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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
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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
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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.
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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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i
P
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l
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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%
20 years
£000
Total
£000
Insurance contract liabilities
Unit-linked
With DPF
CA
S&P
Annuities in payment
Other non-linked
Investment contract liabilities
Unit-linked
Other
Other liabilities
1,453,175
1,453,175
–
–
–
–
1,453,175
65,182
317,674
108,623
287,427
65,182
111,782
27,699
165,020
2,505,419
5,512
133,497
2,505,419
5,512
133,497
–
84,740
24,226
62,535
–
–
–
–
77,116
20,354
44,371
–
–
–
–
45,849
16,217
19,520
–
–
–
–
16,091
23,388
9,550
65,182
335,578
111,884
300,996
–
–
–
2,505,419
5,512
133,497
Total
4,876,509
4,467,286
171,501
141,841
81,586
49,029
4,911,243
31 December 2014
Carrying values and cash
flows arising from:
Carrying value
£000
0-5 years
£000
Contractual cash flows (undiscounted)
10-15 years
5-10 years
£000
£000
15-20 years
£000
>20 years
£000
Total
£000
Insurance contract liabilities
Unit-linked
With DPF
CA
S&P
Annuities in payment
Other non-linked
Investment contract liabilities
Unit-linked
Other
Other liabilities
1,539,842
1,539,842
–
–
–
–
1,539,842
93,407
339,922
115,676
219,196
93,407
118,921
28,009
127,678
2,383,795
6,017
189,526
2,383,795
6,017
189,526
–
85,156
24,665
77,133
–
–
–
–
80,771
20,949
17,811
–
–
–
–
52,398
16,928
4,457
–
–
–
–
16,860
25,112
5,436
93,407
354,106
115,663
232,515
–
–
–
2,383,795
6,017
189,526
Total
4,887,381
4,487,195
186,954
119,531
73,783
47,408
4,914,871
The maturity analysis for unit-linked insurance and investment contracts presents all the liabilities as due in the earliest period in the table because they are
repayable or transferable on demand.
Insurance contracts with DPF (with-profits business) can be surrendered before maturity for a cash amount specified in contractual terms and conditions.
Accordingly, a maturity analysis based on the earliest contractual repayment date would present all the liabilities as due in the earliest period of the table because
this option can be exercised immediately by all policyholders. As stated above, CA insurance contracts with DPF are wholly reinsured to Guardian and hence, in
practice, there is no liquidity risk, the only risk retained for this business being the risk of default by the reinsurer, which is detailed under ‘Credit Risk Management’
on page 108. The maturity analysis in respect of the S&P segment of the business, however, is presented on an estimated basis, in accordance with the
anticipated maturity profile and on estimates of mortality.
106
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
(iii) Currency risk
Currency risk is the risk that the fair value or future cash flows of an asset or liability will change as a result of movements in foreign exchange rates. The
Group’s exposure to currency risk is minimised to the extent that the risk on investments denominated in foreign currencies which back unit-linked investment
and insurance contracts is borne by policyholders. It is, however, exposed to currency risk through:
(i)
its investment in Movestic, the assets and liabilities of which are principally denominated in Swedish krona;
The Group’s currency risk through its ownership of Movestic and the Waard Group is reflected in:
(i)
foreign exchange translation differences arising on the translation into sterling and consolidation of Movestic and the Waard Group’s financial statements; and
(ii) the impact of adverse exchange rate movements on cash flows between Chesnara plc and its foreign subsidiaries: in the short-term these relate to capital
contributions made to Movestic to support its regulatory solvency capital resource requirements as it develops, while, in the medium-term there is the
prospect of cash flows from Movestic to Chesnara by way of dividend payments. The risk on cash flows is managed by closely monitoring exchange rate
movements and buying forward foreign exchange contracts, where deemed appropriate.
The following tables set out the Group’s exposure to assets and liabilities denominated in foreign currencies, expressed in sterling, at the respective balance
sheet date:
31 December
Swedish krona
Assets
Liabilities
Net assets
Euro
Assets
Liabilities
Net assets
Norwegian krone
Assets
Liabilities
Net assets
US dollar
Assets
Liabilities
Net liabilities
2015
£000
2014
£000
2,118,412
(2,070,475 )
1,982,299
(1,939,819 )
47,937
42,480
189,696
(120,266 )
43,965
(55 )
69,430
43,910
3,596
(2,780 )
3,587
(3,566 )
816
21
312
(313 )
(1 )
570
(585 )
(15 )
107
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
(iv) Sensitivities
The table below shows the impact of movements in market risk variables identified above on profit before tax for the year under review and on shareholder
equity as at the balance sheet date.
The variables are:
(i) a 10% increase and decrease in the value of assets backing unit-linked insurance and investment contract liabilities;
(ii) a 10% increase and decrease in equity and property values;
(iii) a 100 basis point increase and decrease in per annum market rates of interest; and
(iv) a 10% favourable and adverse movement in foreign currency exchange rates.
As explained above, market risks relating to assets backing unit-linked insurance and investment contract liabilities are borne by policyholders, while there is
shareholder exposure to volatility in asset-related fees due to the impact of interest rate, equity price and foreign exchange rate movements on the fair value of
the assets held in the linked funds, on which asset-related fees are based. Accordingly, the sensitivities to these risks are presented as generic sensitivities to
unit-linked asset movements.
Variation in/arising from
2015
2014
Profit before Shareholders ’ Profit before Shareholders ’
equity
£m
equity
£m
tax
£m
tax
£m
100 bp increase in market rates of interest
100 bp decrease in market rates of interest
10% increase in equity and property prices
10% decrease in equity and property prices
10% favourable movement in SEK: sterling exchange rate
10% adverse movement in SEK: sterling exchange rate
10% favourable movement in EUR: sterling exchange rate
10% adverse movement in EUR: sterling exchange rate
3.3
(9.9 )
14.0
(14.0 )
0.7
(0.6 )
0.1
(0.1 )
2.6
(7.9 )
11.1
(11.1 )
5.3
(4.4 )
7.6
(6.3 )
5.9
(7.2 )
14.1
(14.1 )
0.5
(0.4 )
4.8
(3.9 )
4.7
(5.8 )
11.2
(11.2 )
4.7
(3.9 )
4.8
(3.9 )
Credit risk management
The Group has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Group is exposed
to credit risk are:
– Counterparty risk with respect to debt securities and cash deposits;
– Reinsurers’ share of insurance liabilities;
– Amounts deposited with reinsurers in relation to investment contracts;
– Amounts due from reinsurers in respect of claims already paid; and
– Insurance and other receivables.
In addition there will be some exposures to individual policyholders, on amounts due on insurance contracts. These are tightly controlled, with contracts being
terminated or benefits amended if amounts owed are outstanding for more than a specified period of time, so that there is no significant risk to the results of
the businesses.
The Group businesses structure the levels of credit risk they accept by placing limits on their exposure to a single counterparty, or group of counterparties.
Such risks are subject to at least an annual review, while watch lists are maintained for exposures requiring additional review.
Although the businesses hold a significant proportion of their financial assets in debt securities and cash deposits the risk of default on these is mitigated to
the extent that any losses arising in respect of unit-linked assets backing the insurance and investment contracts which the businesses issue, would effectively
be passed on to policyholders and investors through the unit-linked funds backing the insurance and investment contracts.
Reinsurance is used to manage insurance risk in the businesses. This does not, however, discharge the businesses’ liability as primary insurers. If a reinsurer
fails to pay a claim for any reason, the businesses remain liable for the payment to the policyholder. In respect of Movestic, the current guidelines state that
re-insurance should only be effected with counterparties with a credit rating of A or higher, except for the reinsurer which is an associate of Movestic: this credit
risk is managed by Movestic being represented on the Board of the reinsurer and, therefore, being able to influence its strategy and operational decisions.
The creditworthiness of major reinsurers is considered on an annual basis by reviewing their financial strength.
108
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The following table presents the assets of the Group which are subject to credit risk and a reconciliation to the balance sheet carrying value of each item:
31 December
Holdings in collective investment schemes
Debt securities
Cash and cash equivalents
Derivative financial instruments
Reinsurers’ share of insurance contract liabilities
Amounts deposited with reinsurers
Insurance and other receivables
Reinsurers’ share of accrued policyholder claims
Income taxes
2015
Balance
2014
Amount not
subject to
credit risk
£000
Amount
subject to
credit risk
£000
sheet Amount not
subject to
credit risk
£000
carrying
value
£000
Amount
subject to
credit risk
£000
3,484,007
124,906
56,160
2,704
–
–
28,175
–
–
15,348
298,848
204,703
17
282,628
33,941
15,499
19,042
3,611
3,499,355
423,754
260,863
2,721
282,628
33,941
43,674
19,042
3,611
3,515,878
114,983
64,594
3,258
–
–
32,863
–
–
546
262,210
177,105
322
335,936
35,498
12,497
14,722
1,962
Balance
sheet
carrying
value
£000
3,516,424
377,193
241,699
3,580
335,936
35,498
45,360
14,722
1,962
Total
3,695,952
873,637
4,569,589
3,731,576
840,798
4,572,374
The amounts presented above as not being subject to credit risk represent unit-linked assets where the risk is borne by the holders of unit-linked insurance and
investment contracts, except for (i) reinsurers’ share of insurers’ contract provisions and (ii) amounts deposited with reinsurers in respect of investment contracts,
where the risk of default is borne by shareholders.
Assets held to cover Insurance contracts with DPF, held within a segregated with-profits fund, are included as being subject to credit risk, as such risk will be
borne by shareholders where default would result in there being insufficient with-profits policyholder assets to fund minimum guaranteed obligations. However,
in normal circumstances (where the asset share is in excess of the minimum guaranteed amount) substantially all the credit risk remains with policyholders.
The Group’s exposure to credit risk is summarised as:
Credit rating
As at 31 December 2015
Reinsurers share of insurance contract liabilities
Holdings in collective investment schemes
Amounts deposited with reinsurers
Debt securities at fair value through income
Insurance and other receivables
Reinsurers share of accrued policyholder claims
Derivative financial instruments
Income taxes
Cash and cash equivalents
AAA
£000
–
–
–
215,914
1,507
–
–
3,611
–
AA
£000
109,278
–
–
55,699
11,901
6,449
–
–
40,730
A
£000
Below A
£000
Unrated
£000
18,388
15,348
–
18,957
–
1,095
17
–
157,167
–
–
–
3,533
–
–
–
–
6,767
154,962
–
33,941
4,745
2,091
11,498
–
–
39
Total
£000
282,628
15,348
33,941
298,848
15,499
19,042
17
3,611
204,703
Total
221,032
224,057
210,972
10,300
207,276
873,637
As at 31 December 2014
Reinsurers share of insurance contract liabilities
Holdings in collective investment schemes
Amounts deposited with reinsurers
Debt securities at fair value through income
Insurance and other receivables
Reinsurers share of accrued policyholder claims
Derivative financial instruments
Income taxes
Cash and cash equivalents
–
–
–
162,248
1,305
–
–
–
4,154
127,372
–
–
93,752
10,733
6,068
–
1,962
60,133
–
546
–
5,025
91
362
322
–
112,759
Total
167,707
300,020
119,105
–
–
–
–
–
–
–
–
–
–
208,564
–
35,498
1,185
368
8,292
–
–
59
335,936
546
35,498
262,210
12,497
14,722
322
1,962
177,105
253,966
840,798
Included within unrated reinsurers’ share of insurance contract provisions and unrated amounts deposited with reinsurers, in respect of investment contracts is
a total significant exposure of £169.9m as at 31 December 2015 (31 December 2014: £224.1m) to Guardian, which does not have a published credit rating. Of this
amount £137.0m (31 December 2014: £179.5m) is in respect of currently guaranteed benefits. This counterparty exposure was mitigated during 2006 when Guardian
granted to CA a floating charge over related investment assets, which ranks that company equally with Guardian policyholders. In order to monitor the ongoing
creditworthiness of Guardian, CA reviews the financial statements and regulatory returns submitted by Guardian to the PRA on an annual basis.
No credit limits were exceeded during the year ended 31 December 2015 and 31 December 2014.
109
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
Credit risk management (continued)
Financial assets that are past due or impaired
In 2008, a cash deposit with Kaupthing Singer & Friedlander (‘KSF’) was written down by its full amount of £1,091,000 as a result of KSF entering administration.
No further distributions were received during 2015 (2014: £10,872).
There are no other Group financial assets that are impaired, would otherwise be past due, or impaired, whose terms have been negotiated or past due but
not impaired.
The Group has no significant exposure to Euro-denominated sovereign debt as at 31 December 2015.
7 Business combinations
On 19 May 2015, Chesnara plc acquired the entire issued share capital (100%) of the Waard Group, a closed life assurance company based in the Netherlands,
from DSB Beheer B.V., a Dutch financial services group for a total consideration of £50,123,000. The acquired companies comprise of the three insurance
companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a service company, Tadas Verzekering. The Waard Group’s policy base is
predominantly made up of term life policies, although also includes unit-linked policies and some non-life policies, covering risks such as occupational disability
and unemployment. The acquisition represents an attractive opportunity to purchase a closed book with the potential to generate significant cash flow over the
near-to-medium term, while also providing a platform to participate in further consolidation within the Dutch and other European markets.
The acquisition of this shareholding has given rise to a profit on acquisition of £16.6m calculated as follows:
Book value Provisional
fair value
adjustments
£000
£000
–
25
13
5,522
170
45,131
37,793
679
64
83,837
1,084
1,824
255
104,381
5,506
–
–
–
–
–
–
–
–
–
–
–
–
–
Fair value
£000
5,506
25
13
5,522
170
45,131
37,793
679
64
83,837
1,084
1,824
255
104,381
196,941
5,506
202,447
125,045
3,025
2,099
72
2,241
70
1,751
–
–
1,377
–
–
–
–
125,045
3,025
3,476
72
2,241
70
1,751
134,303
1,377
135,680
62,638
4,129
66,767
66,767
(50,123 )
16,644
Assets
Intangible assets
Acquired value of in-force business
Software assets
Property and equipment
Reinsurers’ share of insurance contract provisions
Financial assets:
Equity securities at fair value through income
Holdings in collective investment schemes at fair value through income
Debt securities at fair value through income
Insurance and other receivables
Prepayments
Total financial assets
Reinsurers’ share of accrued policyholder claims
Deferred tax asset
Income taxes
Cash and cash equivalents
Total assets
Liabilities
Insurance contract provisions
Other provisions
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance contracts
Income taxes
Other payables
Total liabilities
Net assets
Net assets acquired
Total consideration, paid in cash
Profit arising on business combination
110
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The assets and liabilities at the acquisition date in the table opposite are stated at their provisional fair values and may be amended for 12 months after the date
of acquisition in accordance with IFRS 3, Business Combinations. In our interim financial statements, the profit arising upon business combination was reported
at £16.2m. This has subsequently been revised to reflect more accurately the fair value of the net assets acquired. The adjustment includes an increase in
the expense assumptions used to calculate the acquired value of in-force business and also the recognition of a deferred tax asset, which existed at the
acquisition date but was not recognised due to uncertainty surrounding its ability to be utilised against future profit emergence. This has subsequently been
established as being off-settable against future profit emergence within the Waard fiscal tax unity and is now recognised on the acquisition balance sheet.
Acquired receivables: Within the net assets acquired are reinsurance related and other receivable balances totalling £7.3m, which are held at fair value. For all
receivables other than reinsurers’ share of insurance contract provisions the gross contractual amounts receivable are equal to fair value. The reinsurers’ share of
insurance contract provisions receivable balance of £5.5m is discounted as a result of the long-term nature of this asset. Gross contractual amounts receivable
are estimated as being £6.4m.
Acquired value of in-force business: The acquisition has resulted in the recognition of net of tax intangible asset amounting to £4.1m, which represents the
present value of the future post-tax cash flows expected to arise from policies that were in force at the point of acquisition. The asset has been valued using a
discounted cash flow model that projects the future surpluses that are expected to arise from the business. The model factors in a number of variables, of which
the most influential are; the policyholders’ ages, mortality rates, expected policy lapses, expenses that are expected to be incurred to manage the policies and
future investment growth, as well as the discount rate that has been applied. This asset will be amortised over its expected useful life.
Gain on acquisition: As shown on the previous page, a gain of £16.6m has been recognised on acquisition. Under IFRS 3, a gain on acquisition is defined as
being a ‘bargain purchase’. At the point of price negotiation and subsequent deal completion, the Waard Group was owned by DSB Bank N.V. (a wholly-owned
subsidiary DSB Beheer B.V.) which was subject to bankruptcy proceedings in the Netherlands. In the opinion of the Directors this resulted in a disposal pricing
strategy for the Waard Group that would have differed to that which would have been used had the businesses been sold by a group that was a going concern.
Acquisition-related costs: The costs in respect of the transaction amounted to £3.5m. £2.5m of these costs have been included in Administration Expenses,
of which £1.9m was recognised within the Consolidated Statement of Comprehensive Income in 2014, with the remainder recognised in the current period.
Transaction costs of £1.0m were incurred in respect of the equity fund-raising and were deducted from equity in 2014.
Results of the Waard Group: The results of the Waard Group have been included in the consolidated financial statements of the Group with effect from 19 May
2015. Net insurance premium revenue for the period was £1.1m, with contribution to overall consolidated profit before tax of £0.9m, before the amortisation of
the AVIF intangible asset. Had the Waard Group been consolidated from 1 January 2015, the Consolidated Statement of Comprehensive Income would have included
net insurance premium revenue of £2.2m, and would have contributed £2.1m to the overall consolidated profit before tax.
8 Operating segments
The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally
to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc.
The segments of the Group as at 31 December 2015 comprise:
CA: This segment is part of the Group’s UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc,
the Group’s principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business
of which was transferred to Countrywide Assured plc during 2006. This segment also contains the business of Protection Life, which was purchased on
28 November 2013. 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. CA is responsible for conducting unit-linked and non-linked business.
S&P: This segment, which was acquired on 20 December 2010, comprises the historical business of Save & Prosper Insurance Limited and its then subsidiary
Save & Prosper Pensions Limited. It is responsible for conducting both unit-linked and non-linked business, including a with-profits portfolio, which carries
significant additional market risk, as described in note 6 ‘Management of financial risk’. On 31 December 2011 the whole of the business of this segment was
transferred to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000.
Movestic: This segment comprises the Group’s Swedish life and pensions business, Movestic Livförsäkring AB (‘Movestic’) and its subsidiary and associated
companies, which are open to new business and which are responsible for conducting both unit-linked and pensions and savings business and providing some
life and health product offerings.
The Waard Group: This segment represents the Group’s Dutch life and general insurance business, which was acquired on 19 May 2015 and comprises the
three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Tadas Verzekering. The Waard
Group’s policy base is predominantly made up of term life policies, although also includes unit-linked policies and some non-life policies, covering risks such as
occupational disability and unemployment.
Other Group Activities: The functions performed by the parent company, Chesnara plc, are defined under the operating segment analysis as Other Group Activities.
Also included therein are consolidation and elimination adjustments.
The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal
commercial terms in normal market conditions. The Group evaluates performance of operating segments on the basis of the profit before tax attributable to
shareholders and on the total assets and liabilities of the reporting segments and the Group. There were no changes to the measurement basis for segment
profit during the year ended 31 December 2015.
111
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 Operating segments (continued)
(i) Segmental income statement for the year ended 31 December 2015
Net insurance premium revenue
Fee and commission income
Net investment return
CA
£000
47,880
30,216
24,539
Total revenue (net of reinsurance payable)
Other operating income
102,635
2,854
S&P
£000
UK Total
£000
Movestic
£000
5,413
2,513
37,605
45,531
11,331
53,293
32,729
62,144
13,515
33,502
87,163
148,166
14,185
134,180
4,399
Segmental income/(expenses)
105,489
56,862
162,351
138,579
Net insurance contract claims and benefits incurred
Net change in investment contract liabilities
Fees, commission and other acquisition costs
Administrative expenses:
Amortisation charge on software assets
Depreciation charge on property and equipment
Other
Operating expenses
Financing costs
Share of profit from associates
(54,093 )
(13,240 )
(1,986 )
–
(22 )
(10,691 )
(1,501 )
–
–
(37,282 )
641
(21 )
–
–
(9,628 )
–
–
–
(91,375 )
(12,599 )
(2,007 )
–
(22 )
(20,319 )
(1,501 )
–
–
(6,079 )
(87,137 )
(21,864 )
(1,340 )
(180 )
(9,884 )
(4,481 )
(1,340 )
455
Waard
Group
£000
1,130
18
(1,238 )
(90 )
2
(88 )
2,587
–
83
–
–
(1,715 )
–
–
–
Other
Group
Activities
£000
–
–
445
445
–
Total
£000
67,938
66,249
148,514
282,701
18,586
445
301,287
–
–
–
–
–
(7,841 )
–
(2,116 )
–
(94,867 )
(99,736 )
(23,788 )
(1,340 )
(202 )
(39,759 )
(5,982 )
(3,456 )
455
Profit before tax and consolidation adjustments 23,956
10,572
34,528
6,729
867
(9,512 )
32,612
Other operating expenses:
Charge for amortisation of acquired value
of in-force business
Charge for amortisation of acquired value
of customer relationships
Fees, commission and other acquisition costs
Segmental income less expenses
Profit arising on business combinations
Profit before tax
Income tax (expense)/credit
Profit after tax
(4,975 )
(661 )
(5,636 )
(3,282 )
(356 )
–
–
18,981
–
–
–
9,911
–
18,981
9,911
–
–
28,892
–
28,892
(4,139 )
(107 )
2,913
6,253
–
6,253
(14 )
24,753
6,239
–
–
511
–
511
(124 )
387
–
–
–
(9,512 )
16,644
7,132
1,277
(9,274 )
(107 )
2,913
26,144
16,644
42,788
(3,000 )
8,409
39,788
Further analysis of the segmental profit before tax and consolidation adjustments can be found on page 28 of the Financial Review section.
(ii) Segmental balance sheet as at 31 December 2015
CA
£000
S&P
£000
Movestic
£000
Waard
Group
£000
Other
Group
Activities
£000
Total
£000
1,809,494
(1,702,363 )
1,181,272
(1,125,113 )
2,134,143
(2,070,860 )
188,993
(120,216 )
53,900
(54,088 )
5,367,802
(5,072,640 )
107,131
56,159
63,283
68,777
(188 )
295,162
–
–
–
26
4,707
17,368
–
73
–
–
4,707
17,467
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
112
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Total
£000
76,738
66,592
430,673
(iii) Segmental income statement for the year ended 31 December 2014 (re-stated)*
CA *
£000
S&P
£000
UK Total
£000
Movestic
£000
Other
Group
Activities
£000
Net insurance premium revenue
Fee and commission income
Net investment return
Total revenue (net of reinsurance payable)
Other operating income
54,946
30,773
115,757
201,476
3,011
6,330
2,333
90,292
98,955
11,664
61,276
33,106
206,049
15,462
33,486
224,278
–
–
346
300,431
14,675
273,226
6,086
346
2,863
574,003
23,624
Segmental income
204,487
110,619
315,106
279,312
3,209
597,627
Net insurance contract claims and benefits incurred
Net change in investment contract liabilities
Fees, commission and other acquisition costs
Administrative expenses:
Amortisation charge on software assets
Depreciation charge on property and equipment
Other
Operating expenses
Financing costs
Share of profit from associates
(104,341 )
(38,319 )
(1,991 )
(106,986 )
(2,637 )
(26 )
–
(22 )
(11,190 )
(1,809 )
–
–
–
–
(9,741 )
(411 )
(4 )
–
(211,327 )
(40,956 )
(2,017 )
–
(22 )
(20,931 )
(2,220 )
(4 )
–
(7,891 )
(223,912 )
(23,014 )
(2,188 )
(187 )
(11,273 )
(6,104 )
(663 )
855
–
–
–
(219,218 )
(264,868 )
(25,031 )
–
–
(7,893 )
(647 )
(2,341 )
–
(2,188 )
(209 )
(40,097 )
(8,971 )
(3,008 )
855
Profit before tax and consolidation adjustments
46,815
(9,186)
37,629
4,935
(7,672 )
34,892
Other operating expenses:
Charge for amortisation of acquired value of in-force business
Charge for amortisation of acquired customer relationships
Charge for amortisation of deferred acquisition cost
Segmental income less expenses
Profit arising on business combinations
Profit/(loss) before tax
Income tax (expense)/credit
Profit/(loss) after tax
(4,778 )
–
–
42,037
–
(701 )
–
–
(9,887 )
–
42,037
(9,887 )
(5,479 )
–
–
32,150
–
32,150
(5,045 )
(3,802 )
(132 )
3,324
4,325
–
4,325
929
–
–
–
(7,672 )
–
(7,672 )
888
(9,281 )
(132 )
3,324
28,803
–
28,803
(3,228 )
27,105
5,254
(6,784 )
25,575
(iv) Segmental balance sheet as at 31 December 2014 (re-stated)*
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
* Includes Protection Life Company Limited (previously shown separately)
CA *
£000
S&P
£000
Movestic
£000
Other
Group
Activities
£000
Total
£000
2,020,863
(1,870,682 )
1,234,780
(1,181,721 )
1,999,102
(1,940,262 )
83,301
(66,548 )
5,338,046
(5,059,213 )
150,181
53,059
58,840
16,753
278,833
–
–
–
–
4,388
17,297
–
–
4,388
17,297
113
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 Fees and commission income
Year ended 31 December
Fee income
Policy-based fees
Fund management-based fees
Benefit-based fees
Change in deferred income – gross
Change in deferred income – reinsurers’ share
Total fee income
Commission income
Total fee and commission income
10 Net investment return
Year ended 31 December
Dividend income
Interest income
Rental income from investment properties
Net fair value gains and losses
Equity securities designated as at fair value through income on initial recognition
Debt securities designated as at fair value through income on initial recognition
Derivative financial instruments
Investment properties
Net investment return
2015
£000
12,996
30,981
17,351
762
76
62,166
4,083
2014
£000
13,712
29,219
18,490
891
(57 )
62,255
4,337
66,249
66,592
2015
£000
31,501
24,693
109
112,246
(23,501 )
(811 )
4,277
2014
£000
30,032
26,975
499
287,851
80,517
2,273
2,526
148,514
430,673
Net fair value gains and losses in respect of holdings in collective investment schemes are included in the line that is most appropriate taking into account the
nature of the underlying investments.
No amounts included in net fair value gains and losses of financial instruments were estimated using a valuation technique (year ended 31 December 2014: £nil).
11 Other operating income
Year ended 31 December
Release of unused provisions (Note 36)
Investment management fee rebate
HMRC interest on tax refund
Charges to policyholder funds for yield tax
Other
Total other operating income
All of the income streams set out in notes 9, 10 and 11 equate to revenue as defined by IAS 18.
2015
£000
210
13,835
–
4,345
196
2014
£000
2,933
14,408
44
5,973
266
18,586
23,624
114
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
12 Insurance contract claims and benefits
Year ended 31 December
Claims and benefits paid to insurance contract holders
Decrease in insurance contract provisions
Total insurance contract claims and benefits
Reinsurer’s share of claims and benefits
Net insurance contract claims and benefits incurred
13 Change in investment contract liabilities
Year ended 31 December
Changes in the fair value of investment contracts designated on initial recognition as fair value through income
Changes in the fair value of policyholders’ funds held by the Group designated on initial recognition as fair value through income
Reinsurers’ share of investment contract liabilities
Net increase in investment contract liabilities
Investment contract benefits comprise benefits accruing to holders of investment contracts issued by the Group.
14 Fees, commission and other acquisition costs
Year ended 31 December
Directly expensed costs:
Insurance contracts
Commission
New business and renewal costs
Deferred amount
Investment contracts
Commission
New business and renewal costs
Deferred amount
Amortisation of deferred acquisition costs:
Insurance contracts
Investment contracts
Investment contracts-reinsurance
Total
2015
£000
2014
£000
318,721
(191,850 )
303,521
(39,676 )
126,871
(32,004 )
263,845
(44,627 )
94,867
219,218
2015
£000
94,071
6,398
(733 )
2014
£000
251,668
15,472
(2,272 )
99,736
264,868
2015
£000
2014
£000
6,818
2,186
(5,377 )
3,627
12,860
4,556
(9,382 )
8,034
5,781
3,470
(37 )
7,717
2,468
(6,239 )
3,946
13,142
4,895
(9,970 )
8,067
6,550
3,179
(35 )
20,875
21,707
115
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 Administrative expenses
Year ended 31 December
Personnel-related costs (Note 47)
Investment management fees
Amortisation charge on software assets
Depreciation charge on property and equipment
Costs paid to third-party administrators
Other goods and services
Total
Included in Other goods and services above are the following amounts payable to the Auditor and its associates, exclusive of VAT.
Year ended 31 December
Fees payable to the Company’s Auditor for the audit of the Company’s financial statements
Fees payable to the Company’s Auditor and its associates for other services to the Group:
The audit of the Company’s subsidiaries pursuant to legislation
Audit-related assurance services*
Corporate finance Services**
Non-audit fee***
Total
* Includes the audit of regulatory returns submitted to the UK regulator in both years.
**2014 includes the fees associated with the acquisition of the Waard Group.
***Relates to some non-financial consultancy work performed for Movestic Livförsäkring.
16 Other operating expenses
Year ended 31 December
Charge for amortisation of acquired value of in-force business
Charge for amortisation of acquired value of customer relationships (AVCR)
Other
Direct operating expenses of investment properties
Revenue-generating properties
Non revenue-generating properties
Recovery of cash deposit
Payment of yield tax relating to policyholder funds
Other
Total
2015
£000
14,987
6,395
1,346
203
9,959
8,411
2014
£000
14,556
8,990
1,802
206
11,159
5,781
41,301
42,494
2015
£000
50
512
407
–
45
1,014
2014
£000
50
407
284
161
–
902
2015
£000
2014
£000
9,274
9,281
222
263
(1 )
44
–
4,345
1,478
411
22
(11 )
5,973
2,445
5,866
8,840
The recovery of cash deposit represents interim distributions received from the administrators of Kaupthing Singer & Friedlander relating to a cash deposit,
previously written down and charged to operating expenses.
116
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
17 Financing costs
Year ended 31 December
Interest expense on bank borrowings
Interest expense on financial reinsurance
Other interest
Total financing costs
2015
£000
2,118
1,222
117
2014
£000
2,345
545
118
3,457
3,008
Interest expense on bank borrowings is calculated using the effective interest rate method and is the total interest expense for financial liabilities that are not
designated at fair value through income.
18 Income tax
Total income tax comprises:
Year ended 31 December
CA, S&P and Other Group Activities – net expense
Movestic – net (expense)/credit (See Movestic tax)
The Waard Group – net expense
Total net expense
UK Business
CA, S&P and Other Group Activities
Year ended 31 December
Current tax
Current year
Overseas tax
Adjustment to prior years
Net expense
Deferred tax
Origination and reversal of temporary differences
Adjustment to prior years
Total income tax expense
Reconciliation of effective tax rate on profit before tax
Year ended 31 December
Profit before tax
Income tax using the domestic corporation tax rate of 20.25% (2014: 21.50%)
Non-taxable profit on acquisition of subsidiary
Other permanent differences
Effect of UK tax bases on insurance profits
Offset of franked investment income
Variation in rate of tax on amortisation of acquired in-force value
Foreign tax
Effect of change in tax rate
Other
Over/(under) provided in previous years
Recognition of Protection Life losses following Part VII transfer
2015
£000
(2,862 )
(14 )
(124 )
2014
£000
(4,157 )
929
–
(3,000 )
(3,228 )
2015
£000
(4,148 )
(603 )
130
2014
£000
(4,912 )
(531 )
(307 )
(4,621 )
(5,750 )
1,759
–
5,431
(3,838 )
(2,862 )
(4,157 )
2015
£000
2014
£000
36,024
24,479
(7,295 )
3,370
(947 )
1,767
424
(481 )
90
80
130
–
(5,263 )
–
(747 )
2,295
(92 )
(417 )
346
28
(4,145 )
3,838
Total income tax expense
(2,862 )
(4,157 )
117
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 Income tax (continued)
Swedish Business
Movestic
Year ended 31 December
Current tax
Current year expense
Net credits
Deferred tax
Origination and reversal of temporary differences
Total income tax (expense)/credit
Reconciliation of effective tax rate on profit before tax
Year ended 31 December
Profit before tax
Income tax using the domestic corporation tax rate of 22%
Non-taxable income in relation to unit-linked business
Non-taxable fair value adjustment
Permanent differences
Unrecognised tax recoverable
Non-deductible expenses
Under provided in prior years
Total income tax (expense)/credit
Dutch Business
The Waard Group
Year ended 31 December
Current tax
Current year expense
Adjustment to prior years
Net credits
Deferred tax
Origination and reversal of temporary differences
Total income tax expense
Reconciliation of effective tax rate on profit before tax
Year ended 31 December
Profit before tax
Income tax using the domestic corporation tax rate of 25%
Permanent differences
Under provided in prior years
Total income tax expense
118
2015
£000
2014
£000
(33 )
(33 )
19
(14 )
–
–
929
929
2015
£000
2014
£000
6,253
4,324
(1,376 )
1,469
(85 )
4
5
–
(31 )
(14 )
(951 )
897
(99 )
68
152
(32 )
894
929
2015
£000
2014
£000
(311 )
(21 )
(332 )
208
(124 )
2015
£000
511
(128 )
26
(22 )
(124 )
–
–
–
–
–
2014
£000
–
–
–
–
–
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
19 Deferred acquisition costs
Year ended 31 December
Balance at 1 January
Additions arising from new business
Amortisation charged to income
Foreign exchange translation difference
Balance at 31 December
Current
Non-current
Total
The amortisation charged to income is recognised in Fees, commission and other acquisition costs (see note 14).
20 Acquired value of in-force business (AVIF)
31 December
Cost:
Balance at 1 January
Additions – acquisition of subsidiary
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Amortisation for the year
Foreign exchange translation difference
Balance at 31 December
Carrying amounts
At 1 January
At 31 December
Current
Non-current
Total
2015
£000
31,298
14,759
(9,251 )
(745 )
2014
£000
28,162
16,209
(9,729 )
(3,344 )
36,061
31,298
3,882
32,179
3,190
28,108
36,061
31,298
2015
£000
2014
£000
139,890
5,506
(1,987 )
148,539
–
(8,649 )
143,409
139,890
66,421
9,274
(627 )
59,924
9,281
(2,784 )
75,068
66,421
73,469
68,341
8,989
59,352
88,615
73,469
8,628
64,841
68,341
73,469
The amortisation is charged to the Consolidated Statement of Comprehensive Income and is recognised in Other operating expenses (see note 16).
21 Acquired value of customer relationships (AVCR)
31 December
Cost:
Balance at 1 January
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Amortisation for the year
Foreign exchange translation difference
Balance at 31 December
Carrying amounts
1 January
At 31 December
Current
Non-current
Total
2015
£000
3,636
(125 )
3,511
2,493
222
(79 )
2,636
1,143
875
269
606
875
The amortisation period of AVCR is based on the underlying returns on the policies expected to be written as a result of customer relationships.
The amortisation is charged to income and is recognised in Other operating expenses (see note 16).
2014
£000
4,143
(507 )
3,636
2,560
263
(330 )
2,493
1,583
1,143
274
869
1,143
119
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22 Software assets
Cost:
Balance at 1 January
Additions – acquisition of subsidiary
Additions
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Additions – acquisition of subsidiary
Amortisation charge for the year
Foreign exchange translation difference
Balance at 31 December
Carrying amounts at 31 December
Current
Non-current
Total
23 Property and equipment
31 December
Cost:
Balance at 1 January
Additions – acquisitions of subsidiary
Additions
Disposals
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Additions – acquisitions of subsidiary
Depreciation charge for the year
Disposals
Foreign exchange translation difference
Balance at 31 December
Carrying amounts at 31 December
Current
Non-current
Total
120
2015
£000
2014
£000
13,486
441
2,419
(384 )
14,214
–
1,079
(1,807 )
15,962
13,486
9,771
416
1,346
(291 )
11,242
4,720
1,390
3,330
4,720
2015
£000
1,589
246
265
–
(39 )
9,210
–
1,802
(1,241 )
9,771
3,715
1,394
2,321
3,715
2014
£000
2,000
–
224
(433 )
(202 )
2,061
1,589
1,112
233
203
–
(24 )
1,327
–
206
(281 )
(140 )
1,524
1,112
537
164
373
537
477
172
305
477
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
24 Investment in associate
31 December
Balance at 1 January
Share of profit
Foreign exchange translation difference
Balance at 31 December
Associates at 100%
Modernac S.A.
Total 31 December 2015
Associates at 49%
Modernac S.A.
Total 31 December 2015
25 Investment properties
31 December
Balance at 1 January
Properties acquired
Disposals
Fair value adjustments
Impairment losses
Balance at 31 December
Current
Non-current
Total
2015
£000
4,388
455
(136 )
2014
£000
4,088
855
(555 )
4,707
4,388
Assets
£000
Liabilities
£000
Revenues
£000
32,735
23,138
8,257
32,735
23,128
8,257
Profit
£000
928
928
Equity
at 100%
£000
Equity
at 49%
£000
49% share
of profit
£000
9,607
4,707
9,607
4,707
455
455
2015
£000
5,520
26
(9,590 )
4,277
12
245
245
–
245
2014
£000
20,387
139
(17,532 )
2,526
–
5,520
4,845
675
5,520
Investment properties were bought for investment purposes in line with the investment strategy of the Group. The properties are independently valued in
accordance with International Valuation Standards on the basis of determining the open market value of the investment properties on an annual basis. The
latest valuations were conducted as at 31 December 2015.
Income arises from investment properties in two streams:
(i) Fair value gains arising as a result of market appreciation in the value of the properties; and
(ii) Rental income arising from leases granted on the properties.
Both of these amounts are disclosed in Net investment return (see note 10). Expenses incurred in the operation and maintenance of investment properties are
disclosed in Other operating expenses (see note 16).
121
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26 Financial instruments
Group
Financial assets by measurement category
31 December
Fair value through income
Designated at fair value through income on initial recognition
Derivative financial instruments
Insurance and other receivables
Prepayments
Total
2015
£000
2014
£000
4,599,271
2,721
43,674
6,565
4,534,458
3,580
45,360
4,821
4,652,231
4,588,219
Fair value is the amount for which an asset or liability could be exchanged between willing parties in an arm’s length transaction. The tables below show the
determination of fair value according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1).
However, where such information is not available, the Group applies valuation techniques to measure such instruments. These valuation techniques make
use of market-observable data for all significant inputs where possible (Level 2), but, in some cases it may be necessary to estimate other than market-
observable data within a valuation model for significant inputs (Level 3).
Fair value measurement at 31 December 2015
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Equities
Listed
Holdings in collective investment schemes
Debt securities – fixed rate
Government Bonds
Listed
Debt securities – floating rate listed
Listed
Structured notes
Total debt securities
Policyholders’ funds held by the Group
Derivative financial instruments
Total
Current
Non-current
Total
Financial liabilities
Investment contracts at fair value through income
Liabilities related to policyholders’ funds held by the Group
Derivative financial instruments
Total
486,243
3,498,814
311,805
86,356
6,642
–
404,803
189,919
17
–
541
–
–
–
18,951
18,951
–
2,704
4,579,796
22,196
–
189,919
–
2,457,521
–
444
189,919
2,457,965
–
–
–
–
–
–
–
–
–
–
–
–
–
486,243
3,499,355
311,805
86,356
6,642
18,951
423,754
189,919
2,721
4,601,992
198,962
4,403,030
4,601,992
2,457,521
189,919
444
2,647,884
122
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Fair value measurement at 31 December 2014
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Equities
Listed
Holdings in collective investment schemes
Debt securities – fixed rate
Government Bonds
Listed
Debt securities – floating rate listed
Total debt securities
Policyholders’ funds held by the Group
Derivative financial instruments
Total
Current
Non-current
Total
Financial liabilities
475,983
3,515,878
286,444
84,107
6,642
377,193
164,858
357
–
546
–
–
–
–
–
3,223
4,534,269
3,769
Investment contracts at fair value through income
Liabilities related to policyholders’ funds held by the Group
Derivative financial instruments
Total
–
164,858
–
2,389,812
–
49
164,858
2,389,861
–
–
–
–
–
–
–
–
–
–
–
–
–
475,983
3,516,424
286,444
84,107
6,642
377,193
164,858
3,580
4,538,038
1,946,651
2,591,387
4,538,038
2,389,812
164,858
49
2,554,719
Included within Holdings in collective investment schemes are amounts held with JPMorgan Life Limited through a reinsurance arrangement, under which
the Group has reassured certain unit-linked liabilities. The contract does not transfer significant insurance risk and is accounted for as Holdings in collective
investment schemes, representing the substance of the arrangement in place. These amounts have been classified as Level 2 in the above hierarchy table as
the reinsurance contract itself is not quoted but is valued using market-observable data.
The debt securities classified as Level 2 are structured bond-type or non-standard debt products, held by our newly acquired Dutch subsidiaries, for which there
is no active market. These products were structured such that the principal amount invested was protected by high security assets, with the returns being linked
to underlying pools of riskier, higher-return assets. At acquisition and the balance sheet date, the underlying assets supporting the coupon had under performed
such that no coupon is being paid, resulting in these assets all now behaving like zero coupon bonds. These assets have been classified as Level 2 because
the third-party valuation models include observable inputs to the valuation of these assets, including counterparty default spreads, yield curve swaps and
foreign exchange swaps.
These assets are valued using counterparty or broker quotes and are periodically validated against third-party models.
Within derivative financial instruments is a financial reinsurance embedded derivative related to our Movestic operation. The Group has entered into a reinsurance
contract with a third party that has a section that is deemed to transfer significant insurance risk and a section that is deemed not to transfer significant insurance
risk. The element of the contract that does not transfer significant insurance risk has two components and has been accounted for as a financial liability at amortised
cost and an embedded derivative asset at fair value.
The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being
determined by reference to market interest rate at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination
hierarchy set out above.
The Investment contract liabilities in Level 2 of the valuation hierarchy represent the fair value of linked and non-linked liabilities valued using established actuarial
techniques utilising market observable data for all significant inputs, such as investment yields.
123
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26 Financial instruments (continued)
Except as detailed in the following table, the Directors consider that the carrying value amounts of financial assets and financial liabilities recorded at amortised
cost in the financial statements are approximately equal to their fair values.
31 December
Financial liabilities:
Borrowings
Carrying amount
Fair value
2015
£000
2014
£000
2015
£000
2014
£000
79,025
87,296
79,679
88,568
Borrowings consist of bank loans and an amount due in relation to financial reinsurance. The fair value of the bank loans are taken as the principal outstanding at
the balance sheet date. The amount due in relation to financial reinsurance is fair valued with reference to market interest rates at the balance sheet date. There
were no transfers between Levels 1, 2 and 3 during the year. The Group holds no Level 3 liabilities as at the balance sheet date.
Company
Fair value measurement at 31 December 2015 using
2015
£000
5,012
–
2014
£000
–
1,008
5,012
1,008
5,012
–
1,008
–
5,012
1,008
2015
£000
199,111
50,123
2014
£000
199,111
–
249,234
199,111
–
249,234
–
199,111
249,234
199,111
Holdings in collective investment schemes
Equities Listed
Total
Current
Non-current
Total
There were no Level 2 and Level 3 assets.
Investment in subsidiaries
Company
Year ended 31 December
Balance at 1 January
Acquisition of the Waard Group
Balance at 31 December
Current
Non-current
Total
A list of investments in subsidiaries held by the Group is disclosed in note 54.
124
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
27 Insurance and other receivables and prepayments
Group
Insurance and other receivables
31 December
Receivables arising from insurance contracts
Brokers
Policyholders
Receivables arising from investment contracts
Policyholders
Reinsurance receivables
Commission receivable
Debtor for professional indemnity insurance
Other receivables
Loan to associated companies
Accrued interest income
Accrued rent
Receivables from fund management companies
Initial margin payments on derivatives
Other
Total
Current
Non-current
Total
The carrying amount is a reasonable approximation of fair value.
31 December
Prepayments
Current
Non-current
Total
The carrying amount is a reasonable approximation of fair value.
Company
Receivables and prepayments
31 December
Amounts due from subsidiary companies
Other receivables
Prepayments
Total
Current
Non-current
Total
The carrying amount is a reasonable approximation of fair value.
2015
£000
686
2,123
5
10,432
459
9
573
9,852
294
12,811
3,845
2,585
2014
£000
654
3,415
5
8,832
198
56
618
14,562
–
11,430
3,930
1,660
43,674
45,360
42,107
1,567
43,800
1,560
43,674
45,360
2015
£000
2014
£000
6,565
4,821
5,915
650
4,072
749
6,565
4,821
2015
£000
3,685
–
17
3,702
3,702
–
3,702
2014
£000
455
20
19
494
494
–
494
125
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28 Derivative financial instruments
The Group does not hold derivatives outside the unit-linked and with-profits funds, except for an option to repay a financial reinsurance contract early, which
comprises an embedded derivative.
31 December
Exchange-traded futures
Financial reinsurance embedded derivative
Total
Current
Non-current
Total
Asset
£000
296
2,425
2015
Liability
£000
(444 )
–
Asset
£000
1,034
2,546
2,721
(444 )
3,580
296
2,425
(444 )
–
952
2,628
2,721
(444 )
3,580
2014
Liability
£000
(49 )
–
(49 )
(49 )
–
(49 )
Derivatives within unit-linked funds
As part of its Investment management strategy, the Group purchases derivative financial instruments comprising part of its investment portfolio for unit-linked
investment funds, which match the liabilities arising on its unit-linked insurance and investment business.
A variety of equity futures are part of the portfolio matching the unit-linked investment and insurance liabilities. Derivatives are used to facilitate more efficient
portfolio management allowing changes in investment strategy to be reflected by futures transactions rather than a high volume of transactions in the
underlying assets.
All the contracts are exchange-traded futures, with their fair value being the bid price at the balance sheet date: they are, accordingly, determined at Level 1
in the three-level fair value determination hierarchy set out in note 26.
Exchange-traded futures (by geographical investment market)
31 December
Australia
Canada
Switzerland
Europe
UK
Hong Kong
Japan
USA
UAE
Total
2015
2014
Asset
£000
Liability
£000
Asset
£000
Liability
£000
–
–
–
17
268
–
3
8
–
–
–
(25 )
(197 )
–
–
(217 )
(5 )
–
14
19
77
303
326
–
50
93
152
296
(444 )
1,034
–
–
–
(7 )
–
(7 )
(25 )
(10 )
–
(49 )
Financial reinsurance embedded derivative
In respect of Movestic, the Group has a reinsurance contract with a third party that has a section that is deemed to transfer significant insurance risk and a
section that is deemed not to transfer significant insurance risk. This assessment has been determined by Management based on the contractual terms of the
reinsurance agreement. The element of the contract that does not transfer significant insurance risk has two components and has been accounted for as a
financial liability at amortised cost and an embedded derivative at fair value.
The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being
determined by reference to market interest rates at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination
hierarchy set out in note 26.
126
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Derivatives within the S&P with-profits funds
As part of its investment management strategy, S&P enters into a limited range of derivative instruments to manage its exposure to various risks.
S&P uses equity index futures in order to economically hedge equity market risk in the with-profit funds’ investments.
The change in fair value of the futures contracts is intended to offset the change in fair value of the underlying equities being hedged. S&P settles the market value
of the futures contracts on a daily basis by paying or receiving a variation margin. The futures contracts are not discounted as this daily settlement is equal to the
change in fair value of the futures. As a result, there is no additional fair value to recognise in relation to these derivatives on the balance sheet at the period end.
S&P also purchases exchange rate futures to mitigate exchange rate risk within its with-profits funds.
These contracts are exchange-traded contracts in active markets with their fair value being the bid price at the balance sheet date. They are, accordingly,
determined at Level 1 in the three-level fair value determination hierarchy set out in note 26.
29 Income tax assets
Income tax assets, which are all current, comprise:
31 December
Group
Corporation tax recoverable
Company
Corporation tax recoverable
The carrying amount is a reasonable approximation of fair value.
30 Cash and cash equivalents
Group
31 December
Bank and cash balances
Call deposits due within 1 month
Call deposits due after 1 month
Total cash and cash equivalents
Bank overdrafts
Cash and cash equivalents in the statement of cash flows
2015
£000
2014
£000
3,611
1,962
1,815
1,667
2015
£000
137,641
35,057
88,165
2014
£000
88,572
69,397
83,730
260,863
241,699
(952 )
(1,189 )
259,911
240,510
The effective interest rate on short-term bank deposits was 0.26% (2014: 0.38%), with an average maturity of 19 days (2014: 21 days). All deposits included in
cash and cash equivalents were due to mature within three months of their acquisition.
Included in cash and cash equivalents held by the Group are balances totalling £62,077,000 (2014: £66,048,000) held in unit-linked policyholders’ funds.
Company
31 December
Bank and cash balances
Cash deposits due within 1 month
Cash deposits maturing between greater than 1 month and less than 1 year
Total
2015
£000
314
7,887
35,097
2014
£000
49,002
5
31,095
43,298
80,102
127
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Capital management
This note has been prepared under the Solvency I regime.
(a) Objective
The Group’s capital management framework is designed to provide security for all shareholders, while meeting the expectations of policyholders and shareholders.
Accordingly it:
(i) safeguards policyholders interests by meeting regulatory requirements established by the regulators of the insurance markets in which the Group’s
regulated companies operate, while not retaining unnecessary excess capital;
(ii) seeks to meet the dividend expectations of shareholders and to optimise the gearing ratio to ensure an efficient capital base;
(iii) ensures there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors as they fall due; and
(iv) maintains the Group as a going concern so that it continues to provide returns and to meet obligations to all stakeholders.
The Group’s subsidiary and associate companies are subject to minimum regulatory capital requirements according to the jurisdictions in which they operate.
In addition CA plc is required to prepare and submit a Group-level solvency capital statement in accordance with the EU Insurance Groups Directive (IGD).
The rules are designed to ensure that companies have sufficient assets to meet their liabilities in specified adverse circumstances. As such, there is, in the UK,
a restriction on the full transfer of surpluses from the long-term business funds to shareholder funds in CA plc, and on the full distribution of retained earnings
from CA plc to Chesnara and, in Sweden, on distributions from Movestic shareholder funds.
The overall capital dynamics of the Group are such that the UK business and the Waard Group, being substantially in run-off, are net contributors of capital,
which is reflected in the medium-term by way of dividend distributions to the parent company. The Swedish business, as a growing business, currently does not
distribute dividends due to retained earnings being reinvested in the business. The Swedish business has historically required capital contributions from
the Group, although no future contributions are currently planned. The last capital contribution to the Swedish business was made in 2011.
(b) Operation of the UK, Swedish, Dutch and EU regulatory regimes
UK business
The operation of regulation with respect to the UK business is such as to specify the minimum amount of capital that must be held in addition to the insurance
liabilities as determined for regulatory purposes. This is established by reference to two calculations, being:
(i)
the Pillar 1 calculation, which compares regulatory capital based on the characteristics of the in-force life assurance business with an associated measure of
capital as prescribed by regulation; and
(ii) the Pillar 2 calculation, which compares a risk-based assessment of economic capital with an associated measure of capital based on a realistic assessment
of insurance liabilities.
For CA plc, for the whole of the period covered by these financial statements, the minimum regulatory capital requirement was determined by the first
calculation, as this gave rise to the lower measure of surplus capital. This calculation is set out below in Section (c) Regulatory Capital Resources and
Requirements, together with the CA plc Board’s policy in targeting regulatory capital resource cover for total regulatory capital resource requirements.
The long-term insurance business subsisting within CA plc includes with-profits business, for which that acquired from S&P are maintained in separate
sub-funds. The scale of such with-profits business remains such that the Company falls outside of the scope of the PRA’s ‘realistic capital’ regime. Within these
IFRS Financial Statements excess of policyholder assets and liabilities relating to these funds is classified within insurance contract provisions.
128
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
Swedish business
Movestic is subject to the Swedish regulatory regime and has to maintain a minimum level of regulatory capital, being the prescribed minimum solvency
margin requirements.
The solvency surplus under the Swedish regulatory regime is the excess of the regulatory capital resources over the capital resource requirements which are
based on the insurance business. This calculation is set out below in Section (c) Regulatory Capital Resources and Requirements together with the Movestic
Board’s policy in targeting regulatory capital resource cover for total regulatory capital resource requirements. The Swedish business also includes a 49%
interest in an associated company, Modernac S.A. (‘Modernac’), a Luxembourg-based reinsurer, which is subject to EU regulatory solvency requirements: its
scale of operations are such that its capital resource requirement is the EU regulatory minimum.
Dutch business
The operation of regulation with respect to the Dutch business is such as to specify the minimum amount of capital that must be held in addition to the
insurance liabilities as determined for regulatory purposes. This is established by reference to the Solvency 1 calculation, which compares regulatory capital
based on the characteristics of the in-force life assurance business with an associated measure of capital as prescribed by regulation.
Group
In addition to the solvency requirements for the UK and Swedish businesses, as set out above, the Group is subject to the requirements of the EU Insurance
Group Directive, in accordance with which the Group calculates the excess of the aggregate of regulatory capital resources determined on a Group-wide basis
over the aggregate minimum regulatory capital requirement imposed by local regulators. The requirement is that available Group capital resources, as set out in
Section (d) Group Capital Position Statement, should be at least 100% of capital requirements.
(c) Regulatory capital resources and requirements
UK business
The following summarises the capital resources and requirements of CA plc, as determined for UK regulatory purposes (Pillar 1):
31 December
Available capital resources (CR)
Long-term insurance capital requirement (LTICR)
Resilience capital requirement (RCR)
European minimum
Total capital resource requirements (CRR)
Excess of CR over CRR (solvency surplus)
Ratio of available CR to CRR
Target capital requirement cover
Excess of CR over target requirement
2015
CA plc
£m
2014
CA plc
£m
PL Ltd
£m
117.5
116.1
53.6
4.4
–
58.0
59.5
203%
91.5
26.0
58.0
7.9
–
65.9
50.2
176%
102.1
14.0
3.5
–
–
2.9
2.9
0.6
121%
2.9
0.6
Available capital resources for CA plc as at 31 December 2015 are stated after provision for a dividend of £30.5m which was proposed by the CA plc Board
subsequent to 31 December 2015 (as at 31 December 2014: £65.0m subsequent to 31 December 2014).
129
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Capital management (continued)
(c) Regulatory capital resources and requirements (continued)
UK business (continued)
CA plc’s Board, as a matter of policy, targeted in 2015 CR cover for total CRR at a minimum level of 162.5% of the LTICR plus 100% of the RCR.
Individual Capital Assessment (Pillar 2)
The PRA Prudential Sourcebooks require UK insurance companies to make their own assessment of their capital needs to a required standard (a 99.5% probability
of being able to meet liabilities to policyholders after one year). In the light of scrutiny of this assessment, the PRA may impose its own additional individual
capital guidance. The Individual Capital Assessment (ICA) is based on a realistic liability assessment, rather than on the statutory mathematical reserves, and involves
stress testing the resultant realistic balance sheet for the impact of adverse events, including such market effects as significant falls in equity values, interest rate
increases and decreases, bond defaults and further widening of bond spreads.
Under Pillar 2, CA plc’s Board, as a matter of policy, targeted in 2015 CR cover for total CRR at a minimum level of 130.0% of CRR.
Swedish business
The following summarises the Capital Resources and the Capital Resources Requirements of Movestic as determined for Swedish regulatory purposes and
Movestic’s 49% proportionate share in the Capital Resources and Capital Resources Requirements of Modernac:
Available capital resources (CR)
Total capital resource requirements (CRR)
Excess of CR over CRR (solvency surplus)
Ratio of available CR to CRR
Target capital requirement cover
Excess of CR over target requirement
2015
2014
Movestic
£m
Modernac
£m
Movestic
£m
Modernac
£m
39.6
9.0
30.6
5.3
1.3
4.0
34.9
9.3
25.6
5.0
1.3
3.7
440%
408%
375%
385%
13.5
26.1
n/a
n/a
14.0
20.9
n/a
n/a
The Movestic Board has set a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of
assets, to be fully admissible, is to be held in the form of liquid assets. The operation of this requirement may, from time to time, act as the operative constraint
in determining the level of additional funding requirements, thereby causing the solvency ratio to rise above what it would otherwise have been, had the form
of assets matching capital resources not been a constraint.
Movestic, in accordance with local regulatory requirements, continues to make quarterly assessments of the risk-based capital requirements of its business:
these indicate that capital resources currently provide a comfortable margin over capital resource requirements.
Dutch business
The Dutch businesses manage capital on internal targets of 200%. Current capital levels are far exceeding this, in anticipation of either investing the excess into
acquisition opportunities or distributing dividends to the parent company.
The following summarises the Capital Resources and the Capital Resources Requirements of the Waard Group, as determined for Dutch regulatory purposes:
Available capital resources (CR)
Total capital resource requirements (CRR)
Excess of CR over CRR (solvency surplus)
2015
Waard
Hollands
Leven Welvaren
£m
£m
40.9
4.7
36.2
11.6
2.7
8.9
Waard
Schade
£m
Waard
Hollands
Leven Welvaren
£m
£m
Waard
Schade
£m
2014
6.2
1.8
4.4
41.0
5.4
35.6
11.9
2.9
9.0
6.3
2.0
4.3
Ratio of available CR to CRR
870%
430%
344%
759%
410%
315%
Target capital requirement cover
Excess of CR over target requirement
9.4
31.5
5.4
6.2
3.6
2.6
10.8
30.2
5.8
6.1
4.0
2.3
130
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
(d) Group capital position statement
The following summarises the regulatory capital resources arising in both life and non-life entities, together with a statement of capital resources on a consolidated
basis and with a reconciliation to shareholders’ net equity established on the IFRS basis:
Shareholder
funds outside
long-term Shareholder
funds in
insurance
long-term
funds –
insurance shareholder policyholder
retained
funds
earnings
£000
£000
funds
£000
funds
£000
Total
basis Adjustment
to net
assets
£000
Adjustment
onto
regulatory
Total
available
capital
resources
£000
As at 31 December 2015
UK life business with-profits
UK life businesses non-participating
UK life businesses shareholder
–
–
62,825
37,812
9,013
–
37,812
9,013
62,825
12,743
–
–
2,683
(620 )
(6,922 )
53,238
8,393
55,903
UK life business total
62,825
46,825
109,650
12,743
(4,859 )
117,534
Swedish life and non-life business
Dutch life and non-life businesses
44,459
50,134
–
–
44,459
50,134
–
–
(4,817 )
(495 )
39,642
49,639
Group life insurance business total
157,418
46,825
204,243
12,743
(10,171 )
206,815
Other activities UK business
Other activities Swedish business
Other activities Dutch business
Consolidation adjustments
Group total
Adjustment for dividend
264,687
3,479
14,688
(207,521 )
–
–
–
–
264,687
3,479
14,688
(207,521 )
–
–
–
–
–
33
(3,686 )
(42,195 )
264,687
3,512
11,002
(249,716 )
232,751
46,825
279,576
12,743
(56,019 )
236,300
15,586
–
15,586
Total shareholder’s equity
248,337
46,825
295,162
131
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Capital management (continued)
(d) Group capital position statement (continued)
Shareholder
funds outside
long-term
insurance Shareholder
funds in
Adjustment
onto
regulatory
funds –
retained
earnings
£000
Total
long-term shareholder policyholder
funds
£000
funds
£000
funds
£000
basis Adjustment
to net
assets
£000
Total
available
capital
resources
£000
As at 31 December 2014
UK life business with-profits
UK life businesses non-participating
UK life businesses shareholder
–
–
63,814
37,750
9,758
–
37,750
9,758
63,814
16,319
–
–
(1,816 )
(675 )
(5,515 )
52,253
9,083
58,299
UK life business total
63,814
47,508
111,322
16,319
(8,006 )
119,635
Swedish life and non-life business
38,860
–
38,860
–
(3,960 )
34,900
Group life insurance business total
102,674
47,508
150,182
16,319
(11,966 )
154,535
Other activities UK business
Other activities Swedish business
Consolidation adjustments
Group total
Adjustment for dividend
266,241
3,619
(156,309 )
–
–
–
266,241
3,619
(156,309 )
–
–
–
(101,906 )
–
59,118
164,335
3,619
(97,191 )
216,225
47,508
263,733
16,319
(54,754 )
225,298
15,100
–
15,100
Total shareholder’s equity
231,325
47,508
278,833
The tables presented on the previous page and above illustrate Group total available capital resources as measured for the purposes of inclusion in the related
regulatory returns. As at 31 December 2015 they are stated after provision of a final dividend of £15.6m and, as at 31 December 2014, after provision of a final
dividend of £15.1m, which were approved by the Chesnara plc Board subsequent to the respective year ends. Provision is not made for such dividends on the
IFRS basis: accordingly, it is necessary to make adjustment to shareholder funds outside long-term insurance funds as at 31 December 2015, as reflected
above, in order to illustrate the relationship with the total shareholder equity included in the consolidated balance sheet prepared on the IFRS basis.
132
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
The following tables set out the principal forms of capital, which comprise (i) total available capital resources for the total UK life businesses, the total Swedish
life and non-life business, the Dutch life and non-life business and the total Group for regulatory purposes and (ii) total shareholder funds for the Group on the
IFRS basis.
Available capital resources for regulatory purposes
Year ended 31 December 2015
Share capital
Share premium
Treasury shares
Other equity contributions
Capital redemption reserve
Foreign exchange translation reserve
Surplus in long-term business fund
Surplus in with-profits fund
Retained earnings/(accumulated deficit)
CA
£000
Movestic
£000
Waard
Leven
£000
Waard
Schade
£000
40,000
–
–
–
–
–
8,393
53,238
15,903
1,040
–
–
40,460
–
–
–
–
(1,858 )
667
9,555
–
–
–
–
–
–
33,261
2,668
–
–
–
–
–
–
–
3,488
Group
£000
42,600
76,516
(161 )
–
50
(864 )
–
53,238
64,921
Total
117,534
39,642
43,483
6,156
236,300
The following tables summarise the movement in the available capital resources of the constituent funds of the life businesses, as determined under the
respective regulatory regimes:
UK business
Year ended 31 December 2015
Life business With profits Life business
CA plc shareholder
CA plc
£000
non-profits
CA plc
£000
£000
At beginning of year
Surplus arising in the year
Net profit arising in shareholder fund
Intrafund transfers
Transfer from long-term business fund to shareholder fund
Proposed dividend
9,084
26,191
–
972
(26,972 )
–
52,253
1,957
–
(972 )
–
–
58,299
–
250
–
26,972
(30,500 )
Total life
business
£000
119,636
28,148
250
–
–
(30,500 )
At end of year
9,275
53,238
55,021
117,534
Year ended 31 December 2014
Life business With profits Life business
CA plc shareholder
CA plc
£000
non-profits
CA plc
£000
£000
At beginning of year
Surplus arising in the year
Net profit arising in shareholder fund
Intrafund transfers
Transfer from long-term business fund to shareholder fund
Proposed dividend
20,262
46,440
–
882
(58,500 )
–
51,809
1,326
–
(882 )
–
63,530
–
1,269
–
58,500
(65,000 )
Total life
business
£000
135,601
47,766
1,269
–
–
(65,000 )
At end of year
9,084
52,253
58,299
119,636
There were no changes in available capital resources for the year ended 31 December 2015 due to changes in management policy, regulatory changes or external
factors. The effect of new business written in the period on available capital resources is not considered to be significant.
133
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Capital management (continued)
(d) Group capital position statement (continued)
Swedish business
At beginning of year
Profit arising in the year
Change in foreign exchange reserve
At end of year
2015
£000
34,900
5,934
(1,192 )
2014
£000
34,832
4,328
(4,260 )
39,642
34,900
There were no changes in available capital resources for the period ended 31 December 2015 due to changes in management policy, regulatory changes or
external factors.
The capital position of the Swedish business is sensitive to changes in market conditions affecting the asset values and changes in the assumptions for calculating
the insurance contract liabilities, as described in note 32.
Dutch business
As at 31 December 2015, the capital position of the Dutch businesses is significantly in excess of regulatory and business requirements. It is anticipated that the
position will normalise in the near future, either as a consequence of using available capital for acquisitions or by distributing dividends to the parent company.
Group Capital Adequacy
In accordance with the EU Insurance Groups Directive, the Group calculates the excess of the aggregate of regulatory capital employed over the aggregate
minimum solvency requirement imposed by local regulators for all of the constituent members of the Group, all of which are based in Europe. The following
sets out these calculations after the recognition of final dividends for the respective financial year, but approved by the Board and paid to Group shareholders
after the respective dates:
31 December
Total available capital resources (CR)
Capital resources requirement
CA plc
Movestic Liv
Modernac SA
The Waard Group
Total (CRR)
Group solvency surplus (CR less CRR)
Group solvency ratio
2015
£m
236.3
58.0
9.0
1.3
9.2
77.5
158.8
305%
2014
£m
225.3
68.8
9.3
1.3
–
79.4
145.9
284%
The Group and its individually regulated life assurance businesses have complied with all externally and internally imposed capital requirements during the year.
There has been no material change in the Group’s management of capital during the period, except that, notwithstanding that there are no formal intragroup
funding arrangements in place, the parent company continues to commit to provide any additional capital contributions to support the target capital requirement
of Movestic as set out in Section (c) above. Movestic has historically required capital contributions from the Group, although no future contributions are
currently planned.
Subject to the regulatory constraints and capital management policy of the Group as set out above, capital resources are available for use elsewhere in the Group.
134
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
(e) Technical provisions net of reassurance – UK businesses
(i) The technical provisions established to determine the regulatory capital resources as set out on page 130 are:
31 December
Unit-linked
Insurance contracts
Investment contracts
Non-unit (sterling)
Insurance contracts
Investment contracts
Non-participating
Insurance contracts
Investment contracts
With DPF
Total
CA
2015
£000
2014
£000
SPI/SPP
2015
£000
2014
£000
573,610
630,105
43,333
3,635
133,441
5,461
–
636,239
657,316
50,671
2,902
139,066
6,052
–
726,928
33,555
18,511
157
9,082
–
302,250
762,024
38,896
22,949
165
9,162
–
325,418
1,389,585
1,492,246
1,090,483
1,158,614
(ii) Process used to determine assumptions underlying the calculation of technical provisions.
The process used to determine the assumptions underlying the calculation of technical provisions, which are checked to ensure that they are consistent with
observed market prices or other published information, is intended to result in conservative estimates of the most likely, or expected, outcome. The
assumptions which are considered include the expected number and timing of deaths, other claims and investment returns over the period of risk exposure.
A reasonable allowance is made for the level of uncertainty within the contracts.
(iii) The basis for establishing technical provisions is:
The technical provision for S&P with-profits contracts is based on the guaranteed minimum benefits and is calculated on a gross premium basis, by subtracting
the present value of future premiums from the present value of future benefits payable under the policy, until it ceases at maturity, or death if earlier. The
gross premium method makes explicit allowance for future policy maintenance costs. If the net present value of the future discounted cash flows is positive,
no asset is recognised. Provision is not made for future bonuses as all bonuses are terminal bonuses.
For those classes of CA non-linked and unit-linked business where policyholders participate in profits, the liability is wholly reinsured to Guardian. When
performing the gross liability adequacy test allowance is made for expected future bonuses paid by Guardian. This is based on the realistic liabilities of the
underlying policies reinsured, as provided to CA by Guardian.
For all other classes of unit linked and quasi-linked business, the technical provision consists of a provision equal to the value of the matching unit-linked
assets plus an additional reserve calculated on a gross premium basis, by subtracting the present value of future premiums from the present value of
future benefits payable under the policy, until it ceases at maturity, or death if earlier. The gross premium method makes explicit allowance for future policy
maintenance costs. If the net present value of the future discounted cash flows is positive, no asset is recognised.
For immediate annuities in payment the technical provision is calculated as the discounted value of the expected future annuity payments under the policies,
allowing for mortality, interest rates and expenses.
For certain group business within PL the technical provisions are assessed on an unearned premium method considered appropriate for the nature and scale
of the liabilities. For the remainder of the PL business, the technical provisions are calculated on a gross premiums basis, by subtracting the present value of
future premiums from the present value of future benefits payable under the policy, until it ceases at maturity, or lapse or death if earlier. The gross premiums
method makes explicit allowance for future policy maintenance costs. If the net present value of future discounted cash flows is positive no asset is recognised.
For all other classes of non-linked business the technical provision is calculated on a net premium basis, being the level of premium consistent with a premium
stream, the discounted value of which, at the outset of the policy, would be sufficient to cover exactly the discounted value of the original guaranteed
benefits at maturity, or at death if earlier, on the valuation basis. The provision is then calculated by subtracting the present value of future net premiums from
the present value of the benefits guaranteed at maturity, or death if earlier, as a result of events up to the balance sheet date. Negative provisions do not
arise under the net premium method, which makes no allowances for voluntary discontinuances by policyholders, and which only implicitly allows for future
policy maintenance costs.
(iv) The principal assumptions underlying the calculation of the technical provisions are:
Mortality
A base mortality table is selected which is most appropriate for each type of contract taking into account rates charged by reinsurers. The mortality rates
reflected in these tables are periodically adjusted, allowing for emerging experience and changes in reinsurer rates.
Morbidity
Morbidity tables are derived based on reinsurer tables. These are periodically adjusted to take into account emerging experience where appropriate.
Persistency
In general, no allowance is made for lapses or surrenders within the valuation of insurance contract liabilities, which is a prudent assumption.
135
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Capital management (continued)
(e) Technical provisions net of reassurance – UK business (continued)
For S&P unit-linked business, when assessing additional reserves for expenses and mortality risk, allowance has been made for lapses at a prudent level of 75%
of the expected level as indicated by recent experience, the rates used being:
Rate of lapse 31 December
Assurances:
Regular premium plans
Single premium contracts
Linked TIC*
2015
2014
SPI
SPP
SPI
SPP
3.375%
3.375%
2.625%
3.375%
3.375%
3.375%
2.625%
3.188%
–
4.000%
–
5.000%
*Trustee Investment Contract, a unit-linked contract (‘TIC’).
Discount rates
CA uses appropriate rates of interest, for different product types, in discounting projected liabilities. As at 31 December 2015 for the material product types,
these lay between 0.90% and 2.55% (31 December 2014: between 1.25% and 2.35%).
The rates of interest shown above have been set after consideration of the risk of default on non-government bonds by applying the following adjustments to
the earned yield:
(i) Risk reduction of 0.1% for supranational issuers such as the European Investment Bank;
(ii) For other issuers, a portion of the excess yield above that available on government backed bonds, where the portion varies by credit rating; and
(iii) An overall maximum margin over the equivalent term government fixed interest security of 1.5%.
Credit rating
Reduction
Aaa
25%
Aa
40%
A
45%
Baa
50%
Ba
65%
B
75%
Caa +
80%
For many of the life insurance products the interest rate risk is managed through asset/liability management strategies that seek to match the interest rate
sensitivity of the assets to that of the underlying liabilities. The overall objective of these strategies is to limit the net change in value of assets and liabilities
arising from interest rate movements.
Technical provisions for with-profits contracts are particularly sensitive to the interest rate used when discounting due to the existence of investment guarantees.
Renewal expenses and inflation
The renewal expenses assumed are based on the charges made to CA by its two third party insurance administration services providers, with appropriate margins.
These are assumed to inflate at a mix of current inflation rates in the UK, being the Retail Price Index and the National Average Earnings Index. Explicit allowance
is also made for those Governance expenses which are charged to the long-term funds.
Taxation
It has been assumed that current tax legislation and tax rates will not change.
The sensitivities of technical provisions and of components of capital to changes in assumptions are materially the same as those detailed in note 32.
136
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
31 Capital management (continued)
(f) Valuation of options and guarantees – UK business
Deterministically-valued options and guarantees
Timed Investment Funds
Certain investment funds, the ‘Timed Investment Funds’, carry a guarantee that the price at maturity date or death will not be less than the highest price attained
between commencement and contract cessation. The cost of the guarantee can be managed by changing the investment policy adopted by each fund.
In respect of this guarantee:
(i) a monthly charge of 1⁄48% of the fund value is made; and
(ii) investment conditions were such as to require the establishment of a reserve of £486,000 as at 31 December 2015 (31 December 2014: £390,000).
The reserve for a given fund is derived as the discounted exposure at fund maturity date, the exposure being the difference between the guaranteed Timed
Investment Fund value and the projected fund maturity value, with the latter projected value being derived assuming an immediate fall in value of equities within
the fund of 25% and allowing for future investment returns, including presumed future equity investment return of 4.4% per annum.
Guaranteed Growth Fund
The Guaranteed Growth Fund (GGF) is a deposit-based contract which provides a return to policyholders that is linked to the average residential mortgage rate.
However, the assets backing the contract are largely held as cash on deposit. There is, therefore, likely to be a shortfall between the return given to policyholders
and the return earned on assets, and the value of this shortfall is reserved for.
Reserves for this product comprise a ‘unit’ reserve of the current value of the benefits held and a non-unit reserve for expenses.
The underlying fund at 31 December 2015 was £4.8m (31 December 2014: £5.1m). 526 policies invested in the fund (31 December 2014: 564), of which 40
(31 December 2014: 45) were paying premiums (for a total of approximately £11,000 per annum (31 December 2014: £12,000)).
For the valuation of contract liabilities the following are projected for each future year: – the benefit outgo from the fund;
– the investment return from the assets backing the fund; and
– the difference between these items.
These differences are then discounted and summed to establish the GGF loss reserve.
The following assumptions are used for calculating the loss reserve:
Rate of growth of liability:
Rate of return on cash:
Discount rate:
Retirement age:
Terminations before retirement:
3.07% pa
0.45% pa
0.80% pa
90% of business with policyholders retiring at age 65
10% of business with policyholders retiring at age 70
3% pa
The reserve for the guarantee as at 31 December 2015 was £0.4m (31 December 2014: £0.6m).
Deferral of retirement ages
Policyholders with a Personal Retirement Account and Guaranteed Plus Retirement Plan may defer their retirement age on terms that may be beneficial to the
policyholder. The cost of policyholders exercising this benefit is assessed using a prudent assumption as to the level of take-up of the option and deferral to age
75. The reserve for this option as at 31 December 2015 was £10.4m (31 December 2014: £12.6m).
Increase of premiums on Personal Retirement Account
Policyholders with a Personal Retirement Account may increase their regular premium contribution on terms that can be beneficial to the policyholder. The cost
of policyholders exercising this benefit is assessed using a prudent assumption as to the level of take-up of the option. The reserve for this option as at 31
December 2015 was £0.2m (31 December 2014: £0.2m).
Insurability options
Policyholders with certain contracts have the right to increase their sum assured without underwriting, in certain circumstances. The reserve for this option as
at 31 December 2015 was £0.3m (31 December 2014: £0.3m).
Guaranteed annuity options
A limited number of pension plans offer guaranteed annuity options at retirement. The cost of this option is assessed assuming a prudent assessment of the
take-up of the option and of the cost. The reserve for this option as at 31 December 2015 is £0.26m (31 December 2014: £0.35m).
(g) Management of risk
The Group’s approach to the management of risk which may have an impact on the measurement of capital resources and requirements, as measured on a
regulatory basis, is set out in notes 5 and 6 to these financial statements.
137
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32 Insurance contract provisions
(a) Analysis of insurance contract provisions by operating segment
31 December
CA
S&P
Movestic
The Waard Group
2015
Gross Reinsurance
£000
£000
979,088
1,069,806
70,555
112,634
225,809
5,864
45,601
5,354
Net
£000
753,279
1,063,942
24,954
107,280
2014
Gross Reinsurance
£000
£000
1,112,804
1,126,092
69,147
–
284,471
6,174
45,291
–
Net
£000
828,333
1,119,918
23,856
–
Total insurance contract provisions
2,232,083
282,628
1,949,455
2,308,043
335,936
1,972,107
Current
Non-current
Total
214,153
2,017,930
38,465
244,163
175,688
1,773,767
196,863
2,111,180
26,709
309,227
170,154
1,801,953
2,232,083
282,628
1,949,455
2,308,043
335,936
1,972,107
(b) Analysis of movement in insurance contract provisions
Year ended 31 December
Balance at 1 January
Arising on business combination
Premiums received
Fees deducted
Reserves released in respect of benefits paid
Movements in provisions for contracts sold – Movestic
– in current year
– in prior years
Investment return
Other movements
2015
Gross Reinsurance
£000
£000
Net
£000
2014
Gross Reinsurance
£000
£000
2,308,043
125,044
83,375
(24,962 )
(284,423 )
19,755
(13,026 )
40,079
(21,802 )
335,936
5,736
27,896
(1,880 )
(80,878 )
11,757
(7,104 )
2,028
(10,863 )
1,972,107
119,308
55,479
(23,082 )
(203,545 )
2,362,063
–
92,148
(27,898 )
(274,701 )
7,998
(5,922 )
38,051
(10,939 )
22,688
(6,717 )
135,347
5,113
379,894
–
31,090
(2,476 )
(76,919 )
13,179
119
13,443
(22,394 )
Net
£000
1,982,169
–
61,058
(25,422 )
(197,782 )
9,509
(6,836 )
121,904
27,507
Balance at 31 December
2,232,083
282,628
1,949,455
2,308,043
335,936
1,972,107
(c) Process, basis and assumptions for establishing insurance contract provisions
UK Business
The process, basis and assumptions for establishing insurance contract provisions for the UK businesses are materially the same as those stated in
note 31 (e) (ii), (iii) and (iv) for establishing technical provisions, except as set out in the following.
Provisions for S&P contracts with discretionary participation features (‘DPF’) provide for the present value of projected payments to policyholders based on
guaranteed minimum investment returns, mainly at 5 per cent per annum. When the insurance contract provisions established on this basis are greater than the
associated policyholder asset shares, a shareholder charge for the cost of guarantees arises.
The actual cost to shareholders depends principally on the future investment performance of the associated policyholders’ assets and on the rate of discontinuance
of policies prior to maturity. The method that is used to value the product guarantees is based on a market consistent evaluation of the cost, the methodology
of which is set out on pages 164 to 167 in the EEV Supplementary Information.
138
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
32 Insurance contract provisions (continued)
The following sets out the cumulative charge to shareholders for the cost of guarantees on these bases:
Year ended 31 December
At beginning of the year
Charge to income
At the end of year
2015
£000
34,593
2,563
2014
£000
23,320
11,273
37,156
34,593
Swedish business (Movestic)
Group Contracts are sold on an annual basis and the Individual Contracts include an option for Movestic to increase the premium on an ongoing basis. Therefore,
for both Group and Individual Contracts, Movestic adopts a reserving approach that is similar to that of a non-life insurance business, with claim reserves
projected using an estimated loss ratio with reference to previous loss development for earlier years.
The insurance contract provisions comprise unearned premium provisions, outstanding claims and associated reinsurance recoveries. Except for the income
protection and the waiver of premium benefits within the Individual Contracts, provisions for the insurance contracts are not discounted because of the
short-term nature of the liabilities, which are generally paid by the fourth year of development for a single accident year. Income protection and waiver of premium
contracts are discounted following Finansinspektionen guidelines.
Dutch business (the Waard Group)
For protection policies insurance contract provisions comprise a technical reserve for future claims and a claim reserve for those not settled to completion at the
reporting date.
For general insurance contracts an unearned premium reserve reflecting the non-expired term of contract is held plus an claims provision.
For insurance contracts where the policy value reflects the value of supporting assets (unit-linked contracts) the Insurance Contract Provision equals the value of
assets held.
(d) Assumptions used in establishing insurance contract provisions
UK business
The assumptions used in establishing insurance contract provisions for the UK businesses are materially the same as those set out in note 31 (e) (iv) for
establishing technical provisions.
Swedish business (Movestic)
Unearned premiums
Unearned premiums represent a proportion of the premium relating to policies that expire after the balance sheet date. Unearned premiums are calculated
automatically by the underwriting system and are released to income on a straight-line basis over the period of the policy.
Outstanding claims
Outstanding claims include notified claims, claims incurred as at the balance sheet date but not reported and an estimate of the cost of handling the claims.
The key risk in respect of notified claims is that they are paid or handled inappropriately (for example invalid or fraudulent claims are paid). Management
information is reviewed on a regular basis to identify unusual trends in the payment of claims.
The estimation of claims incurred but not reported (‘IBNR’) is generally subject to a greater degree of uncertainty than the estimation of costs of settling claims
already notified to Movestic, where more information about the claim event is generally available. In calculating the estimated cost of claims which have not
been notified, Movestic uses a variety of estimation techniques, generally based upon statistical analyses of historical experience, which assumes that the
development pattern of the current claims will be consistent with past experience.
The most common methods that are used are the chain ladder method and the Bornhuetter-Ferguson method. Chain ladder methods involve the analysis of
historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected factors are applied to
cumulative claims data for each accident year that is not fully developed to provide an estimated ultimate claims cost. The Bornhuetter-Ferguson method uses a
combination of an initial estimate of the expected loss ratio and an estimate based on observed claims experience. The two estimates are combined using a
formula that gives more weight to the experience based estimate as time passes.
139
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32 Insurance contract provisions (continued)
(d) Assumptions used in establishing insurance contract provisions (continued)
The use of different approaches assists in giving greater understanding of the trends inherent in the data being projected and also assists in setting the range of
possible outcomes. The most appropriate estimation technique is selected taking into account the characteristics of the policies sold. Where deemed appropriate,
an allowance is made for changes or uncertainties which may create distortions in the underlying statistics or which might cause the cost of unsettled claims to
increase or reduce when compared with the cost of previously settled claims. Although claims reserves are considered reasonable, on the basis of information
available to Movestic, the ultimate liabilities will vary as a result of subsequent information and events.
Income protection and waiver of premium benefits within Individual Contracts
For reported claims, the liabilities are reviewed on a case by case basis. A discounted cash flow model is used to determine the liabilities and the key factors used are:
– the probability of `recovery’ (i.e. return to work). The recovery rates depend on age, sex and length of time the claimant has been claiming the benefits;
– the mortality rate; and
– the discount rate.
For unreported claims, the claims development table is used. The development of insurance liabilities provides a measure of Movestic’s ability to estimate the
ultimate value of claims. The top half of the table below illustrates how Movestic’s estimate of total claims outstanding for each accident year has changed at
successive year-ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the balance sheet. An accident-year basis is
considered to be the most appropriate for the business written by Movestic. The information is presented on both a gross and net of reinsurance basis.
Analysis of claims development – gross
Estimate of ultimates
End of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Current estimate of ultimate claims
Cumulative payments
In balance sheet
Provision for prior years
Liability in balance sheet
Analysis of claims development – net
Estimate of ultimates
End of accident year
One year later
Two years later
Three years later
Four years later
Five years later
Current estimate of ultimate claims
Cumulative payments
In balance sheet
Provision for prior years
Liability in balance sheet
2010
£000
2011
£000
2012
£000
2013
£000
2014
£000
38,812
31,882
30,695
29,266
29,334
28,436
28,436
16,377
23,903
15,463
14,080
13,380
12,381
–
12,381
9,154
24,329
16,590
15,838
15,072
–
–
15,072
10,102
25,928
20,832
18,422
–
–
–
18,422
10,823
25,536
19,482
–
–
–
–
19,482
6,962
2015
£000
25,650
–
–
–
–
–
25,650
5,263
44,813
21,535
25,174
29,245
26,444
30,913
2010
£000
12,265
8,719
8,312
7,591
7,900
8,038
8,038
4,080
12,118
2011
£000
10,031
5,139
3,871
3,545
3,723
–
3,723
2,640
6,363
2012
£000
9,193
4,779
4,310
4,361
–
–
4,361
2,804
7,165
2013
£000
10,325
6,816
6,095
–
–
–
6,095
3,453
9,548
970
66,883
2015
£000
9,823
–
–
–
–
–
9,823
1,570
2014
£000
12,321
6,579
–
–
–
–
6,579
1,931
8,510
11,393
169
23,257
Dutch business (the Waard Group)
The technical reserve uses assumptions for mortality, expenses and discounting that were used in the contract pricing, reflecting a book reserve approach.
The continued appropriateness of these assumptions are assessed by undertaking a liability adequacy test.
Claims reserves for general insurance business in Waard Schade contain assessment of those incurred but not reported (IBNR) which are regularly updated
reflecting analysis of recent reporting patterns.
140
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
(e) Sensitivity to changes in assumptions
UK businesses
Assumptions are adjusted for changes in mortality, investment return, policy maintenance expenses and expense inflation to reflect anticipated changes in
market conditions and market experience and price inflation.
CA and S&P re-run their valuation models on various bases. An analysis of sensitivity around various scenarios provides an indication of the sensitivity of the
estimates to changes in assumptions in respect of its life assurance contracts. The table presented below demonstrates the sensitivity of assets and insured
liability estimates to particular movements in assumptions used in the estimation process. Certain variables can be expected to impact on life assurance
liabilities more than others, and consequently a greater degree of sensitivity to these variables may be expected.
Impact on reported net of tax profits and equity to changes in key variables:
CA business
Investment return
Investment return
Mortality/morbidity
Mortality alone
Morbidity alone
Policy maintenance expenses
S&P business
Investment return
Investment return
Mortality
Policy maintenance expenses
Change
in net of
tax profits
and equity
2015
£m
Change
in net of
tax profits
and equity
2014
£m
Change in
variable
%
+1
-1
+10
+10
+10
+10
+1
-1
+10
+10
(2.4 )
(0.1 )
0.5
0.9
(0.4 )
(1.5 )
5.3
(7.6 )
0.3
(2.1 )
(3.3 )
2.8
0.6
1.0
(0.4 )
(1.5 )
7.9
(7.7 )
0.5
(2.8 )
The above sensitivities are calculated as an expected impact on IFRS-based profits, net of reinsurance and tax and the analysis has been prepared for a change in
the stated variable, with all other assumptions remaining constant.
The sensitivities to the changes in investment returns are calculated taking into account the consequential changes to valuation assumptions.
The sensitivities to mortality and morbidity (critical illness) rates shown above are calculated on the assumption that there would be no consequential change in
rates to policyholders. In practice, Group policy is to pass costs on to policyholders where it is contractually permitted and where it considers that the impact of
the change is significant.
The main expense risk is that of unforeseen changes to third party administration expenses: the impact shown above quantifies a 10% increase in those expenses.
141
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
32 Insurance contract provisions (continued)
(e) Sensitivity to changes in assumptions (continued)
Swedish business (Movestic)
The key sensitivities in the measurement of the Group and Individual Contracts insurance claim reserves within Movestic are a movement in the loss ratio
applied to earned premium and the foreign exchange risk arising on business written in Norway. In addition, for the income protection and the waiver of
premium benefits within the Individual Contracts, the claims reserves are impacted by the discount rate used. The impact of these sensitivities is shown below:
5% increase in loss ratio
Gross before reinsurance
Net after reinsurance
5% decrease in loss ratio
Gross before reinsurance
Net after reinsurance
1% increase in discount rate
Gross before reinsurance
Net after reinsurance
1% decrease in discount rate
Gross before reinsurance
Net after reinsurance
Pre-tax profit
2015
£m
2014
£m
Shareholders’ equity
2014
£m
2015
£m
(3.2 )
(1.1 )
3.2
1.1
0.6
0.4
(0.3 )
(0.2 )
(3.3 )
(1.2 )
3.3
1.2
0.7
0.2
(0.9 )
(0.3 )
(2.6 )
(0.9 )
2.6
0.9
0.5
0.3
(0.2 )
(0.1 )
(2.3 )
(0.8 )
2.3
0.8
0.5
0.2
(0.6 )
(0.2 )
Dutch business (the Waard Group)
Assumptions are adjusted for changes in discount rate, mortality, morbidity, longevity and expenses to reflect anticipated changes in market conditions
and experience.
The Dutch division produces sensitivity analyses on a regular basis. The table below shows the sensitivity of discount rates and insured liability estimates to
particular movements.
Life business
Discount rate
Discount rate
Mortality
Expenses
Health business
Discount rate
Discount rate
Morbidity
Expenses
Unit-linked business
Discount rate
Discount rate
Longevity
Expenses
Change in
variable
%
+1
-1
+10
+10
+1
-1
+10
+10
+1
-1
-10
+10
Change in
net of tax
profits and
equity
2015
£m
Change in
net of tax
profits and
equity
2014
£m
(0.1 )
0.0
(2.4 )
(0.4 )
0.0
0.0
(0.2 )
(0.1 )
0.0
0.0
0.0
(0.1 )
0.1
(0.2 )
(2.6 )
(0.3 )
0.1
0.0
(0.2 )
(0.2 )
0.0
0.0
0.0
(0.1 )
The above displayed sensitivities are shown as an expected impact on cash flows and resulting IFRS profits, net of reinsurance. The table shows the impact of
a change in the stated variable, with all other assumptions remaining equal.
The sensitivities to the changes in discount rate show the impact of changing the discount rate on both the value of assets and liabilities.
For the insurance risk, the risk profile is different per portfolio and therefore different types of insurance risk (mortality, morbidity and longevity) are measured.
142
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
33 Investment contracts at fair value through income and amounts deposited with reinsurer
Analysis by operating segment
31 December
CA
S&P
Movestic
Total
Current
Non-current
Total
Investment
contract
liability
£000
2015
Amount
deposited
with
reinsurer
£000
Investment
contract
liability
£000
Net
£000
2014
Amount
deposited
with
reinsurer
£000
Net
£000
667,375
33,555
1,756,591
33,941
–
–
633,434
33,555
1,756,591
697,210
38,896
1,653,706
35,498
–
–
661,712
38,896
1,653,706
2,457,521
33,941
2,423,580
2,389,812
35,498
2,354,314
86,110
2,371,411
451
33,490
85,659
2,337,921
78,552
2,311,260
545
34,953
78,007
2,276,307
2,457,521
33,941
2,423,580
2,389,812
35,498
2,354,314
The fair values of the Groups’ investment contract liabilities are disclosed according to a three-level valuation hierarchy in note 26.
34 Liabilities relating to policyholders’ funds held by the Group
Unit-linked
31 December
Balance at I January
Deposits received
Fees deducted from account balances
Investment yield
Foreign exchange translation difference
Other movements
Balance at 31 December
Current
Non-current
Total
2015
£000
164,858
46,448
(1,417 )
6,398
(4,680 )
(21,688 )
2014
£000
130,237
51,604
(1,239 )
15,472
(19,371 )
(11,845 )
189,919
164,858
11,585
178,334
13,112
151,746
189,919
164,858
The fair values of the ‘Liabilities relating to Policyholders’ funds held by the Group’ are determined according to a three-level valuation hierarchy, which is explained
in note 26.
The fair value of these liabilities is based on the aggregation of prices quoted in active markets of their associated assets (Level 1), as disclosed in note 26.
35 Borrowings
Group
31 December
Bank loan
Amount due in relation to financial reinsurance
Total
Current
Non-current
Total
2015
£000
52,522
26,503
2014
£000
64,327
22,969
79,025
87,296
18,448
60,577
17,198
70,098
79,025
87,296
143
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
35 Borrowings (continued)
Company
31 December
Bank loan
Current
Non-current
Total
2015
£000
2014
£000
52,522
64,327
11,966
40,556
11,826
52,501
52,522
64,327
The bank loan subsisting at 31 December 2015, comprises the following:
– on 7 October 2013 tranche one of a loan facility was drawn down, amounting to £30.0m. This facility is unsecured and is repayable in five increasing annual
instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London
Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. During the year, £6.0m of the
debt was repaid.
– on 27 November 2013 tranche two of the loan facility was drawn down, amounting to £31.0m. As with tranche one, this facility is unsecured and is repayable
in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage
points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. During
the year, £6.0m of the debt was repaid.
– on 27 November 2013 a short-term loan of £12.8m was drawn down. This was originally repayable in full on 27 May 2015. During 2014, the repayment date
of this loan has been extended to December 2018. The outstanding principal on the loan bears interest at a rate of 2.75 percentage points above the London
Inter-Bank Offer Rate.
The fair value of the bank loan at 31 December 2015 was £52,800,000 (31 December 2014: £64,800,000).
The fair value of amounts due in relation to financial reinsurance was £26,879,000 (31 December 2014: £23,767,650). The fair value of other borrowings is not
materially different from their carrying value.
Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.
144
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
36 Other provisions
Group
Balance at 1 January 2014
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Balance at 31 December 2014
Additions arising on acquisition of subsidiary company
Provisions made during the year
Provisions used during the year
Provisions reversed during the year
Foreign exchange movement
Balance at 31 December 2015
31 December 2014
Current
Non-current
Total
31 December 2015
Current
Non-current
Total
Other
complaints
redress
£000
Onerous
contracts
£000
7
–
–
–
7
3,025
–
(1,531 )
–
40
1,541
7
–
7
1,534
7
1,541
3,487
–
(448 )
(2,933 )
106
–
1
(31 )
(6 )
–
70
60
46
106
–
70
70
Other
£000
1,854
66
(1,304 )
–
616
–
230
(348 )
(204 )
–
Total
£000
5,348
66
(1,752 )
(2,933 )
729
3,025
231
(1,910 )
(210 )
40
294
1,905
612
4
616
22
272
294
679
50
729
1,556
349
1,905
The reversal of provisions during the year was credited to Other operating income as disclosed in note 11.
(a) Other complaints redress
The provision for redressing complaints relates to the Dutch business, and was established in 2011 for dealing with complaints made about cost structures
embedded in certain insurance/investment products. The scheme under which Hollands Welvaren compensated clients for such structures was declared legally
binding to policyholders and ran until 5 November 2015. The balance of the provision as at 31 December 2015 comprises the remaining pipeline of policies for
which policyholders have raised a complaint and a portion for a small group of policyholders that have opted-out of this scheme and for which individual settlements
will be sought. In accordance with the Sale and Purchase Agreement under which Chesnara plc acquired the Dutch businesses, any remaining unused balance
will be reimbursed to the seller. Should there be a shortfall in the provision this is indemnified by the seller.
(b) Onerous contracts
The Group and Company have a number of onerous operating lease contracts that have been entered into historically, whose activity and current status is described
in note 50 Operating leases. Given the terms of the contracts the Group and Company have created onerous contract provisions for anticipated future net
costs. Over the terms of the contracts these provisions take account of the contract terms, future payments and future mitigating income from sublets, contract
by contract, to create a view as to the Group’s and Company’s exposure.
These provisions comprise three components: provision for vacant properties, provision for properties due to become empty at the end of their subleases,
and provision for future under-recoveries of costs on subleases entered into.
(c) Other
One of the conditions of the acquisition of Protection Life was to migrate the accounting and policy administration processes from the Direct Line Group to one
of our outsource providers. As a result of this requirement a provision of £2.0m was raised in 2013, representing management’s best estimate of the costs that
will be incurred to fulfill this obligation. Residual amounts of £0.2m of this provision were reversed during the year.
145
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2015
£000
(6,121 )
(385 )
(1,400 )
2014
£000
(7,899 )
(441 )
–
(7,906 )
(8,340 )
(1,517 )
(6,389 )
(1,713 )
(6,627 )
(7,906 )
(8,340 )
(Charge )/ 2015 Assets /
(liabilities )
2014 Assets /
(liabilities )
£000
(1,833 )
(703 )
1,285
(6,717 )
(19,882 )
19,882
30
39
credit
in year
£000
326
131
(233 )
1,550
5,023
(5,023 )
43
(39 )
£000
(1,507 )
(572 )
1,052
(5,167 )
(14,859 )
14,859
73
–
(7,899 )
1,778
(6,121 )
–
(7,899 )
–
1,778
–
(6,121 )
(7,899 )
1,778
(6,121 )
37 Deferred tax assets and liabilities
Deferred tax liabilities comprise:
31 December
Net deferred tax liabilities:
CA, S&P and other group activities
Movestic
The Waard Group
Total
Current
Non-current
Total
CA, S&P and other group activities
(a) Recognised deferred tax assets and liabilities
31 December
Profit arising on transition to new tax regime
Deferred acquisition costs
Deferred income
Acquired value in force
Unrealised and deferred investment gains
Excess expenses of management
Share-based payments
Other
Total
Comprising:-
Net deferred tax assets
Net deferred tax liabilities
Total
146
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
37 Deferred tax assets and liabilities (continued)
CA, S&P, PL and other group activities (continued)
(a) Recognised deferred tax assets and liabilities (continued)
31 December
Profit arising on transition to new tax regime
Deferred acquisition costs
Deferred income
Acquired value in force
Property, plant and equipment
Unrealised and deferred investment gains
Excess expenses of management
Share-based payments
Other
Total
Comprising:-
Net deferred tax assets
Net deferred tax liabilities
Total
2013
Assets /
(liabilities )
£000
(Charge)/
credit
in year
£000
2014
Assets /
(liabilities )
£000
(2,372 )
(796 )
1,452
(7,786 )
(25 )
(4,317 )
4,317
–
25
539
93
(167 )
1,069
25
(15,565 )
15,565
30
14
(1,833 )
(703 )
1,285
(6,717 )
–
(19,882 )
19,882
30
39
(9,502 )
1,603
(7,899 )
–
(9,502 )
–
1,603
–
(7,899 )
(9,502 )
1,603
(7,899 )
The deferred tax (charge)/credit to the Consolidated Statement of Comprehensive Income for the year is classified as follows:
Year ended 31 December
Income tax credit
(b) Items for which no deferred tax asset is recognised
31 December
BLAGAB transitional amounts
Unrelieved expenses
Total
2015
£000
2014
£000
1,778
1,603
2015
£000
3,334
198,413
2014
£000
3,810
174,895
201,747
178,705
A deferred tax asset has not been recognised in respect of unrelieved expenses, because it is not probable that there will be a sufficient level of taxable income
arising from income and gains on financial assets, so that the Group can utilise the benefits therefrom. The movement in this balance reflects an increase in
deferred deemed gains on Collective Investment Schemes in the period, which has decreased the unrelieved expenses at the balance sheet date.
147
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
37 Deferred tax assets and liabilities (continued)
Movestic
(a) Recognised deferred tax assets and liabilities
As at the balance sheet date, Movestic had a recognised deferred tax liability of £385,000 (31 December 2014: £441,000), in respect of fair value
adjustments arising upon acquisition. Unrecognised deferred tax assets of £693,000 existed at the balance sheet date in respect of corporation tax recoverable
(31 December 2014: £528,000).
The Waard Group
(a) Recognised deferred tax assets and liabilities
31 December
Intangible assets
Fair value adjustment on acquisition
Valuation differences
Total
Comprising:
Net deferred tax liabilities
Total
38 Reinsurance payables
Payable to reinsurers
31 December
Payables in respect of insurance contracts
Payables in respect of investment contracts
Reinsurers’ share of deferred acquisition costs and claims deposits
Total
Current
Non-current
Total
The carrying value of payables to reinsurers is a reasonable approximation of fair value.
39 Payables related to direct insurance and investment contracts
2014
Assets /
Arising on
business
(liabilities ) combination
(Charge)/
credit
in year
£000
£000
£000
Foreign
exchange
translations
difference
£000
–
–
–
–
–
(1,377 )
(275 )
(1,652 )
–
(1,652 )
(1,652 )
89
119
208
–
208
208
(31 )
75
44
–
44
44
2015
£000
9,067
17
576
2015
Assets /
(liabilities )
£000
(1,319 )
(81 )
(1,400 )
–
(1,400 )
(1,400 )
2014
£000
9,863
18
618
9,660
10,499
8,505
1,155
8,053
2,446
9,660
10,499
31 December
Accrued claims
Intermediaries’ liabilities
Policyholder premium liabilities
Other
Total
Current
Non-current
Total
2015
Gross Reinsurance
£000
£000
52,275
1,702
1,620
6,687
19,042
–
–
–
Net
£000
33,233
1,702
1,620
6,687
2014
Gross Reinsurance
£000
£000
45,207
2,144
2,821
8,617
14,722
–
–
–
Net
£000
30,485
2,144
2,821
8,617
62,284
19,042
43,242
58,789
14,722
44,067
61,331
953
18,420
622
42,911
331
58,544
245
14,581
141
43,963
104
62,284
19,042
43,242
58,789
14,722
44,067
The carrying value of payables related to the direct insurance and investment contracts is a reasonable approximation of fair value.
148
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
40 Deferred income
31 December
Balance at 1 January
Release to income
Balance at 31 December
Current
Non-current
Total
The release to income is included in Fees and Commission Income (see note 9).
41 Income tax liabilities
31 December
Income tax liabilities, which are all current, comprise:
Corporation tax – CA, S&P, and Other Group Activities
Total
The carrying value of income tax liabilities is a reasonable approximation of fair value.
42 Other payables
Group
31 December
Accrued expenses
VAT
Employee tax
Other
Total
Current
Non-current
Total
Company
31 December
Accrued expenses
Other
Total
Current
Non-current
Total
The carrying value of other payables is a reasonable approximation of fair value.
2015
£000
6,974
(762 )
2014
£000
7,865
(891 )
6,212
6,974
760
5,452
831
6,143
6,212
6,974
2015
£000
6,328
6,328
2015
£000
7,816
109
614
9,862
2014
£000
4,168
4,168
2014
£000
7,861
114
517
9,975
18,401
18,467
18,178
223
18,467
–
18,401
18,467
2015
£000
1,194
372
2014
£000
1,589
632
1,566
2,221
1,566
–
2,221
–
1,566
2,221
149
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
43 Share capital and share premium
Group
31 December
Share capital
Number of
shares
2015
2014
Share
capital Number of
shares
£000
Share
capital
£000
126,552,427
42,600 126,552,427
42,600
Share premium
£000
Share premium
£000
76,516
76,523
The number of shares in issue at the balance sheet date included 147,535 shares held in treasury (31 December 2014: 154,031).
Share capital for the Group includes the impact of ‘reverse acquisition accounting’ associated with Chesnara plc’s acquisition of Countrywide Assured Life
Holdings Ltd (‘CALH‘) from Countrywide plc (‘Countrywide‘) on 24 May 2004. As a result of this, included within share capital of the Group is £41,501,000, which
represents the amount of issued share capital of Countrywide Assured Life Holding (the legal subsidiary) immediately before the acquisition. As a result of
this accounting treatment the Group share capital differs from the Chesnara plc company position, which is set out below.
On 5 December 2014, 11,504,765 new shares were issued to existing shareholders, as part of a fund raising exercise in respect of the proposed acquisition
of the Waard Group of companies. The equity issue raised £35.6m. Transaction costs of £1.0m were incurred in respect of the fund raising and have been
deducted from equity.
Company
31 December
Authorised:
Ordinary shares of 5p each
Issued
Ordinary shares of 5p each
Number of
shares
2015
2014
Share
capital Number of
shares
£000
Share
capital
£000
201,000,000
10,050 201,000,000
10,050
126,552,427
6,328 126,552,427
6,328
Share premium
£000
Share premium
£000
76,516
76,523
The number of shares in issue at the balance sheet date included 147,535 shares held in treasury (31 December 2014: 154,031).
44 Treasury shares
Group and Company
31 December
Balance 31 December
45 Other reserves
Group
31 December
Capital redemption reserve
Foreign exchange translation reserve
Balance at 31 December
Company
31 December
Capital redemption reserve
150
2015
£000
161
2015
£000
50
(864 )
(814 )
2015
£000
50
2014
£000
168
2014
£000
50
(691 )
(641 )
2014
£000
50
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
46 Retained earnings
Group
Year ended 31 December
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January
Profit for the year
Share based payment
Dividends
Final approved and paid for 2013
Interim approved and paid for 2014
Final approved and paid for 2014
Interim approved and paid for 2015
Balance at 31 December
2015
£000
2014
£000
160,519
39,788
212
–
–
(15,143 )
(8,355 )
155,561
25,575
114
(13,357 )
(7,374 )
–
–
177,021
160,519
The interim dividend in respect of 2014, approved and paid in 2014 was paid at the rate of 6.42p per share. The final dividend in respect of 2014, approved and
paid in 2015, was paid at the rate of 11.98p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year
ended 31 December 2014 was made at the rate of 18.40p per share.
The interim dividend in respect of 2015, approved and paid in 2015, was paid at the rate of 6.61p per share to equity shareholders of the Parent Company
registered at the close of business on 11 September 2015, the dividend record date.
A final dividend of 12.33p per share in respect of the year ended 31 December 2015 payable on 23 May 2016 to equity shareholders of the Parent Company
registered at the close of business on 8 April 2016, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total
final dividend of £15.6m has not been provided for in these financial statements and there are no income tax consequences.
The following summarises dividends per share in respect of the year ended 31 December 2015 and 31 December 2014:
Year ended 31 December
Interim – approved and paid
Final – proposed/paid
Total
Company
Year ended 31 December
Balance at 1 January
Profit for the year
Share based payment
Dividends paid
Final approved and paid for 2013
Interim approved and paid for 2014
Final approved and paid for 2014
Interim approved and paid for 2015
Balance at 31 December
Details of dividends, approved and paid, are set out in the ‘Group’ section above.
2015
p
6.61
12.33
2014
p
6.42
11.98
18.94
18.40
2015
£000
133,131
56,468
212
–
–
(15,143 )
(8,355 )
2014
£000
112,534
41,214
114
(13,357 )
(7,374 )
–
–
166,313
133,131
151
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
47 Employee benefit expense, including Directors
Year ended 31 December
Wages and salaries
Social security costs
Pension costs-defined contribution plans
CA
£000
1,114
150
80
S&P
£000
Movestic
£000
496
67
35
6,362
2,592
1,418
Total
1,344
598
10,372
Average number of employees
Company
Subsidiaries
Total
Directors
Note 53 provides detail of compensation to Directors of the Company.
UK based employees
UK based employees are all employed by Chesnara plc.
Waard
Group
£000
Other
Group
Activities
£000
1,573
212
112
674
58
44
776
2015
£000
10,219
3,079
1,689
2014
£000
10,032
2,905
1,619
1,897
14,987
14,556
24
162
186
22
128
150
At the end of May 2005 the Group allowed eligible employees to enter a pension scheme known as the Chesnara plc Stakeholder Scheme, on a basis where
employer contributions are made to the scheme at the same rate as would be payable had their membership of their predecessor scheme continued, provided
that employee contributions also continued to be made at the same rate. The employee may opt to request the Company to pay employer contributions into a
personal pension plan, in which instance, employer contributions will be made on the same terms as for the Chesnara plc Stakeholder Scheme.
The employee who joined the Group as a result of the acquisition of CWA Life Holdings plc continues to be a member of the pre-existing defined contribution
Group Personal Pension scheme, to which employer and employee contributions are made.
The Group has, for the period covered by these financial statements, only made contributions to defined contribution plans to provide pension benefits for
employees upon retirement and, otherwise, has no residual obligation or commitments in respect of any defined benefit scheme.
The Group has established frameworks for approved and unapproved discretionary share option plans which may, at the discretion of the Remuneration Committee,
be utilised for granting options to Executive Directors and to other Group employees. Options have been granted to Executive Directors in the period, in relation
to the share-based payment components of the new Executive incentive schemes that was introduced under the 2014 Terms. Further details can be found in
the Directors’ Remuneration Report section and in note 48 – Share based payments on page 153.
Swedish based employees
The Swedish business participates in a combined defined benefit and defined contribution Scheme operated by Försäkringsbranschens Pensionskassa, ‘FPK’
(the ‘Scheme’). The Scheme is a multi-employer Scheme with participants including other Swedish insurance companies not related to the Group. The Scheme
provides, for those born in 1971 or earlier, benefits to employees which are linked to their final salary and to the amount of time working for companies which
are members of the Scheme. For those employees born in 1972 or later, the Scheme operates on a defined contribution basis.
Assets and liabilities are held on a pooled basis and are not allocated by the Trustee to any individual company. Consequently, reliable information is not available
to account for the Scheme as a defined benefit Scheme and therefore, in accordance with IAS 19 Employee Benefits, the Scheme is accounted for as a defined
contribution Scheme.
Contributions to the Scheme are based on the funding recommendations of the independent qualified actuary: the contributions paid to the Scheme subsequent
to the acquisition of the Swedish business on 23 July 2009 and up to 31 December 2014, totalled KSEK 21,185 (£1,789,250). During 2014 further contributions
of KSEK 5,781 (£486,500) were made.
The employers within the Scheme are responsible collectively for the funding of the Scheme as a whole and therefore in the event that other employers exit
from the Scheme, remaining employers would be responsible for the ongoing funding. The collective nature of the Scheme results in all participating entities
sharing the actuarial risk associated with the Scheme.
Försäkringsbranschens Pensionskassa, (‘FPK’ issues an audited annual report (under Swedish law-limited IFRS) each year. The last available published report
was as at 31 December 2014.
The Annual Report states that the Scheme’s surplus is SEK 985m (2013: SEK1,312m) as at 31 December 2014.
As at 31 December 2014, the fund had assets under management of SEK 1,290m (2013: SEK,1,130m). During 2014, there have been 127 (2013: 134)
employer insurance companies participating in the Scheme and 26,000 (2013: 26,000) insured individuals.
From the available information, it cannot be determined with certainty as to whether there would be a change in the required employer funding rate, although
there is currently no deficit in the Scheme.
152
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
48 Share-based payments
The Group issues equity-settled share based payments to the three Executive Directors based on the 2014 Terms. Equity settled share-based payments are
measured at fair value at the date of the grant, and expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will
eventually vest. The Executive Bonus Scheme consists of two components:
(a) Short-term Incentive Scheme (STI Scheme)
(b Long-term Incentive Scheme (LTI Scheme)
The STI Scheme is based upon a one year performance period measured against IFRS, EEV operating profit and strategic group objectives. In relation to 2015, upon
meeting the necessary performance targets, the Company granted an award in the form of a right to receive a cash amount of up to 75% of the gross salary.
In the event that the gross cash payment due is greater than £20,000, a mandatory 35% of the cash award was deferred into shares, which had a vesting period
of three years. Therefore the award was 65% settled in cash and 35% settled by a share option award, which cannot be exercised for three years.
Under the LTI Scheme, options are granted with a vesting period of three years. These awards are subject to performance conditions tied to the Company’s
financial performance in respect of growth in embedded value and total shareholder return (‘TSR’).
For schemes with market performance criteria, the number of options expected to vest is adjusted only for expectations of leavers prior to vesting. Fair value
of the options is measured by use of the Monte Carlo model at the issuing date.
The LTI scheme also contains a target of embedded value growth. As this is a non-market performance condition, the number of options expected to vest is
recalculated at each balance sheet date based on expectations of performance against target. The movement in cumulative expense since the previous balance
sheet date is recognised in the income statement, with a corresponding entry in reserves.
If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Furthermore, options are forfeited if the employee leaves
the Group before options vest.
(a) 2015 award under the Short-Term Incentive (STI) Scheme
The bonus award for the year is £506,000. Of the bonus included, 35% is deferred in shares for three years and is subject to forfeiture. The deferred share award
will be made following the end of the performance period by the Remuneration Committee. The deferred amount will be divided by the share price on the award
date and the number of share awards will be awarded. The share awards will be accounted for per IFRS 2, under equity settled share-based payments.
The Group has recorded liabilities of £329,000 with respect to the 65% element that is to be paid as a cash bonus. The remaining £177,000 will be deferred over
the vesting period and an expense of £42,000 has been recorded in the current year.
(b) 2015 award made under the Long-Term Incentive (LTI) Scheme
In April 2015, the Group granted 181,000 nil priced share options with a vesting period of three years. These awards were subject to performance conditions
tied to the Company’s financial performance in respect of growth in embedded value and total shareholder return (‘TSR’).
The fair value of the non-market base condition was determined to be 319.00p, which was the share price as at 28 April 2015, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2015 Long-Term Incentive Scheme
Outstanding at the beginning of the year
Granted during the year
Outstanding at the end of the year
Exercisable at the end of the year
The weighted average contractual life is 10 years.
The inputs into the Monte Carlo model are as follows:
Valuation method
Weighted average share price (pence)
Weighted average exercise price (pence)
Weighted average fair value of options granted (pence)
Expected volatility
Expected life
Risk free rate
Expected dividend yield
Options Weighted
average
exercise
price
£
Number
000s
–
181
181
–
–
–
–
–
Monte Carlo
319.00
Nil
187.62
30.21
3 years
1.07%
0%
Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous 10 years.
The Group recognised total expense of £62,000 related to equity settled share based payments transactions in 2015.
153
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
48 Share-based payments (continued)
(a) 2014 award under the Short-Term Incentive (STI) Scheme
The Group has recorded an expense of £22,000 with regards to the 35% element that has been deferred over the vesting period.
(b) 2014 award made under the Long-Term Incentive (LTI) Scheme)
In May 2014, the Group granted 169,000 nil priced share options with a vesting period of three years. These awards were subject to performance conditions tied
to the Company’s financial performance in respect of growth in embedded value and total shareholder return (‘TSR’).
Fair value is measured by use of the Monte Carlo model of the TSR condition. The LTI Scheme also contains embedded value growth. As these are non-market
performance conditions they are not included in the determination of fair value of share options at the grant date. The fair value of the non-market base condition
was determined to be 310.25p, which was the share price as at 20 May 2014, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2014 Long-term Incentive Scheme
2015
Options Weighted
average
exercise
price
£000
Number
£000
2014
Options Weighted
average
exercise
price
£000
Number
£000
117
–
–
(26 )
91
–
–
–
–
–
–
–
–
169
(52 )
117
–
–
–
–
–
–
–
Outstanding at the beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at the end of the year
Exercisable at the end of the year
The weighted average contractual life is 10 years.
The inputs into the Monte Carlo model are as follows:
Valuation method
Weighted average share price (pence)
Weighted average exercise price (pence)
Weighted average fair value of options granted (pence)
Expected volatility
Expected life
Risk free rate
Expected dividend yield
Monte Carlo
310.25
nil
183.08
32.10%
3 years
1.46%
0%
2015
£000
2014
£000
39,788
126,401,635
31.48p
31.41p
25,575
115,711,981
22.10p
22.08p
Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous 10 years.
The Group recognised total expense of £77,000 related to equity settled share based payments transactions in 2014.
49 Earnings per share
Earnings per share are based on the following:
Year ended 31 December
Profit for the year attributable to shareholders (£000)
Weighted average number of ordinary shares
Basic earnings per share
Diluted earnings per share
The weighted average number of ordinary shares in respect of the years ended 31 December 2015 is based upon 126,552,427 shares in issue less 147,535 own
shares held in treasury. The weighted average number of ordinary shares in respect of the years ended 31 December 2014 was based upon 126,552,427 shares
in issue less 154,031 own shares held in treasury.
There were 271,000 share options outstanding at 31 December 2015 (2014: 117,000). Accordingly, there is dilution of the average number of ordinary shares in
issue in respect of 2015.
154
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
50 Operating leases
Leases as lessee
Non-cancellable operating lease rentals are payable as follows:
Operating lease rentals
Year ended 31 December
Less than one year
Between one and two years
Between two and five years
More than five years
Non -
investment
properties
£000
852
835
1,231
–
Expenses recognised in the year in respect of operating leases
908
2015
Motor
vehicles
£000
236
178
158
–
237
Non -
investment
properties
£000
2014
Motor
vehicles
£000
828
642
1,709
–
536
99
83
39
–
72
Total
£000
1,088
1,013
1,389
–
1,145
Total
£000
927
725
1,748
–
608
Leases as lessor
The Group subleases out both investment properties from its investment portfolio and the office premises which are no longer used for Group purposes.
The future minimum lease payments under non-cancellable leases are as follows:
Sub lease rentals
Year ended 31 December
Less than one year
Between one and two years
Between two and five years
More than five years
Rental income recognised in the year
Repairs and maintenance costs recognised in the year
2015
Non -
investment
properties
£000
Investment
properties
£000
Total
£000
Investment
properties
£000
2014
Non -
investment
properties
£000
–
–
–
–
109
(1 )
8
–
–
–
42
–
8
–
–
–
151
(1 )
39
–
–
–
499
411
42
4
–
–
52
24
Total
£000
81
4
–
–
551
435
51 Contingencies
Past sales
The Group has made provision for the estimated cost of settling complaints in respect of past sales of endowment mortgages. Although the provisions are
regularly reviewed, the final outcome could be different from the provisions established as these costs cannot be calculated with certainty and are influenced
by external factors beyond the control of management, including future regulatory actions.
52 Capital commitments
There were no capital commitments as at 31 December 2015 or as at 31 December 2014.
53 Related parties
(a) Identity of related parties
The shares of the Company were widely held and no single shareholder exercised significant influence or control over the Company.
The Company has related party relationships with:
(i) key management personnel who comprise only the Directors of the Company;
(ii) its subsidiary companies;
(iii) its associated company; and
(iv) other companies over which the Directors have significant influence.
155
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
53 Related parties
(b) Related party transactions
(i) Transactions with key management personnel.
Key management personnel comprise of the Directors of the Company. There are no executive officers other than certain of the Directors. Key management
compensation is as follows:
Short-term employee benefits
Post-employment benefits
Long-term employment benefits
Total
2015
£000
1,713
71
–
2014
£000
1,593
65
161
1,784
1,819
In addition to their salaries the Company also provides non-cash benefits to Directors, and contributes to a post employment defined contribution pension plan
on their behalf, or where regulatory contribution limits are reached, pay an equivalent amount as an addition to base salary.
The following amounts were payable to Directors in respect of bonuses and incentives:
Annual bonus scheme (included in the short-term employee benefits above)
Long-term incentive plan
Compensation for loss of office
Total
These amounts have been included in Accrued Expenses as disclosed in note 42.
The amounts payable under the annual bonus scheme were payable within one year.
2015
£000
495
–
–
495
2014
£000
493
161
384
1,038
(ii) Transactions with subsidiaries
The Company undertakes centralised administration functions, the costs of which it charges back to its operating subsidiaries. The following amounts which
effectively comprised a recovery of expenses at no mark up were credited to the Consolidated Statement of Comprehensive Income of the Company for the
respective periods:
Year ended 31 December
Recovery of expenses
(iii) Transactions with associate
Movestic Livförsäkring AB and its associate Modernac SA
Year ended 31 December
Reinsurance premiums paid
Reinsurance recoveries received
Reinsurance commission received
Amounts outstanding as at balance sheet date
156
2015
£000
2014
£000
3,054
2,629
2015
£000
(8,456 )
4,200
1,570
2014
£000
(9,829 )
4,600
1,853
(2,686 )
(3,376 )
(5,321 )
(4,654 )
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
53 Related parties (continued)
(b) Related party transactions (continued)
Movestic Livförsäkring AB had the following amounts outstanding at the balance sheet date:
31 December 2013
2015
2014
Amounts
owed by
associate
£000
Amounts
owed to
associate
£000
Amounts
owed by
associate
£000
Amounts
owed to
associate
£000
Modernac S.A.
–
5,321
–
4,654
These amounts have been included in other payables as disclosed in note 42 and other receivables as disclosed in note 27.
54 Group entities
Control of the Group
The issued share capital of Chesnara plc the Group parent company is widely held, with no single party able to control 20% or more of such capital or of the rights
which such ownership confers.
Group Subsidiary Companies
Name
Countrywide Assured plc
Country of
Incorporation
United Kingdom
Countrywide Assured Life Holdings Limited
United Kingdom
Countrywide Assured Services Limited
United Kingdom
Countrywide Assured Trustee Company Limited
United Kingdom
Movestic Livförsäkring AB
Modernac S.A.
Sweden
Luxembourg
Movestic Kapitalforvältning AB
Sweden
Protection Life Company Limited
United Kingdom
Chesnara Holdings B.V.
Waard Leven N.V.
Waard Schade N.V.
Tadas Verzekering
Hollands Welvaren Leven N.V.
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
(1) Held indirectly through Countrywide Assured Life Holdings Limited.
(2) Held indirectly through Movestic Livförsäkring AB.
(3) Acquired on 28 November 2013.
(4) Company formed on 25 November 2014.
(5) Held indirectly through Chesnara Holdings B.V.
(6) Held indirectly through Waard Leven N.V.
Ownership
interest
31 December
2015
100% of all share
capital (1)
100% of all share
capital
100% of all share
capital
100% of all share
capital
100% of all share
capital
49% of all share
capital (2)
100% of all share
capital (2)
100% of all share
capital (3)
100% of all share
capital (4)
100% of all share
capital (5)
100% of all share
capital (5)
100% of all share
capital (5)
100% of all share
capital (6)
Ownership
interest
31 December
2014
100% of all share
capital (1)
100% of all share
capital
100% of all share
capital
100% of all share
capital
100% of all share
capital
49% of all share
capital (2)
100% of all share
capital (2)
100% of all share
capital (3)
100% of all share
capital (4)
100% of all share
capital (5)
100% of all share
capital (5)
100% of all share
capital (5)
100% of all share
1 capital (6)
Functional
Currency
Sterling
Sterling
Sterling
Sterling
Swedish krona
Swedish krona
Swedish krona
Sterling
Euro
Euro
Euro
Euro
Euro
157
IFRS FINANCIAL STATEMENTS SECTION DCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
IN THIS SECTION
160 Directors’ responsibilities statement
161
Independent Auditor’s Report
162 Summarised EEV consolidated
income statement
163 Summarised EEV consolidated
balance sheet
164 Notes to the EEV
supplementary information
158
INFORMATION E
SECTION E
EEV BASIS SUPPLEMENTARY
DIRECTORS’ RESPONSIBILITIES STATEMENT IN RESPECT
OF THE EEV BASIS SUPPLEMENTARY INFORMATION
The Directors have chosen to prepare Supplementary Information in accordance with the EEV Principles issued in May 2004 by the CFO Forum of
European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005.
When compliance with the EEV Principles is stated, those principles require the Directors to prepare supplementary information in accordance with the
Embedded Value Methodology (‘EVM’) contained in the EEV Principles and to disclose and explain any non-compliance with the EEV guidance included in
the EEV Principles.
In preparing the EEV basis supplementary information, the Directors have:
– Prepared the supplementary information in accordance with the EEV Principles;
– Identified and described the business covered by the EVM;
– Applied the EVM consistently to the covered business;
– Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied
them consistently;
– Made estimates that are reasonable and consistent; and
– Described the basis on which business that is not covered business has been included in the supplementary information, including any material departures
from the accounting framework applicable to the Group’s financial statements.
By order of the Board
Peter Mason
Chairman
30 March 2016
John Deane
Group Chief Executive Officer
30 March 2016
160
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015 INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF CHESNARA PLC
ON THE EEV BASIS SUPPLEMENTARY INFORMATION
We have audited the EEV Basis Supplementary Information of Chesnara plc for the year ended 31 December 2015 which comprises the summarised EEV
consolidated income statement, the condensed EEV consolidated balance sheet and the statement of changes in equity and the related notes 1 to 11. The
financial reporting framework that has been applied in their preparation is the EEV Principles issued in May 2004 by the CFO Forum of European Insurance
Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005 (‘the EEV Principles’).
We have reported separately on the statutory group financial statements of Chesnara plc for the year ended 31 December 2015. The EEV Basis Supplementary
Information should be read in conjunction with the financial statements prepared on an IFRS basis.
This report is made solely to the company’s directors in accordance with our engagement letter and solely for the purpose of expressing an opinion on whether
the EEV Basis Supplementary Information has been properly prepared in accordance with the EEV principles. Our audit work has been undertaken so that
we might state to the company’s directors those matters we are required to state to them in an independent auditor’s report and for no other purpose. To the
fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company, for our audit work, for this report, or for the
opinions we have formed.
Respective responsibilities of directors
As explained more fully in the Directors’ Responsibilities Statement in respect of the EEV Basis Supplementary Information, the Directors are responsible for
the preparation of the EEV Basis Supplementary Information.
Our responsibility
Our responsibility is to audit and express an opinion on the EEV Basis Supplementary Information in accordance with relevant legal and regulatory requirements
and International Standards on Auditing (UK and Ireland).
Scope of review
An audit involves obtaining evidence about the amounts and disclosures in the EEV Supplementary Information sufficient to give reasonable assurance that the
Supplementary Information is free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting
policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall presentation of the Supplementary Information. In addition, we read all the financial
and non-financial information in the annual report to identify material inconsistencies with the audited EEV Supplementary Information and to identify any
information that is apparently materially incorrect based on, or materially inconsistent with the knowledge acquired by us in the course of performing the audit.
If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Conclusion
In our opinion, the EEV Basis Supplementary Information for the year ended 31 December 2015 has been properly prepared in accordance with the EEV principles
using the methodology and assumptions set out on pages 164 to 175.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London,
United Kingdom
30 March 2016
161
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015 SUMMARISED EEV CONSOLIDATED INCOME STATEMENT
Year ended 31 December
Covered business
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
Profit of covered business before tax and profit on acquisition
Tax thereon
Profit of covered business after tax and before profit on acquisition
Profit recognised on business combination
Non-covered business and other group activities
Tax on uncovered business
Note
2015
£000
2014
£000
6
6
6
6
6
6
6
6
6,9
6
6
6,061
9,698
6,300
10,754
8,394
(28 )
31,481
12,195
(698 )
42,978
2,676
45,654
21,313
(10,403 )
947
7,149
541
11,000
9,134
37,522
32,040
(7,451 )
62,111
(12,237 )
49,874
–
(7,409 )
1,782
Profit for the year attributable to the equity holders of the parent company
6
57,511
44,247
Earnings per share
Based on profit for the year
Diluted profit per share
Based on profit for the year
10
10
50.17
38.24
50.06
38.20
The notes and information on pages 164 to 175 form part of this supplementary information.
162
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
SUMMARISED EEV CONSOLIDATED BALANCE SHEET
& STATEMENT OF CHANGES IN EQUITY
Consolidated Balance Sheet
31 December
Assets
Value of in-force business
Adjusted shareholder net worth
Net assets
Equity
Share capital
Share premium
Treasury shares
Foreign exchange reserve
Other reserves
Retained earnings
Note
5, 8
2015
£000
264,765
190,411
2014
£000
243,671
173,571
455,176
417,242
42,600
76,516
(161 )
(5,531 )
50
341,702
42,600
76,523
(168 )
(3,335 )
50
301,572
Total shareholders’ equity
5,8
455,176
417,242
Statement of changes in equity
Year ended 31 December
x
Shareholders’ equity at beginning of the year
Profit for the year attributable to shareholders before modelling adjustments
Effect of modelling adjustments
Profit for the year
Issue of new shares
Share capital
Share premium
Sale of treasury shares
Share based payment
Foreign exchange reserve movement
Dividends paid
2015
£000
2014
£000
417,242
376,370
57,511
5,903
44,247
–
63,414
–
(7 )
7
212
(2,194 )
(23,498 )
44,247
576
33,971
70
–
(17,261 )
(20,731 )
Shareholders’ equity at end of the year
455,176
417,242
Effect of modelling adjustments
Year ended 31 December 2015
During the year ended 31 December 2015 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.
The notes and information on pages 164 to 175 form part of this supplementary information.
Approved by the Board of Directors on 30 March 2016 and signed on its behalf by:
David Rimmington
Finance Director
Company number: 04947166
John Deane
Group Chief Executive Officer
163
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE EEV SUPPLEMENTARY INFORMATION
1 Basis of preparation
This section sets out the detailed methodology followed for producing these Group financial statements which are supplementary to the Group’s primary
financial statements which have been prepared in accordance with International Financial Reporting Standards (‘IFRS’), as adopted by the EU. These
financial statements have been prepared in accordance with the European Embedded Value (‘EEV’) principles issued in May 2004 by the European CFO
Forum and supplemented by Additional Guidance on EEV Disclosures issued by the same body in October 2005. The principles provide a framework
intended to improve comparability and transparency in embedded value reporting across Europe.
In order to improve understanding of the Group’s financial position and performance, certain of the information presented in these financial statements is presented
on a segmental basis: the business segments are the same as those described in note 8 to the consolidated financial statements prepared on the IFRS basis.
Particular segment information
The Group acquired the Waard Group on 19 May 2015 which represents the Group’s Dutch life and general insurance business. As a result, a further operating
segment has been added in notes 4 to 8. Furthermore, 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.
2 Covered business
The Group uses EEV methodology to value the bulk of its long-term business (the ‘covered business’), which is written primarily in the UK, Sweden and
Netherlands, as follows:
(i) for the UK business, the covered business of CA and S&P comprises the business’s long-term business being those individual life insurance, pensions
and annuity contracts falling under the definition of long-term insurance business for UK regulatory purposes.
(ii) for the Swedish business (comprising the Movestic segment), the covered business comprises the business’s long-term pensions and savings unit-linked
business. Group life and sickness business, including waiver of premium and non-linked individual life assurance policies are not included in the covered
business: the result relating to this business is established in accordance with IFRS principles and is included within ‘other operational result’ within the
consolidated summarised income statement.
(iii) for the Dutch business the covered business comprises the long-term insurance business of Waard Leven and Hollands Welvaren. The general insurance
business within Waard Schade is not included in the covered business, with the result relating to this business being established in accordance with IFRS
principles and is included within ‘other operating result’ within the EEV consolidated income statement.
(iv) The operating expenses of the holding company, Chesnara plc, are allocated across the segments.
Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts
different accounting treatments.
3 Methodology
(a) Embedded value
Overview
Shareholders’ equity comprises the embedded value of the covered business, together with the net equity of other Group companies, including that of
the holding company which is stated after writing down fully the carrying value of the covered business.
The embedded value of the covered business is the aggregate of the shareholder net worth (‘SNW’) and the present value of future shareholder cash flows
from in-force covered business (value of in-force business) less any deduction for (i) the cost of guarantees within S&P, and (ii) the cost of required capital.
It is stated after allowance has been made for aggregate risks in the business. SNW comprises those amounts in the long-term businesses, which are either
regarded as required capital or which represent surplus assets within that business.
New business
CA, S&P and the Waard Group
Much of the covered business is in run-off and is therefore substantially closed to new business. Accordingly, for these segments, not all of those items
related to new business values, which are recommended by the EEV guidelines, are reported in this supplementary financial information.
Movestic
New business, in relation to the pensions and savings covered business is taken as all business where contracts are signed and new premiums paid during
the reporting period, for both new policies and premium increases on existing business, but excluding standard renewals. New business premium volumes
as disclosed in ’Enhance value through profitable new business’ on page 22 are not consistent with this definition, as they include non-covered business.
New business premium volumes for the year are as follows:
Pensions and savings covered business
31 December
New business premium income
Regular premium increments
Total new business premium income*
2015
£m
40.7
14.2
54.9
2014
£m
47.4
15.8
63.2
* Basis: annualised premium plus 1/10 single premium translated into sterling at the 2015 average rate of SEK 12.8946 = £1 (2014: SEK 11.2989) = £1).
The new business contribution has been assessed as at the end of the year, using opening assumptions.
164
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
3 Methodology (continued)
(a) Embedded value (continued)
Value of in-force business
The cash flows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash flow.
The present value of the projected cash flows is established by using a discount rate which reflects the time value of money and the risks associated with
the cash flows which are not otherwise allowed for. There is a deduction for the cost of holding the required capital, as set out below.
In respect of Movestic there are certain non-linear exposures of shareholder profit to asset returns arising from variable administrative fees and variable
investment fund rebates which are modelled deterministically rather than stochastically.
Participating business
For participating business within the S&P business the Group maintains the assets and liabilities in separate with-profits funds. In accordance with the Principles
and Practices of Financial Management, in the first instance all benefits, which in some cases include guaranteed minimum investment returns, are paid
from policyholder assets within the fund. The participating business effectively operates as a smoothed unit-linked contract subject to minimum benefit
guarantees. The with-profits funds contain assets which are attributable to shareholders as well as those attributable to policyholders. Assets attributable
to shareholders can only be released from the fund subject to meeting prudent liabilities in respect of minimum benefits and the frictional cost of this restriction
has been allowed for in determining the value of the in-force business.
Fundamentally, the value of the with-profits in-force business is driven by the fund management charges levied on the policyholder assets, subject to the
effect of minimum benefit guarantees.
Taxation
The present value of the projected cash flows arising from in-force business takes into account all tax which is expected to be paid under current legislation,
including tax which would arise if surplus assets within the covered business were eventually to be distributed. All previously announced changes in
corporation tax affecting future periods has been allowed for, with the exception of the most recent reduction in corporation tax rates, announced by the
Chancellor on 16 March 2016.
The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement.
The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax
in the UK businesses, corporation tax rate for the Waard Group and yield tax in Movestic.
Cost of capital
The valuation approach used requires consideration of ‘frictional’ costs of holding shareholder capital: in particular, the cost of tax on investment returns
and the impact of investment management fees can reduce the face value of shareholder funds. For CA, the expenses relating to corporate governance
functions eliminate any taxable investment return in shareholder funds, while investment management fees are not material. The cost of holding the required
capital to support the covered business (see note 3(b)) is reflected as a deduction from the value of in-force business.
Financial options and guarantees
CA
The principal financial options and guarantees in CA are (i) guaranteed annuity rates offered on some unit-linked pension contracts and (ii) a guarantee offered
under Timed Investment Funds that the unit price available at the selected maturity date (or at death, if earlier) will be the highest price attained over the
policy’s life. The cost of these options and guarantees has been assessed, in principle, on a market-consistent basis, but, in practice, this has been
carried out on approximate bases, which are appropriate to the level of materiality of the results.
S&P
The principal financial options and guarantees in S&P are (i) minimum benefits payable on maturity or retirement for participating business; (ii) the option to
extend the term under the Personal Retirement Account contract on terms potentially beneficial to the policyholder; (iii) the option to increase premiums
under the Personal Retirement Account contract on terms potentially beneficial to the policyholder; and (iv) certain insurability options offered.
The cost of guaranteeing a minimum investment return on participating contracts, being the only material guarantee, has been assessed on a market consistent
basis. This has involved the use of a stochastic asset model, which is designed to establish a cost of guarantees which is consistent with prices in the
market at the valuation date, for example the prices of derivative instruments. For the remaining options and guarantees the cost has been assessed on an
approximate basis, appropriate to the level of materiality of the results.
165
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015 NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED)
3 Methodology (continued)
(a) Embedded value (continued)
Movestic
In respect of Movestic, some contracts provide policyholders with an investment guarantee, whereby a minimum rate of return is guaranteed for the first five years
of the policy, at a rate of 3% per annum. The value of the guarantee is ignored as it is not material to the results.
The Waard Group
The unit-linked business within Hollands Welvaren contains a minimum return to policyholders, of 20% of the premium. As this guarantee is substantially out of the
money, it is ignored on materiality grounds.
Allowance for risk
Allowance for risk within the covered business is made by:
(i) setting required capital levels by reference to the assessment of capital needs made by the Directors of the regulated entities within the respective businesses;
(ii) setting the risk discount rate, which is applied to the projected cash flows arising on the in-force business, at a level which includes an appropriate risk margin
(see note 3(c)); and
(iii) explicit allowance for the cost of financial options and guarantees and, where appropriate, for reinsurer default.
Internal group company
EEV Guidance requires that actual and expected profit or loss incurred by an internal group company on services provided to the covered business should be
included in allowances for expenses. The covered business in Movestic is partially managed by an internal group fund management company. Not all relevant
future income and expenses of that company have been included in the calculation of embedded value. However, the effect is not considered to be material.
Consolidation adjustments
Consolidation adjustments have been made to:
(i) eliminate the investment in subsidiaries;
(ii) allocate group debt finance against the segment to which it refers; and
(iii) allocate corporate expenses as explained in note 4(d).
(b) Level of required capital
The level of required capital of the covered business reflects the amount of capital that the Directors consider necessary and appropriate to manage the respective
businesses. In forming their policy the Directors have regard to the minimum statutory requirements and an internal assessment of the market, insurance and
operational risks inherent in the underlying products and business operations. The capital requirement resulting from this assessment represents:
(i) for CA plc (comprising the CA and S&P segments), 162.5% of the long-term insurance capital requirement (‘LTICR’) together with 100% of the resilience
capital requirement (‘RCR’), as determined by the regulations of the Prudential Regulation Authority in the UK;
(ii) for Movestic, 150% of the regulatory solvency requirement as determined by the regulations of the Finansinspektionen in Sweden.
(iii) for the Waard Group, 200% of the regulatory solvency requirements as determined by the regulations of De Nederlandsche Bank in the Netherlands.
The required level of regulatory capital is provided as follows:
(i) for the UK business, by the retained surplus within the long-term business fund and by share capital and retained earnings within the shareholder funds of
the regulated entity;
(ii) for Movestic, by share capital and additional equity contributions from the parent company, net of the accumulated deficit in the regulated entity, these
components together comprising shareholder’s equity; and
(iii) for the Waard Group, by the retained surplus and by share capital and retained earnings within the shareholder funds of the regulated entities.
(c) Discount rates
The discount rates are a combination of the reference rate and a risk margin. The reference rate reflects the time value of money and the risk margin reflects any
residual risks inherent in the covered business and makes allowance for the risk that future experience will differ from that assumed. In order to reduce the
subjectivity when setting the discount rates, the Group has decided to adopt a ‘bottom up’ market-consistent approach to allow explicitly for market risk.
Using the market-consistent approach, each cash flow is valued at a discount rate consistent with that used in the capital markets: in accordance with this,
equity-based cash flows are discounted at an equity discount rate and bond-based cash flows at a bond discount rate. In practice a short-cut method known
as the ‘certainty equivalent’ approach has been adopted. This method assumes that all cash flows earn the reference rate of return and are discounted at the
reference rate.
In general, and consistent with the market’s approach to valuing financial instruments for hedging purposes, the reference rate is based on swap yields. These have
been taken as mid swap yields available in the market at the end of the reporting period.
Allowance also needs to be made for non-market risks. For some of these risks, such as mortality and expense risk, it is assumed that the shareholder can diversify
away any uncertainty where the impact of variations in experience on future cash flows is symmetrical. For those risks that are assumed to be diversifiable, no
adjustment has been made. For any remaining risks that are considered to be nondiversifiable risks, there is no risk premium observable in the market and, therefore,
a constant margin has been added to the risk margin.
166
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
3 Methodology (continued)
(d) Analysis of profit
The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources:
(i) new business;
(ii)
return from in-force business; and
(iii) return from shareholder net worth.
Additional contributions to profit arise from:
(i)
variances between the actual investment return in the year and the assumed long-term investment return; and
(ii)
the effect of economic assumption changes.
The contribution from new business represents the value recognised at the end of each year in respect of new business written in that year, after allowing
for the cost of acquiring the business, the cost of establishing the required technical provisions and after making allowance for the cost of capital, calculated
on opening assumptions.
The return from in-force business is calculated using closing assumptions and comprises:
(i)
the expected return, being the unwind of the discount rates over the year applied to establish the value of in-force business at the beginning of the year;
(ii) variances between the actual experience over the year and the assumptions made to establish the value of business in force at the beginning of the year;
and
(iii) the net effect of changes in future assumptions, made prospectively at the end of the year, from those used in establishing the value of business in force
at the beginning of the year, other than changes in economic assumptions.
The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital.
(e) Assumption setting
There is a requirement under EEV methodology to use best estimate demographic assumptions and to review these at least annually with the economic
assumptions being reviewed at each reporting date. The current practice is detailed below.
Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2015.
The detailed projection assumptions, including mortality, morbidity, persistency and expenses reflect recent operating experience. Allowance is made for
future improvement in annuitant mortality based on experience and externally published data. Favourable changes in operating experience, particularly
in relation to expenses and persistency, are not anticipated until the improvement in experience has been observed. Holding company expenses (for the
Chesnara Group such expenses relate largely to listed company functions) are allocated across the segments in proportion to the value before tax of the
in-force business. Hence the expense assumptions used for the cash flow projections include the full cost of servicing this business.
The economic assumptions are reviewed and updated at each reporting date based on underlying investment conditions at the reporting date. The assumed
discount rates and inflation rates are consistent with the investment return assumptions.
In addition, the demographic assumptions used at 31 December 2015 are considered to be best estimate and, consequently, no further adjustments are
required. In respect of the CA business, the assumptions required in the calculation of the value of the annuity rate guarantee on pension business have
been set equal to best-estimate assumptions.
(f) Pension schemes
In Movestic, where the Group participates in a combined defined benefit and defined contribution scheme, future contributions to the scheme are reflected in the
value of in-force business.
(g) Financial reinsurance
In respect of Movestic the Group uses financial reinsurance to manage the impact of its new business strain. Whilst this liability is valued at fair value within
the IFRS financial statements, allowing for an option which provides the Group with the right to settle the liability early on beneficial terms, when valuing
the shareholder net worth within the EEV it is considered more appropriate to assess this liability at a higher cost, reflecting the likelihood of the option
not being utilised.
167
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED)
4 Assumptions
(a) Investment returns
Investment returns are assumed to be equal to the reference rate, as covered in note 3(c). For linked business, the aggregate return has been determined by the
reference rate less an appropriate allowance for tax.
The rates presented below are indicative spot rates:
31 December
5 year
10 year
15 year
20 year
25 year
30 year
CA*
S&P
Movestic
Waard Group
2015
2014
2015
2014
2015
2014
2015
2014
1.60%
2.04%
2.22%
2.25%
2.21%
2.17%
1.46%
1.88%
2.12%
2.26%
2.29%
2.30%
1.60%
2.04%
2.22%
2.25%
2.21%
2.17%
1.46%
1.88%
2.12%
2.26%
2.29%
2.30%
0.68%
1.59%
2.04%
2.28%
2.28%
2.28%
0.65%
1.27%
1.63%
1.82%
1.82%
1.82%
0.33%
1.02%
1.45%
1.63%
1.66%
1.67%
–
–
–
–
–
–
–
Inflation – RPI
2.50%
2.60%
2.50%
2.60%
1.89%
1.42%
1.50%
*The PL segment is now reported within the CA segment, and as such a single rate of 1.90% is applied for all durations (31 December 2014: 1.80%).
(b) Actuarial assumptions
The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience
identified in the periodic actuarial investigations.
Certain products contain provisions that provide for the charges in respect of mortality risk to be reviewable. In these cases assumptions for future experience and
charges are assumed to be linked and assumptions are only updated when decisions have been made regarding product charges, so as not to capitalise any benefits
that may not accrue to shareholders.
(c) Taxation
Projected tax has been determined assuming current tax legislation and rates continue unaltered, except where future tax rates or practices have been announced.
The tax rates for the UK business allow for changes in Corporation Tax as announced by the Chancellor in his budget speech of 8 July 2015, so reflect a reduction
from the current rate of 20% to 19% from April 2017 and to 18% from April 2020.
(d) Expenses
The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions.
For CA and S&P, these have been determined by reference to:
(i) the outsourcing agreements in place with our third-party business process administrators;
(ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and
(iii) corporate governance costs relating to the covered business.
For Movestic, these have been determined by reference to:
(i) an expense analysis in which all expenses were allocated to covered and uncovered business, with expenses for the covered business being allocated to
acquisition and maintenance activities; and
(ii) expense drivers, being, in relation to acquisition costs, the number of policies sold during the year and, in relation to maintenance expenses, the average
number of policies in force during the year.
For the Waard Group, these have been determined by reference to:
(i) expenses of the covered business excluding those deemed to not relate to ongoing management of the covered business;
(ii) consideration of a suitable allocation between fixed expenses and those that vary with business volumes; and
(iii) the agreement in place with Tadas as the Group’s internal administration company for the Dutch covered business.
Holding company expenses (for the Chesnara Group such expenses relate largely to listed company functions) are allocated across the segments on a basis
that reflects each segment’s economic consumption of such costs.
EEV Guidance requires that no allowance is made for future productivity improvements in expense assumptions. For the UK business, for expenses relating
to policy administration this requirement is met. As the UK company is essentially closed to new business, those governance expenses which are not
immediately variable can reasonably be expected to reduce through management control in the future, though the timing and scale of such reductions is not
fixed. A prudent estimate of the reductions has been allowed for within the expense assumptions.
168
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
4 Assumptions (continued)
(e) Discount rate
An explicit constant margin is added to the reference rate shown in (a) above to cover any remaining risks that are considered to be non-market, non-diversifiable
risks, as there is no risk premium observable in the market. This margin, which is 50 basis points for CA and S&P (as at 31 December 2014: 50 basis points) and
100 basis points for Movestic (as at 31 December 2014: 100 basis points) and 50 basis points for the Waard Group, gives due recognition to the relative sensitivity
of the value of in-force business to the discount rate for the different businesses, and to the fact that:
a) For CA:
(i) the covered business is closed to new business;
(ii) there is no significant exposure in the with-profit business, which is wholly reinsured;
(iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process
administrators; and
(iv) for much of the life business the Group has the ability to vary risk charges made to policyholders.
b) For S&P:
(i) the covered business is closed to new business; and
(ii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business
process administrators.
c) For Movestic:
(i) the covered business remains open;
(ii) reinsurance is used to significantly reduce insurance risks; and
(iii) a number of the risks provide diversification benefits within the Chesnara Group, in relation to reinsurance counterparties, market exposures and
policyholder populations.
d) For the Waard Group:
(i) the covered business is substantially closed to new business;
(ii) reinsurance is used to significantly reduce insurance risks; and
(iii) there are no material guarantees or other asymmetrical items within the cash flows.
169
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED)
5 Analysis of shareholders’ equity
31 December 2015
CA
£000
S&P
£000
Movestic
£000
Other
Waard
Group
£000
group
activities
£000
Regulated entities
Capital required
Free surplus
53,394
27,693
38,108
28,839
13,481
26,162
9,211
40,428
Regulatory capital resource of regulated entities
81,087
66,947
39,643
49,639
Adjustments to shareholder net worth:
Deferred acquisition costs
Financial reinsurance liability
Software asset adjustment
Adjustment to provisions on insurance contracts
Deferred tax
Policyholder funds
Other asset/liability adjustments
Adjusted shareholder net worth
In-force value of covered business
–
–
–
–
1,507
–
415
83,009
88,845
–
–
–
3,055
–
(12,743 )
9
57,268
4,785
(52,696 )
(5,288 )
(4,699 )
–
–
–
6,569
(16,471 )
161,867
Embedded value of regulated entities
Less: amount financed by borrowings
171,854
(31,810 )
62,053
(20,712 )
145,396
–
–
–
–
–
–
–
2,367
52,006
9,268
61,274
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£000
114,194
123,122
237,316
(52,696 )
(5,288 )
(4,699 )
3,055
1,507
(12,743 )
9,360
175,812
264,765
440,577
(52,522 )
Embedded value of regulated entities attributable
to shareholders
Net equity of other Group companies
140,044
–
41,341
–
145,396
1,725
61,274
12,794
–
52,602
388,055
67,121
Total shareholders’ equity
140,044
41,341
147,121
74,068
52,602
455,176
31 December 2014
Regulated entities
Capital required
Free surplus
Regulatory capital resource of regulated entities
Adjustments to shareholder net worth:
Deferred acquisition costs
Financial reinsurance liability
Software asset adjustment
Adjustment to provisions on insurance contracts
Deferred tax
Policyholder funds
Other asset/liability adjustments
Adjusted shareholder net worth
In-force value of covered business
Embedded value of regulated entities
Less: amount financed by borrowings
Embedded value of regulated entities attributable to shareholders
Net equity of other Group companies
CA
£000
S&P
£000
Movestic
£000
60,759
61,441
44,225
18,211
13,911
20,989
122,200
62,436
34,900
–
–
–
–
2,240
–
(46 )
124,394
86,067
210,461
(38,960 )
171,501
–
–
–
–
3,667
–
(16,319 )
5
49,789
11,540
61,329
(25,367 )
35,962
–
(51,210 )
(5,179 )
(3,716 )
–
–
–
5,644
(19,561 )
146,064
126,503
–
126,503
1,936
Other
group
activities
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£000
118,895
100,641
219,536
(51,210 )
(5,179 )
(3,716 )
3,667
2,240
(16,319 )
5,603
154,622
243,671
398,293
(64,327 )
–
81,340
333,966
83,276
Total shareholders’ equity
171,501
35,962
128,439
81,340
417,242
170
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
5 Analysis of shareholders’ equity (continued)
EEV free surplus, as shown above, represents the balance of the shareholder net worth above the capital required. The movement in free surplus is analysed
as follows:
Year ended 31 December 2015
Free surplus at beginning of the year
Dividend paid to parent
Synergies and adjustments arising from Part VII transfer,
including adjustments to required capital
Amount arising on acquisition
Surplus arising in the year
Adjustments to required capital
Decrease in policyholder funds cover for capital requirement
CA
£000
61,441
(58,000 )
2,902
–
16,887
4,463
–
S&P
£000
Movestic
£000
18,211
(7,000 )
–
–
15,087
6,117
(3,576 )
20,989
–
–
–
4,742
431
–
Waard
Group
£000
Total
£000
–
–
100,641
(65,000 )
–
39,516
912
–
–
2,902
39,516
37,628
11,011
(3,576 )
Free surplus at end of the year
27,693
28,839
26,162
40,428
123,122
Year ended 31 December 2014
Free surplus at beginning of the year
Dividend paid to parent
Synergies and adjustments arising from Part VII transfer, including
adjustments to required capital
Surplus arising in the year
Adjustments to required capital
Increase in policyholder funds cover for capital requirement
CA
£000
33,783
(17,000 )
(2,902 )
43,796
3,764
–
S&P
£000
Movestic
£000
44,750
(31,000 )
17,969
–
–
3,727
(778 )
1,512
–
68
2,952
–
Total
£000
96,502
(48,000 )
(2,902 )
47,591
5,938
1,512
Free surplus at end of the year
61,441
18,211
20,989
100,641
The movement in the in-force value of covered business comprises:
Year ended 31 December 2015
Value at beginning of year
Amount arising on acquisition
Amount (charged)/credited to foreign exchange reserve
Amount credited/(charged) to operating profit
CA
£000
86,067
–
–
2,778
S&P
£000
Movestic
£000
11,540
–
–
(6,755 )
146,064
(4,615 )
20,418
Waard
Group
£000
–
8,799
218
251
Total
£000
243,671
8,799
(4,397 )
16,692
Value at end of year
88,845
4,785
161,867
9,268
264,765
Year ended 31 December 2014
Value at beginning of year
Amount charged to foreign exchange reserve
Amount (charged)/credited to operating profit
CA
£000
92,678
–
(6,611 )
S&P
£000
Movestic
£000
30,482
–
(18,942 )
139,001
(19,817 )
26,880
Total
£000
262,161
(19,817 )
1,327
Value at end of year
86,067
11,540
146,064
243,671
S&P
EEV shareholders equity for the S&P segment is presented net of the borrowings that were used to fund their respective acquisitions.
Movestic
The adjusted shareholder net worth of Movestic is that of the regulated entity, which also includes the net worth attributable to the non-covered business within
the regulated entity. Accordingly, for Movestic, the embedded value of regulated entities comprises the embedded value of covered business and the value of
the non-covered business of the regulated entity, the latter component being valued on an IFRS basis.
The Waard Group
The adjusted shareholder net worth of the Waard Group is that of the regulated entities, together with the net worth of the service company. Accordingly, for the
Waard Group, the embedded value comprises the embedded value of the regulated entities and the value of the uncovered business, the latter component being
valued on an IFRS basis.
171
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED)
6 Summarised analysis of profit/(loss)
Year ended 31 December 2015
S&P
£000
UK Total
£000
Movestic
£000
Other
Waard
Group
£000
Group
activities
£000
Covered business
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
CA
£000
361
3,267
6,943
(2,599 )
382
8,354
802
1,619
–
361
713
2,461
5,077
(410 )
7,841
2,848
(2,950 )
3,980
9,404
2,478
(28 )
16,195
3,650
(1,331 )
18,514
2,676
5,700
3,044
127
5,661
–
14,532
8,545
864
23,941
–
Profit of covered business before tax
Tax thereon
10,775
7,739
Profit of covered business after tax
Results of non-covered business and of
other group companies:
Profit recognised on business combination
Effect of modelling adjustments
(Loss)/profit before tax
Tax
21,190
23,941
–
–
–
–
–
–
(1,282 )
(33 )
–
(724 )
1,223
255
–
754
–
(231 )
523
–
523
–
–
389
–
–
–
–
–
–
–
–
–
–
–
–
21,313
5,903
(9,510 )
980
Profit after tax
21,190
22,626
912
18,686
63,414
Year ended 31 December 2014
Covered business
New business contribution
Return from in-force business
Expected return
Experience variances
Operating assumption changes
Return on shareholder net worth
Operating profit/(loss) of covered business
Variation from longer-term investment return
Effect of economic assumption changes
Profit/(loss) of covered business before tax
Tax thereon
Profit of covered business after tax
Results of non-covered business and of
other group companies:
Profit/(loss) before tax
Tax
CA
£000
S&P
£000
UK Total
£000
Movestic
£000
Other
Group
activities
£000
794
2,552
5,437
20,851
1,626
31,260
22,458
(4,651 )
(548 )
(4,803 )
(4,632 )
7,508
(2,475 )
(8,582 )
(3,121 )
49,067
(14,178 )
–
794
8,904
2,004
634
16,219
9,134
28,785
13,876
(7,772 )
34,889
(12,237 )
5,145
(93 )
(5,219 )
–
8,737
18,164
321
27,222
–
22,652
27,222
–
–
–
–
–
–
–
–
–
–
–
–
–
262
894
(7,671 )
888
(7,409 )
1,782
Profit/(loss) after tax
22,652
28,378
(6,783 )
44,247
The results of the non-covered business and of other group companies before tax and before exceptional item are presented as ‘other operational result’ in the
consolidated income statement.
172
Total
£000
6,061
6,300
10,754
8,394
(28 )
31,481
12,195
(698 )
42,978
2,676
45,654
21,313
5,903
(10,403 )
947
Total
£000
9,698
7,149
541
11,000
9,134
37,522
32,040
(7,451 )
62,111
(12,237 )
49,874
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
7 Sensitivities to alternative assumptions
The following tables show the sensitivity of the embedded value as reported at 31 December 2015, and of the new business contribution of Movestic,
to variations in the assumptions adopted in the calculation of the embedded value. Sensitivity analysis is not provided in respect of the new business
contribution of CA and the Waard Group for the year ended 31 December 2015 as the reported level of new business contribution is not considered to
be material (see note 3(a)).
Embedded value
UK business
New business
contribution
Swedish
business
Dutch
business
Swedish
business
Published value as at 31 December 2015
186.9
62.1
(15.0 )
234.0
145.4
61.3
CA
Pre-tax
£m
S&P
Pre-tax
£m
Tax
£m
UK
Post-tax
£m
Post-tax
£m
Post-tax
£m
Changes in embedded value/new business contribution
arising from:
Economic sensitivities
100 basis point increase in yield curve
100 basis point reduction in yield curve
10% decrease in equity and property values
Operating sensitivities
10% decrease in maintenance expenses
10% decrease in lapse rates
5% decrease in mortality/morbidity rates:
Assurances
Annuities
Reduction in the required capital to statutory minimum
(4.5 )
4.9
(7.4 )
3.3
2.0
2.6
(2.2 )
1.5
7.1
(8.6 )
(11.4 )
4.1
(1.2 )
0.4
(0.5 )
0.4
–
(1.4 )
2.6
(0.8 )
–
(0.2 )
(0.1 )
(0.5 )
2.6
(5.1 )
(16.2 )
6.6
0.8
2.8
(2.8 )
1.4
1.0
(1.0 )
(14.5 )
7.4
9.8
0.1
–
–
(3.4 )
1.8
–
0.9
–
1.3
–
0.2
£m
5.6
(0.2 )
0.2
(0.2 )
0.8
1.4
–
–
–
Embedded value
UK business
New business
contribution
Swedish
business
Swedish
business
CA
Pre-tax
£m
S&P
Pre-tax
£m
Tax
£m
UK
Post-tax
£m
Post-tax
£m
Published value as at 31 December 2014
233.3
61.3
(22.8 )
271.8
126.5
Changes in embedded value/new business contribution arising from:
Economic sensitivities
100 basis point increase in yield curve
100 basis point reduction in yield curve
10% decrease in equity and property values
Operating sensitivities
10% decrease in maintenance costs
10% decrease in lapse rates
5% decrease in mortality/morbidity rates:
Assurances
Annuities
Reduction in the required capital to statutory minimum
(4.2 )
5.8
(10.3 )
3.3
2.7
2.5
(2.1 )
1.7
9.7
(9.8 )
(12.6 )
4.8
(1.0 )
0.5
(0.3 )
0.4
(1.1 )
0.4
2.5
(1.0 )
–
(0.2 )
–
–
4.4
(3.6 )
(20.3 )
7.1
1.7
2.8
(2.4 )
2.2
1.0
(1.0 )
(13.2 )
7.0
9.0
0.1
n/a
–
The key assumption changes represented by each of these sensitivities are as follows:
£m
7.6
(0.2 )
0.2
(0.2 )
0.8
1.5
–
n/a
–
Economic sensitivities
(i) 100 basis point increase in the yield curve: The reference rate is increased by 1% and the rate of future inflation has also been increased by 1% so that real
yields remain constant;
(ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% and the rate of future inflation has also been reduced by 1% so that real
yields remain constant; and
(iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding
would reduce by 6% in value.
173
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES TO THE EEV SUPPLEMENTARY INFORMATION (CONTINUED)
7 Sensitivities to alternative assumptions (continued)
Operating sensitivities
(i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of £20 per policy pa reducing to £18 per policy pa;
(ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa;
(iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a base assumption of 95% of the parameters in a selected mortality/morbidity table
reducing to 90.25% of the parameters in the same table, assuming no changes are made to policyholder charges or any other management actions; and
(iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that defined in Note
3(b) to the minimum requirement prescribed by regulation.
In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example,
as stated, changes in interest rates will directly affect the reference rate.
8 Reconciliation of shareholders’ equity on the IFRS basis to shareholders’ equity on the EEV basis
31 December 2015
Shareholders’ equity on the IFRS basis
Reclassifications:
Debt finance
Other
Adjustments:
Deferred acquisition costs
Deferred income
Adjustment to provisions on investment contracts, net of
amounts deposited with reinsurers
Adjustments to provisions on insurance contracts,
net of reinsurers’ share
Acquired in-force value
Acquired value of customer relationships
Software assets
Adjustment to borrowings
Deferred tax
Shareholder net worth
Value of in-force business
CA
£000
S&P
£000
Movestic
£000
Waard
Group
£000
Other
Group
activities
£000
Total
£000
107,131
56,159
63,283
68,777
(188 )
295,162
(31,810 )
(268 )
(20,712 )
–
–
–
(32,232 )
–
–
–
(35,438 )
(757 )
(4,699 )
(7,175 )
2,272
–
–
–
–
–
–
(3,956 )
–
(21 )
–
–
52,522
268
–
–
–
–
–
–
–
–
–
–
–
(35,278 )
5,589
(9,011 )
5,201
(61,855 )
(757 )
(4,720 )
(7,175 )
3,255
–
–
–
5,191
(4,082 )
–
–
–
–
36,556
4,785
(14,746 )
161,867
64,800
9,268
52,602
–
190,411
264,765
(3,046 )
5,589
(9,011 )
10
(18,379 )
–
–
–
983
51,199
88,845
Shareholders’ equity on the EEV basis
140,044
41,341
147,121
74,068
52,602
455,176
Shareholder net worth comprises:
Adjusted shareholder net worth in regulated entities
Shareholders’ net equity in other Group companies
Debt finance
83,009
–
(31,810 )
57,268
–
(20,712 )
(16,471 )
1,725
–
52,006
12,794
–
–
52,602
–
175,812
67,121
(52,522 )
Total
51,199
36,556
(14,746 )
64,800
52,602
190,411
174
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
8 Reconciliation of shareholders’ equity on the IFRS basis to shareholders’ equity on the EEV basis (continued)
31 December 2014
Shareholders’ equity on the IFRS basis
Reclassifications:
Debt finance
Other
Adjustments:
Deferred acquisition costs
Deferred income
Adjustment to provisions on investment contracts,
net of amounts deposited with reinsurers
Adjustments to provisions on insurance contracts,
net of reinsurers’ share
Acquired in-force value
Acquired value of customer relationships
Software assets
Adjustment to borrowings
Deferred tax
Shareholder net worth
Value of in-force business
CA
£000
S&P
£000
Movestic
£000
Other
Group
activities
£000
Total
£000
150,181
53,059
58,840
16,753
278,833
(38,960 )
(260 )
(25,367 )
–
–
–
64,327
260
–
–
–
1,284
(4,554 )
–
–
–
–
(26,910 )
–
–
–
(40,205 )
(898 )
(3,715 )
(7,027 )
2,290
–
–
–
–
–
–
–
–
–
–
–
(30,426 )
6,427
(7,582 )
1,261
(66,754 )
(898 )
(3,715 )
(7,027 )
3,452
24,422
11,540
(17,625 )
146,064
81,340
–
173,571
243,671
(3,516 )
6,427
(7,582 )
(23 )
(21,995 )
–
–
–
1,162
85,434
86,067
Shareholders’ equity on the EEV basis
171,501
35,962
128,439
81,340
417,242
Shareholder net worth comprises:
Adjusted shareholder net worth in regulated entities
Shareholders’ net equity in other Group companies
Debt finance
124,394
–
(38,960 )
49,789
–
(25,367 )
(19,561 )
1,936
–
–
81,340
–
154,622
83,276
(64,327 )
Total
85,434
24,422
(17,625 )
81,340
173,571
9 Profit recognised on business combination
An EEV profit of £21,313,000 has arisen as a result of the purchase of 100% of the share capital of the Waard Group on 19 May 2015. The profit was
measured as the difference between the purchase consideration of £50,123,000 and the European embedded value of the Waard Group at the purchase date,
being £71,436,000, which was established in accordance with the methodology set out in note 3 of the EEV supplementary financial information.
10 Earnings per share
Year ended 31 December
Basic earnings per share
Based on profit for the year
Based on profit for the year before exceptional items
Diluted earnings per share
Based on profit for the year
Based on profit for the year before exceptional items
11 Foreign exchange translation reserve
2015
p
50.17
28.64
50.06
28.58
2014
p
38.24
38.24
38.20
38.20
A foreign exchange translation reserve arises on the translation of the financial statements of Movestic and the Waard Group, the functional currency of which
is the Swedish krona and the euro respectively, into pounds sterling, which is the presentational currency of the Group financial statements. For Movestic, items
in the consolidated income statement are translated at the average exchange rate of SEK 12.8946 = £1 ruling in the year ended 31 December 2015 (year ended
31 December 2014: SEK 11.2989 = £1), while all items in the balance sheet are stated at the closing rates ruling at the reported balance sheet date, being SEK
12.4949 = £1 at 31 December 2015 (SEK 12.0680 = £1 at 31 December 2014). For the Waard Group, items in the consolidated income statement are
translated at the average exchange rate of euro 1.3782 = £1 in the post acquisition period between 19 May and 31 December 2015. All items in the balance
sheet are stated at the closing rate at the reported balance sheet date, being euro 1.3605 = £1 at 31 December 2015. The differences arising on translation
using this methodology are recognised directly in shareholders’ equity within the foreign exchange translation reserve.
The reported embedded value is sensitive to movements in the SEK/euro: £ exchange rate. For Movestic, had the exchange rate as at 31 December 2015 been
10% weaker at SEK 13.7444 = £1, then the reported embedded value of £455.2m as at 31 December 2015 would have been reduced to £440.9m. Had the
euro exchange rate as at 31 December 2015 been 10% weaker at euro 1.4966 = £1, then the reported embedded value of £455.2m as at 31 December 2015
would have been reduced to £448.4m.
175
EEV BASIS SUPPLEMENTARY INFORMATION SECTION ECHESNARA | ANNUAL REPORT & ACCOUNTS 2015
IN THIS SECTION
178 Financial calendar
178 Key contacts
179 Notice of Annual General Meeting
183 Explanatory notes to the notice of
Annual General Meeting
186 Glossary
176
ADDITIONAL INFORMATION F
SECTION F
FINANCIAL CALENDAR
31 March 2016
Results for the year ended 31 December 2015 announced.
18 May 2016
Annual General Meeting.
7 April 2016
Ex dividend date.
8 April 2016
Dividend record date.
20 April 2016
Published Financial Statements issued to shareholders.
23 May 2016
Dividend payment date.
31 August 2016
Half year results for the 6 months ending
30 June 2016 announced.
KEY CONTACTS
Registered and Head Office
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
Tel: 01772 972050
Fax: 01772 482244
www.chesnara.co.uk
Legal Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
100 Barbirolli Square
Manchester
M2 3AB
Auditor
Deloitte LLP
Chartered Accountants & Statutory Auditor
Hill House
1 Little New Street
London
EC4A 3TR
United Kingdom
Registrars
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Stockbrokers
Panmure Gordon
One New Change
London
EC4M 9AF
Canaccord Genuity Limited
88 Wood Street
London
EC2V 7QR
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8th Floor
135 Bishopsgate
London
EC2M 3UR
Lloyds TSB Bank plc
3rd Floor
Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
145 Leadenhall Street
London
EC3V 4QT
Corporate Advisors
Canaccord Genuity Limited
88 Wood Street
London
EC2V 7QR
178
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 NOTICE OF ANNUAL GENERAL MEETING
This document is important and requires your immediate attention
If you are in any doubt as to the action you should
take, you should immediately consult your
stockbroker, bank manager, solicitor, accountant or
other independent professional adviser authorised
under the Financial Services and Markets Act 2000
if you are resident in the United Kingdom or, if you
reside elsewhere, another appropriately authorised
financial adviser.
If you have sold or otherwise transferred all of your
shares in Chesnara plc, please pass this document
(together with the accompanying proxy form) as
soon as possible to the purchaser or transferee, or
to the person who arranged the sale or transfer so
they can pass these documents to the person who
now holds the shares.
Company No. 4947166
(c) to incur political expenditure up to an aggregate
Chesnara plc
Notice is given that the 2016 Annual General Meeting of
Chesnara plc will be held at the offices of Panmure Gordon
(UK) Limited, One New Change, London EC4M 9AF on
18 May 2016 at 11a.m. for the business set out below.
Resolutions 1 to 14 inclusive will be proposed as ordinary
resolutions and resolutions 15 to 18 inclusive will be
proposed as special resolutions.
total amount of £100,000, with the individual amount
authorised for each of heads (a) to (c) above being limited
to £100,000. Any such amounts may comprise sums
paid or incurred in one or more currencies. Any sum
paid or incurred in a currency other than sterling shall be
converted into sterling at such rate as the board may
decide is appropriate. Terms used in this resolution have,
where applicable, the meanings that they have in Part 14
of the Companies Act 2006.
1. To receive and adopt the audited accounts for the financial
year ended 31 December 2015, together with the reports of
the directors and auditor thereon.
2. To declare a final dividend of 12.33 pence per ordinary share
for the financial year ended 31 December 2015.
3. To approve the directors’ remuneration report (other than the
part of it which contains the directors’ remuneration policy
statement) for the year ended 31 December 2015.
4. To re-elect David Rimmington as a director.
5. To re-elect Frank Hughes as a director.
6. To re-elect Peter Mason as a director.
7. To re-elect Veronica Oak as a director.
8. To re-elect David Brand as a director.
9. To re-elect Mike Evans as a director.
10. To re-elect Peter Wright as a director.
14. That the directors be and they are hereby generally and
unconditionally authorised in accordance with section 551 of
the Companies Act 2006 to exercise all powers of the
Company to allot shares in the Company and to grant rights
to subscribe for or to convert any security into such shares
(’Allotment Rights’), but so that:
(a) the maximum amount of shares that may be allotted or
made the subject of Allotment Rights under this
authority are shares with an aggregate nominal value of
£4,213,496, of which:
(i) half may be allotted or made the subject of Allotment
Rights in any circumstances; and
(ii) the other half may be allotted or made the subject of
Allotment Rights pursuant to any rights issue
(as referred to in the Financial Conduct Authority’s
listing rules) or pursuant to any arrangements made
for the placing or underwriting or other allocation
of any shares or other securities included in, but not
taken up under, such rights issue;
(b) this authority shall expire 18 months after the passing of
this resolution or, if earlier, on the date of the Company’s
next Annual General Meeting;
11. To reappoint Deloitte LLP as auditor of the Company to hold
office until the conclusion of the next general meeting of the
Company at which accounts are laid before shareholders.
(c) the Company may make any offer or agreement before such
expiry which would or might require shares to be allotted
or Allotment Rights to be granted after such expiry; and
(d) all authorities vested in the directors on the date of the
notice of this meeting to allot shares or to grant Allotment
Rights that remain unexercised at the commencement of
this meeting are revoked.
12. To authorise the directors to fix the auditor’s remuneration.
13. That, from the passing of this resolution until the earlier of
14 November 2017 and the conclusion of the Company’s next
Annual General Meeting, the Company and all companies
which are its subsidiaries at any time during such period
are authorised:
(a) to make donations to political parties or independent
election candidates;
(b) to make donations to political organisations other than
political parties; and
179
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTICE OF ANNUAL GENERAL MEETING (CONTINUED)
15. That, subject to the passing of the resolution numbered 14 in
the notice convening this meeting, the directors be and they
are hereby empowered, pursuant to sections 570 and 573 of
the Companies Act 2006, to allot equity securities (as defined
in section 560 of that Act) pursuant to the authority conferred
on them by the foregoing resolution numbered 14 in the
notice of this meeting or by way of a sale of treasury shares
as if section 561 of that Act did not apply to such allotment or
sale, provided that this power shall be limited to:
(a) the allotment of equity securities or sale of treasury shares
in connection with any rights issue or open offer (each as
referred to in the Financial Conduct Authority’s listing rules)
or any other pre-emptive offer that is open for acceptance
for a period determined by the directors to the holders
of ordinary shares on the register on any fixed record date
in proportion to their holdings of ordinary shares (and,
if applicable, to the holders of any other class of equity
security in accordance with the rights attached to such
class), subject, in each case, to such exclusions or other
arrangements as the directors may deem necessary
or appropriate in relation to fractions of such securities, the
use of more than one currency for making payments
in respect of such offer, any such shares or other securities
being represented by depositary receipts, treasury
shares, any legal or practical problems in relation to any
territory or the requirements of any regulatory body or any
stock exchange; and
(b) the allotment of equity securities or sale of treasury shares
for cash (otherwise than as mentioned in sub-paragraph
(a) above), provided that the maximum aggregate nominal
value of equity securities allotted and treasury shares
sold does not exceed £316,012 and shall expire 18 months
after the passing of this resolution or, if earlier, on the
date of the Company’s next Annual General Meeting save
that, before the expiry of this power, the Company may
make any offer or agreement which would or might require
equity securities to be allotted and/or treasury shares to
be sold after such expiry.
16.That the Company be and is hereby generally and
unconditionally authorised for the purposes of section 701 of
the Companies Act 2006 to make one or more market
purchases (as defined in section 693 of that Act) of ordinary
shares of 5p each in the capital of the Company, provided that:
(a) the maximum aggregate number of ordinary shares hereby
authorised to be purchased is 12,640,489;
(b) the minimum price (exclusive of expenses) which may be
paid for such ordinary shares is 5p per share;
(c) the maximum price (exclusive of expenses) which may be
paid for such ordinary shares is the maximum price
permitted under the Financial Conduct Authority’s listing
rules or, in the case of a tender offer (as referred to in
those rules), 5% above the average of the middle market
quotations for those shares (as derived from the Daily
Official List of London Stock Exchange plc) for the five
business days immediately preceding the date on which
the terms of the tender offer are announced;
(d) the authority hereby conferred shall expire 18 months
after the passing of this resolution or, if earlier, on the date
of the Company’s next Annual General Meeting; and
(e) the Company may make a contract or contracts to purchase
ordinary shares under the authority hereby conferred
prior to the expiry of such authority which will or may be
completed wholly or partly after the expiry of such
authority, and may make a purchase of ordinary shares in
pursuance of any such contract or contracts.
17. That the Articles of Association be and hereby amended to
adopt certain amendments (the ‘New Articles’) principally in
order to reflect developments in market practice and to
provide clarification and additional flexibility on certain
matters. The existing Articles of Association were adopted
by the Company on 13 May 2010. The principal changes
being proposed are summarised in the Explanatory Notes
accompanying this notice. A copy of the New Articles
will be available for inspection at the Company’s registered
office from the date of this Notice until the 2016 Annual
General Meeting. They will be available for inspection
during normal business hours, Monday to Friday (public
holidays excepted).
18. That a general meeting of the Company (other than an
Annual General Meeting) may be called on not less than
14 clear days’ notice.
By order of the Board
Zoe Kubiak
Company Secretary
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
30 March 2016
180
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 receipt will be taken to be when (as determined by the
timestamp applied by the CREST Applications Host) the
issuer’s agent is first able to retrieve it by enquiry through
the CREST system in the prescribed manner. Euroclear
does not make available special procedures in the CREST
system for transmitting any particular message. Normal
system timings and limitations apply in relation to the input
of CREST proxy appointment instructions. It is the
responsibility of the CREST member concerned to take
(or, if the CREST member is a CREST personal member or
a CREST sponsored member or has appointed any voting
service provider(s), to procure that his CREST sponsor or
voting service provider(s) take(s)) such action as is
necessary to ensure that a message is transmitted by means
of the CREST system by any particular time. CREST
members and, where applicable, their CREST sponsors or
voting service providers should take into account the
provisions of the CREST Manual concerning timings as well
as its section on ‘Practical limitations of the system‘.
In certain circumstances, the Company may, in accordance
with the Uncertificated Securities Regulations 2001 or the
CREST Manual, treat a CREST proxy appointment
instruction as invalid.
4. Copies of Directors’ service contracts and letters of appointment
are available for inspection at the registered office of the
Company during normal business hours each business day. They
will also be available for inspection at the Annual General
Meeting for at least 15 minutes prior to and during the Annual
General Meeting.
5. The time by which a person must be entered on the register
of members in order to have the right to attend and vote
at the Annual General Meeting (and for the purpose of the
determination by the Company of the votes they may cast)
is 6.00 p.m. on Monday 16 May 2016. Changes to entries on
the register of members after that time will be disregarded
in determining the right of any person to attend or vote at
the Annual General Meeting.
NOTES
1. Any member who is entitled to attend and vote at this Annual
General Meeting is entitled to appoint another person, or
two or more persons in respect of different shares held by him,
as his proxy to exercise all or any of his rights to attend and
to speak and to vote at the Annual General Meeting.
2. A member wishing to attend and vote at the Annual General
Meeting in person should arrive prior to the time fixed
for its commencement. A member that is a corporation can
only attend and vote at the Annual General Meeting in
person through one or more representatives appointed in
accordance with section 323 of the Companies Act 2006.
Any such representative should bring to the Annual General
Meeting written evidence of his appointment, such as a
certified copy of a board resolution of, or a letter from, the
corporation concerned confirming the appointment.
Any member wishing to vote at the Annual General Meeting
without attending in person or (in the case of a corporation)
through its duly appointed representative must appoint
a proxy to do so. A proxy need not be a member of the
Company. A form of proxy for this Annual General Meeting
is enclosed and, in order to be valid, must be completed in
accordance with the instructions that accompany it and
then be delivered by hand only (together with any power of
attorney or other authority under which it is signed, or
a certified copy of such item), to the Company’s Registrars,
Capita Asset Services at, The Registry, 34 Beckenham
Road, Beckenham, Kent, BR3 4TU or in accordance with the
reply paid details , by 11 a.m. on Monday 16 May 2016.
Alternatively, members may appoint a proxy online by
following the instructions for the electronic appointment of
a proxy at www.capitashareportal.com by entering the
company name ’Chesnara plc‘ and following the on screen
instructions. To be a valid proxy appointment, the
member’s electronic message confirming the details of the
appointment completed in accordance with those
instructions must be transmitted so as to be received by the
same time. Members who hold their shares in uncertificated
form may also use the ‘CREST’ voting service to appoint
a proxy electronically, as explained below. The appointment
of a proxy will not preclude a member from attending and
voting at the Annual General Meeting.
3. CREST members who wish to appoint one or more proxies
through the CREST system may do so by using the
procedures described in ‘the CREST voting service’ section
of the CREST Manual. CREST personal members or other
CREST sponsored members, and those CREST members
who have appointed one or more voting service providers,
should refer to their CREST sponsor or voting service
provider(s), who will be able to take the appropriate action
on their behalf. In order for a proxy appointment or a
proxy instruction made using the CREST voting service to
be valid, the appropriate CREST message (a ‘CREST proxy
appointment instruction’) must be properly authenticated
in accordance with the specifications of CREST’s operator,
Euroclear UK & Ireland Limited (‘Euroclear‘), and must
contain all the relevant information required by the CREST
Manual. To be valid, the message (regardless of whether it
constitutes the appointment of a proxy or is an amendment
to the instruction given to a previously appointed proxy)
must be transmitted so as to be received by Capita Asset
Services (ID RA10), by 11 a.m. on Monday 16 May 2016,
which is acting as the Company’s ‘issuer’s agent‘. After this
time, any change of instruction to a proxy appointed
through the CREST system should be communicated to the
appointee through other means. The time of the message’s
181
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 NOTES (CONTINUED)
6. The right to appoint proxies does not apply to persons
nominated to receive information rights under section 146
of the Companies Act 2006, as such rights can only be
exercised by the member concerned. Any person nominated
to enjoy information rights under section 146 of the
Companies Act 2006 who has been sent a copy of this notice
of Annual General Meeting is hereby informed, in
accordance with section 149(2) of the Companies Act 2006,
that they may have a right under an agreement with the
registered member by whom they were nominated to be
appointed, or to have someone else appointed, as a proxy
for this Annual General Meeting. If they have no such right,
or do not wish to exercise it, they may have a right under
such an agreement to give instructions to the member as
to the exercise of voting rights. Nominated persons should
contact the registered member by whom they were
nominated in respect of these arrangements.
7. As at 24 March 2016 (being the last practicable date prior to
the publication of this document), the Company’s issued
share capital consisted of 126,552,427 ordinary shares,
carrying one vote each. The total voting rights in the Company
as at 24 March 2016 (being the last practicable date prior to
the publication of this document) were 126,404,892.
8. Information regarding this Annual General Meeting, including
information required by section 311A of the Companies Act
2006, is available at www.chesnara.co.uk Any electronic
address provided either in this notice or any related documents
(including the proxy appointment form) may not be used
to communicate with the Company for any purposes other
than those expressly stated.
9. In accordance with section 319A of the Companies Act 2006,
any member attending the Annual General Meeting has
the right to ask questions. The Company must cause to be
answered any such question relating to the business being
dealt with at the Annual General Meeting, but no such
answer need be given if (a) to do so would interfere unduly
with the preparations for the Annual General Meeting or involve
the disclosure of confidential information, (b) the answer has
already been given on a website in the form of an answer to
a question or (c) it is undesirable in the interests of the
Company or the good order of the Annual General Meeting
that the question be answered.
10. Under section 527 of the Companies Act 2006, members
meeting the threshold requirements set out in that section
have the right to require the Company to publish on a
website a statement in accordance with section 528 of the
Companies Act 2006 setting out any matter relating to (i) the
audit of the Company’s accounts (including the auditor’s
report and the conduct of the audit) that are to be laid before
the Annual General Meeting or (ii) any circumstances
connected with an auditor of the Company ceasing to hold
office since the previous meeting at which annual accounts
and reports were laid in accordance with section 437 of the
Companies Act 2006. The Company may not require the
members requesting any such website publication to pay its
expenses in complying with sections 527 or 528 of the
Companies Act 2006. Where the Company is required to
place a statement on a website under section 527 of the
Companies Act 2006, it must forward the statement to the
Company’s auditor not later than the time when it makes
the statement available on the website. The business which
may be dealt with at the Annual General Meeting includes any
statement that the Company has been required under section
527 of the Companies Act 2006 to publish on a website.
The notes on the following pages give an explanation of the
proposed resolutions:
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ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 EXPLANATORY NOTES TO THE NOTICE OF
ANNUAL GENERAL MEETING
Brief biographical details of each of them can be found on
pages 44 to 45 of the 2015 Report And Accounts.
In accordance with the Code, the Board has reviewed the
independence of its non-executive Directors and has determined
that they remain fully independent of management. The Code
states that whilst the Chairman should, on appointment, meet
the Code’s independence criteria, thereafter the tests of
independence are not appropriate in relation to that post. Peter
Mason did meet the Code’s independence criteria upon his
election as Chairman.
Resolutions 11 and 12:
Re-appointment and remuneration of auditors
The Company is required to appoint an auditor, at each general
meeting before which accounts are laid, to hold office until
the end of the next such meeting. Deloitte LLP has indicated
that it is willing to continue to act as the Company’s auditor.
The Audit & Risk Committee has reviewed Deloitte LLP’s
effectiveness and recommends their reappointment.
The resolutions authorise the Company to reappoint and,
following formal practice, to authorise the Audit & Risk
Committee to determine their remuneration.
Resolution 13:
Political donations
It has always been the Company’s policy that it does not
make political donations. This remains the Company’s policy.
Part 14 of the Companies Act 2006 imposes restrictions on
companies making political donations to any political party
or other political organisation or to any independent election
candidate unless they have been authorised to make
donations at a general meeting of the Company. Whilst the
Company has no intention of making such political donations,
that Act includes broad and ambiguous definitions of the
terms ‘political donation‘ and ‘political expenditure‘ which
may apply to some normal business activities which would
not generally be considered to be political in nature.
The directors therefore consider that, as a purely precautionary
measure, it would be prudent to obtain the approval of the
shareholders to make donations to political parties, political
organisations and independent election candidates and
to incur political expenditure up to the specified limit. The
directors intend to seek renewal of this approval at future
Annual General Meetings, but wish to emphasise that the
proposed resolution is a precautionary measure for the
above reason and that they have no intention of making any
political donations or entering into party political activities.
Resolution 1:
Report and accounts
The Companies Act 2006 requires the directors of a public
company to lay its annual report and accounts before the
company in general meeting, giving shareholders the
opportunity to ask questions on the contents. The annual
report and accounts comprise the audited financial
statements, the auditor’s report, the directors’ report, the
directors’ remuneration report, and the directors’ strategic
report. In accordance with the UK Corporate Governance
Code 2014 (the ‘Code‘), the Company proposes, as
an ordinary resolution, a resolution on its annual report and
accounts for the year ended 31 December 2015.
Resolution 2:
Final dividend
The payment of the final dividend requires the approval of
shareholders in general meeting. If the 2016 Annual General
Meeting approves resolution 2, the final dividend of 12.33
pence per share will be paid on 23 May 2016 to ordinary
shareholders who are on the register of members at the close
of business on 8 April 2016 in respect of each ordinary share.
Resolution 3:
Approval of the directors’ remuneration report
In accordance with the Companies Act 2006, the Company
proposes an ordinary resolution to approve the directors’
remuneration report for the financial year ended 31 December
2015. The directors’ remuneration report can be found on
pages 60 to 67 of the 2015 Report And Accounts and, for
the purposes of this resolution, does not include the parts of
the directors’ remuneration report containing the Directors’
Remuneration Policy Report set out on pages 54 to 59.
The vote on this resolution is advisory only and the directors’
entitlement to remuneration is not conditional on it being passed.
Resolutions 4 - 10 inclusive:
Election and Re-election of directors
The Company’s Articles of Association require one-third of
directors to retire by rotation at each AGM. Any director who
has not retired by rotation must retire at their third AGM after
his or her appointment or re-appointment. In accordance with
its view of best practice, the Board of Directors has decided
that, in addition, all of the Non-executive Directors will retire
at every Annual General Meeting. As a result, Peter Mason,
Veronica Oak, David Brand, Mike Evans and Peter Wright will
retire at the 2016 Annual General Meeting. Frank Hughes,
David Rimmington, Peter Mason, Veronica Oak, David Brand,
Mike Evans and Peter Wright are all put forward by the
Board of Directors for re-election at the 2016 Annual General
Meeting. Biographical details of each director can be found
on page 44 & 45 of this document. The Chairman confirms
that each of the directors proposed for re-election
continues to make an effective and valuable contribution and
demonstrates commitment to their responsibilities. This
is supported by the annual performance evaluation that was
undertaken recently. The Board unanimously recommend
that each of these individuals be re-elected as a director of
the Company.
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ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 EXPLANATORY NOTES TO THE NOTICE OF
ANNUAL GENERAL MEETING (CONTINUED)
Resolution 14
Resolution 15
Power to allot shares
The Directors of the Company (the ‘Directors‘) are currently
authorised to allot shares and to grant rights to subscribe
for or to convert any security into shares of the Company,
but their authorisation ends on the date of this year’s
Annual General Meeting. This resolution seeks to renew the
Directors’ authority to allot shares.
The Association of British Insurers (‘ABI‘) has published
guidance to the effect that ABI members will regard as
routine a request for authorisation to allot new shares in an
amount of up to one third of the existing issued share capital
and additionally that they will regard as routine requests to
authorise the allotment of a further one third, provided that
such additional authority is applied to fully pre-emptive rights
issues only and the authorisation is valid for one year only.
This authority was conferred on the Directors at last year’s
Annual General Meeting and the Directors recommend that
the Company should have this additional headroom this year.
This authority is limited to a maximum nominal amount of
£4,213,496 (representing 84,269,928 ordinary shares), which
represents approximately two thirds in aggregate of the total
ordinary share capital in issue (excluding treasury shares)
as at 24 March 2016 (being the latest practicable date prior to
the publication of this document). Of this amount, 42,134,964
ordinary shares (representing approximately one third in
aggregate of the total ordinary share capital in issue, excluding
treasury shares) can only be allotted pursuant to a rights issue.
As at 24 March 2016 (being the latest practicable date prior to
the publication of this document), the Company held 147,535
treasury shares, being approximately 0.12% of the total ordinary
share capital in issue (calculated exclusive of treasury shares).
The renewed authority will expire 18 months after the passing
of this resolution or, if earlier, on the date of the next Annual
General Meeting.
The Directors have no present intention of exercising this
authority. The purpose of giving the Directors this authority
is to maintain the Company’s flexibility to take advantage of
any appropriate opportunities that may arise.
Disapplication of pre-emption rights
This resolution, which will be proposed as a special resolution,
seeks to renew the authority conferred on the Directors at
last year’s Annual General Meeting to issue equity securities
or sell treasury shares for cash without first offering them
to existing shareholders in proportion to their existing
shareholdings. Other than in connection with a rights or
other similar issue or scrip dividend (where difficulties
arise in offering shares to certain overseas shareholders
and in relation to fractional entitlements), the authority
contained in this resolution will be limited to an aggregate
nominal value of £316,012 (representing 6,320,245 ordinary
shares), which represents approximately 5% of the
Company’s issued equity share capital (excluding treasury
shares) as at 24 March 2016 (being the latest practicable
date prior to the publication of this document). The
renewed authority will expire 18 months after the passing
of this resolution or, if earlier, on the date of the Annual
General Meeting. This is a standard resolution for most UK
listed companies each year.
In accordance with the Statement of Principles on dis-applying
pre-emption rights issued in March 2015 by the Pre-Emption
Group (which is supported by the Association of British
Insurers, the National Association of Pension Funds Limited
The Investment Association), the board confirms its
intention that no more than 7.5% of the issued share capital
will be issued or sold for cash on a non pre-emptive basis
during any rolling three year period. The Directors have no
present intention of exercising this authority.
Resolution 16:
Authority to purchase own shares
This resolution, which will be proposed as a special resolution,
is to renew the authority granted to the Directors at last
year’s Annual General Meeting, which expires on the date of
this year’s Annual General Meeting, and to give the Company
authority to buy back its own ordinary shares in the market as
permitted by the Companies Act 2006. The authority limits
the number of shares that can be purchased to a maximum of
12,640,489 (representing 10% of the issued ordinary share
capital of the Company (excluding treasury shares) as at
24 March 2016 (being the latest practicable date prior to the
publication of this document)) and sets the minimum
and maximum prices. This authority will expire no later than
18 months after the date of the Annual General Meeting.
The Directors believe that the Company should continue to have
the authority to purchase its own shares. The authority will
be exercised only if the Directors believe that to do so would
result in an increase in earnings per share and would promote
the success of the Company for the benefit of its shareholders
generally. To the extent that any shares so purchased are held
in treasury (see below), earnings per share will be enhanced
until such time, if any, as such shares are resold or transferred
out of treasury.
Any purchases of ordinary shares would be by means of market
purchases through the London Stock Exchange.
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ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 Sections 724 – 732 inclusive of the Companies Act 2006
provide that shares held in treasury can be cancelled, sold for
cash or, in appropriate circumstances, used to meet
obligations under employee share schemes. Any shares held
in treasury would not be eligible to vote nor would any
dividend be paid on any such shares. If any ordinary shares
purchased pursuant to this authority are not held by the
Company as treasury shares, then such shares would be
immediately cancelled, in which event the number of ordinary
shares in issue would be reduced.
The Directors believe that it continues to be desirable for the
Company to have this choice. Holding the repurchased shares
as treasury shares gives the Company the ability to re-issue
them quickly and cost effectively and provides the Company
with additional flexibility in the management of its capital
base. No dividends will be paid on, and no voting rights will
be exercised in respect of, treasury shares. In 2014, 6,496
shares were transferred out of treasury to meet share options.
Resolution 17:
Amendment to the Articles of Association
At the 2016 Annual General Meeting, a special resolution will
be proposed to amend the Articles of Association of the
Company by the adoption of the amendment to Article 87.
This proposed amendment will allow for an increase in
the cap on remuneration of the Directors, who do not hold
an executive office, from £350,000 to £1,500,000. This
will provide the board of Directors (the ‘Board‘) scope to be
able to align, where necessary, the Director’s remuneration
commensurate with those in the market or as advised by
independent remuneration advisors. The Board believes
it to be in the best commercial interest of the Group.
Resolution 18:
Notice of general meetings
The Companies Act 2006 requires the notice period for general
meetings of the Company to be at least 21 days, but, as
a result of a resolution which was passed by the Company’s
shareholders at last year’s Annual General Meeting, the
Company is currently able to call general meetings (other than
an Annual General Meeting) on not less than 14 clear days’
notice. In order to preserve this ability, shareholders must
approve the calling of meetings on not less than 14 clear days’
notice. Resolution 18 seeks such approval. The approval will
be effective until the Company’s next Annual General Meeting,
when it is intended that a similar resolution will be proposed.
The Company will also need to meet the requirements for
electronic voting under the Companies (Shareholders’ Rights)
Regulations 2009 before it can call a general meeting on less
than 21 days’ notice.
The shorter notice period would not be used as a matter of
routine for general meetings, but only where the flexibility
is merited by the business of the meeting and is thought to be
to the advantage of shareholders as a whole.
The Directors recommend all shareholders to vote in favour of
all of the above resolutions, as the Directors intend to do in
respect of their own shares, and consider that they are in the
best interests of the Company and its shareholders as a whole.
185
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 GLOSSARY
ABI
AGM
ALM
APE
CA
CALH
CR
CRO
CRR
Directors
or Board
DNB
DPF
Dutch
Business
EEV
FCA
FI
ABI Association of British Insurers –
Represents the collective interests of the UK’s
insurance industry.
Annual General Meeting.
Asset Liability Management – management
of risks that arise due to mismatches between
assets and liabilities.
Annual Premium Equivalent – an industry wide
measure that is used for measuring the annual
equivalent of regular and single premium policies.
Countrywide Assured plc.
Countrywide Assured Life Holdings Limited and
its subsidiary companies.
Capital Resources – in accordance with the
UK’s regulatory regime for insurers it is the sum
of the individual capital resources for each
of the regulated related undertakings less the
book-value of investments by the Company in
those capital resources.
Chief Risk Officer.
Capital Resource Requirement – in accordance
with the UK’s regulatory regime for insurers it is
the sum of individual capital resource
requirements for the insurer and each of its
regulated undertakings.
The Directors of the Company as at the date
of this document whose names are set out on
pages 44 and 45 of this document.
De Nederlandsche Bank being the Dutch
national regulator.
Discretionary Participation Feature – A
contractual right under an insurance contract to
receive, as a supplement to guaranteed benefits,
additional benefits whose amount or timing
is contractually at the discretion of the issuer.
The Waard Group, consisting of Waard Leven
N.V., Hollands Welvaren Leven N.V., Waard
Schade N.V. and Tadas Verzekeringen B.V.
European Embedded Value.
Financial Conduct Authority.
Finansinspektionen, being the Swedish Financial
Supervisory Authority.
Form of Proxy
The form of proxy relating to the General Meeting
being sent to shareholders with this document.
FRC
FSMA
GCR
GCRR
Gross cash
generation
Financial Reporting Council, UK independant
regulator responsible for corporate governance
and reporting.
The Financial Services and Markets Act 2000 of
England and Wales, as amended.
Group Capital Resources – in accordance with
the UK’s regulatory regime for insurers it is the
sum of the individual capital resources for
each of the regulated related undertakings less
the book-value of investments by the Group in
those capital resources.
Group Capital Resource Requirement – in
accordance with the UK’s regulatory regime for
insurers it is the sum of individual capital
resource requirements for the insurer and each
of its regulated undertakings.
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.
Group
The Company and its existing subsidiary
undertakings.
Guardian
Guardian Assurance plc.
HCL
IFA
IFRS
IGD
HCL Insurance BPO Services Limited.
Independent Financial Adviser.
International Financial Reporting Standards.
Insurance Groups Directive – The European
directive setting out the current capital adequacy
regime for insurance groups.
KPI
Key performance indicator.
London Stock
Exchange
LTICR
LTI
MCEV
Modernac
London Stock Exchange plc.
Long-Term Insurance Capital Requirement
– Capital required to be held for regulatory
purposes in respect of investment, expense
and insurance risks.
Long-Term Incentive Scheme – A reward
system designed to incentivise employees’
long-term performance.
Market Consistent Embedded Value.
Modernac SA, an associated company which is
49% owned by Movestic.
Movestic
Movestic Livförsäkring AB.
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.
Official List
The Official List of the Financial Conduct Authority.
Ordinary
Shares
ORSA
PL
PRA
QRT
RCR
Ordinary shares of five pence each in the capital
of the Company.
Own Risk and Solvency Assessment.
Protection Life Company Limited.
Prudential Regulation Authority.
Quantitative Reporting Template.
Risk Capital Requirement – additional amounts
of capital required to be held for regulatory
purposes as a result of two stress tests.
Resolution
The resolution set out in the notice of General
Meeting set out in this document.
RMF
SCR
Risk Management Framework.
Solvency Capital Requirement, being the
terminology used for Solvency requirements
under the Solvency II regime.
Shareholder(s) Holder(s) of Ordinary Shares.
Solvency II
STI
A fundamental review of the capital adequacy
regime for the European insurance industry.
Solvency II establishes a set of EU-wide
capital requirements and risk management
standards that will replace the current Solvency I
requirements.
Short-Term Incentive Scheme – A reward
system designed to incentivise employees’
short-term performance.
Swedish
Business
Movestic and its subsidiaries and associated
companies.
S&P
TCF
TSR
Save & Prosper Insurance Limited and Save &
Prosper Pensions Limited.
Treating Customers Fairly – a central PRA
principle that aims to ensure an efficient and
effective market and thereby help policyholders
achieve a fair deal.
Total Shareholder Return, measured with
reference to both dividends and capital growth.
UK or United
Kingdom
The United Kingdom of Great Britain and
Northern Ireland.
UK Business
CA, S&P, CALH and PL.
VIF
Value of In-force business.
186
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015
NOTES
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ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 NOTES
188
ADDITIONAL INFORMATION SECTION FCHESNARA | ANNUAL REPORT & ACCOUNTS 2015 A
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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
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