20)(cid:22)(cid:3)(cid:3)(cid:3) (cid:21)(cid:19)(cid:15)(cid:22)(cid:28)(cid:20)(cid:3)(cid:3) (cid:20)(cid:19)(cid:15)(cid:19)(cid:19)(cid:21)(cid:3)(cid:3) (cid:21)(cid:15)(cid:24)(cid:22)(cid:28) 26,313 20,391 10,002 2,539 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:3) (cid:68)(cid:87)(cid:3)(cid:20)(cid:19)(cid:19)(cid:8)(cid:3)(cid:3) £000 (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:3) (cid:68)(cid:87)(cid:3)(cid:23)(cid:28)(cid:8)(cid:3)(cid:3) £000 (cid:23)(cid:28)(cid:8)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87) £000 (cid:24)(cid:15)(cid:28)(cid:21)(cid:21)(cid:3)(cid:3) (cid:21)(cid:15)(cid:28)(cid:19)(cid:21)(cid:3)(cid:3) 5,922 2,902 (cid:20)(cid:15)(cid:21)(cid:23)(cid:23) 1,244 2012 £000 2011 £000 (cid:3)(cid:3) (cid:20)(cid:22)(cid:21)(cid:15)(cid:20)(cid:21)(cid:27)(cid:3)(cid:3) (cid:20)(cid:21)(cid:19)(cid:15)(cid:27)(cid:21)(cid:19) 5,927 (32,238 ) (5,650 ) 9,310 (2,235 ) 4,233 100,167 132,128 – 100,167 2,750 129,378 100,167 132,128 Investment properties were bought for investment purposes in line with the investment strategy of the Group. The properties are independently valued in accordance with International Valuation Standards on the basis of determining the open market value of the investment properties on an annual basis. The latest valuations were conducted as at 31 December 2012. Income arises from investment properties in two streams: (i) Fair value gains arising as a result of market appreciation in the value of the properties; and (ii) Rental income arising from leases granted on the properties. Both of these amounts are disclosed in Net Investment Return (see Note 10). Expenses incurred in the operation and maintenance of investment properties are disclosed in Other Operating Expenses (see Note 16). 114 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 26 Financial assets Group (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:68)(cid:87)(cid:72)(cid:74)(cid:82)(cid:85)(cid:92) 31 December Fair value through income Designated at fair-value through income on initial recognition (cid:3)(cid:3) (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Insurance and other receivables Prepayments Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 2011 £000 3,861,650 (cid:22)(cid:15)(cid:19)(cid:28)(cid:24)(cid:3)(cid:3) 24,313 3,160 3,702,056 (cid:20)(cid:19)(cid:15)(cid:22)(cid:19)(cid:27) 30,799 3,234 3,892,218 3,746,397 Fair value is the amount for which an asset could be exchanged between willing parties in an arm’s length transaction. The tables below show the determination of fair value according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1). However, where such information is not available, the Group applies valuation techniques to measure such instruments. These valuation techniques make use of market-observable data for all signiﬁcant inputs where possible (Level 2), but, in some cases it may be necessary to estimate other than market-observable data within a valuation model for signiﬁcant inputs (Level 3). Financial assets at fair value through income (cid:41)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74) Equities Listed (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:178)(cid:3)(cid:192)(cid:91)(cid:72)(cid:71)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72) Government Bonds Listed (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:178)(cid:3)(cid:193)(cid:82)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72) Listed Total debt securities Holdings in collective investment schemes Policyholders’ funds held by the group (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Total Current Non-current Total Level 1 £000 Level 2 £000 Level 3 £000 Total £000 427,303 306,623 46,677 10,077 363,377 3,008,808 61,171 (cid:22)(cid:20)(cid:19)(cid:3)(cid:3) – – – – – 991 – (cid:21)(cid:15)(cid:26)(cid:27)(cid:24)(cid:3)(cid:3) 3,860,969 3,776 – – – – – – – (cid:178)(cid:3)(cid:3) – 427,303 306,623 46,677 10,077 363,377 3,009,799 61,171 (cid:22)(cid:15)(cid:19)(cid:28)(cid:24) 3,864,745 1,466,685 2,396,060 3,864,745 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:41)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74) Level 1 £000 Level 2 £000 Level 3 £000 Total £000 Equities Listed (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:178)(cid:3)(cid:192)(cid:91)(cid:72)(cid:71)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72) Government Bonds Listed (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:178)(cid:3)(cid:193)(cid:82)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72) Listed Total debt securities Holdings in collective investment schemes Policyholders’ funds held by the group (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) Current Non-current Total 404,431 293,903 29,163 7,544 330,610 2,820,197 49,080 (cid:25)(cid:15)(cid:27)(cid:23)(cid:24)(cid:3)(cid:3) – – – – – 97,738 – (cid:22)(cid:15)(cid:23)(cid:25)(cid:22)(cid:3)(cid:3) (cid:22)(cid:15)(cid:25)(cid:20)(cid:20)(cid:15)(cid:20)(cid:25)(cid:22)(cid:3)(cid:3) (cid:20)(cid:19)(cid:20)(cid:15)(cid:21)(cid:19)(cid:20)(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) – – – – – – – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) 404,431 293,903 29,163 7,544 330,610 2,917,935 49,080 (cid:20)(cid:19)(cid:15)(cid:22)(cid:19)(cid:27) (cid:22)(cid:15)(cid:26)(cid:20)(cid:21)(cid:15)(cid:22)(cid:25)(cid:23) 1,337,188 2,375,176 3,712,364 There were no transfers between levels 1, 2 and 3 during the year. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 115 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company Year ended 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Equity contributions paid to Movestic Livförsäkring AB (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Balance at 31 December Current Non-current Total A list of investments in subsidiaries held by the Group is disclosed in Note 53. 27 Insurance and other receivables and prepayments Group Insurance and other receivables 31 December Receivables arising from insurance contracts Brokers Policyholders Receivables arising from investment contracts Policyholders Reinsurance receivables Commission receivables Debtor for professional indemnity insurance Other receivables Loan to associated companies Accrued interest income Accrued rent Receivables from fund management companies Initial margin payments on derivatives Other Total Current Non-current Total The carrying amount is a reasonable approximation of fair value. 31 December Prepayments Current Non-current Total The carrying amount is a reasonable approximation of fair value. 2012 £000 2011 £000 (cid:20)(cid:23)(cid:25)(cid:15)(cid:25)(cid:28)(cid:28)(cid:3)(cid:3) – (cid:20)(cid:23)(cid:20)(cid:15)(cid:23)(cid:22)(cid:23) 5,265 146,699 146,699 – 146,699 – 146,699 146,699 146,699 2012 £000 694 3,667 7 231 267 92 642 4,775 720 3,943 6,663 2,612 2011 £000 653 3,926 1,737 201 417 40 536 4,631 630 7,865 4,997 5,166 24,313 30,799 22,548 1,765 30,263 536 24,313 30,799 2012 £000 2011 £000 3,160 3,234 3,160 – 2,084 1,150 3,160 3,234 116 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 Company Receivables and prepayments 31 December Amounts due from subsidiary companies Other receivables Prepayments Total Current Non-current Total SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 2011 £000 510 25 50 585 585 – 585 188 37 71 296 296 – 296 The carrying amount is a reasonable approximation of fair value. 28 Derivative ﬁnancial instruments The Group does not hold derivatives outside the unit-linked and with-proﬁts funds, except for an option to repay a ﬁnancial reinsurance contract early, which comprises an embedded derivative. 31 December Exchange-traded futures Financial reinsurance embedded derivative Total Current Non-current Total Asset £000 516 2,579 2012 Liability £000 (286 ) – Asset £000 6,893 3,415 3,095 (286 ) 10,308 1,118 1,977 (286 ) – 8,163 2,145 3,095 (286 ) 10,308 2011 Liability £000 (144 ) – (144 ) (144 ) – (144 ) Derivatives within unit-linked funds As part of its Investment management strategy, the Group purchases derivative ﬁnancial instruments comprising part of its investment portfolio for unit-linked investment funds, which match the liabilities arising on its unit-linked insurance and investment business. A variety of equity futures are part of the portfolio matching the unit-linked investment and insurance liabilities. Derivatives are used to facilitate more efﬁcient portfolio management allowing changes in Investment strategy to be reﬂected by futures transactions rather than a high volume of transactions in the underlying assets. All the contracts are exchange-traded futures, with their fair value being the bid price at the balance sheet date: They are, accordingly, determined at Level 1 in the three-level fair value determination hierarchy set out in Note 26. Exchange-traded futures (by geographical investment market) 31 December Australia Europe UK Hong Kong Japan South Korea Singapore USA Total 2012 2011 Asset £000 Liability £000 Asset £000 Liability £000 23 – 140 8 227 16 1 101 516 – (26 ) (260 ) – – – – – 183 878 3,613 137 183 325 30 1,544 (28 ) – (72 ) (4 ) (12 ) (25 ) (3 ) – (286 ) 6,893 (144 ) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 117 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Financial reinsurance embedded derivative In respect of Movestic, the Group has entered into a reinsurance contract with a third party that has a section that is deemed to transfer signiﬁcant insurance risk and a section that is deemed not to transfer signiﬁcant insurance risk. This assessment has been determined by management based on the contractual terms of the reinsurance agreement. The element of the contract that does not transfer signiﬁcant insurance risk has two components and has been accounted for as a ﬁnancial liability at amortised cost and an embedded derivative asset at fair value. The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being determined by reference to market interest rates at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination hierarchy set out in Note 26. Derivatives within the S&P with-proﬁts funds As part of its investment management strategy, S&P enters into a limited range of derivative instruments to manage its exposure to various risks. S&P uses equity index futures in order to economically hedge equity market risk in the with-proﬁt funds’ investments. The change in fair value of the futures contracts is intended to offset the change in fair value of the underlying equities being hedged. S&P settles the market value of the futures contracts on a daily basis by paying or receiving a variation margin. The futures contracts are not discounted as this daily settlement is equal to the change in fair value of the futures. As a result, there is no additional fair value to recognise in relation to these derivatives on the balance sheet at the period end. S&P also purchases exchange rate futures to mitigate exchange rate risk within its with-proﬁts funds. These contracts are exchange-traded contracts in active markets with their fair value being the bid price at the balance sheet date. They are, accordingly, determined at Level 1 in the three-level fair value determination hierarchy set out in Note 26. 29 Income tax assets (cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:29) 31 December Group Corporation tax recoverable Company Corporation tax recoverable The carrying amount is a reasonable approximation of fair value. 30 Cash and cash equivalents Group 31 December Bank and cash balances Call deposits due within 1 month Call deposits due after 1 month 2012 £000 2011 £000 4,299 6,956 1,394 1,197 2012 £000 76,115 58,552 94,009 2011 £000 57,601 73,361 64,958 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Bank overdrafts (cid:3)(cid:3) (cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:21)(cid:21)(cid:27)(cid:15)(cid:25)(cid:26)(cid:25)(cid:3)(cid:3) (602 ) (cid:20)(cid:28)(cid:24)(cid:15)(cid:28)(cid:21)(cid:19) (834 ) (cid:21)(cid:21)(cid:27)(cid:15)(cid:19)(cid:26)(cid:23)(cid:3)(cid:3) (cid:20)(cid:28)(cid:24)(cid:15)(cid:19)(cid:27)(cid:25) The effective interest rate on short-term bank deposits was 0.74% (2011: 0.94%), with an average maturity of 37 days. All deposits included in cash and cash equivalents were due to mature within 3 months of their acquisition. Included in cash and cash equivalents held by the Group are balances totalling £99,253,000 (2011: £78,907,000) held in unit-linked policyholders’ funds. 118 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 Company 31 December Bank and cash balances Call deposits due within 1 month Short-term deposits due within 1 year Total 31 Capital management (a) Objective SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 389 29,015 3,008 2011 £000 267 15,370 – 32,412 15,637 The Group’s capital management framework is designed to provide security for all shareholders, while meeting the expectations of policyholders and shareholders. Accordingly it: 1) safeguards policyholders interests by meeting regulatory requirements established by the regulators of the insurance markets in which the Group’s regulated companies operate, while not retaining unnecessary excess capital; 2) seeks to meet the dividend expectations of shareholders and to optimise the gearing ratio to ensure an efﬁcient capital base; 3) ensures there is sufﬁcient liquidity to meet obligations to policyholders, debt ﬁnanciers and creditors as they fall due; and 4) maintains the Group as a going concern so that it continues to provide returns and to meet obligations to all stakeholders. The Group’s subsidiary and associate companies are subject to minimum regulatory capital requirements according to the jurisdictions in which they operate. In addition CA is required to prepare and submit a Group-level solvency capital statement in accordance with the EU Insurance Groups Directive (IGD). The rules are designed to ensure that companies have sufﬁcient assets to meet their liabilities in speciﬁed adverse circumstances. As such, there is, in the UK, a restriction on the full transfer of surpluses from the long-term business funds to shareholder funds in CA, and on the full distribution of retained earnings from CA to Chesnara and, in Sweden, on distributions from Movestic shareholder funds. On 31 December 2011 the long-term business funds and the shareholder funds of SPI and SPP were transferred to CA under the provisions of Part VII of the Financial Services and Markets Act 2000 (‘the Part VII Transfer’), subject to leaving sufﬁcient capital within SPI and SPP to meet regulatory requirements for the limited period until these companies were de-authorised as they subsequently have been during 2012. Accordingly all of the long-term business of the UK businesses subsists within one regulated entity, CA, with effect from that date. The overall capital dynamics of the Group are such that the UK businesses, being substantially in run-off, are net contributors of capital, which is reﬂected in the medium-term by way of dividend distributions to the parent company, while, in the medium-term, the Swedish business, as it expands, and before it achieves economies of scale, is a net consumer of capital, which is reﬂected by way of additional capital contributions from the parent company. (b) Operation of the UK, Swedish and EU regulatory regimes UK businesses The operation of regulation with respect to the UK Businesses is such as to specify the minimum amount of capital that must be held in addition to the insurance liabilities as determined for regulatory purposes. This is established by reference to two calculations, being: (i) the Pillar 1 calculation, which compares regulatory capital based on the characteristics of the in-force life assurance business with an associated measure of capital as prescribed by regulation; and (ii) the Pillar 2 calculation, which compares a risk-based assessment of economic capital with an associated measure of capital based on a realistic assessment of insurance liabilities. For CA, SPI and SPP, for the whole of the period covered by these ﬁnancial statements, the minimum regulatory capital requirement was determined by the ﬁrst calculation, as this gave rise to the lesser measure of surplus capital. This calculation is set out below in Section (c) Regulatory Capital Resources and Requirements, together with the CA Board’s policy in targeting regulatory capital resource cover for total regulatory capital resource requirements. The long-term insurance business subsisting within CA prior to the Part VII Transfer fell outside the scope of the FSA’s ‘realistic capital’ regime and comprises mainly non-proﬁt business, both unit-linked and non-linked business. The with-proﬁts liabilities of the long-term insurance business, subsisting within CA prior to the Part VII Transfer, are wholly reassured to Guardian. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 119 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Therefore, in respect of this with-proﬁts business, there is no separate with-proﬁts fund. The long-term insurance business transferred to CA from SPI and SPP, which also fell outside the scope of the FSA’s ‘realistic capital’ regime, comprises with-proﬁts business, for which two separate subfunds continue to be maintained, and unit-linked and non-linked non-proﬁt business. CA continues to fall outside the scope of the FSA’s ‘realistic capital’ regime following the Part VII Transfer. Within these IFRS ﬁnancial statements excess of policyholder assets and liabilities relating to these funds is classiﬁed within insurance contract provisions. Swedish business Movestic is subject to the Swedish regulatory regime and has to maintain a minimum level of regulatory capital, being the prescribed minimum solvency margin requirements. The solvency surplus under the Swedish regulatory regime is the excess of the regulatory capital resources over the capital resource requirements which are based on the insurance business. This calculation is set out below in Section (c) Regulatory Capital Resources and Requirements together with the Movestic Board’s policy in targeting regulatory capital resource cover for total regulatory capital resource requirements. The Swedish business also includes a 49% interest in an associated company, Modernac S.A. (‘Modernac’), a Luxembourg-based reinsurer, which is subject to EU regulatory solvency requirements: its scale of operations are such that its capital resource requirement is the EU regulatory minimum. Group In addition to the solvency requirements for the UK and Swedish Businesses, as set out above, the Group is subject to the requirements of the EU Insurance Group Directive, in accordance with which the Group calculates the excess of the aggregate of regulatory capital resources determined on a group-wide basis over the aggregate minimum regulatory capital requirement imposed by local regulators. The requirement is that available Group capital resources, as set out in Section (d) Group Capital Position Statement below, should be at least 100% of capital requirements. (c) Regulatory capital resources and requirements UK businesses The following summarises the capital resources and requirements of CA, SPI and SPP, as determined for UK regulatory purposes (Pillar 1): 31 December Available capital resources (CR)(cid:3) Long-term insurance capital requirement (LTICR)(cid:3) Resilience capital requirement (RCR)(cid:3) (cid:40)(cid:88)(cid:85)(cid:82)(cid:83)(cid:72)(cid:68)(cid:81)(cid:3)(cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3)(cid:86)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) Total capital resource requirements (CRR)(cid:3) (cid:40)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:53)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:38)(cid:53)(cid:53)(cid:3)(cid:11)(cid:86)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:12)(cid:3) Ratio of available CR to CRR (cid:55)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3) (cid:40)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:53)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 2011 £m S&P (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) £m CA (cid:20)(cid:19)(cid:23)(cid:17)(cid:27)(cid:3)(cid:3) (cid:22)(cid:28)(cid:17)(cid:20)(cid:3)(cid:3) (cid:20)(cid:27)(cid:17)(cid:22)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:24)(cid:26)(cid:17)(cid:23)(cid:3)(cid:3) (cid:23)(cid:26)(cid:17)(cid:23)(cid:3)(cid:3) £m S&P (cid:26)(cid:17)(cid:19) (cid:178) (cid:178) (cid:25)(cid:17)(cid:20) (cid:25)(cid:17)(cid:20) (cid:19)(cid:17)(cid:28) 183% 115% (cid:27)(cid:20)(cid:17)(cid:27)(cid:3)(cid:3) (cid:21)(cid:22)(cid:17)(cid:19)(cid:3)(cid:3) (cid:25)(cid:17)(cid:20) (cid:19)(cid:17)(cid:28) £m CA (cid:28)(cid:28)(cid:17)(cid:22)(cid:3)(cid:3) (cid:22)(cid:28)(cid:17)(cid:24)(cid:3)(cid:3) (cid:20)(cid:19)(cid:17)(cid:24)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:24)(cid:19)(cid:17)(cid:19)(cid:3)(cid:3) (cid:23)(cid:28)(cid:17)(cid:22)(cid:3)(cid:3) 199% (cid:26)(cid:23)(cid:17)(cid:26)(cid:3)(cid:3) (cid:21)(cid:23)(cid:17)(cid:25)(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The information presented in respect of CA as at 31 December 2011 reﬂects the position following the Part VII Transfer referred to above. Available capital resources for CA as at 31 December 2012 are stated after provision for a dividend of £40.0m which was approved by the CA Board subsequent to 31 December 2012 (as at 31 December 2011: £44.0m subsequent to 31 December 2011). 120 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS CA’s Board, as a matter of policy, continues to target CR cover for total CRR at a minimum level of 162.5% of the LTICR plus 100% of the RCR. As at 31 December 2011 shareholder funds of £7.0m were retained in S&P, in order to cover the EU regulatory minimum for regulated insurance companies. SPI and SPP were de-authorised during 2012, following which those residual shareholder funds were transferred to CA shareholder funds. Individual Capital Assessment (Pillar 2) The FSA Prudential Sourcebooks require UK insurance companies to make their own assessment of their capital needs to a required standard (a 99.5% probability of being able to meet liabilities to policyholders after one year). In the light of scrutiny of this assessment, the FSA may impose its own additional individual capital guidance. The Individual Capital Assessment (ICA) is based on a realistic liability assessment, rather than on the statutory mathematical reserves, and involves stress testing the resultant realistic balance sheet for the impact of adverse events, including such market effects as signiﬁcant falls in equity values, interest rate increases and decreases, bond defaults and further widening of bond spreads. CA completed a full annual assessment during 2012 as a result of which it was concluded that the effective current and medium-term capital requirement constraints on distributions to Chesnara will continue to be on the basis set out under ‘Regulatory capital resources and requirements’ above. This assessment is subject to quarterly high-level updates until the next full annual assessment. Swedish business The following summarises the Capital Resources and the Capital Resources Requirements of Movestic as determined for Swedish regulatory purposes and Movestic’s 49% proportionate share in the Capital Resources and Capital Resources Requirements of Modernac: 31 December 2012 (cid:3) Available Capital Resources (CR)(cid:3) Capital Resource Requirements (CRR)(cid:3) (cid:40)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:53)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:38)(cid:53)(cid:53)(cid:3)(cid:11)(cid:86)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:12)(cid:3) Ratio of available CR to CRR (cid:55)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3) (cid:40)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:53)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) 31 December 2011 (cid:3) Available Capital Resources (CR)(cid:3) Capital Resource Requirements (CRR)(cid:3) (cid:40)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:53)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:38)(cid:53)(cid:53)(cid:3)(cid:11)(cid:86)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:12)(cid:3) Ratio of available CR to CRR (cid:55)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3) (cid:40)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:53)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £m (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70) £m (cid:22)(cid:21)(cid:17)(cid:24)(cid:3)(cid:3) (cid:20)(cid:20)(cid:17)(cid:25)(cid:3)(cid:3) (cid:21)(cid:19)(cid:17)(cid:28)(cid:3)(cid:3) (cid:22)(cid:17)(cid:24) (cid:20)(cid:17)(cid:22) (cid:21)(cid:17)(cid:21) 280% 269% (cid:20)(cid:26)(cid:17)(cid:23)(cid:3)(cid:3) (cid:20)(cid:24)(cid:17)(cid:20)(cid:3)(cid:3) (cid:81)(cid:18)(cid:68) (cid:81)(cid:18)(cid:68) (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £m (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70) £m (cid:21)(cid:28)(cid:17)(cid:25)(cid:3)(cid:3) (cid:20)(cid:21)(cid:17)(cid:20)(cid:3)(cid:3) (cid:20)(cid:26)(cid:17)(cid:24)(cid:3)(cid:3) (cid:21)(cid:17)(cid:22) (cid:20)(cid:17)(cid:24) (cid:19)(cid:17)(cid:27) 245% 153% (cid:20)(cid:27)(cid:17)(cid:21)(cid:3)(cid:3) (cid:20)(cid:20)(cid:17)(cid:23)(cid:3)(cid:3) (cid:81)(cid:18)(cid:68) (cid:81)(cid:18)(cid:68) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 121 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Movestic Board has set a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of assets, to be fully admissible, is to be held in the form of cash. The operation of this requirement may, from time to time, act as the operative constraint in determining the level of additional funding requirements, thereby causing the solvency ratio to rise above what it would otherwise have been, had the form of assets matching capital resources not been a constraint. Movestic’s solvency ratio declines as the increasing scale of its business requires a higher level of regulatory capital: as the ratio approaches 150%, further planned capital contributions will be made by the Group. Movestic, in accordance with local regulatory requirements, continues to make quarterly assessments of the risk-based capital requirements of its business: these indicate that capital resources currently provide a comfortable margin over capital resource requirements. (d) Group capital position statement The following summarises the regulatory capital resources arising in both life and non-life entities, together with a statement of capital resources on a consolidated basis and with a reconciliation to shareholders’ net equity established on the IFRS basis: As at 31 December 2012 (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) businesses (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) businesses (cid:3)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:16)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:3) £000 (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:3) non- £000 £000 (cid:3)(cid:3) (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) business (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 businesses (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72) (cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72) businesses (cid:87)(cid:82)(cid:87)(cid:68)(cid:79) £000 Shareholder funds outside long-term insurance funds – retained earnings Shareholder funds in long-term insurance funds – 44,456 – 4,917 49,110 – 49,110 49,373 38,759 – 87,869 49,373 Total shareholder funds 44,456 4,917 49,110 98,483 38,759 137,242 Adjustment onto regulatory basis Policyholder funds Adjustments to net assets 15,351 (7,312 ) – (839 ) – (6,330 ) 15,351 (14,481 ) – (6,277 ) 15,351 (20,758 ) Total available capital resources 52,495 4,078 42,780 99,353 32,482 131,835 (cid:3) (cid:3) Shareholder funds outside long-term insurance funds – retained earnings Shareholder funds in long-term insurance funds Total shareholder funds Adjustment onto regulatory basis Policyholder funds Adjustments to net assets Group life insurance (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:3) (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 Other activities (cid:56)(cid:46)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) £000 Other activities (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) (cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:3) £000 £000 (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:3) (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79) (cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86) £000 (cid:73)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:3) £000 (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 87,869 49,373 178,839 – 1,649 – (112,304 ) – 156,053 49,373 12,920 – 168,973 49,373 137,242 178,839 1,649 (112,304 ) 205,426 12,920 218,346 15,351 (20,758 ) – (62,960 ) – 3 – 16,217 15,351 (67,498 ) Total available capital resources 131,835 125,879 1,652 (96,087 ) 153,279 122 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 As at 31 December 2011 (cid:3) (cid:3) (cid:3) Shareholder funds outside long-term insurance funds – retained earnings Shareholder funds in long-term insurance funds Total shareholder funds Adjustment onto regulatory basis Policyholder funds Adjustments to net assets SECTION D IFRS FINANCIAL STATEMENTS (cid:3)(cid:3) (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) business (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 businesses (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72) (cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72) businesses (cid:87)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) businesses (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) businesses (cid:3)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:16)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:3) £000 (cid:56)(cid:46)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:3) non- £000 £000 – 40,990 – 7,623 61,164 1,078 61,164 49,691 37,059 – 98,223 49,691 40,990 7,623 62,242 110,855 37,059 147,914 15,643 (7,709 ) – (1,090 ) – (5,872 ) 15,643 (14,671 ) – (7,454 ) 15,643 (22,125 ) Total available capital resources 48,924 6,533 56,370 111,827 29,605 141,432 (cid:3) (cid:3) Shareholder funds outside long-term insurance funds – retained earnings Shareholder funds in long-term insurance funds Total shareholder funds Adjustment onto regulatory basis Policyholder funds Adjustments to net assets Group life insurance (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:3) (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 Other activities (cid:56)(cid:46)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) £000 Other activities (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) (cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:3) £000 £000 (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:3) (cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79) (cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86) £000 (cid:73)(cid:82)(cid:85)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:3) £000 (cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 98,223 49,691 156,529 – 1,662 – (109,435 ) – 146,979 49,691 12,519 – 159,498 49,691 147,914 156,529 1,662 (109,435 ) 196,670 12,519 209,189 15,643 (22,125 ) – (52,271 ) – 16 – 14,537 15,643 (59,843 ) Total available capital resources 141,432 104,258 1,678 (94,898 ) 152,470 The tables presented above illustrate Group total available capital resources as measured for the purposes of inclusion in the related regulatory returns. As at 31 December 2012 they are stated after provision of a dividend of £12.9m and, as at 31 December 2011, after provision of a dividend of £12.5m, which were approved by the Chesnara plc Board subsequent to the respective year ends. Provision is not made for such dividends on the IFRS basis: accordingly, it is necessary to make adjustment to shareholder funds outside long-term insurance funds as at 31 December 2012, as reﬂected above, in order to illustrate the relationship with the total shareholder equity included in the consolidated balance sheet prepared on the IFRS basis. The following tables set out the principal forms of capital, which comprise (i) total available capital resources for the total UK Life Businesses, the total Swedish Life and Non-life Business and the total Group for regulatory purposes and (ii) total shareholder funds for the Group on the IFRS basis. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 123 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Available Capital Resources for Regulatory Purposes (cid:60)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3) (cid:3)(cid:3) Share capital Share premium Treasury shares Other equity contributions Capital redemption reserve Foreign exchange translation reserve Surplus in long-term business fund (cid:54)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:16)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3) (cid:53)(cid:72)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:18)(cid:11)(cid:68)(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:192)(cid:70)(cid:76)(cid:87)(cid:12)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 40,000 – – – – – 4,078 (cid:24)(cid:21)(cid:15)(cid:23)(cid:28)(cid:24)(cid:3)(cid:3) (cid:21)(cid:15)(cid:26)(cid:27)(cid:19)(cid:3)(cid:3) (cid:28)(cid:28)(cid:15)(cid:22)(cid:24)(cid:22)(cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:42)(cid:85)(cid:82)(cid:88)(cid:83) £000 – – – – – – – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) 1,235 – – 40,460 – – – (cid:178)(cid:3)(cid:3) (9,213 ) 42,024 42,523 (217 ) – 50 7,669 – (cid:24)(cid:21)(cid:15)(cid:23)(cid:28)(cid:24)(cid:3) 8,735 (cid:22)(cid:21)(cid:15)(cid:23)(cid:27)(cid:21)(cid:3)(cid:3) (cid:20)(cid:24)(cid:22)(cid:15)(cid:21)(cid:26)(cid:28)(cid:3) The following tables summarise the movement in the available capital resources of the constituent funds of the life businesses, as determined under the respective regulatory regimes for the year ended 31 December 2012: UK businesses Year ended 31 December 2012 (cid:3) non- Life business Life business non- (cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3) S&P £000 CA £000 At beginning of period Surplus arising in the year (cid:49)(cid:72)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3) Intrafund transfers Transfer from long-term business fund to shareholder fund Proposed dividend At end of period 6,533 22,545 (cid:178)(cid:3)(cid:3) – (25,000 ) – (cid:23)(cid:15)(cid:19)(cid:26)(cid:27)(cid:3)(cid:3) – – (cid:178)(cid:3)(cid:3) – – – (cid:178)(cid:3)(cid:3) With (cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) CA £000 48,924 4,593 (cid:178)(cid:3)(cid:3) (1,022 ) – – With Life Life business business (cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:3) S&P £000 CA £000 S&P £000 – – (cid:178)(cid:3)(cid:3) – – – 49,370 – (cid:22)(cid:27)(cid:27)(cid:3)(cid:3) 8,022 25,000 (40,000 ) 7,000 – (cid:178)(cid:3)(cid:3) (7,000 ) – – (cid:178)(cid:3)(cid:3) (cid:24)(cid:21)(cid:15)(cid:23)(cid:28)(cid:24)(cid:3)(cid:3) (cid:3)(cid:178)(cid:3) (cid:23)(cid:21)(cid:15)(cid:26)(cid:27)(cid:19)(cid:3)(cid:3) Year ended 31 December 2011 (cid:3) non- Life business Life business non- (cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3) (cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:3) S&P £000 CA £000 With (cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) CA £000 With Life Life business business (cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:3) (cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:3) S&P £000 CA £000 S&P £000 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72) business £000 111,827 27,138 (cid:22)(cid:27)(cid:27) – – (40,000 ) (cid:28)(cid:28)(cid:15)(cid:22)(cid:24)(cid:22) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72) business £000 (cid:36)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) Surplus arising on alignment of actuarial reserving methodology Surplus arising in the year, net of the effect of the item shown above (cid:49)(cid:72)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3) Intrafund transfers Transfer from long-term business fund to shareholder fund Part VII Transfer Proposed dividend (cid:22)(cid:15)(cid:21)(cid:23)(cid:27)(cid:3)(cid:3) 3,215 21,148 (cid:178)(cid:3)(cid:3) – (22,000 ) 922 – (cid:28)(cid:21)(cid:23)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:22)(cid:25)(cid:15)(cid:25)(cid:24)(cid:20)(cid:3)(cid:3) (cid:23)(cid:19)(cid:15)(cid:27)(cid:20)(cid:25)(cid:3)(cid:3) (cid:22)(cid:21)(cid:15)(cid:20)(cid:26)(cid:21)(cid:3)(cid:3) (cid:20)(cid:20)(cid:22)(cid:15)(cid:27)(cid:20)(cid:20) – 10,153 (1,502 ) (cid:178)(cid:3)(cid:3) 1,500 – (922 ) – – (cid:178)(cid:3)(cid:3) (1,078 ) – 39,849 – – 3,198 (cid:178)(cid:3)(cid:3) – – (39,849 ) – – – (cid:25)(cid:22)(cid:25)(cid:3)(cid:3) 1,078 22,000 28,840 (44,000 ) – 13,368 – (cid:20)(cid:25)(cid:27)(cid:3)(cid:3) (1,500 ) – (23,840 ) – 22,844 (cid:27)(cid:19)(cid:23) – – 5,000 (44,000 ) (cid:36)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:25)(cid:15)(cid:24)(cid:22)(cid:22)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:23)(cid:27)(cid:15)(cid:28)(cid:21)(cid:23)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:23)(cid:28)(cid:15)(cid:22)(cid:26)(cid:19)(cid:3)(cid:3) (cid:26)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) (cid:20)(cid:20)(cid:20)(cid:15)(cid:27)(cid:21)(cid:26) There were no changes in available capital resources for the year ended 31 December 2012 due to changes in management policy, regulatory changes or external factors. The effect of new business written in the period on available capital resources is not considered to be signiﬁcant. 124 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS Swedish business Year ended 31 December 2012 At beginning of period (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) Equity contributions Change in intangible assets: software assets Change in deferred tax Change in foreign exchange reserve At end of period Year ended 31 December 2011 At beginning of period (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) Equity contributions Change in intangible assets: software assets Change in deferred tax Change in foreign exchange reserve At end of period (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Total £000 29,605 (cid:27)(cid:15)(cid:26)(cid:27)(cid:26) – (6,274 ) (3 ) 367 32,482 Total £000 23,321 (cid:27)(cid:15)(cid:26)(cid:24)(cid:27) 5,265 (7,438 ) (16 ) (285 ) 29,605 There were no changes in available capital resources for the period ended 31 December 2012 due to changes in management policy, regulatory changes or external factors. The capital position of the Swedish business is sensitive to changes in market conditions affecting the asset values and changes in the assumptions for calculating the insurance contract liabilities, as described in Note 32. Group Capital Adequacy In accordance with the EU Insurance Groups Directive, the Group calculates the excess of the aggregate of regulatory capital employed over the aggregate minimum solvency requirement imposed by local regulators for all of the constituent members of the Group, all of which are based in Europe. The following sets out these calculations after the recognition of ﬁnal dividends for the respective ﬁnancial year, but approved by the Board and paid to Group shareholders after the respective dates: 31 December Total available capital resources (CR)(cid:3) Capital resources requirement (cid:38)(cid:36)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3) (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:47)(cid:76)(cid:89)(cid:3) (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70)(cid:3)(cid:54)(cid:36)(cid:3) Total (CRR)(cid:3) Group solvency surplus (CR less CRR)(cid:3) Group solvency ratio (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £m (cid:20)(cid:24)(cid:22)(cid:17)(cid:22)(cid:3)(cid:3) (cid:24)(cid:19)(cid:17)(cid:19)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:20)(cid:20)(cid:17)(cid:25)(cid:3)(cid:3) (cid:20)(cid:17)(cid:22)(cid:3)(cid:3) (cid:25)(cid:21)(cid:17)(cid:28)(cid:3)(cid:3) (cid:28)(cid:19)(cid:17)(cid:23)(cid:3)(cid:3) 2011 £m (cid:20)(cid:24)(cid:21)(cid:17)(cid:24) (cid:24)(cid:26)(cid:17)(cid:23) (cid:25)(cid:17)(cid:20) (cid:20)(cid:21)(cid:17)(cid:20) (cid:20)(cid:17)(cid:24) (cid:26)(cid:26)(cid:17)(cid:20) (cid:26)(cid:24)(cid:17)(cid:23) 244% 198% The Group and its individually regulated life assurance businesses have complied with all externally and internally imposed capital requirements during the year. There has been no material change in the Group’s management of capital during the period, except that, notwithstanding that there are no formal intragroup funding arrangements in place, the parent company continues to commit to provide any additional capital contributions to support the target capital requirement of Movestic as set out in Section (c) above. Subject to the regulatory constraints and capital management policy of the Group as set out above, capital resources are available for use elsewhere in the Group. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 125 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (e) Technical provisions net of reassurance – UK businesses (i) The technical provisions established to determine the regulatory capital resources as set out above are: 31 December Unit-linked Insurance contracts Investment contracts Non-unit (sterling) Insurance contracts Investment contracts Non-participating Insurance contracts Investment contracts With DPF Total CA 2012 £000 2011 £000 SPI/SPP 2012 £000 2011 £000 662,316 592,777 20,128 9,627 149,265 9,485 – 670,117 563,576 17,541 9,232 139,984 11,037 – 704,833 92,170 19,403 191 9,900 – 340,848 709,813 105,547 17,502 273 11,056 – 340,915 1,443,599 1,411,487 1,167,345 1,185,106 (ii) Process used to determine assumptions underlying the calculation of technical provisions. The process used to determine the assumptions underlying the calculation of technical provisions, which are checked to ensure that they are consistent with observed market prices or other published information, is intended to result in conservative estimates of the most likely, or expected, outcome. The assumptions which are considered include the expected number and timing of deaths, other claims and investment returns over the period of risk exposure. A reasonable allowance is made for the level of uncertainty within the contracts. (iii) The basis for establishing technical provisions is: The technical provision for S&P with-proﬁts contracts is based on the guaranteed minimum beneﬁts and is calculated on a gross premium basis, by subtracting the present value of future premiums from the present value of future beneﬁts payable under the policy, until it ceases at maturity, or death if earlier. The gross premium method makes explicit allowance for future policy maintenance costs. If the net present value of the future discounted cash ﬂows is positive, no asset is recognised. Provision is not made for future bonuses as all bonuses are terminal bonuses. For those classes of CA non-linked and unit-linked business where policyholders participate in proﬁts, the liability is wholly reinsured to Guardian. When performing the gross liability adequacy test allowance is made for expected future bonuses paid by Guardian. This is based on the realistic liabilities of the underlying policies reinsured, as provided to CA by Guardian. For all other classes of unit linked and quasi-linked business, the technical provision consists of a provision equal to the value of the matching unit-linked assets plus an additional reserve calculated on a gross premium basis, by subtracting the present value of future premiums from the present value of future beneﬁts payable under the policy, until it ceases at maturity, or death if earlier. The gross premium method makes explicit allowance for future policy maintenance costs. If the net present value of the future discounted cash ﬂows is positive, no asset is recognised. For immediate annuities in payment the technical provision is calculated as the discounted value of the expected future annuity payments under the policies, allowing for mortality, interest rates and expenses. For all other classes of non-linked business the technical provision is calculated on a net premium basis, being the level of premium consistent with a premium stream, the discounted value of which, at the outset of the policy, would be sufﬁcient to cover exactly the discounted value of the original guaranteed beneﬁts at maturity, or at death if earlier, on the valuation basis. The provision is then calculated by subtracting the present value of future net premiums from the present value of the beneﬁts guaranteed at maturity, or death if earlier, as a result of events up to the balance sheet date. Negative provisions do not arise under the net premium method, which makes no allowances for voluntary discontinuances by policyholders, and which only implicitly allows for future policy maintenance costs. 126 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (iv) The principal assumptions underlying the calculation of the technical provisions are: Mortality A base mortality table is selected which is most appropriate for each type of contract taking into account rates charged to CA by reinsurers. The mortality rates reﬂected in these tables are periodically adjusted, allowing for emerging experience and changes in reinsurer rates. Morbidity Morbidity tables are derived based on reinsurer tables. These are periodically adjusted to take into account emerging experience where appropriate. Persistency In general, no allowance is made for lapses or surrenders within the valuation of insurance contract liabilities, which is a prudent assumption. For S&P unit-linked business, when assessing additional reserves for expenses and mortality risk, allowance has been made for lapses at a prudent level of 75% of the expected level as indicated by recent experience, the rates used being: Rate of lapse 31 December Assurances: (cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:85)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:3) (cid:54)(cid:76)(cid:81)(cid:74)(cid:79)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3) (cid:47)(cid:76)(cid:81)(cid:78)(cid:72)(cid:71)(cid:3)(cid:55)(cid:44)(cid:38)(cid:13)(cid:3) 2012 2011 SPI * SPP * SPI SPP (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:22)(cid:17)(cid:19)(cid:8)(cid:3)(cid:3) (cid:22)(cid:17)(cid:22)(cid:26)(cid:24)(cid:8)(cid:3)(cid:3) (cid:21)(cid:17)(cid:25)(cid:21)(cid:24)(cid:8)(cid:3)(cid:3) (cid:22)(cid:17)(cid:22)(cid:26)(cid:24)(cid:8)(cid:3)(cid:3) (cid:22)(cid:17)(cid:26)(cid:24)(cid:8)(cid:3)(cid:3) (cid:22)(cid:17)(cid:26)(cid:24)(cid:8)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:26)(cid:17)(cid:24)(cid:19)(cid:8)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:22)(cid:17)(cid:19)(cid:19)(cid:8) (cid:22)(cid:17)(cid:26)(cid:24)(cid:8) (cid:26)(cid:17)(cid:24)(cid:19)(cid:8) * Trustee Investment Contract, a unit-linked contract (‘TIC’). Discount rates CA uses appropriate rates of interest, for different product types, in discounting projected liabilities. As at 31 December 2012 for the material product types, these lay between 1.4%% and 2.75% (31 December 2011: between 1.25% and 3.2%). The rates of interest shown above have been set after consideration of the risk of default on non-government bonds by applying the following adjustments to the earned yield: (i) Risk reduction of 0.1% for supranational issuers such as the European Investment Bank; (ii) For other issuers, a portion of the excess yield above that available on government backed bonds, where the portion varies by credit rating; and (iii) An overall maximum margin over the equivalent term government ﬁxed interest security of 2.0%. Credit rating Reduction AAA 25% AA 30% A 35% BBB 40% BB 50% B 65% C+ 80% For many of the life insurance products the interest rate risk is managed through asset/liability management strategies that seek to match the interest rate sensitivity of the assets to that of the underlying liabilities. The overall objective of these strategies is to limit the net change in value of assets and liabilities arising from interest rate movements. Technical provisions for with-proﬁts contracts are particularly sensitive to the interest rate used when discounting due to the existence of investment guarantees. Renewal expenses and inﬂation The renewal expenses assumed are based on the charges made to CA by its two third party insurance administration services providers, with appropriate margins. These are assumed to inﬂate at a mix of current inﬂation rates in the UK, being the Retail Price Index and the National Average Earnings Index. Explicit allowance is also made for those Governance expenses which are charged to the long-term funds. Taxation It has been assumed that current tax legislation and tax rates will not change. The sensitivities of technical provisions and of components of capital to changes in assumptions are materially the same as those detailed in Note 32. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 127 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (f) Valuation of options and guarantees – UK businesses (i) Stochastically-valued options and guarantees CA has a small number of guaranteed annuity options which are valued stochastically. (ii) Deterministically-valued options and guarantees Timed Investment Funds Certain investment funds, the ‘Timed Investment Funds’, carry a guarantee that the price at maturity date or death will not be less than the highest price attained between commencement and contract cessation. The cost of the guarantee can be managed by changing the investment policy adopted by each fund. In respect of this guarantee: (i) a monthly charge of 1⁄48% of the fund value is made; and (ii) investment conditions were such as to require the establishment of a reserve of £327,000 as at 31 December 2012 (31 December 2011: £279,605). The reserve for a given fund is derived as the discounted exposure at fund maturity date, the exposure being the difference between the guaranteed Timed Investment Fund value and the projected fund maturity value, with the latter projected value being derived assuming an immediate fall in value of equities within the fund of 26% and allowing for future investment returns, including presumed future equity investment return of 2.57% per annum. Guaranteed Growth Fund The Guaranteed Growth Fund (GGF) is a deposit-based contract which provides a return to policyholders that is linked to the average residential mortgage rate. However, the assets backing the contract are largely held as cash on deposit. There is, therefore, likely to be a shortfall between the return given to policyholders and the return earned on assets, and the value of this shortfall is reserved for. Reserves for this product comprise a ‘unit’ reserve of the current value of the beneﬁts held and a non-unit reserve for expenses. The underlying fund at 31 December 2012 was £2.0m (31 December 2011: £6.47m). 196 policies invested in the fund (31 December 2011: 717), of which 75 (31 December 2011: 76) were paying premiums (for a total of approximately £2,000 per annum (31 December 2011: £25,500). For the valuation of contract liabilities the following are projected for each future year: – the beneﬁt outgo from the fund; – the investment return from the assets backing the fund; and – the difference between these items. These differences are then discounted and summed to establish the GGF loss reserve. The following assumptions are used for calculating the loss reserve: Rate of growth of liability: 4.18% pa Rate of return on cash: Discount rate: Retirement age: 0.4% pa 0.5% pa 90% of business with policyholders retiring at age 65 10% of business with policyholders retiring at age 70 Terminations before retirement: 3% pa The reserve for the guarantee as at 31 December 2012 was £0.5m (31 December 2011: £1.0m). Deferral of retirement ages Policyholders with a Personal Retirement Account and Guaranteed Plus Retirement Plan may defer their retirement age on terms that may be beneﬁcial to the policyholder. The cost of policyholders exercising this beneﬁt is assessed using a prudent assumption as to the level of take-up of the option and deferral to age 75. The reserve for this option as at 31 December 2012 was £7.1m (31 December 2011: £7.3m). Increase of premiums on Personal Retirement Account Policyholders with a Personal Retirement Account may increase their regular premium contribution on terms that can be beneﬁcial to the policyholder. The cost of policyholders exercising this beneﬁt is assessed using a prudent assumption as to the level of take-up of the option. The reserve for this option as at 31 December 2012 was £0.2m (31 December 2011: £0.2m). Insurability options Policyholders with certain contracts have the right to increase their sum assured without underwriting, in certain circumstances. The reserve for this option as at 31 December 2012 was £0.3m (31 December 2011: £0.3m). (g) Management of risk The Group’s approach to the management of risk which may have an impact on the measurement of capital resources and requirements, as measured on a regulatory basis, is set out in Notes 5 and 6 to these ﬁnancial statements. 128 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS 32 Insurance contract provisions (a) Analysis of insurance contract provisions by operating segment 31 December CA S&P Movestic 2012 Gross Reinsurance £000 £000 Net £000 Gross Reinsurance £000 £000 Net £000 2011 (restated) 1,058,070 1,080,427 68,581 226,649 5,873 46,170 831,421 1,074,554 22,411 1,042,030 1,085,127 63,782 214,719 6,008 43,065 827,311 1,079,119 20,717 Total insurance contract provisions 2,207,078 278,692 1,928,386 2,190,939 263,792 1,927,147 Current Non-current Total 408,702 1,798,376 18,551 260,141 390,151 1,538,235 185,261 2,005,678 16,719 247,073 168,542 1,758,605 2,207,078 278,692 1,928,386 2,190,939 263,792 1,927,147 See Note 2(d) for an explanation of the re-statement as at 31 December 2011. (b) Analysis of movement in insurance contract provisions Year ended 31 December 2012 Gross Reinsurance £000 £000 Net £000 Gross Reinsurance £000 £000 Net £000 2011 (restated) (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) Premiums received Fees deducted (cid:53)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3) Movements in provisions for contracts sold – Movestic – in current year – in prior years Investment return Other movements (cid:3)(cid:3) (cid:3)(cid:3) (cid:21)(cid:15)(cid:20)(cid:28)(cid:19)(cid:15)(cid:28)(cid:22)(cid:28)(cid:3)(cid:3) 75,575 (27,467 ) (233,017 ) (cid:21)(cid:25)(cid:22)(cid:15)(cid:26)(cid:28)(cid:21)(cid:3)(cid:3) 10,845 (3,140 ) (18,356 ) (cid:20)(cid:15)(cid:28)(cid:21)(cid:26)(cid:15)(cid:20)(cid:23)(cid:26)(cid:3)(cid:3) 64,730 (24,327 ) (214,661 ) (cid:21)(cid:15)(cid:23)(cid:19)(cid:23)(cid:15)(cid:20)(cid:25)(cid:21)(cid:3)(cid:3) 82,668 (27,815 ) (226,419 ) (cid:21)(cid:27)(cid:19)(cid:15)(cid:26)(cid:23)(cid:22)(cid:3)(cid:3) 11,748 (3,446 ) (20,718 ) (cid:21)(cid:15)(cid:20)(cid:21)(cid:22)(cid:15)(cid:23)(cid:20)(cid:28) 70,920 (24,369 ) (205,701 ) 25,363 (14,972 ) 159,877 30,780 14,992 (7,611 ) 7,983 10,187 10,371 (7,361 ) – 20,593 25,477 (16,212 ) (27,888 ) (23,034 ) 14,172 (9,134 ) (7,908 ) (1,665 ) 11,305 (7,078 ) (19,980 ) (21,369 ) Balance at 31 December 2,207,078 278,692 1,928,386 2,190,939 263,792 1,927,147 See Note 2(d) for an explanation of the re-statement for the year ended 31 December 2011. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 129 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (c) Process, basis and assumptions for establishing insurance contract provisions The process, basis and assumptions for establishing insurance contract provisions for the UK businesses are materially the same as those stated in Note 31(e) (ii), (iii) and (iv) for establishing technical provisions, except as set out in the following. Provisions for S&P contracts with discretionary participation features (‘DPF’) provide for the present value of projected payments to policyholders based on guaranteed minimum investment returns, mainly at 5 per cent per annum. When the insurance contract provisions established on this basis are greater than the associated policyholder asset shares, a shareholder charge for the cost of guarantees arises. The actual cost to shareholders depends principally on the future investment performance of the associated policyholders’ assets and on the rate of discontinuance of policies prior to maturity. Up to 31 December 2011 the estimated cost of these guarantees to shareholders was based on a simpliﬁcation of the method used for statutory solvency purposes, which sought to remove some of the unrealistic level of prudence associated with that method. However, this basis is recognised as potentially giving rise to costs below the market-consistent level, which is considered to be the lowest acceptable reported cost. As a consequence, the estimated cost to shareholders, subsequent to that date, has been reﬁned and is determined by reference to the market consistent evaluation of the cost, the methodology of which is set out on page 158 in the EEV Supplementary Information following and is taken as a constant margin of 10% above the amount so determined, in order to allow for an appropriate level of prudence (the ‘market-consistent’ method). The following sets out the cumulative charge to shareholders for the cost of guarantees on these bases: Year ended 31 December At beginning of the period Effect of change to market-consistent method: charge to income Charge/(credit) to income At the end of period 2012 £000s 44,011 1,899 400 2011 £000s 50,596 – (6,585 ) 46,310 44,011 Had the market consistent embedded value (MCEV) method been used during 2011, the cumulative cost of guarantees would have been £4,700.000 lower at the beginning of the period and £1,899,000 higher at the end of the period, with no resultant charge or credit to income. Swedish business (Movestic) Group Contracts are sold on an annual basis and the Individual Contracts include an option for Movestic to increase the premium on an ongoing basis. Therefore, for both Group and Individual Contracts, Movestic adopts a reserving approach that is similar to that of a non-life insurance business, with claim reserves projected using an estimated loss ratio with reference to previous loss development for earlier years. The insurance contract provisions comprise unearned premium provisions, outstanding claims and associated reinsurance recoveries. Except for the income protection and the waiver of premium beneﬁts within the Individual Contracts, provisions for the insurance contracts are not discounted because of the short-term nature of the liabilities, which are generally paid by the fourth year of development for a single accident year. Income protection and waiver of premium contracts are discounted at a rate equivalent to a high quality (i.e. AA rated) corporate bond. (d) Assumptions used in establishing insurance contract provisions The assumptions used in establishing insurance contract provisions for the UK businesses are materially the same as those set out in Note 31 (e) (iv) for establishing technical provisions. Swedish business (Movestic) Unearned premiums Unearned premiums represent a proportion of the premium relating to policies that expire after the balance sheet date. Unearned premiums are calculated automatically by the underwriting system on a straight-line basis over the period of the policy. Outstanding claims Outstanding claims include notiﬁed claims, claims incurred as at the balance sheet date but not reported and an estimate of the cost of handling the claims. The key risk in respect of notiﬁed claims is that they are paid or handled inappropriately (for example invalid or fraudulent claims are paid). Management information is reviewed on a regular basis to identify unusual trends in the payment of claims. The estimation of claims incurred but not reported (‘IBNR’) is generally subject to a greater degree of uncertainty than the estimation of costs of settling claims already notiﬁed to Movestic, where more information about the claim event is generally available. In calculating the estimated cost of claims which have not been notiﬁed, Movestic uses a variety of estimation techniques, generally based upon statistical analyses of historical experience, which assumes that the development pattern of the current claims will be consistent with past experience. The most common methods that are used are the chain ladder method and the Bornhuetter-Ferguson method. Chain ladder methods involve the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected factors are applied to cumulative claims data for each accident year that is not fully developed to provide an estimated ultimate claims cost. The Bornhuetter-Ferguson method uses a combination of an initial estimate of the expected loss ratio and an estimate based on observed claims experience. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. 130 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS The use of different approaches assists in giving greater understanding of the trends inherent in the data being projected and also assists in setting the range of possible outcomes. The most appropriate estimation technique is selected taking into account the characteristics of the policies sold. Where deemed appropriate, an allowance is made for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims. Although claim reserves are considered reasonable, on the basis of information available to Movestic, the ultimate liabilities will vary as a result of subsequent information and events. Income protection and waiver of premium beneﬁts within Individual Contracts For reported claims, the liabilities are reviewed on a case by case basis. A discounted cash ﬂow model is used to determine the liabilities and the key factors used are: – the probability of `recovery’ (i.e. return to work). The recovery rates depend on age, sex and length of time the claimant has been claiming the beneﬁts; – the mortality rate; and – the discount rate. For unreported claims, the claims development table is used. The development of insurance liabilities provides a measure of Movestic’s ability to estimate the ultimate value of claims. The top half of the table below illustrates how Movestic’s estimate of total claims outstanding for each accident year has changed at successive year-ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the balance sheet. An accident-year basis is considered to be the most appropriate for the business written by Movestic. The information is presented on both a gross and net of reinsurance basis. Analysis of claims development – gross Estimate of ultimates End of accident year One year later Two years later Three years later Four years later Five years later Current estimate of ultimate claims Cumulative payments In balance sheet Provision for prior years Liability in balance sheet Analysis of claims development – net Estimate of ultimates End of accident year One year later Two years later Three years later Four years later Five years later Current estimate of ultimate claims Cumulative payments In balance sheet Provision for prior years Liability in balance sheet 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 17,421 13,204 11,322 10,134 9,651 9,547 9,547 (7,601 ) 19,619 15,435 14,078 11,825 11,410 – 11,410 (9,711 ) 20,269 13,879 13,841 13,797 – – 13,797 (8,920 ) 50,916 37,851 36,566 – – – 36,566 (14,185 ) 31,981 18,397 – – – – 18,397 (8,753 ) 33,163 – – – – – 33,163 (7,299 ) 1,946 1,699 4,877 22,381 9,644 25,864 2,171 68,581 2007 £000 2,711 1,717 1,642 1,485 1,408 1,443 1,443 (1,068 ) 2008 £000 2,704 2,349 2,137 1,715 1,708 – 1,708 (1,406 ) 2009 £000 3,464 2,111 2,442 2,446 – – 2,446 (1,549 ) 2010 £000 2011 £000 2012 £000 17,287 10,356 9,902 – – – 9,902 (3,532 ) 13,028 6,113 – – – – 6,113 (2,569 ) 12,790 – – – – – 12,790 (2,214 ) 375 302 897 6,370 3,544 10,576 347 22,411 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 131 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) e) Sensitivity to changes in assumptions UK businesses (CA and S&P) Assumptions are adjusted for changes in mortality, investment return, policy maintenance expenses and expense inﬂation to reﬂect anticipated changes in market conditions and market experience and price inﬂation. CA and S&P re-run their valuation models on various bases. An analysis of sensitivity around various scenarios provides an indication of the sensitivity of the estimates to changes in assumptions in respect of its life assurance contracts. The table presented below demonstrates the sensitivity of assets and insured liability estimates to particular movements in assumptions used in the estimation process. Certain variables can be expected to impact on life assurance liabilities more than others, and consequently a greater degree of sensitivity to these variables may be expected. Impact on reported net of tax proﬁts and equity to changes in key variables: (cid:3) (cid:3) CA business Investment return Investment return (cid:48)(cid:82)(cid:85)(cid:87)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:18)(cid:80)(cid:82)(cid:85)(cid:69)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3) (cid:48)(cid:82)(cid:85)(cid:87)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:79)(cid:82)(cid:81)(cid:72)(cid:3) Morbidity alone Policy maintenance expenses S&P business (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3) Investment return (cid:48)(cid:82)(cid:85)(cid:87)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3) Policy maintenance expenses (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Change in net of (cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86)(cid:3)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:3) 2012 £m Change in net of (cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:86) (cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) 2011 £m (cid:3)(cid:3) (cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:3) variable % +1 -1 (cid:14)(cid:20)(cid:19)(cid:3)(cid:3) (cid:14)(cid:20)(cid:19)(cid:3)(cid:3) +10 +10 (cid:14)(cid:20)(cid:3)(cid:3) -1 (cid:14)(cid:20)(cid:19)(cid:3)(cid:3) +10 ((cid:22)(cid:17)(cid:19)(cid:3)) ((cid:20)(cid:17)(cid:19)(cid:3))(cid:3) (cid:21)(cid:17)(cid:23)(cid:3)(cid:3) (cid:22)(cid:17)(cid:24)(cid:3)(cid:3) ((cid:20)(cid:17)(cid:20)(cid:3)) ((cid:20)(cid:17)(cid:26)(cid:3)) (cid:20)(cid:25)(cid:17)(cid:20)(cid:3)(cid:3) ((cid:20)(cid:26)(cid:17)(cid:25)(cid:3)) (cid:19)(cid:17)(cid:23)(cid:3)(cid:3) ((cid:20)(cid:17)(cid:27)(cid:3)) ((cid:20)(cid:17)(cid:25)(cid:3)) (cid:21)(cid:17)(cid:25) (cid:20)(cid:17)(cid:27) (cid:21)(cid:17)(cid:28) ((cid:20)(cid:17)(cid:20)(cid:3)) ((cid:20)(cid:17)(cid:27)(cid:3)) (cid:23)(cid:17)(cid:25) ((cid:23)(cid:17)(cid:22)(cid:3)) (cid:19)(cid:17)(cid:26) ((cid:21)(cid:17)(cid:24)(cid:3)) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The above sensitivities are calculated as an expected impact on IFRS-based proﬁts, net of reinsurance and tax and the analysis has been prepared for a change in the stated variable, with all other assumptions remaining constant. The sensitivities to the changes in investment returns are calculated taking into account the consequential changes to valuation assumptions. The sensitivities to mortality and morbidity (critical illness) rates shown above are calculated on the assumption that there would be no consequential change in rates to policyholders. In practice, Group policy is to pass costs on to policyholders where it is contractually permitted and where it considers that the impact of the change is signiﬁcant. As explained in Note 32(c) on page 130 the method of estimating the cost of guarantees to policyholders in respect of the S&P with-proﬁts funds has been changed. An effect of this change has been to make the results and ﬁnancial position of the Group more sensitive to variations in market rates of interest. The main expense risk is that of unforeseen changes to third party administration expenses: the impact shown above quantiﬁes a 10% increase in those expenses. 132 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 Swedish business (Movestic) The key sensitivities in the measurement of the Group and Individual Contracts insurance claim reserves within Movestic are a movement in the loss ratio applied to earned premium and the foreign exchange risk arising on business written in Norway. In addition, for the income protection and the waiver of premium beneﬁts within the Individual Contracts, the claims reserves are impacted by the discount rate used. The impact of these sensitivities is shown below: SECTION D IFRS FINANCIAL STATEMENTS (cid:3) (cid:51)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3) 5% increase in loss ratio Gross before reinsurance Net after reinsurance 5% decrease in loss ratio Gross before reinsurance Net after reinsurance 10% increase in the Norwegian Krone Gross before reinsurance Net after reinsurance 10% decrease in the Norwegian Krone Gross before reinsurance Net after reinsurance 1% increase in discount rate Gross before reinsurance Net after reinsurance 1% decrease in discount rate Gross before reinsurance Net after reinsurance 33 Investment contracts at fair value through income and amounts deposited with reinsurer Analysis by operating segment 31 December 2012 £000 (1,962 ) (1,320 ) 1,962 1,320 (238 ) (31 ) 238 31 1,979 782 (2,363 ) (917 ) 2011 £000 (1,875 ) (681 ) 1,875 681 (476 ) 74 476 74 1,772 577 (2,014 ) (656 ) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) 2011 £000 2012 £000 (1,474 ) (992 ) 1,474 992 (179 ) (23 ) 179 23 1,487 588 (1,776 ) (689 ) (1,382 ) (502 ) 1,382 502 (351 ) (55 ) 351 55 1,547 425 (1,484 ) (484 ) Net £000 (cid:3) CA S&P Movestic Total Current Non-current Total (cid:3)(cid:3) Investment (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:3) liability £000 2012 Amount deposited (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:3) reinsurer £000 Investment (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:3) liability £000 (cid:3)(cid:3) Net £000 2011 Amount deposited (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:3) reinsurer £000 629,882 92,170 1,300,262 30,245 – – 599,637 92,170 1,300,262 599,495 105,547 1,171,421 28,031 – – 571,464 105,547 1,171,421 2,022,314 30,245 1,992,069 1,876,463 28,031 1,848,432 568,222 1,454,092 523 29,722 567,699 1,424,370 138,114 1,738,349 488 27,543 137,626 1,710,806 2,022,314 30,245 1,992,069 1,876,463 28,031 1,848,432 The fair values of the Groups’ investment contract liabilities are determined according to a three-level valuation hierarchy which is explained in Note 26, as follows: Investment contract liabilities 2,010,545 11,509 260 2,022,314 The liabilities in Level 1 of the valuation hierarchy represent the fair value of unit-linked liabilities based on the aggregation of prices quoted in active markets of their associated assets. The liabilities in Level 2 of the valuation hierarchy represent the fair value of non-linked and guaranteed income and growth bond liabilities valued using established actuarial techniques utilising market observable data for all signiﬁcant inputs, such as investment yields. Level 1 £000 Level 2 £000 Level 3 £000 Total £000 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 133 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 34 Liabilities relating to policyholders’ funds held by the Group Unit-linked 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Deposits received Fees deducted from account balances Investment yield Foreign exchange translation difference Other movements Balance at 31 December Current Non-current Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:23)(cid:28)(cid:15)(cid:19)(cid:27)(cid:19)(cid:3)(cid:3) 17,869 (277 ) 3,314 833 (9,648 ) 2011 £000 (cid:24)(cid:21)(cid:15)(cid:22)(cid:22)(cid:26) 4,877 (526 ) (5,115 ) (578 ) (1,915 ) 61,171 49,080 21,356 39,815 4,304 44,776 61,171 49,080 The fair values of the ‘Liabilities relating to Policyholders’ funds held by the Group’ are determined according to a three-level valuation hierarchy, which is explained in Note 26. The fair value of these liabilities is based on the aggregation of prices quoted in active markets of their associated assets (Level 1), as disclosed in Note 26. 35 Borrowings Group 31 December Bank loan (cid:36)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Total Current Non-current Total Company 31 December Bank loan Current Non-current Total 2012 £000 29,662 (cid:20)(cid:27)(cid:15)(cid:25)(cid:25)(cid:21)(cid:3)(cid:3) 2011 £000 35,486 (cid:20)(cid:28)(cid:15)(cid:21)(cid:25)(cid:26) 48,324 54,753 12,218 36,106 12,472 42,281 48,324 54,753 2012 £000 2011 £000 29,662 35,486 7,844 21,818 5,819 29,667 29,662 35,486 The bank loan subsisting at 31 December 2012, which was drawn down on 20 December 2010 under a facility made available on 17 November 2010, is unsecured and is repayable in ﬁve increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. The fair value of the bank loan at 31 December 2012 was £30,000,000 (31 December 2011: £36,000,000). The fair value of amounts due in relation to ﬁnancial reinsurance was £20,197,549 (31 December 2011: £20,672,526). The fair value of other borrowings is not materially different from their carrying value. 134 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 36 Other provisions Group (cid:3) (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3) Provisions made during the year Provisions used during the year Provisions reversed during the year Balance at 31 December 2011 Provisions made during the year Provisions used during the year Provisions reversed during the year Balance at 31 December 2012 31 December 2011 Current Non-current Total 31 December 2012 Current Non-current Total Other complaints (cid:85)(cid:72)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) £000 (cid:48)(cid:40)(cid:38)(cid:53)(cid:3)(cid:3) £000 Onerous (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:3) £000 Unit pricing (cid:85)(cid:72)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) £000 (cid:25)(cid:20)(cid:3)(cid:3) 25 (17 ) – 69 40 (28 ) – 81 69 – 69 81 – 81 (cid:21)(cid:21)(cid:20)(cid:3)(cid:3) 6 (15 ) (10 ) 202 2 (1 ) – 203 202 – 202 203 – 203 (cid:20)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 1,500 (119 ) (291 ) 2,090 2,504 (263 ) (184 ) 4,147 315 1,775 2,090 496 3,651 4,147 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:20)(cid:15)(cid:27)(cid:21)(cid:21) 1,531 (152 ) (390 ) 2,811 3,258 (279 ) (629 ) (cid:24)(cid:23)(cid:19)(cid:3)(cid:3) – (1 ) (89 ) 450 – (1 ) (445 ) 4 5,161 450 – 450 4 – 4 1,036 1,775 2,811 1,510 3,651 5,161 The reversal of provisions during the year was credited to Other Operating Income as disclosed in Note 11. Company (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3) Provisions made during the year Balance at 31 December 2011 Provisions made during the year Provisions used during the year Company balance at 31 December 2012 31 December 2011 Current Non-current Total 31 December 2012 Current Non-current Total Onerous contracts £000 (cid:178) 1,500 1,500 2,463 (159 ) 3,804 176 1,324 1,500 399 3,405 3,804 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 135 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (a) Mortgage Endowment Complaints Redress (MECR) Insurance contract provisions include a mortgage endowment complaints reserve of £2.44m, in respect of the estimate of future redress for future claims by customers in respect of past misselling of mortgage endowment policies. As part of the redress process if the complaint is upheld an offer of redress is made to the customer where a loss has occurred. These offers are classiﬁed as payables for the ﬁrst 6 months after they are made, subsequent to which they are reclassiﬁed as provisions, as the customer loses the right of redress at the level offered, but continues to have a right to enforce a claim, which the Group has the right to reassess. The provision is established at the original offer level. (b) Other complaints redress Offers of redress on complaints other than mortgage endowment related are classiﬁed in a manner similar to that detailed for MECR above. (c) Onerous contracts The Group and Company have a number of onerous operating lease contracts that have been entered into historically, whose activity and current status is described in Note 49 Operating leases. Given the terms of the contracts the Group and company have created onerous contract provisions for anticipated future net costs. Over the terms of the contracts these provisions take account of the contract terms, future payments and future mitigating income from sublets, contract by contract, to create a view as to the Group’s and Company’s exposure. These provisions comprise three components: provision for vacant properties, provision for properties due to become empty at the end of their subleases, and provision for future under-recoveries of costs on subleases entered into. The provision made during 2011 of £1.5m relates to the potential cost of vacant space within the Harbour House Head Ofﬁce in Preston. The Company has a lease arrangement until mid-2019 for the entire building although it only occupies a small proportion. The majority of the building is available for sub-let. The additional provision represents the future contractual costs not expected to be covered by sub-let income when existing tenants vacate the building. During 2012 Chesnara plc has received notice from tenants of their intention to vacate Harbour House. In recognition of this, and in light of the excess commercial property capacity in the market, the estimated level of future sub let income has been reduced and the provision as at 31 December 2012 has been increased accordingly. The critical factor to which the value is sensitive is the assumed level of re-letting income. The closing provision includes a signiﬁcantly reduced level of re-let income such that the maximum exposure based on no re-letting income is £0.7m. (d) Unit pricing redress A data error in the indexation of the costs of underlying ﬁnancial assets in certain of the unit-linked funds was identiﬁed during 2007. As a result, the amount of capital gains chargeable to tax had been overestimated for unit pricing purposes and greater deductions were made from these funds than would otherwise have been the case. A provision of £2,994,000 was established at 31 December 2007 to cover the estimated cost of redress and the administration costs of performing the review. Associated recoveries from third parties were established at £494,000 as at the same date and these were included in ‘Insurance and other receivables’ as at 31 December 2007. The provision established at 31 December 2007 was estimated insofar as it was not based on speciﬁc individual calculations for each policyholder, but was established on the basis of generic data relating to the amount of payments to policyholders who exited from the funds in speciﬁc periods, of the unit prices ruling in those periods and of an estimate of the extent of the pricing error pertaining to those periods. Subsequently, a revised estimate was established at £2,794,000 based on speciﬁc policy-by-policy data, which by 31 December 2011 had reduced to £450,000 as compensation was paid to policyholders. During 2012 the majority of outstanding amounts owed to policyholders, for which the respective policyholders could not be traced, were re-invested into unit-linked funds for the beneﬁt of all remaining policyholders, and only a small balancing residual provision of £4,000 as at 31 December 2012 continues to be held until all of the associated administration procedures are completed. (e) Sharesave Plan A Sharesave Plan was launched during October 2011. The level of contributions combined with the closing share price, result in an immaterial level of company liability and hence no provision has been raised. 37 Deferred tax assets and liabilities Deferred tax assets and liabilities comprise: 31 December Net deferred tax assets CA, S&P and Other Group Activities Movestic Total Current Non-current (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) 2012 £000 2,295 – 2,295 – 2,295 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:21)(cid:15)(cid:21)(cid:28)(cid:24)(cid:3)(cid:3) 2011 £000 – – – – – (cid:178) 136 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 31 December Net deferred tax liabilities CA, S&P and Other Group Activities Movestic Total Current Non-current Total CA, S&P and Other Group Activities (a) Recognised deferred tax assets and liabilities 31 December (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:68)(cid:85)(cid:76)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:80)(cid:72)(cid:3) Deferred acquisition costs Deferred income Acquired value in force Property, plant and equipment Tax losses on pensions business Unrealised and deferred investment gains Excess expenses of management Insurance contract provisions Other Total Comprising:- Net deferred tax assets Net deferred tax liabilities Total SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 2011 £000 (4,786 ) (1,108 ) (14,623 ) (767 ) (5,894 ) (15,390 ) (1,048 ) (4,846 ) (1,279 ) (14,111 ) (5,894 ) (15,390 ) 2011 Assets / (liabilities ) £000 (Charge)/ credit in year £000 2012 Assets / (liabilities ) £000 (cid:178)(cid:3)(cid:3) (1,319 ) 2,322 (6,159 ) (79 ) – (4,682 ) – (4,706 ) – (2,636 ) 254 (433 ) 1,302 40 4,178 27 4,655 4,706 39 (2,636 ) (1,065 ) 1,889 (4,857 ) (39 ) 4,178 (4,655 ) 4,655 – 39 (14,623 ) 12,132 (2,491 ) – (14,623 ) 2,295 9,837 2,295 (4,786 ) (14,623 ) 12,132 (2,491 ) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 137 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 31 December Deferred acquisition costs Contingency reserves Deferred income Acquired value in force Property, plant and equipment Unrealised and deferred investment gains Insurance contract provisions Total Comprising:- Net deferred tax assets Net deferred tax liabilities Total (cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:11)(cid:76)(cid:12)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:192)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:86)(cid:29) Year ended 31 December Income tax credit before exceptional item Exceptional item (see Note 7 on page 104) Total 2010 Assets / (liabilities ) £000 (Charge)/ credit in year £000 2011 Assets / (liabilities ) £000 (1,692 ) (220 ) 2,939 (8,007 ) (73 ) (6,776 ) (5,918 ) 373 220 (617 ) 1,848 (6 ) 2,094 1,212 (1,319 ) – 2,322 (6,159 ) (79 ) (4,682 ) (4,706 ) (19,747 ) 5,124 (14,623 ) – (19,747 ) – 5,124 – (14,623 ) (19,747 ) 5,124 (14,623 ) 2012 £000 7,354 4,778 2011 £000 5,124 – 12,132 5,124 A new regime for the taxation of life assurance companies in the UK was introduced with effect from 1 January 2013. The new regime bases the taxable trading proﬁt on IFRS proﬁts rather than on FSA return surplus generated as under the previous rules and also treats pension business separately from life assurance business. Whilst this change does not impact the 2012 current tax charge, it has created a signiﬁcant recovery in the deferred tax charge as the pension losses in the UK life company will be of value going forward whereas no value was ascribed to them under the previous regime. In addition, as part of the transition to the new regime, accumulated historical proﬁts as at 31 December 2012 are compared between the two bases and any taxable difference is brought into charge over the next ten years. This transitional adjustment has created a deferred tax charge as at 31 December 2012, partially offsetting the pension related-recovery noted here. (b) Items for which no deferred tax asset is recognised 31 December Tax losses on pensions business Transitional losses on non-pensions business Unrelieved expenses Realised and unrealised investment losses Total 2012 £000 – 4,837 58,685 4,235 2011 £000 34,180 – 90,695 2,166 67,757 127,041 A deferred tax asset has not been recognised in respect of unrelieved expenses, because it is not probable that there will be a sufﬁcient level of taxable income arising from income and gains on ﬁnancial assets, so that the Group can utilise the beneﬁts therefrom. 138 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 Movestic (a) Recognised deferred tax assets and liabilities 31 December (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) SECTION D IFRS FINANCIAL STATEMENTS (cid:3)(cid:3) 2011 Assets / (liabilities ) £000 (cid:3)(cid:3) (Charge)/ credit in year £000 (cid:41)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:3) exchange translation difference £000 2012 Assets / (liabilities ) £000 (561 ) – (222 ) 16 (31 ) 90 (368 ) (14 ) (9 ) 1 (11 ) 1 (601 ) 91 (601 ) 3 (767 ) (323 ) (18 ) (1,108 ) 16 (783 ) (767 ) 76 (399 ) (323 ) 2 (20 ) (18 ) 94 (1,202 ) (1,108 ) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2010 Assets / (liabilities ) £000 (cid:3)(cid:3) (Charge)/ credit in year £000 (cid:41)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:3) exchange translation difference £000 2011 Assets / (liabilities ) £000 (564 ) 50 (270 ) 5 (779 ) 55 (834 ) (779 ) (5 ) (50 ) 45 11 1 (39 ) 40 1 8 – 3 – 11 – 11 11 2012 £000 (822 ) (822 ) (561 ) – (222 ) 16 (767 ) 16 (783 ) (767 ) 2011 £000 734 734 Intangible assets Fair value adjustment on acquisition Corporation tax recoverable Equity accounting for associate Property, plant and equipment Total Comprising:- Net deferred tax assets Net deferred tax liabilities Total 31 December (cid:3) Intangible assets Fair value adjustments on acquisition Corporation tax recoverable Equity accounting for associate Property, Plant and Equipment Total Comprising:- Net deferred tax assets Net deferred tax liabilities Total (b) Unrecognised deferred tax (liabilities)/assets (gross) 31 December Corporation tax recoverable – not recognised Total CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 139 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 38 Reinsurance payables Payable to reinsurers 31 December Payables in respect of insurance contracts Payables in respect of investment contracts Reinsurer’s share of deferred acquisition costs and claims deposits Total Current Non-current Total The carrying value of payables to reinsurers is a reasonable approximation of fair value. 39 Payables related to direct insurance and investment contracts 2012 £000 15,914 22 674 2011 £000 15,060 105 1,171 16,610 16,336 15,154 1,456 16,336 – 16,610 16,336 31 December Accrued claims Intermediaries’ liabilities Policyholder premium liabilities Other Total Current Non-current Total 2012 Gross Reinsurance £000 £000 32,490 1,447 2,289 2,668 4,489 – – – Net £000 28,001 1,447 2,289 2,668 2011 Gross Reinsurance £000 £000 30,784 2,378 5,610 1,879 4,667 – – – Net £000 26,117 2,378 5,610 1,879 38,894 4,489 34,405 40,651 4,667 35,984 38,894 – 4,489 – 34,405 – 40,651 – 4,667 – 35,984 – 38,894 4,489 34,405 40,651 4,667 35,984 The carrying value of payables related to the direct insurance and investment contracts is a reasonable approximation of fair value. 40 Deferred income 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) Release to income Balance at 31 December Current Non-current Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 2011 £000 (cid:20)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) (1,116 ) (cid:20)(cid:20)(cid:15)(cid:25)(cid:23)(cid:26) (1,647 ) 8,884 10,000 1,018 7,866 1,147 8,853 8,884 10,000 The release to income is included in Fees and Commission Income (see Note 9). 140 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 41 Income tax liabilities 31 December (cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:29)(cid:3) (cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:178)(cid:3)(cid:38)(cid:36)(cid:17)(cid:3)(cid:54)(cid:9)(cid:51)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Corporation tax – Movestic (cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The carrying value of income tax liabilities is a reasonable approximation of fair value. 42 Other payables Group 31 December Accrued expenses VAT Employee tax Policyholder property fund creditors Other Total Current Non-current Total Company 31 December Accrued expenses Amounts due to Group companies Other Total Current Non-current Total The carrying value of other payables is a reasonable approximation of fair value. SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 (cid:178)(cid:3)(cid:3) – (cid:178)(cid:3)(cid:3) 2012 £000 4,222 474 538 1,773 10,050 2011 £000 (cid:28)(cid:23)(cid:26) – (cid:28)(cid:23)(cid:26) 2011 £000 6,524 360 421 – 17,112 17,057 24,417 17,057 – 24,417 – 17,057 24,417 2012 £000 2,544 – 181 2011 £000 1,481 266 340 2,725 2,087 2,725 – 2,087 – 2,725 2,087 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 141 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 43 Share capital and share premium Group 31 December Share capital 115,047,662 42,024 115,047,662 42,024 Number of shares 2012 2011 Share capital Number of shares £000 Share capital £000 Share premium £000 42,523 Share premium £000 42,523 The number of shares in issue at the balance sheet date included 199,011 shares held in treasury (31 December 2011: 199,011). Share capital for the group includes the impact of “reserve acquistition accounting” associated with Chesnara plc’s acquisition of Countrywide Assured Life Holdings Ltd (CALH) from Countrywide plc (Countrywide) on 24 May 2004. As a result of this, included within share capital of the Group is £41,501,00, which represents the amount of issued share capital of Countrywide Assured Life Holding (the legal subsidiary) immediately before the acquisition. As a result of this accounting treatment the Group share capital differs from the Chesnara plc company position. Which is set out below. There were no changes in Group share capital or share premium during the years ended 31st December 2012 and 31st December 2011. Company 31 December Authorised Ordinary shares of 5p each Issued Ordinary shares of 5p each Number of shares 2012 2011 Share capital Number of shares £000 Share capital £000 201,000,000 10,050,000 201,000,000 10,050,000 115,047,662 5,752,383 115,047,662 5,752,383 Share premium £000 42,523 Share premium £000 42,523 The number of shares in issue at the balance sheet date included 199,011 shares held in treasury (31 December 2011: 199,011). 142 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 44 Treasury shares Group and Company 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 45 Other reserves Group 31 December Capital redemption reserve Foreign exchange translation reserve Balance at 31 December Company 31 December Capital redemption reserve SECTION D IFRS FINANCIAL STATEMENTS 2012 £000 (cid:21)(cid:20)(cid:26)(cid:3)(cid:3) 2012 £000 50 7,669 2011 £000 (cid:21)(cid:20)(cid:26) 2011 £000 50 6,928 7,719 6,978 2012 £000 50 2011 £000 50 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 143 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 46 Retained earnings Group Year ended 31 December Retained earnings attributable to equity holders of the parent company comprise: (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) Dividends (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:20)(cid:20)(cid:26)(cid:15)(cid:27)(cid:27)(cid:20)(cid:3)(cid:3) (cid:21)(cid:26)(cid:15)(cid:28)(cid:23)(cid:20)(cid:3)(cid:3) (cid:20)(cid:20)(cid:20)(cid:15)(cid:21)(cid:21)(cid:22) (cid:21)(cid:24)(cid:15)(cid:25)(cid:25)(cid:24) 2012 £000 2011 £000 Final approved and paid for 2010 Interim approved and paid for 2011 Final approved and paid for 2011 Interim approved and paid for 2012 Balance at 31 December – – (12,519 ) (7,006 ) (12,174 ) (6,833 ) – – 126,297 117,881 The interim dividend in respect of 2011, approved and paid in 2011 was paid at the rate of 5.95p per share. The ﬁnal dividend in respect of 2011, approved and paid in 2012, was paid at the rate of 10.90p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2011 was made at the rate of 16.85p per share. The interim dividend in respect of 2012, approved and paid in 2012, was paid at the rate of 6.10p per share to equity shareholders of the Parent Company registered at the close of business on 14 September 2012, the dividend record date. A ﬁnal dividend of 11.25p per share in respect of the year ended 31 December 2012 payable on 22 May 2013 to equity shareholders of the Parent Company registered at the close of business on 12 April 2013, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total ﬁnal dividend of £12.9m has not been provided for in these ﬁnancial statements and there are no income tax consequences. The following summarises dividends per share in respect of the year ended 31 December 2012 and 31 December 2011: Year ended 31 December (cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:76)(cid:80)(cid:3)(cid:178)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3) (cid:41)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:178)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:82)(cid:86)(cid:72)(cid:71)(cid:18)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:3) Total Company Year ended 31 December (cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) Dividends paid Final approved and paid for 2010 Interim approved and paid for 2011 Final approved and paid for 2011 Interim approved and paid for 2012 Balance at 31 December (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 p (cid:25)(cid:17)(cid:20)(cid:19)(cid:3)(cid:3) (cid:20)(cid:20)(cid:17)(cid:21)(cid:24)(cid:3)(cid:3) 2011 p (cid:24)(cid:17)(cid:28)(cid:24) (cid:20)(cid:19)(cid:17)(cid:28)(cid:19) 17.35 16.85 2012 £000 (cid:26)(cid:25)(cid:15)(cid:25)(cid:23)(cid:27)(cid:3)(cid:3) (cid:22)(cid:28)(cid:15)(cid:25)(cid:25)(cid:27)(cid:3)(cid:3) – – (12,519 ) (7,006 ) 2011 £000 (cid:26)(cid:23)(cid:15)(cid:19)(cid:21)(cid:20) (cid:21)(cid:20)(cid:15)(cid:25)(cid:22)(cid:23) (12,174 ) (6,833 ) – – 96,791 76,648 Details of dividends, approved and paid, are set out in the ‘Group’ section above. 144 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS 47 Employee beneﬁt expense, including Directors Year ended 31 December (cid:3) Wages and salaries Social security costs (cid:51)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:16)(cid:71)(cid:72)(cid:192)(cid:81)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 1,126 152 (cid:20)(cid:22)(cid:20)(cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 840 113 (cid:20)(cid:20)(cid:26)(cid:3)(cid:3) (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 Other Group (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 6,124 1,924 (cid:20)(cid:15)(cid:20)(cid:22)(cid:21)(cid:3)(cid:3) 991 143 (cid:20)(cid:20)(cid:26)(cid:3)(cid:3) (cid:21)(cid:19)(cid:20)(cid:21)(cid:3)(cid:3) £000 9,081 2,332 (cid:20)(cid:15)(cid:23)(cid:28)(cid:26)(cid:3)(cid:3) (cid:21)(cid:19)(cid:20)(cid:20) £000 8,930 2,381 (cid:20)(cid:15)(cid:23)(cid:25)(cid:20) Total 1,409 1,070 9,180 1,251 12,910 12,772 Average number of employees Company Subsidiaries Total Directors Note 52 provides detail of compensation to Directors of the Company. UK-based employees UK-based employees are all employed by Chesnara plc. 23 125 148 22 134 156 At the end of May 2005 the Group allowed eligible employees to enter a pension scheme known as the Chesnara plc Stakeholder Scheme, on a basis where employer contributions are made to the scheme at the same rate as would be payable had their membership of their predecessor scheme continued, provided that employee contributions also continued to be made at the same rate. The employee may opt to request the Company to pay employer contributions into a personal pension plan, in which instance, employer contributions will be made on the same terms as for the Chesnara plc Stakeholder Scheme. Employees who joined the Group as a result of the acquisition of CWA Life Holdings plc continue to be members of the pre-existing deﬁned contribution Group Personal Pension scheme, to which employer and employee contributions are made. The Group has, for the period covered by these ﬁnancial statements, only made contributions to deﬁned contribution plans to provide pension beneﬁts for employees upon retirement and, otherwise, has no residual obligation or commitments in respect of any deﬁned beneﬁt scheme. The Group has established frameworks for approved and unapproved discretionary share option plans which may, at the discretion of the Remuneration Committee, be utilised for granting options to Executive Directors and to other Group employees. No options have been granted in relation to these plans. A Sharesave Plan was launched to all UK employees of the Group in October 2011. Swedish-based employees The Swedish Business participates in a combined deﬁned beneﬁt and deﬁned contribution scheme operated by Försäkringsbranschen Pensionskassa (the ‘Scheme’). The Scheme is a multi-employer scheme with participants including other Swedish insurance companies not related to the Group. The Scheme provides, for those born in 1978 or earlier, beneﬁts to employees which are linked to their ﬁnal salary and to the amount of time working for companies which are members of the Scheme. For those employees born in 1979 or later, the scheme operates on a deﬁned contribution basis. Assets and liabilities are held on a pooled basis and are not allocated by the Trustee to any individual company. Consequently, reliable information is not available to account for the Scheme as a deﬁned beneﬁt scheme and therefore, in accordance with IAS 19 Employee Beneﬁts, the Scheme is accounted for as a deﬁned contribution scheme. Contributions to the Scheme are based on the funding recommendations of the independent qualiﬁed actuary: the contributions paid to the Scheme subsequent to the acquisition of the Swedish Business on 23 July 2009 and up to 31 December 2011, totalled SEK6,967,053 (£633,642). During 2012 further contributions of SEK 4,211,042 (£392,360) were made. The employers within the Scheme are responsible collectively for the funding of the Scheme as a whole and therefore in the event that other employers exit from the Scheme, remaining employers would be responsible for the ongoing funding. The collective nature of the Scheme results in all participating entities sharing the actuarial risk associated with the Scheme. Försäkringsbranschens Pensionskassa (“FPK”) issues an audited annual report (under Swedish law-limited IFRS) each year. The last available published report was as at 31 December 2011. The annual report states that the Scheme’s surplus is SEK 179m (£16.8m) as at 31 December 2011 (SEK 1,525m (£146.5m) as at 31 December 2010). As at 31 December 2011, the fund had assets under management of SEK 10.4bn (£976m), 141 employer insurance companies participating in the Scheme and 25,900 insured individuals. From the available information, it cannot be determined with certainty as to whether there would be a change in the required employer funding rate, although there is currently no deﬁcit in the Scheme. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 145 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 48 Earnings per share Earnings per share are based on the following: Year ended 31 December (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(£000) Weighted average number of ordinary shares 2012 £000 2011 £000 27,941 25,665 114,848,651 114,848,651 (cid:37)(cid:68)(cid:86)(cid:76)(cid:70)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:21)(cid:23)(cid:17)(cid:22)(cid:22)(cid:83)(cid:3)(cid:3) (cid:21)(cid:21)(cid:17)(cid:22)(cid:24)(cid:83) Diluted earnings per share (cid:21)(cid:23)(cid:17)(cid:22)(cid:22)(cid:83)(cid:3)(cid:3) (cid:21)(cid:21)(cid:17)(cid:22)(cid:24)(cid:83) The weighted average number of ordinary shares in respect of the years ended 31 December 2012 and 31 December 2011 is based upon 115,047,662 shares in issue less 199,011 own shares held in treasury. There were no share options outstanding during the year ended 31 December 2011 or during the year ended 31 December 2012. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods. 49 Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: Operating lease rentals Year ended 31 December (cid:3) Less than one year Between one and two years (cid:37)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:192)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3) (cid:48)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:192)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3) Non- (cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:3) properties £000 1,437 1,169 (cid:21)(cid:15)(cid:23)(cid:20)(cid:20)(cid:3)(cid:3) (cid:26)(cid:23)(cid:25)(cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 (cid:48)(cid:82)(cid:87)(cid:82)(cid:85)(cid:3)(cid:3) vehicles £000 31 19 (cid:22)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:3)(cid:3) Total £000 1,468 1,188 (cid:21)(cid:15)(cid:23)(cid:20)(cid:23)(cid:3)(cid:3) (cid:26)(cid:23)(cid:25)(cid:3)(cid:3) Non- (cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:3) properties £000 1,306 1,363 (cid:21)(cid:15)(cid:27)(cid:27)(cid:26)(cid:3)(cid:3) (cid:20)(cid:15)(cid:21)(cid:21)(cid:25)(cid:3)(cid:3) 2011 (cid:48)(cid:82)(cid:87)(cid:82)(cid:85)(cid:3)(cid:3) vehicles £000 74 64 (cid:22)(cid:26)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) Total £000 1,380 1,427 (cid:21)(cid:15)(cid:28)(cid:21)(cid:23) (cid:20)(cid:15)(cid:21)(cid:21)(cid:25) Expenses recognised in the year in respect of operating leases 1,347 46 1,393 1,312 65 1,377 The Group leases a property under an operating lease which it part occupies in the course of its day-to-day business. The lease expires on 22 July 2019, with an option to renew the lease after that date. Lease payments are reviewed every five years to reflect market rentals. The lease does not include any contingent rentals. The Group also leases a number of ofﬁce premises which are no longer used for Group purposes. The leases typically run for approximately a further 4 years after the balance sheet date. Lease payments are reviewed every ﬁve years to reﬂect market rentals. None of the leases includes contingent rentals. These leased properties are sublet by the Group. Sublease payments as detailed below are expected to be received during the following years. The Group has recognised a provision of £4,147,000 at 31 December 2012 (31 December 2011: £2,090,000) in respect of these leases (see Note 36). Leases as lessor The Group subleases out both investment properties from its investment portfolio and the ofﬁce premises which are no longer used for Group purposes. The future minimum lease payments under non-cancellable leases are as follows: Sub lease rentals Year ended 31 December Less than one year Between one and two years (cid:37)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:192)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3) (cid:48)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:192)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Rental income recognised in the year Repairs and maintenance costs recognised in the year 2012 Non- investment properties £000 Investment properties £000 6,011 5,426 (cid:20)(cid:22)(cid:15)(cid:24)(cid:26)(cid:26)(cid:3)(cid:3) (cid:21)(cid:19)(cid:15)(cid:22)(cid:20)(cid:22)(cid:3)(cid:3) 7,612 1,212 244 25 (cid:23)(cid:24)(cid:3)(cid:3) (cid:22)(cid:19)(cid:3)(cid:3) 220 74 2011 Non- investment properties £000 Investment properties £000 7,692 7,577 (cid:20)(cid:27)(cid:15)(cid:25)(cid:28)(cid:25)(cid:3)(cid:3) (cid:21)(cid:23)(cid:15)(cid:26)(cid:26)(cid:20)(cid:3)(cid:3) 8,108 1,162 382 372 (cid:28)(cid:20)(cid:20)(cid:3)(cid:3) (cid:26)(cid:25)(cid:26)(cid:3)(cid:3) 465 154 Total £000 6,255 5,451 (cid:20)(cid:22)(cid:15)(cid:25)(cid:21)(cid:21)(cid:3)(cid:3) (cid:21)(cid:19)(cid:15)(cid:22)(cid:23)(cid:22)(cid:3)(cid:3) 7,832 1,286 Total £000 8,074 7,949 (cid:20)(cid:28)(cid:15)(cid:25)(cid:19)(cid:26) (cid:21)(cid:24)(cid:15)(cid:24)(cid:22)(cid:27) 8,573 1,316 146 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION D IFRS FINANCIAL STATEMENTS 50 Contingencies Past sales The Group has made provision for the estimated cost of settling complaints in respect of past sales of endowment mortgages. Although the provisions are regularly reviewed, the ﬁnal outcome could be different from the provisions established as these costs cannot be calculated with certainty and are inﬂuenced by external factors beyond the control of management, including future regulatory actions. 51 Capital commitments There were no capital commitments as at 31 December 2012 or as at 31 December 2011. 52 Related party transactions (a) Identity of related parties The shares of the Company were widely held and no single shareholder exercised signiﬁcant inﬂuence or control over the Company. The Company has related party relationships with: (i) key management personnel who comprise only the Directors of the Company; (ii) its subsidiary companies; (iii) its associated company; and (iv) other companies over which the Directors have signiﬁcant inﬂuence. (b) Related party transactions (i) Transactions with key management personnel. Key management personnel comprise of the Directors of the Company. There are no executive ofﬁcers other than certain of the Directors. Key management compensation is as follows: Year ended 31 December (cid:54)(cid:75)(cid:82)(cid:85)(cid:87)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3) (cid:51)(cid:82)(cid:86)(cid:87)(cid:16)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3) (cid:47)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3) Total (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:20)(cid:15)(cid:23)(cid:23)(cid:19)(cid:3)(cid:3) (cid:20)(cid:22)(cid:25)(cid:3)(cid:3) (cid:22)(cid:28)(cid:3)(cid:3) 2011 £000 (cid:28)(cid:26)(cid:19) (cid:20)(cid:22)(cid:21) (cid:178) 1,615 1,102 In addition to their salaries the Company also provides non-cash beneﬁts to Directors, and contributes to a post employment deﬁned contribution pension plan on their behalf. The following amounts were payable to Directors in respect of bonuses and incentives: Year ended 31 December (cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:69)(cid:82)(cid:81)(cid:88)(cid:86)(cid:3)(cid:86)(cid:70)(cid:75)(cid:72)(cid:80)(cid:72)(cid:3)(cid:11)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:75)(cid:82)(cid:85)(cid:87)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:12)(cid:3) Long-term incentive plan Discretionary bonus (cid:38)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:73)(cid:192)(cid:70)(cid:72)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Total 2012 £000 (cid:23)(cid:23)(cid:21)(cid:3)(cid:3) 453 238 (cid:20)(cid:20)(cid:26)(cid:3)(cid:3) 1,250 2011 £000 (cid:20)(cid:20)(cid:21) 415 238 (cid:178) 765 These amounts have been included in Accrued Expenses as disclosed in Note 42. The amounts payable under the annual bonus scheme were payable within one year. As at 31 December 2012, £415,715 is payable within one year in respect of the long-term incentive plan (as at 31 December 2011: £nil). As at 31 December 2012, £237,500 in respect of discretionary bonuses was payable within one year (as at 31 December 2011: £nil). CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 147 SECTION D IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ii) Transactions with subsidiaries The Company undertakes centralised administration functions, the costs of which it charges back to its operating subsidiaries. The following amounts which effectively comprised a recovery of expenses at no mark up were credited to the income statement of the Company for the respective periods: Year ended 31 December Recovery of expenses In addition, the Company has made equity contributions to its subsidiary, Movestic Livförsäkring AB as follows: Year ended 31 December 2012 £000 2011 £000 2,834 2,775 2012 £000 2011 £000 (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:178)(cid:3)(cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:47)(cid:76)(cid:89)(cid:73)(cid:124)(cid:85)(cid:86)(cid:108)(cid:78)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:36)(cid:37)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:24)(cid:15)(cid:21)(cid:25)(cid:24) (iii) Transactions with associate Movestic Livförsäkring AB and its associate Modernac SA Year ended 31 December Reinsurance premiums paid Reinsurance recoveries received Reinsurance commission received Amounts outstanding as at balance sheet date Movestic Livförsäkring AB had the following amounts outstanding at the balance sheet date: 31 December 2012 (cid:3) (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70)(cid:3)(cid:54)(cid:17)(cid:36)(cid:17)(cid:3) 31 December 2011 (cid:3) (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70)(cid:3)(cid:54)(cid:17)(cid:36)(cid:17)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (9,442 ) 4,109 899 (4,434 ) 2011 £000 (8,863 ) 4,167 878 (3,818 ) (6,731 ) (1,450 ) Amounts (cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:3) associate £000 Amounts (cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82) associate £000 (cid:20)(cid:22)(cid:19)(cid:3)(cid:3) (cid:25)(cid:15)(cid:27)(cid:25)(cid:20) Amounts (cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:3) associate £000 Amounts (cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82) associate £000 (cid:25)(cid:24)(cid:27)(cid:3)(cid:3) (cid:21)(cid:15)(cid:20)(cid:19)(cid:27) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) These amounts have been included in other payables as disclosed in Note 42 and other receivables as disclosed in Note 27. 148 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 53 Group entities Control of the Group The issued share capital of Chesnara plc the Group parent company is widely held, with no single party able to control 20% or more of such capital or of the rights which such ownership confers. SECTION D IFRS FINANCIAL STATEMENTS Group Subsidiary Companies (cid:3) (cid:3) Name Countrywide Assured plc (cid:3)(cid:3) Country of (cid:44)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:3) or Registration England & Wales Countrywide Assured Life Holdings Limited England & Wales Countrywide Assured Services Limited England & Wales Countrywide Assured Trustee Company Limited England & Wales CWA Trustee Company Limited England & Wales (cid:50)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:3) interest (cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:3) 2012 (cid:50)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:3) interest (cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:3) 2011 100% of all share capital (1 ) 100% of all share share capital (1 ) 100% of all share capital (1 ) 100% of all share share capital (1 ) 100% of all share capital (1 ) 100% of all share share capital (1 ) 100% of all share capital (1 ) 100% of all share share capital (1 ) Dissolved 20 March 2012 100% of all share share capital (2 ) (cid:41)(cid:88)(cid:81)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79) Currency Sterling Sterling Sterling Sterling Sterling Sterling CWA Life Holdings plc Movestic Livförsäkring AB (cid:48)(cid:82)(cid:71)(cid:72)(cid:85)(cid:81)(cid:68)(cid:70)(cid:3)(cid:54)(cid:17)(cid:36)(cid:17)(cid:3)(cid:3) AkademikerRådgivning i Sverige AB Movestic Kapitalforvältning AB Save & Prosper Insurance Limited Save & Prosper Pensions Limited England & Wales Dissolved 10 April 2012 100% of all share share capital Sweden 100% of all share capital 100% of all share capital Swedish Krona (cid:47)(cid:88)(cid:91)(cid:72)(cid:80)(cid:69)(cid:82)(cid:88)(cid:85)(cid:74)(cid:3)(cid:3) (cid:23)(cid:28)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:3) share capital (3 ) (cid:23)(cid:28)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) share capital (3 ) Swedish Krona Sweden Sweden Dissolved 31 January 2012 100% of all share capital (3 ) 100% of all share capital (3 ) Swedish Krona 100% of all share capital (3 ) Swedish Krona England & Wales 100% of all share share capital (5 ) 100% of all share share capital England & Wales 100% of all share share capital (4)/(5 ) 100% of all share share capital (4 ) Sterling Sterling (1) Held indirectly through Countrywide Assured Life Holdings Limited (2) Held indirectly through CWA Life Holdings plc – dissolved on 20 March 2012 (3) Held indirectly through Movestic Livförsäkring AB (4) Held indirectly through Save & Prosper Insurance Limited (5) Dissolved 22 January 2013 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 149 150 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION IN THIS SECTION 152 153 154 155 156—169 Notes to the EEV Supplementary Information Directors’ Responsibility Statement Independent Auditor’s Report Summarised EEV Consolidated Income Statement Summarised EEV Consolidated Balance Sheet 151 SECTION E EEV SUPPLEMENTARY INFORMATION DIRECTORS’ RESPONSIBILITY STATEMENT Directors’ Responsibility Statement in respect of the EEV Basis Supplementary Information The Directors have chosen to prepare supplementary information in accordance with the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005. When compliance with the EEV Principles is stated, those principles require the Directors to prepare supplementary information in accordance with the Embedded Value Methodology (‘EVM’) contained in the EEV Principles and to disclose and explain any non-compliance with the EEV guidance included in the EEV Principles. In preparing the EEV supplementary information, the Directors have: – Prepared the supplementary information in accordance with the EEV Principles; – Identiﬁed and described the business covered by the EVM; – Applied the EVM consistently to the covered business; – Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; – Made estimates that are reasonable and consistent; and – Described the basis on which business that is not covered business has been included in the supplementary information, including any material departures from the accounting framework applicable to the Group’s ﬁnancial statements. By order of the Board Chairman Peter Mason 27 March 2013 Chief Executive Ofﬁcer Graham Kettleborough 27 March 2013 152 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report to the Directors of Chesnara plc on the European Embedded Value (EEV) Basis Supplementary Information We have audited the EEV Basis Supplementary Information of Chesnara plc for the year ended 31 December 2012 which comprises the summarised EEV consolidated income statement, the summarised EEV consolidated balance sheet and the related notes 1 to 10. The ﬁnancial reporting framework that has been applied in their preparation is the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005 (“the EEV Principles”). We have reported separately on the statutory group ﬁnancial statements of Chesnara plc for the year ended 31 December 2012. The EEV Basis Supplementary Information should be read in conjunction with the ﬁnancial statements prepared on an IFRS basis. This report is made solely to the company’s directors in accordance with our engagement letter and solely for the purpose of expressing an opinion on whether the EEV Basis Supplementary Information has been properly prepared in accordance with the EEV principles. Our audit work has been undertaken so that we might state to the company’s directors those matters we are required to state to them in an independent auditors’ report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibility Statement in respect of the EEV Basis Supplementary Information, the directors are responsible for the preparation of the EEV Basis Supplementary Information. Our responsibility is to audit and express an opinion on the EEV Basis Supplementary Information in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). Scope of the audit of the EEV Basis Supplementary Information An audit involves obtaining evidence about the amounts and disclosures in the Supplementary Information sufﬁcient to give reasonable assurance that the Supplementary Information is free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the directors; and the overall presentation of the Supplementary Information. In addition, we read all the ﬁnancial and non-ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion In our opinion, the EEV Basis Supplementary Information for the year ended 31 December 2012 has been properly prepared in accordance with the EEV principles using the methodology and assumptions set out on pages 156 to 169. Deloitte LLP Chartered Accountants Manchester United Kingdom 27 March 2013 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 153 SECTION E EEV SUPPLEMENTARY INFORMATION SUMMARISED EEV CONSOLIDATED INCOME STATEMENT Summarised EEV consolidated income statement for the year ended 31 December 2012 Year ended 31 December (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Other operational result (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3) Variation from longer-term investment return Effect of economic assumption changes (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:3) Exceptional item Effect of modelling adjustments (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) Tax (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:3)(cid:3) (cid:40)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:39)(cid:76)(cid:79)(cid:88)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) The notes and information on pages 156 to 169 form part of this supplementary information. Note 6 6 (cid:3)(cid:3) 6 6 (cid:3)(cid:3) 6 (cid:3)(cid:3) 6 (cid:3)(cid:3) 9 9 2012 £000 19,032 (4,446 ) (cid:20)(cid:23)(cid:15)(cid:24)(cid:27)(cid:25)(cid:3)(cid:3) 28,035 (6,504 ) 2011 £000 15,314 (2,811 ) (cid:20)(cid:21)(cid:15)(cid:24)(cid:19)(cid:22) (16,929 ) (32,479 ) (cid:22)(cid:25)(cid:15)(cid:20)(cid:20)(cid:26)(cid:3)(cid:3) (cid:11)36,905 (cid:12) 3,574 (10,328 ) (cid:22)(cid:28)(cid:15)(cid:25)(cid:28)(cid:20)(cid:3)(cid:3) (4,862 ) (cid:11)(cid:23)(cid:26)(cid:15)(cid:21)(cid:22)(cid:22)(cid:3)(cid:12) 7,123 (cid:22)(cid:23)(cid:15)(cid:27)(cid:21)(cid:28)(cid:3)(cid:3) (cid:11)40,110 (cid:12) 30.33p (34.92 )p 30.33p (34.92 )p (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 154 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SUMMARISED EEV CONSOLIDATED BALANCE SHEET Summarised EEV consolidated balance sheet as at 31 December 2012 SECTION E EEV SUPPLEMENTARY INFORMATION (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:3) 31 December (cid:36)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) Value of in-force business Deferred acquisition costs arising on unmodelled business Acquired value of customer relationships Property and equipment Investment in associate Deferred tax asset Reinsurers’ share of insurance contract provisions Amounts deposited with reinsurers Investment properties Financial assets Equity securities at fair value through income Holdings in collective investment schemes at fair value through income Debt securities at fair value through income Insurance and other receivables Prepayments Policyholders’ funds held by the Group (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) Reinsurers’ share of accrued policy claims Income taxes Cash and cash equivalents (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) (cid:47)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) Insurance contract provisions Other provisions Deferred tax liabilities Financial liabilities Investment contracts at fair value through income Borrowings (cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Liabilities relating to policyholders’ funds held by the Group (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Reinsurance payables Payables related to direct insurance and investment contracts Income taxes Other payables Bank overdraft (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:49)(cid:72)(cid:87)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) Share capital Share premium Treasury shares Foreign exchange reserve Other reserves Retained earnings (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:24)(cid:15)(cid:3)(cid:27) (cid:3)(cid:3) (cid:3)(cid:3) 2012 (cid:133)(cid:19)(cid:19)(cid:19)(cid:3)(cid:3) 210,080 497 562 369 2,902 1,280 235,782 28,941 100,167 427,303 3,009,799 363,377 24,313 3,160 61,171 (cid:22)(cid:15)(cid:19)(cid:28)(cid:24)(cid:3)(cid:3) (cid:22)(cid:15)(cid:27)(cid:28)(cid:21)(cid:15)(cid:21)(cid:20)(cid:27)(cid:3)(cid:3) 4,489 8,649 228,676 2011 (cid:133)(cid:19)(cid:19)(cid:19) 199,560 834 694 385 1,613 – 230,891 26,637 132,128 404,431 2,917,935 330,610 30,799 3,234 49,080 (cid:20)(cid:19)(cid:15)(cid:22)(cid:19)(cid:27) (cid:22)(cid:15)(cid:26)(cid:23)(cid:25)(cid:15)(cid:22)(cid:28)(cid:26) 4,667 6,932 195,920 (cid:3)(cid:3) (cid:23)(cid:15)(cid:26)(cid:20)(cid:23)(cid:15)(cid:25)(cid:20)(cid:21)(cid:3)(cid:3) (cid:23)(cid:15)(cid:24)(cid:23)(cid:25)(cid:15)(cid:25)(cid:24)(cid:27) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2,171,259 5,161 – 2,033,131 55,373 (cid:21)(cid:27)(cid:25)(cid:3)(cid:3) 61,171 (cid:21)(cid:15)(cid:20)(cid:23)(cid:28)(cid:15)(cid:28)(cid:25)(cid:20)(cid:3)(cid:3) 16,183 38,894 4,350 17,057 602 2,165,320 2,811 3,080 1,887,261 61,765 (cid:20)(cid:23)(cid:23) 49,080 (cid:20)(cid:15)(cid:28)(cid:28)(cid:27)(cid:15)(cid:21)(cid:24)(cid:19) 15,883 40,651 923 24,417 834 (cid:23)(cid:15)(cid:23)(cid:19)(cid:22)(cid:15)(cid:23)(cid:25)(cid:26)(cid:3)(cid:3) (cid:23)(cid:15)(cid:21)(cid:24)(cid:21)(cid:15)(cid:20)(cid:25)(cid:28) (cid:22)(cid:20)(cid:20)(cid:15)(cid:20)(cid:23)(cid:24)(cid:3)(cid:3) (cid:21)(cid:28)(cid:23)(cid:15)(cid:23)(cid:27)(cid:28) 42,024 42,523 (217 ) 15,378 50 211,387 42,024 42,523 (217 ) 14,026 50 196,083 (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:24)(cid:15)(cid:3)(cid:27)(cid:3)(cid:3) (cid:22)(cid:20)(cid:20)(cid:15)(cid:20)(cid:23)(cid:24)(cid:3)(cid:3) (cid:21)(cid:28)(cid:23)(cid:15)(cid:23)(cid:27)(cid:28) The notes and information on pages 156 to 169 form part of this supplementary information. Approved by the Board of Directors on 27 March 2013 and signed on its behalf by: Ken Romney Graham Kettleborough CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 155 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION 1 Basis of preparation This section sets out the detailed methodology followed for producing these Group ﬁnancial statements which are supplementary to the Group’s primary ﬁnancial statements which have been prepared in accordance with International Financial Reporting Standards (‘IFRS’). These ﬁnancial statements have been prepared in accordance with the European Embedded Value (‘EEV’) principles issued in May 2004 by the European CFO Forum and supplemented by Additional Guidance on EEV Disclosures issued by the same body in October 2005. The principles provide a framework intended to improve comparability and transparency in embedded value reporting across Europe. In order to improve understanding of the Group’s ﬁnancial position and performance, certain of the information presented in these ﬁnancial statements is presented on a segmental basis: the business segments are the same as those described in Note 8 to the primary ﬁnancial statements prepared on the IFRS basis. 2 Covered business The Group uses EEV methodology to value the bulk of its long-term business (the ‘covered business’), which is written primarily in the UK and Sweden, as follows: (i) for the UK businesses (comprising the CA and S&P segments), the covered business comprises the business’s long-term business being those individual life insurance, pensions and annuity contracts falling under the deﬁnition of long-term insurance business for UK regulatory purposes. (ii) for the Swedish business (comprising the Movestic segment), the covered business comprises the business’s long-term pensions and savings unit-linked business. Group life and sickness business, including waiver of premium and non-linked individual life assurance policies are not included in the covered business: the result relating to this business is established in accordance with IFRS principles and is included within ‘other operational result’ within the consolidated summarised income statement. (iii) The operating expenses of the holding company, Chesnara plc, are allocated across the segments. On 31 December 2011, under the provisions of Part VII of the Financial Services and Markets Act 2000 (‘The Part VII Transfer’), the long-term business funds and certain of the shareholder funds of the companies comprising the S&P business segment, being Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, were transferred to Countrywide Assured plc (‘CA’), the principal operating subsidiary company of the UK Business. As a result, the whole of the covered business of the UK Business subsists within CA with effect from that date. The transfer gives rise to beneﬁts which have been recognised within the covered business, including: (i) Determination of the capital requirements of the covered business on a combined basis; and (ii) Other ﬁnancial synergies. The impact of these beneﬁts has been recognised in the cash ﬂow projections relating to the value of business in force as at 31 December 2011 and in the income statement for the year then ended. Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments. 3 Methodology (a) Embedded value Overview Shareholders’ equity comprises the embedded value of the covered business, together with the net equity of other Group companies, including that of the holding company which is stated after writing down fully the carrying value of the covered business. The embedded value of the covered business is the aggregate of the shareholder net worth (‘SNW’) and the present value of future shareholder cash ﬂows from in-force covered business (value of in-force business) less any deduction for (i) the cost of guarantees within S&P, and (ii) the cost of required capital. It is stated after allowance has been made for aggregate risks in the business. SNW comprises those amounts in the long-term business, which are either regarded as required capital or which represent surplus assets within that business. 156 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION New business CA and S&P Much of the covered business is in run-off and is, accordingly, substantially closed to new business. Up to 31 December 2012 the UK businesses did still sell a small amount of new business but, overall, the contribution from new business to the results established using EEV methodology is not material. Accordingly, not all of those items related to new business values, which are recommended by the EEV guidelines, are reported in this supplementary ﬁnancial information. Movestic New business, in relation to the pensions and savings covered business is taken as all business where contracts are signed and new premiums paid during the reporting period, for both new policies and premium increases on existing business, but excluding standard renewals. New business premium volumes as disclosed in the Swedish Business Review on page 25 are not consistent with this deﬁnition, as they include non-covered business. New business premium volume for the period which is consistent with the analysis of proﬁt in Note 6 is as follows: (cid:51)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:68)(cid:89)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) 31 December New business premium income* 2012 2011 £18.8m £26.3m *Basis: annualised premium plus 1/10 single premium translated into sterling at the 2012 average rate of SEK 10.7326 = £1 (2011: SEK10.4102 = £1). The new business contribution has been assessed as at the end of the period, using opening assumptions. Value of in-force business The cash ﬂows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash ﬂow. The present value of the projected cash ﬂows is established by using a discount rate which reﬂects the time value of money and the risks associated with the cash ﬂows which are not otherwise allowed for. There is a deduction for the cost of holding the required capital, as set out below. In respect of Movestic there are certain non-linear exposures of shareholder proﬁt to asset returns arising from variable administrative fees and variable investment fund rebates which are modelled deterministically rather than stochastically. Participating business For participating business within the S&P business the Group maintains the assets and liabilities in separate with-proﬁts funds. In accordance with the Principles and Practices of Financial Management, in the ﬁrst instance all beneﬁts, which in some cases include guaranteed minimum investment returns, are paid from policyholder assets within the fund. The participating business effectively operates as a smoothed unit linked contract subject to minimum beneﬁt guarantees. The with-proﬁts funds contain assets which are attributable to shareholders as well as those attributable to policyholders. Assets attributable to shareholders can only be released from the fund subject to meeting prudent liabilities in respect of minimum beneﬁts and the frictional cost of this restriction has been allowed for in determining the value of the in-force business. Fundamentally, the value of the with-proﬁts in-force business is driven by the fund management charges levied on the policyholder assets, subject to the effect of minimum beneﬁt guarantees. Taxation The present value of the projected cash ﬂows arising from in-force business takes into account all tax which is expected to be paid under current legislation, including tax which would arise if surplus assets within the covered business were eventually to be distributed. For the UK businesses, allowance has been made for planned reductions in corporation tax, as announced by the Chancellor in his budget speech on 21 March 2012, and allowance has been made for changes to insurance taxation taking effect from 1 January 2013. The value as at 31 December 2011 was not restated to allow for these changes. No allowance has been made for the changes announced by the Chancellor in his budget speech on 20 March 2013. The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement. The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax in the UK businesses and yield tax in Movestic. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 157 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED) Cost of capital The valuation approach used requires consideration of ‘frictional’ costs of holding shareholder capital: in particular, the cost of tax on investment returns and the impact of investment management fees can reduce the face value of shareholder funds. For CA, the expenses relating to corporate governance functions eliminate any taxable investment return in shareholder funds, while investment management fees are not material. The cost of holding the required capital to support the covered business (see 3(b) below) is reﬂected as a deduction from the value of in-force business. Financial options and guarantees CA The principal ﬁnancial options and guarantees in CA are (i) guaranteed annuity rates offered on some unit-linked pension contracts and (ii) a guarantee offered under Timed Investment Funds that the unit price available at the selected maturity date (or at death, if earlier) will be the highest price attained over the policy’s life. The cost of these options and guarantees has been assessed, in principle, on a market-consistent basis, but, in practice, this has been carried out on approximate bases, which are appropriate to the level of materiality of the results. S&P The principal ﬁnancial options and guarantees in S&P are (i) minimum beneﬁts payable on maturity or retirement for participating business; (ii) the option to extend the term under the Personal Retirement Account contract on terms potentially beneﬁcial to the policyholder; (iii) the option to increase premiums under the Personal Retirement Account contract on terms potentially beneﬁcial to the policyholder; and (iv) certain insurability options offered. The cost of guaranteeing a minimum investment return on participating contracts, being the only material guarantee, has been assessed on a market consistent basis. This has involved the use of a stochastic asset model, which is designed to establish a cost of guarantees which is consistent with prices in the market at the valuation date, for example the prices of derivative instruments. For the remaining options and guarantees the cost has been assessed on an approximate basis, appropriate to the level of materiality of the results. Movestic In respect of Movestic, some contracts provide policyholders with an investment guarantee, whereby a minimum rate of return is guaranteed for the ﬁrst 5 years of the policy, at a rate of 3% per annum. The value of the guarantee is ignored as it is not material to the results. Allowance for risk Allowance for risk within the covered business is made by: (i) setting required capital levels by reference to the assessment of capital needs made by the directors of the regulated entities within the respective businesses; (ii) setting the risk discount rate, which is applied to the projected cash ﬂows arising on the in-force business, at a level which includes an appropriate risk margin (see 3(c) below); and (iii) explicit allowance for the cost of ﬁnancial options and guarantees and, where appropriate, for reinsurer default. Internal group company EEV Guidance requires that actual and expected proﬁt or loss incurred by an internal group company on services provided to the covered business should be included in allowances for expenses. The covered business in Movestic is partially managed by an internal group fund management company. Not all relevant future income and expenses of that company have been included in the calculation of embedded value. However, the effect is not considered to be material. Consolidation adjustments Consolidation adjustments have been made to: (i) eliminate the investment in subsidiaries; (ii) allocate group debt ﬁnance against the segment to which it relates; and (iii) allocate corporate expenses as explained in Note 4(d) below. 158 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION (b) Level of required capital The level of required capital of the covered business reﬂects the amount of capital that the Directors consider necessary and appropriate to manage the respective businesses. In forming their policy the Directors have regard to the minimum statutory requirements and an internal assessment of the market, insurance and operational risks inherent in the underlying products and business operations. The capital requirement resulting from this assessment represents: (i) for the UK business, 162.5% of the long-term insurance capital requirement (‘LTICR’) together with 100% of the resilience capital requirement (‘RCR’), as determined by the regulations of the Financial Services Authority in the UK; and (ii) or Movestic, 150% of the regulatory solvency requirement as determined by Finansinspektionen in Sweden. The required level of regulatory capital is provided as follows: (i) for the UK businesses, by the retained surplus within the long-term business fund and by share capital and retained earnings within the shareholder funds of the regulated entities; and (ii) for Movestic, by share capital and additional equity contributions from the parent company, net of the accumulated deﬁcit in the regulated entity, these components together comprising shareholder’s equity. Movestic is reliant, in the short to medium term, on further equity contributions from the parent company, Chesnara plc. (c) Discount rates The discount rates are a combination of the reference rate and a risk margin. The reference rate reﬂects the time value of money and the risk margin reﬂects any residual risks inherent in the covered business and makes allowance for the risk that future experience will differ from that assumed. In order to reduce the subjectivity when setting the discount rates, the Group has decided to adopt a ‘bottom up’ market-consistent approach to allow explicitly for market risk. Using the market-consistent approach, each cash ﬂow is valued at a discount rate consistent with that used in the capital markets: in accordance with this, equity-based cash ﬂows are discounted at an equity discount rate and bond-based cash ﬂows at a bond discount rate. In practice a short-cut method known as the ‘certainty equivalent’ approach has been adopted. This method assumes that all cash ﬂows earn the reference rate of return and are discounted at the reference rate. In general, and consistent with the market’s approach to valuing ﬁnancial instruments for hedging purposes, the reference rate is based on swap yields. These have been taken as mid swap yields available in the market at the end of the reporting period. Allowance also needs to be made for non-market risks. For some of these risks, such as mortality and expense risk, it is assumed that the shareholder can diversify away any uncertainty where the impact of variations in experience on future cash ﬂows is symmetrical. For those risks that are assumed to be diversiﬁable, no adjustment has been made. For any remaining risks that are considered to be non-diversiﬁable risks, there is no risk premium observable in the market and, therefore, a constant margin has been added to the risk margin. The margin added reﬂects the assumed risks within the businesses and is 50 basis points for CA and S&P (2011: 50 basis points), and 70 basis points for Movestic (2011: 70 basis points). This margin is applied to the basic value of in-force business prior to the deductions for ﬁnancial options and guarantees and the cost of required capital. (d) Analysis of proﬁt The contribution to operating proﬁt, which is identiﬁed at a level which reﬂects an assumed longer-term level of investment return, arises from three sources: (i) new business; (ii) return from in-force business; and (iii) return from shareholder net worth. Additional contributions to proﬁt arise from: (i) variances between the actual investment return in the period and the assumed long-term investment return; and (ii) the effect of economic assumption changes. The contribution from new business represents the value recognised at the end of each period in respect of new business written in that period, after allowing for the cost of acquiring the business, the cost of establishing the required technical provisions and after making allowance for the cost of capital, calculated on opening assumptions. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 159 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED) The return from in-force business is calculated using closing assumptions and comprises: (i) the expected return, being the unwind of the discount rates over the period applied to establish the value of in-force business at the beginning of the period; (ii) variances between the actual experience over the period and the assumptions made to establish the value of business in force at the beginning of the period; and (iii) the net effect of changes in future assumptions, made prospectively at the end of the period, from those used in establishing the value of business in force at the beginning of the period, other than changes in economic assumptions. The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital. (e) Assumption setting There is a requirement under EEV methodology to use best estimate demographic assumptions and to review these at least annually with the economic assumptions being reviewed at each reporting date. The current practice is detailed below. Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2012. The detailed projection assumptions, including mortality, morbidity, persistency and expenses reﬂect recent operating experience. Allowance is made for future improvement in annuitant mortality based on experience and externally published data. Favourable changes in operating experience, particularly in relation to expenses and persistency, are not anticipated until the improvement in experience has been observed. Holding company expenses (for the Chesnara Group such expenses relate largely to listed company functions) are allocated across the segments in proportion to the value before tax of the in-force business. Hence the expense assumptions used for the cash ﬂow projections include the full cost of servicing this business. The economic assumptions are reviewed and updated at each reporting date based on underlying investment conditions at the reporting date. The assumed discount rates and inﬂation rates are consistent with the investment return assumptions. In addition, the demographic assumptions used at 31 December 2012 are considered to be best estimate and, consequently, no further adjustments are required. In respect of the CA Business, the assumptions required in the calculation of the value of the annuity rate guarantee on pension business have been set equal to best-estimate assumptions. (f) Pension schemes In Movestic, where the Group participates in a combined deﬁned beneﬁt and deﬁned contribution scheme, future contributions to the scheme are reﬂected in the value of in-force business. (g) Financial reassurance In respect of Movestic the Group uses ﬁnancial reinsurance to manage the impact of its new business strain. Whilst this liability is valued at fair value within the IFRS statements, allowing for an option which provides the Group with the right to settle the liability early on beneﬁcial terms, when valuing the shareholder net worth within the EEV it is considered more appropriate to assess this liability at a higher cost, reﬂecting the likelihood of the option not being utilised. 160 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION 4 Assumptions (a) Investment returns Investment returns are assumed to be equal to the reference rate, as covered in Note 3(c) above. For linked business, the aggregate return has been determined by the reference rate less an appropriate allowance for tax. For the valuation at 31 December 2012 the models for the CA business have been enhanced to allow for the use of a full yield curve. Refer to Note 6(a) below for the impact of this change which is classiﬁed as a modelling adjustment. For 2011, whilst for S&P and Movestic, a full swap curve was used, for the CA business, a single rate was applied for all durations. The rates presented below are indicative spot rates: 31 December (cid:3) Investment Return 5 year 10 year 15 year 20 year 25 year 30 year (cid:44)(cid:81)(cid:193)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:178)(cid:3)(cid:53)(cid:51)(cid:44)(cid:3) (cid:38)(cid:36)(cid:3) 2012 2011 1.9% 1.03% 1.93% 2.58% 2.94% 3.15% 3.23% (cid:54)(cid:9)(cid:51)(cid:3) (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70) 2012 2011 2012 2011 1.03% 1.93% 2.58% 2.94% 3.15% 3.23% 1.58% 2.36% 2.79% 3.00% 3.14% 3.20% 1.52% 2.04% 2.28% 2.33% 2.33% 2.33% 2.04% 2.37% 2.42% 2.39% 2.39% 2.39% (cid:21)(cid:17)(cid:22)(cid:8) (cid:3)(cid:3) (cid:21)(cid:17)(cid:22)(cid:8)(cid:3)(cid:3) (cid:21)(cid:17)(cid:23)(cid:8)(cid:3)(cid:3) (cid:21)(cid:17)(cid:22)(cid:8)(cid:3)(cid:3) (cid:21)(cid:17)(cid:23)(cid:3)(cid:8)(cid:3) (cid:20)(cid:17)(cid:26)(cid:20)(cid:8)(cid:3)(cid:3) (b) Actuarial assumptions The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identiﬁed in the periodic actuarial investigations. Certain products contain provisions that provide for the charges in respect of morality risk to be reviewable. In these cases assumptions for future experience and charges are assumed to be in linked and assumptions are only updated when decisions have been made regarding product charges, so as not to capitalise any beneﬁts that may not accrue to shareholders. (c) Taxation Projected tax has been determined assuming current tax legislation and rates continue unaltered, except where future tax rates or practices have been announced. The tax rates for CA and S&P allow for changes in Corporation Tax as announced by the Chancellor in his budget speech of 21 March 2012, so reﬂect a reduction from the current rate of 24% to 23% from April 2013, and 21% from April 2014. They do not allow for the further change, announced by the Chancellor in his budget speech on 20 March 2013, for a reduction in the UK Corporation Tax rate to 20% from April 2015. (d) Expenses The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions. For CA and S&P, these have been determined by reference to: (i) the outsourcing agreements in place with our third-party business process administrators; (ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and (iii) corporate governance costs relating to the covered business. For Movestic, these have been determined by reference to: (i) an expense analysis in which all expenses were allocated to covered and uncovered business, with expenses for the covered business being allocated to acquisition and maintenance activities; and (ii) expense drivers, being, in relation to acquisition costs, the number of policies sold during the period and, in relation to maintenance expenses, the average number of policies in force during the period. Holding company expenses (for the Chesnara Group such expenses relate largely to listed company functions) are allocated across the segments in proportion to the value before tax of the in-force business. For periods up to and including 31 December 2011 such expenses were previously reported as wholly allocable to the CA segment. All segmental information in the following Notes to the Supplementary Information has, as applicable, been restated to reﬂect the change in allocation methodology. EEV Guidance requires that no allowance is made for future productivity improvements in expense assumptions. For the UK business, for expenses relating to policy administration this requirement is met. As the UK company is essentially closed to new business, those governance expenses which are not immediately variable can reasonably be expected to reduce through management control in the future, though the timing and scale of such reductions is not ﬁxed. A prudent estimate of the reductions has been allowed for within the expense assumptions. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 161 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED) (e) Discount rate An explicit constant margin is added to the reference rate shown in (a) above to cover any remaining risks that are considered to be non-market, non-diversiﬁable risks, as there is no risk premium observable in the market. This margin, which is 50 basis points for CA and S&P (as at 31 December 2011: 50 basis points) and 70 basis points for Movestic (as at 31 December 2011: 70 basis points), gives due recognition to the relative sensitivity of the value of in-force business to the discount rate for the different businesses, and to the fact that: a) For CA: (i) the covered business is substantially closed to new business; (ii) there is no signiﬁcant exposure in the with proﬁt business, which is wholly reinsured; (iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators; and (iv) for much of the life business the Group has the ability to vary risk charges made to policyholders. b) For S&P: (i) the covered business is substantially closed to new business; and (ii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators. c) For Movestic: (i) the covered business remains open; (ii) the in-force business is relatively small; (iii) reinsurance is used to signiﬁcantly reduce insurance risks; and (iv) a number of the risks provide diversiﬁcation beneﬁts within the Chesnara Group, in relation to reinsurance counterparties, market exposures and policyholder populations. 162 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION 5 Analysis of shareholders’ equity 31 December 2012 (cid:3) (cid:3) Regulated entities Capital required Restricted capital Free surplus (cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Adjustments to shareholder net worth: Deferred acquisition costs Financial reinsurance liability Software asset adjustment Adjustment to provisions on insurance contracts Policyholder funds (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:18)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3) In-force value of covered business (cid:40)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:47)(cid:72)(cid:86)(cid:86)(cid:29)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:40)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) Net equity of other Group companies (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3) (cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:11)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:12) (cid:3) (cid:3) Regulated entities Capital required Restricted capital Free surplus (cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) Adjustments to shareholder net worth: Deferred acquisition costs Financial reinsurance liability Software asset adjustment Adjustment to provisions on insurance contracts Policyholder funds (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:18)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3) In-force value of covered business (cid:40)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:47)(cid:72)(cid:86)(cid:86)(cid:29)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:40)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3) Net equity of other Group companies (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 26,967 – 37,142 47,731 – 27,513 17,355 – 15,127 (cid:25)(cid:23)(cid:15)(cid:20)(cid:19)(cid:28)(cid:3)(cid:3) (cid:26)(cid:24)(cid:15)(cid:21)(cid:23)(cid:23)(cid:3)(cid:3) (cid:22)(cid:21)(cid:15)(cid:23)(cid:27)(cid:21)(cid:3)(cid:3) – – – – – (cid:22)(cid:27)(cid:27)(cid:3)(cid:3) (cid:25)(cid:23)(cid:15)(cid:23)(cid:28)(cid:26)(cid:3)(cid:3) 67,040 (cid:20)(cid:22)(cid:20)(cid:15)(cid:24)(cid:22)(cid:26)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:20)(cid:22)(cid:20)(cid:15)(cid:24)(cid:22)(cid:26)(cid:3)(cid:3) – – – – 3,052 (15,351 ) (cid:178)(cid:3)(cid:3) (cid:25)(cid:21)(cid:15)(cid:28)(cid:23)(cid:24)(cid:3)(cid:3) 18,537 (cid:27)(cid:20)(cid:15)(cid:23)(cid:27)(cid:21)(cid:3)(cid:3) (29,662 ) (cid:24)(cid:20)(cid:15)(cid:27)(cid:21)(cid:19)(cid:3)(cid:3) – (54,314 ) (5,213 ) (5,712 ) – – (cid:25)(cid:15)(cid:22)(cid:23)(cid:19)(cid:3)(cid:3) (cid:11)(cid:21)(cid:25)(cid:15)(cid:23)(cid:20)(cid:26)(cid:3)(cid:12)(cid:3) 124,503 (cid:28)(cid:27)(cid:15)(cid:19)(cid:27)(cid:25)(cid:3)(cid:3) – (cid:28)(cid:27)(cid:15)(cid:19)(cid:27)(cid:25)(cid:3)(cid:3) 1,587 (cid:20)(cid:22)(cid:20)(cid:15)(cid:24)(cid:22)(cid:26)(cid:3)(cid:3) (cid:24)(cid:20)(cid:15)(cid:27)(cid:21)(cid:19)(cid:3)(cid:3) (cid:28)(cid:28)(cid:15)(cid:25)(cid:26)(cid:22)(cid:3)(cid:3) (cid:21)(cid:27)(cid:15)(cid:20)(cid:20)(cid:24)(cid:3)(cid:3) (cid:22)(cid:20)(cid:20)(cid:15)(cid:20)(cid:23)(cid:24) (cid:178)(cid:3)(cid:3) 28,115 (cid:21)(cid:27)(cid:20)(cid:15)(cid:23)(cid:23)(cid:22) 29,702 (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 28,701 – 37,147 (cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 59,237 888 29,854 18,131 – 11,474 (cid:3)(cid:3) (cid:25)(cid:24)(cid:15)(cid:27)(cid:23)(cid:27)(cid:3)(cid:3) (cid:27)(cid:28)(cid:15)(cid:28)(cid:26)(cid:28)(cid:3)(cid:3) (cid:21)(cid:28)(cid:15)(cid:25)(cid:19)(cid:24)(cid:3)(cid:3) – – – – – (cid:22)(cid:19)(cid:27)(cid:3)(cid:3) (cid:25)(cid:25)(cid:15)(cid:20)(cid:24)(cid:25)(cid:3)(cid:3) 60,655 (cid:20)(cid:21)(cid:25)(cid:15)(cid:27)(cid:20)(cid:20)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) (cid:20)(cid:21)(cid:25)(cid:15)(cid:27)(cid:20)(cid:20)(cid:3)(cid:3) – – – – 2,913 (15,643 ) (cid:178)(cid:3)(cid:3) (cid:26)(cid:26)(cid:15)(cid:21)(cid:23)(cid:28)(cid:3)(cid:3) 17,519 (cid:28)(cid:23)(cid:15)(cid:26)(cid:25)(cid:27)(cid:3)(cid:3) (35,486 ) (cid:24)(cid:28)(cid:15)(cid:21)(cid:27)(cid:21)(cid:3)(cid:3) – (53,293 ) (5,499 ) (6,744 ) – – (cid:26)(cid:15)(cid:26)(cid:27)(cid:23)(cid:3)(cid:3) (cid:11)(cid:21)(cid:27)(cid:15)(cid:20)(cid:23)(cid:26)(cid:3)(cid:12)(cid:3) 121,386 (cid:28)(cid:22)(cid:15)(cid:21)(cid:22)(cid:28)(cid:3)(cid:3) – (cid:28)(cid:22)(cid:15)(cid:21)(cid:22)(cid:28)(cid:3)(cid:3) 1,332 (cid:20)(cid:21)(cid:25)(cid:15)(cid:27)(cid:20)(cid:20)(cid:3)(cid:3) (cid:24)(cid:28)(cid:15)(cid:21)(cid:27)(cid:21)(cid:3)(cid:3) (cid:28)(cid:23)(cid:15)(cid:24)(cid:26)(cid:20)(cid:3)(cid:3) (cid:20)(cid:22)(cid:15)(cid:27)(cid:21)(cid:24)(cid:3)(cid:3) (cid:21)(cid:28)(cid:23)(cid:15)(cid:23)(cid:27)(cid:28) (cid:178)(cid:3)(cid:3) 13,825 (cid:21)(cid:26)(cid:28)(cid:15)(cid:22)(cid:22)(cid:21) 15,157 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 92,053 – 79,782 (cid:20)(cid:26)(cid:20)(cid:15)(cid:27)(cid:22)(cid:24)(cid:3) (54,314 ) (5,213 ) (5,712 ) 3,052 (15,351 ) (cid:25)(cid:15)(cid:26)(cid:21)(cid:27) (cid:20)(cid:19)(cid:20)(cid:15)(cid:19)(cid:21)(cid:24) 210,080 (cid:22)(cid:20)(cid:20)(cid:15)(cid:20)(cid:19)(cid:24) (29,662 ) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 106,069 888 78,475 (cid:20)(cid:27)(cid:24)(cid:15)(cid:23)(cid:22)(cid:21) (53,293 ) (5,499 ) (6,744 ) 2,913 (15,643 ) (cid:27)(cid:15)(cid:19)(cid:28)(cid:21) (cid:20)(cid:20)(cid:24)(cid:15)(cid:21)(cid:24)(cid:27) 199,560 (cid:22)(cid:20)(cid:23)(cid:15)(cid:27)(cid:20)(cid:27) (35,486 ) – – – (cid:178)(cid:3)(cid:3) – – – – – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – (cid:178)(cid:3)(cid:3) – – – (cid:178)(cid:3)(cid:3) – – – – – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – (cid:178)(cid:3)(cid:3) – The analysis of shareholder equity at 31 December 2011 has been restated to: (i) reﬂect the change in methodology for the allocation of holding company expenses to the segments, as explained in Note 4(d) above; and to (ii) reﬂect a change in the determination of S&P restricted capital and free surplus within the analysis of the S&P regulated capital resources, there being a £5,366,000 reduction in the determination of restricted capital, and a consequential increase of the same amount in free surplus. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 163 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED) EEV free surplus, as shown above, represents the balance of the shareholder’s net worth above the capital required. The movement in free surplus is analysed as follows: Year ended 31 December 2012 (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:41)(cid:85)(cid:72)(cid:72)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85) Dividend paid to parent Contribution from parent Synergies and adjustments arising from the Part VII transfer, including adjustments to required capital Surplus arising in the year Adjustments to required capital Decrease in policyholder funds cover for capital requirement (cid:41)(cid:85)(cid:72)(cid:72)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) (cid:60)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:11)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:12) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:41)(cid:85)(cid:72)(cid:72)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85) Dividend paid to parent Contribution from parent Synergies and adjustments arising from the Part VII transfer, including adjustments to required capital Surplus arising in the year Adjustments to required capital Increase in policyholder funds cover for capital requirement (cid:41)(cid:85)(cid:72)(cid:72)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) (cid:3)(cid:3) The movement in the in-force value of covered business comprises: Year ended 31 December 2012 (cid:3) (cid:57)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) Amount charged to foreign exchange reserve (cid:36)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3) (cid:57)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:60)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:11)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:12) (cid:3) (cid:57)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) Amount charged to foreign exchange reserve (cid:36)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3) (cid:57)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:22)(cid:26)(cid:15)(cid:20)(cid:23)(cid:26)(cid:3)(cid:3) (22,000 ) – 7,000 13,261 1,734 – (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:21)(cid:28)(cid:15)(cid:27)(cid:24)(cid:23)(cid:3)(cid:3) (22,000 ) – – 14,557 5,394 (292 ) (cid:20)(cid:20)(cid:15)(cid:23)(cid:26)(cid:23)(cid:3)(cid:3) – – – 2,877 776 – (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:26)(cid:27)(cid:15)(cid:23)(cid:26)(cid:24) (44,000 ) – 7,000 30,695 7,904 (292 ) (cid:22)(cid:26)(cid:15)(cid:20)(cid:23)(cid:21)(cid:3)(cid:3) (cid:21)(cid:26)(cid:15)(cid:24)(cid:20)(cid:22)(cid:3)(cid:3) (cid:20)(cid:24)(cid:15)(cid:20)(cid:21)(cid:26)(cid:3)(cid:3) (cid:26)(cid:28)(cid:15)(cid:26)(cid:27)(cid:21) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:22)(cid:19)(cid:15)(cid:19)(cid:25)(cid:23)(cid:3)(cid:3) (26,000 ) – 10,144 21,784 1,155 – (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:21)(cid:23)(cid:15)(cid:20)(cid:23)(cid:28)(cid:3)(cid:3) – – 2,243 14,518 (11,770 ) 714 (cid:23)(cid:15)(cid:26)(cid:22)(cid:25)(cid:3)(cid:3) – 5,265 – 1,019 454 – (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:24)(cid:27)(cid:15)(cid:28)(cid:23)(cid:28) (26,000 ) 5,265 12,387 37,321 (10,161 ) 714 (cid:22)(cid:26)(cid:15)(cid:20)(cid:23)(cid:26)(cid:3)(cid:3) (cid:21)(cid:28)(cid:15)(cid:27)(cid:24)(cid:23)(cid:3)(cid:3) (cid:20)(cid:20)(cid:15)(cid:23)(cid:26)(cid:23)(cid:3)(cid:3) (cid:26)(cid:27)(cid:15)(cid:23)(cid:26)(cid:24) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:25)(cid:19)(cid:15)(cid:25)(cid:24)(cid:24)(cid:3)(cid:3) – (cid:25)(cid:15)(cid:22)(cid:27)(cid:24)(cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:20)(cid:26)(cid:15)(cid:24)(cid:20)(cid:28)(cid:3)(cid:3) – (cid:20)(cid:15)(cid:19)(cid:20)(cid:27)(cid:3)(cid:3) (cid:20)(cid:21)(cid:20)(cid:15)(cid:22)(cid:27)(cid:25)(cid:3)(cid:3) 1,640 (cid:20)(cid:15)(cid:23)(cid:26)(cid:26)(cid:3)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 199,560 1,640 (cid:27)(cid:15)(cid:27)(cid:27)(cid:19) (cid:25)(cid:26)(cid:15)(cid:19)(cid:23)(cid:19)(cid:3)(cid:3) (cid:20)(cid:27)(cid:15)(cid:24)(cid:22)(cid:26)(cid:3)(cid:3) (cid:20)(cid:21)(cid:23)(cid:15)(cid:24)(cid:19)(cid:22)(cid:3)(cid:3) (cid:21)(cid:20)(cid:19)(cid:15)(cid:19)(cid:27)(cid:19) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:27)(cid:24)(cid:15)(cid:19)(cid:22)(cid:24)(cid:3)(cid:3) (cid:22)(cid:28)(cid:15)(cid:21)(cid:25)(cid:28)(cid:3)(cid:3) (24,380 ) (21,750 ) (cid:20)(cid:23)(cid:20)(cid:15)(cid:20)(cid:20)(cid:20)(cid:3)(cid:3) (1,409 ) (18,316 ) (cid:21)(cid:25)(cid:24)(cid:15)(cid:23)(cid:20)(cid:24) (1,409 ) (64,446 ) (cid:25)(cid:19)(cid:15)(cid:25)(cid:24)(cid:24)(cid:3)(cid:3) (cid:20)(cid:26)(cid:15)(cid:24)(cid:20)(cid:28)(cid:3)(cid:3) (cid:20)(cid:21)(cid:20)(cid:15)(cid:22)(cid:27)(cid:25)(cid:3)(cid:3) (cid:20)(cid:28)(cid:28)(cid:15)(cid:24)(cid:25)(cid:19) The movement in the in-force value for the year ended 31 December 2011 has been restated to reﬂect the change in methodology for the allocation of holding company expenses to the segments, as explained in Note 4(d). 164 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION S&P On 20 December 2010, the Group drew down £40m on a bank loan facility, in order to part fund the acquisition of Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited (together ‘S&P’). This effectively represented a purchase of part of the underlying value in force of S&P by way of debt ﬁnance and it follows that the embedded value of the UK regulated entity is not attributable to equity shareholders of the Group to the extent of the outstanding balance on the loan account at each balance sheet date. In accordance with this a further £6.0m of the loan was repaid on 20 December 2012, leaving principal outstanding at that date of £30m. Movestic The adjusted shareholder net worth of Movestic is that of the regulated entity, which includes also the net worth attributable to the non-covered business within the regulated entity. Accordingly, for Movestic, the embedded value of regulated entities comprises the embedded value of covered business and the value of the non-covered business of the regulated entity, the latter component being valued on an IFRS basis. 6 Summarised statement of changes in equity and analysis of proﬁt/(loss) (a) Changes in equity may be summarised as: (cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92) Year ended 31 December (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) Effect of modelling adjustments (cid:3)(cid:3) (cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) Foreign exchange reserve movement Dividends paid (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:3)(cid:3) (cid:22)(cid:20)(cid:15)(cid:21)(cid:24)(cid:24)(cid:3)(cid:3) 3,574 (cid:3)(cid:3) (cid:3)(cid:3) 2012 £000 (cid:21)(cid:28)(cid:23)(cid:15)(cid:23)(cid:27)(cid:28)(cid:3)(cid:3) (cid:3)(cid:3) (cid:22)(cid:23)(cid:15)(cid:27)(cid:21)(cid:28)(cid:3)(cid:3) 1,352 (19,525 ) (cid:22)(cid:20)(cid:20)(cid:15)(cid:20)(cid:23)(cid:24)(cid:3)(cid:3) 2011 £000 (cid:3)(cid:3) (29,782 ) (10,328 ) (cid:3)(cid:3) (cid:3)(cid:3) 2011 £000 (cid:22)(cid:24)(cid:23)(cid:15)(cid:25)(cid:22)(cid:25) (cid:11)40,110 (cid:12) (1,030 ) (19,007 ) (cid:21)(cid:28)(cid:23)(cid:15)(cid:23)(cid:27)(cid:28) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Effect of modelling adjustments Modelling adjustments during the year ended 31 December 2012 give rise to a net increase in EEV of £3.6m, comprising: Movestic During 2012, there has been a continued focus on ensuring that the Movestic EEV model is robust. The process, which has included independent review, has identiﬁed the following: (i) Levels of commission claw-back within the future cash ﬂow projections were overstated by £7.9m; and (ii) Several enhancements to policy fee cash ﬂow estimates and data input routines have been identiﬁed with a total net adverse impact of £1.1m. UK The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed the use of a full yield curve. This approximation was reported in the EEV assumptions section 4(a) of the Supplementary Information within the 2011 Report and Accounts. As at 31 December 2012 the models have been enhanced to recognise differing rates of return across the different durations of the yield curve resulting in a net of tax increase of £12.6m. Modelling adjustments during the year ended 31 December 2011 gave rise to a net reduction in EEV of £(10.3)m comprising: Movestic (i) An improvement was introduced into the Movestic modelling system in respect of projected fee income from investment contracts where the fee is premium based, such contracts hitherto not being differentiated and this resulted in an increase in embedded value of £2.7m; and (ii) Modelling errors were detected relating to certain parameters and discounting periods speciﬁed at inception of the new model and the correction of these has given rise to a reduction in embedded value of £12.4m. The European Embedded Value principles issued by the European CFO Forum in May 2004, together with supplementary guidance, do not provide speciﬁc guidance on how these errors should be treated and presented. UK S&P model enhancements giving rise to a further £0.6m reduction in EEV, account for the balance of the total modelling adjustments of £(10.3)m for the year ended 31 December 2011, as presented above. The effect of modelling adjustments is classiﬁed as an exceptional item in the consolidated income statement and is presented after operating proﬁt. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 165 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED) (b) The proﬁt/(loss) for the year before modelling adjustments is analysed as: (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 339 2,308 5,194 (335 ) 859 (cid:27)(cid:15)(cid:22)(cid:25)(cid:24)(cid:3)(cid:3) 8,864 (4,106 ) Year ended 31 December 2012 (cid:3) (cid:3) (cid:38)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) New business contribution Return from in-force business Expected return Experience variances Operating assumption changes Return on shareholder net worth (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) Variation from longer-term investment return Effect of economic assumption changes (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) Tax thereon (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) (cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86) (cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) Tax (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:20)(cid:22)(cid:15)(cid:20)(cid:21)(cid:22)(cid:3)(cid:3) (cid:20)(cid:24)(cid:15)(cid:26)(cid:20)(cid:23)(cid:3)(cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (33 ) 274 3,029 (2,858 ) 7,048 (cid:26)(cid:15)(cid:23)(cid:25)(cid:19)(cid:3)(cid:3) 10,967 (2,713 ) (cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 306 2,596 2,582 8,223 (3,193 ) 7,907 (cid:20)(cid:24)(cid:15)(cid:27)(cid:21)(cid:24)(cid:3)(cid:3) 19,831 (6,819 ) (cid:21)(cid:27)(cid:15)(cid:27)(cid:22)(cid:26)(cid:3)(cid:3) (5,990 ) 3,290 (7,855 ) 5,176 – (cid:22)(cid:15)(cid:21)(cid:19)(cid:26)(cid:3)(cid:3) 8,204 315 (cid:20)(cid:20)(cid:15)(cid:26)(cid:21)(cid:25)(cid:3)(cid:3) – (cid:21)(cid:21)(cid:15)(cid:27)(cid:23)(cid:26)(cid:3)(cid:3) (cid:20)(cid:20)(cid:15)(cid:26)(cid:21)(cid:25)(cid:3)(cid:3) – – – – – – – – – – – (cid:3) (cid:178)(cid:3)(cid:3) – (cid:20)(cid:15)(cid:21)(cid:28)(cid:28)(cid:3)(cid:3) (295 ) (5,745 ) 1,423 (cid:21)(cid:21)(cid:15)(cid:27)(cid:23)(cid:26)(cid:3)(cid:3) (cid:20)(cid:21)(cid:15)(cid:26)(cid:22)(cid:19)(cid:3)(cid:3) (cid:11)4,322 (cid:12) 31,255 The results of the non-covered business and of other group companies before tax and before exceptional item are presented as ‘other operational result’ in the consolidated income statement. (cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 398 4,072 5,203 1,641 1,126 (cid:60)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:11)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:12) (cid:3) (cid:3) (cid:38)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) New business contribution Return from in-force business Expected return Experience variances Operating assumption changes Return on shareholder net worth (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) Variation from longer-term investment return Effect of economic assumption changes (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) Tax thereon (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:47)(cid:82)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) (cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86) (cid:3)(cid:3) (cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) Tax (cid:47)(cid:82)(cid:86)(cid:86)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 3,066 (8,754 ) (1,762 ) (23,706 ) (cid:25)(cid:15)(cid:26)(cid:24)(cid:21)(cid:3)(cid:3) (cid:11)(cid:21)(cid:22)(cid:15)(cid:21)(cid:26)(cid:26)(cid:3)(cid:12) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 42 440 3,074 257 (157 ) (887 ) 2,936 4,329 5,046 754 4,062 5,902 (4,922 ) (3,371 ) – (cid:20)(cid:21)(cid:15)(cid:23)(cid:23)(cid:19)(cid:3)(cid:3) (cid:21)(cid:15)(cid:20)(cid:28)(cid:20)(cid:3)(cid:3) (cid:20)(cid:23)(cid:15)(cid:25)(cid:22)(cid:20)(cid:3)(cid:3) (cid:25)(cid:27)(cid:22)(cid:3)(cid:3) 1,304 (32,460 ) (cid:11)16,525 (cid:12) 5,651 (18,233 ) (19 ) (cid:11)(cid:20)(cid:26)(cid:15)(cid:24)(cid:25)(cid:28)(cid:3)(cid:12)(cid:3) – (cid:11)(cid:20)(cid:19)(cid:15)(cid:27)(cid:26)(cid:23)(cid:3)(cid:12) (cid:11)(cid:20)(cid:26)(cid:15)(cid:24)(cid:25)(cid:28)(cid:3)(cid:12)(cid:3) – – – – – (cid:178)(cid:3)(cid:3) – – (cid:178)(cid:3)(cid:3) – (cid:178)(cid:3)(cid:3) (cid:178)(cid:3)(cid:3) – (cid:22)(cid:19)(cid:27)(cid:3)(cid:3) 280 (3,119 ) 1,192 (cid:11)(cid:20)(cid:19)(cid:15)(cid:27)(cid:26)(cid:23)(cid:3)(cid:12) (cid:11)(cid:20)(cid:25)(cid:15)(cid:28)(cid:27)(cid:20)(cid:3)(cid:12) (cid:11)(cid:20)(cid:15)(cid:28)(cid:21)(cid:26)(cid:3)(cid:12) (cid:11)(cid:21)(cid:28)(cid:15)(cid:26)(cid:27)(cid:21)(cid:3)(cid:12) The analysis of proﬁt/(loss) of covered business before tax for the year ended 31 December 2011 has been restated to reﬂect the change in methodology for the allocation of holding company expenses to the segments as explained in Note 4(d) above. 166 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 2,902 5,872 368 1,983 7,907 19,032 28,035 (6,504 ) 40,563 (5,990 ) (cid:22)(cid:23)(cid:15)(cid:24)(cid:26)(cid:22) (4,446 ) 1,128 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 3,514 10,231 124 (2,617 ) 4,062 (cid:20)(cid:24)(cid:15)(cid:22)(cid:20)(cid:23) (16,929 ) (32,479 ) (cid:11)34,094 (cid:12) 5,651 (cid:11)(cid:21)(cid:27)(cid:15)(cid:23)(cid:23)(cid:22)(cid:3)(cid:12) (2,811 ) 1,472 SECTION E EEV SUPPLEMENTARY INFORMATION 7 Sensitivities to alternative assumptions The following tables show the sensitivity of the embedded value as reported at 31 December 2012, and of the new business contribution of Movestic, to variations in the assumptions adopted in the calculation of the embedded value. Sensitivity analysis is not provided in respect of the new business contribution of CA and S&P for the year ended 31 December 2012 as the reported level of new business contribution is not considered to be material (see Note 3(a)). (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:40)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3) (cid:3)(cid:3) (cid:56)(cid:46)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) (cid:51)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) (cid:51)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:3)(cid:3) (cid:55)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:56)(cid:46)(cid:3)(cid:3) (cid:51)(cid:82)(cid:86)(cid:87)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:3)(cid:3) (cid:3)(cid:3) (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:3) (cid:3)(cid:3) (cid:51)(cid:82)(cid:86)(cid:87)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:3) £m (cid:51)(cid:88)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:3) (cid:20)(cid:23)(cid:28)(cid:17)(cid:22)(cid:3)(cid:3) (cid:27)(cid:20)(cid:17)(cid:24) (cid:11)(cid:20)(cid:26)(cid:17)(cid:27)(cid:3)(cid:12)(cid:3) (cid:21)(cid:20)(cid:22)(cid:17)(cid:19)(cid:3)(cid:3) (cid:28)(cid:27)(cid:17)(cid:20)(cid:3)(cid:3) (cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:80)(cid:69)(cid:72)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:18)(cid:81)(cid:72)(cid:90)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) contribution arising from: (cid:40)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:70)(cid:3)(cid:86)(cid:72)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) 100 basis point increase in yield curve 100 basis point reduction in yield curve 10% decrease in equity and property values (cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:72)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86) 10% decrease in maintenance expenses 10% decrease in lapse rates (cid:24)(cid:8)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:80)(cid:82)(cid:85)(cid:87)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:18)(cid:80)(cid:82)(cid:85)(cid:69)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86) Assurances Annuities Reduction in the required capital to statutory minimum (2.5 ) 3.1 (2.2 ) 3.1 2.7 1.0 (1.8 ) 0.4 18.0 (17.8 ) (10.9 ) 4.5 (1.9 ) 0.9 (0.7 ) 0.8 (1.7 ) (1.3 ) 1.5 (0.2 ) 0.2 – 0.2 – 13.8 (16.0 ) (11.6 ) 7.4 1.0 1.9 (2.3 )(cid:3) 1.2 (0.6 ) 0.6 (10.2 ) 6.1 8.9 0.2 (cid:81)(cid:18)(cid:68)(cid:3)(cid:3) – (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:49)(cid:72)(cid:90) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81) (cid:54)(cid:90)(cid:72)(cid:71)(cid:76)(cid:86)(cid:75)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) £m (cid:21)(cid:17)(cid:25) (0.1 ) 0.1 – 0.4 0.8 – (cid:81)(cid:18)(cid:68) – The key assumption changes represented by each of these sensitivities are as follows: Economic sensitivities (i) 100 basis point increase in the yield curve: The reference rate is increased by 1% and the rate of future inﬂation has also been increased by 1% so that real yields remain constant; (ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% (with a minimum of zero to avoid negative yields where relevant) and the rate of future inﬂation has also been reduced by 1% so that real yields remain constant; and (iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding would reduce by 6% in value. Operating sensitivities (i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of £20 per policy pa reducing to £18 per policy pa; (ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa; (iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a base assumption of 95% of the parameters in a selected mortality/morbidity table reducing to 90.25% of the parameters in the same table, assuming no changes are made to policyholder charges or any other management actions; and (iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that deﬁned in Note 3(b) above to the minimum requirement prescribed by regulation. In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 167 SECTION E EEV SUPPLEMENTARY INFORMATION NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED) 8 Reconciliation of shareholders’ equity on the IFRS basis to shareholders’ equity on the EEV basis 31 December 2012 (cid:3) (cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3) (cid:53)(cid:72)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:192)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86) (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) Other Adjustments (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Deferred acquisition costs Deferred income Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers Adjustments to provisions on insurance contracts, net of reinsurers’ share Acquired in-force value Acquired value of customer relationships Software assets Adjustment to borrowings Deferred tax (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3) Value of in-force business (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:40)(cid:57)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:86)(cid:29) Shareholder net worth in regulated entities Shareholders’ net equity in other Group companies (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:27)(cid:25)(cid:15)(cid:23)(cid:28)(cid:27)(cid:3)(cid:3) (cid:26)(cid:24)(cid:15)(cid:24)(cid:26)(cid:19)(cid:3)(cid:3) (cid:24)(cid:27)(cid:15)(cid:19)(cid:26)(cid:27)(cid:3)(cid:3) (cid:11)(cid:20)(cid:15)(cid:27)(cid:19)(cid:19)(cid:3)(cid:12)(cid:3) (cid:21)(cid:20)(cid:27)(cid:15)(cid:22)(cid:23)(cid:25) (cid:178)(cid:3)(cid:3) (253 ) (4,631 ) 8,214 (11,451 ) (40 ) (11,403 ) – – – (2,437 ) (cid:25)(cid:23)(cid:15)(cid:23)(cid:28)(cid:26)(cid:3)(cid:3) 67,040 (29,662 ) – – – – (7,051 ) (5,574 ) – – – – – – 29,662 253 (17,000 ) – – – (54,286 ) (1,322 ) (5,712 ) (7,049 ) 2,461 – – – – – – – – – – – (21,631 ) 8,214 (11,451 ) (7,091 ) (71,263 ) (1,322 ) (5,712 ) (7,049 ) 24 (cid:22)(cid:22)(cid:15)(cid:21)(cid:27)(cid:22)(cid:3)(cid:3) 18,537 (cid:11)(cid:21)(cid:23)(cid:15)(cid:27)(cid:22)(cid:19)(cid:3)(cid:12)(cid:3) 124,503 (cid:21)(cid:27)(cid:15)(cid:20)(cid:20)(cid:24)(cid:3)(cid:3) – (cid:20)(cid:19)(cid:20)(cid:15)(cid:19)(cid:25)(cid:24) 210,080 (cid:20)(cid:22)(cid:20)(cid:15)(cid:24)(cid:22)(cid:26)(cid:3)(cid:3) (cid:24)(cid:20)(cid:15)(cid:27)(cid:21)(cid:19)(cid:3)(cid:3) (cid:28)(cid:28)(cid:15)(cid:25)(cid:26)(cid:22)(cid:3)(cid:3) (cid:21)(cid:27)(cid:15)(cid:20)(cid:20)(cid:24)(cid:3)(cid:3) (cid:22)(cid:20)(cid:20)(cid:15)(cid:20)(cid:23)(cid:24) 64,497 – (cid:178)(cid:3)(cid:3) 62,945 – (29,662 ) (26,417 ) 1,587 – – 28,115 – 101,025 29,702 (29,662 ) (cid:25)(cid:23)(cid:15)(cid:25)(cid:23)(cid:26)(cid:3)(cid:3) (cid:22)(cid:22)(cid:15)(cid:21)(cid:27)(cid:22)(cid:3)(cid:3) (cid:11)(cid:21)(cid:23)(cid:15)(cid:27)(cid:22)(cid:19)(cid:3)(cid:12)(cid:3) (cid:21)(cid:27)(cid:15)(cid:20)(cid:20)(cid:24)(cid:3)(cid:3) (cid:20)(cid:19)(cid:20)(cid:15)(cid:19)(cid:25)(cid:24) 168 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION E EEV SUPPLEMENTARY INFORMATION (cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:11)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:12) (cid:3) (cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:44)(cid:41)(cid:53)(cid:54)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3) (cid:53)(cid:72)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:192)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86) (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) Other Adjustments (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) Deferred acquisition costs Deferred income Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers Adjustments to provisions on insurance contracts, net of reinsurers’ share Acquired in-force value Acquired value of customer relationships Software assets Adjustment to borrowings Deferred tax (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3) Value of in-force business (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:183)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:40)(cid:40)(cid:57)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3) (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:90)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:86)(cid:29) Shareholder net worth in regulated entities Shareholders’ net equity in other Group companies (cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:38)(cid:36)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:54)(cid:9)(cid:51)(cid:3)(cid:3) £000 (cid:48)(cid:82)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:70)(cid:3)(cid:3) £000 (cid:3)(cid:3) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:3) (cid:36)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:3) £000 (cid:55)(cid:82)(cid:87)(cid:68)(cid:79) £000 (cid:27)(cid:24)(cid:15)(cid:23)(cid:27)(cid:25)(cid:3)(cid:3) (cid:27)(cid:27)(cid:15)(cid:26)(cid:22)(cid:25)(cid:3)(cid:3) (cid:24)(cid:25)(cid:15)(cid:28)(cid:20)(cid:19)(cid:3)(cid:3) (cid:11)21,943 (cid:12)(cid:3) (cid:21)(cid:19)(cid:28)(cid:15)(cid:20)(cid:27)(cid:28) (cid:178)(cid:3)(cid:3) (282 ) (5,272 ) 9,285 (11,477 ) (119 ) (13,350 ) – – – 1,885 (cid:25)(cid:25)(cid:15)(cid:20)(cid:24)(cid:25)(cid:3)(cid:3) 60,655 (35,486 ) – – – – (7,163 ) (6,068 ) – – – 1,744 – – 35,486 282 (13,161 ) – – – (57,770 ) (1,561 ) (6,744 ) (7,012 ) 2,523 – – – – – – – – – – – (18,433 ) 9,285 (11,477 ) (7,282 ) (77,188 ) (1,561 ) (6,744 ) (7,012 ) 6,152 (cid:23)(cid:20)(cid:15)(cid:26)(cid:25)(cid:22)(cid:3)(cid:3) 17,519 (cid:11)(cid:21)(cid:25)(cid:15)(cid:27)(cid:20)(cid:24)(cid:3)(cid:12)(cid:3) 121,386 (cid:20)(cid:22)(cid:15)(cid:27)(cid:21)(cid:24)(cid:3)(cid:3) – (cid:28)(cid:23)(cid:15)(cid:28)(cid:21)(cid:28) 199,560 (cid:20)(cid:21)(cid:25)(cid:15)(cid:27)(cid:20)(cid:20)(cid:3)(cid:3) (cid:24)(cid:28)(cid:15)(cid:21)(cid:27)(cid:21)(cid:3)(cid:3) (cid:28)(cid:23)(cid:15)(cid:24)(cid:26)(cid:20)(cid:3)(cid:3) (cid:20)(cid:22)(cid:15)(cid:27)(cid:21)(cid:24)(cid:3)(cid:3) (cid:21)(cid:28)(cid:23)(cid:15)(cid:23)(cid:27)(cid:28) 66,156 – (cid:178)(cid:3)(cid:3) 77,249 – (35,486 ) (28,147 ) 1,332 – – 13,825 – 115,258 15,157 (35,486 ) (cid:25)(cid:25)(cid:15)(cid:20)(cid:24)(cid:25)(cid:3)(cid:3) (cid:23)(cid:20)(cid:15)(cid:26)(cid:25)(cid:22)(cid:3)(cid:3) (cid:11)(cid:21)(cid:25)(cid:15)(cid:27)(cid:20)(cid:24)(cid:3)(cid:12)(cid:3) (cid:20)(cid:22)(cid:15)(cid:27)(cid:21)(cid:24)(cid:3)(cid:3) (cid:28)(cid:23)(cid:15)(cid:28)(cid:21)(cid:28) The reconciliation for the year ended 31 December 2011 has been restated to reﬂect the change in methodology for the allocation of holding company expenses to the segments as explained in Note 4(d) above. 9 Earnings per share Year ended 31 December (cid:37)(cid:68)(cid:86)(cid:76)(cid:70)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:3) (cid:39)(cid:76)(cid:79)(cid:88)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:18)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) (cid:3)(cid:3) 2012 p (cid:22)(cid:19)(cid:17)(cid:22)(cid:22)(cid:3)(cid:3) (cid:21)(cid:26)(cid:17)(cid:21)(cid:20)(cid:3)(cid:3) (cid:22)(cid:19)(cid:17)(cid:22)(cid:22)(cid:3)(cid:3) (cid:21)(cid:26)(cid:17)(cid:21)(cid:20)(cid:3)(cid:3) 2011 p (34.92 ) (25.93 ) (34.92 ) (25.93 ) 10 Foreign exchange translation reserve A foreign exchange translation reserve arises on the translation of the ﬁnancial statements of Movestic, the functional currency of which is the Swedish Krona, into pounds sterling, which is the presentational currency of the Group ﬁnancial statements. Items in the consolidated income statement are translated at the average exchange rate of SEK10.7326 = £1 ruling in the reported period (year ended 31 December 2011: SEK10.4104 = £1), while all items in the balance sheet are stated at the closing rates ruling at the reported balance sheet date, being SEK10.5247 = £1 at 31 December 2012 (SEK10.6553 = £1 at 31 December 2011). The differences arising on translation using this methodology are recognised directly in shareholders’ equity within the foreign exchange translation reserve. The reported embedded value is sensitive to movements in the SEK: £ exchange rate. Had the exchange rate as at 31 December 2012 been 10% higher at SEK11.5772 = £1, then the reported embedded value of £311.1m as at 31 December 2012 would have been reported as £301.7m. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 169 170 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION F ADDITIONAL INFORMATION IN THIS SECTION Financial Calendar Key Contacts 172 173 174—177 Notice of Annual General Meeting 178—180 Explanatory Notes to the Notice of Annual General Meeting CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 171 SECTION F ADDITIONAL INFORMATION FINANCIAL CALENDAR 28 March 2013 Results for the year ended 31 December 2012 announced 10 April 2013 Ex dividend date 11 April 2013 Published Financial Statements issued to shareholders 12 April 2013 Dividend record date 17 May 2013 Annual General Meeting 17 May 2013 Interim Management Statement for the quarter ending 31 March 2013 22 May 2013 Dividend payment date August 2013 Interim results for the 6 months ending 30 June 2013 announced November 2013 Interim Management Statement for the quarter ending 30 September 2013 announced 172 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION F ADDITIONAL INFORMATION Bankers National Westminster Bank plc 135 Bishopsgate London EC2M 3UR The Royal Bank of Scotland 8th Floor, 135 Bishopsgate London EC2M 3UR Lloyds TSB Bank plc 3rd Floor, Black Horse House Medway Wharf Road Tonbridge Kent TN9 1QS Public Relations Consultants Cubitt Consulting 30 Coleman Street London EC2R 5AL Corporate Advisors Canaccord Genuity Limited 41 Lothbury London EC2R 7AE KEY CONTACTS Registered and Head Ofﬁce Harbour House Portway Preston Lancashire PR2 2PR Tel: +44 (0)1772 840000 Fax: +44 (0)1772 840010 www.chesnara.co.uk Legal Advisors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Addleshaw Goddard LLP 100 Barbirolli Square Manchester M2 3AB Auditor Deloitte LLP Chartered Accountants and Statutory Auditors 2 Hardman Street Manchester M60 2AT United Kingdom Registrars Capita The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Stockbrokers Panmure Gordon One New Change London EC4M 3UR Canaccord Genuity Limited 88 Wood Street London EC2V 7QR CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 173 SECTION F ADDITIONAL INFORMATION NOTICE OF ANNUAL GENERAL MEETING This document is important and requires your immediate attention If you are in any doubt as to the action you should take, you should immediately consult your stockbroker, bank manager, solicitor, accountant or other independent professional adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if you reside elsewhere, another appropriately authorised ﬁnancial adviser. If you have sold or otherwise transferred all of your shares in Chesnara plc please pass this document together with the accompanying proxy form as soon as possible to the purchaser or transferee, or to the person who arranged the sale or transfer so they can pass these documents to the person who now holds the shares. Company No. 4947166 (b) to make donations to political organisations other than Chesnara plc Notice is given that the 2013 Annual General Meeting of Chesnara plc will be held at the ofﬁces of Panmure Gordon (UK) Limited, One New Change, London EC4M 9AF on 17 May 2013 at 11a.m. for the business set out below. Resolutions 1 to 12 inclusive will be proposed as ordinary resolutions and resolutions 13 to 15 inclusive will be proposed as special resolutions. 1. To receive and adopt the audited accounts for the ﬁnancial year ended 31 December 2012, together with the reports of the directors and auditor thereon. 2. To declare a ﬁnal dividend of 11.25 pence per share for the ﬁnancial year ended 31 December 2012. 3. To approve the directors’ remuneration report set out in the Annual Report and Accounts for the ﬁnancial year ended 31 December 2012. 4. To re-elect Frank Hughes as a director who retires by rotation in accordance with the Company’s Articles of Association. 5. To elect Veronica France as a director. 6. To elect David Brand as a director. 7. To elect Mike Evans as a director. 8. To elect David Rimmington as a director. 9. To reappoint Deloitte LLP as auditor of the Company to hold ofﬁce until the conclusion of the next general meeting of the Company at which accounts are laid before shareholders. 10. To authorise the directors to ﬁx the auditor’s remuneration. 11. That, from the passing of this resolution until the earlier of 16 November 2014 and the conclusion of the Company’s next Annual General Meeting, the Company and all companies which are its subsidiaries at any time during such period are authorised: (a) to make donations to political parties or independent election candidates; political parties; and (c) to incur political expenditure, up to an aggregate total amount of £100,000, with the individual amount authorised for each of heads (a) to (c) above being limited to £100,000. Any such amounts may comprise sums paid or incurred in one or more currencies. Any sum paid or incurred in a currency other than sterling shall be converted into sterling at such rate as the board may decide is appropriate. Terms used in this resolution have, where applicable, the meanings that they have in Part 14 of the Companies Act 2006 on “Control of political donations and expenditure”. 12. That the directors be and they are hereby generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 to exercise all powers of the Company to allot shares in the Company and to grant rights to subscribe for or to convert any security into such shares (“Allotment Rights”), but so that: (a) the maximum amount of shares that may be allotted or made the subject of Allotment Rights under this authority are shares with an aggregate nominal value of £3,790,019, of which: (i) half may be allotted or made the subject of Allotment Rights in any circumstances; and (ii) the other half may be allotted or made the subject of Allotment Rights pursuant to any rights issue (as referred to in the Financial Services Authority’s listing rules) or pursuant to any arrangements made for the placing or underwriting or other allocation of any shares or other securities included in, but not taken up under, such rights issue; (b) this authority shall expire 18 months after the passing of this resolution or, if earlier, on the date of the Company’s next Annual General Meeting; (c) the Company may make any offer or agreement before such expiry which would or might require shares to be allotted or Allotment Rights to be granted after such expiry; and (d) all authorities vested in the directors on the date of the notice of this meeting to allot shares or to grant Allotment Rights that remain unexercised at the commencement of this meeting are revoked. 174 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION F ADDITIONAL INFORMATION 13. That, subject to the passing of the resolution numbered 12 in the notice convening this meeting, the directors be and they are hereby empowered, pursuant to section 570 of the Companies Act 2006, to allot equity securities (as deﬁned in section 560 of that Act) pursuant to the authority conferred on them by the foregoing resolution numbered 12 in the notice of this meeting or by way of a sale of treasury shares as if section 561 of that Act did not apply to such allotment, provided that this power shall be limited to: (c) the maximum price (exclusive of expenses) which may be paid for such ordinary shares is the maximum price permitted under the Financial Services Authority’s listing rules or, in the case of a tender offer (as referred to in those rules), 5% above the average of the middle market quotations for the ordinary shares (as derived from the Daily Ofﬁcial List of London Stock Exchange plc) for the ﬁve business days immediately preceding the date on which the terms of the tender offer are announced; (d) the authority hereby conferred shall expire 18 months after the passing of this resolution or, if earlier, on the date of the Company’s next Annual General Meeting; and (e) the Company may make a contract or contracts to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be completed wholly or partly after the expiry of such authority, and may make a purchase of ordinary shares in pursuance of any such contract or contracts. 15. That a general meeting of the Company (other than an Annual General Meeting) may be called on not less than 14 clear days’ notice. By order of the Board Mary Fishwick Company Secretary Registered ofﬁce: Harbour House Portway Preston Lancashire PR2 2PR Registered in England No. 4947166 Dated 27 March 2013 (a) the allotment of equity securities in connection with any rights issue or open offer (each as referred to in the Financial Services Authority’s listing rules) or any other pre-emptive offer that is open for acceptance for a period determined by the directors to the holders of ordinary shares on the register on any ﬁxed record date in proportion to their holdings of ordinary shares (and, if applicable, to the holders of any other class of equity security in accordance with the rights attached to such class), subject, in each case, to such exclusions or other arrangements as the directors may deem necessary or appropriate in relation to fractions of such securities, the use of more than one currency for making payments in respect of such offer, any such shares or other securities being represented by depositary receipts, treasury shares, any legal or practical problems in relation to any territory or the requirements of any regulatory body or any stock exchange; and (b) the allotment of equity securities for cash (otherwise than as mentioned in sub-paragraph (a) above), provided that the maximum aggregate nominal value of equity securities allotted does not exceed £287,619, and shall expire 18 months after the passing of this resolution or, if earlier, on the date of the Company’s next Annual General Meeting save that, before the expiry of this power, the Company may make any offer or agreement which would or might require equity securities to be allotted after such expiry. 14. That the Company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Companies Act 2006 to make one or more market purchases (as deﬁned in section 693 of that Act) of ordinary shares of 5p each in the capital of the Company, provided that: (a) the maximum aggregate number of ordinary shares hereby authorised to be purchased is 11,484,908; (b) the minimum price (exclusive of expenses) which may be paid for such ordinary shares is 5p per share; CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 175 SECTION F ADDITIONAL INFORMATION NOTES 1. Any member who is entitled to attend and vote at this 3. CREST members who wish to appoint one or more proxies Annual General Meeting is entitled to appoint another person, or two or more persons in respect of different shares held by him, as his proxy to exercise all or any of his rights to attend and to speak and to vote at the Annual General Meeting. 2. A member wishing to attend and vote at the Annual General Meeting in person should arrive prior to the time ﬁxed for its commencement. A member that is a corporation can only attend and vote at the Annual General Meeting in person through one or more representatives appointed in accordance with section 323 of the Companies Act 2006. Any such representative should bring to the Annual General Meeting written evidence of his appointment such as a certiﬁed copy of a board resolution of, or a letter from, the corporation concerned conﬁrming the appointment. Any member wishing to vote at the Annual General Meeting without attending in person or (in the case of a corporation) through its duly appointed representative must appoint a proxy to do so. A proxy need not be a member of the Company. A form of proxy for this Annual General Meeting is enclosed and, in order to be valid, must be completed in accordance with the instructions that accompany it and then be delivered (together with any power of attorney or other authority under which it is signed, or a certiﬁed copy of such item), to the Company’s Registrars, Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU or by post to Business Reply Licence No RSBH-UXKS-LRBC, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU by 11 a.m. on Wednesday 15 May 2013. Alternatively, members may appoint a proxy online by following the instructions for the electronic appointment of a proxy at www.capitashareportal.com, by entering the company name “Chesnara plc” and following the on screen instructions. To be a valid proxy appointment, the member’s electronic message conﬁrming the details of the appointment completed in accordance with those instructions must be transmitted so as to be received by the same time. Members who hold their shares in uncertiﬁcated form may also use the “CREST” voting service to appoint a proxy electronically, as explained below. The appointment of a proxy will not preclude a member from attending and voting at the Annual General Meeting. through the CREST system may do so by using the procedures described in “the CREST voting service” section of the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed one or more voting service providers, should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or a proxy instruction made using the CREST voting service to be valid, the appropriate CREST message (a “CREST proxy appointment instruction”) must be properly authenticated in accordance with the speciﬁcations of CREST’s operator, Euroclear UK & Ireland Limited (“Euroclear”), and must contain all the relevant information required by the CREST Manual. To be valid, the message (regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy) must be transmitted so as to be received by Capita Registrars (ID RA10), by 11 a.m. on Wednesday 15 May 2013, which is acting as the Company’s “issuer’s agent”. After this time, any change of instruction to a proxy appointed through the CREST system should be communicated to the appointee through other means. The time of the message’s receipt will be taken to be when (as determined by the timestamp applied by the CREST Applications Host) the issuer’s agent is ﬁrst able to retrieve it by enquiry through the CREST system in the prescribed manner. Euroclear does not make available special procedures in the CREST system for transmitting any particular message. Normal system timings and limitations apply in relation to the input of CREST proxy appointment instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or a CREST sponsored member or has appointed any voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as is necessary to ensure that a message is transmitted by means of the CREST system by any particular time. CREST members and, where applicable, their CREST sponsors or voting service providers should take into account the provisions of the CREST Manual concerning timings as well as its section on “Practical limitations of the system”. In certain circumstances, the Company may, in accordance with the Uncertiﬁcated Securities Regulations 2001 or the CREST Manual, treat a CREST proxy appointment instruction as invalid. 4. Copies of directors’ service contracts and letters of appointment will be available for inspection at the registered ofﬁce of the Company during normal business hours each business day and at the place of the Annual General Meeting for at least 15 minutes prior to and during the Annual General Meeting. 176 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION F ADDITIONAL INFORMATION 5. The time by which a person must be entered on the register of members in order to have the right to attend and vote at the Annual General Meeting (and for the purpose of the determination by the Company of the votes they may cast) is 6.00p.m. on Wednesday 15 May 2013. Changes to entries on the register of members after that time will be disregarded in determining the right of any person to attend or vote at the Annual General Meeting. 6. The right to appoint proxies does not apply to persons nominated to receive information rights under section 146 of the Companies Act 2006, as such rights can only be exercised by the member concerned. Any person nominated to enjoy information rights under section 146 of the Companies Act 2006 who has been sent a copy of this notice of Annual General Meeting is hereby informed, in accordance with section 149(2) of the Companies Act 2006, that they may have a right under an agreement with the registered member by whom they were nominated to be appointed, or to have someone else appointed, as a proxy for this Annual General Meeting. If they have no such right, or do not wish to exercise it, they may have a right under such an agreement to give instructions to the member as to the exercise of voting rights. Nominated persons should contact the registered member by whom they were nominated in respect of these arrangements. 7. As at 27 March 2013 (being the last practicable date prior to the publication of this document), the Company’s issued share capital consisted of 115,047,662 ordinary shares, carrying one vote each. The total voting rights in the Company as at 27 March 2013 (being the last practicable date prior to the publication of this document) were 114,849,083. 8. Information regarding this Annual General Meeting, including information required by section 311A of the Companies Act 2006, is available at www.chesnara.co.uk. Any electronic address provided either in this notice or any related documents (including the proxy appointment form) may not be used to communicate with the Company for any purposes other than those expressly stated. 9. In accordance with section 319A of the Companies Act 2006, any member attending the Annual General Meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the Annual General Meeting, but no such answer need be given if (a) to do so would interfere unduly with the preparations for the Annual General Meeting or involve the disclosure of conﬁdential information, (b) the answer has already been given on a website in the form of an answer to a question or (c) it is undesirable in the interests of the Company or the good order of the Annual General Meeting that the question be answered. 10. Under section 527 of the Companies Act 2006, members meeting the threshold requirements set out in that section have the right to require the Company to publish on a website a statement in accordance with section 528 of the Companies Act 2006 setting out any matter relating to (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the Annual General Meeting or (ii) any circumstances connected with an auditor of the Company ceasing to hold ofﬁce since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Companies Act 2006. The Company may not require the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Companies Act 2006. Where the Company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the Annual General Meeting includes any statement that the Company has been required under section 527 of the Companies Act 2006 to publish on a website. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 177 SECTION F ADDITIONAL INFORMATION EXPLANATORY NOTES TO THE NOTICE OF ANNUAL GENERAL MEETING The notes on the following pages give an explanation of the proposed resolutions: Resolution 1: Report and accounts For each ﬁnancial year, the directors are required to present the directors’ report, the audited accounts and the auditor’s reports to shareholders at a general meeting. Resolution 2: Final dividend The payment of the ﬁnal dividend requires the approval of shareholders in general meeting. If the Annual General Meeting approves resolution 2, the ﬁnal dividend of 11.25 pence per share will be paid on 22 May 2013 to ordinary shareholders who are on the register of members at the close of business on 12 April 2013 in respect of each ordinary share. Resolution 3: Approval of the directors’ remuneration report The Company is required by law to seek the approval of shareholders of its annual report on remuneration policy and practice. This does not affect the directors’ entitlement to remuneration and the result of this resolution is advisory only. The remuneration report for the year ended 31 December 2012 is set out in full on pages 56 to 60 of this document. Your directors are satisﬁed that the Company’s policy and practice in relation to directors’ remuneration are reasonable and that they deserve shareholder support. Resolutions 4 – 8 inclusive: Re-election/Election of directors Under the Company’s Articles of Association, directors are obliged to retire by rotation at Annual General Meetings and may not serve beyond three years without being re-elected by shareholders. The director who now falls due for retirement and re-election at the Annual General Meeting is Frank Hughes. In addition, Veronica France, David Brand and Mike Evans have been appointed to the board since the last Annual General Meeting and it is proposed that David Rimmington be elected to the board at the Meeting and they are therefore put forward for election to the board. Brief biographical details of Veronica France, David Brand, Mike Evans and David Rimmington can be found on page 49 of this document. The Chairman conﬁrms that, following formal performance evaluation of Frank Hughes by the board, he continues to be effective and demonstrate commitment to the role. The Chairman further conﬁrms that, following a rigorous selection process by the board, each of Veronica France, David Brand, Mike Evans and David Rimmington, is expected to be effective and committed to her or his role. The remaining directors therefore unanimously recommend that each of these directors be re-elected or elected (as applicable) as a director of the Company. Resolutions 9 and 10: Re-appointment and remuneration of auditors The Company is required to appoint an auditor, at each general meeting before which accounts are laid, to hold ofﬁce until the end of the next such meeting. Deloitte LLP has indicated that it is willing to act as the Company’s auditor. You are asked to re-appoint Deloitte LLP and, following normal practice, to authorise the directors to determine its remuneration. The directors recommend its appointment. Resolution 11: Political donations It has always been the Company’s policy that it does not make political donations. This remains the Company’s policy. Part 14 of the Companies Act 2006 imposes restrictions on companies making political donations to any political party or other political organisation or to any independent election candidate unless they have been authorised to make donations at a general meeting of the Company. Whilst the Company has no intention of making such political donations, the Act includes broad and ambiguous deﬁnitions of the terms “political donation” and “political expenditure” which may apply to some normal business activities which would not generally be considered to be political in nature. The directors therefore consider that, as a purely precautionary measure, it would be prudent to obtain the approval of the shareholders to make donations to political parties, political organisations and independent election candidates and to incur political expenditure up to the speciﬁed limit. The directors intend to seek renewal of this approval at future Annual General Meetings, but wish to emphasise that the proposed resolution is a precautionary measure for the above reason and that they have no intention of making any political donations or entering into party political activities. Resolution 12 Power to allot shares The directors are currently authorised to allot shares and to grant rights to subscribe for or to convert any security into shares of the Company, but their authorisation ends on the date of this year’s Annual General Meeting. This resolution seeks to renew the directors’ authority to allot shares. The Association of British Insurers (“ABI”) published guidance on 31 December 2008 (as amended on 30 November 2009) to the effect that ABI members will regard as routine a request for authorisation to allot new shares in an amount of up to one third of the existing issued share capital and additionally that they will regard as routine requests to authorise the allotment of a further one third, provided that such additional authority is applied to fully pre-emptive rights issues only and the authorisation is valid for one year only. This authority was conferred on the directors at last year’s Annual General Meeting and the directors recommend that the Company 178 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 SECTION F ADDITIONAL INFORMATION should have this additional headroom this year. This authority is limited to a maximum nominal amount of £3,790,019 (representing 75,800,380 ordinary shares), which represents approximately two thirds in aggregate of the total ordinary share capital in issue (excluding treasury shares) as at 27 March 2013 (being the latest practicable date prior to the publication of this document). Of this amount, 37,900,190 ordinary shares (representing approximately one third in aggregate of the total ordinary share capital in issue, excluding treasury shares) can only be allotted pursuant to a rights issue. As at 27 March 2013 (being latest practicable date prior to the publication of this document), the Company held 198,579 treasury shares, being approximately 0.17% of the total ordinary share capital in issue (calculated exclusive of treasury shares). The renewed authority will expire 18 months after the passing of this resolution or, if earlier, on the date of the next Annual General Meeting. The directors have no present intention of exercising this authority. The purpose of giving the directors this authority is to maintain the Company’s ﬂexibility to take advantage of any appropriate opportunities that may arise. Resolution 13 Disapplication of pre-emption rights This resolution, which will be proposed as a special resolution, seeks to renew the authority conferred on the directors at last year’s Annual General Meeting to issue equity securities of the Company for cash without ﬁrst offering them to existing shareholders in proportion to their existing shareholdings. Other than in connection with a rights or other similar issue or scrip dividend (where difﬁculties arise in offering shares to certain overseas shareholders and in relation to fractional entitlements), the authority contained in this resolution will be limited to an aggregate nominal value of £287,619 (representing 5,752,380 ordinary shares), which represents approximately 5% of the Company’s issued equity share capital as at 27 March 2013 (being the latest practicable date prior to the publication of this document). The renewed authority will expire 18 months after the passing of this resolution or, if earlier, on the date of the of the next Annual General Meeting. This is a standard resolution for most UK listed companies each year. In accordance with the Statement of Principles on disapplying pre-emption rights issued in July 2008 by the Pre-Emption Group (which is supported by the Association of British Insurers, the National Association of Pension Funds Limited and the Investment Managers Association), the board conﬁrms its intention that no more than 7.5% of the issued share capital will be issued for cash on a non pre-emptive basis during any rolling three year period. The directors have no present intention of exercising this authority. Resolution 14: Authority to purchase own shares This resolution, which will be proposed as a special resolution, is to renew the authority granted to the directors at last year’s Annual General Meeting, which expires on the date of this year’s Annual General Meeting, and to give the Company authority to buy back its own ordinary shares in the market as permitted by the Companies Act 2006. The authority limits the number of shares that can be purchased to a maximum of 11,484,908 (representing 10% of the issued ordinary share capital of the Company (excluding treasury shares) as at 27 March 2013 (being the latest practicable date prior to the publication of this document) and sets the minimum and maximum prices. This authority will expire no later than 18 months after the date of the Annual General Meeting. Your directors believe that the Company should continue to have the authority to purchase its own shares. The authority will be exercised only if the directors believe that to do so would result in an increase in earnings per share and would promote the success of the Company for the beneﬁt of its shareholders generally. To the extent that any shares so purchased are held in treasury (see below), earnings per share will be enhanced until such time, if any, as such shares are resold or transferred out of treasury. Any purchases of ordinary shares would be by means of market purchases through the London Stock Exchange. Sections 724 – 732 inclusive of the Companies Act 2006 provide that shares held in treasury can be cancelled, sold for cash or, in appropriate circumstances, used to meet obligations under employee share schemes. Any shares held in treasury would not be eligible to vote nor would any dividend be paid on any such shares. If any ordinary shares purchased pursuant to this authority are not held by the Company as treasury shares, then such shares would be immediately cancelled, in which event the number of ordinary shares in issue would be reduced. The directors believe that it continues to be desirable for the Company to have this choice. Holding the repurchased shares as treasury shares gives the Company the ability to re-issue them quickly and cost effectively and provides the Company with additional ﬂexibility in the management of its capital base. No dividends will be paid on, and no voting rights will be exercised in respect of, treasury shares. In 2012, no shares were purchased into treasury, none were sold and none were cancelled. Between 1 January 2013 and 27 March 2013 432 shares were transferred out of treasury to meet a sharesave plan option. CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 179 SECTION F ADDITIONAL INFORMATION EXPLANATORY NOTES TO THE NOTICE OF ANNUAL GENERAL MEETING (CONTINUED) Resolution 15: Notice of general meetings The Companies Act 2006 requires the notice period for general meetings of the Company to be at least 21 days, but, as a result of a resolution which was passed by the Company’s shareholders at last year’s Annual General Meeting, the Company is currently able to call general meetings (other than an Annual General Meeting) on not less than 14 clear days’ notice. In order to preserve this ability, shareholders must approve the calling of meetings on not less than 14 days’ notice. Resolution 14 seeks such approval. The approval will be effective until the Company’s next Annual General Meeting, when it is intended that a similar resolution will be proposed. The Company will also need to meet the requirements for electronic voting under the Companies (Shareholders’ Rights) Regulations 2009 before it can call a general meeting on less than 21 days’ notice. The shorter notice period would not be used as a matter of routine for general meetings, but only where the ﬂexibility is merited by the business of the meeting and is thought to be to the advantage of shareholders as a whole. The directors recommend all shareholders to vote in favour of all the resolutions, as the directors intend to do in respect of their own shares, and consider that they are in the best interests of the Company and its shareholders as a whole. 180 CHESNARA | ANNUAL REPORT & ACCOUNTS 2012 Registered and Head Ofﬁce Harbour House, Portway, Preston, Lancashire PR2 2PR T +44 (0)1772 840 000 F +44 (0)1772 840 010 www.chesnara.co.uk Designed by The Chase

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