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Annual Report & Accounts
2013
Cautionary statement
This document may contain forward-looking
statements with respect to certain of the plans
and current expectations relating to the future
financial condition, business performance and
results of Chesnara plc. By their nature, all
forward-looking statements involve risk and
uncertainty because they relate to future
events and circumstances that are beyond the
control of Chesnara plc including, amongst
other things, UK domestic, Swedish domestic
and global economic and business conditions,
market-related risks such as fluctuations in
interest rates, currency exchange rates,
inflation, deflation, the impact of competition,
changes in customer preferences, delays in
implementing proposals, the timing, impact and
other uncertainties of future acquisitions or
other combinations within relevant industries,
the policies and actions of regulatory
authorities, the impact of tax or other legislation
and other regulations in the jurisdictions in
which Chesnara plc and its subsidiaries operate.
As a result, Chesnara plc’s actual future
condition, business performance and results
may differ materially from the plans, goals
and expectations expressed or implied in these
forward-looking statements.
section A
overview
04 An Introduction
06
2013 Highlights
07 Chairman’s Statement
section b
strAtegic report
Strategic Objectives
The Chesnara Business
12 Our Vision & Strategy
13
16
17 Business Model
18 Business Review
Financial Review
28
40
Financial Management
44 Risk Management
47
Solvency II
48 Corporate and Social Responsibility
section c
corporAte g overnAnce
52 Governance Overview from the Chairman
53 Board of Directors
54 Board Profile
55 Corporate Governance Report
60 Directors’ Remuneration Report
82 Audit & Risk Committee Report
85 Directors’ Report
87 Directors’ Responsibilities Statement
section D
iFrs FinAnciAl s tAtements
Independent Auditor’s Report to the Members of Chesnara plc
90
93 Consolidated Statement of Comprehensive Income
94 Consolidated Balance Sheet
95 Company Balance Sheet
96 Consolidated Statement of Cash Flows
97 Company Statement of Cash Flows
98 Consolidated Statement of Changes in Equity
99 Company Statement of Changes in Equity
100 Notes to the Consolidated Financial Statements
section e
eev s upplementAry i nFormAtion
178 Directors’ Responsibilities Statement
179
Independent Auditor’s Report
180 Summarised EEV Consolidated Income Statement
181 Summarised EEV Consolidated Balance Sheet
182 Notes to the EEV Supplementary Information
section F
ADDition Al inFormAtion
198 Financial Calendar
199 Key Contacts
200 Notice of Annual General Meeting
204 Explanatory Notes to the Notice of Annual General Meeting
212 Glossary
Chesnara | annual report & aCCounts 2013
note on terminology
As explained in Note 9 to the IFRS financial statements, the principal
reporting segments of the Group are:
CA
S&P
PL
which comprises the original business of Countrywide Assured plc,
the Group’s original UK operating subsidiary, and of City of
Westminster Assurance Company Limited, which was acquired
by the Group in 2005 and the long-term business of which was
transferred to Countrywide Assured plc during 2006;
which was acquired on 20 December 2010. This business was
transferred from Save & Prosper Insurance Limited and Save & Prosper
Pensions Limited to Countrywide Assured plc on 31 December
2011 under the provisions of Part VII of the Financial Services and
Markets Act 2000;
which was purchased on 28 November 2013 from Direct Line
Insurance Group plc. On acquisition the company was called Direct
Line Life Insurance Company, and was subsequently renamed
Protection Life Company Limited. PL is included within the Group’s
UK business; and
Movestic
which was purchased on 23 July 2009 and comprises the Group’s
Swedish business, Movestic Livförsäkring AB and its subsidiary and
associated companies.
In this Report & Accounts:
i.
The CA, S&P and PL 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 plc’ refers to the legal entity Countrywide Assured plc, which includes the
long-term business of CA, CWA and S&P;
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;
vi. ‘PL’ refers to Protection Life Company Limited (previously Direct Line Life Insurance
Company Limited), which was purchased on 28 November 2013; and
vii. ‘Movestic’ may also refer to Movestic Livförsäkring AB, as the context implies.
02
chesn ArA | A nnuAl report & Accounts 2013
section A
overview
in this section
04 An Introduction
06 2013 Highlights
07 Chairman’s Statement
chesn ArA | A nnuAl report & Accounts 2013
03
section A
overview
An introDuction
Chesnara plc is primarily a Life and
Pensions closed book consolidator.
It currently has books of business
in the UK and Sweden. The UK
business is predominantly closed to
new business whereas our Swedish
subsidiary continues to run a profitable
new business operation.
Who we are
Chesnara plc, formed in 2004, is listed on the London
Stock Exchange. The Group initially consisted of
Countrywide Assured, a closed Life and Pensions book
demerged from Countrywide plc, a large estate agency
group. Since incorporation the Group has grown
through the acquisition of three predominantly closed
UK businesses, CWA, S&P and PL plus Movestic, an
open Swedish Life and Pensions business.
What we do
– We administer c.870,000 Life and Pension policies (c.420,000
in the UK and c.450,000 in Sweden).
c.870,000
Life and Pension policies.
– We manage £4.7 billion of funds (£3.0 billion in the UK and
£1.7 billion in Sweden).
£4.7bn
of total assets under management.
– We operate to high regulatory standards and ensure
we offer efficient service levels and competitive returns
to policyholders.
– We provide value to shareholders primarily by way of an
established and attractive dividend strategy but also by
value enhancement through acquisitions and the writing
of profitable new business in Sweden.
Chesnara is a responsible and profitable company
engaged in the management of Life and Pension policies
in the UK and Sweden. Our focus is:
– Commitment to the core business of closed UK life
and pensions book management.
– Further acquisitions where they meet stringent
assessment criteria.
– Value enhancement through the writing of profitable
new business in Sweden.
– Continued delivery of competitive returns to shareholders
and policyholders.
How we operate
– We maintain a small professional corporate governance team
responsible for ensuring regulatory best practice, risk
and capital management, and oversight of both our Swedish
subsidiary and our predominantly outsourced UK business.
– We maintain a robust regulatory, compliance and risk
management regime.
– The governance team has significant experience and a proven
track record in acquiring and successfully integrating Life and
Pension businesses. The team engages professional partners
and advisors to support the acquisition model, as required.
– Acquisitions are funded by a combination of cash, debt and
equity as appropriate. We have tried and tested support
from debt providers and from our established and supportive
shareholder base.
– We maintain robust solvency levels.
How we create value
Policyholder
Effective customer service operations together with
competitive fund performance, whilst always adopting
exacting standards with regard to all regulatory matters
ensures policyholders receive good returns in line with policy,
industry and market expectations.
Shareholder
Efficient management of the policy base and good capital
management practices means that surpluses emerge
from the in-force books of business. These surpluses enable
dividend transfers to be made from the subsidiaries to
Chesnara, which fund the attractive dividend strategy.
In addition, growth from both the proven acquisition model
and from writing profitable new business in Sweden has
had a positive impact on the embedded value of the business
(as shown at the bottom of the page).
group eev Development h istory
The Embedded Value of the Group has grown significantly since incorporation. The reported growth is net of £149m of cumulative dividend payments.
The chart illustrates Embedded Value growth and the impact of the acquisition strategy. Values quoted are as at 31 December of the relevant year.
04
£126M
Chesnara lists on the
London Stock Exchange,
following its acquisition
of CA plc.
04
05
£176M
Chesnara acquired
CWA from Irish Life and
Permanent plc. EEV
gain of £30.3m arising on
acquisition and £22.0m
new share capital issued.
06
07
08
£189M
£187M
£183M
The long-term business of
CWA was transferred to
CA plc under the provisions
of Part VII of FSMA.
Steady operating profit
on covered business to
support dividend payment.
Steady operating profit on
covered business supports
dividend payment in year.
chesn ArA | A nnuAl report & Accounts 2013
section A
overview
gross c Ash gener Ation
£49.7M in 2013
(2012: £34.0m).
£49.7M
£33.1M
£34.0M
£18.8M
2010
2011
2012
2013
Note 1: Cash generation is defined on page 34. The
figures exclude any impact from acquisition funding
arrangements including cash utilised to directly
fund acquisitions.
totAl shA reholDer return
5 year TSR of 261%
2013 TSR of 79%
The Chesnara investment proposition
is dependent upon cash emerging from
the in-force books of business at levels
sufficient to fund the dividend strategy,
support future acquisitions, fund
Movestic and provide adequate surplus
to protect against the potential for
earnings volatility in the future.
The cumulative gross cash generation
since 2010 of £136m is more than
adequate to support the funding of the
total dividend payments over that
period, providing 174% coverage of paid
and proposed dividends of £78m for
the same period.
Capital management actions including
Part VII transfers and regulator approved
capital extractions ensure the cash
generated is available for distribution
to the fullest extent possible.
proven AttrActive DiviDenD history
£10.2M
£13.1M
£13.7M
£15.8M
£16.0M
£16.2M
£18.1M
£19.4M
£19.9M
£20.5M
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
09
£263M
Chesnara acquired Movestic
Liv, an open Swedish Life
and Pensions business,
resulting in an EEV gain of
£54.2m on acquisition.
10
£355M
11
Chesnara acquired SPI
and its subsidiary, SPP, from
JPMorgan and Movestic
acquired the business of
Aspis Liv, a small Swedish
life and health insurer. These
purchases resulted in a
combined gain on acquisition
of £41.0m. £25.7m new share
capital issued.
£295M
The long-term business
of SPI and SPP were
transferred to CA plc under
the provisions of Part VII
of FSMA. Falls in both
equity markets and bond
yields result in a reduction
in EEV in the year.
12
£311m
SPI and SPP were
de-authorised from
conducting activities
regulated under the
provisions of FSMA 2000.
Investment market factors
support the increase in
EEV in the year.
13
£376M
Chesnara acquired
Protection Life (formerly
Direct Line Life Insurance
Company Limited) from
Direct Line Group plc,
with an EEV gain on
acquisition of £12.3m.
Strong investment
markets drive EEV growth.
chesn ArA | A nnuAl report & Accounts 2013
05
section A
overview
Notes
1. Throughout the Chairman’s Statement,
Business Review and Financial Review
sections, all results quoted at a business
segment level exclude the impact of
consolidation adjustments. These
consolidation adjustments are analysed
by business segment on page 30.
2. Net cash generation in the year is defined
as the net amount of the following items:
i. Gross cash generation, defined as:
a. the change in the excess of actual
regulatory capital resources over target
capital resources in respect of the
CA, S&P and PL operating segments;
b. less capital contributions made by
the Group to the Movestic operating
segment; and
c. less cash utilised by Parent Company
operations.
ii. Plus the cash impact of one-off
management actions coupled with
movements in the restrictions of
policyholder funds to shareholder funds.
As such, the net and gross cash
generation KPIs defined above do not
align to the Cash Flow Statement as
included in the IFRS Financial Statements.
Throughout the Annual Report &
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/Total Shareholder Return
Part VII
Operational performance
Compliance
New business market share
Acquisitions
1
2
3
4
5
06
2013 highlights
FinA nciAl
208% INCREASE IN IFRS PRE-tAX pro Fit
Increase in IFRS pre-tax profit for the year ended 31 December 2013 to £60.6m
(year ended 31 December 2012: £19.7m). This is stated after a gain arising on the
purchase of Protection Life of £2.8m.
Financial Review Page 30
GROSS CASH GENERATION £49.7M
Gross cash generated in the year of £49.7m (year ended 31 December 2012: £34.0m).
Cash Generation Page 34
EEV INCREASE OF £65.3M
Increase in EEV from £311.1m at 31 December 2012 to £376.4m at 31 December 2013
after dividend distributions of £20.1m in the year.
Financial Review Page 37
EEV EARNINGS AFTER TAX OF £82.7M
(PRE-MODELLING ADJUSTMENTS)
EEV earnings net of tax increased by £51.5m to £82.7m for the year ended
31 December 2013 (year ended 31 December 2012: £31.2m).
Financial Review Page 35
MOVESTIC NEW BUSINESS CONTRIBUTION OF £7.2M
Movestic has generated a new business contribution of £7.2m in the year
(year ended 31 December 2012: £2.6m).
Financial Review Page 36
GROUP SOLVENCY 194%
Strong Insurance Group Directive solvency cover of 194% (31 December 2012: 244%).
Financial Management Page 25
FINAL DIVIDEND INCREASED BY 3.4%
Proposed interim dividend increased by 3.4% to 11.63p per share.
oper AtionAl
purchAse o F protection li Fe
The purchase of Protection Life completed on 28 November 2013, in line with one
of our core objectives of purchasing value-adding closed life books in the UK.
gooD compliAnce recorD
Good regulatory compliance record continues.
movestic new business growth
Return of IFA support has driven a 61.9% increase in like for like APE new
business volumes.
MOVESTIC NEW BUSINESS MARKET SHARE
Strong recovery of new unit-linked pensions business market share continues in
the year to 8.0% (2012: 5.3%).
chesn ArA | A nnuAl report & Accounts 2013
Throughout the Annual Report & Accounts the following colour themes are used to help distinguish between the five core Group strategic objectives: Maximise value from the in-force book Enhance value through new business Acquire life and pension businesses Maintain a strong solvency position Adopt good regulatory practice at all times
CHAIRMAN’S S TATEMENT
2013 has been an extremely positive year
for Chesnara. Operationally the business
has delivered strongly across all of its
stated strategic objectives. In particular,
the successful acquisition of Direct Line
Life (now Protection Life), the continued
emergence of significant value from the
in-force books and the generation of
material Movestic new business profits
demonstrates the effective delivery of
the main value enhancement pillars of
our corporate strategy. The operational
performance has resulted in impressive
financial results in the year. We commence
2014 with increasingly robust operational
and financial foundations which bode
well for the continued success of the
Chesnara Group.
Peter Mason
Chairman
07
Chesnara | annual report & aCCounts 2013seCtion aoverview CHAIRMAN’S S TATEMENT (continueD)
I am pleased to report that Chesnara has performed towards the top end of realistic expectations across all aspects of the corporate strategy.
Objective
Outcome
Headline
Reference
Page
1
2
3
4
5
Maximise value from the in-force book
£49.7m of gross cash generation
Business review
Enhance value through new business
£7.2m of Swedish new business profit
Business review
Acquire life and pensions businesses
Successful acquisition of Direct Line Life
Business review
Maintain a strong solvency position
Group solvency of 194%
Business review
Adopt good regulatory practice at all times
Continued good regulatory record
Business review
19
22
24
25
27
The strong performance has enabled the continuation
of our attractive dividend policy and the subsequent value
enhancement has resulted in competitive share price
growth. This has led to an impressive total shareholder return
(TSR) of 79% in the year. My statement considers the
more material components of our strategy in a little more
detail as follows:
Maximise value from the in-force book
The UK in-force book is the primary source of IFRS surplus
and cash generation. I am particularly pleased to report that
significant value has emerged from the UK in-force book
during the year. As explained in more detail in the Financial
Review section of the Strategic Report, the in-force book
can be characterised into two components in terms of value
emergence dynamics. The “stable core”, consisting of the
CA, and CWA books (and now also Protection Life), has
generated a strong level of surplus very much towards the
higher end of expectations. The “variable element”, namely
S&P is known to be more sensitive to investment market
conditions. During 2013 investment market conditions have
been beneficial, resulting in a significant reduction in the
expected exposure to policy guarantees. In addition,
Management has, with regulatory approval, released £15.5m
of capital previously constrained in S&P. Gross cash of
£49.7m was generated and the total combined impact of the
financial results, capital restrictions, Protection Life capital
requirements and the exceptional capital release results in net
cash available for distribution from the in-force book of
£36.7m during 2013.
Cash available for distribution
2013: £36.7m
2012: £36.1m
Enhance value through new business
I noted in my statement in the
2012 Annual Report & Accounts
that following a difficult period,
I was encouraged that there
were signs of recovery in the
Movestic business. I am delighted
to report that those early
positive signs have resulted in
a significant recovery in IFA
support of the Movestic business
during 2013.
This is illustrated by the 61.9% increase in APE new business
volumes compared with 2012. This growth has been
achieved without any discernible increase in the acquisition
cost base and hence the results show a significant new
business contribution for the year.
Movestic new business
contribution in 2013
£7.2m
2012: £2.6m
From this profitable base and with the level of momentum
and positive sentiment to the new business proposition,
I expect Movestic, now that it has re-established its strong
market position, to continue to make a significant
contribution to the Embedded Value of the Group from
its new business operations in the future.
08
Chesnara | annual report & aCCounts 2013seCtion aoverview Acquiring life and pension businesses
The acquisition of Protection Life during the year was a
good transaction. The business fits well with the existing UK
product portfolio and operating model. The transaction
has created incremental embedded value of £12.3m which
is consistent with the low level of risk associated with the
acquired business.
In addition to the stand alone benefits
of the Protection Life acquisition,
the deal continues to give momentum
to our acquisition strategy and
reaffirms the strength of our acquisition
proposition. The process confirms
our continued presence in the
consolidation market, the support
of our investors and debt finance
providers and our credibility with the
regulatory authorities following the
move to the dual regulation model.
I would like to thank those involved in the transaction including
our business partners, advisors, the Chesnara governance
team and also the management team of Direct Line Group
who were professional and efficient throughout the
acquisition process.
Maintain strong solvency position
It was mutually beneficial to both parties that Protection
Life was acquired with no capital surplus and subsequently
Chesnara recapitalised the business on acquisition. This,
together with the fact that the PL purchase consideration was
greater than the net worth acquired, has resulted in a
reduction in the Group solvency position at the end of the
year. The impact was as expected based on our assessment
of the PL acquisition. The Part VII transfer planned for 2014
will have a positive impact such that much of the adverse
effect is expected to be reversed. Despite the impact on
Group solvency from the PL acquisition, the position remains
strong and significantly higher than the internal governance
target of 100%.
Adopt good regulatory practice at all times
2013 has seen a significant amount of regulatory change.
The Solvency II programme has picked up more momentum
as guidelines and timetables have become clearer. Reporting
developments, including improvements to the way we
articulate the performance of the business in the year and
enhancements to the reporting of our remuneration policy,
have been made and the improvements are incorporated
in Section B “Strategic Report” and Section C “Corporate
Governance” of the Report & Accounts. Our regulatory
framework remains robust. I report on regulatory and
governance matters in more detail in my governance overview
on page 52.
Risk management
Risk management is not stated as a specific objective. It is
ingrained in the culture and decision making in all we do as a
business and is seen as an integral and key priority that feeds
into all our objectives. We simply do not consider the
delivery of any strategic objective as being successful if the
appropriate balance between risk and reward has not been
retained. As such I am reassured that our assessment is that
we have marginally reduced the overall risk profile of the
Group during the year.
Pension reforms
In his Budget announcement on 19 March, the Chancellor
of the Exchequer announced significant changes which will
affect the pensions and annuity markets. Chesnara’s UK
business does not have a significant exposure to annuities and
has not sought to write such business for a number of years.
We note the changes to flexibility of pensions arrangements
however we are not expecting any immediate or significant
change to our book of business, or the value of it.
Outlook
We commence 2014 with strong operational platforms in
both the UK and Sweden, solvency margins are healthy and
increased levels of cash generation provide a reassuring
buffer against future potential earnings variability and a good
source of funding for future potential acquisitions and
dividend payments. This, together with the fact that we have
reaffirmed our acquisition capabilities and credentials during
the year, gives cause for optimism for the continued success
of Chesnara in terms of providing value to both policyholders
and shareholders.
Group solvency
194%
2012: 244%
Peter Mason
Chairman
27 March 2014
09
Chesnara | annual report & aCCounts 2013seCtion aoverview 10
chesn ArA | A nnuAl report & Accounts 2013
Chesnara | annual report & aCCounts 2013seCtion aoverview seC tIon B
strategIC
report
In th Is seCtI on
12 Our Vision & Strategy
13 Strategic Objectives
16 The Chesnara Business
17 Business Model
18 Business Review
28 Financial Review
40 Financial Management
44 Risk Management
47 Solvency II
48 Corporate and Social Responsibility
Chesnara | annual report & aCCounts 2013
11
our vIsIon & strategy
MIssIon
our mission is to deliver value for shareholders, while maximising
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
bring expertise and quality thinking into our business and industry, but
also have a passion for improving outcomes for our customers and
shareholders. all members of the Chesnara team share a common value
in recognising their responsibility to shareholders and policyholders.
vIsIon
To be recognised as a responsible and profitable company engaged
in the management of life and pensions books in the uK and Western
europe through:
– Commitment to the core business of closed uK life and pensions
book management;
– Further acquisitions where they meet stringent assessment criteria;
– realisation of increasing economies of scale; and
– 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
and pensions books run off, we also consider the acquisition of open
businesses where there is clear value enhancement and where the
scale is such that our core proposition of being principally a closed
book consolidator and manager does not become unbalanced.
At Chesnara the strategic objectives, which support the fulfilment
of our mission and the realisation of our vision are embedded in
day-to-day business operations and underpin Management decisions.
at the core of the business is the recognition by the Board and
Management team of their responsibilities to policyholders and
shareholders, so that the values and principles of Management wholly
align with strategic objectives. this value of responsibility is at the
heart of the Chesnara business model. our core strategic objectives
are explained and evidenced on the following pages.
str ategIC
oB jeCtIves
12
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT strategIC oBjeC tIves
1
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 from onerous policy options and guarantees,
and compensation claims for past misselling of products.
The Group’s portfolios had, in earlier years, 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 to market performance increased.
Furthermore, the Group continues to have exposure to
market weakness 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 aims to ensure that 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. As such 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)
Limited 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 varies in line with the 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 challenge
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.
2
enhanCe value through ne W
BusIness I n sele CteD 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.
Risks associated with this strategic objective
– New business volumes fall below levels required to ensure
sufficient return on the acquisition cost base.
– 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.
13
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT strategIC oBjeC tIves (ContInueD )
3
aCQuIre lIFe anD pensIons
BusInesses
4
MaIntaIn a strong
solvenCy posItIon
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, our target market being the UK
and Western Europe.
We actively engage with various investment advisers
(including Canaccord Genuity Limited on a retained basis)
to ensure we are aware of acquisition opportunities.
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, with the potential impact on dividend sustainability.
– 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.
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?
The Board considers comprehensive information covering
the actual solvency position, together with projections for
expected and stressed 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
– Sustained adverse economic conditions outside of risk
appetite tolerances will erode the solvency surplus.
– Changes in legal or regulatory requirements.
14
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
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
continues to make decisions
that benefit all stakeholders
in the longer term.
the governance framework
ensures controls and
procedures are in place to
protect all stakeholders.
5
aDopt gooD regulatory
pr aCtICe at all t IMes
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 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 Prudential
Regulation Authority (‘PRA’) the Financial Conduct Authority
(‘FCA’), 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 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 structure which
sits at the heart of the Chesnara operating model, supported
by 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 reflects
the Board’s desire to ensure 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.
15
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT seCtIon B
str ategIC report
the Chesnara BusIness
the history of the development of
the Chesnara group, together with a
description of the characteristics of
our operating businesses, illustrates
how we have endeavoured to achieve
our strategic objectives and how
we have created the platform for their
ongoing realisation.
The successive acquisitions made by Chesnara have
progressively increased the overall longevity of its run-off
portfolio, while diversifying the policy base. At 31 December
2013, the Group had 255,000 (2012: 258,000) pension
policies and 615,000 (2012: 525,000) life policies in force.
Chesnara continues to seek to
participate in the consolidation of life
assurance and pensions businesses in
the uK and Western europe.
We primarily target acquisitions with an acquisition 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.
13
12
11
10
History (2004 – 2013)
Chesnara acquired Direct Line Life Insurance Company
Limited (now renamed Protection Life Company Limited) from
Direct Line Group plc for £39.3m, funded by a mixture of
bank debt and internal cash resources. PL is closed to new
business, with a portfolio containing non-linked products,
including mortgage life cover, fixed term life cover (both with
and without critical illness cover) and over 50’s life cover to
UK customers.
SPI and SPP were de-authorised from conducting activities
regulated under the provisions of the Financial Services and
Markets Act 2000, thereby releasing £7.0m of solvency capital.
The long-term business funds and part of the shareholder
funds of SPI and SPP were transferred to CA plc under the
provisions of Part VII of FSMA, thereby realising significant
financial and operational synergies.
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.
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.
09
Chesnara acquired Movestic Liv, an open predominantly
unit-linked Swedish Life and Pensions business, for £20m,
representing 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.
06
The long-term business of CWA was transferred to CA plc
under the provisions of Part VII of the Financial Services
and Markets Act 2000 (‘FSMA’), thereby realising significant
financial and operational synergies.
05
04
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.
Chesnara listed on the London Stock Exchange, following
its acquisition of CA plc 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.
16
Chesnara | annual report & aCCounts 2013
BusIness M oDel
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 21 (2012:20) full-time equivalent
employees in its corporate governance team in the UK. In
Sweden, the headcount is 123 (2012:127).
UK
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.
– 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.
– The primary focus of the UK businesses 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 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 which is 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,
and 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, actuarial 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.
17
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT BusIness revI eW
Introduction
the Business review is structured to report on how we
have performed against each of our stated strategic objectives.
For each objective the review reports separately for our
uK and swedish operations to the extent separate reporting
is relevant. For each objective the review focuses on:
– how we have performed generally
– Key developments or challenges
– Key performance indicators
– risks associated with each objective
The strategic objectives are reassessed on an annual basis as part of the
Group business planning process. The continued relevance of the objectives
gives consideration to recent performance, emerging risks and future
opportunity. They are assessed giving full regard to both internal and external
influences e.g. changes to regulatory requirements.
The strategic objectives have not changed during 2013 nor is there expected
to be any significant change in focus during 2014.
In addition to the five core objectives there is an over-arching objective to
“Deliver value to stakeholders on a responsible and balanced basis”. That is,
over-arching 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
continues to make decisions that benefit all stakeholders in the longer term.
The governance framework seeks to ensure that controls and procedures
are in place to protect all stakeholders. The control environment has remained
effective and robust throughout the year. Further details of the operation
of the governance framework are included in Section C – Corporate Governance,
including a governance overview from the Chairman.
Our over-arching objective: Deliver value to stakeholders on a responsible and balanced basis
1
2
3
Maximise
value from the
in-force book
Enhance value
through new
business
Acquire life
and pension
businesses
4
Maintain
a strong
solvency
position
5
Adopt good
regulatory
practise at
all times
18
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT BusIness rev IeW
1
MaxIMIse value F roM the I n-ForCe BooK u K
seCtIon B
str ategIC report
Significant levels of cash have
emerged from the in-force
book during the year at levels
towards the top end of
realistic expectations.
Highlights
– £54.1m of gross cash generation (excluding
Chesnara parent company cash).
– £15.5m exceptional cash release due to the
removal of a capital constraint in S&P.
– 5% growth in funds under management.
– Positive EEV development.
– Strong fund performance.
– Improved policy attrition levels.
Review of the year
Operational performance has been strong across the three
key areas of focus for the in-force book, namely: management
of the assets, regulatory compliance and ensuring we
continue to provide a high quality service to policyholders in
terms of administration service levels and investment return.
Our administration and asset management outsource
partners have all performed well during the year and
generally exceeded service level arrangements and relevant
benchmarks. Further assessment of our future expenses
associated with our outsourcing model have led to a
strengthening of our expense assumptions during the year.
The CA plc Investment Committee has continued its
oversight of policyholder funds through regular meetings with
the investment managers. We continue to work with our
managers in order to ensure the underlying investment mix
is the most appropriate for policyholders. In particular, the
programme to move the ex-S&P Pension Property Fund from
direct investment to collective funds has progressed well.
£54.1m of gross cash generated
from business as usual operations
Cash generation during the year has been particularly strong.
This is primarily due to the core product based surpluses
remaining resilient together with a significant reduction in the
cost of S&P guarantees. The S&P book has made a significant
contribution of £28.9m to the 2013 cash generation. This is
consistent with the fact that the S&P surplus is sensitive to
investment market performance, which was generally
favourable during the year.
In addition to the operational
cash generated, a process has
been undertaken whereby, with
regulatory approval, £15.5m
of constrained capital in save
& prosper has been released
to shareholder funds.
Unit-linked funds under management
The continuing strong level of unit-linked funds under
management supports the on-going 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 a function of:
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.
Good performance by our administration and investment
management business partners has contributed positively
to all three of the above factors.
5% growth in funds under
management in the year
Risks associated with the strategic objective
The acquisition of S&P, as signalled at the time of the
acquisition, has added an increased level of earnings
volatility for the UK business. S&P has a 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 fall or when, particularly for those
guarantees expressed as an amount of pension, bond yields
fall. To mitigate this risk, to some extent, assets held by
shareholders to provide security for these guarantees are
invested in cash and long bonds. As a consequence, our
results will be negatively affected by falls in equity and
property values, which impact assets backing policyholder
liabilities, and/or falls in bond yields, which impacts the
cost of providing the guarantees were to occur. Conversely,
increasing markets and yields will positively affect the
results. Close management of the portfolio backing these
liabilities continues.
Funds under management year on year
increase (£m)
2,331
2,221
Fund performance
Policy attrition, based on policy count
18.2%
20.4%
13.9%
14.6%
10.9% 11.4% 11.5% 9.9%
8.3% 8.2%
6.7%
6.9%
5.6%
7.4%
2013
2012
Chesnara | annual report & aCCounts 2013
2013
2012
CA Pension Managed
CWA Balanced Managed Pension
S&P Managed Pension
Benchmark – ABI Mixed Inv 40%- 85% shares
CA
S&P
Total UK
2013
2012
19
BusIness rev IeW
1
MaxIMIse value F roM the I n-ForCe BooK sW eDen
Following a favourable investment
market performance and the evident
increase in IFa support, Movestic’s
funds under management have increased
by 24.1% during 2013.
Highlights
– Strong growth in funds under management;
increase of 24.1% during 2013.
– Positive EEV development.
– Fund performance improved significantly during 2013.
– Significant improvement in the ratio of transferred in
business to transferred out business.
Review of the year
During 2013 the efforts to regain confidence in the market
were manifested by the increased IFA support which was
evident not only in new sales but also in the large amount of
transferred in business and in the stabilised position for
transferred out business. The focus to ensure that we continue
to provide a high quality service to IFAs and policyholders
in terms of administration service levels and investment
return continues and independent market surveys show
continuously improving ratings.
Within the Life & Health book of business, the portfolio
continues to deliver high quality in terms of claims
development with a gross loss ratio of 50.3% for 2013
(2012: 48.4%).
The scale of the Pension and Savings in-force book in Sweden
is such that profits emerging from it are relatively modest
in comparison to UK equivalents. As such, the challenge is to
increase the value of the funds under management from
which we earn income in the form of management charges
and fund rebates. The following matrix illustrates the factors
that directly influence the growth of the in-force book:
ne W
BusIness
polICy
attrItI on
groWth
FunD
perForMan Ce
preMIuM
InCo Me
The general performance on all four factors has been
positive resulting in strong fund growth. The factors are
considered in more detail below:
New business
The review of the new business operation is covered in
the “Enhance value from new business” objective review
on page 22.
Policy attrition (fig 1 & fig 2 on the following page)
The strengthened IFA support so evident in the new
business results has had a less marked impact on policy
attrition levels. Whilst the lapse rates did improve
significantly during 2013 the level of policy transfers out
remains broadly stable. We believe this indicates that the
levels of transfers experienced during 2013 are reflective
of the broader dynamics of the IFA market, rather than
being a direct reflection of customer service levels within
Movestic. In light of this, the persistency assumptions
were further strengthened during 2013. The embedded
value, as reported within the 2013 results, therefore now
broadly aligns to current levels of persistency. Management
still believes that, in time, the impact of continued
improvements in service levels, together with general
external market developments, should have a positive
impact on the long-term persistency levels. Any positive
impact will only be recognised if improvements are seen
in actual attrition rates.
Despite there being no improvements in transfer levels,
the ratios of transferred in business to transferred out has
improved from 1:4 during 2012 to 1:1.5 during 2013.
Significant
improvement in
the ratio of transferred in business
to transferred out business.
40%
60%
20%
80%
2013
2012
Transferred out
Transferred in
20
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1
MaxIMIse value F roM the I n-ForCe BooK sW eDen
(ContInueD )
Fund performance (fig 3)
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 with the relevant index
are wholly replaced if there are no acceptable strategies for
improvement. Where applicable we continue to add further
funds to fill perceived gaps in the range.
The relative fund performance measure 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. According to that measure,
Movestic’s fund range performed very well during 2013 with
an average return of 13.8%, building on 7.7% in 2012, which
maintains our strong market position.
Premium income (fig 4)
The increase in premium income is predominantly due
to an increase in new business levels. The recurring regular
premiums have increased marginally year on year for the
Pensions and Savings business which is key to achieving
sustained growth. Regular premiums for the Life and
Health business have remained broadly flat year on year.
Risks associated with the strategic objective
The risk of high levels for persistency rates has somewhat
altered during the year. It has become more evident that
there is inherent risk in the Swedish market where customer
awareness of the ability to transfer their pension is a feature
with increasing influence as a consequence of intensified
public discussion. The Movestic product proposition already
offers significantly more portability for transferring pensions
than the general market. As such, although higher transfer
rates would create challenges, an increased right to transfer
would be beneficial to Movestic in terms of its market
position with other more traditional competitors.
Policy attrition trend analysis (fig 1)
21.1%
15.5%
13.0%
5.6%
5.8%
4.5%
5.0%
9.5%
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Lapses/paid-ups (pensions and endowments)
Transfers (pensions)
Policy attrition 2013 vs. 2012 (fig 2)
17.6%
15.0%
5.2%
5.4%
Transfers (Pensions)
Lapses/Paid-ups (Pensions)
and Endowments
2013
2012
Fund performance (fig 3)
26
39
30
26
12 months to
December 2013
12 months to
December 2012
Outperformed against the relevant index
Underperformed against the relevant index
Total premium income (fig 4)
2012
2013
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Pensions & savings – Unit-linked
Pensions & savings – Deposit insurance
Risk & health
21
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT BusIness rev IeW
2
enhanCe value through n eW Bus Iness sW eDen
IFa support of the Movestic proposition
has continued to gain momentum as
evidenced by a 61.9% increase in ape
new business volumes compared
with 2012.
Highlights
– 61.9% increase in new business volumes
compared with 2012.
– Continued recovery in new business market
share throughout the year.
– IFA support as measured by the number of IFA’s
that sell Movestic products, shows an increase
of 32.5% in 2013.
– The development of innovative product
concepts continues.
Review of the year
In light of the administration performance issues in 2011 and
2012 it is particularly encouraging to report the significant
recovery in new business rates and also that the re-engineered
processes have coped well with the sharp increase in new
business volumes.
Changes to the senior management structure together with
the transfer of certain IFA-critical processes to Stockholm
have had a positive impact and ensure the operating model
is now better suited to support the acquisition and
marketing proposition.
There is a positive management environment which means
that staff are well motivated and there is a strong collective
sense of commitment to continue with improvements
required to fully recover and consolidate its market position.
The Group CEO made a statement in the 2012 Annual
Report & Accounts that “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”. The
strong performance in 2013 is confirmation that the
previous signs of recovery were real and have supported the
development of a profitable new business operation.
New business premium income
New sales in the unit-linked business have shown substantial
growth in 2013, with a 61.9% increase compared to 2012.
A key driver of this is the recovery in IFA sentiment towards
Movestic following the significant improvements in service
levels when compared with prior years. The monthly trend
is upwards and we expect new business growth to
continue but at a more modest growth rate following the
significant recovery.
New business markets, as ever, remain challenging.
Whilst some companies have continued to offer traditional
investment products which have a lower risk profile and
contain guarantees (which we believe to be unsustainable)
we have started to see some movement to equity-linked
products as a consequence of strong market performance.
Further momentum in this area would have a positive
impact on future new business potential.
Trend analysis of new business
premium income (£m)
18.8
16.6
15.3
14.0
11.4
10.6
10.4
7.5
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
New business premium income (£m)
64.6
39.9
2013
2012
22
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT Market share
In a mature market with low levels of overall growth, the
increase in new business volumes means that the company
has gained market share during the year, leading to a
position within the top five suppliers in the core unit-linked
company pension market. In fact during the third quarter
of the year Movestic was the largest provider in terms of
market share in our core unit-linked company pension market.
During the third quarter Movestic’s
15.4% market share was the
largest share of the unit-linked company
contribution market.
This performance should be seen in the context of some of
the traditional product providers having undertaken campaigns
to move customers from traditional insurance contracts to
‘new’ unit-linked policies to address the challenges inherent in
traditional guaranteed return products. Such internal switches
are having an adverse distorting effect on the unit-linked
market share figures from Movestic’s perspective.
Trend analysis of Movestic’s share
of new business
15.1%
12.4%
11.9%
9.9%
6.9%
7.8%
8.7%
7.1%
8.9%
5.2%
5.1%
5.6%
H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013
Total business
Unit-linked company-paid pension business
(excluding ‘tick the box’ market)
Movestic’s share of new unit-linked company-
paid pension business (total business only)
(excluding ‘tick the box’ market)
8.0%
5.3%
2013
2012
Development of innovative product concepts
The trend within the company-paid insurance solutions
market in Sweden is to look for overall concepts where the
pension plan is complemented by risk insurance products
to cover the entire need for companies and their employees.
Movestic’s full range offering within both pension and risk
products makes it possible to create such concepts and
smaller variations to existing risk products packaged together
with competitive pension plans, can provide the adapted
solutions the market asks for.
A differentiating feature of Movestic is the carefully selected
fund range which over time has proven to perform very well
compared to similar offerings. The work to further develop
and improve the fund range is continually given high priority.
Risks associated with the strategic objective
Economic conditions in Sweden have remained stable and
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 led to
consumers preferring more traditional investment products to
equity-based unit-linked investments. Recent improvements
in confidence and good equity market performance has led
to a shift to equities and Movestic remains committed to the
unit-linked market. We believe that as equity market
confidence continues to recover and that as the traditional
investment offerings become less sustainable for providers,
there will be a gradual shift back towards unit-linked
investments. New business volumes remain sensitive to
market preferences and continued IFA support.
New business remains relatively concentrated towards
several large IFA’s. This is inevitable to some extent but the
fact that Movestic has extended the breadth of IFA support
in the year has reduced the concentration risk to some
extent. The competitive market puts pressure on new sales
margins and even though Movestic’s margins have held
up well, these external pressures have led to management
focussing on achieving better terms in the fund operation.
23
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3
aCQuIre lIF e anD pens Ion BusInesses
the acquisition of Direct line life (now protection life) during the year is a
continuation of the successful acquisition track record of the group. In addition
to the direct financial benefits of the transaction, it reaffirms that Chesnara
has the specialist skills, experience and reputation to complete value-adding deals
in an increasingly active market.
Highlights
– Successful acquisition of Protection Life for £39.3m.
– EEV increase of £12.3m as a direct consequence
of acquisition of Protection Life.
– General increase in acquisition market activity
in the sector.
Review of the year
There has been a significant increase in general market
activity in the UK and across Europe. The activity is due
to a number of factors including larger financial organisations
wishing to re-focus on core activities and the desire to release
capital or generate funds from potentially capital intensive
Life and Pension businesses. Chesnara has been involved
in several opportunities and has progressed to various
stages dependent on our view of how well the opportunities
align to our assessment criteria. It is encouraging that
Chesnara continues to be invited to consider many of the
known opportunities which reflects well on our continued
presence and credibility in the market. There is of course
competition in the market and hence the completion of
the acquisition of Protection Life towards the end of 2013
was particularly pleasing.
Protection Life
The Protection Life acquisition fits well with our stated
strategy. It is however towards the lower end of our target value
range and hence the absolute level of value enhancement
is relatively modest in comparison to previous deals.
the acquisition of Direct
line life (now protection
life) resulted in an increase
in embedded value of £12.3m
The level of incremental embedded value is however deemed
to be attractive in the context of the funding structure for the
acquisition and the risk profile of the Protection Life business:
– The transaction has been funded by a combination of bank
debt and cash both of which represent a relatively low cost
source of finance. We also utilised debt capacity due to pre-
existing low levels of gearing and supportive debt providers.
– The Protection Life book has a low risk profile. The products
are primarily straightforward term assurance policies, which
are predominantly reinsured, with the matching assets being
held in corporate bonds and the book being well managed by
a small and effective dedicated team. The acquisition therefore
has minimal impact on both the insurance and finance risk
profiles of the Group.
– Whilst there is operational risk associated with the acquisition
Acquisition process and approach
Chesnara is an established Life and Pensions consolidator
with a proven track record. This together with a good network
of contacts in the adviser community, who understand
the Chesnara acquisition model and are mindful of our good
reputation with the regulator, ensure we are aware of
most viable opportunities in the UK and many opportunities
in Europe.
We assess the financial impact of potential acquisition
opportunities by estimating the impact on three financial
measures namely; the cash flow of the Group, the
incremental embedded value and the internal rate of return.
The financial measures are assessed under best estimate
and stress scenarios.
The measures are considered by the Board and Audit & Risk
Committee, in the context of other non-financial measures
including the level of risk, the degree of strategic fit and the
opportunity of alternative acquisitions.
We engage specialists to support stringent due diligence
procedures and the actual acquisition process.
Risks associated with the strategic objective
The risk of not effectively delivering this objective is two-fold.
Firstly, there is the risk that Chesnara makes no further
acquisitions and secondly there is the risk that we make an
inappropriate acquisition that adversely impacts the financial
strength of the Group. The general increase in market activity
together with the momentum created by the Protection
Life acquisition suggests that the risk of no further value
adding acquisitions has actually reduced somewhat over
the past year.
the protection life deal does not
mean that other opportunities
cannot be fully progressed should
they become available.
During recent years and through the Protection Life
assessment process, we have enhanced our financial
projection modelling capabilities which improves the quality
of financial information available to the Board. This strongly
mitigates the risk of inappropriate opportunities being
pursued. In addition, the increased financial strength of the
Group means that any perceived risk that pressure to do a
deal could result in a departure from the stringent assessment
criteria will have reduced.
due to the planned migration of the business to our
outsourcer’s systems, the substantial migration experience
of our outsourcing partner, the good progress made to
date and the relatively simple nature of the products being
migrated gives us confidence that the overall migration
risk is low.
Acquisition outlook
We continue to see a reasonable flow of possible acquisition
opportunities and assess them appropriately. The general
market background is positive with, in particular, the now firm
implementation date for Solvency II, leading portfolio holders
and owners to review their strategic options.
24
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT BusIness rev IeW
4
MaIntaIn a s trong solvenCy posItIon u K anD sW eDen
Objectives
One of the Group’s key strategic objectives is to
maintain a strong, but not excessive, solvency
position. This brings a number of benefits, including
supporting:
– One of our key financial management objectives
of safeguarding policyholder interests.
– Delivering to the dividend expectations of our
shareholders.
– Potential acquisition opportunities.
– Our ability to absorb volatility created by external
economic conditions.
Excess of Capital Resources over Target Requirement
Excess of Target Capital Requirement over Minimum
Minimum Regulatory Capital Resources Requirement
156%
1.4
12.6
25.2
PL
2013
193%
11.9
13.8
1.6
27.6
PL
2012
311%
18.0
5.6
11.2
280%
280%
15.1
5.8
11.6
Movestic
2013
Movestic
2012
We have continued to
demonstrate our
commitment to maintaining
a strong solvency position,
with group solvency being
194% at 31 December 2013.
Highlights
– Group solvency continues to be strong at 194%
(2012: 244%). This is stated after a proposed final
dividend of £13.4m.
– The acquisition of Protection Life has had an
expected adverse impact on our Group Solvency
position due to it being purchased with a net
worth equivalent to 100% of its regulatory capital
requirements.
£m
Regulatory capital at 31 December
180
160
140
120
100
80
60
40
20
0
194%
244%
76.8
90.4
218%
81.9
62.9
29.2
23.1
44.1
199%
24.6
24.7
50.0
Group
2013
Group
2012
CA plc
2013
CA plc
2012
Notes
– The percentages in the chart above represent
the excess of the capital resources over the
minimum regulatory capital resources requirement.
– The target capital requirements stated above are
based on the Board’s internal minimum targets, and
are set as follows:
– Group – 100% of minimum regulatory capital
resources requirement.
– CA plc – 162.5% of the minimum long-term
insurance capital requirement plus 100% of the
resilience capital requirement.
– PL – 150% of the minimum long-term insurance
capital requirement.
– Movestic – 150% of the capital resources requirement.
– Information in relation to PL for 2012 has been
provided for illustrative purposes. Capital resources
have reduced compared with 2012 as a result of
distributions that were made to the previous owners
prior to purchase by Chesnara.
25
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT
BusIness rev IeW
4
MaIntaIn a s trong solvenCy posItIon uK anD sWeDen
(ContInueD )
Group solvency (IGD)
The IGD represents the solvency of the Group, and is
calculated using requirements imposed by the PRA. The IGD
ratio at 31 December 2013 is 194% (2012: 244%) with the
surplus having moved from £90.4m at 31 December 2012 to
£76.8m at 31 December 2013. IGD is stated after foreseeable
dividends of £13.4m (2012: £12.9m). The movement in IGD
this year is a function of the following key items:
– The purchase of Protection Life; which has had a negative
impact on IGD as a result of it needing to be recapitalised
immediately on acquisition as a result of it being purchased
with a net worth equivalent to 100% of its solvency
requirement. An element of this dynamic is expected to
reverse on successful completion of the Part VII transfer of
the PL business into CA plc, which is expected to complete
in 2014.
– Group surplus in the year. As reported elsewhere in the
Report & Accounts the Group regulatory surplus in 2013
has been strong. This has resulted in a significant benefit to
the IGD, outweighing the impact of the 2013 total dividend
of £20.6m (interim dividend of £7.2m plus the proposed final
2013 dividend of £13.4m).
Solo solvency
The Board sets internal solvency targets for each of its
regulated subsidiaries, which have remained unchanged
when compared with the prior year. The graph on the
previous page shows that the solvency positions of each
regulated subsidiary continue to exceed the internal
targets imposed by the Board.
– CA plc solvency has moved from 199% to 218%.
This is stated after proposed dividends of £48.0m (2012:
£40.0m), thereby showing that strong solvency is still
being achieved whilst delivering strong cash flows to the
Chesnara parent company.
– Protection Life solvency is 156% at 31 December 2013.
The reduction when compared to the prior year is because
prior to Protection Life being purchased dividends were paid
to its previous owners such that it left net worth in the
company equivalent to 100% of its solvency requirement.
Post acquisition this was immediately increased to 150%
by way of a capital injection of £13.1m by Chesnara plc.
The Part VII transfer of Protection Life into CA plc is planned
to take place during 2014 and this is expected to deliver
capital efficiencies that will be reflected in the 2014 IGD.
No dividends are proposed to be paid by Protection Life
this year.
– Movestic had a solvency ratio of 311% at 31 December 2013.
Whilst it has a very strong solvency ratio, Movestic does
not currently pay dividends to Chesnara due to an additional
liquidity constraint that is imposed by the Swedish FI.
Solvency II
The introduction of Solvency II will change the capital
requirements of both the Group and its regulated subsidiaries.
The final impact of Solvency II continues to be uncertain
although we expect the Group impact to be manageable.
Solvency II may also result in the Board re-assessing the
internal targets imposed on each regulated entity. Further
detail over the status of our Solvency II programme is
included on page 47.
26
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT BusIness rev IeW
5
aDopt gooD r egulatory p raCtICe at all tIMes u K an D sW eDen
Treating Customers Fairly (TCF)
We have continued to monitor performance against, and
to continue the development of, our TCF measures. The
results are discussed, where relevant, with our outsourcing
partners and are reviewed by senior management and
reported to the CA plc Board. No issues of significance
have arisen.
Complaints
There has been a general downward trend in the overall
volume of complaints received although we continue to
receive a steady number of complaints from Complaint
Management Companies in respect of endowment policies
surrendered or lapsed many years ago. The Financial
Ombudsman Service continues to agree with our decision on
the majority of complaints referred to them for adjudication.
Policyholder investment funds
Through the auspices of the CA plc Investment Committee
we have continued our oversight of policyholder funds through
regular meetings with the investment managers. With
them we continue to review the funds to ensure the underlying
investment mix is the most appropriate for policyholders.
sWeDen
Solvency II
Continued commitment to this project means that our
progress remains in line with our plans. As the implementation
date has, as widely expected, been postponed to 2016 this
has given us the opportunity to review necessary progress,
whilst bearing in mind that interim measures will be
introduced. Therefore, 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 47.
Customer information
Movestic’s legal and marketing departments have
conducted a review of all the information sent to customers
of savings products. This has led to more comprehensible
and uniform information, which at the same time fulfils all
legal requirements.
Pensions portability
The debate on the proposal to increase portability of pensions
is intense in Sweden. As Movestic offers full right to transfer
already, the risk for us can be described as the risk of no
change. An increased right to transfer would be beneficial to
Movestic as a part of the market that is now closed would
become possible to approach.
Chesnara continues to
operate to high regulatory
standards in both its day
to day operations and its
acquisition activity.
uK
Regulation and legal
As ever in this highly regulated industry there have been a
number of new and ongoing initiatives that have led to various
levels of attention and challenge. It is pleasing to report
that none of these have given rise to significant issues. The
commentary below sets out a list of the key activities during
the year.
FSA
The FSA disbanded in April and was replaced by the Prudential
Regulation Authority (PRA) and the Financial Conduct
Authority (FCA). As a dual regulated business we maintain
our commitment to maintaining a compliant operating
model and a good relationship with both our regulators.
PRA
The PRA, a subsidiary of the Bank of England, focuses on
prudential supervision. To assist their thematic supervisory
work we have responded in a timely manner to a small
number of requests for generic information, for example
on asset valuation methodologies.
FCA
The FCA’s focus is conduct and consumer protection. We
are currently addressing rule changes on preparing product
information, including new guidance to calculate inflation-
adjusted illustrations for personal pensions and lower growth
rates for life and pension illustrations, for implementation
in April 2014.
Solvency II
With an implementation date of January 2016 now certain,
planning, preparation and delivery has been re-energised. By
January 2016 we will have the required models, data,
processes, governance and reporting in place to be Solvency II
compliant. Further information on our Solvency II project is
provided on page 47.
ABI Retirement Code
During 2013 there was increasing scrutiny of the annuity
market and we have continued to comply with the ABI
retirement code to ensure that pension policyholders are
provided with timely and clear information regarding the
options available to them in the annuity market prior to vesting
their pension. In his Budget announcement on 19 March,
the Chancellor of the Exchequer announced significant
changes which will affect pensions and the annuity market.
CA plc does not have a significant exposure to annuities
(having around 6,000 such arrangements) and has not sought
to write such business for a number of years. Although we
do have far more pensions policies (around 169,000) we do
not expect any immediate and significant change to affect
this book or the value of it.
27
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT FInanCIal revI eW
IFRS pre-tax profit
£60.6m
2012: £19.7m
Net cash generation
£36.7m
2012: £36.1m
What is it?
The presentation of the results in accordance with
International Financial Reporting Standards (IFRS)
aims to smooth the recognition of profit arising from
written business over the life of insurance and
investment contracts.
Why is it important?
For businesses in run-off the reported profit is closely
aligned with, and a strong indicator of, the emergence
of surplus arising within the long-term insurance
funds of those businesses. The emergence of surplus
supports the payments of dividends from the
regulated insurance businesses to Chesnara plc,
which in turn enables the payment of dividends
to our shareholders. IFRS pre-tax profit is a strong
indicator of how we are performing against our
stated strategic objectives to “maximise value from
the in-force book” and “maintain a strong
solvency position”.
What is it?
Net cash generation is a measure of how much
distributable cash the subsidiaries have generated
in the period. The dominating aspect of cash
generation is the change in amounts freely transferable
from the operating businesses, taking into account
target statutory solvency requirements which are
determined by the boards of the respective businesses.
It follows that cash generation is not only influenced
by the level of surplus arising but also by the level of
target solvency capital.
Why is it important?
Cash generation is a key measure, because it is the
net cash flows to Chesnara from its Life and Pensions
businesses which support Chesnara’s dividend
capacity. Cash generation can be a strong indicator of
how we are performing against our stated objective
of “maximising value from the in-force book”, although
this KPI can also be negatively affected by our stated
objective of “maintaining a strong solvency position”.
Highlights
– IFRS pre-tax profit of £60.6m shows a 208%
Highlights
improvement compared with the prior year of £19.7m.
– At £23.6m cash generation in CA continues to be
– IFRS pre-tax profit is stated after a gain arising on
the purchase of Protection Life of £2.8m.
– Profits from the core CA closed book remain
significant, and have increased compared with the
prior year (2013: £25.0m; 2012: £18.5m). The
increase is predominantly due to investment market
movements, with the core underlying product
based surplus remaining resilient to book run-off.
The CA surplus also reflects the impact of actuarial
assumption changes, the key ones being a surplus
arising from weakening mortality assumptions offset
by a strengthening of our expense assumptions.
– The 2013 result includes a £36.4m profit from the
S&P business. This compares favourably with
the profit for 2012 of £14.6m, largely as a result
of a reduction on the cost of guarantees driven
by favourable investment market movements.
– There was a £1.2m improvement in the Movestic
result when compared with the prior year.
Risks
The IFRS profit can be affected by a number of our
principal risks and uncertainties as set out on pages
45 and 46. In particular, strong equity and property
markets in 2013 coupled with positive yields on fixed
interest securities have contributed to a strong IFRS
pre-tax profit in the year. The corollary to this is that
deteriorating markets can have a material negative
impact on the IFRS pre-tax result.
strong (2012: £15.1m).
– S&P has contributed £28.9m of operational cash
generation in 2013 compared with £19.5m for 2012.
– PL has utilised cash of £11.5m. This is net of a
£13.1m injection as a result of the business being
purchased with net worth below the Board’s
stated target resources of 150% of the capital
requirement. A large portion of this is expected
to reverse following the planned Part VII transfer
into CA plc during 2014.
– Movestic has required no capital support during
the year (2012: £nil).
– Chesnara cash generation includes acquisition
expenses of £2.4m as a result of acquiring PL during
the year.
Risks
The ability of the underlying regulated subsidiaries
within the Group to generate cash is affected by a
number of our principal risks and uncertainties as set
out on pages 45 to 46. Whilst cash generation is a
function of the regulatory surplus, as opposed to the
IFRS surplus, they are closely aligned, and therefore
factors such as yields on fixed interest securities and
equity and property performance contribute
significantly to the level of cash generation within the
Group. In addition to this, regulatory change, such
as the introduction of Solvency II can also materially
affect the ability of the regulated subsidiaries to
generate cash.
The Group’s key financial
performance indicators as
at 31 December 2013 and
for the year ended on that
date demonstrate the
financial performance and
strength of the group as
a whole. a summary of
these is shown and further
analysis is provided in the
following sections:
28
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT EEV earnings, net of tax*
£82.7m
2012: £31.2m
*excluding modelling adjustments of £4.1m in 2013
(2012: £3.6m) .
EEV
£376.4m
2012: £311.1m
What is it?
In recognition of the longer-term nature of the Group’s
insurance and investment contracts, supplementary
information is presented in accordance with European
Embedded Value ‘EEV’ principles.
The principal underlying components of the
EEV result are:
– The expected return from existing business
(being the effect of the unwind of the rates used
to discount the value in-force).
– Value added by the writing of new business.
– Variations in actual experience from that assumed
in the opening valuation.
– The impact of restating assumptions underlying
the determination of expected cash flows.
Why is it important?
By recognising the net present value of expected
future cash flows arising from the contracts (in-force
value), a different perspective is provided in the
performance of the Group and on the valuation of the
business. EEV earnings are an important KPI as they
provide a longer-term measure of the value generated
during a period. The EEV earnings of the Group can
be a strong indicator of how we have delivered to our
strategic objectives, in particular the new business
profits generated from “enhancing our value through
new business in selected markets”, coupled with
“maximising our value from the in-force book”.
Highlights
– Significant economic profit of £71.1m (2012: £21.5m).
– Decrease in operating profit to £6.6m (2012: £14.6m).
– Movestic has generated a £15.0m EEV profit, which
includes the adverse impact of a further strengthening
of lapse assumptions during the year.
– Movestic has generated a new business contribution
of £7.2m in the year (2012: £2.6m).
– One off profit arising on acquisition of Protection Life
amounting to £12.3m.
Risks
The EEV earnings of the Group can be affected by a
number of factors, including those highlighted within
our principle risks and uncertainties as set out on
pages 45 and 46. In addition to the factors that affect
the IFRS pre-tax profit and cash generation of the
Group, the EEV earnings can be more sensitive to
other factors such as the expense base and
persistency assumptions. This is primarily due to the
fact that assumption changes in EEV affect our
long-term view of the future cash flows arising from
our books of business.
What is it?
The European Embedded Value (EEV) of a life
insurance company is the present value of future
profits, plus adjusted net asset value. It is a
construct from the field of actuarial science which
allows insurance companies to be valued.
Why is it important?
As the EEV takes into account expected future
earnings streams on a discounted basis, EEV is an
important reference point by which to assess
Chesnara’s market capitalisation. A life and pensions
group may typically be characterised as trading at a
discount or premium to its embedded value. Analysis
of EEV, distinguishing value in-force by segment
and by product type, provides additional insight into
the development of the business over time.
The EEV development of the Chesnara Group over
time can be a strong indicator of how we have
delivered to our strategic objectives, in particular the
value created from acquiring life and pensions
businesses and enhancing our value through new
business in selected markets.
Highlights
– £85.4m increase in EEV before recognition of dividend
payments. This is driven by strong investment
market performance during the year contributing
to the result, coupled with a gain of £12.3m
arising on the acquisition of PL.
– Model enhancements generated a £4.1m increase in
EEV in the year (2012: £3.6m). These related entirely
to the Movestic business.
– A slight weakening of Swedish Krona against Sterling
has contributed to a £1.4m decrease in embedded
value in the year.
– Good balance of EEV across the operating segments.
– Good product diversification within the value in-force.
Risks
The Embedded Value of the Group is affected by
economic factors such as equity and property markets
and yields on fixed interest securities. In addition to
this, whilst the other KPIs (which are all “performance
measures”) remain relatively insensitive to exchange
rate movements (largely due to the proportion of
IFRS pre-tax profit generated by Movestic compared
with the other UK businesses) the EEV of the Group
can also be materially affected by exchange rate
fluctuations between Swedish Krona and Sterling. For
example a 10% weakening of exchange rates between
Swedish Krona and Sterling would reduce the EEV
of the Group by 3%, based on the composition of the
Group’s EEV at 31 December 2013.
29
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT FInan CIal rev IeW
IFRS pre-tax profit
£60.6m 2012: £19.7m
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 business which is in run-off. During 2013 this has been
supplemented as a result of the purchase of the Protection
Life business, which, whilst not contributing significantly
to the 2013 result as a function of the timing of the
purchase, is a complementary addition to the stable core of
the UK business.
The requirements of the CA and PL books are to provide a
predictable and stable platform for the financial model and
dividend strategy. As a closed book, the key is to sustain
this income source as effectively as possible. The IFRS results
during the year support this objective, with product-based
deductions from CA of £28.7m continuing to emerge in a
predictable fashion and at a level that compares favourably
with 2012 (£26.3m). This level of product-based deductions
has underpinned CA’s ability to generate a significant level
of IFRS pre-tax profit at £25.0m (2012: £18.5m). Assets under
management within the CA segment have grown by 6.0%,
from £1,638m to £1,736m, in the year. The PL segment,
having only been owned for a month, contributed a modest
IFRS surplus of £0.2m during 2013.
Further detail of the results of the CA and PL segments can
be found on page 31 and 32 respectively.
Variable element
The S&P component brings an element of earnings volatility
to the Group, with the results being particularly sensitive to
investment market movements. This is illustrated by a
material reduction in the reserve for costs of guarantees
since the start of the year, giving rise to a £28.5m economic
benefit to the result during the year, £8.5m of which was
driven by investment market movements, with £20.0m
arising from changes to the yield curve. For 2012 this same
dynamic gave rise to a £2.5m surplus contribution, with
investment market movements contributing £9.0m, offset
by £6.5m negative movements as a result of changes in the
yield curve. Product based deductions continue to remain
strong, at £17.1m (2012: £16.9m).
Further detail of the results of the S&P segment can be
found on page 32.
Growth operation
Movestic has posted an IFRS profit of £2.6m during the
year (2012: £1.4m), a pleasing result showing that the
results continue to trend in the right direction. The long-term
financial model is based on growth, with levels of new
business being targeted to more than offset the impact of
policy attrition, leading to a general increase in assets under
management and, hence, management fee income. There
has been an increase in funds under management of 24.1%
(on constant exchange rates) since 31 December 2012.
The Movestic result in 2013 is stated after an adverse DAC
asset adjustment of £3.0m, predominantly arising from
refinements to the DAC amortisation model that were made
during the year. The impact on the Group IFRS results of
this adjustment is muted as a large proportion of the
adjustment (£2.6m) relates to DAC on policies that were in
force on acquisition, and this is not recognised in the Group
IFRS balance sheet.
Further detail of the results of the Movestic segment can
be found on page 33.
IFRS results
The financial dynamics of Chesnara, as described above, are
reflected in the following IFRS results:
Year ended 31 December
2013
£m
2012
£m
Note
CA
S&P
PL
Movestic
Chesnara
Consolidation adjustments
Total profit before tax and
exceptional item
Profit arising from
PL acquisition
Exceptional tax item
Total profit before tax
Tax
25.0
36.4
0.2
2.6
(4.9 )
(1.5 )
18.5
14.6
–
1.4
(5.8 )
(4.2 )
57.8
24.5
2.8
–
60.6
(11.2 )
–
(4.8 )
19.7
8.2
Total profit after tax
49.4
27.9
2
3
1
4
4
Note 1 – The Group profit before tax is stated after
recognition of a £2.8m gain arising as a result of the
purchase of Protection Life. More detail over how
the gain was calculated has been provided in Note 7
to the IFRS Financial Statements.
Note 2 – The S&P results for the year include a
£28.5m surplus arising from the reduction in reserves
held for products with guarantees. The reduction
is driven by favourable asset growth and bond yield
movements.
Note 3 – The Chesnara result represents holding
company expenses. For 2013 this includes the impact
of £1.6m of costs expensed during the year that were
incurred in relation to the purchase of Protection Life.
Note 4 – The tax charge for 2013 is not affected by
any significant one-off items. As explained in Note 5
to the IFRS financial statements, an exceptional
item of £4.8m was reported in 2012 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 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.
30
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
Consolidation adjustments
The adjustments arising on consolidation are analysed below:
The key components of the 2013 IFRS result are summarised
as follows:
Year ended 31 December
CA – Amortisation of AVIF
S&P – Amortisation of AVIF
PL – Amortisation of AVIF
Movestic:
Amortisation of AVIF
Write back of DAC
Total
2013
£m
2012
£m
(2.2 )
(0.8 )
(0.2 )
(4.4 )
6.1
1.7
(2.8 )
(0.8 )
–
(4.0 )
3.4
(0.6 )
Total
(1.5 )
(4.2 )
Note
Pre-tax IFRS profit
2013
£m
2012
£m
Note
1
Product-based deductions
Administration expenses
Gains and interest on
retained surplus
Operating assumption
changes
Other effects due to
market movements
Complaint costs
Other
28.7
(7.0 )
3.5
(1.7 )
3.3
(1.5 )
(0.3 )
26.3
(7.6 )
5.4
(1.5 )
(2.4 )
(2.3 )
0.6
2
2
3
4
Total
25.0
18.5
Note 1 – Included within consolidation adjustments
is an item in relation to Movestic that reverses the
amortisation charge on DAC relating to policies
that were written prior to Chesnara ownership. This
adjustment has increased in the year due to the
additional charge that was booked in the year as a
result of the refinements made to the DAC
amortisation model. See page 33 for further detail.
The IFRS results by business segment are analysed in more
detail as follows:
CA
A slight increase in product-based deductions, the core
source of IFRS earnings, together with the impact of
investment markets has contributed to an increase in the
overall CA IFRS result as compared with the prior year.
There are a number of complex aspects to the IFRS result
but the primary drivers of this increase is the impact of
market movements compared with the prior year, as
illustrated below:
Profit before tax movement
Year ended 31 December 2012 to year ended
31 December 2013 (£m)
0.8
0.3
1.9
2.4
5.7
0.2
25.0
18.5
Dec
2012
Complaint
costs
Product
based
deductions
(note 5)
Other
effects
due to
market
movements
(note 7)
Other
Dec
2013
Operating
assumption
changes
Gains
and
interest
on retained
surplus
(note 6)
Note 2 – Product-based deductions and returns on
retained surplus remain significantly in excess of
recurring administration expenses. The total level of
product-based deductions has increased slightly
when compared with the prior year despite the
run-off of the book.
Note 3 – Operating assumption changes contain a
number of items relating to the impact of certain
assumption changes that were made during the year.
In particular this includes a £7.5m strain arising from
strengthening our expense assumptions following a
management review of likely future expenses, offset
by the positive effect of a £4.0m surplus arising from
weakening our mortality assumptions, which has
reduced the reserves held on our annuity business.
Note 4 – During the year ended 31 December
2012 complaint costs included the impact of the
strengthening of the mortgage endowment
mis-selling reserve. Some further strengthening
has been made during 2013.
Note 5 – Product-based deductions continue
to remain strong and are a core source of profit.
The deductions during 2013 exceeded 2012
by £2.4m primarily driven by higher policyholder
tax deductions.
Note 6 – Gains and interest on the retained surplus
has fallen when compared with 2012, driven by
a fall in bond values during the year.
Note 7 – The impact of market movements on
the result during 2013 is £5.7m higher than it was
during 2012. This is primarily driven by asset
mismatching contributing a positive impact of £4.0m
during the year, in contrast with this same dynamic
having a negative effect of circa £1.0m during 2012.
Dec 2012
Negative movements
Positive movements
Dec 2013
31
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT
Note 3 – During the year the impact of movements
in reserves for the cost of guarantees was positive,
resulting in a £24.4m benefit to the IFRS result
(2012: £2.7m loss). The key drivers of this benefit in
2013 were a combination of increases in bond yields
and increases in equity values during the year.
Included within the change in the costs of
guarantees is a lapse experience loss of £3.7m,
driven by observed lapses being slightly less than
assumed at the start of the year.
Note 4 – 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 £5.4m in the year is predominantly driven by
investment market movements.
PL
The purchase of PL was completed on 28 November 2013
and therefore the contribution to the Group IFRS profit,
being £0.2m in 2013, is small.
As referred to above the acquisition of PL resulted in a
one-off gain on acquisition of £2.8m.
FInan CIal rev IeW
IFrs pre -tax pro FIt (ContInueD )
S&P
The S&P pre-tax profit has increased significantly compared
with the prior year:
Profit before tax movement
Year ended 31 December 2012 to year ended
31 December 2013 (£m)
27.1
1.5
1.1
0.2
1.4
6.7
36.4
14.6
Dec
2012
Change
in
Cost of
Guarantees
(note 1)
Change
in sterling
and
expense
reserves
Admin
expenses
Product
based
deductions
Other
Dec
2013
Income
on
with-profits
shareholder
funds
Dec 2012
Negative movement
Positive movement
Dec 2013
S&P posted a pre-tax IFRS profit of £36.4m for year, the key
components of the result being:
Pre-tax IFRS profit
2013
£m
2012
£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
Other
Total
Change in sterling and
expense reserves
Other
17.1
(9.9 )
(0.4 )
16.9
(11.0 )
6.3
8.6
19.9
(3.7 )
(0.4 )
24.4
5.4
(0.2 )
9.0
(6.5 )
(3.3 )
(1.9 )
(2.7 )
3.9
1.2
Total
36.4
14.6
1
1
2
3
4
Note 1 – Product-based deductions have held up
well as the book runs-off. These are supported by
assets under management, which have increased
from £1,089m to £1,113m in the year, driven by strong
investment markets. Product deductions exceed
administration expenses by £7.2m and £5.9m in 2013
and 2012 respectively.
Note 2 – The income on with-profits shareholder
funds is driven by investment market performance.
The 2013 result includes the impact of the reduction
in bond values that has been witnessed during the
year which did not occur during 2012.
32
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
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
results have remained consistent year on year, at
£1.3m. The financial reinsurance fair value adjustment
for the year has generated a £0.9m loss compared
with a £0.6m loss for 2012. All of these movements
are predominately a consequence of investment
market conditions.
Note 4 – During 2013 a review of the amortisation
model that was used for spreading the costs of
acquiring new policies was performed. As a result of
this review the model was updated to provide more
granular information and has resulted in the
requirement, for certain policies underwritten in
certain years, to shorten the period over which these
costs are spread. This has resulted in a one-off
accelerated DAC charge of £3.0m. A large proportion
of this DAC amortisation charge related to polices that
were in force when Movestic was purchased by
Chesnara, and therefore the Group IFRS result only
reflects £0.3m of this charge, this being the element
of the charge that relates to policies that were written
post acquisition. This is because the DAC at
acquisition was written off as part of the acquisition
accounting process, having been replaced by an
intangible AVIF asset.
Movestic
Pre-tax IFRS profit
Pensions and Savings,
before impact of DAC
model change
Risk and health
Other
Total profit before impact of
DAC model change
Impact of DAC model change
Total profit before tax
2013
£m
2012
£m
Note
2.2
2.2
1.2
5.6
(3.0 )
2.6
(0.3 )
0.9
0.8
1.4
–
1.4
1
2
3
4
Note 1 – The Pensions and Savings business model
is directly dependent upon fees and rebates earned
on funds under management (FUM). The average
FUM has increased during the year resulting in a
£2.8m (13.5%) increase in fee and rebate income.
This is partly offset by a £1.4m (7.7%) increase in
expenses and brokerage fees. Reinsurance financing
costs have also made a positive contribution to the
year on year improvement, having reduced by £1.2m
in the year.
Note 2 – The Risk and Health business, although
not the core target growth operation, is significant
to the Movestic financial and operating model.
Unlike the longer-term Pension and Savings
business the Risk and Health business tends to be
cash generative in the short-term, thereby
providing a source of internal funding. The Risk
and Health business is operationally significant
due to the size of the book, there being 363,000
short-term policies in force as at 31 December
2013 (2012: 404,000), which generated £39.3m of
gross annual premiums in the year (2012: £36.0m).
The Risk and Health business uses reinsurance
arrangements which contain profit share elements.
During the year the results benefited from profit
share income of £1.2m. This was principally as a
result of the strong technical profit in Modernac,
Movestic’s associate.
33
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT
FInan CIal rev IeW
Net cash generation
£36.7m 2012: £36.1m
The Group’s cash flows are generated
principally from the interest earned on capital,
the release of excess capital as the life funds
run down, policyholder charges and management
fees earned on assets under management.
The following table 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):
2013
2012
Note
£m
£m
This information illustrates that gross and net cash generation within the
Group continues to be robust. Key aspects underpinning the outcome are:
Highlights
– Gross cash generation in the UK run-off businesses has increased by
£15.7m in the year compared with 2012, driven by more favourable
investment markets driving the surplus.
– Net cash generation has benefitted from a one-off release from Save
& Prosper. This is offset by the adverse impact of restricted surplus
in the SPP with-profit fund (see note 3).
– As expected the acquisition of Protection Life has had a short-term
adverse impact on net cash generation as a result of a day one capital
injection being required to increase the capital resources to 150% of
the minimum regulatory capital requirement. As can be seen from
the table to the right, £1.6m of cash has been generated by PL since
acquisition to offset this.
CA
Surplus and profits arising
in the year
Change in target capital
requirement
S&P
Surplus and profits arising
in the year
Change in target capital
requirement
Decrease in policyholder
funds cover for target
capital requirement
PL
Surplus and profits arising
in the year
Change in target capital
requirement
– The pause in Movestic funding has continued, with no additional funding
being required in 2013 (2012: £nil).
Movestic
Additional capital contributions
20.4
13.4
3.2
1.7
25.1
14.4
4.3
5.4
(0.5 )
(0.3 )
0.2
1.4
–
–
–
–
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 ultimately naturally decline over time as the UK
businesses run-off. Despite this natural downward pressure there
was an increase in cash generation in 2013 when compared with 2012.
Although investment returns are less predictable, a significant
portion of the investment risk is borne by policyholders. However,
the S&P segment continues to demonstrate short-term volatility.
This arises from the impact of investment market movements
and 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.
Chesnara
Cash utilised by operations
(4.4 )
(0.6 )
Total gross cash generation
49.7
34.0
Items affecting ability to
distribute cash
Synergistic effects of
Part VII transfer
PL capital injection
Release of capital from
S&P WP fund
Restricted surplus in
S&P WP fund
–
7.0
(13.1 )
15.5
–
–
(15.4 )
(4.9 )
Net cash generation
available for distribution
36.7
36.1
1
2
3
3
4
Items affecting the cash available for distribution:
Note 1 – As a result of the S&P Part VII transfer in 2011 we were
able to de-regulate the S&P companies in 2012 thereby releasing
£7m of capital.
Note 2 – PL was acquired at a solvency level lower than the target
requirement. An immediate capital injection was made which has
an impact on net cash available for distribution.
Note 3 – An element of the statutory surplus in the year emerges
in the S&P WP fund. In the absence of management action the
majority of the surplus is not available for distribution and the net
cash generated recognises this restriction. Periodically Chesnara,
with regulatory approval, can apply a waiver to release some of
the previously restricted surplus within S&P. This process was
undertaken during 2013 resulting in a £15.5m capital release.
Note 4 – The net cash generation KPI is a useful
indicator of the dividend paying capacity of the Group’s
regulated subsidiaries. This is monitored closely
by Management as cash generated by the Group’s
regulated subsidiaries is used by the Chesnara
Parent Company for corporate transactions such as
the servicing of debt, payments of dividends and
the funding of future acquisitions. It should be noted
that this KPI is quite distinct from the Group’s Cash
Flow Statement as included in the Group’s IFRS
Financial Statements, which is intended to reflect the
movement in cash held by Chesnara and its subsidiaries
but does not reflect that most of the subsidiary cash
balances are held in regulated insurance funds and are
therefore not available for use by the Parent Company.
34
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
FInan CIal rev IeW
EEV earnings*
£82.7m 2012: £31.2m
*excluding modelling adjustments
EEV result
Analysis of the EEV result in the year by earnings source
Summary
The headline EEV result has improved significantly during the
year. The improvement relates directly to investment
market conditions. The results benefit from both economic
experience and assumption profits, which are driven
predominately from equity market growth and an increase in
the yield curve.
The EEV operating profit of covered business of the Group
has reduced from £19.0m in 2012 to £8.9m in 2013. The
reduction is primarily due to the 2012 comparatives including
some £13m due to positive assumption changes relating to
broker and fund manager rebates in Movestic that have not
been replicated to the same degree during 2013. Excluding
this there has been an underlying increase from £6.0m to £8.9m.
A significant proportion of the operating profit is also directly
the result of investment market movements. The return on
shareholder net worth loss of £0.3m reflects a reduction in
bond capital values. During 2012 reducing bond yields
contributed to a corresponding £7.9m profit.
The following tables analyse the Group EEV earnings after-tax
by source and by business segment:
Profit after tax movement
Year ended 31 December 2012 to year
ended 31 December 2013 (£m)
27.0
0.1
2.5
0.6
12.3
2.4
82.7
11.4
31.2
2012
CA
S&P
PL
Movestic Chesnara
Profit
on purchase
of PL
Tax
2013
2012
Negative movement
Positive movement
2013
Analysis of the EEV result in the year by
business segment
CA
S&P
Movestic
PL
Chesnara
Profit before tax and gain on acquisition
Gain on acquisition of Protection Life
Profit before tax
Tax
2013
£m
2012
£m
24.5
42.7
15.5
0.1
(5.1 )
77.7
12.3
90.0
(7.3 )
13.1
15.7
13.0
–
(5.7 )
36.1
–
36.1
(4.9 )
Profit after tax
82.7
31.2
New business contribution
Return from in-force business
Expected return
Experience variances
Operating assumption changes
Return on shareholder net worth
2013
£m
2012
£m
7.9
5.5
5.8
(10.0 )
(0.3 )
2.9
5.8
0.4
2.0
7.9
Operating profit of covered business
Variation from longer term
investment return
Effect of economic assumption changes
8.9
19.0
54.7
16.4
28.0
(6.5 )
Profit on covered business before tax
and before gain on acquisition
Tax
80.0
(7.6 )
40.5
(6.0 )
Profit on covered business after tax
and before gain on acquisition
Gain on acquisition of Protection Life
Uncovered business and other
group activities
Tax on uncovered business
72.4
12.3
(2.3 )
0.3
34.5
–
(4.4 )
1.1
Profit after tax
82.7
31.2
Economic conditions
As indicated above, the EEV result is sensitive to economic
conditions. Economic experience and assumption changes
contributed a profit of £71.1m in the year compared with a
profit of £21.5m for 2012. The results are sensitive to both
equity markets and bond yields (further sensitivity analysis
is provided in Note 7 of EEV Supplementary Information).
Economic assumption changes are dominated by bond
yield movements, which following a period of decline
during 2012, have increased relatively sharply during 2013.
The “variation from longer term investment return” profit is
predominantly due to continued equity market growth. The
impact of these effects on each operating segment is
illustrated below:
Economic experience and
assumption changes
CA
S&P
PL
Movestic
Total
2013
£m
2012
£m
18.7
33.9
–
18.4
4.7
8.3
–
8.5
71.1
21.5
The S&P profit in 2013 includes the impact of a reduction in
the estimate of costs on products with guarantees of some
£21.0m, coupled with the positive impact of bond yield
increases across the rest of the book.
35
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT
FInan CIal rev IeW
eev earn Ings (ContInueD )
As can be seen on the previous page the CA segment has
benefitted from positive economic conditions, with profits
improving by £14.0m compared with 2012. In particular
favourable tax deductions and movements in tax liabilities
that are a direct result of investment market performance
have significantly contributed to the economic experience in
the year. Off-setting this are adverse economic assumption
changes of £3.6m.
The Movestic business is sensitive to movements in equity
markets due to its core income stream being dependent upon
management charges levied on funds under management,
which are primarily equity-based. Of the £18.4m economic
profit, £20.8m relates to equity growth in the year. Off-setting
against this is an adverse economic assumption change
of c £2.4m. This is driven by a number of factors, including
the effect of inflation on future expenses.
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 £7.2m,
of which £2.7m relates to the value of premium increments
received on existing policies. Profits on “new contract”
business of £4.5m, compared with the 2012 equivalent of
£0.2m. The recent recovery is due to a 61.9% increase in new
business volumes following the rectification of the 2012
servicing issues that arose from a 2011 systems migration.
Experience variances
CA
S&P
PL
Movestic
Total
2013
£m
2012
£m
7.6
4.7
–
(6.5 )
5.2
3.1
–
(7.9 )
5.8
0.4
The CA favourable variances relate to policy persistency and
mortality experience being better than assumed. The S&P
favourable variances in 2013 relate principally to policyholder
tax deductions and better than assumed expense and lapse
experience.
The Movestic experience variance includes expense and
commission overruns of some £2.7m coupled with the net
adverse impact of a number of other experience variances
such as changes to rebate levels, changes in investment mix
and changes to certain policyholder funding structures.
Off-setting this is a small positive persistency profit of £0.5m,
which compares favourably with the 2012 loss of £6.0m. This
would be expected given that persistency assumptions were
further strengthened during the first half of 2013, the impact
of which is included in the operating assumption changes.
Operating assumption changes
Operating assumption changes
CA
S&P
PL
Movestic
Total
2013
£m
2012
£m
(4.3 )
4.5
–
(10.2 )
(0.3 )
(2.9 )
–
5.2
(10.0 )
2.0
The CA segment operating assumption change loss of
£4.7m is predominantly driven by the positive effect of
lapse and mortality assumptions being weakened during
the year resulting in a profit of £5.5m, offset by a £10.0m
adverse impact due to expense assumptions being
strengthened, of which £7.5m arises as a result of further
assessment of potential future administration expenses.
The S&P segment includes an operating assumption
change profit of £4.4m arising from changes to expense
assumptions. This is driven by reduced forecast
governance overhead costs as a result of reduced property
spend coupled with a reduction in salary spend. The 2012
result reflected a loss of £3.7m following a change in lapse
assumptions. This has not been repeated this year.
Movestic has reported an operating assumption change loss
of £10.2m, compared with a £5.2m positive operating
assumption change profit in 2012. The loss in the year
includes the impact of the aforementioned persistency
assumption strengthening, contributing an adverse variance
of some £6.0m. In addition, increases in maintenance
expense assumptions have resulted in a further negative
assumption change loss of £2.6m. During 2012 the Movestic
long-term persistency assumptions were strengthened,
with a total adverse impact of £7.9m. This was more than
offset by positive assumption changes relating to broker and
fund manager rebates totalling some £13.0m.
Gain on acquisition of Protection Life
The EEV results for the year includes the impact of one-off
gain of £12.3m arising from the purchase of Protection
Life. Further detail is provided in Note 9 to the EEV
supplementary information.
Uncovered business and other group activities
Uncovered business and other
group activities
2013
£m
2012
£m
Chesnara
Movestic
Total
(5.0 )
2.7
(5.7 )
1.3
(2.3 )
(4.4 )
The result includes Chesnara parent company costs relating
to corporate governance and business development, not
attributable to the covered business. The 2013 expense is
reflective of the steady state cost base coupled with the
costs incurred associated with the purchase of PL, which
amounted to £2.4m, £1.6m of which has been reported as
an expenses, with the remainder relating to loan
arrangement fees, which are being spread over the life of
the loan. The 2012 comparison included a £2.5m one-off
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 of £2.2m is £1.3m higher than the prior year profit
of £0.9m.
ii) Profit from the Modernac associate, which at £0.9m for
2013 has decreased slightly compared with a profit of
£1.2m for 2012.
36
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
FInan CIal rev IeW
European Embedded Value
£376.4m 2012: £311.1m
EEV movement 31 December 2012 to
31 December 2013 (£m):
More detail behind each of these components has been
provided below:
12.3
4.1
1.4
20.1
70.4
376.4
Net of tax profit
The EEV profit arising during the year is analysed in more
detail within the preceding section.
311.1
EEV
2012
Net of
tax profit
arising
in the
year*
Exceptional
surplus
on
acquisition
Effect of
modelling
adjustment
Foreign
exchange
reserve
movement
Dividends
paid
EEV
2013
Dec 2012
Negative movement
Positive movement
Dec 2013
EEV movement 31 December 2011 to
31 December 2012 (£m):
31.2
3.6
1.3
19.5
Exceptional surplus on acquisition
The purchase of Protection Life has resulted in a surplus
arising on acquisition of £12.3m. The surplus has arisen
because the EEV of Protection Life at the acquisition
date amounted to £51.6m, which is £12.3m higher than
the purchase price of £39.3m.
Effect of modelling adjustments
Year ended 31 December 2013
Modelling adjustments during the year have reduced
when compared with those included in the prior year.
Positive modelling adjustments this year of £4.1m relate
entirely to the Movestic business. These have arisen due
to refinements being made to the way in which modelling
of commission is performed, which is now performed at
a more granular level.
Year ended 31 December 2012
The modelling adjustments that were reported during
2012 included more materially individual items,
contributing to an increase in EEV of £3.6m, comprising:
311.1
294.5
EEV
2011
Net of
tax profit
arising
in the
year*
Effect of
modelling
adjustments
Foreign
exchange
reserve
movement
Dividends
paid
EEV
2012
Dec 2011
Negative movement
Positive movement
Dec 2012
*Stated before exceptional items
Summary
The EEV of the Chesnara Group represents the present
value of the estimated future profits of the Group plus an
adjusted net asset value. Movements between different
periods are a function of the following components:
– Net of tax profit arising in the year, pre exceptional items;
– Exceptional items, such as:
– the surplus arising on the acquisition of Protection Life;
and
– Modelling adjustments;
– Foreign exchange movements arising from retranslating
the EEV of Movestic into Sterling; and
– Dividends that are paid in the year.
Movestic
As a result of a review of the model during 2012 the
following adjustments were reflected in the EEV at 31
December 2012:
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 were 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. As at 31
December 2012 the models were 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.
Foreign exchange reserve movements
The £1.4m foreign exchange reserve movement during 2013
has arisen as a result of a slight weakening of the Swedish
Krona against Sterling by 0.6% since the end of 2012.
Dividends paid
Dividends of £20.1m were paid during 2013, being the final
dividend from 2012 of £12.9m and the interim dividend from
2013 of £7.2m.
37
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT FInan CIal rev IeW
european e MBeDDeD value (ContInueD )
Analysis of EEV
The information on this page provides some further analysis of the EEV of the Group, both in terms of the split between
different operating segments and also the split between the adjusted shareholder net worth and the value of the in-force (VIF)
business. The adjusted shareholder net worth represents the IFRS net worth of the Group, but adjusted for items that are
measured differently under EEV measurement rules and the VIF represents Management’s best estimate of the present value
of the future profits that will arise out of each book of business.
EEV – Value in force (VIF) and adjusted shareholder net worth (SNW)
(£m)
376.4
262.2
311.1
294.5
210.0
199.6
114.2
101.1
94.9
31 Dec 2013
31 Dec 2012
31 Dec 2011
Total EEV VIF SNW
Analysis of VIF at 31 December 2013 - £262.2m
Analysis of EEV at 31 December 2013 - £376.4m
139.0
67.2
30.5
25.5
117.3
126.1
106.5
64.7
Movestic
CA
S&P
PL
(38.2)
Other
Group
Activities
Movestic
CA
S&P
PL
In the above segmental analysis any outstanding
debt in relation to the S&P and PL acquisitions is
included in “Other Group Activities”.
Highlights
– There is a good balance in EEV across the core
business segments, with the UK businesses
representing the majority (79.0%) of the total EEV,
which includes the supplementary addition of the
Protection Life business during the year. The value
in-force component is dominated by the Swedish
business which represents 53.0% of the total Group VIF.
– The Group EEV includes £64.7m in relation to
Protection Life. Offsetting this is the reduction in the
EEV in “Other Group Activities”, primarily due to the
purchase price and one-off capital injection relating to
this acquisition.
– 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, 61.8% of the
total product level value in-force relates to pension
contracts, 24.5% to protection business and 10.9%
to endowments.
38
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT Analysis of VIF by policy type
The tables below set out the value of in-force business by major product line at each year 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.
31 December 2013
Number of policies
Value of in-force business
CA
000’s
S&P
000’s
PL Movestic
000’s
000’s
Total
000’s
Endowment
Protection
Annuities
Pensions
Other
34
40
6
44
3
4
4
–
123
11
–
146
–
–
–
Total at product level
127
142
146
11
–
–
82
–
93
Valuation adjustments:
Holding company
expenses
Other
Cost of capital/
frictional costs
Value in-force pre-tax
Taxation
Value in-force post-tax
Endowment
Protection
Annuities
Pensions
Other
39
43
6
46
3
5
5
–
128
12
Total at product level
137
150
–
–
–
–
–
–
12
–
–
78
–
90
Valuation adjustments:
Holding company
expenses
Other
Cost of capital/
frictional costs
Value in-force pre-tax
Taxation
Value in-force post-tax
CA
£m
24.1
46.2
4.0
29.7
3.9
S&P
£m
2.9
3.9
1.1
44.6
4.9
PL Movestic
£m
£m
Total
£m
–
36.0
–
–
–
8.0
–
–
140.0
–
35
86.1
5.1
214.3
8.8
49
190
6
249
14
508
107.9
57.4
36.0
148.0
349.3
(6.5 )
(16.5 )
(3.4 )
(21.2 )
–
–
(8.9 )
–
(18.8 )
(37.7 )
(1.0 )
(2.3 )
83.9
(16.7 )
30.5
–
(4.0 )
32.0
(6.5 )
(0.1 )
(7.4 )
139.0
–
285.4
(23.2 )
67.2
30.5
25.5
139.0
262.2
CA
£m
27.7
49.2
7.8
33.6
3.2
S&P
£m
3.8
3.7
0.9
55.0
3.3
56
48
6
252
15
377
121.5
66.7
(7.0 )
(28.6 )
(1.1 )
84.8
(17.8 )
(3.9 )
(41.8 )
(2.4 )
18.6
–
67.0
18.6
Total
£m
39.6
52.9
8.7
212.8
6.5
8.1
–
–
124.2
–
132.3
320.5
(7.7 )
–
(0.1 )
124.5
–
(18.6 )
(70.4 )
(3.6 )
227.9
(17.8 )
124.5
210.1
–
–
–
–
–
–
–
–
–
–
–
–
31 December 2012
Number of policies
Value of in-force business
CA
000’s
S&P
000’s
PL Movestic
000’s
000’s
Total
000’s
PL Movestic
£m
£m
The value-in-force represents the discounted value of the
future surpluses arising from the insurance and investment
contracts in force at each respective year end. The future
surpluses are calculated by using realistic assumptions for
each component of the cash flows.
Holding company expenses are apportioned across the
segments pro-rata to the total product-based VIF.
’Other’ valuation adjustments in CA principally comprise
expenses for managing policies which are not attributed
at product level. In S&P they represent the estimated cost
of guarantees to with-profits policyholders.
Taxation in the value-in-force is modelled on a combined
CA and S&P basis and, in the analysis above, is attributed
wholly to the CA segment.
39
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT
FInan CIal ManageMent
The Group’s financial management framework is designed
to provide security for all stakeholders, while meeting the
expectations of policyholders and shareholders.
The following diagram illustrates the aims, approach and outcomes from the financial management framework:
OBJECTIVES
The Group’s financial management framework is designed to provide security for all stakeholders,
while meeting the expectations of policyholders, shareholders and regulators. Accordingly we:
Maintain solvency
targets
Meet the dividend
expectations of
shareholders
Optimise the
gearing ratio to
ensure an efficient
capital base
Maintain the Group
as a going concern
Ensure there is
sufficient liquidity
to meet obligations
to policyholders,
debt financiers and
creditors
hOW WE dElIVEr Our OBJECTIVES
In order to meet our obligations we employ and undertake a number of methods. These are centred on:
1. Monitor and control solvency
2. Project key financial variables
3. Responsible investment management
OuTCOMES
Key outcomes from our financial management process, in terms of meeting our objectives, are set out below:
1. SOlVENCy
2. SharEhOldEr
rETurNS
3. CapITal STruCTurE
4. lIquIdITy aNd
pOlICyhOldEr
rETurNS
5. MaINTaIN ThE
GrOup aS a GOING
CONCErN
Group Solvency
Ratio of 194%
2013 TSR
79%
2013 dividend yield
5.6%
Based on share price as at
31 December 2013 of 321.75p
and full year 2013 dividend
of 17.88p.
Gearing ratio of
29.6% following
acquisition of PL
This does not include the
financial reinsurance that
is held within the Swedish
business.
Competitive fund
performance
Group remains a
going concern
Policyholders’
realistic
expectations
maintained
(see Directors’
Report on pages
85 to 86)
40
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT hOW WE dElIVEr Our FINaNCIal MaNaGEMENT OBJECTIVES
1. MONITOr aNd CONTrOl rISK
aNd SOlVENCy
2. lONGEr-TErM prOJECTIONS
3. rESpONSIBlE INVESTMENT
MaNaGEMENT
The Board sets internal solvency
targets that are based on
solvency requirements imposed
by our regulators. The targets are
set with the intention of balancing
the requirements of both our
shareholders and policyholders.
i) a Pillar 1 calculation, which
compares regulatory capital
resource requirements, based
on the characteristics of the
in-force life business, with an
associated measure of capital
as prescribed by regulation;
and
ii) a Pillar 2 calculation which
compares a risk-based
assessment of solvency
capital with an associated
measure of capital based on
a realistic assessment of
insurance liabilities; and
iii) the amount of required
regulatory solvency capital is
then determined by the
method which gives rise to
the lower excess of regulatory
capital over requirements.
These calculations are monitored
continually.
Long-term projections are performed covering,
as a minimum:
i)
Segmental earnings and surplus arising in
the long-term insurance funds;
ii) Chesnara holding company cash flows;
iii) Regulatory solvency and capital resources
and requirements; and
iv) European embedded value.
The projections are prepared for a base case,
using latest board-approved assumptions,
and for various individual and multiple economic
and non-economic sensitivities.
In addition:
Financial condition reports are prepared on an
annual basis which includes assessments of the
ability of the business to withstand key adverse
events, including increased rates of policy lapse,
expense overruns and unfavourable market
conditions.
Reverse stress testing techniques are employed
which assess events and circumstances which
would cause the business to become unviable.
In this context, unviable is defined as the point at
which the market loses confidence in the firm being
able to carry out its normal business activities.
Investment management
We aim to promote customer
retention by pursuing good
relative investment performance
across both our UK and Swedish
businesses.
We use third party investment
managers in both the UK and
Sweden. They are charged with
operating within pre-determined
guidelines which are set having
regard to the nature of the fund
and to contractual obligations to
policyholders. For the with-profits
funds these are also in
accordance with the published
Principles and Practices of
Financial Management. In
Sweden a larger number of fund
managers are used, which are
subject to very stringent initial
selection and ongoing monitoring
criteria.
A conservative approach to
the investment of shareholders’
funds is also adopted within
the Group.
41
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT
FInan CIal ManageMent (ContInueD )
Throughout 2013 and up to 25 March 2014 there has been
a general appreciation in the share price, having increased by
55% from 193.0p per share at 1 January 2013 to 300.0p
per share at 25 March 2014. The combined impact of the share
price growth throughout 2013 and the continuing attractive
dividends means shareholders have achieved strong total
shareholder return.
3. Capital structure
The Group’s UK operations are ordinarily financed through
retained earnings and through the current emergence of
surplus in the UK life businesses.
These flows are used:
i)
to repay our debt obligations;
ii) to support dividend distributions to shareholders; and
iii) to support the medium-term requirements of Movestic
to meet regulatory solvency capital requirements as it
expands.
The acquisition of S&P in December 2010 for £63.5m was
accomplished by way of debt: equity financing broadly in a
ratio of 2:1. This introduced a modest level of gearing to the
structure of Group financing.
The acquisition of PL in November 2013 for £39.3m was
funded using a combination of debt and existing cash
resources. The process for raising the debt to fund the
purchase of PL also gave rise to a restructuring of the
existing facilities that were initially arranged to fund the
purchase of S&P. The result is that, at 31 December 2013
bank borrowings amounted to £73.0m, which is being
repaid over a five year term.
The purchase of Movestic was financed by internal cash
resources. On an ongoing basis the Movestic business is
financed by a combination of external financial reinsurance
arrangements and capital contributions from Chesnara.
With respect to acquisitions the Group seeks to finance
these through a suitable mix of debt and equity, within the
constraints imposed by the operation of regulatory rules over
the level of debt finance which may be borne by Insurance
Groups without breaching solvency requirements.
Other factors which may place a demand on capital
resources in the future include the costs of unavoidable large
scale systems developments such as those which may be
involved with changing regulatory requirements. To the
extent that ongoing administration of the UK life businesses
is performed within the terms of its third-party outsourcing
agreements, the Group is sheltered, to a degree, from these
development costs as they are likely to be on a shared basis.
outCo Mes F roM IMpleMentIng our
FInanCIal ManageMent o BjeCtIves
Key outcomes from our financial management process, in
terms of meeting our objectives are set out below:
1. Solvency
The solvency and regulatory capital of the Group and its
regulated subsidiaries is monitored continually. Further
detail of the year end solvency positions has been
summarised in the Business Review on pages 25 to 26.
2. Shareholder returns
The Board’s primary aim is to provide an attractive dividend
flow to its shareholders. With Movestic in its growth phase,
shareholder dividend flows are currently generated by the
UK run-off businesses within CA plc, by way of the emergence
of surpluses in, and transfer of surpluses from, its long-term
insurance funds to shareholder funds and by the return on
shareholder net assets.
Dividend flows from CA plc to Chesnara are utilised in the
first instance for the repayment and servicing of debt, coupled
with bearing central corporate governance costs which
cannot be fairly attributed to the long-term insurance funds,
and which arise largely in connection with Chesnara’s
obligations as a listed company.
Returns to shareholders can be assessed by reference to
many measures including the actual share price, the yields
on the shares and the comparison of total market capital to
embedded value. The graphs below illustrate:
– how the EEV per share has compared with the share price
over recent years, up to 31 December 2013; and
– the dividend growth per share over this same period.
EEV per share versus share price:
400
350
300
250
200
150
100
9
0
c
e
D
0
1
r
a
M
0
1
n
u
J
0
1
p
e
S
0
1
c
e
D
1
1
r
a
M
1
1
n
u
J
1
1
p
e
S
1
1
c
e
D
2
1
r
a
M
2
1
n
u
J
2
1
p
e
S
2
1
c
e
D
3
1
r
a
M
3
1
n
u
J
3
1
p
e
S
3
1
c
e
D
EEV per share (p) Share price (p)
Dividends (pence per share):
16.40
16.85
17.35
17.88
2010
2011
2012
2013
42
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
4. Liquidity and policyholder returns
Key aspects of policyholder fund performance in respect of
the UK Business and in respect of the Swedish Business
are set out in the Business Review.
The current profile and mix of investment asset holdings
between fixed-interest securities and cash deposits is such
that realisations to meet obligations to third parties and to
support dividend distributions can be made in an orderly
and efficient way.
5. Maintain the Group as a going concern
The Group’s cash flow position, together with the return on
financial assets in the parent company, supports the ability
to trade in the short-term. Accordingly, the underlying
solvency position of the UK life business and their ongoing
ability to generate surpluses which support cash transfers
to shareholders’ funds is critical to the ongoing ability of
the Group to continue trading and to meet its obligations as
they fall due.
The information set out in ‘Maintain strong solvency
position’ on pages 25 and 26 indicates a strong solvency
position as at 31 December 2013 as measured at both the
individual regulated life company levels in both the UK and
Sweden and at the Group level. In addition, in respect of
the UK business, the financial condition report and reverse
stress testing assessments indicate that it is able to
withstand the impact of adverse scenarios, including the
effect of significant investment market falls, while the
business’s outsourcing arrangements protect it from
significant expense overruns.
Notwithstanding that the Group is well capitalised, the
current financial and economic environment continues to
present specific threats to its short-term cash flow position
and it is appropriate to assess other relevant factors. In the
first instance, the Group does not rely on the renewal or
extension of bank facilities to continue trading – indeed,
as indicated, its day to day operations are cash generative.
The Group does, however, rely on cash flow from the
maturity or sale of fixed interest securities which match
certain obligations to policyholders: in the current
economic environment there remains a continuing risk of
bond default, particularly in respect of financial institutions.
In order to manage this risk we ensure that our bond
portfolio is actively monitored and well diversified. Other
significant counterparty default risk relates to our principal
reassurers. We monitor their financial position and are
satisfied that any associated credit default risk is low.
It is noteworthy that we have negligible exposure to
Euro-denominated sovereign debt.
Our expectation is that, notwithstanding the risks set out
above, the Group will continue to generate surplus in its
UK long-term businesses sufficient to meet its debt
obligations as they fall due, to continue to pursue an
attractive dividend policy and to meet the short-term
financing requirements of Movestic. The Director’s Report
on pages 85 and 86 provides confirmation that the IFRS
Financial Statements have been prepared on the Going
Concern basis.
43
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT rIsK ManageMent
Risk management processes
Overlaying all the day-to-day and development activity we
undertake is a focused risk management culture and regime.
In both the UK and Swedish businesses we maintain
processes for identifying, evaluating and managing the
significant risks faced by the Group, which are regularly
reviewed by the Group Audit & Risk Committee. Our risk
processes have regard to the significance of risks, the
likelihood of their occurrence and take account of existing
controls and the cost of mitigating them. The processes are
designed to manage rather than eliminate risk and, as such,
provide reasonable, but not absolute, assurance against loss.
At the subsidiary level in the UK businesses we maintain, in
accordance with the regulatory requirements of the PRA
and FCA, a risk and responsibility regime. Accordingly, the
identification, assessment and control of risk are firmly
embedded within the organisation and the procedures for
the monitoring and updating of risk are robust. As part of
this we have a Risk Committee in CA plc, which comprises
solely of Non-executive Directors. This Committee receives
quarterly updates of the key risk registers, as maintained by
the senior management, for review and challenge. The
Committee reports directly to the CA plc Board which also
reviews reports from the compliance and internal audit
functions. The Risk Committee reports are also reviewed by
the Chesnara Audit & Risk Committee on a quarterly basis.
Since its acquisition similar arrangements have been
established for Protection Life.
The key risk registers have been designed to complement
the production of Individual Capital Assessments, which
we are required to submit to the PRA on request and
maintain on an ongoing basis. We categorise all risks against
the following relevant categories - insurance, market,
credit, liquidity, operational and Group - and identify potential
exposures and the necessary capital requirements
accordingly.
In the Swedish business, at the Movestic subsidiary level,
there is full compliance with the regulatory requirement in
that its Board and Managing Director have responsibility for
ensuring that the management of the organisation is
characterised by sound internal control, which is responsive
to internal and external risks and changes in them. The
Board has responsibility for ensuring that there is an internal
control risk function, which is charged with (i) ensuring that
there is information which provides a comprehensive and
objective representation of the risks within the organisation
and (ii) proposing changes in processes and documentation
regarding risk management. These obligations are
evidenced by regular compliance, internal audit, general risk
and financial risk reports to the Movestic Board. The latter is
supplemented by quarterly returns to the Swedish regulator,
Finansinspektionen, which set out estimated capital
requirements in respect of insurance, market, credit,
liquidity, currency and operational risks.
Risk management processes are enhanced by stress and
scenario testing, which evaluates the impact on the Group of
certain adverse events occurring separately or in combination.
There is a strong correlation between these adverse events
and the risks identified in ‘principal risks and uncertainties’
below. The outcome of this testing provides context against
which the Group can assess whether any changes to its risk
management processes are required.
Group and subsidiary auditors regularly report to management
on identified control weaknesses together with suggested
improvements.
In accordance with the need to comply with the requirements
of Solvency II on an EU-wide basis, we are currently reviewing
and upgrading our risk management processes, so that
Group-wide they will be enhanced in a uniform and consistent
manner, embracing:
– articulation of risk appetite statements, following from
documented strategic objectives;
– formulation and monitoring of associated risk metrics;
– risk identification and assessment;
– calculation of risk-based capital; and
– the embedding of risk management processes so that they
are at the forefront of, and underpin, strategic and operating
decisions.
These developments have continued during 2013 and are
planned to continue during 2014 and into 2015.
Principal risks and uncertainties
Risks and uncertainties are assessed by reference
to the extent to which they threaten, or
potentially threaten, the ability of the Group to
meet its core strategic objectives. These currently
centre on the intention of the Group to maintain
an attractive dividend policy.
The specific principal risks and uncertainties subsisting
within the Group are determined by the fact that:
i)
the Group’s core operations centre on the run-off
of closed life and pensions businesses in the UK;
ii) notwithstanding this, the Group has a material
segment, which comprises an open life and
pensions business operating in a foreign
jurisdiction; and
iii) these businesses are subject to local regulation,
which significantly influences the amount of
capital which they are required to retain and
which may otherwise constrain the conduct
of business.
44
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
The following identifies the principal risks and uncertainties, together with a
description of their actual or potential impact and of the way in which the group
seeks to control the specific insurance and financial risks it faces. The acquisition
of protection life has not introduced any new principal risks and uncertainties to
the group.
prI nCIpal rI sKs an D un CertaI ntIes
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
Adverse Sterling:
Swedish Krona
exchange rate
movements
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.
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.
– 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.
– The Group monitors exchange rate
movements and the cost of hedging the
currency risk on cash flows when
appropriate.
45
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT rIsK ManageMent (ContInueD )
prI nCIpal rI sKs an D un CertaI ntIes (ContInueD )
Risk
Impact
Control
Adverse movements
in yields on fixed
interest securities
The Group maintains portfolios of fixed interest
securities (i) in order to match its insurance
contract liabilities, in terms of yield and cash
flow characteristics, and (ii) as an integral part
of the investment funds it manages on behalf
of policyholders and investors. It is exposed to
mismatch losses arising from a failure to match
its insurance contract liabilities or from the fact
that sharp and discrete fixed interest yield
movements may not be associated fully and
immediately with corresponding changes in
actuarial valuation interest rates.
– 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.
Counterparty failure
The Group carries significant inherent risk
of counterparty failure in respect of:
– its fixed interest security portfolio;
– cash deposits; and
– amounts due from reinsurers.
– Operation of guidelines which limit the level of exposure to
any one counterparty and which impose limits on exposure
to credit ratings.
– In respect of exposure to one major reinsurer, Guardian
Assurance Limited (‘Guardian’), the Group has a floating
charge over the reinsurer’s related investment assets, which
ranks the Group equally with Guardian’s policyholders.
Failure of outsourced
service providers to
fulfil contractual
obligations
Key man dependency
Adverse regulatory
and legal changes
The Group’s UK life and pensions businesses
are heavily dependent on outsourced service
providers to fulfil a significant number of
their core functions. In the event of failure by
either or both service providers to fulfil their
contractual obligations, in whole or in part, to
the requisite standards specified in the
contracts, the Group may suffer loss as its
functions degrade.
– Rigorous service level measures and management
information flows under its contractual arrangements.
– Continuing and close oversight of the performance of both
service providers.
– The supplier relationship management approach is
conducive to ensuring the outsource arrangements deliver
to their 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.
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 next 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.
46
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
solvenCy 11
our solvency II programme
remains well on track to
ensure we are ready for the
planned implementation date.
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 is now 1 January 2016 and interim
measures have been agreed by the PRA which require us to
develop and implement various aspects of Solvency II in the
lead up to the revised implementation date.
Chesnara’s approach
Pillar 1
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 CA plc, PL 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 initial dry runs for the CA and
Movestic businesses were undertaken during Q1
2013 and reported to the respective boards in Q1
and Q2 2013 and consolidated Pillar 1 results for the
Group were produced in Q2 2013. Revised Pillar 1
plans have been developed to support the interim
requirements and were reviewed by the Chesnara
board in January 2014.
Pillar 2
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
Following confirmation of the new implementation
date work has re-commenced on developing our
SII-compliant approach to risk management, business
planning, projections, stress testing solvency
assessment and governance. Revised Pillar 2 plans
have been developed to support the interim
requirements and were reviewed by the Chesnara
board in January 2014.
Pillar 3
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 (QRT’S). This work will identify the source
of the data required for populating the QRT’s and
estimate the development work required to deliver
the completed QRT’s. The analysis is now mostly
complete with some further work required with one
of our outsourcers during 2014. Revised Pillar 3 plans
have been developed to support the interim
requirements and were reviewed by the Chesnara
board in January 2014.
47
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT Corporate anD s oCIal r esponsIBIl Ity
social and environmental issues
are taken seriously by Chesnara,
with particular emphasis given
to 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.
The table below shows the gender split of employees of
the Chesnara Group split across different categories:
2013
2012
Male Female Male Female
Directors of Chesnara plc
7
1
7
–
Senior management of
the Group (other than
Directors of Chesnara plc)
Heads of business units
and Group functions
1
–
1
–
6
6
6
6
Employees of the Group
60
62
61
65
Total
74
69
75
71
Senior management includes employees other than Group
Directors who have the responsibility for planning, directing
or controlling the activities of the company, or a strategically
significant part of the company. In Chesnara’s case, this is
the Managing Director of the Swedish subsidiary, Movestic
Livförsäkringar AB.
The Board has not identified any senior management as
defined by the Companies Act outside of the Board of
Directors and subsidiary Directors. However, to give
additional information in keeping with the spirit of the
Company’s focus on diversity we have provided additional
disclosures to cover the employees within the Group. We
have provided an analysis of diversity which shows “Heads
of Business Units and Group functions” separately from the
remainder of employees within the Group.
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.
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.
Greenhouse gas reporting
Disclosure of emissions
Global GHG emissions data for the period from 1 January
2013 to 31 December 2013:
Tonnes
of CO2e
Emissions from:
Combustion of fuel and operation of facilities
(scope 1)
Electricity, heat, steam and cooling purchased
for own use (scope 2)
Travel (scope 3)
Company’s chosen intensity measurement =
tonnes of CO2 e per square metre of office
space occupied
Emissions reported above normalised to per tonne of product output
–
121.3
87.8
0.117
48
Chesnara | annual report & aCCounts 2013SECTION BSTRATEGIC REPORT
Methodology used to calculate emissions
We have followed the requirements of the GHG Protocol
Corporate Accounting and Reporting Standard (revised
edition) and the Carbon Trust conversion factors to measure
and report greenhouse gas emissions, as well as the
disclosure requirements in Part 7 of the Companies Act
2006 (Strategic Report and Directors’ Report) Regulations
2013. The financial control method, which captures the
sources that fall within our consolidated financial statements,
has been used. Although we operate an outsourced
model, these outsourcers do not work exclusively for the
Group and therefore it is not deemed appropriate to include
emissions outside of the Group consolidated financial
statements. The Group’s carbon reporting falls under three
scopes as shown in the table on the previous page.
There are 16 company-leased vehicles in total in the UK
and Sweden which are used primarily for commuting and
not business-related activities. Commuting mileage is
a personal expense of the employee and is not therefore
included in the consolidated financial statements.
Approved by the Board on 27 March 2014 and signed
on its behalf by:
Peter Mason
Chairman
Graham Kettleborough
Chief Executive Officer
49
Chesnara | annual report & aCCounts 2013SECTION BSTraTEgIC rEpOrT 50
Chesnara | annual report & aCCounts 2013
seC tion C
Corporate
governanCe
in this seCtion
52 Governance Overview from the Chairman
53 Board of Directors
54 Board Profile
55 Corporate Governance Report
60 Directors’ Remuneration Report
82 Audit & Risk Committee Report
85 Directors’ Report
87 Directors’ Responsibilities Statement
Chesnara | annual report & aCCounts 2013
51
governanCe overview from the Chairman
During 2013 a number of significant
narrative reporting changes have been
introduced that affect how we
report our governance of the Group.
This section of the Report & Accounts provides me with
an opportunity to provide insight into the governance of
the Company. 2013 has been a year of significant change
regarding the way that this is reported, and has resulted
in a reasonable level of re-structuring of the front half of our
Report & Accounts. In particular the new remuneration
reporting rules and the implementation of the strategic report
have resulted in a number of key changes. I have taken this
opportunity to highlight the key changes below:
The new strategic report
In August 2013 Parliament approved the Companies Act 2006
(Strategic Report and Directors’ Report) Regulations 2013.
The new strategic report replaces the old “Performance”
section of our 2012 Report & Accounts and has been used
to articulate a number of key aspects of our business, such
as our strategic aims, our business model, a business and
financial review of the year, our approach to risk management
and an insight into Chesnara’s approach towards corporate and
social responsibility. We have used the draft Guidance on
the Strategic Report as issued in August 2013 by the Financial
Reporting Council to assist with structuring this section.
As can be seen this revised section has brought us a new
opportunity to articulate the key Chesnara messages, including
how the various elements of our business interlink (such as
how our strategic aims have been implemented in the year).
This section also includes new information regarding our
greenhouse gas consumption coupled with new disclosure
requirements for gender diversity among our employees
and directors.
The new strategic report is included on pages 11 to 49.
New remuneration reporting and incentive
scheme re-design
This year has also seen the introduction of new remuneration
rules, in regard to both the process for setting and agreeing
Directors’ remuneration and also how this is reported. This
represents the biggest change in this field for some time.
Our new remuneration report on pages 60 to 81 addresses
this new legislation and will assist with providing our
shareholders with a clearer picture on the processes that we
use to determine how our Directors are remunerated, and
how these processes link with our strategic goals. The new
report has three key sections:
– The Remuneration Committee Chairman’s annual
statement: This provides an overview of the work of the
Remuneration Committee during the year.
– Remuneration policy report: This articulates the policy
that, subject to shareholder approval, will be effective from
the AGM and will govern the way we set and manage
Directors’ remuneration.
– Annual remuneration report: This report shows the level
of remuneration paid to our Directors in the financial year.
The new rules have introduced a new concept of a “single
figure” of remuneration for each Director, and now provides
more analysis over the pay of the Chief Executive Officer,
including comparison to other financial metrics, coupled with
a 5-year history of his pay.
I would like to thank the Chairman of the Remuneration
Committee, Veronica France, for her work in delivering a report
that meets these new requirements.
The 2012 Corporate Governance Code
As referred to in our 2012 Report & Accounts Chesnara
developed its Corporate Governance practices and procedures
during 2012 with a view to establishing a platform by
which we can demonstrate we are meeting the Governance
requirements specified by the UK Corporate Governance
Code (2012) “the Code”, which has been applied for the first
time this year.
As can be seen in our Corporate Governance report on pages
55 to 59 we continue to demonstrate how that the Board
is committed to the principles of the code and that we have
complied with the provisions of the Code in full during
the year.
The Audit & Risk Committee report has also been updated
this year to incorporate the revisions to the Code. Key areas
of note are the disclosures surrounding the support that that
Committee has provided to the Board in making the statement
that the Report & Accounts when taken as a whole are
fair, balanced and understandable, and the further disclosures
on the Audit & Risk Committee’s role in the appointment
and interaction with the external auditor.
Peter Mason
Chairman
27 March 2014
52
Chesnara | annual report & aCCounts 2013Section ccorporate governance Board of d ireCtors
Peter Mason was appointed as Chairman of Chesnara plc and
Chairman of the Nomination Committee on 1 January 2009
and was appointed as Chairman of Movestic Livförsäkring AB
with effect from 23 July 2009. He is also a member of the
Remuneration Committee. He was the Investment Director
and Actuary of Neville James Group, an investment
management company and was admitted as a Fellow of the
Institute of Actuaries in 1979. He has over 40 years’ experience
in financial services and held several non-executive posts
within the industry.
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. He has
lifetime experience in the financial services industry, primarily
in customer service, marketing and product and business
development, gained with Scottish Provident, Prolific Life,
City of Westminster Assurance and Target Life.
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.
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. 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 and Audit & Risk
Committees and took over the role of Chairman of the
Remuneration Committee when Mike Gordon stepped down
on 17 May 2013. She is currently a Non-executive Director
of Family Assurance where she is a member of their Risk
& Audit and Nominations Committees and chairs their
Remuneration Committee. Having held a number of positions
within life companies, including Marketing Director, in
1992, Veronica set up 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 on 16 January 2013. He serves
on the Nomination, and Audit & Risk Committees. He was
appointed as a Non-executive Director at Exeter Friendly
Society in January 2014, where he sits on the Audit, Risk
and Compliance Committee and the Investment Committee.
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 became 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,
and serves on the Remuneration and Nomination Committees.
He originally joined the Hargreaves Lansdown Board as a
Non-executive Director in 2006 and has served on their Audit
Committee. Mike is also a Non-executive Director of esure
Group plc where he serves on the Remuneration, Risk and
Audit Committees, a Non-executive Director of CBRE Global
Investors Group (UK) and a member of the advisory board
of Spectrum Corporate Finance. He is Chairman of the Board
of Trustees of Wessex Heartbeat. Mike is a qualified actuary
and served in a number of Director level positions within
Skandia UK between 1991 and 2006.
David Rimmington was appointed as Group Finance Director
with effect from 17 May 2013. 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.
53
Chesnara | annual report & aCCounts 2013Section ccorporate governance Board p rofile
The Board’s mix of skills and
experience creates a solid platform
to govern the Group and deliver
its 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 13 to 15.
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 2013 with the prior year
assessment both of which reflect the impact of the Board
composition changes during 2013.
Highlights of the current profile and including
changes compared with 2012 are:
– In general the Board changes early in 2013 were deemed
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 were replaced was deemed
to have an inevitable temporary adverse impact on the
Chesnara Company knowledge measure, with the corollary
that fresh viewpoints were brought to the Group. It was also
recognised that the changes resulted in a short-term reduction
in the overall level of knowledge of the Swedish business.
These temporary impacts were recognised in the Board
profile reported in 2012. Subsequently, induction programmes
and on-going familiarisation during 2013 have had a positive
impact and these competencies ratings have increased
in 2013.
– 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
2013
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
54
Chesnara | annual report & aCCounts 2013Section ccorporate governance Corporate g overnanC e r eport
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 60 to 81 and the Audit &
Risk Committee Report on pages 82 to 84 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 2013.
During the year under review the UK life and pensions
businesses of the Group subsisted in two UK subsidiary
companies being Countrywide Assured plc and Protection
Life Company Limited. Protection Life Company Limited
was formerly known as Direct Line Life Insurance Company
Limited and became part of the Group on 28 November 2013.
Compliance with the Code
The Company has complied throughout the year with all of
the relevant provisions of the Code.
The Board
At the end of the year ended 31 December 2013, the Board
comprised a Non-executive Chairman, four other
Non-executive Directors and three Executive Directors.
During the year, there have been changes to the
Board membership.
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 stepped down from the Board from 17 May 2013,
the date of the Annual General Meeting. Mike Gordon was
the chairman of the Remuneration Committee and that role
has been assumed by Veronica France from 17 May 2013.
Mike Evans has assumed the role of Senior Independent
Director from Mike Gordon.
In addition, Ken Romney stepped down from the Board and
left the Company on 17 May 2013, with David Rimmington
being appointed to the Board as Finance Director from
that date.
Biographical details of all current Directors are given
on page 53 and a Board Profile, which assesses the core
competencies required to meet strategic objectives, is
provided on page 54. 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 plc’), a UK-based life and
pensions business subsidiary of the Group. Under PRA
Regulation the Directors of CA plc 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) five Directors of the Company Messrs Mason, Evans,
Kettleborough and Rimmington, and Ms France are also
Directors of Protection Life Company Limited (“PL”)
a UK-based life business subsidiary of the Group. Under
PRA Regulation the Directors of PL 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;
iii) 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
stepped down from the Movestic Board when he left the
Chesnara Board on 17 May 2013 and was replaced by
David Brand.
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.
55
Chesnara | annual report & aCCounts 2013Section ccorporate governance Corporate governanC e report (Continued)
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 and
supplying timely information, ensuring its effectiveness,
encouraging challenge from Non-executive Directors 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.
Senior Independent Director
The Board has designated Mike Evans 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.
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.
With regard to Peter Mason 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 he held the relevant position, 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 his considerable specific
experience and knowledge in the business of the Group
outweighs any residual risk in the historical relationships
described above.
The Board considers that all Non-executive Directors are
independent. In making this determination, the Board has
carefully considered that 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.
With regard to Peter Wright, the nature of the services he
provided, being subject either to FSA regulation at that time
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.
There were no comparable matters to consider in respect of
Veronica France, David Brand or Mike Evans.
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,
knowledge and number that they are able to challenge the
Executive Directors and their views carry significant weight
in the Company’s decision making. The Board feels that the
changes in Board membership have further enhanced 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 53. 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 plc Board,
and where relevant PL 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 and
Brand, 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 plc, PL 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 plc and PL:
– Earnings report;
– Report from the Actuarial Function Holder
and With-profits Actuary;
– Compliance report;
– Investment report; and
– Outsourcing reports.
56
Chesnara | annual report & aCCounts 2013Section ccorporate governance CA plc and PL monitor risk management procedures, including
the identification, measurement and control of risk through
the offices of a Risk Committee. These committees are
accountable to and reports to their Boards on a quarterly basis.
In addition, annual reports are produced which cover an
assessment of the capital requirements of the life assurance
subsidiaries, their financial condition and a review of risk
management and internal control systems.
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 and Nomination
Committees, and of individual directors. 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 comparisons. Individual Director assessments
were supplemented by discussions between the Chairman
and each Director on a one-to-one basis.
The Chairman of the Audit & Risk Committee performed
a similar evaluation in respect of this Committee. Given the
extensive changes to the composition of the Remuneration
Committee in May and July 2013 its evaluation will take place
within a year of these changes taking effect. 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 UK 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 considers its approach to the evaluation
of Board effectiveness on an annual basis.
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 (resigned 17 May 2013)
Mike Gordon – Non-executive Director (resigned 17 May 2013)
Peter Wright – Non-executive Director
Graham Kettleborough – Executive Director
Ken Romney – Executive Director (resigned 17 May 2013)
Frank Hughes – Executive Director
Veronica France – Non-executive Director (appointed 16 January 2013)
David Brand – Non-executive Director (appointed 16 January 2013)
David Rimmington – Executive Director (appointed 17 May 2013)
Mike Evans – Non-executive Director (appointed 4 March 2013)
Scheduled
Board
Nomination
Committee
Remuneration
Committee
Audit & Risk
Committee
9 (9 )
2 (2 )
2 (2 )
9 (9 )
9 (9 )
2 (2 )
9 (9 )
9 (9 )
9 (9 )
7 (7 )
8 (8 )
2 (2 )
n/a
n/a
2 (2 )
n/a
n/a
n/a
2 (2 )
2 (2 )
n/a
2 (2 )
3 (3 )
1 (1 )
1 (1 )
2 (2 )
n/a
n/a
n/a
3 (3 )
2 (2 )
n/a
3 (3 )
4 (4 )
1 (1 )
1 (1 )
6 (6 )
n/a
n/a
n/a
6 (6 )
6 (6 )
n/a
5 (5 )
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 January 2013 to 31 January 2014. Peter Mason resigned from the Audit and Risk
Committee on 17 October 2013 having served the maximum nine year term as a member.
57
Chesnara | annual report & aCCounts 2013Section ccorporate governance
Corporate governanC e report (Continued)
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
Regular meetings are held
with industry analysts and
commentators so that
they are better informed in
formulating opinions and
making judgements on the
Group’s performance.
Private investors are encouraged to attend the Annual General
Meeting (‘AGM’) at which the results are explained and
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 16 May 2014
can be found in the notice of the meeting on pages 195 to 196.
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
& Accounts, and that the process is regularly reviewed by the
Board and accords with the guidance.
In accordance with the regulatory requirements of the PRA,
CA plc 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 plc and PL Risk Management functions
review and report quarterly on this regime to the relevant
CA plc and PL Boards.
Nomination Committee
During the period under review, the Nomination Committee
comprised Peter Mason, who also served as Chairman
of the Committee and Peter Wright, both of whom served
throughout the period. David Brand, Veronica France and
Mike Evans joined from the date on which they were
appointed to the Chesnara Board. The Terms of Reference
for the Committee can be found on the company website,
www.chesnara.co.uk
The role of the Nomination Committee is to:
– review the balance and composition of the Board and its
Committees, ensuring that they remain appropriate;
– be responsible for overseeing the Board’s succession planning
requirements including the identification and assessment
of potential Board candidates and making recommendations
to the Board for its approval; and
– keep under review the leadership needs of, and succession
planning for, the Group in relation to both its Executive
Directors and other senior executives.
This includes the consideration of recommendations made
by the Chief Executive Officer for changes to the executive
membership of the Board.
The Nomination 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 twice to consider the
continuing mix of skills and experience of the Directors.
Remuneration Committee
Full details of the composition and work of the Remuneration
Committee are provided in the Directors’ Remuneration
Report on pages 60 to 81.
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 82 to 84.
Relations with shareholders
The Chief Executive, Graham Kettleborough, and the
Finance Director, David Rimmington, 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.
58
Chesnara | annual report & aCCounts 2013Section ccorporate governance Financial reporting
Management is responsible for establishing and
maintaining adequate internal controls over financial
reporting. These controls are designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements
for external reporting purposes.
The Group has comprehensive planning, budgeting,
forecasting and monthly reporting processes in place.
A summary of the Group’s financial results supported
by commentary and performance measures is provided
to the Board before each Board Meeting.
In relation to the preparation of the Group financial
statements, the controls in place include:
– the finance governance team review new developments in
reporting requirements and standards to ensure that these
are reflected in Group accounting policies; and
– the finance governance team develop the Group’s financial
control processes and procedures which are implemented
across the Group.
The reporting process is supported by transactional and
consolidation finance systems. Reviews of the applications
of controls for external reporting purposes are carried out
by senior finance management. The results of these reviews
are considered by the Board as part of its monitoring of the
performance of controls around financial reporting. The Audit
& Risk Committee reviews the application of financial reporting
standards and any significant accounting judgements made
by management.
Going concern
The Directors’ Statement on Going Concern is included in the
Directors’ Report on page 86.
Directors
The present Directors of the Company and their biographical
details are set out on page 53.
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 plc, PL and
Movestic. The maintenance of the key risk registers is the
responsibility of senior management, who respectively report
on them quarterly to the CA plc Risk Committee, PL 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:
– 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.
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 plc Board and the Company thereby has
effective oversight of the maintenance and effectiveness of
controls subsisting within CA plc. Regarding PL and Movestic,
such oversight is exercised by way of the membership of a
number the Chesnara Directors of their Boards, together with
quarterly reporting by PL and 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 2013, and
that it has taken account of material developments between
that date and the date of approval of the Annual Report &
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 UK Internal Audit Function, which reports
to the Chairman of the Audit & Risk Committee. The Internal
Audit function in Sweden is provided by external consultants
who, in accordance with Swedish insurance regulations, must
report formally to the Movestic Board.
59
Chesnara | annual report & aCCounts 2013Section ccorporate governance DiReCToRS’ RemUNeR aTioN Repo RT
THe R emUNeRaTioN CommiTTee CH aiRmaN’S
annual statement
Changes to the Remuneration Committee
This is my first report since taking over from Mike Gordon as
Chairman of the Remuneration Committee in May last year.
Following some changes to the Committee that I will come
onto later, the other Committee members are Mike Evans
(Senior Independent Director) who joined the Chesnara Board
in March last year and Peter Mason (Chairman of Chesnara).
By invitation, our CEO, Graham Kettleborough attends our
meetings and our Company Secretary, Mary Fishwick
provides secretarial services.
With a significant proportion of its book being closed to new
business, in the medium to longer-term, acquisitions are
very important for sustaining future performance. So from
a strategic perspective important management actions
within the last year have been to identify an acquisition that
meets the company’s stringent acquisition criteria; to
successfully complete the deal to acquire what is now known
as Protection Life from the Direct Line Group and to begin
the process of integration in order that maximum value may
be derived for shareholders.
Chesnara’s Business and number of employees
Chesnara plc is a holding company engaged in the
management of life and pension books of business in the
UK and Western Europe and at year end had a market
capitalisation of £370.2m. As a result of its UK operating model
predicated on the use of outsourcing, Chesnara has a small
UK workforce of 21 employees including three Executive
Directors. Chesnara’s Swedish business, which is open to new
business, has a larger workforce of 123 people including
one with executive responsibilities within the subsidiary.
Business performance
The company has delivered very good financial results in
2013, with IFRS pre-tax profit of £60.6m being £40.9m higher
than in 2012, and Group EEV growing by 21% to £376.4m.
The Group has delivered total shareholder return over the last
year of 79%, compared with the FTSE 350 High Yield TSR
of 15% in the same period.
Looking at these results through the lens of the Remuneration
Committee, we have to look through the headline results
and consider the influence that management action has had
on these positive results and also assess the extent to which
management is taking action in support of the continuation
of good results for shareholders into the future. Undoubtedly,
positive investment markets have played a significant role in
the company’s results for 2013 but I am confident that what
shareholders are also seeing is a reflection of the Directors’
prudent management of the company and delivery on its
longer-term strategy.
Management continues to seek further acquisitions to help
sustain shareholder returns into the future, for which success
will be rewarded primarily through the new Long-Term
Incentive scheme.
Effect of business performance on variable remuneration
On the back of the favourable IFRS results which exceeded
the stretch target under the 2013 Annual Bonus Scheme, the
Directors have been awarded the maximum bonus potential
of 100% of salary. The effect of this maximum award means
that there will be no payout under the 2013 Long-Term
Incentive plan as a result of the maximum potential being
shared across the two schemes. This shape of reward,
maximum annual payout with no headroom left for rewards
for longer-term performance is something we are seeking
to change with our proposals for two new incentive schemes
which I cover later in this report.
You will see in our Annual Remuneration Report that the
CEO and the Business Services Director have both been paid
deferred performance related bonuses that were awarded in
2010 following the successful acquisition of Movestic. That
performance metric having been met at the end of 2012 –
the deferred elements have been paid in full during 2013 and
are included in the 2012 single earnings figures.
There is no further deferred payment from legacy bonus
awards in respect of the acquisition of Save and Prosper
which was paid to the participating Directors without
adjustment in January 2014.
60
Chesnara | annual report & aCCounts 2013Section ccorporate governance 2012 shareholder voting – a clear message
Last year’s voting on the Remuneration Report (74.8% in
favour) gave the Committee the clear message that our
shareholders were not totally happy with the remuneration
approach at Chesnara. Having undertaken a review, we
appreciate that shareholders and governance agencies find
certain aspects of the current incentive schemes hard to
support, in particular:
– use of a single performance measure;
– awards being totally in cash;
– absence of any deferral; and
further develop the Company’s approach to Director
remuneration and better align the Director’s interests with
those of shareholders.
As a result of our review, we have concluded that we should
make a number of changes to the Executive Directors’
incentive schemes in order to:
– assess performance on a broader range of metrics;
– improve the transparency of the performance measures;
– improve the alignment of Director and shareholder interests;
– better balance Executive’s interests in short-term vs.
– absence of any minimum shareholding requirement
longer-term performance; and importantly
for Directors.
– ensure that the schemes are simple and easy to understand.
As already mentioned, acquisition activity is a key part of
Chesnara’s strategy. Going back four to five years, there was
no Long-Term Incentive scheme in place and acquisition
activity (Movestic and Save and Prosper) was rewarded with
discretionary bonuses. This was addressed in 2012 with the
introduction of an LTIP Scheme with performance based on
an adjusted Group European Embedded Value (EEV) measure
and cash based awards – we now think it appropriate to
To achieve these objectives, we are recommending to
shareholders that the current plans are replaced with two
new incentive schemes; a Short-Term Incentive (STI)
scheme and a Long-Term Incentive (LTI) scheme. These are
being supported with the implementation of a minimum
shareholding requirement for the Executive Directors equal
to one times salary.
Summaries of the principle terms are on page 66, the table below provides a high level summary.
Annual Bonus Plan v new STI Scheme
LTIP v new LTI Scheme
Current
New
Current
New
1 year performance period.
No change.
3 year performance period.
No change.
Single performance
measure (IFRS).
May include a range of
measures. For 2014 these
will be IFRS, EEV operating
profit and strategic group
objectives.
Combination of Group EEV
and share price performance
relative to the EEV.
50% TSR linked to FTSE 350
High Yield Index.
50% projected Group EEV.
100% cash.
65% cash.
100% cash.
100% share awards.
No deferral.
35% deferred for 3 years into
shares to be held until the
new minimum shareholding
requirement is met.
No deferral.
No deferral – but shares
awarded to be held until the
new minimum shareholding
requirement is met.
Maximum potential
100% of salary.
2014 scheme 75% of salary
with potential for future
awards to be up to 100%.
Maximum between 0% and
100% depending upon payout
under Annual Bonus Plan.
2014 scheme 75% of salary
with potential for future
awards to be up to 100%.
As is currently the case, the three Executive Directors only will be invited to participate in these Schemes. Shareholder approval
is being sought at the AGM for both Schemes and assuming a favourable outcome, they will be put into effect following the
AGM with performance periods starting on 1 January 2014.
61
Chesnara | annual report & aCCounts 2013Section ccorporate governance DiReCToRS’ RemUNeR aTioN Repo RT
THe R emUNeRaTioN CommiTTee CH aiRmaN’S
annual statement (Continued)
Major decisions on Director Remuneration
Aside from the decisions taken in connection with the
Executive Directors’ incentive schemes, the Committee
made the following notable decisions during the course
of the year:
1. Agreed to implement a minimum shareholding requirement
for the Executive Directors equal to one times salary which
will take effect from the date of the AGM.
– To demonstrate to all shareholders that the remuneration
of the senior executive members of the Group is set by a
Committee of the Chesnara plc Board members who have
no personal interest in the outcome of the decisions and
who will give due regard to the interests of the shareholders
and to the financial and commercial health of the Group.
– To ensure there is a formal and transparent procedure for
developing policy on executive remuneration and for fixing
the remuneration of individual directors.
2. In May 2013 David Rimmington was appointed to succeed
– To recommend fees for non-executive directors. Approval
Ken Romney as Finance Director on a lower salary to reflect
his experience at operating at this level. We have been
impressed with the competent way in which David has, in his
first few months of being FD dealt not only with the day-to-
day requirements of the role but has also led the finance area
successfully through an acquisition (Protection Life). As a
result, in November 2013 we made the first step in taking his
salary towards the competent point for this role and increased
his salary from £150,000 to £175,000 which still leaves him
on a lower salary than his predecessor and modestly paid as
compared to the FD role in many similar sized organisations.
3. Where justified by the Company’s results and the
satisfactory performance of individuals, it is our normal
practice to award Executive Directors, and indeed all
employees, an annual salary increase broadly in line with
inflation. This year, Executive Directors (with the exception
of David Rimmington) were granted a pay rise of 2.5% of
salary. Other UK employees received pay increases depending
upon performance, which averaged slightly more than this.
4. The effect of Government changes to pension limits means
that some Executive Directors (and other UK employees) may
find they that they are unable to put all their pension benefit
into their scheme. Where this is the case, the Remuneration
Committee has agreed that cash payments may be made
in lieu of pension contributions.
5. The Remuneration Committee together with the CEO (without
the Chairman being present) undertook a review of fees for
the position of Chairman and concluded that since the last
increase in 2010, the Chairman’s fee had fallen behind that
generally being paid for this role in similar sized organisations
and recommended to the Board that the Chairman’s fees
be increased by 11% to £100,000. This having been agreed
by the Board became effective on 1 January 2014.
Role and composition of Committee
Following the recruitment of three Non-Executive Directors
and a review by the Board of its Committee composition,
the size of the Remuneration Committee was reduced from
five to three. Peter Wright and David Brand left the
Committee in July.
The key objectives of the Remuneration Committee are:
– To ensure that the Group’s Executive Directors are fairly
rewarded for their individual contributions to the Group’s
overall performance by determining their pay and
other remuneration.
of NED fees, other than those of the Chairman, will be by the
Chairman and executive directors in a meeting without the
other NEDs being present. Approval of the Chairman’s fees will
be by the Board in a meeting without the Chairman present.
The full terms of reference of the Remuneration Committee
can be found on Chesnara’s website www.chesnara.co.uk
Committee’s activities
During the year the Committee held three meetings. In
addition to the matters already noted, during the year and
into 2014 the Committee:
– Engaged the services of KPMG for advice on the design
of two new incentive schemes.
– Engaged PwC to support the drafting of the rules to the
Chesnara 2014 STI and LTI schemes and the associated
shareholder resolutions.
– Discussed and agreed the outcome of prior years’
achievements against target in respect of the current
annual bonus and LTI plans.
– Discussed and set performance targets for the new STI
and LTI Schemes (in anticipation of gaining shareholder
approval for the schemes).
– Reviewed its Remuneration Policy without substantial
change to its principles and we believe that it now better
articulates how the policy will operate in practice.
The Committee welcomes dialogue with shareholders. I hope
this statement together with all elements of the remuneration
report provides you with a clear account of the operation of
the Remuneration Committee, its policy and its execution
of that policy. We are of the view that the changes proposed
as part of the new incentive schemes make a step change
to improving the alignment of interests between the Executive
Directors and shareholders and hope you feel able to support
the enabling resolutions on which we are seeking approval
at the Company’s AGM on 16 May 2014.
Veronica France
27 March 2014
62
Chesnara | annual report & aCCounts 2013Section ccorporate governance
DiReCToRS’ RemUNeR aTioN Repo RT
remuner ation poli CY report
Introduction
Remuneration policy
This section sets out the Company’s policy on Directors’
remuneration which is subject to a binding shareholder vote
at the 2014 Annual General Meeting. This has been developed
by the Remuneration Committee (the Committee) to provide
a clear framework for reward which is linked to the strategy
of the Company and aligns the interests of executives
and shareholders.
Shareholder approval is being sought for this Policy at the
next AGM and if approval is granted, it will take effect from
the date of the AGM. It is the intention of the Committee
that this Policy remains in place for the next three years at
which point it will, once again, be put to shareholders for
approval. Any commitments made by the Company prior to
the approval and implementation of this Policy which were
consistent with the remuneration policy in force at the time,
can be honoured, even if they would not be consistent with
this Policy at the time the commitment is fulfilled.
In developing its policy and making decisions about Executive
Director remuneration the Committee has taken into account
the terms and conditions of employment for employees
throughout the Company, together with the strategy and
objectives for the business, and developments in the external
marketplace. The Company has not consulted with employees.
Chesnara plc is a holding company engaged in the
management of life and pension books of business in the
UK and Western Europe. With an operating model in the
UK which extensively utilises the benefits of outsourcing,
Chesnara has 21 employees in the UK including three
Executive Directors. Chesnara has a wholly owned life
insurance subsidiary in Sweden, Movestic which is open
to new business and employs 123 people.
The schematic below illustrates how the Company’s KPI’s
align to the strategic objectives and in turn how those KPIs
are recognised as key components of both the new short
and long-term incentive schemes. Reading across the chart
shows how the KPIs cover the objectives. For example,
“Maximise the value from the in-force book”, “Enhance value
from new business” and “Acquire life and pensions
businesses” will all directly impact the EEV growth of the
Group. Likewise all objectives should have an impact on the
TSR to varying degrees. Strong performance in terms of
“maximising value from the in-force book” should positively
influence all four KPIs.
The diagram demonstrates that the remuneration policy aligns
well to all aspects of the Group’s objectives. In addition to
the KPIs shown, the Short-Term Incentive scheme includes
a measure that assesses how effectively the Executive
Directors have performed in delivering strategic initiatives.
The initiatives will include any major regulatory projects
and hence the objective to “Adopt good regulatory practice
at all times” is also directly covered by the remuneration
policy as well as being indirectly covered by way of the
TSR measure.
Strategic objectives
Key performance indicators
Deliver shareholder value
Short-Term Incentive scheme
Long-Term Incentive scheme
1
2
3
4
5
Maximise value from the in-force book
Enhance value through new business
Acquire life and pensions businesses
Maintain a strong solvency position
Adopt good regulatory practice at all times
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Short-Term Incentive scheme
Long-Term Incentive scheme
63
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remuner ation poli CY report (Continued)
Overall remuneration policy aims are:
The implementation of this policy involves:
– to maintain a consistent remuneration strategy based on clear
– paying salaries that reflect individual roles and sustained
principles and objectives;
– to ensure remuneration structures do not encourage or
reward excessive risk-taking which is outside the boundaries
of our stated risk appetite;
– to link remuneration clearly to the achievement of our
business strategy and ensure executive and shareholder
reward is closely aligned;
– to enable the Company to attract, motivate and retain
high-calibre executives; and
– for the policy to be easy to understand and communicate.
individual performance and contribution, taking account of
the external competitive market;
– enabling executives to enhance their earnings by meeting
and out-performing stretching short and long-term targets
in line with the Group’s strategy;
– requiring executives to build and maintain shareholdings in
the Company;
– rewarding executives fairly and responsibly for their
contribution and paying what is commensurate with
achievement of these objectives; and
– including malus provisions, as appropriate in the Short-Term
Incentive scheme (including the deferred share award) and
the Long-Term Incentive scheme.
For the avoidance of doubt, the Directors’ Remuneration
Policy includes authority for the Company to honour any
commitments entered into with current or former Directors
that have been disclosed to shareholders in previous
Remuneration Reports. Details of any payments to former
Directors will be set out in the implementation section of
this report as they arise.
The following tables give an overview of the Company’s
policy on the different elements of the remuneration package.
64
Chesnara | annual report & aCCounts 2013Section ccorporate governance Performance
measures and
maximum
Changes to
2013 policy
There have
been no
changes to the
2013 policy.
Personal
and Group
performance
is taken into
consideration
when deciding
whether a
salary increase
should be
awarded – but
salary increases
may not be
awarded on the
strength of
performance
alone.
Future policy table
Executive Directors’ remuneration
Purpose and link
to strategy
Operation
Basic salary
To recruit and retain
individuals with the
skills and experience
needed for the role and
to contribute to the
success of the Group.
In setting salaries for new executive roles or reviewing the
salaries for existing roles, the Committee will take into account,
as it considers appropriate, some or all of the following factors:
– assessment of the responsibilities of the role and the
experience and skills of the jobholder
– the Company’s salary budgets and results
– the jobholder’s performance
– with the use of periodic benchmarking exercises, the external
market for roles of a similar size and accountability
– inflation and salaries across the Company
– balance between fixed and variable pay to help ensure good
risk management.
Where a new appointment is made, pay may be initially below
that applicable to the role and then may increase over time subject
to satisfactory performance.
Salaries are usually reviewed annually There may be reviews
and changes during the year in exceptional circumstances (such
as new appointments to executive positions).
Since the last Report salaries for the CEO and Business Services
Director have risen by 2.5% – slightly below the average increase
awarded to all staff – and are effective 1 January 2014.
Director
Basic salary from
1 January 2014
Increase
Graham Kettleborough
Frank Hughes
2.5%
2.5%
£328,189
£202,814
The Finance Director, David Rimmington was newly appointed
to the role in May 2013 and has quickly demonstrated an
ability to operate at a higher level of competency than his starting
salary suggested and was awarded an increase of 16.6% in
November 2013 taking his salary to £175,000 which remains below
that appropriate for the role and may be adjusted further subject
to continued satisfactory performance.
Taxable benefits
To recruit and retain
individuals with the
skills and experience
needed for the role and
to contribute to the
success of the Group
and to minimise the
potential of ill health to
undermine Executive’s
performance.
Pensions
To recruit and retain
individuals with the
skills and experience
needed for the role and
to contribute to the
success of the Group
and to encourage
responsible provision
for retirement.
Executive Directors receive life assurance, a company car, fuel
benefit and private medical insurance. A cash equivalent may
be paid in lieu of a car.
Benefits may be changed in response to changing circumstances
whether personal to an Executive Director or otherwise subject
to the cost of any changes being largely cost neutral.
No
performance
measures
attached.
There have
been no
changes to the
2013 policy.
The Executive Directors participate in a defined contribution
pension scheme with employer contributions varying between
7.5% and 9.5% of basic salary. If regulatory maxima have
been reached, the executive can elect to receive the balance
of the contribution as cash.
No
performance
measures
attached.
Change to allow
pension
contributions to
be taken in cash
once regulatory
maxima have
been reached.
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Future policy table (continued)
Executive Directors’ remuneration (continued)
Purpose and link
to strategy
Operation
Short-Term Incentive (STI) scheme
Performance measures
and maximum
Changes to
2013 policy
To drive
and reward
achievement of
the Group’s
business plan
and key
performance
indicators. To
help retention
and align the
interests of
Executive
Directors with
those of
shareholders.
The 2014 STI Scheme is discretionary.
Awards are based on the Committee’s
assessment and judgement of performance
against specific performance targets and
Group strategic objectives, assessed over
a financial year.
Performance is measured based on
the financial results of the Group and its
strategic priorities, together with the
performance of the Executives in relation
to specific objectives. The main weighting
is given to financial results – typically 80%.
Provided the minimum performance
criteria is judged to have been achieved
then an award will be granted in two
parts; at least 35% into deferred share
awards in the shape of nil cost options
which will vest after a 3 year deferral
period and the balance in cash.
Dividend equivalents accrue in cash with
interest thereon in respect of the deferred
share awards between the date the share
award is granted and the date the options
are exercised.
It is the intention of the Committee
to grant awards annually and the
performance criteria will be set out in the
corresponding Implementation Plan.
The Committee can apply malus
provisions to unvested awards,
for example, in the event of misstated
performance or misconduct.
The targets may include costs, IFRS
pre-tax profit, EEV operating profit, cash
generation, Group objectives and
personal performance.
STI Scheme targets are commercially
sensitive and therefore, not disclosed.
Actual targets and results will be disclosed
in the Annual Report immediately
following each performance period.
For the 2014 STI award the measures
and their weighting are:
– IFRS pre-tax profit 50%
– EEV operating profit 30%
– Group Strategic objectives 20%
The Committee may substitute, vary
or waive the performance measures
in accordance with the Scheme Rules.
The maximum award is 100% of basic
salary, however the STI Scheme award for
2014 is limited to 75%.
Long-Term Incentive (LTI) scheme
To incentivise
the delivery of
the longer-term
strategy by
the setting of
stretching
targets based
on shareholder
value, and to
help retain key
executives and
increase their
share ownership
in the Company.
The 2014 LTI Scheme is discretionary.
Awards are made under a performance
share plan, with no exercise price.
The right to receive shares awarded
will be based on achievement of
performance conditions over a minimum
three-year period.
It is the intention of the Committee
to grant awards annually and the
performance criteria will be set out in the
corresponding Implementation Plan.
The Committee may apply malus
provisions to unvested awards,
for example, in the event of misstated
performance or misconduct.
For 2014 vesting is dependent on two
equally weighted performance measures:
1. Total Shareholder Return: Performance
conditions are based on total
shareholder return of the Company
when compared to that of the
companies comprising the FTSE 350
High Yield Index. No payout will be
made unless the Company achieves
at least median performance. Full
vesting will be achieved if the Company
is at the upper quartile compared to
the peer group.
2. Group Embedded Value: This target
is commercially sensitive and therefore,
not disclosed. Actual targets and
results will be disclosed in the Annual
Report for the year in which an award
vests. The assumptions underpinning
the calculations are subject to
independent actuarial scrutiny.
The Committee may substitute, vary
or waive the performance measures
in accordance with the Scheme Rules.
The maximum award is 100% of basic
salary, however the LTI Scheme award for
2014 is limited to 75%.
The Remuneration
Committee has
undertaken
a review of the
remuneration
policy during
2013.
This is a new
scheme for which
shareholder
approval is being
sought at the
AGM.
More information
is set out in the
notes to this
table and in the
Resolution on
page 199.
The Remuneration
Committee
has undertaken
a review of the
remuneration
policy during
2013. This is
a new scheme
for which
shareholder
approval is
being sought
at the AGM.
More information
is set out in the
notes to this
table and in the
Resolution on
page 199.
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Chesnara | annual report & aCCounts 2013Section ccorporate governance Non-executive Directors’ remuneration
Purpose and link
to strategy
Operation
Performance measures and
maximum (where applicable)
Changes to
2013 policy
Fees for the Chairman and Non-executive
Directors are not performance related.
Reflecting the periodic nature of the
fee reviews, increases at the time they
are made, may be above those paid
to Executives and/or other employees.
There have
been no
changes to the
2013 policy.
Fees
To recruit
and retain
independent
individuals
with the skills,
experience
and qualities
relevant to
the role and
who are also
able to fulfil the
required time
commitment.
Fees for the Chairman are determined
and agreed with the Board by the
Committee (without the Chairman being
party to this). Non-executive Director
fees are determined by the Chairman and
the Executive Directors.
Fees are reviewed periodically and in
setting fees consideration is given to
market data for similar roles in companies
of comparable size and complexity
whilst also taking account of the required
time commitment.
All Non-executive Directors are paid
a base fee. Additional fees are paid to
the Senior Independent Director, the
chair of Board Committees and to other
Non-executive Directors to reflect
additional time commitments and
responsibilities required by their role.
Since our last report and following
a review of market practice on fees for
similar sized organisations, the
Chairman’s fees have been increased
by 11.1% from £90,000 to £100,000
effective from 1 January 2014. The last
increase was in 2010.
The Remuneration Committee Chairman
will be paid an additional fee of
£5,000 in 2013 and 2014 to reflect the
increased time commitment required
to support the changes to the company’s
remuneration policy and other
regulatory requirements.
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Explanatory notes:
1. Why these performance measures were chosen and
how performance targets are set
STI Scheme – The performance measures for the STI Scheme
reflect the main financial contributors to sustaining returns
for shareholders and the Group strategic objectives to ensure
that management is incentivised on the important projects
needed to support the strategy. The Remuneration Committee
determines the measures, their weighting and the targets
for each financial year. The measures will be based upon the
most relevant taken from a selection of measures which
may include costs, IFRS pre-tax profit, EEV operating profit,
cash generation, Group strategic objectives and personal
performance. The maximum potential award requires
significant outperformance of budgeted targets.
LTI Scheme – The performance measures for the LTI Scheme
have been selected for their alignment to shareholder
interests using an absolute measure (growth in Group EEV)
and a comparative measure (TSR). The measures and the
targets are set by the Committee. The maximum potential
award for the Group EEV measure requires significant
outperformance of budgeted targets. The TSR measure uses
the FTSE 350 High Yield Index over a 3 year period with
averaging during the first and last month. The Committee
currently considers this to be an appropriate comparator given
Chesnara’s strategic aims and focus on dividend payments.
In setting targets for both Schemes, the Committee exercises
its judgement to try and ensure that there is a balance
between stretch in the targets and the company’s risk appetite.
Full details of the performance measures, weightings and
targets and the corresponding potential awards are set out
in the Implementation Plan. (For 2014 see page 66).
The Future Policy table notes that all the financial targets for
the STI Scheme are commercially sensitive as is one of the
measures for the LTI Scheme. The Committee has considered
whether it could reasonably use transparent targets but
concluded that transparency should not be sought at the
expense of choosing the right ones for the alignment of
Executive Director and shareholder interests even if these
are not capable of being disclosed up front.
2. Changes to the Executive Directors’ incentive schemes
The Committee has undertaken a wide ranging review of
the Executive Directors’ incentive schemes primarily to better
align the interests of Executive Directors and shareholders;
and to improve the balance of awards between short-term
results and achievement of longer-term strategic initiatives.
The review has resulted in two new schemes being put to
shareholders for approval at the 2014 AGM.
Short-Term Incentive (STI) scheme
The Committee has made the following changes in relation
to its approach to short-term incentives to address concerns
that have been expressed about the previous arrangements
and to better align the Executive Directors’ interests to those
of shareholders:-
(i)
moved away from a single performance measure (IFRS
pre-tax profit) to a broader range of measures –
including Group strategic objectives;
(ii) each year, the Committee will determine the measures
and their weighting to help ensure there is focus on
each of the elements necessary to drive sustainable
performance. The main weighting will be given to
financial measures (typically 80%);
(iii) replaced a purely cash-based award without any
deferral with an award that is part cash and part share
award deferred for a further 3 years. For 2014 the award
is 65% cash and 35% deferred into shares provided
that the total award to a participant is at least £20,000
otherwise the award is 100% cash with no deferral.
The Committee may increase the weighting for the share
award in future years and adjust the de-minimis amount;
(iv) the period during which unvested awards may be
withheld under the terms of the malus provisions has
been extended by virtue of the introduction of a 3 year
deferred period for part of the award; and
(v) it is the intention of the Committee to make a new
award each year.
Further information about the new 2014 STI Scheme can be
found in the Scheme Summary on page 79.
Long-Term Incentive (LTI) scheme
Following its review the Committee believes this new
scheme provides a more transparent approach to long-term
incentives and better aligns the interests of Executive
Directors with those of shareholders. More specifically:
(i)
replaced a purely cash based award with a performance
share plan;
(ii) moved away from a single absolute performance measure
(EEV) to use of absolute and comparative measures;
(iii) in making a new award, the Committee will determine
the measures, their weighting and targets to maintain
a clear focus on longer-term strategic aims;
(iv) performance period at least three years and exactly
three years for the awards made in 2014; and
(v) it is the intention of the Committee to make a new award
each year.
Consistent with the previous LTIP, malus provisions
are included.
Further information about the new 2014 LTI Scheme can be
found in the Scheme Summary on page 80.
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Chesnara | annual report & aCCounts 2013Section ccorporate governance Changes common to both new incentive schemes
– Annual bonus: This is an integral part of the Company’s
Maximum Potential Awards
Under the existing incentive arrangements, the potential
maximum award is 100% of basic salary and is shared
between the annual and long-term plans. The maximum is
now 75% and applies to each new Scheme independently
which has the effect of increasing the Executive Director’s
overall maximum potential across the two Schemes. The
Committee is of the view that independent maxima are
preferable in order to remove any potential bias in the
Executive Directors’ behaviours to favour creation of good
short-term results at the expense of creating value over
the longer-term. Additionally, the Committee is of the view
that the revised quantum (75% of basic salary for each
award in 2014) strikes the right balance between being
motivational for the Executive Directors and not excessive
either in absolute terms or by comparison with the market.
The Committee may, in future years, increase the maximum
award for the STI Scheme and/or the LTI Scheme up to
100% of basic salary if it considers that the targets justify
a higher potential reward.
Minimum shareholding requirement
In order to further align the Executive Directors’ interests with
those of shareholders, a minimum shareholding requirement
has been introduced equal to one times salary. There is no
timescale attached and it may be achieved by participating in
the Company’s share plans. It is a requirement that shares
awarded under the STI and LTI schemes (net of shares sold
to pay for any income tax and National Insurance) must be
retained if the minimum requirement has not been met. Details
of Executive Directors’ shareholdings and the extent to which
the requirements have been met are disclosed on page 79
of the Annual Report on Remuneration.
Existing incentive plans
Vesting of outstanding awards made under existing plans
will be dependent on the performance conditions and other
rules of the Long-Term Incentive plan under which the
awards were granted.
philosophy with all UK employees below Board level being
eligible to participate in a bonus scheme which is based on
service and achievement of financial targets. Senior managers
in Sweden participate in annual bonus schemes which reflect
the achievement of business targets and personal goals. In
line with Swedish regulations part of the payment of this
bonus is deferred. Other employees in Sweden participate
in a scheme based on the achievement of company-wide
business goals.
– Long-term plans: Only Executive Directors are entitled
to participate in the long-term plans as these are the roles
which have most influence on and accountability for the
strategic direction of the business and the delivery of returns
to shareholders.
– Pension: The level of contribution made by the Company
to Executive Directors is similar to that offered to the
majority of other UK employees. Certain employees do
receive lower company pension contributions.
4. Other
The Company currently operates an SAYE scheme which
expires in 2014. The Committee has the discretion to
renew the SAYE scheme, a tax efficient all employee scheme
in which Executive Directors are eligible to participate.
Approach to remuneration on recruitment
The following principles apply when recruiting
Executive Directors:
– To offer a remuneration package that is sufficient to attract
individuals with the skills and experience appropriate to the
role to be filled whilst also being consistent with this Policy.
In addition to salary and variable remuneration, this may
include pension, taxable benefits and other allowances such
as relocation, housing and education.
– Pay levels will be set taking account of remuneration across
the company including other senior appointees, and the
salary offered for similar roles by other companies of similar
size and complexity.
3. Differences in policy compared with other employees:
– Each element of remuneration offered will be considered
The following note outlines any differences in the Company’s
policy on Executive Director remuneration from other
employees of the Group.
– Salary and fees: There are no differences in policy. The
Committee takes into account the Company’s overall salary
budget and percentage increases made to other employees.
– All taxable benefits: There are no differences in policy
although the benefits available vary by personnel and
jurisdiction and with job role. For example cars and health
insurance benefits are broadly consistent with the equivalent
benefits when offered to UK Non-Director personnel.
Executive Directors receive fuel allowances which is a benefit
not offered to other grades receiving a car allowance.
separately and collectively in this context.
– The maximum awards in respect of the STI Scheme and LTI
Scheme as set out in the table on pages 79 and 80 apply in
recruitment situations, save that exceptionally the Company
may award a one-off compensatory bonus or LTI award
where the new joiner would lose a bonus or long-term award
relating to his or her former role. In the event that such a
payment is made, full details will be disclosed in the Annual
Report on remuneration for the relevant year.
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Service contracts and loss of office
Executive Directors
Our policy is for Executive Directors to have service contracts
with a rolling twelve-month notice period.
with any relevant rules or contractual provisions. Typically, a
leaving employee is classified as a ‘Good Leaver’ if they depart
under ‘Special Circumstances’ (defined in the table below).
An employee leaving under any other circumstances is
classified as a ‘Bad Leaver’.
The table below summarises the notice periods and other
termination rights of the Executive Directors and the Company.
The approach of the Company on any termination is to
consider all relevant circumstances and to act in accordance
The Committee has discretion to classify an employee as a
Good Leaver or a Bad Leaver and to determine the treatment
of their outstanding awards upon departure.
Typical treatment in relation to salary, benefits and outstanding incentive awards for leavers under each scenario is shown below:
Nature of
termination
Notice
period
Salary and
benefits
Short-Term Incentive
scheme
Long-Term Incentive
scheme
Pension
Cease
on date
employment
ends.
Cease
on date
employment
ends.
Cease
on date
employment
ends.
12 months.
By Executive
Director or
company
giving notice
(excluding
special
circumstances
see below).
Cease on date
employment
ends.
Payment may be
made for any
unused holiday
entitlement.
No grants following service of notice.
Right to cash payment and unvested
deferred share awards cease on date
employment ends.
Outstanding options must be
exercised within 6 months of date
employment ends.
No grants following
service of notice.
Unvested awards lapse on
date employment ends.
Outstanding options
must be exercised
within 6 months of date
employment ends.
By Company
summarily.
None.
Cease on date
employment
ends.
None
prescribed.
Special
circumstances:
leaving by reason
of death, injury
or disability,
redundancy,
retirement with
the agreement of
the Remuneration
Committee, the
sale of employing
business or
company, or
other special
circumstances
at the discretion
of the Committee.
Normally
cease on date
employment
ends.
Payment may be
made for any
unused holiday
entitlement.
Discretion to
Company to
pay salary and
benefits in a
single payment
or in monthly
instalments.
Where payments
are made
monthly the
executive is
under an
obligation to
mitigate his or
her loss and
monthly
payments will
cease or
reduce upon
the executive
accepting
alternative
employment.
No further grants.
No further grants.
Right to cash payment and unvested
deferred share awards cease on date
employment ends.
Outstanding options must be
exercised within 6 months of date
employment ends.
Unvested awards lapse on
date employment ends.
Outstanding options
must be exercised
within 6 months of date
employment ends.
Discretion to make further grants during
a notice period where this is considered
to be in the company’s interests.
Where employment ends before
deferred share awards made, at the
discretion of the Committee, the award
may be retained.
If retained, the Committee has
discretion to allow the award to vest in
accordance with original terms, or
determine award is to vest on ceasing to
be employed and will also assess the
extent to which targets have been met.
In either case the award will be pro-rated
to reflect period of Performance
Period that has been worked and will be
paid in cash. Committee has discretion
to pro-rate using a longer period.
Where employment ends after deferred
share awards made, the award will
be retained and vest in accordance with
original terms. The Committee has
discretion to allow the award to vest
on ceasing to be employed.
All outstanding options must be
exercised within 6 months of the date on
which employment ends or on which
they vest (whichever is later), unless the
Committee specifies a longer period.
No further grants.
Where employment ends
before share awards vest,
at the discretion of the
Committee the award may
be retained. If retained, the
Committee has discretion
to allow the award to vest
in accordance with original
terms or, may determine
awards to vest on ceasing
to be employed and will also
assess the extent to which
the targets have been met.
In either case the award will
be pro-rated to reflect the
period of the Performance
Period that has been
worked. Committee has
discretion to pro-rate
using a longer period.
All outstanding options
must be exercised within
6 months of the date on
which employment ends
or on which they vest
(whichever is later) unless
the Committee specifies
a longer period.
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Chesnara | annual report & aCCounts 2013Section ccorporate governance Non-executive Directors
– Appointments are made under a contract for services for an
initial term of three years subject to election by shareholders
at the first Annual General Meeting following their appointment
and annual re-election thereafter.
Other Directorships
Executive Directors may, if approved by the Board, accept
appointments as non-executive directors of suitable
organisations. Normally fees for such positions are paid to
the Company, unless the Board determines otherwise.
– Non-executive Directors are typically expected to serve two
three-year terms but may be invited by the Board to serve
for an additional period. Any renewal is subject to Board review
and AGM re-election.
– The terms of an appointment are set out in a letter of
appointment which can be terminated by either party with
three months’ notice.
– There are no compensation terms regardless of the
circumstances that may lead to a contract being terminated.
Illustration of application of Remuneration Policy
The view of the Committee is that there should be balance
between fixed and variable pay such that when stretching
performance targets have been achieved in full around half
of an Executive Directors’ earnings are variable and half are
fixed. The Committee believes that this is appropriate given
the strategy of the Company and its risk appetite.
The charts below provide estimates of the potential future
reward opportunities for each Executive Director, and the
potential split between the different elements of remuneration
under three different performance scenarios: ‘Minimum’,
‘In line with expectation’ and ‘Maximum’. The illustration
assumes that the 2014 Policy applies throughout the period
and that the new STI and LTI Schemes are both approved
by shareholders.
Chief Executive Officer
Finance Director
Business Services Director
£000’s
Long-term incentive
Annual variable
Fixed
546
13%
17%
383
874
28%
28%
100%
70%
44%
205
100%
293
13%
17%
70%
467
28%
28%
44%
540
28%
28%
44%
337
13%
17%
70%
236
100%
Minimum
In line with
expectation
Maximum
Minimum
In line with
expectation
Maximum
Minimum
In line with
expectation
Maximum
Minimum
The table below analyses the constitution of the minimum earnings projection for 2014:
Director
Chief Executive Officer
Finance Director
Business Services Director
Salary and fees
£000
Benefits
£000
Pension
£000
Total fixed pay
£000
326
166
198
21
15
14
36
24
24
383
205
236
The pension information above includes both employee
and employer contributions. Employee pension contributions
are funded by way of a salary sacrifice arrangement and
as such are reported as part of the pensions value with a
corresponding reduction in salary. The employer contribution
element of the pension value varies by Director, and is
between 7.5% and 9.5% of gross basic salary before salary
sacrifice items.
Statement of shareholder views
The review of Executive Director incentives which has been
carried out during 2013 by the Remuneration Committee
has taken into account views expressed by shareholders in
connection with the 2012 Remuneration Report.
71
Chesnara | annual report & aCCounts 2013Section ccorporate governance
DiReCToRS’ RemUNeR aTioN Repo RT
annual remuner ation report
Single total figure of remuneration for each Director (audited information)
The remuneration of the Executive Directors for the years ended 31 December 2013 and 31 December 2012 is made up as follows:
Executive Directors’ remuneration as a single figure – year ended 31 December 2013
Name of Director
Salaries All taxable
benefits
and fees
£000
£000
Annual
bonuses
£000
LTIP
£000
Pension
£000
Graham Kettleborough
Ken Romney (resigned 17 May 2013)
David Rimmington (appointed 17 May 2013)
Frank Hughes
Total
302
77
93
167
639
21
5
9
14
49
320
–
98
198
616
–
–
–
–
–
Total for
2013
£000
694
99
213
429
51
17
13
50
131
1,435
Executive Directors’ remuneration as a single figure – year ended 31 December 2012
Name of Director
Graham Kettleborough
Ken Romney
Frank Hughes
Total
Salaries All taxable
benefits
and fees
£000
£000
Annual
bonuses
£000
272
190
150
612
18
12
14
44
190
130
117
437
LTIP
£000
Pension
£000
75
50
25
49
42
45
Total for
2012
£000
604
424
351
150
136
1,379
The remuneration of the Non-executive Directors for the years ended 31 December 2013 and 31 December 2012 is made as follows:
Non-executive Directors’ remuneration as a single figure – year ended 31 December 2013
Name of Director
Peter Mason
Mike Gordon (resigned on 17 May 2013)
Terry Marris (resigned on 17 May 2013)
Peter Wright
Veronica France (appointed 16 January 2013)
David Brand (appointed 16 January 2013)
Mike Evans (appointed 4 March 2013)
Total
Non-executive Directors’ remuneration as a single figure – year ended 31 December 2012
Name of Director
Peter Mason
Mike Gordon
Terry Marris
Peter Wright
Total
72
Salaries All taxable
benefits
and fees
£000
£000
Total for
2013
£000
90
17
15
60
46
43
37
308
–
–
–
–
–
–
–
–
90
17
15
60
46
43
37
308
Salaries All taxable
benefits
and fees
£000
£000
Total for
2013
£000
90
45
40
50
225
–
–
–
–
–
90
45
40
50
225
Chesnara | annual report & aCCounts 2013Section ccorporate governance
Salary and fees
Basic salaries are usually reviewed annually by the
Remuneration Committee. Assessments are made giving full
regard to external factors such as earnings inflation and
industry benchmarks and to internal factors such as changes
to the role by way of either structural reorganisations or
enlargement of the Group. In addition, basic pay levels reflect
levels of experience. The single earnings figures demonstrate
the application of this assessment process. The year on
year increase in the basic salary of Graham Kettleborough and
Frank Hughes reflect the findings from a benchmarking
exercise undertaken by the Remuneration Committee towards
the end of 2012, details of which were included in the 2012
Annual Report & Accounts. David Rimmington has entered
the Finance Director position at a lower basic salary then
his predecessor and the Remuneration Committee will assess
development and performance and reconsider the level of
basic pay as appropriate.
Taxable benefits
The taxable benefits relate to the provision of a car, fuel
allowance and medical insurance.
Annual bonuses and LTIPs
The 2013 annual bonus scheme is based on a single measure,
namely IFRS pre-tax profit. The scheme begins to generate
value at 75% of IFRS pre-tax profit target increasing to a value
of 15.79% of annual basic salary for achieving 100% of
target. Thereafter the value increases on a straight line basis
until a maximum award of 100% of basic salary is earned.
During 2013 the IFRS pre-tax profit was 398% of the target,
which is at a level such that the maximum attainment of
100% of basic salary has been reached. Despite the 100%
of basic salary cap the analysis suggests that the annual
bonus is actually higher than basic salary. This apparent
anomaly is due to the fact that the salary reported is net of
employees’ pension scheme contributions made by way of
salary sacrifice.
During 2013 the incentive arrangements have a combined
cap of 100% of basic salary for both the annual bonus plan
and the LTIP. Therefore the 2013 LTIP which vests in 2015
has zero value potential.
The 2012 annual bonus scheme was as per the 2013 scheme
detailed above. The IFRS pre-tax profit represented an
achievement of 178.89% of the target profit and an annual
bonus scheme award of 66% of basic salary.
The 2012 LTIP scheme is dependent upon target embedded
value criteria being achieved at the end of 2014 and hence
has generated zero value at the end of 2012 and 2013. The
100% of basic salary combined annual bonus and LTIP cap
means that the maximum potential 2012 LTIP value is 34%
of basic salary.
The LTIP value reported in the 2012 single earnings figure
analysis relates to the final award under a discretionary
scheme set up in 2009 to reflect the value generated by the
acquisition of Movestic. The scheme included a fixed bonus
value payable in 2013 subject to the embedded value of
Movestic at 31 December 2012 being higher than the value
on 31 December 2009 and the performance criteria was met.
Pension
The pension component in the single figure table above
includes a combination of employer’s contributions and a
salary sacrifice element. The employer’s contribution is based
on a fixed percentage of each Executive’s salary, and can
vary between Executives. With regard to the salary sacrifice
element, this is determined at the discretion of each
Executive. For the salary sacrifice component the Company
contributes the NI saving associated with the amount of
salary sacrificed by each Executive.
73
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annual remuner ation report (Continued)
Scheme interests awarded during the financial year
(audited information)
Up until and including 2011 the LTIP schemes for Executive
Directors were effectively based on single year performance
measures with payments deferred for three years. As such
any amounts due from pre-2012 LTIP schemes are recognised
within the single earnings figures for the original performance
assessment year. That is, all awards have already crystallised
prior to this financial year and have been reported.
The LTIP schemes for 2012 and 2013 depend upon three year
EEV projection targets being met or exceeded. As such
no value in these schemes has as yet crystallised. The 2012
and 2013 schemes will vest at the end of 2014 and 2015
respectively and will hence be included in the single earning
figures in those future vesting years. Note however that for
2012 and 2013 the total maximum combined bonus from the
short-term annual incentive plans and long-term incentive
plans is capped at 100% of basic salary. In light of the annual
bonuses earned in 2012 and 2013, the maximum potential
value from the current active LTIPs is relatively limited. Annual
bonus payments during 2012 represented 65.48% of the
total basic salary and as such only 34.52% remains available
from any potential LTIP award. During 2013 the annual
bonus represents 100% of basic salary and hence the 2013
LTIP has no potential value on vesting.
The table below sets out potential Long-Term Incentive scheme interests that have accrued during the year:
Face
value
(note 1)
£
% of award
vesting for
minimum
performance
–
–
Length
of vesting
period
Summary of performance
measures and targets
(note 2)
3 years –
vesting date
31 December
2015.
99,775
–
3 years –
vesting date
31 December
2014.
Based on achievement of a
target share price at the end of
2015: 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. (Note 2)
Based on achievement of a
target share price at the end of
2014: 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. (Note 2)
Name of
Executive
Director
Name of
scheme
Basis of
award
Graham
Kettleborough
2013
LTIP
2012
LTIP
Awards in
cash are made
dependent on the
EEV outcome
against target EEV
projections at
the end of a 3 year
assessment
period.
Awards in
cash are made
dependent on the
EEV outcome
against target EEV
projections at
the end of a 3 year
assessment
period.
74
Chesnara | annual report & aCCounts 2013Section ccorporate governance Scheme interests awarded during the financial year (audited information)(continued)
Face
value
(note 1)
£
% of award
vesting for
minimum
performance
–
–
Length
of vesting
period
Summary of performance
measures and targets
(note 2)
3 years –
vesting date
31 December
2015.
Name of
Executive
Director
Name of
scheme
Basis of
award
Frank
Hughes
2013
LTIP
2012
LTIP
David
Rimmington
2013
LTIP
Awards in
cash are made
dependent on the
EEV outcome
against target EEV
projections at
the end of a 3 year
assessment
period.
Awards in
cash are made
dependent on the
EEV outcome
against target EEV
projections at
the end of a 3 year
assessment
period.
Awards in
cash are made
dependent on the
EEV outcome
against target EEV
projections at
the end of a 3 year
assessment
period.
61,204
–
3 years –
vesting date
31 December
2014.
–
–
3 years –
vesting date
31 December
2015.
Based on achievement of a
target share price at the end of
2015: 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. (Note 2)
Based on achievement of a
target share price at the end of
2014: 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. (Note 2)
Based on achievement of a
target share price at the end of
2015: 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. (Note 2)
Note 1 – The Face Value is reported as the current
estimate of the potential value on vesting less any
adjustment to recognise the combined Annual Bonus
and LTIP cap of 100% of basic salary.
Note 2 – Any payments, together with the annual
bonus, would normally be capped, on award, at 100%
of basic salary.
Note 3 – Any amounts vesting will be subject to a pro
rata adjustment to reflect scheme entry part way through
the year.
75
Chesnara | annual report & aCCounts 2013Section ccorporate governance DiReCToRS’ RemUNeR aTioN Repo RT
annual remuner ation report (Continued)
Payments for loss of office (audited information)
On 17 May 2013 Ken Romney resigned as Finance Director of the Group. The total amount that he was paid for loss
of office was as follows:
Description
Amount £
Explanation of how calculated
Pay in lieu of notice
Compensation for early
termination of employment
Early payment of
performance-vested annual bonus
with deferred elements and
acquisition-related payments
Payment in lieu of 2012
LTIP award
125,233
75,000
155,110
41,601
Total
396,944
This represents payment of salary and contractual benefits.
This is a discretionary amount agreed by the Committee as
compensation for early termination of employment.
This represents early payment of deferred awards where performance
conditions have been met, that would have been paid at the end of
2013, and which were paid early at the discretion of the Remuneration
Committee as the majority of the deferral period had been served.
This represents a discretionary early payment of the 2012 LTIP
award, based on an assessment of the level of financial
performance up to the point of departure.
As reported in the 2012 Annual Report & Accounts all of
the payments in the table above were conditional upon
certain personal performance obligations being achieved to
the satisfaction of the Board. It can be confirmed that these
performance obligations were met and therefore payment
of the above items was made in full.
The table below shows, in relation to each Director, the
total number of share interests with and without performance
conditions, the total number of share options with and
without performance measures, those vested but unexercised
and those exercised at 31 December 2013 or the date
of resignation.
Statement of Directors’ shareholding and share
interests (audited information)
The Remuneration policy, effective from the 2014 AGM,
requires Executive Directors to hold shares to the value of their
basic salary. This recognises that it is not practical to impose
an immediate requirement and as such Directors are expected
to retain all shares received from either short-term or
long-term incentive schemes until the requirement is met.
Directors may dispose of shares even when the minimum
holding level has not been achieved where funds are required
to discharge any income tax and National Insurance liabilities
arising from awards received from a Chesnara incentive plan.
The share options without performance measures relate
to amounts invested by the Executive Directors into a
“save as you earn” scheme instigated in 2011 which vests
in 2014. The number of shares is based on a cumulative
investment values of £27,000 divided by an option price of
173.4p per share.
No changes took place in the interests of the Directors
between 31 December 2013 and 27 March 2014.
Name of Director
Shares
Options
With
Without
performance performance performance performance
Without
With
measures
measures
measures
Vested
but
measures unexercised
Graham Kettleborough
Ken Romney (resigned on
17 May 2013)
David Rimmington
Frank Hughes
Peter Mason
Mike Gordon (resigned on
17 May 2013)
Terry Marris (resigned on
17 May 2013)
Peter Wright
Veronica France
David Brand
Mike Evans
Total
–
–
–
–
–
–
–
–
–
–
–
–
68,100
79,476
2,127
5,832
19,768
–
57,615
70,000
–
–
–
302,918
–
–
–
–
–
–
–
–
–
–
–
–
5,190
–
5,190
5,190
–
–
–
–
–
–
–
15,570
–
–
–
–
–
–
–
–
–
–
–
–
76
Exercised
during the
year
–
–
–
–
–
–
–
–
–
–
–
–
Chesnara | annual report & aCCounts 2013Section ccorporate governance
Performance graph and CEO remuneration table
The following graph shows the Company’s performance,
measured by total shareholder return, compared with the
performance of the FTSE 350 High Yield Index and the FTSE
UK Life Insurance Index, which are also measured by total
shareholder return. The FTSE 350 High Yield Index has been
selected as a comparison because it is the index used by the
Company for the performance criterion for the 2014 Long-Term
Incentive scheme, and the FTSE UK Life Insurance Index has
been selected due to Chesnara’s inclusion within this index.
Chesnara total shareholder return rebased
FTSE UK Life Insurance Index, rebased
FTSE 350 High Yield Index, rebased
x
e
d
n
I
R
S
T
450
400
350
300
250
200
150
100
50
0
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
The table below sets out the details for the Director undertaking the role of Chief Executive Officer.
Year
2013
2012
2011
2010
2009
CEO single
figure of total
remuneration
£000
Annual bonus
pay-out
against
maximum
%
694
604
376
624
502
100.00%
65.48%
17.39%
100.00%
94.27%
Long-term
incentive
vesting
rates against
maximum
opportunity
%
n/a
100.00%
n/a
n/a
n/a
Note
1
2
3
3
3
Note 1 – During 2013 no LTIP value as been earned
because the annual bonus in isolation has accounted for
the full 100% combined bonus cap.
Note 2 – The vesting percentage in 2012 within the
Long-term incentive column does not relate to a formal
LTIP scheme. It relates to a discretionary supplementary
scheme established in 2009 to recognise the value
added to the Group from the acquisition of Movestic. The
amount vesting has been classified in the LTIP column
due to the fact its award was subject to certain future
performance criteria being achieved. That scheme has
generated the maximum potential value of £75,000 in
2012. The formal 2012 LTIP scheme has contributed no
value to the total single remuneration figure as it does
not vest until performance criteria have been achieved
in 2014.
Note 3 – Prior to 2012 the LTIP schemes were in fact
better characterised as deferred annual bonus schemes.
As such they are classified within the annual bonus
value and any value is included in the annual bonus pay-out
against maximum percentage.
77
Chesnara | annual report & aCCounts 2013Section ccorporate governance
DiReCToRS’ RemUNeR aTioN Repo RT
annual remuner ation report (Continued)
Percentage change in remuneration or Director undertaking the role of Chief Executive Officer
The table below shows the percentage change in remuneration or the Director undertaking the role of Chief Executive
Officer and the company’s employees as a whole between the years 2013 and 2012.
Percentage change in remuneration in 2013 compared with 2012
Salary and fees
All taxable benefits
Annual bonuses
Relative importance of spend on pay
The graph to the right shows the actual expenditure of the
Group and change between the current and previous years.
Due to the fact that Chesnara adopts a strategy of outsourcing
much of its activities the level of total employee pay is
relatively low in comparison to dividends. In addition, the graph
shows a comparison with the Group’s total acquisition and
maintenance expenditure. As can be seen, the total employee
pay is relatively small against our overall cost base.
£m
70
60
50
40
30
20
10
0
CEO
+11.32%
+17.48%
+68.15%
Group
employees
+7.73%
+2.64%
+11.53%
2013
2012
+6%
+15%
+3%
Total employee
pay
Business
acquisition and
maintenance
expenditure
Dividends
78
Chesnara | annual report & aCCounts 2013Section ccorporate governance
Statement of Implementation of Remuneration
Policy in the following financial year
A Remuneration Policy has been developed during 2013
in accordance with regulatory requirements and, subject
to appropriate approvals being received, will take effect from
the date of the 2014 AGM.
The following tables and commentary illustrate, in terms of
parameters and targets, how the policy will be implemented
during 2014:
Salaries and fees
Will be managed in accordance with the Company’s
Remuneration Policy (see page 65).
2014 Short-Term Incentive (STI) scheme
The table below and accompanying notes set out the
performance measures, weightings and the potential
outcomes for achieving minimum, on-target and maximum
performance. The actual targets for each measure are
commercially sensitive and will not be disclosed until 2015
together with the actual performance against those targets.
Measures
Weightings
Ranges and targets
Potential outcomes in terms
of % of basic salary
Minimum
achievement
(as % of
Target
target) achievement
Max
achievement
(as % of
Max
target) achievement achievement achievement
Minimum
Target
IFRS pre-tax profit
EEV operating
profit
Group strategic
objectives
50%
30%
20%
75%
Target
200%
90%
Target
150%
75%
Target
125%
–
–
–
11.25%
37.50%
9.60%
22.50%
7.50%
15.00%
Subject to shareholder approval, the 2014 STI Scheme will be implemented and operated by the Remuneration Committee
as set out within the Remuneration Policy (see the Future Policy table on page 66 and its accompanying notes).
Weightings
The weightings have been set by the Remuneration
Committee. The financial measures that align most directly to
shareholder benefit are generally assigned a higher weighting.
Targets
The IFRS pre-tax profit and EEV operating profit targets
are initially based on the 2014 budgets produced as part
of the 2014 Group business planning process. The Group
business plan is subject to rigorous Chesnara Board scrutiny
and approval. The Remuneration Committee can make
discretionary adjustments to either the targets or to the actual
results for the year if it considers this to be appropriate.
Measures
The three measures selected by the Remuneration
Committee for 2014 ensure a balance between aligning
Executive Director remuneration to shareholder returns
whilst also recognising measures over which the Directors
can exercise more immediate and direct influence. The
IFRS pre-tax profit and EEV operating profit are recognised
outputs from the audited year end Financial Statements,
although it should be noted that the Remuneration Committee
is able to make discretionary adjustments if deemed
necessary. The Executive Director objectives include major
regulatory or business development initiatives that are
expected to be progressed during the year. The Remuneration
Committee reviewed the Group business plan and identified
developments which it considers appropriate for assessing
the Executive Directors. Each individual development
objective is assigned a “significance weighting” influenced
by factors such as business criticality, scale, complexity
and level of Executive Director influence. Developments with
a higher significance are weighted more heavily when
establishing the overall performance target.
79
Chesnara | annual report & aCCounts 2013Section ccorporate governance
DiReCToRS’ RemUNeR aTioN Repo RT
annual remuner ation report (Continued)
2014 Long-Term Incentive (LTI) scheme
The table below and accompanying notes set out the performance measures, weightings and the potential outcomes relative
to achieving minimum, on-target and maximum performance. The actual EEV target is commercially sensitive and will not be
disclosed until 2017 together with the actual performance against those targets.
Measures
Weightings
Ranges and targets
Potential outcomes in terms
of % of basic salary
Minimum
achievement
Target
(as % of
target) achievement
Max
achievement
Max
(as % of
target) achievement achievement achievement
Minimum
Target
TSR
EEV
50%
50%
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