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Registered and Head Office
Building Four, West Strand Business Park,
West Strand Road, Preston, Lancashire PR1 8UY
T +44 (0)1772 972050 F +44 (0)1772 482244
www.chesnara.co.uk
Registered Number: 04947166
Designed by The Chase
—
Annual Report & Accounts
2015
MP4263 Chesnara 2015 R&A Cover_AW_V2.indd 1
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WELCOME TO THE CHESNARA
ANNUAL REPORT 2015
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,
Dutch 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.
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SECTION A | OVERVIEW
04
06
07
An introduction
2015 highlights
Chairman’s statement
SECTION B | STRATEGIC REPORT
12
14
16
18
26
34
36
40
Overview of strategy, culture & values and business model
Culture and values
Our strategy
Business review
Financial review
Financial management
Risk management
Corporate and social responsibility
SECTION C | CORPORATE GOVERNANCE
44
46
47
52
68
71
73
Board profile and Board of Directors
Governance overview from the Chairman
Corporate governance report
Directors’ remuneration report
Audit & Risk Committee report
Directors’ report
Directors’ responsibilities statement
SECTION D | IFRS FINANCIAL STATEMENTS
76
80
81
82
83
84
85
85
86
Independent Auditor’s report to the Members of Chesnara plc
Consolidated statement of comprehensive Income
Consolidated balance sheet
Company balance sheet
Consolidated statement of cash flows
Company statement of cash flows
Consolidated statement of changes in equity
Company statement of changes in equity
Notes to the consolidated financial statements
SECTION E | EEV BASIS SUPPLEMENTARY INFORMATION
160
161
162
163
164
Directors’ responsibilities statement
Independent Auditor’s report
Summarised EEV consolidated income statement
Summarised EEV consolidated balance sheet & statement
of changes in equity
Notes to the EEV supplementary information
SECTION F | ADDITIONAL INFORMATION
178
178
179
183
186
Financial calendar
Key contacts
Notice of Annual General Meeting
Explanatory notes to the notice of Annual General Meeting
Glossary
IN THIS SECTION
04 An introduction
06 2015 highlights
07 Chairman’s statement
NOTE ON TERMINOLOGY
As explained in note 8 to the IFRS financial statements, the
principal reporting segments of the Group are:
CA
S&P
which comprises the original business of
Countrywide Assured plc, the Group’s original UK
operating subsidiary; City of Westminster Assurance
Company Limited, which was acquired by the
Group in 2005, the long-term business of which was
transferred to Countrywide Assured plc during
2006; and Protection Life Company Limited which
was acquired by the Group in 2013, the long-term
business of which was transferred into Countrywide
Assured plc in 2014;
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;
Movestic
which was purchased on 23 July 2009 and
comprises the Group’s Swedish business, Movestic
Livförsäkring AB and its subsidiary and associated
companies;
The
Waard
Group
which was acquired on 19 May 2015 and comprises
three insurance companies; Waard Leven N.V.,
Hollands Welvaren Leven N.V. and Waard Schade
N.V.; and a service company, Tadas Verzekering; and
Other
Group
Activities
which represents the functions performed by the
parent company, Chesnara plc. Also included
in this segment are consolidation adjustments.
Following the Part VII transfer on 31 December 2014 of the
long-term business of Protection Life Company Limited into
Countrywide Assured plc, the business of Protection Life (PL) is
now reported within the CA segment, effective from 1 January
2015. Previously PL was reported as a separate segment.
Comparative information has been restated to reflect this change.
IN THIS REPORT & ACCOUNTS:
i. The CA & S&P segments may also be collectively referred
to as the ‘UK business’;
ii. The Movestic segment may also be referred to as the
‘Swedish business’;
iii. The ‘Waard Group’ segment may also be referred to as the
iv.
‘Dutch business’;
‘CA plc’ refers to the legal entity Countrywide Assured plc,
which includes the long-term business of CA, CWA, S&P
and PL;
‘CWA’ refers to the long-term business of City of
v.
Westminster Assurance Company Limited, which subsides
within Countrywide Assured plc;
vi. ‘S&P’ refers collectively to the original business of Save
& Prosper Insurance Limited and Save & Prosper Pensions
Limited, which subsides within Countrywide Assured plc;
vii. ‘PL’ refers to the long-term business that was, prior to the
Part VII transfer into CA plc on 31 December 2014, reported
within Protection Life Company Limited and was reported
as a separate segment for IFRS reporting purposes;
viii. ‘PL Ltd’ refers to the legal entity Protection Life
Company Limited;
ix. ‘Movestic’ may also refer to Movestic Livförsäkring AB,
x.
as the context implies; and
‘Acquisition of the Waard Group’ refers to the purchase of
the Waard Group, based in the Netherlands, on 19 May 2015.
02
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
OVERVIEWA
SECTION A
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
OVERVIEW SECTION A
AN INTRODUCTION
Chesnara plc is a Life Assurance and Pensions consolidator. It has operations in the UK, Sweden and
the Netherlands. The Dutch business was acquired during the year and mainly consists of term-life
policies, is closed to new business, and has c.80,000 policies. The UK business is closed to new business
whereas our Swedish subsidiary continues to run a profitable new business operation.
ABOUT CHESNARA
Who we are
What we do
– We are a responsible and profitable company engaged in the management of
Life and Pension policies in the UK, Sweden and the Netherlands.
– Chesnara plc was formed in 2004 and 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, an open Life and Pensions business in
Sweden and a closed-book group in the Netherlands.
– We administer c.910,000 Life and Pension policies for our policyholders:
349,000 in the UK, 481,000 in Sweden and 80,000 in the Netherlands.
– We manage £4.9 billion of funds (£2.8 billion in the UK, £1.9 billion in Sweden
and £0.2 billion in the Netherlands).
– We operate to high regulatory standards, ensure we offer effective service
levels and strong solvency levels as we aim to deliver fair outcomes 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.
– We are committed to delivering our stated strategic objectives of:
1. Maximising value from our existing businesses.
2. Making further life and pensions acquisitions where they meet stringent
assessment criteria.
3. Value enhancement through the writing of profitable new business in Sweden.
WHAT MATTERS TO OUR SHAREHOLDERS
PROVEN ATTRACTIVE
DIVIDEND HISTORY
25
20
15
10
5
0
450
400
350
300
250
200
150
100
£10.2M
‘04
£13.1M
‘05
£13.7M
‘06
£15.8M
‘07
£16.0M
‘08
£16.2M
‘09
£18.1M
‘10
£19.4M
‘11
£19.9M
‘12
£20.5M
‘13
£22.5M
‘14
£24.0M
‘15
GROUP EEV
HISTORY
The Embedded value of the Group has grown significantly since incorporation.
The reported growth is net of £194m of cumulative dividends.
‘04
£126M
‘05
£176M
‘06
£189M
‘07
£187M
‘08
£183M
‘09
£263M
Chesnara lists on the
London Stock Exchange,
following its acquisition
of CA plc.
Chesnara acquires CWA
from Irish Life and
Permanent plc for £47.8m.
EEV gain of £30.3m arising
on acquisition and £22.0m
new share capital issued.
The long-term business
of CWA was transferred
to CA plc.
Steady operating
profit on covered
business to support
dividend payment
in year.
Steady operating profit
on covered business
supports dividend
payment in year.
Chesnara acquires
Movestic, an open Swedish
Life and Pensions business,
for £20m, resulting in
an EEV gain of £54.2m on
acquisition.
04
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
OVERVIEW SECTION A
The Chesnara investment proposition is based upon cash emergence from the in-force books of business at levels sufficient to
fund the dividend strategy, support future acquisitions and provide adequate surplus to protect against the potential for earnings
volatility in the future.
The gross cash generated in 2015 has continued at levels in line with the prior year and continues to exceed our annual dividend.
In addition to an attractive dividend yield, growth is delivered through Swedish new business and value adding acquisitions.
Our 5 year Total Shareholder Return exceeds that of the FTSE 350 higher yield index.
How we operate
– We maintain a corporate governance team in the UK responsible for ensuring
prudential and conduct risk regulatory compliance, risk and capital
management, and oversight of our overseas subsidiaries and our
predominantly outsourced UK business.
– 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 strong solvency levels.
How we create value
Policyholder
Providing security through strong solvency. Effective customer service
operations together with competitive fund performance whilst giving full
regard to all regulatory matters support our aim to ensure policyholders receive
good returns and service in line with policy 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 dividends to be made from the subsidiaries to
Chesnara, which fund the attractive dividend strategy and support our desire
to be a ‘low maintenance’ share for our shareholders.
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.
GROSS CASH GENERATION
£44.2M IN 2015 (2014: £42.6m).
This represents the operational cash generated from the existing business.
RETURNS TO
SHAREHOLDERS
50
40
30
20
10
0
£33.1M
‘11
£34.0M
‘12
£49.7M
‘13
£42.6M
‘14
£44.2M
‘15
5 YEAR TSR: 98.5%
2015 YEAR TSR: 4.1%
2015 DIVIDEND YIELD: 5.7%*
*based on share price at 31 December 2015.
‘10
£355M
‘11
£295M
‘12
£311M
‘13
£376M
‘14
£417M
‘15
£455M
S&P acquired from
JPMorgan for £63.5m and
Movestic acquires the
business of Aspis Liv, a
small Swedish Life and
Health insurer. These
result in a combined gain
on acquisition of £41.0m.
£25.7m new share capital
issued in the year.
The long-term business
of S&P is transferred
to CA plc. Falls in both
equity markets and
bond yields result in a
reduction in EEV in
the year.
S&P de-authorised
from conducting
regulated activities
following transfer into
CA plc. Investment
market factors support
the increase in EEV in
the year.
Chesnara acquires
Protection Life from
Direct Line Group plc for
£39.3m, resulting in
an EEV gain on acquisition
of £12.3m. Strong
investment markets
drive EEV growth.
The long-term business
of Protection Life was
transferred into CA plc.
£34.5m of new equity
raised for the pending
acquisition of the
Waard Group.
Chesnara purchases the
Waard Group, a Dutch Life
insurer, resulting in a day 1
EEV gain of £21.3m.
05
OVERVIEW SECTION ACHESNARA | ANNUAL REPORT & ACCOUNTS 2015 CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
2015 HIGHLIGHTS
FINANCIAL
IFRS PRE-TA X PROFIT
£42.8M
IFRS pre-tax profit for the year ended 31 December 2015 of £42.8m
(year ended 31 December 2014: £28.8m). Financial Review page 28
GROSS CASH GENER ATION
£44.2M NOTE 2
Gross cash generated in the year of £44.2m (year ended 31 December
2014: £42.6m). Cash Generation page 30
NET CASH GENER ATION
£82.4M NOTE 2
GROUP SOLVENCY
SOLVENCY I
305%
SOLVENCY II Note 3
146%
Strong Insurance Group Directive solvency cover of 305% (31 December
2014: 284%). Group Solvency II ratio of 146% does not use any elements
of the Long-Term Guarantee Package, including transitional arrangements.
Business Review pages 23 to 25
FULL YEAR DIVIDEND INCREASE
2.9%
Total dividends for the year increased by 2.9% to 18.94p per share (6.61p
interim and 12.33p proposed final). This compares with 18.40p per share in
2014 (6.42p interim and 11.98p final).
Net cash generation of £82.4m (2014: £71.1m) includes £44.2m of gross
cash generation and £39.9m of cash generation arising on the acquisition
of the Waard Group. Cash Generation page 30
OPERATIONAL AND STRATEGIC
COMPLETED ACQUISITION OF
THE WA ARD GROUP DURING THE YEAR
EEV
£455.2M
The Waard Group acquisition, announced in December 2014, received
regulatory approval in the period and was completed on 19 May 2015.
Business Review page 21
Increase in EEV of £38.0m from £417.2m at 31 December 2014 to £455.2m at
31 December 2015, stated after dividend distributions of £23.5m in the year.
Financial Review page 32
ENHANCEMENTS TO
GOVERNANCE MODEL
EEV EARNINGS AFTER TA X
£57.5M
EEV earnings net of tax of £57.5m (year ended 31 December 2014: £44.2m),
before modelling adjustments. Financial Review page 31
Enhancements to our governance model have been made during the year.
This has included the completion of Governance Maps across the Group
and its divisions, the development of divisional and Group-wide ORSA
processes and improvements to our risk management framework following
the recruitment of a Group CRO.
MOVESTIC EEV NEW BUSINESS CONTRIBUTION
£5.7M
COMPLETION OF
SOLVENCY II
READINESS PROGR AMME
Movestic has generated a new business contribution of £5.7m in the year
(year ended 31 December 2014: £8.9m). Financial Review page 31
During the year significant effort has been put in across the Group to
ensure that we were ready for Solvency II going live on 1 January 2016.
The development programme was completed in the year.
Business Review pages 23 to 25
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
Risk appetite
06
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.
2. Gross and net cash generation are defined as follows:
i. Gross cash generation:
This represents the operational cash that has been generated in the period.
The cash generating capacity of the Group is largely a function of the
movement in the solvency position of the insurance subsidiaries within the
Group, and takes account of the buffers that management has set to hold over
and above the solvency requirements imposed by our regulators.
ii. Net cash generation:
This represents the cash that has become available for distribution to
shareholders during the period. It builds on ‘gross cash generation’ and makes
adjustments for items (either positive or negative) that affect the availability
of cash for distribution. For example, capital releases arising from capital
restructuring and one-off cash generation from acquisitions.
iii. Both the gross and net cash generation measures above have been determined
with reference to the Solvency I regulatory framework.
3. The Solvency II numbers referred to in the highlights above and throughout
the rest of this document have not been subject to external audit. Our first
solo Solvency II reporting to our local regulators is due on 19 May 2016.
OVERVIEW SECTION ACHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
OVERVIEW SECTION A
CHAIRMAN’S STATEMENT
2015 has been a busy and successful year for Chesnara.
The UK business has generated cash in line with
expectations and at a level sufficient to support Chesnara’s
dividend by itself.
The acquisition of the Waard Group has created significant
cash resource and, of equal importance, our entry to the
Dutch market has enhanced the outlook for our ongoing
acquisition strategy.
Movestic has continued to grow and has begun to make a
material contribution to the Group’s cash generation.
Lastly, we have delivered our Solvency II readiness
programme and remain well-capitalised under the new
regime, with a ratio of 146%. We have not used
transitional arrangements and the ratio is stated after the
proposed final dividend.
Peter Mason, Chairman
07
CHAIRMAN’S STATEMENT (CONTINUED)
I start my Chairman’s statement by reviewing how Chesnara has delivered against its three core
strategic objectives and how it has done so remaining true to its well established culture & values of
treating customers fairly and adopting a robust approach to regulatory compliance.
MAXIMISE VALUE FROM
EXISTING BUSINESS
ACQUIRE LIFE AND PENSIONS
BUSINESSES
ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
£44.2m of gross cash generation
which includes a positive
contribution from Movestic of
£5.1m.
Completion of the Waard Group
acquisition, resulting in
recognition of one-off cash
generation item of £39.9m.
New business profits of
£5.7m in Movestic continue to
contribute Embedded value
growth although profits are
down compared to prior year
(2014: £8.9m). New business
also contributes to growth in
funds under management.
See page 18 for further information.
See page 21 for further information.
See page 22 for further information.
– The Group Solvency II ratio is significantly in
excess of both statutory and internal Board
requirements, which are set at a higher
hurdle rate for the purposes of managing
the day to day business.
– The absolute level of surplus over and
above the internal Board requirement is
broadly consistent between Solvency I
and Solvency II at a divisional level, with the
total Group surplus under Solvency II
remaining healthy.
– The Risk and Governance requirements
under Solvency II have always aligned well
with the established Chesnara approach.
Solvency II does require an increased level
of formality, transparency and rigour
which if operated efficiently will enhance
the Chesnara governance framework.
– The capital requirements model under
Solvency II creates a clear and transparent
link between the business model and
the resultant capital required. This will help
the Board better understand how the
risks within the business and any decisions
we make impact capital and solvency.
This will in turn improve risk-based decision
making and enhance capital management.
– We have delivered Solvency II in a very cost
effective manner.
Maximise value from existing business
Our existing books have performed well in
the year. The UK business has reported
marginally positive economic profits despite
there being a continued level of short-term
volatility. Although the UK business remains
the primary source of dividend funding,
the continued growth in Movestic fund
values and income flows has resulted in
Movestic beginning to make a material
positive contribution to the Group’s cash
generation model.
We expect the transition to SII to create a
further short-term increase in surplus capital
within our divisions and hence additional
cash distribution potential. Our 2015 cash
generation results do not recognise this
potential additional divisional cash. We intend
to defer recognition until we have a fully
audited Solvency II balance sheet and a full
understanding of any potential barriers
to the additional surplus becoming available
for distribution.
The embedded values of the in-force books
have also increased during the year. In
particular the value of Movestic has benefitted
from increases in income derived from an
11% growth in funds under management.
Acquire life and pensions businesses
The completion of the acquisition of the
Waard Group has had a material positive
impact on the Group’s financial position and
acquisition outlook.
The Waard Group is well capitalised and
the surplus of £44.2m over and above our
target capital requirements represents a
future source of cash. This will either support
the Chesnara dividend or fund further
acquisitions. The acquisition also increased
the Group’s embedded value by £21.3m.
Net cash generation of £82.4m
which includes gross cash of
£44.2m from the existing
business and £39.9m from the
Waard Group acquisition.
Enhance value through profitable
new business
The downturn in new business profits from
Movestic is slightly disappointing; however
the level of profit in the year remains
very much in line with Chesnara’s strategic
positioning. Profit from new business is only
one aspect of the Movestic overall profit
growth and other aspects such as continued
funds under management growth and an
increase in average fees more than
compensate for the small downturn in the
value of new business. Our future
expectations from new business remain to
deliver modest profits from a realistic market
share of 10-15% of our target market
(average 2015 market share of 11.7%) and the
new business will support the overall growth
of the Movestic funds.
Solvency II
Over recent years Solvency II has created a
great deal of work and also a degree of
uncertainty across the industry. I am pleased
to report that there is now clear light at the
end of the Solvency II tunnel. Despite the
significant effort associated with Solvency II
we have not lost focus on our core business
objectives. The fact that Solvency II has
been delivered during a period which included
two successful acquisitions, continued
Movestic growth and UK cash emergence at
levels higher than expected, is testament
to the strength of the Chesnara business
model and also the dedication and abilities of
the entire Chesnara team and our outsource
partners. Importantly, we also assess the
outcome from the transition to Solvency II
to be positive, in that:
08
OVERVIEW SECTION ACHESNARA | ANNUAL REPORT & ACCOUNTS 2015 Outlook
Much has been said regarding the
potential impact on British industry should
the referendum in July regarding British
membership of the EU result in a ‘leave’ vote.
The longer term economic impacts of
staying in the EU or leaving remain uncertain
and as a result we continue to monitor the
situation closely. We do, however, believe
that the impact of a ‘leave’ vote will
not materially affect Chesnara’s business.
Our financial and governance foundations
are strong and our existing books continue
to generate reassuring levels of cash.
In addition, with more certainty about the
impact of Solvency II across the industry
and with our entry to the Dutch market,
the acquisition outlook is increasingly
positive. I am therefore confident that
Chesnara can continue to deliver against
its strategic objectives and provide value to
policyholders and shareholders.
Peter Mason
Chairman
30 March 2016
Regulation
Compliance with regulation remains a priority
for the Group, not least Solvency II. We
have continued to maintain a positive and
constructive relationship with regulatory
bodies across the Group.
Investment proposition
The performance in the year has resulted in
strong returns to shareholders in the form
of the continuation of our attractive dividend
strategy whilst also ensuring we retain
sufficient resources to support future growth.
Within the UK the FCA has recently issued
its report regarding the ‘Fair treatment of
long-standing customers in the life insurance
sector’. At the time of this report the findings
are subject to a three month consultation
period. As a result of this review the FCA
announced the launch of an investigation into
whether disclosure of paid up and early
transfer charges to the customers of
Countrywide Assured and other providers
was adequate to enable those customers
to make informed decisions.
We will of course co-operate fully with the
FCA in its investigation. We also note that no
conclusion has yet been reached as to
whether there have been any breaches of
regulatory requirements within CA.
With regards to the broader review, we
would envisage it will result in the need for
changes to processes and customer
communications to meet these new best
practice standards. We will fully commit to
any such industry enhancement programme
when the scope and expectations are better
known post consultation and whilst we
expect there will be a cost for this work we
do not expect it will have a material impact
on our financial model.
During July 2015 the Government launched a
consultation linked to the new pension
freedoms introduced in the UK, entitled
‘Pension transfers and early exit charges’.
In the consultation response the Government
has indicated that it has passed legislation
to enable the FCA to consider whether caps
on certain exit charges should be introduced,
and at what level. To date we have supported
the ABI acting on behalf of the industry as a
whole in relation to this subject, and will
support the FCA in delivering the work it has
been charged with performing following the
Government’s consultation. Analysis indicates
that should exit fees on pension policies
be capped at 5% then the impact on the
embedded value of Chesnara is not material.
5.7% dividend yield
based on share price at 31 December 2015
People
Chesnara’s success has always been built
upon a culture whereby the Board,
management and staff all recognise their
responsibility of safe-guarding the interests
of our stakeholders. We have always
placed a high importance on transparency
and integrity and managing the business in
a compliant and responsible manner.
Continuity of culture is a challenge particularly
when we make acquisitions or when there
is a change in Senior Management. In light
of this I am particularly pleased to report that
John Deane, appointed as our new CEO
at the beginning of the year, has done an
excellent job in his first year, building upon
all the positive qualities that have served
Chesnara well over the years. As we have
integrated the Waard Group it has become
clear that local management fit very well
into the Chesnara culture. They operate in a
professional and transparent manner giving
full regard to regulatory compliance.
Governance and Risk Management
During the year we have developed and
embedded Governance Maps across the
Group. We have also invested significant time
in the production of revised principles
and policies. These developments will
ensure robust and consistent governance and
capital management across the enlarged
Chesnara Group.
Chesnara has always given appropriate
consideration to the risks to which the
business is exposed. To further enhance our
management of risk we have recruited a
Group Chief Risk Officer during the year. The
new Group Chief Risk Officer has taken a
lead role in the development of risk appetite
statements, our Own Risk and Solvency
Assessments (ORSAs) and is well on the way
to enhancing our risk management framework
across the group.
The improved risk management processes
together with the continued Board focus on
risk assessment means high quality risk
management will continue to be a key strength
at the heart of Chesnara’s ongoing success.
09
OVERVIEW SECTION ACHESNARA | ANNUAL REPORT & ACCOUNTS 2015 IN THIS SECTION
12 Overview of strategy, culture &
values and business model
14 Culture and values
16 Our strategy
18 Business review
26 Financial review
34 Financial management
36 Risk management
40 Corporate and social responsibility
10
STRATEGIC REPORT B
SECTION B
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
OVERVIEW OF STRATEGY, CULTURE & VALUES AND BUSINESS MODEL
Our strategy focuses on delivering value to shareholders and policyholders (see pages 16 and 17).
The strategy is delivered through a proven business model (see page 16) underpinned by a robust risk
management and governance framework (now based on SII requirements) and by adapting our
established culture & values (see pages 14 and 15).
MAINTAIN
ADEQUATE
FINANCIAL
RESOURCES
FAIR
TREATMENT
OF CUSTOMERS
PROVIDE A
COMPETITIVE
RETURN TO
SHAREHOLDERS
ROBUST
REGULATORY
COMPLIANCE
12
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
STRATEGIC OBJECTIVES,
CULTURE & VALUES
OVERVIEW
CULTURE & VALUES
Our strong culture & values underpin
everything we do.
A summary of our culture & values and
why they are important, coupled with
management’s actions this year and their
impact are summarised on pages 14 and 15.
BUSINESS MODEL
Our strategic objectives and culture &
values are delivered through the operation
of our business model, as described on
pages 16 and 17.
MAXIMISE VALUE
FROM EXISTING
BUSINESS
ACQUIRE LIFE
AND PENSIONS
BUSINESSES
An overview of why we focus on this
objective, our delivery against it during
2015 along with our views on 2016 and
beyond can be found on pages 16 and 17.
Further analysis of the outcomes of this
objective for 2015, split by operating
territory, can be found in the Business
Review on pages 18 to 20.
An overview of why we focus on this
objective, our delivery against it during
2015 along with our views on 2016 and
beyond can be found on pages 16 and 17.
Further analysis of the outcomes of this
objective during 2015 can be found in the
Business Review on page 21.
ENHANCE VALUE
THROUGH
PROFITABLE NEW
BUSINESS
An overview of why we focus on this
objective, our delivery against it during
2015 along with our views on 2016 and
beyond can be found on pages 16 and 17.
Further analysis of the outcomes of this
objective during 2015 can be found in the
Business Review on page 22.
13
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
CULTURES & VALUES
Our long established and proven culture & values underpin the delivery of our core strategic
objectives. Risk management is at the heart of our robust governance framework. Our values
are strongly influenced by the recognition of our responsibility to a range of key stakeholders
including policyholders, regulators, employees and our investors.
CULTURE & VALUES
WHY IMPORTANT
Maintaining adequate
financial resources is
at the heart of good
business conduct.
Effective capital
management is a
critical focus and a
key requirement
upon which all our
cultural objectives
are dependent.
Further information
regarding the
Group’s solvency
position is included
in the business
review on pages 23
to 25.
Responsible risk-based
management for the benefit
of all of our stakeholders
Fair treatment of customers
Provide a competitive return
to our shareholders
Robust regulatory
compliance
Risk taking is a key part of our business model
– taking the ’right risks’ and managing them
well is essential to our success. We achieve
this by understanding the key risk drivers of the
business plan and strategy, and by making sure
we monitor these risks and take appropriate
risk-based decisions in a timely fashion, for the
benefit of all of our stakeholders.
The fair treatment of customers across the
Group is our primary responsibility. It is
also important to the Chesnara business
strategy as it promotes stronger relationships
with our customers and regulators.
When applying the terms of our customer
contracts, coupled with the developing
guidance from local regulators on the
application of policy conditions, we place a
high priority on taking account of the
treatment of our customers while balancing
the interests of our other stakeholders.
As a public company it is imperative that we
offer an attractive investment case. Given
the majority of our investors hold our shares
in ’income funds’, it is important that we deliver
an attractive and sustainable dividend. We also
recognise the benefits of being a
’low maintenance’ investment offering clarity
and consistency of performance.
Working constructively with our regulators
and complying with regulatory requirements
is imperative to the delivery of our
objectives. The regulators’ desire for robust
and responsible governance is very much a
principal aim of the Chesnara Directors.
14
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
WHAT WE HAVE DONE
OUTCOME
The appointment of a Group Chief Risk Officer together with the
– Strengthened controls reducing risk likelihood and impact of adverse
ongoing delivery of our Solvency II programme of change
has resulted in significant improvements to an already robust risk
management framework. Key developments include:
– Development of a Risk Appetite and Limit system.
– Refreshed Capital Management and Risk policies.
– Development of Group and Divisional ORSAs.
– Enhancements to our risk-based acquisition assessment model.
– Established Governance Maps across the Group.
– Embedded Own Risk and Solvency Assessment processes and
aligned with Strategic Planning.
outcomes for shareholders and policyholders.
– Increased Board awareness of the risk drivers and solvency position.
– More focused and timely Board awareness of material risk matters.
– Stronger linkage between risk, capital and strategy.
– More carefully considered risk taking and risk-based decision making.
– More robust governance.
– Positive regulatory relationships.
– Solvency II ready prior to go live date of 1 January 2016.
– Across the Group we have delivered a good standard of customer service.
– In the UK our administrative outsource service partners have delivered
– General low level of complaints that have been received across the
Group has continued.
within stringent service level requirements.
– In the UK the Financial Ombudsman Service continues to agree
– Purchased and efficiently integrated the Waard Group.
– Service standards in Sweden remain strong as evidenced by external
with our decision on the majority of complaints referred to them
for adjudication.
surveys undertaken by brokers.
– Unit-linked policy returns in Movestic remain competitive based on both
fund benchmarks and external unit-linked policy performance surveys.
– Fund performance in the UK was below benchmark for two of our three
primary managed funds (see page 18 for further detail).
– Where complaints do arise we continue to manage them in accordance
with regulatory best practice.
– A new complaints registration system was introduced in the Netherlands,
in accordance with regulatory requirements.
– Across the Group we closely monitor any regulatory developments
to ensure we continue to treat customers fairly in accordance with
regulatory requirements and their contract terms.
– Good service standards and customer outcomes in Sweden have
supported continued IFA new business levels within our target
market share range.
– The acquisition of the Waard Group business during the year has
had no adverse impact on service levels or customer outcomes.
– The Waard Group acquisition and Movestic new business profits
increased Embedded Value.
– The Waard Group acquisition generated significant distributable cash.
– Effective transition to Solvency II.
– Continuation of our dividend strategy.
– Dividend track record continues.
– 2.9% dividend growth.
– dividend yield of 5.7% based on share price at 31 December 2015.
– Effective delivery of Solvency II.
– Positive relationship with the DNB built up through the Waard
Group acquisition process.
– Established Governance Maps across the Group.
– Supported the work performed by the FCA in relation to its ’legacy
review’ work.
– Ongoing constructive relationship with UK and Swedish regulators.
We have had confirmation that the PRA is the Group Supervisor under
Solvency II.
– Obtained regulatory approval from the DNB for the acquisition of the
Waard Group.
– No material breaches of any internal governance policies and principles.
– Subsequent to year end, on 3 March 2016 the FCA announced that
they will perform an investigation into whether disclosure of paid up
and early transfer charges to the customers of Countrywide Assured
and other providers was adequate to enable those customers to
make informed decisions, following their ’legacy review’ data
collection exercise that was announced and performed during 2014.
15
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
OUR STRATEGY
STRATEGIC OBJECTIVE WHY THIS MATTERS
HOW WE DELIVER
OUR BUSINESS MODEL
MAXIMISE VALUE
FROM EXISTING
BUSINESS
The existing in-force books are
the principal source of cash
generation and are hence at the
heart of the investment case.
ACQUIRE LIFE AND
PENSIONS
BUSINESSES
Chesnara is primarily a closed
book operation and as such
will inevitably lose scale over
time. Acquisitions maintain the
effectiveness of the operating
model. In addition, well
considered and appropriately
priced acquisitions will create a
source of value enhancement
and sustain the cash generation
potential of the Group.
In the UK Chesnara adopts an outsourced
business model. Governance oversight and
Corporate management is provided by a
highly experienced centralised governance
team. This governance team also ensures
robust and consistent governance practice
across the Group, although operational
autonomy is devolved to Sweden and the
Netherlands to ensure we benefit from our
strong divisional management teams. Core
operations are not outsourced in Sweden or
the Netherlands because it would not suit the
open business model or inherited model in
those territories respectively.
Identify potential deals through an effective
network of advisers and industry associates.
We work cooperatively with regulators and
assess deals applying well established criteria
which consider the impact on cash generation
and embedded value under best estimate and
stressed scenarios.
The financial benefits are viewed in the context
of the impact the deal will have on the enlarged
Group’s risk profile.
Transaction risk is minimised through stringent
risk-based due diligence procedures and
the senior management team’s acquisition
experience and track record.
We fund deals with debt, equity or cash depending
on the size and cash flows of each deal.
ENHANCE VALUE
THROUGH
PROFITABLE NEW
BUSINESS
Whilst new business profits are
a relatively modest component
of the Chesnara financial
model, they are an important
and welcome regular source of
value growth which supplements
growth delivered from
our periodic acquisitions.
New business activity is only carried out in
Sweden, where we primarily focus on unit-linked
pensions and savings. We distribute through
IFAs and target a realistic share of our target
market of between 10-15%. To achieve higher
volumes would require a pricing strategy that
may compromise the keen focus on ensuring
the business we write is profitable.
16
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
HOW WE MEASURE DELIVERY
WHAT WE DID IN 2015
Continued focus on sound
governance including the
implementation of Solvency II,
together with good performance
by our outsource partners has
resulted in cash emerging in
line with expectations in the UK.
Although, the UK remains the
primary source of cash, Movestic
has reached sufficient scale
during 2015 that it has begun to
contribute positively to this core
objective. The Waard Group,
being a very well-capitalised
business, brings with it surplus
cash that is available for
distribution in an orderly fashion.
Fund performance in the UK
was below benchmark for two
of our three primary managed
funds (see page 18).
We completed the acquisition of
the Waard Group which delivered
positively against all our
assessment measures,
generating £39.9m of immediate
cash and increasing the Group’s
EEV by £21.3m. The acquisition
has provided a safe solution for
the policyholders and there has
been no service deterioration
throughout the business transfer.
We measure gross cash from the closed
book which is defined as the movement
in the surplus of capital resources over
capital requirements set by management.
As such cash can be generated by
either profits arising in the period or
a reduction in capital requirements.
Value is measured by reference to the
movement in embedded value.
This is measured through monitoring:
– customer service metrics;
– policyholder fund performance against
industry and market expectations;
– customer complaint levels; and
– our compliance with regards to
regulatory conduct matters.
Collectively our future acquisitions
must be suitably cash generative
to continue to fund the Chesnara
dividend strategy.
Acquisitions are required to have a
positive impact on the embedded
value per share under best estimate
and certain more adverse scenarios.
Acquisitions must ensure we protect,
or ideally enhance, customer interests.
Acquisition should normally align with
the Group’s documented Risk
Appetite. If a deal is deemed to sit
outside our risk appetite the financial
returns must be suitably compelling.
We measure the amount of embedded
value added through the writing of
new contracts. The value added takes
full account of all costs incurred so
as to ensure the profit represents true
incremental value.
During the year Movestic
generated new business profits
of £5.7m.
PRIORITIES FOR 2016
AND BEYOND
Embedding Solvency II across the
Group and further enhancing our
Governance framework are a key focus.
The Group’s priority is to continue to
service customers in an efficient and
effective manner, reacting appropriately
to any regulatory changes that may
emerge. Movestic will continue to aim
to improve margins and deliver fund
growth such that they become an
increasingly positive contributor to this
corporate objective. Movestic will
develop its IT systems and processes
to ensure the growth can be
well managed with no deterioration
of service levels.
We will continue to closely monitor
fund performance across the Group,
including the UK where fund
performance was below benchmark
in 2015 for two of our three primary
managed funds.
Continue to demonstrate we
offer a safe proposition for acquired
businesses.
Proactively investigate and assess
opportunities in our target markets,
namely the UK and the Netherlands.
Movestic will continue to enhance
the product offering in terms
of fund range and performance.
This, together with ongoing
improvements to the sales process
and infrastructure, is expected
to result in Movestic moving up its
10-15% market share target.
Pricing policy and cost control will
mean the targeted modest sales
growth results in a corresponding
increase in profits.
17
Cash generationValue optimisationCustomer outcomesCash generationValue enhancementCustomer outcomesValue enhancementRisk appetite
BUSINESS REVIEW
MAXIMISE VALUE FROM EXISTING BUSINESS UK
Value has continued to emerge
from the UK business across all
key financial metrics.
Highlights
– Completion of Governance Map during the year.
– No significant impact following pension freedoms introduction to date.
– Good gross (operational) cash generation of £42.5m underpinning net
cash generation of £40.8m.
– Solvency II ready.
Review of the year
The UK business has seen some significant
internal changes during 2015, mainly arising
through preparing for a number of regulatory
changes impacting the business. This has
included Solvency II, which applied from
1 January 2016, the application of the Senior
Insurance Managers Regime (SIMR),
coupled with ensuring that our operations and
processes were appropriately adapted to
support the enactment of increased freedoms
given to policyholders with pension products.
During the year management has continued
to support any open regulatory matters,
including a review into exit and transfer
charges on pension products and the FCA’s
review on the fair treatment of long-standing
customers.
The operational changes that have been made
in relation to Solvency II and the SIMR are
very positive to the business and continue to
support our objective of value maximisation.
For example Solvency II introduces, through
the ORSA process, improved linkage between
assessing/managing risk and decision
making. The development of a UK Governance
Map to support a Group-wide Governance
Map implementation programme helped
prepare the division for the implementation
of the SIMR on 7 March 2016. Good
governance is central to ensuring that our
business is well controlled and in particular
will bring enhancements to our risk
management framework and reporting of risk,
something that will continue to be developed
and implemented during 2016, led by our new
Chief Risk Officer.
Solvency II has also introduced a new lens
through which management looks at the
regulatory capital of the UK business, where
the ’standard formula’ is applied. Further
insight on the quantitative impact of moving
from Solvency I to Solvency II can be found
on page 23.
As a predominantly outsourced operation a
key part of managing value is through having
well controlled oversight over our
outsource providers, who cover policyholder
administration, accounting, actuarial and
investment management services. Our
contracts are managed through regular
relationship meetings and are underpinned by
robust contractual Service Level Agreements
(SLAs) which encompass a variety of quality,
risk management, regulatory compliance
and policyholder treatment measures. The
investment management outsourcing is
overseen by CA plc’s Investment Committee.
Our outsourcers have continued to deliver
strongly across all service targets.
Following the Part VII transfer of the Protection
Life business into CA plc on 31 December 2014
the de-regulation process of Protection Life
Company Limited has now been completed,
thereby making £2.9m of additional capital
available to the Group.
Financial performance
The UK business has continued to deliver
strongly across its key financial metrics of
Solvency, IFRS profit, EEV profit, and Cash
Generation. Further analysis behind these
metrics can be found on pages 23 and 26 to 33.
Value driver metrics
Unit-linked funds under management
The levels of unit-linked funds under
management continue to support the on-going
level of profitability of the UK business, 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.
The reduction in funds under management
during the year is primarily driven by the
reduction in policy numbers. Investment
markets during 2015 have displayed volatility,
but closed broadly in line with the start of
the year.
Fund performance
Despite volatile global equity markets the
performance of our investment management
partners has contributed to positive returns in
our main managed funds during the year
ended 31 December 2015 though below the
benchmark for the CA Pension Managed fund
and CWA Balanced Managed fund. The
last times these funds were below benchmark
were 2011 and 2013 respectively.
Policy attrition
As a closed book, policy numbers are
expected to reduce over time. The reduction
in policy numbers in 2015 is marginally up
compared with the prior year. The impact of
the new pension freedoms on policyholder
attrition levels has been closely monitored by
management and, whilst a small ’spike‘ was
witnessed, the overall policy count reduction
year on year is only slightly up, increasing from
6.9% to 7.5%.
Risks associated with the strategic
objective
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 falls or when,
particularly for those guarantees expressed
as an amount of pension, bond yields fall. To
mitigate this risk, assets held by shareholders
to provide security for these guarantees are
invested in cash and long-term bonds.
Consequently our results will be negatively
affected by falls in equity values, which
impact assets backing policyholder liabilities,
and/or falls in bond yields, which impact the
cost of providing the guarantees were they to
occur. Conversely, increasing markets and
yields will positively affect the results. Close
management of the portfolio backing these
liabilities continues.
Increased lapses on cash generative products
are also a risk to the delivery of this strategic
objective. This risk is managed through:
– Close monitoring of persistency levels.
– Active investment management with the
aim of delivering competitive policyholder
investment returns.
– Outsourcer service levels that ensure strong
customer service standards.
– Customer retention processes.
Unit-linked funds under management (£m)
Fund performance
Policy attrition, based on policy count
2,083
2,300
CA Pension Managed
CWA Balanced Managed Pension
S&P Managed Pension
Benchmark – ABI Mixed Inv 40%-85% shares
2015
2014
1.9% 1.7% 4.7% 2.4%
7.0% 8.2% 6.9% 5.0%
8.1%
7.7%
6.5%
5.5%
7.5%
6.9%
2015
2014
2015
2014
CA
S&P
Total UK
18
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
BUSINESS REVIEW
MAXIMISE VALUE FROM EXISTING BUSINESS SWEDEN
Strong value emergence driven by
growth in assets under management
and improvements in performance
fee rebates.
Highlights
– Division has generated positive cash results in the year.
– Improved performance fee rebate levels.
– Continued good growth in assets under management.
– Solvency II ready.
Review of the year
The Swedish division has delivered strong
growth during the year supporting the
Group’s strategic objective of maximising
value from its existing businesses. Two key
factors have driven this value generation:
(i) improved fund performance fee rebates as
a result of various investment management
changes that were made during late 2014
and have continued into 2015; and
(ii) good growth in funds under management.
Being able to provide a wide range of funds
to its policyholders is a key differentiator of
Movestic compared with its more traditional
competitors. Movestic’s funds are continually
reviewed and where appropriate new funds
are added to satisfy its policyholder
requirements. During 2015 additional ‘white
label’ funds have been launched, building on
three new funds that were made available
during 2014. These have been delivered
through revised funding structures which
have resulted in higher fee generation
than previously. Successful renegotiations
with certain fund managers have delivered
additional performance fee rebate income
during the year.
To support its continued growth strategy
and to deliver enhancements to the way
existing business is managed, the Division
has started to invest further in its business
processes and systems. This will facilitate
more effective policyholder/distributor
communications and policy management.
The business management layer of the new
system will also support more streamlined
business reporting, in particular the regular
reporting that is required to Regulators
under Solvency II.
With Solvency II becoming effective from
1 January 2016, during 2015 the business
has delivered its Solvency II development
programme such that it is now ready across
all aspects of the new regime. In particular,
governance and risk management
enhancements have been made, all of
which will deliver value generation through
enhanced risk-based decision making
and business control. The prudential
management aspects of Solvency II have
also resulted in a new way in which
management assess the capital within the
business and how it meets the capital
requirements. Further information on this
has been included on page 23.
Financial performance
The Swedish business has performed
well during the year across all key financial
metrics, specifically regarding its cash
generation. Further analysis behind these
metrics can be found on pages 26 to 33.
Value driver metrics
New business
A review of the new business operation of
Movestic is covered on page 22.
Assets under management
Assets under management are a key value
driver of the business through providing
a source of revenue in the forms of
performance fee rebates from asset
managers and charges to policyholders.
Assets under management have grown by
11% during the year, closing at SEK 24.3bn.
Underpinning the growth in assets under
management are three key drivers:
– performance of the new business operation
(see page 22);
Policyholder behaviour: The number of
policies that have either become paid up,
or have surrendered, has decreased when
compared with 2014. There has been a
slight increase in policyholders transferring
out their policies to another provider during
the year, which has also resulted in the
transfers-in to transfers-out ratio becoming
less favourable compared with 2014.
Transfers within the Swedish Division can
depend on a number of factors, including
competitor offerings agitating the transfer
market and changes in relationships
with brokers. The net impact of these
factors has resulted in transfers-out being
slightly up on the prior year.
Risks associated with the strategic
objective
– High levels of lapses and transfers remains
a risk. Given that the Movestic product
proposition already offers significantly more
portability for transferring pensions
than the general market, our view is that
an increased right to transfer would
be beneficial to customers and to Movestic
in terms of its market position with other
more traditional competitors.
– Profit emerging from the in-force book is
dependent upon the size of the funds
under management. Adverse investment
market conditions would therefore
adversely impact this strategic objective.
– Loss of key brokers can result in increases
– overall performance of investments within
in the level of transfers-out.
the funds (see below); and
– behaviour of policyholders (see below).
Investment performance: Overall funds
under management have returned growth of
4.9% for policyholders during 2015. Good
investment return not only supports income
generation for the business but is also
important in retaining existing policyholders
and attracting new ones. The fund
performance analysis below shows that 38
out of 59 funds out-performed their
benchmark index during the year.
– Regulatory change can potentially impact
the cash flows arising from the in-force
book. For example, there remains
ongoing debate in Sweden regarding
possible changes to up-front fees and
rebate commissions.
– From a Group perspective we are exposed
to foreign currency fluctuations which
impacts the sterling value emerging from
the Swedish operations.
Policy attrition
Transfers
Assets under management
Fund performance (for those with benchmarks)
2015
2014
Transferred in
Transferred out
Outperformed against
the relevant index
Underperformed against
the relevant index
40%
52%
43%
)
n
b
(
K
E
S
21
38
35
35
5.4%
4.9%
15.7%
16.6%
60%
48%
57%
17.8
21.9
24.3
Transfers
(Pensions)
Lapses/Paid-ups
(Pensions and
Endowments)
2013
2014
2015
2013
2014
2015
12 months to
December 2015
12 months to
December 2014
19
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
BUSINESS REVIEW
MAXIMISE VALUE FROM EXISTING BUSINESS NETHERLANDS
Positive emergence of value in line with
expectations from the newly acquired
Waard Group.
Highlights
– Full year IFRS pre-tax profit of £2.6m is broadly in line with
expectations and provides a useful estimate of future in force book
profit expectations Note 1.
– EEV of £74.1m at 31 December 2015, which includes £9.3m in
relation to future profit cash flows.
– Positive gross (operational) cash generation, and one-off cash
generation on acquisition of £39.9m.
– Business now fully integrated into Chesnara governance processes.
– Solvency II ready.
Review of the year
Key value drivers
The dutch Division has delivered a full
year IFRS result that is broadly in line with
expectations, and the solvency position
of the business is strong. The one-off
positive impact on cash generation of the
Group of £39.9m arising upon acquisition
has been further enhanced by additional
positive cash generation in the period
of £4.0m.
Summary of the in-force book
The Waard Group book consists of
c.80,000 policies, the majority of which are
term assurance contracts, with the balance
relating to unemployment and disability
cover and unit-linked savings contracts.
In addition to the insured contracts, the
Waard Group is, through its service-
company subsidiary, responsible for the
administration of c.79,000 policies for
third party insurers.
There are three key areas of focus for the
in-force book, namely: management
of the assets, regulatory compliance and
ensuring that a high quality service
to policyholders is continued in terms of
administration service levels.
Policy attrition levels for 2014 and 2015
remain at a steady level of circa 8%
across the total in-force book and are in
line with the anticipated book run-off.
The business is administered and governed
by an established and high quality team,
combining operational excellence with strong
customer contact. The internet is
increasingly used to combine these two
items. The business operates to high
governance standards and there is a positive
relationship with the Dutch regulator.
Since the acquisition completed on 19 May
2015, the Waard Group business has been
integrated into Chesnara’s governance
processes including the financial reporting
routines.
Profits emerge primarily as a result of
positive mortality experience on the term
assurance contracts. The third party
administration contributes only modest
additional profit, while covering an
adequate element of the fixed cost base.
Further acquisitions should provide
additional economies of scale.
Risks associated with the strategic
objective
– The primary risk to the profit and cash
emergence is that mortality experience
increases significantly and exceeds the
assumed rates.
– Increased lapses on cash generative products
are also a risk to the delivery of this strategic
objective. This risk is managed through
close monitoring of persistency levels, service
levels that ensure strong customer service
standards and our pro-active approach to the
renewal process to keep retention rates high.
– There is also a risk that expenditure
levels exceed those assumed in reserves
and provisions. Expense assumptions are
deemed to be realistic and the cost base
is well controlled, predictable and within
direct management influence.
– Although regulatory developments are not
in themselves a risk to the value
emergence, management recognises the
long-term benefits of robust governance.
Regulatory change can impact the cash
potential of the business if it directly
impacts the cash flows from the products
(such as through emerging regulatory
best practice) or increases the likelihood
of increased book attrition. There is full
indemnification from the previous owner
of the Waard Group regarding the
compensation arrangements currently
in place for certain unit-linked products
historically sold.
– As with our Swedish division, the Group
is exposed to foreign currency fluctuations
which impacts the sterling value emerging
from the Dutch operations.
Note 1 – Only the proportion of this total profit relating to the post acquisition period (19 May 2015 to 31 December 2015) is consolidated into the Chesnara Group
IFRS income statement, amounting to £0.9m.
In-force policies (000’s)
Term assurance
Unemployment and
disability
Unit-linked
2015
3.3
2014
5.5
23.9
25.0
52.5
56.9
20
Policy attrition
2015
2014
40.0%
31.3%
7.7%
6.6%
4.4%
7.1%
8.8%
8.8%
Term assurance Unemployment
Unit-linked
Total
and disability
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
BUSINESS REVIEW
ACQUIRE LIFE AND PENSIONS BUSINESSES
We completed the acquisition of the Waard Group during
May 2015. The Group embedded value increased by £21.3m and
the net cash generation has increased by £39.9m as a direct
consequence of the acquisition. Over and above the direct and
immediate financial benefits the acquisition creates opportunity
to progress further value-adding deals in the Dutch market.
Highlights
– Completion of the acquisition of the Waard Group
in the Netherlands for £50.1m resulting in £21.3m
increase in Group Embedded Value.
– £39.9m of additional cash distribution potential
created.
– Entry to a third territory of the Group assessed
as having significant further market consolidation
potential.
Review of the year
Acquisition of the Waard Group
On 19 May 2015 we completed the acquisition
of the Waard Group in the Netherlands for
£50.1m (€69.9m). The deal was financed
through raising £34.5m of equity during late
2014, with the remainder being funded through
existing cash resources. The acquisition has
created an excellent opportunity to operate
in a new market within which life insurance
consolidation is in its early stages. The deal
was originally assessed positively on all four
elements of our assessment scorecard.
The table below illustrates how these actual
benefits arose on acquisition:
CASH GENERATION:
The solvency position on
acquisition confirms that
significant surplus (£39.9m)
is available for distribution
in an orderly fashion
over a three year period.
EMBEDDED VALUE:
The actual discount to
embedded value of 29.8%
has resulted in an embedded
value increment of £21.3m.
STRATEGIC OPPORTUNITY:
Initial evidence of potential
deal opportunities reaffirms
our view that Chesnara can
benefit from closed book
market consolidation in the
Netherlands.
RISK CONSIDERATIONS:
Business, market and
regulatory developments
during the period support our
initial positive assessment of
the risk profile of the business.
UK market
There has recently been a general lull in
closed book market activity in the UK,
driven in part by uncertainty resulting from
Solvency II and regulatory developments.
That said, there has been some activity
recently, and we believe the factors which
will drive further consolidation persist,
namely 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. In the short-term
we have increased our focus on Western
Europe, in particular investigating
opportunities in the Dutch market following
the acquisition of the Waard Group.
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 track record and good reputation
with our regulators, ensures we are aware
of most viable opportunities in the UK
and Western Europe. To support our proven
market presence, we have recently
implemented a revised acquisition process
framework in order to ensure we continue to
identify and assess all potential value adding
deals across our widening geographical
markets. Importantly we have rolled the
acquisition process out into the Dutch
management team, who have begun to
implement the process in the Dutch market.
This ensures we get the benefits of local
market knowledge complemented by
closed book consolidation experience and
expertise provided by the Chesnara
management team.
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,
in the context of other non-financial
measures including the level of risk and the
degree of strategic fit and opportunity.
Acquisition outlook
We remain confident that all the commercial
and economic drivers for consolidation
remain positive in the UK. The acquisition of
the Waard Group provides significant
potential in the Dutch market and we are well
positioned to take advantage of any
value adding opportunities that may arise.
Our financial foundations are strong
and we continue to have strong support from
shareholders and lending institutions to
progress our acquisition strategy. In addition
our operating model which consists of well
established outsource arrangements plus
efficient, modern in-house solutions, means
we have the flexibility to accommodate a
wide range of potential target books. With all
the above in mind, we are confident that we
are well positioned to continue the successful
acquisition track record in the future.
Risks associated with this strategic
objective
– There is the risk that if we do not deliver
against this objective then the investment
case for Chesnara diminishes over time.
– There is the risk that we make an
inappropriate acquisition that adversely
impacts the financial strength of the Group.
– The acquisition of the Waard Group opens
a new territory and hence increases
our options thereby reducing the risk that no
further value adding deals are done.
– The broader target market also reduces the
risk of inappropriate opportunities being
progressed on the grounds that better
optionality will enable us to identify better
fit deals at a more competitive price.
– As our acquisition strategy currently places
greater focus more on non-UK markets
we become increasingly exposed to currency
risk. Flexibility over the timing of
subsequent capital extractions and dividend
flows provide an element of management
control over the sterling value of cash inflows.
We accept the short-term fluctuations in the
reporting of embedded value that can arise.
– During recent years we have enhanced our
financial deal assessment 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.
21
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
BUSINESS REVIEW
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS SWEDEN
New business profits continue to enhance
Movestic’s embedded value and support
the overall fund growth, although a difficult
market for transfers and staff vacancies
in the sales team have resulted in a slight
downturn compared to 2014.
Highlights
– New business profit of £5.7m (2014: £8.9m).
– 4.9% reduction in new business volumes.
– Average market share of 11.7% is within target 10 -15% range.
– New business remains relatively
concentrated towards several large IFAs.
This is inevitable to some extent but the fact
that Movestic has extended the breadth
of IFA support in the year has reduced this
concentration risk. Whilst Movestic has
further broadened its coverage of the broker
market, the fact remains that a large
proportion of new business comes from
two large brokers thereby creating a level
of concentration risk. In light of this risk,
Movestic takes comfort from the fact they
are assessed very favourably on an internal
product provider assessment scorecard
maintained by one of the major brokers. The
second large broker has a proven strong
level of support for the Movestic proposition
as demonstrated by its continued support
of Movestic during and subsequent to the
servicing difficulties experienced historically.
– The competitive market puts pressure on new
sales margins. Movestic’s margins have
generally held up well although the improved
terms offered for the higher margin transfer
business is evidence of the pressure on
margins. Movestic has redressed the margin
balance by successfully focussing on
achieving better terms in the fund operation.
Review of the year
After two years of new business growth we
have seen a downturn in new business
volumes in 2015. The transfer market was
particularly competitive during the first
half of the year and unit-linked products came
under pressure from the traditional
market products which offered attractive
guaranteed returns. As expected the level
of guarantees being offered has not been
sustainable and the unit-linked market has
become more competitive during the
second half of the year. The transfer market
is profitable and hence is a natural target
for Movestic given its focus on sustainable
profit margins. Revised pricing for transfers
has reinvigorated transfer volumes in the
second half of the year. This, together with
the aforementioned reduction in traditional
guarantees has contributed to a strong second
half of 2015, during which new business
volumes exceeded those in the second half
of 2014.
During the year Movestic has seen changes
in key sales positions. This resulted in some
short-term vacancies in the sales team.
This will have contributed somewhat to the
reduction in sales during the year. Importantly,
the team is now fully staffed and ready
to build on the positive improvements seen
towards the end of 2015.
Market share
The market share of our specific target
market, namely the company paid unit linked
market was within our target range of
between 10% to 15%. We did lose a little
market share compared to 2014 due
in part to the impact of a reorganisation of the
sales team. Management plans which
completed during the second half of the year
have had a positive impact on market shares
in the final quarter and we aim to consolidate
towards the middle of our target market share
range during 2016.
Development of innovative product
concepts and margin enhancement
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 highest priority. During the year the work
with ‘white-labelled’ Movestic funds has
continued and intensified. The benefits of the
new ‘white-labelled’ funds, enabled through
the set-up of a new Movestic SICAV (fund
structure) in 2014, mean that in addition
to being well matched to policyholder
requirements, Movestic receives a higher
proportion of the product value chain thereby
improving new business margins. Three
new Movestic funds have been launched
during the year, building on the first three
being launched during 2014. A further
five new Movestic funds are planned to be
launched during 2016.
Risks associated with this strategic
objective
– The attractiveness of unit linked products can
be influenced by economic conditions
especially as some traditional products offer
guaranteed returns in uncertain times. In
light of this the recent good general equity
performance is encouraging. Also, Swedish
investors tend not to adopt an ’all or nothing
approach’ to equity exposure and hence
there will always be a certain level of
unit-linked demand. The recent reductions
in traditional product guarantees have
reduced this product bias risk.
– New business volumes are sensitive to
the quality of service to the IFA and the
end customer. Movestic continues to score
highly in internal and external service
level assessments.
Trend analysis of new business premium income (£m)
Movestic’s share of new unit-linked company-paid pension business
54.3
Q4, 13.7
Q3, 10.6
Q2, 15.4
Q1, 14.6
2015
57.1
Q4, 12.3
Q3, 11.2
Q2, 17.0
Q1, 16.6
2014
22
11.7%
12.5%
2015
2014
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 BUSINESS REVIEW
CAPITAL MANAGEMENT – SOLVENCY I AND SOLVENCY II
Managing the Group and subsidiaries’ capital positions
appropriately is a critical part of ensuring we remain true to
the Group’s culture & values, which includes a clear
focus on maintaining adequate financial resources. We are
well-capitalised at a Group and subsidiary level under
both Solvency I and Solvency II. In applying Solvency II we
have not used any elements of the Long-Term Guarantee
Package, including transitional arrangements.
The Group and its subsidiaries manage capital in
accordance with their respective capital management
policies, which are based on the requirements of our
Regulators. These policies introduce the concept of a
’management buffer’, which is incremental to the
Regulatory capital requirements.
The graphs below show a summary of the solvency
position of the Group and its principal subsidiaries
under Solvency I, along with a comparison to the year
end unaudited Solvency II position.
Solvency I
Solvency II
Post-dividend
Solvency Ratio:
284%
Post-dividend
Solvency Ratio:
305%
Post-dividend
Solvency Ratio:
146%
94
16
397
26
261
240
146
15
252
158
16
79
78
31 Dec 2014
31 Dec 2015
31 Dec 2015
Post-dividend
Solvency Ratio:
176%
Post-dividend
Solvency Ratio:
203%
Post-dividend
Solvency Ratio:
135%
14
65
181
100
148
36
66
33
58
19
31
26
31
198
24
124
Chesnara Group
Movement in Solvency I (2014 to 2015)
– Capital resources of the Group have grown over the year as surplus has emerged from the life
insurance companies within each division.
Impact of applying Solvency II
– Capital resources have increased, with this being driven by the policyholder reserves reducing as a
result of them including an estimate of future surpluses expected to emerge from the in-force book,
something that was not included in Solvency I.
– For the Group capital requirement calculation, under Solvency I no capital requirements were
included for non-regulated non-insurance companies. Under Solvency II all companies in the Group
are required to be treated as if they were insurance companies. This, as well as the generally higher
levels of capital requirements under Solvency II, have led to the increase.
– The Group remains well capitalised under Solvency II.
CA
Movement in Solvency I (2014 to 2015)
– Capital resources increased from £116m (post dividend) to £148m (pre dividend), representing an
increase of £32m, broadly in line with IFRS result. This includes £3.5m of assets transferred from
Protection Life following its deauthorisation.
– The proposed dividend is subject to a ’no objection’ process with the PRA.
Impact of applying Solvency II
– The increase in capital resources is largely due to reduction in technical provisions, which now
includes an estimate of expected future profits. This has the biggest impact on unit-linked products.
– Capital requirements are more risk-based and reflect the increased capital resources position
31 Dec 2014
31 Dec 2015
31 Dec 2015
of the company.
– CA plc remains well-capitalised under SII. Although the solvency ratio reduces under Solvency II,
the absolute surplus levels above the ‘management buffer’ remain broadly in line with Solvency I.
Solvency Ratio:
376%
Solvency Ratio:
439%
Solvency Ratio:
163%
Movestic Liv
Movement in Solvency I (2014 to 2015)
150
19
92
– Capital resources have increased over the year as a result of surplus generation, offset by the slight
39
weakening of SEK over the year.
Impact of applying Solvency II
– The large increase in capital resources (own funds) is largely due to a reduction in technical
provisions, which now includes an estimate of expected future profits.
– Capital requirements are now more risk-based and reflect the increased capital resources position of
the company.
31 Dec 2015
– Movestic is better-capitalised in absolute terms under SII compared with SI, although the
solvency ratio reduces due to the increase of both ‘own funds’ and SCR.
26
39
4
9
31 Dec 2015
21
35
5
9
31 Dec 2014
Solvency Ratio:
761%
Solvency Ratio:
879%
Solvency Ratio:
480%
Waard Leven
Movement in Solvency I (2014 to 2015)
34
41
31
41
31
53
5
5
31 Dec 2014
5
5
31 Dec 2015
8
11
31 Dec 2015
– Modest surplus has emerged from Waard Leven in the year, as expected.
– For GBP reporting purposes, this is not seen in the above graphs due to the euro weakening against
GBP during 2015.
Impact of applying Solvency II
– The transition to Solvency II is less marked for Waard Leven than for the other life companies within
the Group. This is primarily because the policy base is largely made up of term assurance products,
which are less impacted by SII.
– Waard Leven remains well-capitalised under SII.
Capital
resources
Capital requirement
Proposed dividend
’Management buffer’
Surplus capital resources above
’Management buffer’
23
£m
450
400
350
300
250
200
150
100
50
0
£m
200
150
50
0
£m
140
120
100
80
60
40
20
0
£m
60
50
40
30
20
10
0
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
BUSINESS REVIEW
TRANSITION TO SOLVENCY II
CURRENT SITUATION
SOLVENCY II
Under the Solvency I regime different practices for reserving
for longer-term business made it difficult to compare the
solvency position of insurance companies across Europe.
Additional capital requirements are set by local regulators.
For example in the UK companies are required to establish a
risk-based assessment of the required level of capital specific
to the circumstances of that business.
Under the Solvency II regime regulators across Europe set
consistent rules, including a common ’standard formula’ based
capital requirement (unless companies adopt to use an alternative
’Internal Model’ approach). In applying Solvency II we have
not used any elements of the Long-Term Guarantee Package,
including transitional arrangements. Our capital requirements
have been determined using the ’standard formula’.
The ORSA, part of SII Pillar 2, requires firms to consider their
’Overall Solvency Needs Assessment’ and in particular,
how their internal assessment of capital compares with that
under Pillar 1. However, whether or not Companies end
up with a Pillar 2 number that differs to Pillar 1 depends on
their individual circumstances.
Companies hold an additional ’management buffer’ at a level
appropriate for that business but agreed with the regulator.
Solvency 1
Ratio:
Surplus above requirement: £158.8m
Constraining pillar
Pillar 1
305%
Companies hold an additional ’management buffer’ at a
level appropriate for that business.
Solvency 1I
Ratio:
Surplus above requirement: £120.5m
Constraining pillar
Pillar 1
146%
– Embedded Value reporting is the primary measure by which
investors value Life and Pension businesses.
– Embedded Values are deemed to represent a reasonable
commercial value because they recognise expected future
profits arising on long-term policies.
At face value Solvency II valuations do not fully recognise all
the future cash flows that Embedded Value reporting was in
part developed to recognise, and hence one of the
consequences is that new or amended metrics for the value
of a company may emerge in 2016 based on Solvency II and
Embedded Value.
Given the nature of Life Insurance, most insurers in Europe
have well-established frameworks and procedures for
identifying and managing existing risk profile. The ICAS
regime that was introduced in the UK in 2004 strengthened
links between Risk and Capital, but fell short of achieving
links with Strategic Planning. An equivalent to the ICAS
regime was not introduced in all of Continental Europe,
resulting in some countries not having a secondary risk-based
capital regime.
Solvency II places Risk and Capital management at the heart
of the business; in particular with the ORSA which pulls
together Strategy, Risk and Capital into a single report.
There is also more emphasis on taking a forward-looking
approach to risk management and greater value is
placed on stress and scenario testing. Formality around
the application and documentation of governance has also
been strengthened.
1
r
a
l
l
i
P
2
r
a
l
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P
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24
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
ISSUES AND CHALLENGES
IMPLICATIONS AND OUTCOMES
– Total Group surplus above the SCR remains robust under Solvency II.
– Transition does not adversely impact Chesnara dividend paying capacity.
– Not using transitional arrangements ensures a clear and transparent
view of our solvency and avoids potential complexities or operating
constraints associated with managing transitional arrangements.
– Application of the standard formula reflects Chesnara’s relatively
simple business model whilst also ensuring Chesnara continues to
deliver on its aim to keep the business as clear and simple to manage
and understand as possible.
– The fact that solvency ratios when expressed in percentage terms
are lower than under Solvency I should not be misinterpreted as
there being a deterioration of the financial stability of companies in
the industry.
– Dual SCR environment with a mix of ’internal’ model firms and
’standard formula’ firms creates further challenges regarding
cross-sector company comparisons.
– Companies can take advantage of a ’long-term guarantee package’,
which comprises the ’matching adjustment’, ’volatility adjustment’
and ’transitional measures’. No companies within the Group
have used any elements of this. The existence of the option to apply
these measures creates a potential risk of unfair direct comparison
between companies. Investors are also likely to be keen to look
through the impact of such adjustments.
– Solvency II is a risk-based regime and therefore should naturally
support lower risked organisations such as Chesnara (primarily
closed to new business, limited guarantee exposure, mainly
unit-linked contracts) operating at a lower level of capital, without
there being any implication of lower levels of financial stability.
– Solvency II valuations undervalue Chesnara compared to Embedded
– Chesnara has continued to produce Embedded Value figures in the
Value because:
– Contract Boundaries – Solvency II rules do not allow for the
recognition of future cash flows on certain in-force contracts,
despite a high probability of receipt.
– Risk margin – the Solvency II rules require a significant ’risk margin’
which is held on the Solvency II balance sheet as a liability, which
is considered to be materially above a realistic cost.
– For IFRS reporting purposes technical provisions for non-participating
insurance contracts will still be based on Solvency I, and investment
contracts will continue to be valued under IAS 39. Both of these differ
to Solvency II, adding a further complication when comparing
different valuation metrics.
Risk management has been traditionally viewed as an overhead
to the business and Solvency II potentially increases the burden
by increasing the requirements for processes we need to carry
out and documentation we need to maintain. However, risk
management is increasingly being viewed as a value-adding
activity resulting in a reduction in financial volatility and losses
and better service for policyholders. If done well, for example,
it can significantly increase the level of certainty around the
anticipated benefits from acquisitions. Overall, the key is in
striking the right balance and ensuring focus of risk management
activity is directed appropriately.
2015 Report & Accounts.
– Embedded Value measurement, in its current form, is expected to be
reviewed by the industry and many companies may phase out its use,
probably with a replacement reflecting Solvency II valuations. Whilst
we have not concluded our deliberations we note that for Chesnara
Solvency II valuations understate our commercial value.
– We expect that a revised valuation metric will be an adjusted
Solvency II valuation with adjustments for items where the Solvency II
rules mean the realistic commercial value of Chesnara is not fairly
recognised. The chart below shows the major changes between
Embedded Value and Solvency II.
– The revised valuation approach will include adjustments to the
Solvency II value to add back items such as ‘contract boundaries‘.
The foreseen adjustments are expected to result in a revised valuation
which is not significantly different to our current Embedded Value.
470
£m
455
(63)
450
430
410
390
370
350
(20)
22
(16)
3
Group EEV Risk margin
Contract
boundaries
Cost of
capital
Dividend
Other
381
Group SII
own funds
– More robust and more clearly documented Group Governance
resulting in greater Group consistency and sound management and
decision making.
– Enhanced risk-based acquisition process resulting in ‘safer transactions’
and ultimately enhancing risk-based return on investment.
– Regular review and enhancement of internal and outsourcer control
environment resulting in a reduction in operational incidents and
financial losses.
– Improved management understanding of the key risk drivers and the
sensitivity of key business performance measures to those drivers
– driving more risk informed decision making, enhancing profits.
– More clearly articulated Risk Appetite and a supporting Risk Limit
System that enables management to objectively monitor whether
the business is operating within its Risk Appetite.
– A shared understanding of our approach to risk management across
the Group resulting in consistent standards and a shared risk culture.
25
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
FINANCIAL REVIEW
The key performance indicators below are a reflection of how we have performed in delivering our three strategic
objectives and our core culture & values. 2015 has seen strong net cash generation of £82.4m, together with the
robust Embedded Value earnings in the year, resulting in a closing EEV of £455.2m.
IFRS PRE-TA X PROFIT
£42.8M
2014: £28.8M
What is it?
The presentation of the results in accordance with International Financial
Reporting Standards (IFRS) aims to recognise the profit arising from the
longer term insurance and investment contracts over the life of the policy.
Why is it important?
IFRS pre-tax profit is an indicator of the value that has been generated within
the long-term insurance funds of the divisions within the Group, and is a key
measure used both internally and by our external stakeholders in assessing the
performance of the business. IFRS pre-tax profit is an indicator of how we are
performing against our stated strategic objective of ’maximising value from the
in-force book’ and can also be impacted by one-off gains arising from delivering
against our stated objective of ’acquiring life and pensions businesses’.
Risks
The IFRS pre-tax profit can be affected by a number of our principal risks
and uncertainties as set out on pages 37 to 39. In particular, volatility in equity
markets and bond yields can result in volatility in the IFRS pre-tax profit.
NET CASH GENER ATION
£82.4M
2014: £71.1M
What is it?
Net cash generation is a measure of how much distributable cash has been
generated in the period. The dominating aspect of cash generation is the
change in amounts freely transferable from the operating businesses, taking
into account Board-approved solvency buffers that are based on those imposed
by our Regulators. It follows that cash generation is not only influenced by
the level of surplus arising but also by the level of required 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-paying capacity and acquisition strategy. Cash generation can be
a strong indicator of how we are performing against our stated objective of
’maximising value from the in-force book’. However, our cash generation
is always managed in the context of our stated value of maintaining strong
solvency positions within the regulated entities of the Group.
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 37 to 39. Whilst cash generation is a function of the
regulatory surplus under Solvency I, as opposed to the IFRS surplus, they are
generally 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 future periods our cash generation
metric will be calculated with reference to Solvency II. This cash metric is
expected to display sensitivities to the same economic factors referred to above.
26
Highlights
2015
2014
CA
S&P
Movestic Waard
Group &
consol adj
Profit on
acquisition
£m
40
20
-
(20)
– A day one gain of £16.6m has been recognised on the acquisition of the Waard
Group in the Netherlands, representing the excess of the IFRS net assets
acquired over the purchase price.
– Linked to the Waard Group acquisition, the Group segment includes a
£3.5m foreign exchange translation loss arising from holding euros to fund
the acquisition.
– The Waard Group post acquisition profit is small, but in line with expectations
at the time of the acquisition. The Waard Group is not expected to generate
significant IFRS profits.
– The CA result is less than the same period in 2014 largely due to 2014 including
some one-off items not repeated in 2015.
– The S&P segment has reported a profit in 2015 compared with a loss in 2014.
The 2014 loss was largely driven by reducing government gilt yields in that
year, something that has not been witnessed in 2015.
– Movestic has continued to deliver growth in its IFRS results.
Highlights
2015
2014
Total Gross cash generated
Synergistic effects
of Part VII transfer
Exceptional cash on
Waard acquisition
Movement in restriction
of S&P WP Capital
Net cash generation
£m (20) (10) - 10 20 30 40 50 60 70 80
– Gross cash generation across the Group continues to support our current
attractive dividend strategy.
– Net cash generation in 2015 is dominated by the cash surpluses arising from
the acquisition of the Waard Group, which can be used to both support our
future dividends and potential acquisitions.
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
EEV EARNINGS NET OF TAX
2014: £44.2M
£57.5M *
*excluding the positive impact of
modelling adjustments of £5.9m
What is it?
Highlights
2015
2014
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.
– The impact of acquisitions.
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 against all three of our core strategic objectives.
This includes new business profits generated from writing profitable new business,
EEV profit emergence from our existing businesses, and the EEV impact of acquisitions.
Risks
The EEV earnings of the Group can be affected by a number of factors, including those
highlighted within our principal risks and uncertainties as set out on pages 37 to 39. 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.
New business contribution
Operating profit -
existing business
Economic effects
Uncovered business
& other group
Profit on acquisition
Tax
Total EEV earnings
£m (20) (10) - 10 20 30 40 50 60
– Strong EEV earnings in the year supported by:
• £21.3m gain on acquisition of the Waard Group, offset by
the euro holding foreign exchange loss of £3.5m.
• Continued emergence of economic profits, although
these are lower than in 2014.
• Operating profits that are in line with 2014.
– New business profits from Movestic continue to be
delivered, albeit at lower levels than 2014 due to a
challenging market which has witnessed aggressive
pricing strategies from competitors.
EEV
£455.2M
31 December 2014: £417.2M
What is it?
The European Embedded Value (EEV) of a life insurance company represents the present
value of future profits of the existing insurance business, plus adjusted net asset value of the
non-insurance business within the Group. It is often used to compare values of different life
insurance companies.
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 intrinsic value. 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 writing profitable new business. It
ignores the potential of new business to be written in the future (the franchise value of our
Swedish business) and the value of the Company’s ability to acquire further businesses.
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, the EEV position of the Group can be materially affected by exchange rate
fluctuations. For example a 10.0% weakening of the Swedish krona and euro against
sterling would reduce the EEV of the Group by 3.2% and 1.5% respectively, based on the
composition of the Group’s EEV at 31 December 2015.
Highlights
5.9
(1.9)
£m
21.3
36.2
417.2
(23. 5)
455.2
EEV
2014
Net of
tax profit
arising in
the period*
Profit on
acquisition
Effect of
modelling
adjustment
Foreign
exchange
and other
reserve
movements
Dividends
paid
EEV
2015
*stated before gain on acquisition of the Waard Group
– Closing EEV is £38m higher than at the start of the year.
– Post-tax EEV earnings have contributed £36.2m, excluding
the acquisition profit of the Waard Group.
– Profit of £21.3m arising on acquisition of the Waard Group,
representing the excess of the EEV acquired over the purchase
price, enhances EEV in the year.
– Small foreign exchange losses arising on retranslation of the
Swedish and Dutch businesses.
– Dividends paid of £23.5m in the year, being the payment of
the year end 2014 final dividend and the 2015 interim dividend.
27
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
FINANCIAL REVIEW
IFRS PRE-TA X PROFIT
£42.8M 2014: £28.8M
Executive summary
The Group IFRS results reflect the natural dynamics of the segments of the
Group, which can be characterised in three major components:
(1) Stable core: At the heart of surplus, and hence cash generation, are the
CA and Waard Group segments. The requirements of these 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 below show that the stable core
continues to deliver against these requirements.
(2) Variable element: The S&P component can bring an element of
short-term earnings volatility to the Group, with the results being particularly
sensitive to investment market movements.
(3) Growth operation: The long-term financial model of Movestic is based
on growth, with levels of new business and premiums from existing 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.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the
following IFRS results:
The IFRS results by business segment are analysed in more detail as follows:
CA
The key components of the IFRS result for CA the year are as follows:
2015
2014
7
7
8
9
10
Product-based deductions
Administration expenses
Returns on retained surplus
Reserve changes, inc. those due
to market movements
Impact of new HCL contract
Other
Total profit before tax
£m (20) (10) 0 10 20 30 40 50
Year ended 31 December
CA
S&P
Movestic
The Waard Group
Chesnara
Consolidation adjustments
Profit before tax and profit on acquisition
Profit on acquisition of the Waard Group
Profit before tax
Tax
Profit after tax
2015
£m
2014
£m
Note
1
2
3
4
5
6
4
Note 7 – Product-based deductions and administrative expenses have remained broadly
in line year on year, as would be expected. Charges have remained resilient to policy
attrition and continue to significantly exceed administration expenses.
Note 8 – Retained surpluses are held in low-risk Government gilts. During 2015 the gilt
index has remained broadly flat, resulting in small returns, whereas higher returns were
seen in 2014 due to gilt value appreciation during that year.
Note 9 – Policyholder reserves have reduced by £4.8m during the year. The movement
in these reserves is the result of an actuarial basis assessment, where all key
judgments affecting the reserves are set. There is no dominating feature of the 2015
basis assessment, with the net impact in reserves being positive during 2015. 2014
witnessed a higher reserve reduction in the year, primarily due to economic impacts.
Note 10 – During 2014 a key outsourcing contract was re-negotiated, resulting in a
positive benefit to the CA segment. No such dynamics existed this year.
23.9
10.6
6.7
0.9
(9.5 )
(6.4 )
26.2
16.6
42.8
(3.0 )
46.7
(9.2 )
4.9
–
(7.6 )
(6.0 )
28.8
–
28.8
(3.2 )
39.8
25.6
Note 1 – The CA segment has reported good results for the year, albeit reduced compared
with 2014. The reduction is primarily due to 2014 including some one-off items, coupled
with more suppressed market conditions in 2015. Further insight is provided in the CA
segmental analysis to the right.
Note 2 – The S&P segment has reported a profit for the year compared with a loss in 2014.
The principal driver of this swing is that the 2014 results included a large loss arising
from an increase in the reserves held for products with guarantees driven by a significant
reduction in government gilt yields during that year. Further detail can be found on page 29.
Note 3 – The Movestic result has improved when compared with 2014, principally arising
from the Pensions & Savings division which continues to grow, resulting in growing fee
income. Further analysis can be found on page 29.
Note 4 – The Waard Group acquisition completed on 19 May 2015 and therefore the
IFRS results only include just over seven months of profit. The acquisition resulted in the
recognition of a one-off gain of £16.6m, representing the excess of the net assets
acquired over the purchase price.
Note 5 – The Chesnara result represents holding company expenses. 2015 costs are
higher than 2014 primarily due to a one-off foreign currency re-translation loss of £3.5m
arising from holding euros prior to the completion of the Waard Group purchase.
Note 6 – Consolidation adjustments relate to items such as the amortisation of intangible
assets and remain broadly in line year on year.
28
S&P
The key components of the IFRS result for S&P the year are as follows:
Movestic
The key components of the IFRS result of Movestic for the year are as follows:
2015
2014
2015
2014
Product based deductions
Administration expenses
Income on S&P shareholder funds
Change in cost of guarantees
in with-profit funds
Change in sterling and expense reserves
Impact of new HCL contract
Other
Total profit before tax
1
1
2
3
4
5
£m (20) (10) 0 10 20 30
Note 1 – Product-based deductions and administrative expenses have remained
broadly in line year on year, as would be expected. Product deductions have remained
resilient to policy attrition.
Note 2 – Shareholder funds are invested in low-risk Government gilts. During 2015
the gilt index has remained broadly flat, resulting in small returns, whereas higher returns
were seen in 2014 due to gilt value appreciation during that year.
Note 3 – One of the main drivers of the S&P surplus in any one year is the movement
in the reserves held for products with guarantees, which are sensitive to both equity
and gilt markets. During 2014 reductions in gilt yields gave rise to a large increase
in such reserves, resulting in a large loss. For 2015 the gilt yields and equity markets
closed broadly in line with the start of the year.
Note 4 – During 2015 modelling refinements have been made to align the way in which
expenses are modelled across the UK business. This has contributed to the positive
reserve movements during the year.
Note 5 – During 2014 a key outsourcing contract was re-negotiated, resulting in a
strain arising in the S&P segment. No such dynamics existed this year.
Pensions and Savings
Risk and Health
Other
Total profit before tax
6
7
8
£m (1) 0 1 2 3 4 5 6 7 8
Note 6 – The Pensions & Savings business continues to be the core source of IFRS
profit in Movestic. The segment has reported strong results growth, with 2015 IFRS
profits amounting to £5.9m. Good performance in the year is driven by two key factors.
Firstly, policyholder fee income has increased year on year, arising from growth in
funds under management. Secondly, improvements in the fund operation have resulted
in increased performance fee rebates in the year, largely due to ’white-labelling’ initiatives
and renegotiations with certain fund managers.
Note 7 – The Risk and Health business has generated a profit in the year amounting to
£1.0m. The loss ratios in the year have remained stable, and premium income has
remained broadly the same year on year. Policy numbers for this book have remained
at just over 380,000 for both 2015 and 2014.
Note 8 – The ’Other’ component includes: the results of Movestic’s associated company,
Modernac; investment income; the results of Movestic’s investment management
business and fair value adjustments on the financial reinsurance that Movestic uses to
fund the writing of new Pensions & Savings business. The key reason for the small
loss of £0.2m in 2015 compared with a profit of £2.1m in 2014 is as a result of a number
of small factors. In particular, the fund business, Movestic Kapital delivered profits of
£0.1m during 2015 compared with £0.8m in 2014, largely because 2014 included some
one-off income. In addition there has been a swing of some £0.4m due to lower
investment returns on shareholder assets, largely due to the negative interest rate
environment in Sweden.
The Waard Group
The Waard Group has reported a small profit of £0.9m since acquisition
reflecting the natural emergence of surplus in the business. Surpluses
principally arise from mortality surpluses arising from the Waard Group’s
term assurance policies.
29
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
FINANCIAL REVIEW
NET CASH GENER ATION
£82.4M 2014: £71.1M
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.
Highlights
– A significant amount of net cash, amounting to £39.9m, has
emerged from the acquisition of the Waard Group, driven by the
strong levels of regulatory surplus in this group.
– Gross cash generation in the UK run-off business of £42.5m is
broadly in line with the same period in 2014.
– We are reporting modest levels of cash generation of £5.1m for
Movestic for the first time since its acquisition in 2009.
Cash generation is a function of the Group’s and each Division’s capital management policies, in that we only report
cash as being available for distribution if it exceeds the Board-approved capital requirement included within these
policies. Capital management policies are set with reference to the regulatory capital requirements with the inclusion
of a ‘management buffer’. For 2015 the cash generation that we have reported is calculated with reference to
our Solvency I capital management policies. For future periods cash generation will be reported with reference to our
capital management policies based on Solvency II.
Year ended 31 December
Cash generated from/(utilised by):
2015
£m
2014
£m
Note
CA
S&P
Cash generation in the year
21.4
46.5
Cash generation in the year
21.1
4.4
UK gross cash generation
42.5
50.9
Movestic
Underlying cash generation in year
Foreign exchange movements
The Waard
Group
Underlying cash generation in year
Foreign exchange movements
5.6
(0.5 )
4.0
1.0
–
–
–
–
Chesnara
Cash utilised by operations
(8.4 )
(8.3 )
Total gross cash generation
44.2
42.6
Items affecting ability to distribute cash
Synergistic effects of Part VII transfer
Cash generated on acquisition of the Waard Group
Movement in restricted surplus in S&P WP fund
2.9
39.9
(4.6 )
27.4
–
1.1
Net cash generation available for distribution
82.4
71.1
Items affecting the cash available for distribution:
1
2
2
3
3
4
3
5
Note 1 – Cash generation for the UK business has continued to be strong following a
good year in 2014. Statutory surplus has continued to emerge well from both UK
segments (£32.0m) and this, coupled with the decrease in our capital management
requirements as the books run-off (£10.5m) have driven our cash generation in the year.
Note 4 – During 2015 Protection Life Company Limited has been deauthorised as a
regulated entity as it no longer carries on insurance activities, following the Part VII transfer
of the business into CA plc on 31 December 2014. As a result this has released a further
£2.9m of available capital across the Group.
Note 2 – We are reporting cash generation for Movestic for the first time since it was
acquired during 2009. Cash generation of £5.6m represents surplus generation of £5.7m,
offset by an increase in our capital requirements of £0.1m. A small foreign exchange
loss in the year has reduced the value of the surplus cash available for distribution.
Note 3 – The acquisition of the Waard Group has delivered a significant one-off cash
generation item, amounting to £39.9m, driven by the strong levels of regulatory
surplus in this group.
Post acquisition the Waard Group has reported a small amount of cash generation,
as expected. A small foreign exchange gain has also been reported, due to a slight
strengthening of the euro against sterling post acquisition.
Note 5 – 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.
30
FINANCIAL REVIEW
EEV EARNINGS
£57.5M * 2014: £44.2M
*excluding the positive impact of modelling adjustments of £5.9m
EEV profits have emerged across all three insurance
divisions of the Group, with Movestic having delivered
a significant proportion of this. The EEV results include
a one-off profit of £21.3m arising from the acquisition
of the Waard Group.
The following tables analyse the Group EEV earnings after-tax by source and
by business segment:
Analysis of the EEV result in the year by earnings source
Analysis of the EEV result in the year by earnings source
New business contribution
Return from in-force business
Expected return
Experience variances
Operating assumption changes
Return on shareholder net worth
Operating profit of covered business
Variation from longer term investment return
Effect of economic assumption changes
2015
£m
2014
£m
6.1
9.7
6.3
10.8
8.3
–
31.5
12.2
(0.7 )
7.1
0.6
11.0
9.1
37.5
32.0
(7.5 )
Profit on covered business before tax and gain on acquisition
Tax
43.0
2.7
62.0
(12.2 )
Profit on covered business after tax and before
gain on acquisition
Gain on acquisition of the Waard Group
Uncovered business and other group activities
Tax on uncovered business
Profit after tax
45.7
21.3
(10.4 )
0.9
49.8
–
(7.3 )
1.7
57.5
44.2
Analysis of the EEV result in the year by business segment
CA
S&P
Movestic
The Waard Group
Chesnara
Profit before tax and gain on acquisition
Gain on acquisition of the Waard Group
Profit before tax
Tax
Profit after tax
2015
£m
2014
£m
10.8
7.7
22.7
0.9
(9.5 )
32.6
21.3
53.9
3.6
49.1
(14.2 )
27.5
–
(7.7 )
54.7
–
54.7
(10.5 )
57.5
44.2
1
2
3
4
5
4
6
£m
60
40
20
0
(20)
CA
S&P
Movestic
Waard
Chesnara
Profit on
acquisition
Tax
Total
2015
2014
STR ATEGIC REPORT SECTION B
Economic conditions: The EEV result is sensitive to investment market
conditions. The 2015 EEV results include a positive contribution as a result of
investment markets, especially with regards to Movestic, although this
is much less marked across the Group than the positive experience in 2014.
Key investment market conditions are as follows:
– The FTSE All share index has decreased by 2.5% during 2015, compared with
falling by 2.1% in 2014.
– The Swedish OMX all share index has increased by 6.6% during the year
compared with a 11.9% increase in the prior year.
– 10 year UK gilt yields have increased by 21 points in 2015 compared with a
reduction of 120 points in 2014.
Note 1 – CA: The CA segment result of £10.8m is driven by positive experience
variances of £6.9m offset by adverse operating assumption changes of £2.5m.
Economic-related results have contributed an additional £2.4m to the result. The £6.9m
of positive experience variances is primarily made up of £4.8m of positive lapse
experience coupled with £2.1m of reserve releases. Adverse operating assumption
changes includes the impact of adverse expense assumption changes offset by
positive mortality assumption changes.
Note 2 – S&P: The S&P segment result of £7.7m is driven by £2.5m of positive
experience variances and £5.1m of positive operating assumption changes. The positive
experience variances are largely as a result of positive lapse experiences in the year.
Operating assumption changes are the net of a number of items, but primarily relate
to the net impact of updating our expense modelling for new assumptions and
aligning the expense modelling with the rest of the UK business.
Note 3 – Movestic: Movestic has contributed significantly to the Group EEV earnings
in the year with a £22.7m segmental result (2014: £27.5m). The following factors are
the key drivers of the result:
– New business profits of £5.7m: New business profits have reduced compared with
last year’s result of £8.9m. The key reason for the reduction compared with 2014 is due
to very strong competition in the first half of the year from more traditional life
insurance companies who were offering very attractive policyholder returns. Such market
offerings have now become much less commonplace. This resulted in volume and
margin pressure to the business, although market share has improved during the latter
half of 2015.
– Economic profits of £9.4m: Equity markets have continued to perform well in Sweden
during 2015, building on strong returns in 2014, and this has resulted in the strong
economic profits in the year.
– Positive operating assumption changes of £5.7m: Two key factors have contributed to
net positive operating assumption changes:
• Expenses – assumptions have been strengthened during 2015 to recognise the cost
of the current business process improvements project, coupled with a strengthening
of maintenance cost assumptions. The net impact of this a cost strain of £8.4m.
• Performance fee rebate income – as a result of improvements in fee rebates during
the year the assumptions have been aligned to recent performance, resulting in a
positive impact of £18.4m.
Note 4 – The Waard Group: The Waard Group has reported a small profit in the
post acquisition period. Overall the Waard Group is not expected to be a significant
generator of future EEV surplus.
As a result of the acquisition of the Waard Group a gain of £21.3m has been recognised
in the Report and Accounts, representing the excess of the Embedded Value acquired
over the consideration paid.
Note 5 – Chesnara: The Chesnara result represents holding company expenses.
2015 costs are higher than 2014 primarily due to a one-off foreign currency
re-translation loss of £3.5m arising from holding euros prior to the completion of
the Waard Group purchase.
Note 6 – Tax: The combined EEV tax credit of £3.6m can be broken down into a
current tax charge of £4.7m offset by a deferred tax credit of £8.3m. The deferred
tax component represents the movement in deferred tax on the value of in-force
policies during the year, with a credit arising as a result of the VIF reduction in the
year coupled with the impact of some modelling refinements.
31
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
FINANCIAL REVIEW
EUROPEAN EMBEDDED VALUE
£455.2M 31 DECEMBER 2014: £417.2M
EEV movement 31 December 2014 to 31 December 2015 (£m):
5.9
(1.9)
(23. 5)
21.3
36.2
455.2
417.2
EEV 2014
Net of tax
profit arising
in the period*
Profit on
acquisition
Effect of
modelling
adjustment
Foreign
exchange and
other reserve
movements
Dividends
paid
EEV 2015
*Stated before exceptional items
EEV movement 31 December 2013 to 31 December 2014 (£m):
34.6
(17.3)
(20.7 )
44.2
417.2
376.4
EEV 2013
Net of tax profit
arising in the
period
Equity raised
for the Waard
Group
acquisition
Foreign
exchange
reserve
movement
Dividends paid
EEV 2014
STR ATEGIC REPORT SECTION B
Summary
The EEV of the Chesnara Group represents the present value of the estimated
future profits of the Group plus an adjusted net asset value. Movements
between different periods are a function of the following components:
– Net of tax profit arising in the period, pre exceptional items;
– One-off items, such as:
• the impact of raising new equity;
• the surpluses arising on acquisitions; and
• modelling adjustments;
– Foreign exchange movements arising from retranslating the EEV of
Movestic and the Waard Group into sterling; and
– Dividends that are paid during the year.
More detail behind each of these components has been provided below:
Net of tax profit
The EEV profit arising during the year is analysed in more detail within the
preceding section.
Profit on acquisition
The purchase of the Waard Group has resulted in the recognition of a
’day 1’ profit of £21.3m. The profit arose because the EEV of the Waard
Group at the acquisition date amounted to £71.4m, which is £21.3m
higher than the purchase price of £50.1m.
Effect of modelling adjustments
During the year an adjustment of £5.9m has been reported relating to a tax
error in the EEV model which resulted in the tax charge in the EEV model
being overstated at 31 December 2014. This has been corrected in the year.
Foreign exchange reserve movements
The £1.9m loss reported as a foreign exchange reserve movement during
2015 has arisen as a result of a small depreciation of the Swedish krona
against sterling during 2015. This compares with a 14% depreciation during
2014. Included within the exchange reserve movement loss is a small
profit arising from the slight appreciation of the euro against GBP since the
acquisition of the Waard Group.
Dividends paid
Dividends of £23.5m were paid during 2015, being the final dividend from
2014 of £15.1m and the interim dividend from 2015 of 8.4m.
Equity raised for acquisition
During 2014 we announced the acquisition of the Waard Group in the
Netherlands. To finance the deal we raised £34.5m of equity through a
well supported share placing exercise.
32
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015 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.
Analysis of EEV between VIF and shareholder net worth (SNW):
2015
2014
455.2
Total EEV
264.8
VIF
190.4
SNW
417.2
Total EEV
243.7
VIF
173. 5
SNW
The VIF component of £264.8m consists of 61% in relation to the Swedish business, 35% UK and 4% the Netherlands.
Analysis of EEV by segment:
2015
2014
Movestic
CA
S&P
Waard
Other Group Activities
Movestic
CA
S&P
Waard
Other Group Activities
There is a good balance in EEV across the Group with the UK business representing the majority (51%) of the total EEV (2014: 65%).
In the above segmental analysis any outstanding debt in relation to the S&P and PL acquisitions is included in ’Other Group Activities’.
Analysis of VIF by policy type:
2015
2014
£m
225
175
125
75
25
£m
250
200
150
100
50
(50)
(100)
Endowment
Protection
Annuities
Pensions
Other
Valuation adj.
Endowment
Protection
Annuities
Pensions
Other
Valuation adj.
89% of the Group VIF is attributable to pensions products. These are typically products that are in their savings phase, with the VIF representing the best
estimate of the future cash flows expected to be earned by the Group from these products.
’Valuation adjustments’ in the above graph comprise items that are not attributed at product level, such as certain expenses and the cost of guarantees to
with-profits policyholders in the S&P business.
Analysis of policy numbers by policy type:
2015
000s
250
200
150
100
50
2014
Endowment
Protection
Annuities
Pensions
Other
Endowment
Protection
Annuities
Pensions
Other
The increase in protection products is as a result of the Waard Group acquisition during the year.
Policy numbers above only reflect those that are included in our EEV calculations (’covered business’). As a result, these graphs do not include 379,000
(2014: 382,000) Life & Health policies in the Swedish division and 24,000 unemployment and disability policies in the Dutch division.
33
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
FINANCIAL MANAGEMENT
The Group’s financial management framework is designed to provide security for all stakeholders,
while meeting the expectations of policyholders, shareholders and regulators.
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 aim to:
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 TO OUR OBJECTIVES
In order to meet our obligations we employ and undertake
a number of methods. These are centred on:
1. Monitor and control
risk & solvency
2. Longer-term
projections
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
3. Capital structure
Group Solvency
Ratio:
Solvency I: 305%
Solvency II: 146%
returns
2015 TSR 4.1%
2015 dividend
yield 5.7%
Based on share price as at
31 December 2015 of 335.00p
and full year 2015 dividend
of 18.94p.
Gearing ratio of
17.8%
This does not include the
financial reinsurance within
the Swedish business.
5. Maintain the
Group as a
going concern
Group remains a
going concern
(see page 35)
4. Liquidity and
policyholder
returns
Policyholders’
reasonable
expectations
maintained
Asset liability
matching
framework
operated effectively
in the year.
Sufficient liquidity
in the Chesnara
holding company.
34
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
STR ATEGIC REPORT SECTION B
Outcomes from implementing our financial management objectives.
1. Capital structure
The Group is funded by a combination of share capital,
retained earnings and debt finance, with the debt gearing
(excluding financial reinsurance in Sweden) being 17.8%
at 31 December 2015 (23.1% at 31 December 2014).
The level of debt that the Board is prepared to take on
is driven by the Group’s ’Debt and leverage policy’ which
incorporates the Board’s risk appetite in this area.
Over time, the level of gearing within the Group will change,
and is a function of:
– funding requirements for future acquisitions (i.e. debt, equity
and internal financial resources); and
– repayment of existing debt that was used to fund previous
acquisitions.
As referred to above, acquisitions are funded through a
combination of debt, equity and internal cash resources. The
ratios of these three funding methods vary on a deal-by-deal
basis and are driven by a number of factors including, but
not limited to:
– size of the acquisition;
The information set out on page 23 indicates a strong
Solvency II position as at 31 December 2015 as measured at
both the individual regulated life company levels and at the
Group level. As well as being well-capitalised the Group also
has a healthy level of cash reserves to be able to meet
its debt obligations as they fall due, and does not rely on the
renewal or extension of bank facilities to continue trading.
The Group’s subsidiaries do, however, rely on cash flows
from the maturity or sale of fixed interest securities which
match certain obligations to policyholders, which brings
with it the risk of bond default. 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 reinsurers. We monitor their
financial position and are satisfied that any associated credit
default risk is low.
In light of this information, the Board has concluded that
the Group and Company has a reasonable expectation that
the Group and Company have adequate resources to
continue in operational existence for the foreseeable future,
and, as stated in the Directors Report on pages 71 to 72,
the Financial Statements have continued to be prepared on
a going concern basis.
– current cash resources of the Group;
3. Longer term viability statement
– current gearing ratio and the Board’s risk tolerance limits for
additional debt;
– expected cash generation profile and funding requirements
of the existing subsidiaries and potential acquisition;
– future financial commitments; and
– regulatory rules.
In accordance with provision C.2.2 of the 2014 revision of the
UK Corporate Governance Code, the Directors have
assessed the prospect of the Company over a longer period
than the 12 months required by the going concern provision.
The Board conducted this review for a period of three years
because the Group’s business plan covers a three year
period and includes an assessment of Group cash
generation and Group solvency margins over that time period.
In addition to the above, Movestic uses a financial reinsurance
arrangement to fund its new business operation.
2. Maintain the Group as a going concern
The Directors have considered the ability of the Group to
continue on a going concern basis. As such the Board has
performed an assessment as to whether the Group can meet
its liabilities as they fall due for a period of at least 12 months
from which these 2015 Report & Accounts have been signed.
The Group business plan considers the Group’s cash flows,
the Group’s ability to remain above target solvency levels
and other key financial measures over the period, assuming
continuation of the Group’s established dividend payment
strategy. These metrics are subject to scenario analysis
representing the principal risks to which the Group is most
sensitive, both individually and in unison. Where appropriate
this analysis is carried out to evaluate the potential impact of
adverse economic and other experience effects, including,
but not limited to:
In performing this work, the Board has considered the current
cash position of the Group and Company, coupled with the
i. Equity market declines
Group’s and Company’s expected cash generation as
ii. Reduction in yield curves
highlighted in its recent business plan, which covers a three
year period. The business plan considers the financial
projections of the Group and its subsidiaries on both a base
case and a range of stressed scenarios, covering projected
IFRS, EEV and solvency positions. These projections also
focus on the cash generation of the life insurance divisions
and how these flow up into the Chesnara parent company
balance sheet, with these cash flows being used to fund debt
repayments, shareholder dividends and the head office
function of the parent company.
iii. Adverse mortality and lapse experience
iv. Adverse expense experiences
v. Reduced new business volumes
vi. Adverse exchange rate experience
Based on the results of this analysis, the Directors have a
reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due
over the three year period of their assessment.
35
RISK MANAGEMENT
Risk management processes
Risk taking is a key part of our business model – taking the
’correct risks’ and managing them well is essential to our
success. We achieve this by understanding the key risk
drivers of the business plan and strategy, and making sure
we monitor these closely and take appropriate risk-based
decisions in a timely fashion.
Management and Supervisory Boards. To stay abreast with
market developments, the company’s Risk and Compliance
function also engages external professional support
when conducting these Risk reviews. The risks identified
and corresponding mitigating internal control measures are
centrally registered and appropriate monitoring is overseen
by the Risk & Compliance function.
Chesnara applies the ’Three Lines of Defence’ model,
Risk management processes are enhanced by stress and
adjusted for our size, across the group with a single set of
Risk and Governance Principles applying consistently across
the business, underpinned by Board-approved Group and
Divisional Governance Maps and Risk Policies.
In all Divisions we maintain processes for identifying,
evaluating and managing all material risks faced by the Group,
which are regularly reviewed by the Divisional and Group
Audit & Risk Committees. Our risk assessment 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 to ensure that the risk
profile remains within the Board’s approved Risk Appetite.
At the subsidiary level, in the UK we maintain, in accordance
with the regulatory requirements of the PRA and FCA, a risk
and responsibility regime – now enhanced by the introduction
of the Senior Insurance Managers Regime which became
effective on 7 March 2016. 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 CA plc
Audit and Risk Committee, which comprises solely of
Non-executive Directors. The Committee reports directly
to the CA plc Board which also reviews reports from the
compliance and internal audit functions.
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 internal control weaknesses
together with suggested improvements.
Following the recruitment of a Group Chief Risk Officer in
Q4 2015, these risk management processes are continuing
to be refined and embedded, building on the developments
progressed in 2015. In particular our Group-wide risk
management processes are being enhanced in a uniform
and consistent manner, embracing:
– further enhancements to and embedding and monitoring of
the Boards’ risk appetite and tolerance limits;
– the development of Key Risk Indicators (KRIs) and
management action triggers;
– a more forward-looking approach to risk identification and
assessment; and
– the strengthening of links between the setting and execution
of the business strategy and risk and solvency management.
In the Swedish business, at the Movestic subsidiary level,
there is full compliance with the regulatory requirement in
that the Board and Managing Director take 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 a responsibility for ensuring that the Company
has a Risk Management 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 and Audit & Risk Committee. Also, quarterly
returns to the Swedish regulator, Finansinspektionen,
which sets out capital requirements in respect of insurance,
market, credit, liquidity, currency and operational risks.
The Dutch business has a risk management framework in
place in accordance with guidance issued by the local
regulators (DNB for prudential supervision and AFM for
financial conduct supervision). The Dutch business
comprises a two-tier governance structure consisting of
a Management Board and a Supervisory Board. The Risk
& Compliance function performs Quarterly Risk Reviews
with the risk owners, which include the identification
and response to newly emerging risks, and reports to the
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 profile.
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 and the Netherlands;
ii) notwithstanding this, the Group has a material
segment, which comprises an open life and
pensions business; 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.
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STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The below table identifies the principal risks and uncertainties of the Group and what controls are in place
to mitigate or manage their impact. It has been drawn together following a robust assessment performed
by the Directors of the principal risks facing the company, including those that would threaten its business
model, future performance, solvency or liquidity. These have been updated to reflect the risks of the
Waard Group, and it is worth noting that they have remained materially unchanged as a result of this update
since those reported in the 2014 Annual Report & Accounts.
PRINCIPAL RISKS AND UNCERTAINTIES
Risk
Impact
Control
Adverse mortality /
morbidity / longevity
experience
In the event that actual mortality or morbidity rates
vary from the assumptions underlying product
pricing and subsequent reserving, more or less profit
will accrue to the Group.
Adverse persistency
experience
If persistency rates are significantly lower than
those assumed in product pricing and
subsequent reserving, this will lead to reduced
Group profitability in the medium to long-term.
Expense overruns
and unsustainable
unit cost growth
For the closed UK and Dutch 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.
Significant and
prolonged equity
market falls
A significant part of the Group’s income and, therefore,
overall profitability derives from fees received in respect
of the management of policyholder and investor funds.
Fee levels are generally proportional to the value
of funds under management and, as the managed
investment funds overall comprise a significant
equity content, the Group is exposed to the impact of
significant and prolonged equity market falls, which
may lead to policyholders switching to lower-margin,
fixed-interest funds.
Adverse exchange
rate movements
against sterling
Exposure to adverse sterling: Swedish krona and
sterling: euro exchange rate movements arises from
actual planned cash flows between Chesnara and its
overseas subsidiaries 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.
– Active investment management to ensure competitive
policyholder investment funds.
– Stringent customer service management information
ensures Management is aware of any customer servicing
issues, with any issues being tracked and followed up.
– Product distributor relationship management processes.
– Close monitoring of persistency levels across all groups
of business.
– For the UK business the Group pursues a strategy of
outsourcing functions with charging structures such that
the policy administration cost is aligned 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.
– The Dutch business pursues a low cost-base strategy
using a designated service company. The cost base is
supported by service income from third party customers.
– For all three divisions, the Group maintains a strict
regime of budgetary control.
– Individual fund mandates are intended to give rise to a
degree of diversification of risk.
– Certain investment management costs are also
proportional to fund values thereby reduce in the event
of market falls and hence some cost savings arise partially
hedging the impact on income.
– There is a wide range of investment funds and managers
so that there is no significant concentration of risk.
– In the Movestic business, management options include
the ability to increase charges in the circumstances of a
material fall in assets under management.
– The Group monitors exchange rate movements and the cost
of hedging the currency risk on cash flows when appropriate.
– The impact of any adverse currency movements can
be reduced by timing the cash flows from subsidiaries to
Group, if appropriate given various other applicable criteria
for transfers.
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STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
RISK MANAGEMENT (CONTINUED)
PRINCIPAL RISKS AND UNCERTAINTIES (CONTINUED)
Risk
Impact
Control
Counterparty
failure
The Group carries significant inherent risk of counterparty
failure in respect of:
– its fixed interest security portfolio;
– cash deposits; and
– payments due from reinsurers.
Adverse movements
in yields on fixed
interest securities
Failure of outsourced
service providers
to fulfil contractual
obligations
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’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 any of the service providers to
fulfil their contractual obligations, in whole or in part,
to the requisite standards specified in the contracts,
the Group may suffer losses, poor customer outcomes,
or reputational damage as its functions degrade.
Key man dependency
The nature of the Group is such that it relies on a
number of key individuals who have particular
knowledge, experience and know how. The Group
is, accordingly, exposed to the sudden loss of the
services of these individuals.
– Operation of guidelines which limit the level of exposure to
any single counterparty and which impose limits on exposure
to credit ratings.
– In respect of a significant 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.
– 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.
– Rigorous service level measures and management
information flows under its contractual arrangements.
– Continuing and close oversight of the performance of all
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 Group promotes the sharing of knowledge and
expertise to the fullest extent possible.
– It periodically reviews and assesses staffing levels, and,
where the circumstances of the Group justify and permit,
will enhance resource to ensure that know how and
expertise is more widely embedded.
– The Group maintains succession plans and remuneration
structures which comprise a retention element.
– The Group complements its internal expertise with
established relationships with external specialist partners.
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STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
PRINCIPAL RISKS AND UNCERTAINTIES (CONTINUED)
Risk
Impact
Control
Adverse regulatory
and legal changes
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 and embedding of Solvency II
requirements;
ii) the FCA’s review of legacy business;
iii) the changes in pensions legislation in April 2015;
iv) HM Treasury’s review of exit charges on pensions
business; and
v) Commission and rebate income changes
in Sweden.
Strong project management disciplines are applied when
delivering regulatory change programmes.
Chesnara seeks to limit any potential impacts of Regulatory
change on the business by:
– Having processes in place for monitoring changes, to
enable timely actions to be taken, as appropriate
– Being a member of the ABI and other means of joint
industry representation
– Performing internal reviews of compliance with regulations
– Utilising external specialist advice, when appropriate,
including Assurance
– Chesnara maintains strong relationships with all key
regulators including regular and open dialogue about
areas of potential change that could affect any of the
Chesnara businesses.
Through the Risk Management Framework, regulatory
risk is monitored and scenario tests are performed to
understand the potential impacts of adverse regulatory
or legal changes, along with consideration of actions that
may be taken to minimise the impact, should they arise.
Inconsistent
regulation across
territories
Chesnara currently operates in three regulatory domains
and is therefore exposed to inconsistent application
of regulatory standards across divisions, such as the
imposition of higher Capital Buffers over and above
regulatory minimums.
– Strong and open relationships are maintained with all
regulators. Evidence is provided to Regulators that
demonstrates consistent stability and control across
Divisions, achieved through strong risk management
and governance standards.
Availability of future
acquisitions
Potential consequences of this risk for Chesnara
constraining the efficient and fluid use of capital within
the Group, or creating a non-level playing field with
respect to future deal assessments.
Chesnara’s inorganic growth strategy is dependent on
the availability of attractive future acquisition
opportunities. Hence, the business is exposed to the
risk of a reduction in the availability of available
acquisition opportunities in Chesnara’s current target
markets, for example arising as a result of a change
in competition in the consolidation market or
from regulatory change influencing the extent of life
company strategic restructuring.
– In extremis, Chesnara could consider the re-domiciling
of subsidiaries or legal restructure of the business.
Chesnara’s financial strength and market reputation for
successful execution of transactions enables the
company to adopt a patient and risk-based approach to
assessing acquisition opportunities.
– Operating in multi-territories provides some
diversification against the risk of changing market
circumstances in one of the territories.
– Maintaining strong relationships and reputation as ’safe
hands acquirer’ via regular contact with regulators,
banks and target companies.
Defective acquisition
due diligence
Through the execution of acquisitions, Chesnara is
exposed to the risk of erosion of value or financial losses
arising from risks inherent within businesses or
funds acquired which are not adequately priced for or
mitigated within the transaction.
– Structured Board approved risk-based acquisition process
including Group Chief Risk Officer involvement in due
diligence process.
– Management team with significant and proven mergers
and acquisitions experience.
– Cautious risk appetite and pricing approach.
Cyber fraud
Cyber fraud is a growing risk affecting all companies,
– Ongoing specialist external advice, modifications to IT
particularly in the financial sector.
This risk exposes Chesnara to potential financial
losses and disruption to Policyholder services (and
corresponding reputational damage).
infrastructure and updates as appropriate.
– Penetration and vulnerability testing.
39
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CORPORATE AND SOCIAL RESPONSIBILITY
Making a positive contribution to our policyholders
and shareholders, whilst taking seriously social and
environmental issues.
Our main objective is to ensure we continue to manage the business
responsibly and for the long-term benefit of all stakeholders, including
our customers, shareholders, employees, regulators, outsourcers and
local communities.
Equal opportunities
Our people are our greatest assets. We recognise that to be able to meet
the expectations that we have set ourselves, we need to ensure, in a
competitive market, we continue to attract, promote and retain the best
candidates. Our approach is to be open, entrepreneurial and inclusive in
how we operate. 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:
Directors of Chesnara plc
Senior management of the Group
Heads of business units and
Group functions
Employees of the Group
Total
2015
Male
Female
2014
Male Female
7
2
14
79
102
1
–
6
77
84
7
1
6
70
84
1
–
5
60
66
The Davies report recommends a Board diversity target of 25% for FTSE
350 companies. Gender diversity forms an important part of the Board
appointment process.
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. The Board has
not identified a material number of senior management as defined by the
Companies Act outside of the Board of Directors and subsidiary Directors.
However, we continue to provide 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 given
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.
Modern Slavery Act 2015
The Modern Slavery Act 2015 (Slavery Act) requires a commercial organisation
over a certain size to publish a slavery and human trafficking statement
for each financial year. Chesnara plc and its subsidiaries are committed to
responsible employee practices in both our direct and indirect operations
and our supply chain as a whole. In 2016 we plan to issue the statement on
the website.
Case Study of Movestic Livförsäkring AB
In March 2015, subsidiary, Movestic Livförsäkring AB began a three-year
partnership with adventurer and lecturer Aaron Anderson. When Aaron was
seven years old he suffered from cancer in the lower back, after a year
of treatment, he ended up in a wheelchair. Aaron was not defeated, he now
has countless medals in athletics, participated in the Paralympics and he
has hand-cycled from Sweden to Paris to raise money for the Child Cancer
Foundation. He was also the first ever wheelchair person to climb
Kebnekaise mountain. When a child gets cancer, it affects the whole family.
To help these families and to fight childhood cancer, Movestic teamed up
with Aaron. The partnership is a move towards further sustainability work
and is line with the focus on the good health of our employees.
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STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Greenhouse gas reporting
Disclosure of emissions
Global GHG emissions data for the period from 1 January 2015 to
31 December 2015:
There are 24 company-leased vehicles in total across the Group 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.
Tonnes of CO2e
2015
2014
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
–
104.9
–
76.4
130.3
122.2
0.077
0.112
The above analysis shows that our total emissions have increased when
compared with the prior year. This increase is predominantly as a
result of the additional travel incurred as a result of the acquisition of the
Waard Group, coupled with the general enlargement of the Group
resulting in additional energy consumption through an enlarged occupancy
of office space.
Methodology used to calculate emissions
We have followed the requirements of the GHG Protocol Corporate
Accounting and Reporting Standard (revised edition) and the Defra 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 in the UK, 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 above.
Energy Saving Opportunity Scheme Regulations 2014
The Company has also committed to fully engaging with the Energy Saving
Opportunity Scheme Regulations 2014 (ESOS). As part of the ESOS, the
Company submitted and was externally assessed for the energy usage, in
the UK, for the period 31 December 2014 to 31 December 2015. Energy
usage examined was in relation to any energy consumed by the Company,
lighting, heating, fuel to name a few. Due to the nature and size of the
business of Chesnara the total energy consumption was £13,661 (energy:
33,378kWh) for the year. Energy savings identified were £3,325; these
reductions were through improving lighting and heating in the head office
along with reviewing the Company travel policy. We will work with the findings
of the energy assessment to pursue a reduction in consumption in 2016.
Approved by the Board on 30 March 2016 and signed on its behalf by:
Peter Mason
Chairman
John Deane
Chief Executive Officer
41
STRATEGIC REPORT SECTION BCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
IN THIS SECTION
44 Board profile and Board of Directors
46 Governance overview from the
Chairman
47 Corporate governance report
52 Directors’ remuneration report
68 Audit & Risk Committee report
71 Directors’ report
73 Directors’ Responsibilities
Statement
42
CORPORATE GOVERNANCE C
SECTION C
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CORPOR ATE GOVERNANCE SECTION C
BOARD PROFILE AND BOARD OF DIRECTORS
A strong Board with the appropriate skills, knowledge and experience
is an essential requirement of our Corporate Governance Framework.
The Board also needs to operate to a common Governance Map, have well considered Terms of Reference and have values
and a risk management approach which are consistent with that of the Chesnara Group.
In light of this, we now open the Corporate Governance section of our 2015 Report & Accounts with details of the
Chesnara Board members.
We have given further thought to the assessment of how well the skills, knowledge and experience of our Board members
ensure we continue to deliver against our strategic objectives. We continue to disclose a Board competency profile, as
summarised in the graph to the right. This summary is based on the core competencies that have been identified as being
key to the Board discharging its responsibilities and shows the collective score based on the current Board make-up.
To provide further insight into the skills, knowledge and experience of each Board member, the biographies below now
show the specific areas of specialism each member provides, with each letter correlating to the competency matrix
graph to the right. Where a Board member has a competency in dark blue this indicates a primary specialism. The light
grey colour indicates that this competency is a secondary specialism for that Board member.
THE BOARD
PETER MASON
CHAIRMAN
MIKE EVANS
SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
Non-executive Chairman of the Board, Peter is responsible
for the leadership of the Board, setting the agenda and
ensuring the Board’s effectiveness on all aspects of its role.
Appointment to the Board: Appointed to the Chesnara plc
Board in March 2013. Mike became Senior Independent
Director in May 2013.
Appointment to the Board: Appointed to the Board in
March 2004 and as Chairman in January 2009.
Committee membership: Nomination and Governance,
Audit & Risk and Remuneration.
Committee membership: Nomination & Governance
(Chairman) and a member of the Remuneration Committee.
Peter attends the Audit & Risk Committee by invitation.
Current directorships/business interests:
– Chairman of Movestic Livförsäkring AB
– Chairman of Chesnara Holdings BV
– Chairman of Countrywide Assured plc
– Non-executive Director of Countrywide Assured Life
Holdings Limited
Skills and experience:
A
B C D E
F G H I
PETER WRIGHT
NON-EXECUTIVE DIRECTOR AND CHAIRMAN OF THE
AUDIT & RISK COMMITTEE
Appointment to the Board: Appointed to the Chesnara plc
Board and as Chairman of the Audit & Risk Committee in
January 2009.
Committee membership: Audit & Risk and Nomination
& Governance.
Current directorships/business interests:
– Chairman of the With-Profits Committee Countrywide
Assured plc
– Countrywide Assured plc
Skills and experience:
A
B D E
F G H
Current directorships/business interests:
– Hargreaves Lansdown plc, Chairman
– Zoopla Property Group plc, Chairman
– Chesnara Holdings BV
– Countrywide Assured plc
Skills and experience:
A
B C D E
F G H I
K
JOHN DEANE
CHIEF EXECUTIVE
Appointment to the Board: Appointed as Chief Executive
in January 2015.
Career, skills and experience: John is a qualified Actuary
and has over 30 years experience in the life assurance
industry. John joined Century Life, a closed book acquisition
company in 1993. As CEO, he oversaw the creation
of the outsourcing company Adepta in 2000. He joined
Old Mutual plc in 2003 becoming their Corporate
Development Director later that year. In 2007 he joined
the Board of Royal London with responsibility for its open
businesses in the UK, Ireland and Isle of Man.
Skills and experience:
A
B C D E
F G H I
J K
44
CHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CORPOR ATE GOVERNANCE SECTION C
BOARD KNOWLEDGE, SKILLS AND EXPERIENCE SUMMARY
KEY KNOWLEDGE / SKILL / EXPERIENCE
A
B
C
D
E
F
Chesnara company knowledge
Industry knowledge – UK
Industry knowledge – Sweden/Netherlands
Governance – actuarial
Governance – financial
Audit and risk management
G
Investment management
H
M & A and business development
I
J
K
Commercial management
Operational change management
Operational management
SUMMARY
• • • • • • • •
• • • • • • • •
• • • • •
• • • • • •
• • • • • •
• • • • • • •
• • • • •
• • • • • • •
• • • • •
• • • •
• • • •
This recent assessment
confirms that our Board
not only has significant
experience in the
Insurance Sector but
also have a range of
specialisms which ensure
all aspects of our
competency profile are
well covered.
In the above diagram a dark blue circle represents the number of individuals with a primary specialism in that area, with a light grey
circle reflecting a secondary area of expertise. Where Board members are not deemed to have a level of specialism regarding a specific
competency they clearly contribute constructively to those matters through their general level of Board and business experience.
VERONICA OAK
NON-EXECUTIVE DIRECTOR, CHAIRMAN OF THE
REMUNERATION COMMITTEE
DAVID BRAND
NON-EXECUTIVE DIRECTOR
Appointment to the Board: Appointed to the Chesnara plc
Appointment to the Board: Appointed to the Chesnara plc
Board in January 2013.
Committee membership: Nomination & Governance,
Audit & Risk, and Remuneration.
Current directorships/business interests:
– Hanley Economic Building Society, NED
– With-Profits Committee, Countrywide Assured plc
– Countrywide Assured plc
Skills and experience:
A
B H
I
J
K
Board and the Board of Movestic Livförsäkring AB in
January 2013.
Committee membership: Nomination & Governance, Audit
& Risk, and Remuneration.
Current directorships/business interests:
– Exeter Friendly Society, Chairman of the Investment
Committee
– Movestic Livförsäkring AB, Chair of the Audit & Risk
Committee
– Countrywide Assured plc
Skills and experience:
A
B C D
E
F
G H
DAVID RIMMINGTON
EXECUTIVE – GROUP FINANCE DIRECTOR
FRANK HUGHES
EXECUTIVE – BUSINESS SERVICES DIRECTOR
Appointment to the Board: Appointed as Group Finance
Director with effect from May 2013.
Appointment to the Board: Appointed as an executive
director in March 2004.
Career, skills and experience: David 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 six years as Head of
Group Management Reporting.
Skills and experience:
A
B C D E
F H J
Career, skills and experience: Frank joined Countrywide
Assured plc in November 1992 as an IT Project Manager
and was appointed to the CA board as IT Director in May
2002 and to the Chesnara board as Business Services
Director in May 2004. He has 27 years’ experience in the
life assurance industry gained in CA and Chesnara and
also with Royal Life, Norwich Union and CMG.
Skills and experience:
A
B F G I
J K
45
GOVERNANCE OVERVIEW FROM THE CHAIRMAN
Effective and robust governance
remains central to the ongoing success
of the Group.
– oversight of the integration of the Dutch business,
the Waard Group; and
– oversight of the implementation and development of
Solvency II and the Senior Insurance Managers Regime
(‘SIMR’).
Dear Shareholder
The Board has continued to evolve and build on our
governance framework and have also sought to create an
environment in which honesty, integrity and openness are
encouraged and fostered. I believe this approach has made
the team and governance framework stronger.
Introduction
This section of the Annual Report & Accounts sets out our
governance policies and practices, and includes detail of how
the Company has, during 2015, applied the UK Corporate
Governance Code 2014 (the ‘Code’).
Audit & Risk Committee Report
In 2015 the Audit & Risk Committee continued to provide
excellent oversight, challenge and guidance to support the
Board and its activities. The Audit & Risk Committee report
provides insight into the key activities of the Committee
during 2015. Of note has been the Committee’s involvement
in the creation of the Group ORSA, a requirement of
Solvency II, and provision of guidance on key financial
reporting items during the year, such as the acquisition
accounting for the Waard Group and the new longer-term
viability statement required by the 2014 Corporate
Governance Code.
As a Board, we are committed to maintaining high standards
of governance which we believe remains central to the
ongoing and future success of the Group. We understand
that good governance is fundamental to the effective
management of the business and its sustainability both in
the short and the long-term.
Remuneration Committee
The Remuneration Committee continues to promote the
long-term success of the Company. This has been achieved
through monitoring and reviewing performance related
rewards to ensure they remain appropriate, transparent and
do not reward excessive risk taking.
As a result of increased requirements under the Code, the
The key highlights of the work of Committee during the year
Company has sought to strengthen its going concern
statement with the introduction of a ‘Longer-Term Viability
Statement’. In the year the Board reviewed the Company’s
viability as part of its business planning process. It
concluded that the Board is confident that the viability of the
Company would continue, with this assessment being
made over a three year period in line with the business plan.
The composition of the Board
I was delighted to welcome John Deane who was appointed,
as Group Chief Executive Officer, to the Board on 1 January
2015. John has made a considerable contribution to the
Board in 2015 and has brought a wealth of experience in
particular of the insurance and life sector.
Biographical detail and membership for each director who
served during 2015 can be found on pages 44 and 45.
Governance of the Group
In 2015 we successfully developed and implemented the
new Corporate Governance Maps (the ‘Governance Maps’)
at Group level and where possible within the divisions. The
new Governance Maps introduce a detailed framework and
supporting policies which, amongst other things,
has brought a more consistent divisionalised structure across
the Group. The Group Board has delegated appropriate levels
of authority to each divisional Board.
Key areas of governance that the Board had oversight of
during the year:
– implementation of the Corporate Governance Maps,
including the standardisation where possible of all Divisional
and Group policies;
have been:
– to review the role and responsibilities of the senior
management team in the UK, including the Group FD and
the Group CEO;
– the adoption of SII guidance on remuneration; and
– the review of the Committee’s adherence to and application
of the UK Corporate Governance Code 2014, the
Corporate Governance Map and the Committee’s own
Terms of Reference.
Nomination & Governance Committee
In October 2015 the FRC published a paper on ‘UK Board
Succession Planning’. The aim of the paper was to review
the key issues, identify good practice and to examine how
the Nomination & Governance Committee can play an
effective role in succession planning within the company.
The Committee amongst other matters considered this
paper and what this would mean to the Company. This work
included reviewing management’s succession plans for
senior executive and management positions for the Group.
Senior appointments have been made in the year and the
Committee has sought to ensure that the most appropriate
candidates have been appointed.
I trust that the various reports in the rest of this section
of the Annual Report & Accounts demonstrate that effective
and robust governance is central to the ongoing success
of Chesnara.
– review and revision of the role and responsibilities of the
senior management team in the UK, details of this can be
found in the Directors’ Remuneration Report on page 52;
Peter Mason
Chairman
30 March 2016
46
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CORPORATE GOVERNANCE REPORT
It is essential to have a well designed
and effective governance framework to
ensure that stakeholders’ investments
are safeguarded.
The following statement, together with the Directors’
Remuneration Report on pages 52 to 67 and the Audit & Risk
Committee Report on pages 68 to 70 describe 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 2015.
Compliance with the Code
The Company has complied throughout the year with all of
the relevant provisions of the Code.
The Board
At 31 December 2015, the Board comprised a Non-executive
Chairman, four other Non-executive Directors and three
Executive Directors.
Biographical details of Directors who served during 2015 are
given on pages 44 and 45 and a Board profile, which assesses
the core competencies required to meet the strategic
objectives, is provided on page 45. The Board, which plans
to meet at least 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.
i)
In addition:
the Directors of the Company are also the Directors of
Countrywide Assured plc, a UK-based life and pensions
subsidiary within the Group;
ii) three Directors of the Company, being Messrs Mason,
Deane and Evans, were also Directors of Chesnara
Holdings BV throughout the year; and
iii) four Directors of the Company, being Messrs Mason,
Deane, Brand and Rimmington, were also Directors of
Movestic Livförsäkring AB throughout the year.
Under local legislation or regulation for all three divisions
of the business, the Directors 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. The Prudential Regulation Authority has
been appointed as Group Supervisor to maintain oversight
of all three divisions of the business.
The responsibilities that the Board has delegated to
the respective Executive Management teams of the UK,
Dutch and Swedish businesses include: the implementation
of the strategies and policies of the Group as determined
by the Board; monitoring of operational and financial
results against plans and budget; prioritising the allocation
of capital, technical and human resources and developing
and managing risk management systems.
The roles of the Chairman and Group Chief
Executive Officer
The division of responsibilities between the Chairman of
the Board, and the Group Chief Executive Officer 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 Group
Chief Executive Officer 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.
47
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CORPORATE GOVERNANCE REPORT (CONTINUED)
Directors and Directors’ independence
The Board considers that all Non-executive Directors are
independent and that the Chairman was independent at
the date of his appointment.
Information
Regular reports and information are circulated to the
Directors in a timely manner in preparation for Board and
Committee meetings.
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.
As stated above, the Company’s Directors are also variously
members of the Boards of CA plc, the Waard Group and
Movestic. These Boards hold scheduled meetings, at least
quarterly, which are serviced by detailed regular reports
and information, which cover all of the key areas relevant to
the direction and operation of those subsidiary entities,
including but not limited to:
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 44. The Board is satisfied
that these are not such as to interfere with his performance,
which is based around a commitment of between 50 and
60 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 their responsibilities and
duties which is contained within the Corporate Governance
Map, which covers 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. During the year specific
specialist areas of training has also been provided to the
Board, in particular on Solvency II. Through their membership
of the CA plc 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, Deane, Evans, Brand
and Rimmington, through their membership of the divisional
boards, between them have considerable knowledge
and experience of both the Swedish and Dutch-based
businesses of the Group.
– Earnings report;
– Where applicable, a report from the Actuarial Function
Holder and With-profits Actuary;
– Compliance report;
– Investment report;
– Outsourcing reports;
– Internal audit report;
– Risk report;
– Capital requirement report;
– Own Risk and Solvency Assessment
– Financial risk report, including emerging risk, risk based
capital, and principal risks; and
– Risk management report.
All divisional entities monitor risk management procedures,
including the identification, measurement and control of
risk through the auspices of a Risk Committee where
available. These committees are accountable to and report
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.
In addition, the divisions are required to submit to the Chesnara
Audit & Risk Committee a quarterly risk report, an Annual
Report on risk management and internal control systems
and a summary of 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 Officer, 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.
48
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Performance evaluation
During the period under review the Chairman undertook a
formal performance evaluation of the Board and Nomination
& Governance Committees, and of individual directors. To
that end he held in-depth discussions with each Director on
a one-to-one basis.
The Chairmen of the Audit & Risk Committee and
Remuneration Committee used a questionnaire approach in
their respective performance evaluation of the Committees
they chair.
In addition, and using similar methods to those described
above, the Non-executive Directors, led by the Senior
Independent Director, met to conduct a formal performance
evaluation of the Chairman.
During the year, the Board conducted an evaluation of its
performance and that of the Audit & Risk, Nomination &
Governance, and Remuneration Committees to ensure that
they continue to remain effective and that each of the
directors demonstrates commitment to his or her role, along
with sufficient time to meet the required time commitment
to the Company. Having conducted its evaluation, it was
concluded that the structure and composition of the
Board and its Committees was considered appropriate. The
timeliness and quality of papers was considered to be
adequate. However, a project is underway to deliver even
better quality papers and to reduce the quantity to ensure
focus remains on key issues, strategy, and delivery of Group
management information. The new style papers will be
rolled out over the coming year.
Peter Mason – Non-executive Chairman
Peter Wright – Non-executive Director
John Deane – Executive Director
Frank Hughes – Executive Director
Veronica Oak – Non-executive Director
David Brand – Non-executive Director
David Rimmington – Executive Director
Mike Evans – Non-executive Director
Company Secretary
Zoe Kubiak is the Company Secretary and is responsible
for advising the Board, through the Chairman, on all
governance matters. 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:
Scheduled
Board
Nomination &
Governance
Committee
Remuneration
Committee
Audit & Risk
Committee
8 (8 )
8 (8 )
8 (8 )
8 (8 )
8 (8 )
8 (8 )
8 (8 )
8 (8 )
3 (3 )
3 (3 )
n/a
n/a
3 (3 )
3 (3 )
n/a
3 (3 )
5 (5 )
n/a
n/a
n/a
5 (5 )
n/a
n/a
5 (5 )
n/a
7 (7 )
n/a
n/a
7 (7 )
7 (7 )
n/a
7 (7 )
The figures in brackets indicate the maximum number of scheduled meetings in the period during which the individual was a Board or
Committee member.
49
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
CORPORATE GOVERNANCE REPORT (CONTINUED)
The Nomination & Governance
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.
Nomination & Governance Committee
During the period under review, the Committee comprised
Peter Mason, who also served as Chairman of the Committee,
Peter Wright, David Brand, Veronica Oak and Mike Evans, all
of whom served throughout the period. The Terms of Reference
for the Committee can be found on the company website,
www.chesnara.co.uk
The role of the Nomination & Governance Committee is to:
– keep under review the balance, structure, size 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;
– keep under review the leadership needs of, and succession
planning for, the Group in relation to both its Executive Directors
and other senior management;
– identify and nominate, for the approval of the Board, candidates
to fill board vacancies as and when they arise; and
– evaluate the balance of skills, knowledge, experience and
diversity of the Board.
This includes consideration of recommendations made by
the Group Chief Executive Officer for changes to the executive
membership of the Board.
During the period, the Committee met three times to consider
the continuing mix of skills and experience of the Directors.
Board appointment process
The Committee adopts a formal and transparent procedure
for the appointment of new directors to the Board.
The Board’s process is to use external recruitment consultants
for appointing directors. The Company will provide a brief of
the candidate desired, along with a role profile to the recruitment
consultant. Any candidate deemed suitable, based on merit
and against objective criteria, is submitted to the Committee
as a potential candidate. The Committee will review a shortlist
of suitable candidates against the criteria, and put forward for
interview by the Board and the Executive Management
Team. Any candidate deemed suitable for appointment will,
if necessary, first have to go through the fit and proper process
as outlined in the Senior Insurance Managers Regime (SIMR)
which came into full force on 7 March 2016.
Diversity
The Board recognises the benefits of having diversity across
all areas of the Group. When considering the make-up of
the Board, the benefits of diversity are appropriately reviewed
and balanced where possible and appropriate, including in
terms of difference in skills, sector experience, gender, race,
disability, age, nationality and other contributions that
individuals may make. In identifying suitable candidates the
Committee will seek candidates from a range of backgrounds,
with the final decision being based on merit against the role
criteria set.
Remuneration Committee
Full details of the composition and work of the Remuneration
Committee are provided in the Directors’ Remuneration Report
on pages 52 to 67.
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 68 to 70.
Relations with shareholders
The Group Chief Executive Officer and the Group Finance
Director 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 Group Chief
Executive Officer and the Group Finance Director with
shareholders and is responsible for ensuring that the views of
shareholders are known to the Board. This includes twice
yearly feedback prepared by the Group’s brokers on meetings
the Executive Directors have held with institutional
shareholders.
Annual and interim reports are distributed to other parties
who may have an interest in the Group’s performance and
those reports, together with a wide range of information of
interest to existing and potential shareholders, are made
available on the Company’s website, www.chesnara.co.uk
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.
All shareholders 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 18 May 2016
can be found in the notice of the meeting on pages 179 to 184.
50
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 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 the FRC’s guidance on Risk Management,
Internal Control and related financial and business reporting,
the Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks faced
by the Group. This process has been in place for the year
under review and up to the date of approval of the Annual
Report & Accounts, and the process is regularly reviewed
by the Board and accords with the guidance.
In accordance with the regulatory requirements of the PRA
and SII, CA has maintained and enhanced its 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 Audit & Risk Committee
regularly reviews and reports quarterly on risks to the Board.
The Group also maintains a Principal Risk Register which
ensures identification, assessment and control of the
significant risks subsisting within the Company, CA, the
Waard Group and Movestic. The maintenance of the key
risk registers is the responsibility of senior management,
who report on them quarterly to both the respective
divisional Audit & Risk Committees and to the Chesnara
Audit & Risk Committee. The overseas divisions maintain
a risk and responsibility regime which ensures that:
– the Boards and Group Chief Executive Officer 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 Boards have responsibility for the satisfactory
management and control of risks through the specification
of internal procedures; and
– there is a dedicated risk function, which is supported by
compliance and internal control functions.
As an integral part of this regime a detailed risk register is
maintained, which identifies, monitors and assesses
appropriate risk classifications.
All 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 the Waard Group and Movestic, such
oversight is exercised by way of the membership of a number
of the Chesnara Directors on their Boards, together with
quarterly reporting 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 2015, 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 and Compliance
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 their 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 Group Audit & Risk Committee.
The Internal Audit functions in Sweden and Netherlands are
provided by external consultants who report formally through
either their Board or Audit & Risk Committee. The Group
Audit & Risk Committee has access to this work and speaks
with them on an annual basis.
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 Annual Report &
Accounts, 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 maintains and develops the
Group’s financial reporting control processes and procedures.
The reporting process is supported by transactional and
consolidation finance systems. Reviews of the application
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 Group Audit & Risk Committee reviews the application of
financial reporting standards and any significant accounting
judgements made by management.
Going Concern and Viability statement
The Directors’ Statement on Going Concern is included in
the Directors’ Report on page 72 and the Longer-Term
Viability Statement is set out on page 35.
Directors
The present Directors of the Company and their biographical
details are set out on pages 44 and 45.
51
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT
REMUNER ATION COMMITTEE CHAIRMAN’S ANNUAL STATEMENT
Dear Shareholder
Area of focus
Matter considered
On behalf of the Board, I am pleased to present the 2015 Directors’
Remuneration Report, for which we seek your support at our forthcoming
Annual General Meeting (AGM), in May 2016. The Remuneration Report
is designed to demonstrate the link between the Group’s strategy, its
performance, and the remuneration outcomes for our Executive Directors.
Annual Salary
Review
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, the Executive Directors did not
receive an Annual Salary increase, with the exception
of Frank Hughes who received an increase of 3% on his
basic pay. John Deane and David Rimmington received
an increase during 2015 following a review of their role
and responsibilities.
The Committee reviewed the draft Directors’
Remuneration Report for the 2014 Financial Statements
and recommended their approval by the Chesnara Board.
An internal audit of pay arrangements for directors and
staff was undertaken in the UK. There were no material
matters of concern to note.
The Committee approved the final terms of settlement
for the former Group Chief Executive Officer, Graham
Kettleborough.
The Committee approved the renewal of the all employee
SAYE Scheme. All UK employees were invited to take part
in the new scheme.
The Committee made changes to the employee benefits
provided to UK employees. This had no effect on benefits
to Executive Directors. The Committee also approved
recommendations from management on the Staff Bonus
Scheme so that it better supports a new performance
management programme and to the introduction of
performance related bonuses.
There were no material gaps identified and where
recommendations were made these were actioned.
The Committee reviewed the Executive Directors
performance against targets set. It was the view of the
Committee that Executives have performed well against
targets set.
Directors’
Remuneration
Reporting
Internal Audit
Report for
payments to
directors
and staff
Final settlement
arrangements for
Graham
Kettleborough
All employee
SAYE
Review of
employee
benefits
Review of the
Committee’s
compliance with
the Remuneration
Policy, internal
Governance
Map and the UK
Corporate
Governance Code
Performance
against strategic
targets
Regulatory
changes
The Committee reviewed the Solvency II regulatory
changes and agreed to take responsibility for overseeing
the CA plc Remuneration Policy.
As I alluded to in my statement last year, under the leadership of the new
Group CEO, a review of the company’s corporate structure and
organisational design has been undertaken. The outcome has created a
structure better able to support the governance of the Group following
its expansion into the Netherlands; its endeavours to complete on
further acquisitions; the requirements of Solvency II and, in the UK, the
start of the Senior Insurance Managers Regime. As a result, and
with the engagement of external advisors, the Committee undertook an
exercise to evaluate the senior management roles affected by the
organisational redesign.
The Directors’ Remuneration Report for the year ended 31 December
2015 comprises:
– My report as Remuneration Committee Chairman and our Annual
Remuneration Report, both of which are subject to an advisory shareholder
vote at the AGM in May 2016; and
– The Remuneration Policy (‘the Policy’), which is set out on pages 54 to 59.
The Remuneration Policy will next be subject to a binding shareholder vote
at the AGM held in 2017.
Composition and activities of the Remuneration Committee
I should like to thank shareholders for their continued valued support for
our remuneration arrangements. In this year’s report, we have sought to
improve both the look and feel of the report. Our Remuneration Policy,
shown in summary, remains unchanged and the recruitment and exit policy
arrangements are shown in full. The Committee has taken care to
ensure changes or decisions made in connection with Executive Directors’
remuneration remains consistent and in line with the policy approved
by shareholders.
There have been no changes this year to the composition of the Committee.
In addition to myself, Committee members are Peter Mason (Chairman of the
Board) and Mike Evans (Senior Independent Director).
Highlights
In 2015 the Committee met five times and dealt with the following matters:
Area of focus
Matter considered
Executive Director
remuneration
and reward
The Committee discussed and set the scheme awards and
performance targets for the award made in 2015 under the
2014 Short-Term Incentive Scheme (STI) and the 2014
Long-Term Incentive Scheme (LTI) for Executive Directors.
A half-year evaluation was also undertaken.
A review of remuneration trends across the Group
revealed that pay remains at appropriate levels and is not
adversely affecting staff turnover or the ability to recruit
new members of staff with the required skills and
experience. In addition, the Committee reviewed salary
and where relevant bonus awards to senior management
within Movestic and the Waard Group.
Following an organisational redesign the Committee
undertook a separate evaluation of some of the
Executive roles.
The Committee’s Terms of Reference were reviewed and
it was concluded that they continue to be appropriate
for the activities of the Committee. A wider review of the
Remuneration Committee Terms of Reference for the
subsidiaries was also undertaken.
The Company’s Remuneration Policy was reviewed and
it was concluded that no changes were necessary.
An evaluation of the Committee’s performance suggested
that the Committee is working effectively and that the
composition of the Committee is appropriate at the
current time.
All employee
and Executive
remuneration
Terms of
Reference
Review of the
Remuneration
Policy
Committee
Evaluation
52
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The Committee engaged New Bridge Street, an independent external
Committee’s Responsibilities
The Committee strives to ensure the Company’s remuneration structure
aligns to the interests of management and shareholders.
The Committee’s key responsibilities include:
– considering and making recommendations to the Board on the strategy and
policy for the remuneration of the Executive Directors, the Chairman and
senior employees across the Group;
– ensuring pay levels are appropriate to enable the Company to attract, retain
and motivate its Executives and other members of staff;
– determining the design, conditions and coverage of annual and long-term
incentive plans for senior executives and approving total and individual
payments/awards under the plans;
– determining the targets for any performance-related incentive schemes;
– determining the issue and terms of all share-based plans available to all
employees; and
– determining the compensation (if any) in the event of termination of service
contracts of Executive Directors and senior employees across the Group.
The Committee’s terms of reference are reviewed by the Board on an annual
basis. The terms of reference are available in the Governance section of the
Company’s website.
The Group Chief Executive Officer and the Company Secretary were invited
to attend most meetings. None of them were present during any discussion
of their own remuneration. When considering remuneration for Executive
Directors, the Remuneration Committee used the Policy framework approved
by shareholders at the AGM in May 2014.
Shareholder engagement
The voting outcome at the 2015 AGM in respect of the Directors’ Remuneration
Report for the year ended 31 December 2014 is set out on page 67 and
reflects the support of both private and institutional shareholders. No
changes are proposed to the Policy this year. Shareholders will be invited to
approve the Annual Remuneration Report for the year ended 31 December
2015 (which will be a non-binding advisory vote) at the Company’s AGM.
The Committee will continue to be mindful to the interests of shareholders
and other stakeholders and I welcome shareholder feedback.
I hope my report together with our Remuneration Report provides you with
a clear account of the operation of the Remuneration Committee during
2015 and how we have put our Remuneration Policy into practice. I’m very
happy to talk to shareholders to discuss any aspect of our activities
or decisions.
Veronica Oak
Chairman of the Remuneration Committee
30 March 2016
remuneration advisor, to assist with evaluating and benchmarking the new
group roles. Having assessed the responsibilities of these roles and being
mindful of internal pay relativities, company performance and the economic
climate in general, the Committee has, as permitted under the existing
remuneration policy, attached to these roles higher salaries and increased
the maximum participation levels under both the Short-Term and Long-Term
incentive schemes. The salary awards also take into account the experience
and competency of the jobholders. These changes are within the terms
of the company’s Remuneration Policy and the Committee is of the view
that the total target remuneration is now fully aligned with the increased
responsibilities of the roles and is still relatively modest as compared with
companies of a similar size.
Management’s performance in 2015
During 2015 the Executive Directors have continued to deliver on key financial
metrics and on a number of important strategic initiatives and
regulatory requirements, notably the ongoing progress towards Solvency II.
The main factors to influence the Committee’s assessment of performance
in 2015 were:
– Growth in the business – up 9.1% measured by European Embedded
Value (EEV) after dividend distribution and profit before tax on an IFRS basis
of £42.8m;
– The Group’s readiness (in all territories) to meet the requirements of
Solvency II which became effective on 1 January 2016;
– Completion and successful integration of the Waard acquisition; and
– Enhancement of the Group’s governance model to support its expansion
into a new territory and, in the UK, the start of the Senior Insurance
Managers Regime.
In light of the performance of the Executive Team in 2015, the Remuneration
Committee is satisfied that the reward outcomes are appropriate. Our
performance assessment of the 2014 Short-Term Incentive Scheme has
resulted in an award for the three Executive Directors equivalent to 61.47%
of salary (full detail can be found on page 61).
Directors’ Remuneration Policy
The full Remuneration Policy can be found on pages 55 to 59 of the Annual
Report 2013 or in the Governance Reports section of the Company’s
website which is available at www.chesnara.co.uk A summary of the Policy
has been included in this year’s report for your ease of use.
The Directors’ Remuneration Policy was approved at the 2014 AGM and will be
effective until the 2017 AGM. It has not been amended during the year. In
respect of the year under review there have been no departures from this Policy.
Looking ahead
One of the initial tasks for our new CEO was to undertake a review of the
company’s corporate governance and organisational design to strengthen
Chesnara’s group function. This has been completed and all Solvency II
requirements have been satisfied, and in the UK, the Company is prepared
for the new Senior Insurance Managers Regime. This review also extended
to the Group’s overseas territories to standardise their remuneration
framework in line with the Group’s. The main focus for 2016 will be to evaluate
the performance targets to ensure they remain effective and appropriate to
the Company. This may mean moving away from using European Embedded
Value (EEV), which, with the advent of Solvency II has an uncertain future
in the life and pensions industry. If Chesnara ceases to produce EEV results
then the targets in the STI and LTI schemes will need to be aligned to an
alternative measure. The Committee will ensure that any substitute measure
results in comparable targets. Any change in measurement will require
formal Remuneration Committee approval.
53
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
REMUNER ATION POLICY REPORT
The Remuneration Policy was approved by our shareholders at the Annual
General Meeting held on 16 May 2014, and although not a requirement, the
Committee has included a summary of the Policy in this year’s Report for ease of
reference. The Remuneration Policy will next be subject to a binding vote at the
AGM in 2017. The Policy as approved by shareholders can be found on our website
www.chesnara.co.uk/corporate-responsibility/governance-reports
Meeting the strategic objectives
The Committee has continued to review the Group’s
remuneration philosophy and structure to ensure it remains
supportive to the Company’s strategic objectives whilst
rewarding individuals for their contribution to the business.
The remuneration review undertaken in the year sought
to keep remuneration at or around median and in line with
appropriate benchmarks for the market in which the Company
operates. We consider our approach to be conservative
and within the framework of the Remuneration Policy. The total
remuneration package aims to link corporate and individual
performance with an appropriate balance between short and
long-term rewards, and fixed and variable elements. The
Committee considers that the targets set for the Executives
for their different components of performance remained
appropriate and sufficiently challenging. The Committee has
the discretion to amend certain elements of the Policy in
exceptional circumstances when considered to be in the best
interests of shareholders. Should this discretion be used this
will be explained and reported in the Directors’ Remuneration
Report in the following year. In the year under review no such
discretion was used.
Overall remuneration policy aims are:
– to maintain a consistent remuneration strategy based on clear
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.
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 23 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 145 people. In 2015 the Waard Group, a
Netherlands-based Group comprising three closed book
insurance companies and a servicing company was acquired.
This business employs 23 people.
The schematic below illustrates how the Company’s KPIs
align to its strategic objectives and cultural values and in turn
how those KPIs are recognised as key components of
both the short and long-term incentive schemes. Reading
across the chart shows how the KPIs cover the objectives. For
example, ‘Maximise value from existing business’, ‘Enhance
value through profitable 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 existing business’ should
positively influence all three KPIs. Our three objectives are
the Group’s core strategic objectives. Underpinning the
delivery of these three core objectives is the Group’s culture
& values, something that is pervasive in everything we do.
This covers how we manage our investors, policyholders,
employees and regulators, and how we conduct our business.
As can be seen below adhering to our core culture & values
is expected to benefit all KPIs that are used to assess the
performance remuneration of the Executive Directors.
Strategic objectives/cultural values
Key performance indicators
Short-term incentive scheme
Long-term incentive scheme
Deliver shareholder value
Maximise value from existing business
Acquire life and pensions businesses
Enhance value through profitable new business
Chesnara culture & values
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54
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The Remuneration Policy table
Executive Directors’ remuneration
The following tables give an overview of the Company’s policy on the different elements of the remuneration package.
Purpose and link
to strategy
Operation
Performance measures and maximum
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.
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.
Personal and Group performance is taken
into consideration when deciding whether a
salary increase should be awarded. Salary
increases may not be awarded on the strength
of performance alone.
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 Group’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; and
– 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).
The table below has been updated to reflect the salaries for each
Executive Director effective from 1 January 2016.
Director
John Deane
David Rimmington
Frank Hughes
Change from Basic salary from
1 January 2016
prior year
16.7%
23.2%
3.0%
£420,000
£250,000
£212,032
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.
The Executive Directors participate in a defined contribution
pension scheme. During 2015, employer contributions varied
between 7.5% and 9.5% of basic salary. With effect from
1 January 2016, employer contributions have been aligned at
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.
55
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
REMUNER ATION POLICY REPORT (CONTINUED)
Remuneration Policy table (continued)
Executive Directors’ remuneration (continued)
Purpose and link
to strategy
Operation
Short-Term Incentive (STI) Scheme
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.
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 three 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 and in line with new regulatory changes may
apply clawback to awards made after 1 January 2015.
As referred to on page 63 the Company has a minimum
shareholding policy that requires each Director to hold shares
in the Company up to the value of their annual salary. The
Directors will only be able to sell the shares awarded under
this scheme subject to meeting these rules.
Long-Term Incentive (LTI) Scheme
Performance measures and maximum
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%.
The targets may include costs, IFRS pre-tax profit, EEV
operating profit, cash generation, Group strategic 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 & Accounts immediately
following each performance period.
For the 2016 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 up to 100% of basic salary.
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 and in line with new regulatory changes may
apply clawback to awards made after 1 January 2015.
As referred to on page 63 the Company has a minimum
shareholding policy that requires each Director to hold shares
in the Company up to the value of their annual salary. The
Directors will only be able to sell the shares awarded under
this scheme subject to meeting these rules.
For 2016 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
Higher 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 & Accounts 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 up to 100% of basic salary.
Non-executive Directors’ remuneration
Purpose and link
to strategy
Operation
Fees & Expenses
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.
56
Performance measures
and maximum (where applicable)
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.
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 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 Higher Yield Index over a three 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.
– 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.
3. Other
The SAYE expired in 2014. The Committee, using its
discretion, renewed the SAYE Scheme in 2015. The SAYE
provides a tax efficient all employee scheme in which
Executive Directors are eligible to participate.
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.
Approach to remuneration on recruitment
The following principles apply when recruiting Executive
Directors:
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.
Details of the performance measures, weightings and
targets and the corresponding potential awards for 2016
are set out on page 65.
– 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;
– Each element of remuneration offered will be considered
separately and collectively in this context; and
– The maximum awards in respect of the STI Scheme and LTI
Scheme as set out in the tables on pages 65 and 66 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.
The future Remuneration 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 upfront.
2. Differences in policy compared with other employees:
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 employees. Executive Directors
receive fuel allowances which is a benefit not offered to other
grades receiving a car allowance.
– Annual bonus: This is an integral part of the Company’s
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. There is no annual bonus
scheme within the Waard Group.
57
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
REMUNER ATION POLICY REPORT (CONTINUED)
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.
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 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 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
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.
No grants following service
of notice.
Unvested awards lapse on
date employment ends.
Cease on
date
employment
ends.
Outstanding options must be exercised
within six months of date employment
ends.
Outstanding options must be
exercised within six 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.
Cease on
date
employment
ends.
Cease on
date
employment
ends.
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 six months of date
employment ends.
Unvested awards lapse on
date employment ends.
Outstanding options must
be exercised within six
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 six 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
six months of the date on
which employment ends
or on which they vest
(whichever is later) unless
the Committee specifies a
longer period.
58
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 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.
– 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 2016 LTI and STI Schemes
apply throughout the period.
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.
Group Chief Executive Officer
Group Finance Director
Business Services Director
£000’s
1,330
£000’s
Long-term incentive
Annual variable
Fixed
771
16%
21%
490
32%
32%
Long-term incentive
Annual variable
Fixed
443
15%
19%
292
742
30%
30%
100%
63%
36%
100%
66%
40%
£000’s
Long-term incentive
Annual variable
Fixed
363
13%
18%
69%
253
100%
582
28%
29%
43%
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 remuneration projection for 2016:
Director
Group Chief Executive Officer
Group Finance Director
Business Services Director
Salary and fees
£000
Benefits
£000
Pension
£000
Total fixed pay
£000
420
250
212
30
18
21
40
24
20
490
292
253
The pension information above includes the employer contribution element of the pension value, which equates to 9.5% of
gross basic salary.
Statement of shareholder views
There are no matters to report this year, there having been no occasion for us to contact shareholders or vice versa.
59
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
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 2015 and 31 December 2014 is made up as follows:
Executive Directors’ remuneration as a single figure – year ended 31 December 2015
Name of Director
John Deane
David Rimmington
Frank Hughes
Total
Salary All taxable Non taxable
benefits
benefits
£000
£000
and fees1 &2
£000
Annual
bonuses
£000
LTIP
£000
Pension
£000
290
227
206
723
26
12
15
53
3
6
5
14
240
139
127
506
–
–
–
–
37
18
16
71
Total for
2015
£000
596
402
369
1,367
Notes
1. John Deane received fees of £100,000 from his directorship appointment with Atom plc, and therefore the salary paid by the Company was reduced by this amount.
2. Resulting from the Remuneration Review in the year, both John Deane and David Rimmington received a salary increase effective from 1 July 2015.
Executive Directors’ remuneration as a single figure – year ended 31 December 2014
Name of Director
John Deane
David Rimmington
Frank Hughes
Graham Kettleborough*
Total
Salary All taxable Non taxable
benefits
benefits
£000
£000
and fees
£000
Annual
bonuses
£000
LTIP
£000
Pension
£000
30
188
203
328
749
2
13
14
20
49
–
5
5
8
18
–
128
139
225
492
–
–
61
100
161
3
16
15
31
65
*Graham Kettleborough retired from the Board on 31 December 2014.
The remuneration of the Non-executive Directors for the years ended 31 December 2015 and 31 December 2014 is made up as follows:
Non-executive Directors’ remuneration as a single figure – year ended 31 December 2014 and 2015
Name of Director
Peter Mason
Peter Wright
Veronica Oak
David Brand
Mike Evans
Total
2015
2015
Salary All taxable
benefits
£000
and fees
£000
106
64
54
52
52
328
–
–
–
–
–
–
2015
Total
£000
106
64
54
52
52
328
2014
2014
Salary All taxable
benefits
£000
and fees *
£000
100
60
50
45
45
300
–
–
–
–
–
–
Total for
2014
£000
35
350
437
712
1,534
2014
Total *
£000
100
60
50
45
45
300
*The fees paid to for Veronica Oak in 2014 include an additional fee of £5,000 per annum, payable for two years only commencing in May 2013
for the increased workload for the Remuneration Committee Chairman in designing and implementing the new incentive schemes and adopting
new regulatory requirements.
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. As a result of the remuneration and organisational review both John Deane and David Rimmington’s
salary was increased, based on an increase in responsibility and expansion of their roles and their experience within those roles. An increase
of £60,000 and £47,000 per annum respectively was awarded and this was effective from 1 July 2015. Following this adjustment, we believe
that the salary levels for Executive Directors are now set at the correct position.
60
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The remuneration policy for the Executive Directors is designed with regard to the policy for employees across the Group as
a whole. Our ability to meet our growth expectations and compete effectively is dependent on the skills, experience and
performance of all our employees. Our employment policies, remuneration and benefit packages for employees are regularly
reviewed. There are some differences in the structure of the remuneration policy for the Executive Directors and senior
management team compared to other employees reflecting their differing responsibilities, with the principal difference being
the increased emphasis on performance related pay for the more senior employees within the organisation.
Employee share ownership is encouraged and facilitated through participation in the SAYE Scheme (subject to minimum
service requirement).
Although the Committee does not consult directly with employees on Directors’ pay, the Committee does take into consideration
the pay and employment conditions of all employees when setting the policy for Directors’ remuneration. In terms of
comparison metrics, the Committee takes into account the average level of salary increase being budgeted for the UK workforce
when reviewing the salary levels of the Executive Directors. The Committee is also mindful of any changes to the pay and benefit
conditions for employees more generally when considering the policy for directors’ pay.
Payments in respect of salary and pension benefits amounting to £89,712 were made to Graham Kettleborough who remained
an employee until 31 March 2015, following the cessation of his role as CEO on 31 December 2014. In addition, he received
taxable benefits during this period of £5,703.
Taxable benefits
The taxable benefits relate to the provision of a car, fuel allowance and medical insurance.
Annual bonuses
The amount reported as Annual Bonuses in 2015 is entirely made up of awards made under the 2014 STI Scheme. The amounts
awarded to the Executive Directors under this scheme are based on performance against three core measures, being IFRS
pre-tax profit, EEV operating profit and Group strategic objectives. The table below shows the outcome of each measure
when compared with the target and the resulting 2014 STI award.
Upper
threshold for
minimum
Percentage
award for
maximum
performance performance performance performance performance performance
Minimum
threshold for
maximum
Percentage
award for
on target
Percentage
award for
min
On target
Actual
result
Actual
percentage
total award
Actual
percentage
award as
%age of
salary
IFRS pre-tax result
EEV operating result
Group strategic
objectives
£19.408m
£20.340m
0%
0%
£24.533m*
£22.600m
15.0%
12.8%
£49.066m
£33.900m
50%
30%
£37.544m*
£39.881m
60% of max
0%
80% of max
10.0%
100%
20%
92.0% of max
38%
30%
18%
25.2%
22.5%
13.8%
For results between the performance thresholds, a straight-line basis applies.
*Note – this is stated after certain adjustments, such as consolidation adjustments. The actual results are also adjusted in the
same manner.
The outcome of the Group strategic objectives reflects progress on a number of key projects for the Group, including the Solvency II
project in line with plans, operational improvements in the UK, improvements in Group governance and reporting, integration of the
Waard Group and reviewing and updating the company’s acquisition policies.
Name of Director
John Deane
David Rimmington
Frank Hughes
Total
Salary on
which award
based
£
Maximum
potential
award as
%age
of salary
390,000
226,500
205,856
75%
75%
75%
Actual
award as
%age of
salary
61.47%
61.47%
61.47%
Total
value of
award
£
239,740
139,234
126,544
505,518
35% of the above awards are granted as deferred share awards that will vest at the end of a three year deferred period.
Pension
The pension component in the single figure table represents employer’s contributions that form part of the Director’s
remuneration package. The employer’s contribution is based on a fixed percentage of each Executive’s salary, and can
vary between Executives.
61
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
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 have been 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 Scheme for 2013 depends upon three year EEV
projection targets being met or exceeded. However, given
that there was a bonus cap which was shared between this
scheme and the 2013 Annual Bonus Scheme there was no
value on vesting as the maximum was fully utilised by the
2013 Annual Bonus Scheme.
The table below sets out potential long-term incentive
scheme interests that have accrued during the year, and
each Director’s interest in that scheme:
Name of
Executive
Director
Name of
Scheme
Date award
was granted
Amount of
options
awarded1
Face value on the
date of grant2
% of award
vesting for
minimum
performance
Length of vesting period –
3 years
Date of vesting
John Deane
2014 LTI
28 April 2015
84,639
Frank Hughes
2014 LTI
28 April 2015
48,399
2014 LTI
20 May 2014
48,443
David
Rimmington
2014 LTI
28 April 2015
47,727
2014 LTI
20 May 2014
41,800
£269,998
based on share price
(319.00p)
£154,392
based on share price
(319.00p)
£150,294
based on share price
(310.25p)
£152,249
based on share price
(319.00p)
£129,685
based on share price
(310.25p)
0%
0%
0%
0%
0%
28 April 2018
28 April 2018
20 May 2017
28 April 2018
20 May 2017
Summary of performance measures and targets
2014 LTI: Share options awarded equal to 75% of basic salary using the share price at close of business on date of award. Options
have a nil exercise price
Total Shareholder Return
50% of the award will vest subject to the TSR target being in a certain range, with the range being the ranking of the TSR of Chesnara
against the TSR of the individual companies in the FTSE 350 Higher Yield Index. The award will be made on a sliding scale from nil
if the Chesnara TSR is below the median to full if the Chesnara TSR is in the upper quartile.
EEV growth target
50% of the award will vest subject to the EEV outcome being within a certain range of the Embedded Value target. The award will
be made on a sliding scale with nil being paid out if the outcome is less than or equal to 89% of target, up to a maximum pay-out if
the outcome is greater than or equal to 114% of target.
Note 1 – No awards are made if performance is below the minimum criteria.
Note 2 – The face value is reported as the estimate of the maximum potential value on vesting.
62
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Statement of Directors’ shareholding and share interests (audited information)
The Remuneration Policy, which was effective from the 2014 AGM, requires Executive Directors to build up a shareholding through the retention of shares to
the value of their basic salary over a period agreed by the Committee. 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 Chairman and Non-executive Directors are encouraged to hold shares in the Company but are not subject to a formal shareholding guideline.
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 2015 or the date of resignation.
No changes took place in the interests of the Directors between 31 December 2015 and 30 March 2016.
Name of Director
Shares held: Shares held:
Options:
Without
1 January 31 December performance performance
Options:
With
2015
2015
measures
Options:
Vested but
measures* unexercised
John Deane
David Rimmington
Frank Hughes
Peter Mason
Peter Wright
Veronica Oak
David Brand
Mike Evans
9,677
8,048
12,123
21,743
70,000
2,000
3,000
6,452
9,677
8,048
12,123
21,743
70,000
2,000
3,000
6,452
84,639
89,527
96,842
–
–
–
–
–
6,298
20,384
21,535
–
–
–
–
–
Total
133,043
133,043
271,008
48,217
–
–
–
–
–
–
–
–
–
Options:
Exercised Percentage of
during the shareholding
year target held**
–
–
–
–
–
–
–
–
–
8%
30%
44%
–
–
–
–
–
–
* The ‘options without performance measures’ column in the above table does not include the share options that will be awarded as part of the mandatory deferral rules
under the 2014 STI Scheme in respect of awards made in relation to the 2015 financial year, which equate to 35% of the cash award under this scheme. The timetable
for the administration of the scheme means that these will be reported in the 2016 Annual Report & Accounts. This category does include the options that will be
available to the Executive Directors that have participated in the 2015 Save As You Earn Scheme.
* * Calculated using the share price of 335p for shares held & options without performance measures at 31 December 2015, based on the sum of the shares held at
31 December 2015 and the nil price options awarded in 2015 relating to the STI Scheme for the 2014 financial year. This does not include the options under the
2015 SAYE as they have the potential to not be in the money on maturity.
Outstanding share options and share awards
Below are details of outstanding share options and awards for Executive Directors.
Name of
Executive
Director
Scheme
Grant
date
Exercise
price (p)
John Deane
2014 LTI
(2015 award)
28/04/15
Nil
Share save
29/09/15
285.08
David
Rimmington
2014 LTI
(2015 award)
28/04/15
Nil
Number
of shares
under
option at
1 January
2015
–
–
–
–
Number of
shares under
option and
Number unexercised
at 31
granted
during
year
End of
December performance
period
2015
Vesting Performance
period
date
Date of
expiry of
option
84,639
84,639
31/12/17
28/04/18
3 years
28/04/25
6,298
6,298
n/a
01/11/18
n/a
n/a
90,937
90,937
47,727
47,727
31/12/17
28/04/18
3 years
28/04/25
20/05/14
Nil
41,800
–
41,800
31/12/16
20/05/17
3 years
20/05/24
2014 LTI
(2014 award)
2014 STI
(2014 award)
27/03/15
Nil
Share save
29/09/15
285.08
–
–
14,086
14,086
n/a
27/03/18
n/a
20/05/24
6,298
6,298
n/a
01/11/18
n/a
n/a
41,800
68,111
109,911
Frank
Hughes
2014 LTI
(2015 award)
2014 LTI
(2014 award)
28/04/15
Nil
–
48,399
48,399
31/12/17
28/04/15
3 years
28/04/25
20/05/14
Nil
48,443
–
48,443
31/12/16
20/05/17
3 years
20/05/24
2014 STI
27/03/15
Nil
(2014 award)
Share save
29/09/15
285.08
–
–
15,237
15,237
n/a
27/03/18
n/a
20/05/24
6,298
6,298
n/a
01/11/18
n/a
n/a
48,443
69,934
118,377
63
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
ANNUAL REMUNER ATION REPORT (CONTINUED)
ANNUAL REMUNER ATION REPORT (CONTINUED)
Performance graph and
CEO remuneration table
The graph on the right shows
the Company’s performance
compared with the
performance of the FTSE 350
Higher Yield Index and the
FTSE UK Life Insurance
Index. The FTSE 350 Higher
Yield Index has been selected
since 2014 as a comparison
because it is the index used
by the Company for the
performance criterion for its
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 – Total Return Index, rebased
FTSE 350 Higher Yield – Total Return Index, rebased
500
450
400
350
300
250
200
150
100
50
x
e
d
n
I
R
S
T
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
The table below sets out the details for the Director undertaking the role of Group Chief Executive Officer:
Year
2015
2014
2013
2012
2011
2010
2009
Individual performing CEO role
John Deane
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
CEO single
figure of total
remuneration
£000
Annual bonus
pay-out
against
maximum
596
712
702
612
384
631
502
81.96%
91.30%
100.00%
65.48%
17.39%
100.00%
94.27%
Long-term
incentive
vesting
rates against
maximum
opportunity
–
34.52%
n/a
100.00%
n/a
n/a
n/a
Note
1
2
3
4
5
5
5
Note 1 – John Deane was appointed CEO on 1 January 2015.
Note 2 – During 2014 an LTIP that was granted to the CEO in 2012 vested. The LTIP
included a condition such that the sum of the LTIPs and annual bonuses awarded in that
year could not exceed 100% of the CEO’s salary. The annual bonus in 2012 amounted to
65.48% of salary. When the performance measurements for the 2012 LTIP were
assessed, the award was required to be restricted due to the operation of the 100%
combined cap, such that the 2012 LTIP paid out 34.52% of the salary at the time of award.
During 2014 the annual bonus that was awarded represented 68.5% of the CEO’s salary.
The maximum payable was up to 75% of the CEO’s salary, resulting in a 91.3% pay-out
with reference to the maximum potential award.
Note 3 – During 2013 no LTIP value was earned because the annual bonus in isolation has
accounted for the full 100% combined bonus cap.
Note 4 – 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
generated the maximum potential value of £75,000 in 2012. The formal 2012 LTIP
Scheme contributed no value to the total single remuneration figure as it did not vest until
performance criteria had been achieved in 2014.
Note 5 – 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.
Percentage change in remuneration for the Director undertaking the role of Group Chief Executive Officer
The table below shows the percentage change in remuneration for the Director undertaking the role of Group Chief
Executive Officer and the Company’s employees as a whole between the years 2015 and 2014.
Percentage change in remuneration in 2015 compared with 2014
Salary and fees
All taxable benefits
Annual bonuses
CEO
18.83%
4.64%
6.69%
Group
employees
6.20%
4.44%
3.00%
The notable increase in salary for the CEO follows a market review and an increase to the scope of the CEO’s responsibilities.
See pages 52 and 53 for a fuller account.
64
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
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 Chesnara adopting 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 the overall cost base.
£m
70
60
50
40
30
20
10
0
-3%
2015
2014
+6%
+1%
Total employee
pay
Business
acquisition and
maintenance
expenditure
Dividends
Statement of implementation of Remuneration Policy in the following financial year
The current Remuneration Policy took effect following approval at the 2014 AGM. The following states how the Remuneration Policy will be implemented.
Salaries and fees
Will be set in accordance with the Company’s Remuneration Policy (see pages 54 to 59).
2016 award under the Short-Term Incentive (STI) Scheme
The Remuneration Committee proposes to grant awards to the Executive Directors under the Chesnara 2014 Remuneration Policy.
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 2019 together with the actual
performance against those targets.
Individual
Measures
Weightings Ranges and targets
Potential outcomes in terms of % of basic salary
Minimum
Target
achievement achievement
(as % of
target)
(as % of
target)
Max
achievement
(as % of
Minimum
target achievement
Target
achievement
Max
achievement
John Deane
IFRS pre-tax profit
EEV operating profit
Group strategic objectives
David
IFRS pre-tax profit
Rimmington
EEV operating profit
Group strategic objectives
Frank Hughes
IFRS pre-tax profit
EEV operating profit
Group strategic objectives
50.0%
30.0%
20.0%
50.0%
30.0%
20.0%
50.0%
30.0%
20.0%
75.0%
90.0%
75.0%
75.0%
90.0%
75.0%
75.0%
90.0%
75.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
200.0%
150.0%
125.0%
200.0%
150.0%
125.0%
200.0%
150.0%
125.0%
–
–
–
–
–
–
–
–
–
15.0%
12.8%
10.0%
13.5%
11.5%
9.0%
12.0%
10.2%
8.0%
50.0%
30.0%
20.0%
45.0%
27.0%
18.0%
40.0%
24.0%
16.0%
The 2014 STI Scheme will be implemented and operated by the Remuneration Committee as set out within the Remuneration Policy (see the Policy table and
accompanying notes) on pages 55 to 59.
Measures
The three measures selected by the Remuneration Committee continue to
ensure there is 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 Annual Report & Accounts, although it should be noted
that the Remuneration Committee is able to make discretionary adjustments
if deemed necessary. The objectives assigned to each Executive Director
are relevant to their roles and include major regulatory or business
development initiatives that the Committee considers key to delivery of
the Company’s business plan. 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.
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 latest budget which is produced annually as part of the 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.
Malus and Clawback
This Scheme includes malus and clawback provisions covering material
misstatement, assessment error and misconduct if this arises within
two years of an award vesting.
65
CORPORATE GOVERNANCE SECTION CCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
DIRECTORS’ REMUNER ATION REPORT (CONTINUED)
ANNUAL REMUNER ATION REPORT (CONTINUED)
2016 award made under the Long-Term Incentive (LTI) Scheme
In 2016 the Remuneration Committee proposes to grant awards to the Executive Directors under the Chesnara 2014 Long-Term
Incentive 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 2019 together with the actual performance against those targets.
Individual Measures Weightings Ranges and targets
Potential outcomes in terms
of % of basic salary
Minimum
achievement
(as % of
Target
target) achievement
Max
achievement
(as % of
Minimum
target) achievement
Target
achievement
Max
achievement
John Deane TSR
EEV
David
TSR
Rimmington EEV
Frank
Hughes
TSR
EEV
50%
50%
50%
50%
50%
50%
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