ANNUAL REPORT
& ACCOUNTS
2017
WELCOME TO THE
CHESNARA
ANNUAL
REPORT for year ended
31 December 2017
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.
CONTENTS
SECTION A • OVERVIEW
04 An introduction to Chesnara
06 Delivering our strategy
08 2017 highlights
10 Measuring our performance
12 Chairman’s Statement
SECTION B • STRATEGIC REPORT
18 Overview of strategy, culture & values
and business model
20 Our strategy
22 Culture & values
24 Business review
31 Capital management
34 Financial review
40 Financial management
42 Risk management
46 Corporate and social responsibility
SECTION C • CORPORATE GOVERNANCE
50 Board profile and board of directors
52 Governance overview from the Chairman
53 Corporate Governance Report
58 Nomination & Governance
Committee Report
60 Remuneration Committee Chairman’s
Annual Statement
62 Directors’ Remuneration Report
80 Audit & Risk Committee Report
86 Directors’ Report
89 Directors’ Responsibilities Statement
SECTION D • IFRS FINANCIAL STATEMENTS
92
Independent Auditor’s Report to the
members of Chesnara plc
98 Consolidated Statement of
Comprehensive Income
99 Consolidated Balance Sheet
100 Company Balance Sheet
101 Consolidated Statement of Cash Flows
102 Company Statement of Cash Flows
103 Consolidated Statement of Changes
in Equity
103 Company Statement of Changes in Equity
104 Notes to the Consolidated
Financial Statements
SECTION E • ADDITIONAL INFORMATION
176 Financial calendar
176 Key contacts
177 Notice of Annual General Meeting
179 Explanatory notes to the notice of
Annual General Meeting
184 Reconciliation of metrics
185 Glossary
186 Notes on terminology
Lancashire, England, United Kingdom
SECTION A:
OVERVIEW
SECTION A • OVERVIEW
04 An introduction to Chesnara
06 Delivering our strategy
08 2017 highlights
10 Measuring our performance
12 Chairman’s Statement
Amsterdam, Netherlands
03
OVERVIEW AN INTRODUCTION TO CHESNARA
Chesnara plc is a life assurance and pensions
The group comprises both open-book and
consolidator. It has operations in the UK,
closed-book operations. We write new business
Sweden and the Netherlands.
where we are confident that conditions
will ensure the sales are value adding. The new
Our primary focus is the efficient management
business operations will always be based on
of life assurance and pension policies to
realistic market share expectations and hence
give good and fair outcomes to our customers,
the writing of new business will not detract
generating profits to provide attractive
from our core objective of managing in-force
dividends and value growth to our investors.
books to provide good returns to policyholders
Periodically we seek to create further value
and investors.
and sustain our dividend policy by acquiring
new companies or books of business. Our
Chesnara’s long established culture & values
acquisition strategy primarily focuses on the
underpin the delivery of our core strategic
territories in which we operate, though we
objectives. Risk and solvency management are
will consider opportunities in other European
at the heart of our robust governance framework
countries where there is sufficient value and
and the group is well capitalised. Throughout
strategic and cultural fit.
its history, Chesnara has aimed to deliver
fair outcomes for policyholders whilst
providing consistent returns for shareholders.
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 both a closed-book
group and an open life and pensions business in
the Netherlands. See page 6 for further detail on
our history and businesses.
MAXIMISE
VALUE FROM EXISTING
BUSINESS
RISK BASED
MANAGEMENT
ACQUIRE LIFE
AND PENSION
BUSINESSES
ENHANCE
VALUE THROUGH
PROFITABLE NEW
BUSINESS
OVER
1.1m
POLICIES
MANAGE
£7.8bn
FUNDS
UK
SWEDEN
NETHERLANDS
04
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
OVERVIEW HOW WE OPERATE
– Chesnara devolves management to its divisions which
operate within a centrally defined governance and risk
management framework.
– A central UK-based team has significant experience and a
proven track record in governing, acquiring and successfully
integrating life and pension businesses.
– In the UK, we adopt an outsourced operating model to the
fullest extent possible, whereas our overseas divisions use
outsourced services on a more limited basis.
– Acquisitions are assessed against stringent financial criteria
adopting a robust risk-based due diligence process.
– We maintain strong solvency levels.
WE AIM TO PROVIDE VALUE FOR MONEY
TO OUR CUSTOMERS AND INVESTORS IN
A COMPLIANT MANNER.
S
W
E
D
E
N
U
K
N
E
T
H
E
R
L
A
N
D
S
HOW WE CREATE VALUE
Policyholder
– Effective customer service operations, clear communication
and competitive fund performance, with full regard to all
regulatory matters, support our aim to ensure policyholders
receive good returns and service in line with fair outcomes
for customers.
– Provide security through strong solvency.
Shareholder
– Surpluses emerge from the in-force books of business
through efficient management of the policy base and good
capital management practices. These surpluses enable
dividends to be paid from the subsidiaries to Chesnara,
which fund the attractive dividend strategy and support our
wish to be a share held for the long term by our
shareholders.
– Growth from both the proven acquisition model and from
writing profitable new business in Sweden and the
Netherlands has a positive impact on the Economic Value of
the business.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
05
OVERVIEW DELIVERING OUR STRATEGY
Our company history has helped shape our business,
which in turn enables us to deliver against our objectives.
COMPANY HISTORY
WHAT WE’VE DONE
2004
Chesnara is born - Countrywide estate agency group
divests its life insurance business and this
becomes the inaugural portfolio of Chesnara plc
with an opening Embedded Value of £126m.
6 SUCCESSFUL ACQUISITIONS ACROSS
3 TERRITORIES.
OUTCOMES
Our deals demonstrate flexibility
and creativity where appropriate:
– Tactical ‘bolt-on’ deals to more
transformative deals
– Open minded regarding deal size
– Willingness to find value beyond the UK
– Flexible and efficient deal funding
solutions
– Capability to find expedient solutions to
de-risk where required.
We are not willing to compromise on
quality, value or risk. All deals have:
– been at a competitive discount to value
– satisfied our dual financial requirements
of generating medium-term cash and
enhancing long-term value
– been within Chesnara’s risk appetite
– been subject to appropriate due diligence
– been either neutral or positive in terms of
customer outcomes
– supported Chesnara’s position as an
income investment.
2005
Chesnara makes its first acquisition City of
Westminster Assurance, adding £30.3m of
Embedded Value.
2007
Chesnara becomes established as an attractive
dividend stock, after three years of dividend growth.
2009
Chesnara plc moves into Europe with the
acquisition of a Swedish business now called
Movestic. The group’s Embedded Value reaches
£263m. Unlike the UK operation, Movestic is open
to new business which adds a further source of
embedded value growth.
2010
The acquisition of Save and Prosper takes the
group’s assets under management to over £4bn.
2013
Direct Line’s life assurance business is acquired and
by the end of 2014, total group embedded value rises
above £400m.
2015
Expansion into a new territory with the
acquisition of the Waard Group (a closed book) in
the Netherlands.
2016
Building upon our entry to the Dutch market
we announce the acquisition of Legal & General
Nederland, an open business.
2017
Completion of Legal & General Nederland
acquisition renamed Scildon, at a 32% discount to
its Economic Value of £202.5m.
06
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
OVERVIEW
DIVIDEND HISTORY
VALUE GROWTH
13 SUCCESSIVE YEARS OF DIVIDEND GROWTH
We recognise the importance of providing stable and attractive
dividends to our shareholders. A full year 2017 dividend of
20.07p per share represents an increase of 2.98% on the
prior year, and is Chesnara’s 13th successive year of
dividend growth.
£723m OF ECONOMIC VALUE
Value growth* is achieved through a combination of efficient
management of the existing policies, acquisitions and
writing profitable new business. The growth includes £148m
of new equity since 2004 but is net of £267m of cumulative
dividend payments.
Dividend per share history
Pence per share
Value growth
£m
723
603
11.9
12 . 5
13.1
15.1
15.6
16.0
16.4
16.9
17.4
17.9
18.4
18.9
19. 5
20.1
455
417
376
355
295
311
263
176
189
187
183
126
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 2017
2004
2005
2006 2007 2008
2009 2010 2011 2012
2013
2014 2015 2016 2017
*Value is based on Embedded Value principles up until 2015, thereafter it is based on
Economic Value (see page 39 for further information). The transition from Embedded
Value to Economic Value resulted in only a modest change in valuation.
CASH GENERATION
POLICYHOLDERS
CASH GENERATION CONTINUES TO
SUPPORT DIVIDENDS
OUR PRIMARY RESPONSIBILITIES REMAIN
TO OUR POLICYHOLDERS
Ultimately the group needs to generate cash to service its
dividends. Cumulative cash generation over the last five years
represents c200% of the total dividends over the same period.
– Customers can be confident that they have policies with a
well capitalised group where financial stability is central to
our culture and values.
Business as usual
cash generation*
£m
Dividend
84.0
– Our investment returns remain competitive across the group.
– We deliver good customer service levels across the group.
49.7
20. 5
2013
42 .6
44.2
22 . 5
24.0
36. 5
27.6
30.1
*The chart to the left illustrates how business as usual cash generation
compares to the total shareholder dividend. For this purpose the cash figure
is based on divisional cash generation plus non-exceptional group items.
To include exceptional items would mislead in terms of illustrating the
effectiveness of the core business in funding the dividend.
2014
2015
2016
2017
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
07
OVERVIEW
2017 HIGHLIGHTS
FINANCIAL
SOLVENCY
146%
IFRS
£89.6m
IFRS PRE-TAX PROFIT
2016 £40.7M
The 2017 result includes £20.3m gain on acquisition of Legal & General Nederland.
£86.9m
IFRS TOTAL COMPREHENSIVE INCOME
2016 £55.4M
The 2017 result includes foreign exchange gain of £8.3m (2016: £20.1m).
Financial review p36
GROUP SOLVENCY
2016 158% (144% EXCLUDING EQUIT Y RAISE IMPACT)*
We are well capitalised at both group and subsidiary level and
under Solvency II have not used any elements of the long
term guarantee package, including transitional arrangements.
Capital management p32
*The 2016 closing ratio of 158% was enhanced by equity raised ahead of the purchase of
Legal & General Nederland. The adjusted position at 31 December 2016, excluding
this impact, was 144%. This figure represents a more logical comparison for assessing
movements during 2017.
ECONOMIC VALUE
CASH GENERATION
£723.1m
ECONOMIC VALUE
2016 £602.6M
Movement in the period is stated after dividend distributions
of £29.5m.
Includes gain on acquisition of Legal & General Nederland
of £65.4m.
Financial review p39
ECONOMIC VALUE EARNINGS
£139.5m
ECONOMIC VALUE EARNINGS
2016 £72.5M
Financial review p38
£12.4m
NEW BUSINESS PROFIT
2016 £11.7M
Business review p26 to 29
£28.6m
GROUP CASH GENERATION
2016 £85.4M
A £48.9m one-off positive impact, in respect of equity raised
ahead of completion of the acquisition of Legal & General
Nederland, was included in the 2016 result. We highlighted this
as a temporary impact in our 2016 accounts. As expected, on
completion, the 2017 result includes a consequential negative
impact of £55.3m. This explains the large year on year swing
on the headline group cash generation metric. The end to end
impact of the Legal & General Nederland acquisition is to
reduce cash generation by £6.4m.
Financial review p37
£86.7m
DIVISIONAL CASH GENERATION
2016 £34.3M
Includes the cash generated post acquisition by Scildon of £16.2m.
Financial review p37
These financial highlights include the use of Alternative Performance Measures (APMs) that are not required to be reported under
International Financial Reporting Standards. The definition for each of these items has been included in page 10 and in further detail
within the Financial Review section on pages 34 to 35.
08
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
OVERVIEW
OPERATIONAL & STRATEGIC
DIVIDEND
SYMBOL GUIDE
FULL YEAR DIVIDEND INCREASE
Throughout the Annual Report and Accounts the following symbols are used to help
distinguish between the various financial and non-financial measures reported:
Total dividends for the year increased by 2.98% to 20.07p per
share (7.00p interim and 13.07p proposed final). This compares
with 19.49p in 2016 (6.80p interim and 12.69p final).
IFRS
Cash generation
Economic Value
Economic Value Earnings
Solvency
Dividend/Total Shareholder Return
Part VII
Operational performance
Compliance
New business market share
Acquisitions
Risk appetite
ACQUISITIONS
COMPLETION OF LEGAL & GENERAL
NEDERLAND ACQUISITION
With a purchase price of €161m, this acquisition was
successfully completed on 5 April 2017 and the company
renamed Scildon. Good progress has been made on
integrating the business with the Chesnara group with
benefits delivered slightly ahead of expectations.
ECONOMIC BACKDROP
EQUITY GROWTH, WEAKENING STERLING
Equity markets in all territories have performed positively during
the year. The Swedish krona and euro have both strengthened
against sterling, resulting in positive exchange gains being
reported in the period.
DIVISIONAL DIVIDEND
£70.0M OF TOTAL PROPOSED DIVISIONAL DIVIDENDS
The results during the year, combined with associated solvency
positions, have enabled the divisions to propose total dividends
to Chesnara of £70.0m. As expected, the UK business dividend
of £32m continues to be the largest contributor but it is equally
encouraging to see the Dutch businesses of Scildon and Waard
propose dividends of £22.2m and £13.0m respectively.
The fact that a growth business such as Movestic has proposed
a dividend of £2.8m is also very positive.
SOLVENCY
SOLVENCY II IN ACTION
As planned, we have continued to enhance our understanding
of the Solvency II figures during the year. This has resulted
in a number of changes to the SCR. These changes consist of
positive capital management actions such as de-risking Scildon’s
shareholder assets, improved asset analysis in Movestic and
model enhancements which ensure the SCR better aligns to
our business.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
09
OVERVIEW
MEASURING OUR PERFORMANCE
HOW WE MEASURE PERFORMANCE WITHIN THESE REPORT & ACCOUNTS
Throughout our Report & Accounts, we use measures to assess and report how well we have performed.
The range of measures is broad and includes many measures that are not based on IFRS.
The financial analysis of a life and pensions business also needs to recognise the importance of
Solvency II figures, the basis of regulatory solvency. In addition, the measures aim to
assess performance from the perspective of all stakeholders.
FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS
Whilst the IFRS results form the core of the Report & Accounts and hence retain prominence as a key financial performance metric, there is a general
acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business.
In light of the limitations of IFRS reporting, these Report & Accounts adopt several Alternative Performance Measures (APMs) to present a more meaningful
view of the financial position and performance. The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and as such, all major
financial APMs are derived from a defined rules-based regime. The diagram below shows the core financial metrics that sit alongside the IFRS results,
together with their associated KPIs and interested parties.
FINANCIAL STATEMENTS
ADDITIONAL METRICS
IFRS profits
I
R
Capital requirements
Solvency capital
requirement
Management
buffer
IFRS net assets
STAKEHOLDER FOCUS:
P
I
R
B
Policyholders
Investors
Regulators
Business partners
*
I
Solvency II valuation
(Own Funds)
P
I
R
B
Solvency
Percentage
Absolute
Economic Value
I
B
Cash generation
Key performance indicators
Balance sheet
Earnings
Group
Divisional
SOLVENCY
ECONOMIC VALUE
CASH GENERATION
Solvency is a fundamental financial measure
which is of paramount importance to
investors and policyholders. It represents the
relationship between the value of the
business as measured on a Solvency II basis
and the capital the business is required to
hold – the Solvency Capital Requirement (SCR).
Solvency can be reported as an absolute
surplus value or as a ratio.
Solvency gives policyholders comfort
regarding the security of their provider. This
is also the case for investors together with
giving them a sense of the level of potential
surplus available to invest in the business
or distribute as dividends (subject to other
considerations and approvals).
Economic Value (EcV) is deemed to be a
more meaningful measure of the long term
value of the group and it generally
approximates to Embedded Value reporting,
which was used before the introduction
of SII. In essence, the IFRS balance sheet is
not generally deemed to represent a fair
commercial value of our business as it does
not fully recognise the impact of future profit
expectations of long term policies.
EcV is derived from Solvency II Own Funds
and recognises the impact of future profit
expectations from existing business.
Cash generation is a measure of how much
distributable surplus has been generated
in the period, which supports the ability of the
group to pay its dividends. It is driven by the
change in solvency surplus, taking into account
board-approved capital management policies.
*See page 138 for a reconciliation
between IFRS net assets and
Solvency ll own funds.
Further details on p31 to 33
Further details on p38 to 39
Further details on p37
10
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
OVERVIEW OPERATIONAL AND OTHER PERFORMANCE MEASURES
In addition to the financial performance measures, the Report & Accounts include measures that
consider and assess performance of all our key stakeholder groups. The diagram below summarises the
performance measures adopted throughout the Report & Accounts.
Key stakeholders
l
r
e
d
o
h
y
c
i
l
o
P
r
o
t
s
e
v
n
I
l
s
r
o
t
a
u
g
e
R
*
r
e
n
t
r
a
p
s
s
e
n
i
s
u
B
Key:
Primary interest
Secondary interest
What is it and why is it important?
e
g
a
P
How well we service our customers is of paramount importance and so through various means
we aim to assess customer service levels. The business reviews within the Report & Accounts
refer to a number of indicators of customer service levels.
24-29
Broker satisfaction is important because they sell new policies, provide ongoing service to their
customers and influence book persistency. We include several measures within the Report &
Accounts, including direct broker assessment ratings for Movestic and general assessment of
how our brands fair in industry performance awards in the Netherlands.
26-29
This is a measure of how the assets are performing that underpin policyholder returns. It is
important as it indicates to the customer the returns that their contributions are generating.
24-29
This is a comparative measure of how well our investments are performing against the rest of
the industry, which provides valuable context to our performance.
24-29
This shows the value of the investments that the business manages. This is important
because scale influences operational sustainability in run-off books and operational efficiency
in growing books. Funds under management are also a strong indicator of fee income.
26-27
Policy count is the number of policies that the group manages on behalf of customers. This is
important to show the scale of the business, particularly to provide context to the rate at which
the closed book business is maturing. In our open businesses, the policy count shows the net
impact of new business versus policy attrition.
This includes dividend growth and yield and shows the return that an investor is generating
on the shares that they hold. It is highly important as it shows the success of the business in
translating its operations into a return for shareholders.
This shows our ability to write profitable new business which increases the value of the group.
This is an important indicator given one of our core objectives is to ‘enhance value through
profitable new business’.
This shows our success at writing new business relative to the rest of the market and is
important context for considering our success at writing new business against our target
market shares.
The gearing is a ratio of debt to IFRS net assets and shows the extent to which the business
is funded by external debt versus internal resources. The appropriate use of debt is an efficient
source of funding but in general Chesnara seek to avoid becoming overly dependent on
permanent debt on the balance sheet.
This is a key measure given our view that the quality, balance and effectiveness of the board of
directors has a direct bearing on delivering positive outcomes to all stakeholders.
4
40
26-29
26-29
40
50-51
Measure
Customer
service
levels
Broker
satisfaction
Policy
investment
performance
Industry
performance
assessments
Funds under
management
Policy count
Total
shareholder
returns
New business
profitability
New business
market share
Gearing ratio
Knowledge,
skills and
experience of
the Board of
Directors
* For the purposes of this key performance indicator assessment business partners refers to major suppliers and outsource partners.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
11
OVERVIEW
CHAIRMAN’S STATEMENT
Our financial results have been
achieved while remaining true to our
well established culture and values.
2017 has been another good year for Chesnara during which we completed
the acquisition of Legal & General Nederland, now successfully rebranded
Scildon, and made good progress on integrating it into our business. The
acquisition has contributed to an impressive set of results on all financial
metrics, including IFRS, Economic Value and Solvency II.
In particular I am pleased to report an Economic Value growth, excluding the
acquisition gain, of 9.1%.
All divisions have made significant contributions to cash and value generation. The UK
business had again generated cash ahead of expectations and Movestic continues
to deliver significant growth, which has resulted in further cash generation.
During the post acquisition period, Scildon has delivered Economic Value growth and
solvency surplus broadly in line with our initial expectations. That said, we retain our
view that the business would benefit from some focussed improvements and have
initiated a development programme to improve the profitability of new business.
As a result of the positive performance in the year, Chesnara expects total dividends
from its divisions of £70.0m, including an inaugural Scildon dividend of £22.2m.
PETER MASON,
CHAIRMAN
12
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
OVERVIEW
During 2017 we have delivered against each of
our core strategic objectives thanks to economic
tailwinds, good operational delivery and the
successful completion of the acquisition of Legal &
General Nederland. This has resulted in financial
results which support the continuation of our
dividend strategy and show continued Economic
Value growth. This has been achieved whilst
remaining true to our well established culture and
values of treating customers fairly and adopting
a robust approach to regulatory compliance.
Importantly, the business growth has been achieved
without compromising our risk appetite.
01
MAXIMISE VALUE FROM EXISTING
BUSINESS
£86.7m of divisional cash generation
representing 288% dividend cover.
See pages 24 to 29 for further information.
02
ACQUIRE LIFE AND PENSIONS
BUSINESSES
Acquisition of Legal & General Nederland
(now Scildon) created a positive Economic
Value impact of £65.4m.
See page 30 for further information.
THE ECONOMIC VALUE OF THE GROUP HAS
INCREASED BY 20.0% IN THE YEAR, OF WHICH 10.9%
RELATES TO THE GAIN ON COMPLETION OF THE
ACQUISITION OF LEGAL & GENERAL NEDERLAND.
The completion of the acquisition of Legal & General Nederland has delivered
‘Day 1’ financial benefits slightly ahead of expectations. Since completion,
management has spent time working with our new colleagues in the
Netherlands. Initial assessment confirms that the business is well managed
and soundly governed. As expected we have also identified opportunities to
make some process improvements over the next two years which we expect
to increase the future financial returns from the business. We have completed
a successful rebrand to the new company name, ‘Scildon’, and have made
significant progress in integrating the business into the Chesnara group. The
successful integration of Scildon means the group remain well positioned
for any new opportunity that arises.
The profitability of our existing business remains at the heart of our business
model. IFRS pre-tax profits, which predominantly flow from the in-force
business, of £89.6m (2016: £40.7m) compare favourably to prior year and base
case expectations.
03
In addition, all of our divisions, including Scildon, have made significant positive
cash contributions totalling £86.7m.
A 7.1% growth in the Economic Value of the existing business, excluding the
impact of new business and acquisitions, is also dominated by the impact
of positive economic conditions. The group has reported a modest economic
value operating profit of £3.3m. This consists of an underlying operating
profit of £22.5m, offset by the negative impact of making provision to adopt
a slightly more attractive pricing strategy on certain white label funds in
Movestic and to cover the one-off costs of developing the Scildon business.
ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
New business profits from Movestic of
£11.8m plus a modest full year new business
profit of £1.9m from Scildon.
See pages 26 to 29 for further information.
Movestic has continued to operate within its market share target range and
has generated £11.8m of new business profit representing a 5.2% growth
on Movestic’s opening Economic Value.
We acquired Scildon with an expectation that it was breaking even on
writing new business. The fact that Scildon have reported a modest new
business profit for the full year of £1.9m is encouraging but this level
of profit is not deemed commercially acceptable. We have initiated changes,
to be delivered over a two year timeframe, which we believe will improve
market shares towards the upper end of our target 5% - 10% protection market
share range and which would create more commercially meaningful levels of
new business profit.
NEW BUSINESS PROFIT FROM MOVESTIC OF £11.8M
AND AS EXPECTED SCILDON IS ONLY MARGINALLY
PROFITABLE. A DEVELOPMENT PROGRAMME HAS
BEEN INITIATED TO IMPROVE SCILDON’S
PROFITABILITY OVER THE NEXT TWO YEARS.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
13
OVERVIEW CHAIRMAN’S STATEMENT
The value of our existing businesses
continues to grow across all territories.
Solvency
At the end of 2016, the group solvency ratio, which
includes no transitional adjustments, was 158%
which translated to an absolute level of surplus of
£185m. This position had the temporary benefit
of holding £50m of surplus due to the equity
raised in advance of funding the acquisition of
Legal & General Nederland. The underlying
solvency ratio of 144% equated to £135m of
absolute surplus.
During 2017, the absolute level of surplus, over
and above the SCR increased by £58m after
accounting for the impact of dividends. Of this
increase, £4.7m was the direct consequence of
the acquisition of Legal & General Nederland.
This relatively modest impact is in line with
expectations and is consistent with the equity
raise prospectus. The acquisition impact as
reported includes the benefits of having reinvested
shareholder assets shortly after completion from
equities to fixed income investments, with
lower capital requirements. This is consistent with
Chesnara’s investment policy and risk appetite
regarding the investment of shareholder assets.
The remainder of the surplus emerging is due to
surpluses arising in all of our businesses. The UK
provided the majority of the increase although
Movestic and Waard continued to make meaningful
positive contributions. Whilst it is still relatively
early in the post acquisition period for Scildon,
it was encouraging to see a surplus of £16.2m
emerge during this time. On an annualised basis,
this is broadly in line with expectations.
When expressed as a ratio, the closing solvency
ratio as at 31 December 2017 of 146% is
marginally improved compared to the end of
2016 (adjusted to exclude the temporary equity
raise benefit).
AN INCREASED UNDERSTANDING OF THE DYNAMICS OF SOLVENCY II
HAS, AS EXPECTED, CREATED CAPITAL OPTIMISATION BENEFITS
IN THE YEAR. WE WILL CONTINUE TO IDENTIFY FURTHER CAPITAL
OPTIMISATION BENEFITS OVER THE COMING YEARS
Solvency II and IFRS 17
After many years and much hard work, I am
pleased to report the implementation stage of the
transition to the Solvency II regime is now
fully complete. During the year, we successfully
produced our inaugural Solvency II narrative
reports with the Solvency and Financial Condition
Report being made available on our website. We
believe Solvency II creates an improved focus
on capital requirements and risk. This means we
can better assess the impact of management
decisions and also creates the potential for value
adding management actions.
As Solvency II becomes embedded into day to
day operations, the industry now faces the
challenge of applying new accounting rules for
insurance contracts, known as IFRS 17. It is
not expected to have any direct bearing on the
commercial assessment of Chesnara. That is, it
is not expected to have an impact on Economic
Value or cash generation, other than the direct
impact of the cost of implementing the change.
Regulation
Compliance with regulation remains a priority for
the group. We have continued to maintain a positive
and constructive relationship with regulatory bodies
across the group.
Following the final guidance from the FCA’s review
of the ‘Fair treatment of long standing customers
in the life insurance sector’, we have been
able to progress with the delivery of our Customer
Strategy in the UK. The programme is now
established and board approved budgets are
recognised within our provisions. The work
undertaken to date continues to support the level
of provision made. The project does include
enhancements to meet new regulatory standards.
The investigation into how Countrywide Assured
disclosed exit fees to customers, initially announced
on 3 March 2016, is ongoing. We have provided
the FCA with all information requested. Discussions
continue and given the narrow scope of the
investigation we retain our opinion that the outcome
from the investigation will not have a material impact
on the company.
No significant regulatory issues have arisen in
Sweden or the Netherlands during the year.
Investment proposition
Given Chesnara shares are primarily held by those
requiring attractive income, I am pleased to report
a 2.98% increase in our full year dividend.
I AM PLEASED TO REPORT
A 2.9% INCREASE IN FULL
YEAR DIVIDEND
Governance and risk management
We continue to place great importance on the
ongoing enhancement of our risk and governance
system, and have a number of developments
underway. Embedding activity progresses, with
significant focus in 2017 on continuing to increase
the consistency of our approach across the group,
including the newly acquired Scildon business.
In line with our implementation of a strong
governance framework, we have carried out a
tender process for our external audit during the
second half of 2017. As a result of this, we
recommend the reappointment of Deloitte and
further details of the process are included in the
Audit and Risk Committee Report.
14
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
OVERVIEW
AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE WAY AND HAVE
A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL REGARD TO THE RELATIVE INTERESTS
OF ALL STAKEHOLDERS. DURING THE YEAR, WE HAVE TAKEN THE OPPORTUNITY TO A STEP BACK
TO REFLECT UPON OUR CORPORATE PURPOSE.
Corporate purpose
We have assessed our corporate purpose by
considering eight aspects of our business and by
looking at the business from the perspective of
all stakeholders.
Business model
– Our acquisition strategy is built upon long term
commitments to any markets we operate in. Our
consolidation model therefore offers a genuine
solution to the challenges certain insurance
markets face.
The products and services we provide
– We help protect people and their dependants
through the provision of life, health and disability
cover or by providing savings and pensions
which help customers with their financial needs
in the future. We seek to provide customers and
their advisers with helpful and reliable support.
Sustainability
– Driven in part by consumer demand, especially
in our Swedish and Dutch operations, there is
a continued positive shift towards an increased
focus of sustainable fund investments.
– The nature of our business is such that in general
we have a relatively low carbon footprint.
Shareholder proposition
– Investors, especially in a low interest rate
environment do have a genuine need for income
and hence our investor proposition, track
record and responsible approach provides an
investment opportunity for individuals seeking
sustainable equity based income.
Taxation
– As per our tax strategy, we adopt a responsible
and open approach to taxation and, as
a consequence, pay the appropriate taxes.
Staff
– We provide high quality jobs with competitive
remuneration and good working conditions both
directly and through outsourced arrangements.
Suppliers and partners
– We seek mutually respectful and sustainable
relationships with our suppliers. We believe that
supplier relationships only work in the long
term if the terms and conditions are mutually
beneficial. Our instinct and natural preference is
to maintain established long term supplier
relationships where they remain commercially
competitive and operationally viable.
Local community
– Investment and continued commitment to the
North West and Preston in particular creates high
quality financial services roles outside of London.
– All divisions support local community initiatives
to the extent deemed appropriate given our
financial responsibilities as a PLC.
In summary based on the above, our view is that
Chesnara fulfils a positive corporate purpose.
OUR VIEW IS THAT CHESNARA
FULFILS A POSITIVE
CORPORATE PURPOSE.
Outlook and Brexit
I remain optimistic that Chesnara can continue to
deliver against its strategic objectives, which in
turn fund our well established dividend strategy.
In particular, the UK business remains a robust
source of cash, with additional potential to take
management actions to enhance the core cash if
required. Movestic now has the scale to continue
contributing to the cash position and provisions
made during the year create the required capacity
to react to any market driven fee pressures without
adverse profit impact. Scildon has significant
surplus capital and is also expected to be cash
generative on an ongoing basis.
We now have sufficient scale and presence in both
the UK and the Netherlands to continue our focus
on acquisition activity in those territories. We also
remain open minded about new territories but
the benefits would need to outweigh the inherent
challenge of adding another regulatory environment
into our business model. Our balance sheet
has further capacity for debt and we are nearing
completion of a debt syndication process that will
ensure we are in a strong position to take
advantage of the balance sheet capacity. We have
significant levels of surplus capital and recent
experience suggests we retain shareholder
support for further equity for the right deal. This
together with operational capacity means we
remain well positioned to act should an
opportunity arise that meets our stringent price
and risk profile criteria.
Movestic has become an established profitable
new business operation and I see potential
for Scildon to make improvements to their new
business value in the medium term. We have
provided for the expected cost of the
improvement plan. I believe this will result in a
meaningful level of recurring value growth
from new business without a material shift from
our core specialism of acquiring and managing
in-force businesses.
The structure of the group, with established
regulated entities in several European countries,
together with the fact we do not trade or share
resource across territories, means I remain of the
view that whatever the outcome from the
Brexit negotiations, we expect it to have little
direct impact on our business model.
In light of the above I remain confident that
Chesnara is well positioned to continue to provide
value to policyholders and shareholders.
Peter Mason
Chairman
28 March 2018
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
15
OVERVIEW
SECTION B:
STRATEGIC
REPORT
SECTION B • STRATEGIC REPORT
18 Overview of strategy, culture & values
and business model
20 Our strategy
22 Culture & values
24 Business review
31 Capital management
34 Financial review
40 Financial management
42 Risk management
46 Corporate and social responsibility
Preston, England, United Kingdom
17
OVERVIEW OF OUR STRATEGY, CULTURE &
VALUES AND BUSINESS MODEL
Our strategy focuses on delivering value to policyholders and shareholders.
The strategy is delivered through a proven business model underpinned by a robust risk
management and governance framework and our established culture & values.
OUR BUSINESS MODEL
Key
stakeholders
R
REGULATORS
C
CUSTOMERS
I
INVESTORS
Stakeholder
objectives
Financial stability and
regulatory compliance
Fair outcomes
Competitive return
Cash generation through divisional dividends and
value generation through EcV growth
Division
UK
NETHERLANDS
SWEDEN
Operating
company
Strategic
objectives
Culture
& values
Countrywide
Assured
01
02
Waard
Group
01
02
Scildon
01
03
Movestic
01
02
03
Read more on p24
Read more on p28
Read more on p28
Read more on p26
Responsible risk-based management for the benefit of all of our stakeholders
OUR STRATEGIC OBJECTIVES
01
02
03
MAXIMISE THE VALUE FROM
EXISTING BUSINESS
ACQUIRE LIFE AND
PENSIONS BUSINESSES
ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
Managing our existing customers
fairly and efficiently is core to
delivering our overall strategic aims.
Acquiring and integrating companies
into our business model is key
to continuing our growth journey.
Writing profitable new business
supports the growth of our
group and helps mitigate the natural
run-off of our book.
18
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 01
V A L U E F ROM EXISTING BUSIN
E
S
S
E
X I M I S
A
M
MAINTAIN
ADEQUATE
FINANCIAL
RESOURCES
FAIR
TREATMENT
OF CUSTOMERS
PROVIDE A
COMPETITIVE
RETURN TO
SHAREHOLDERS
ROBUST
REGULATORY
COMPLIANCE
A
C
Q
U
I
R
E
L
I
F
E
02
A
N
D
P
E
N
S
I
O
N
S
B
U
SIN
E
S
SES
G
E T H R O U
U
L
A
E V
E N H A N C
S
S
E
N
I
S
U
B
W
E
N
E
L
B
A
FIT
O
R
H P
03
19
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
OUR STRATEGY
STRATEGIC OBJECTIVE WHY THIS MATTERS
HOW WE DELIVER
OUR BUSINESS MODEL
MAXIMISE VALUE
FROM OUR
EXISTING BUSINESS
The existing in-force books are the
principal source of cash generation and
are hence at the heart of the
investment case for our shareholders.
A centralised governance oversight and corporate
management team ensures robust and consistent
governance across the group. Operating autonomy
is delivered to the divisions to ensure we benefit
from our strong divisional management teams. In
the UK, Chesnara adopts an outsourced business
model. Core operations are not outsourced in
Sweden or the Netherlands because it would not
suit the business models in those territories.
01
ACQUIRE LIFE
AND PENSIONS
BUSINESSES
Well considered and appropriately priced
acquisitions maintain the effectiveness
of the operating model, create a source
of value enhancement and sustain the
cash generation potential of the group.
Identify potential deals through an effective network
of advisers and industry associates.
We assess deals applying well established criteria
which consider the impact on cash generation and
Economic Value under best estimate and stressed
scenarios.
We work cooperatively with regulators.
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
positive track record.
We fund deals with debt, equity or cash depending
on the size and cash flows of each opportunity.
02
ENHANCE VALUE
THROUGH
PROFITABLE
NEW BUSINESS
03
20
The primary focus of our operations is
to ensure we manage the existing policy
base in an efficient and compliant
manner. That said, the Chesnara financial
model supports modest incremental
value generation through writing new
business. New business profits are an
important and welcome source of
regular value growth which supplements
the growth delivered from our existing
policy base and periodic acquisitions.
Our two operating subsidiaries that are open to
new business are Movestic in Sweden and Scildon
in the Netherlands. Movestic primarily focuses on
unit-linked pensions and savings business, distributed
through IFAs, and targets a realistic share of our
target market of between 10-15%. Scildon sells
protection products, individual savings and group
pensions contracts via a broker-led distribution
model, and targets a market share of 5-10%. For
both open businesses, we believe that to achieve
higher volumes would require a pricing strategy
that may compromise the keen focus on ensuring
the business we write is profitable.
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 HOW WE MEASURE DELIVERY
RISKS
RISKS
UPDATE
WHAT CAN STOP US
MEETING THIS OBJECTIVE
WHAT CAN WE DO
ABOUT THIS
– Adverse investment market
– Where appropriate, active
Cash generated by the existing business is
an important measure for how the business
is performing. It is defined as the movement
in the surplus of capital resources over capital
requirements set by the board. As such cash
can be generated by either profits arising in the
period or a reduction in capital requirements.
Value generation is measured by reference
to the movement in Economic Value over
the period.
conditions can result in lower assets
under management and hence lower
fee income from unit-linked business.
For products with guarantees,
this can increase the cost of fulfilling
the guarantees.
– Increased lapses on cash generative
/value enhancing products.
– Loss of key brokers can result in
increases in the level of transfers-out.
– Regulatory change can potentially
impact the cash flows arising from
the existing business.
– Expenditure levels could exceed
This is measured through monitoring:
those assumed.
– customer service metrics;
– policyholder fund performance against
industry and market expectations;
– customer complaint levels; and
– our compliance with regards to regulatory
conduct matters.
– Foreign currency fluctuations can
impact the sterling value emerging
from overseas operations.
– There is the risk that if a lack of
suitable acquisition opportunities
come to market at a realistic
valuation, 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.
– Our acquisition strategy includes both
UK and non-UK markets.
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 Economic Value per share
under best estimate and certain more
adverse scenarios.
Acquisitions must ensure we protect, or ideally
enhance, customer interests.
Acquisitions 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 Economic 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.
UK
Pages 24-25
investment management with
the aim of delivering
competitive policyholder
investment returns.
– Outsourcer service levels that
ensure strong customer service
standards.
Sweden
Pages 26-27
Netherlands
Pages 28-29
Page 30
– Expense assumptions are
deemed to be realistic and the
cost base is well controlled,
predictable and within direct
management influence.
– Close monitoring of persistency
levels and strong customer
service standards help manage
lapse rates and ensure
customers do not unknowingly
exit when it is not in their
interest to do so.
– Operating in three territories
increases our options thereby
reducing the risk that no further
value adding deals are done.
– A broader target market also
increases the potential for
deals that meet our strategic
objectives.
– Flexibility over the timing of
subsequent capital extractions
and dividend flows provide an
element of management
control over the sterling value
of cash inflows.
– Each acquisition is supported
by a financial deal assessment
model which includes high
quality financial analysis. This
is reviewed and challenged by
management and the board,
mitigating the risk of a bad deal
being pursued.
– The attractiveness of products can be
influenced by economic conditions
especially as some traditional
products offer guaranteed returns in
uncertain times.
– New business volumes are sensitive
to the quality of service to
intermediaries and the end
customer.
– In Sweden, new business remains
relatively concentrated towards
several large IFAs.
– A competitive market puts pressure
on new sales margins.
– In Sweden, continue to extend
the breadth of IFA support.
– Ensure high quality of service
Sweden
Pages 26-27
to existing network of
intermediaries.
– Focus on other margin drivers
beyond product pricing, for
example the fund
management operation.
– In the Netherlands, enhance our
business processes and
product offering to be attractive
to brokers and consumers.
Netherlands
Pages 28-29
21
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017Value enhancementCash generationValue optimisationCustomer outcomesCash generationValue enhancementCustomer outcomesRisk appetite OUR CULTURE & 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 customers, regulators and our investors.
CULTURE & VALUES
RESPONSIBLE RISK-BASED
MANAGEMENT FOR
THE BENEFIT OF ALL OF
OUR STAKEHOLDERS
FAIR TREATMENT
OF CUSTOMERS
Maintaining
adequate financial
resources is at
the heart of good
business conduct.
Effective capital
management is a
key requirement
that underpins our
cultural objectives.
Further information
regarding the
group’s solvency
position is included
on pages 31 to 33.
PROVIDE A COMPETITIVE
RETURN TO OUR
SHAREHOLDERS
ROBUST REGULATORY
COMPLIANCE
22
WHY IS IT IMPORTANT?
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,
distributors 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 fair treatment of
our customers.
As a public company it is imperative that
we offer an attractive investment
proposition. 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 benefit of being
an investment that offers 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 part of our culture and a
principal aim of the Chesnara directors.
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 WHAT WE HAVE DONE
THE OUTCOMES
– Embedded governance maps across the group, and commenced
– Scildon has started to apply the governance and risk culture practices
governance map alignment within Scildon.
of Chesnara.
– Strengthened the Scildon board with new appointments, including
– Strengthened controls reducing risk likelihood and impact of adverse
a new CEO and a new CFO.
outcomes for shareholders and policyholders.
– Delivered against continuity plans in Sweden with internal appointment
– Constructive dialogue with regulators across the different territories
of new CEO.
– Adopted SII across the group, showing a strong group and divisional
solvency position throughout the year, and furthered our understanding
of the complex capital dynamics of the regime, particularly ensuring
the linkage to our risk-based decision making processes.
– Delivered inaugural divisional and group SII regulatory narrative reporting
to the relevant prudential regulators and continued to enhance our
Own Risk and Solvency Assessments (ORSAs), further supporting the
group and divisions in making informed risk-based decisions.
– Across the group, we have continued to deliver a good standard of
customer service.
– The UK division is delivering to its customer strategy implementation in
support of regulatory guidelines at the end of 2016. The UK’s
administrative outsource service partners have delivered within stringent
service level requirements.
– Service standards in Sweden remain strong, as evidenced by external
surveys of brokers undertaken by independent organisations.
– Unit-linked policy returns remain competitive based on both fund
benchmarks and external unit-linked policy performance surveys.
– Where complaints do arise across the group, we continue to manage
them in accordance with best regulatory practice.
– We closely monitor any regulatory developments to ensure we continue
to treat our customers fairly in accordance with regulatory requirements.
in which the group operates.
– Better understanding of Solvency II balance sheet provides a stronger
linkage between risk, capital and strategy aiding more risk-based
decision-making.
– Generally low level of complaints across the group has continued.
– For the UK business, preparatory work in the year leaves us in an
excellent position to launch a new website and improve our written
communications to our customers.
– Service standards and customer outcomes in Sweden mean we
continue to meet our targets for market share range.
– In the Netherlands, Scildon has again received awards from Afdiz, the
Dutch broker organisation, for ‘Best occupational pension insurer’
and ‘Best annuity insurer’ and was rated second for term insurance.
– Completed the acquisition of LGN at a discount to EcV of 32% and
achieved an increase in EcV on acquisition of £65.4m and an IFRS
gain of £20.3m.
– Dividend track record continues, with 2.98% dividend growth in 2017.
– Over the past five years, £124.7m of dividends have been paid.
– Total 2017 Economic Value growth of £120.5m, an increase of 20%
– Delivered EcV growth across the group.
– Continued our dividend strategy.
on the 2016 position.
.
– Effective implementation of Solvency II and maintenance of robust
levels of solvency across the group and all divisions throughout
the year.
– Positive relationship with the regulators as evidenced by working with
the Dutch regulator, the DNB, on the successful LGN acquisition process.
– Ongoing constructive relationships with UK, Swedish and
Dutch regulators.
– Regarding the investigation by the FCA, given its narrow scope we
retain our opinion that the outcome should not have a material impact
on the company.
– Continued to fully support the work performed by the FCA in
– Continued adherence to internal governance policies and principles.
relation to its investigation into the disclosure of exit fees in customer
correspondence.
23
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 BUSINESS REVIEW • UK
The UK division manages c300,000 policies and is in run-off. The division follows an outsourcer-based operating
model, with functions such as customer services, investment management and accounting and actuarial services
being outsourced. A central governance team is responsible for managing all outsourced operations.
BACKGROUND INFORMATION
INITIATIVES & PROGRESS IN 2017
CAPITAL &
VALUE
MANAGEMENT
– As a closed book, the division creates value
through managing the following key value
drivers: costs, policy attrition, investment
return and reinsurance strategy.
– Economic Value growth of £45.9m (21.9%) in the year (before
the impact of the dividend paid in the year), driven by the positive
investment market experience gains in the year.
– Cash of £34.5m has been generated by the division. This includes
– In general, surplus regulatory capital emerges
as the book runs off. The level of required
capital is closely linked to the level of risk to
which the division is exposed. Management’s
risk-based decision-making process seeks
to continually manage and monitor the balance
of making value enhancing decisions whilst
maintaining a risk profile in line with the board’s
risk appetite.
– At the heart of maintaining value is ensuring
that the division is governed well from a
regulatory and customer perspective.
the positive benefit of £9.0m being transferred out of the
S&P with-profit funds, while still ensuring suitable protection for
with-profits customers.
– Successful embedding of our Capital Optimisation Advisory
Group, a sub-set of executive team members who focus on the
division’s solvency and value management initiatives.
– Implemented a change to our assets backing the with-profit funds,
focusing on seeking the appropriate balance from a customer and
shareholder perspective.
CUSTOMER
OUTCOMES
– Treating customers fairly is one of our primary
responsibilities. We seek to do this by having
effective customer service operations together
with competitive fund performance whilst
giving full regard to all regulatory matters.
This supports our aim to ensure policyholders
receive good returns, appropriate
communication, and service in line with
customer expectations.
– During December 2016 the FCA issued a
publication ’FG 16/ 8 Fair treatment of
long-standing customers in the life insurance
sector’. Our customer strategy incorporates
plans to ensure the guidelines within this
publication are fully complied with.
– A key focus has been the delivery of a three-year customer
strategy plan, which is overseen by the customer committee.
During 2017 the following has been delivered:
• Designed a refreshed Countrywide Assured website
ready for roll out in 2018;
• Reviewed our key customer communications in the context of
new guidelines issued by the FCA, ready for going live in 2018;
• Developed a refreshed product governance framework, ready
for the delivery of product reviews during 2018; and
• Continued to perform work seeking to get back in touch with
customers that we no longer have contact with.
– The FCA’s investigation into the level of disclosure of exit charges
to customers, which was announced in March 2016, remains open.
Full ongoing support has been provided to the FCA. We have had
seven separate information requests to date.
– The 1% exit fee cap on all pension products where the policyholder
is over 55 was successfully implemented during the period.
GOVERNANCE
– Maintaining effective governance and a
constructive relationship with regulators underpins
the delivery of the division’s strategic plans.
– Having robust governance processes provides
management with a platform to deliver the other
aspects of the business strategy. As a result, a
significant proportion of management’s time and
attention continues to be focused on ensuring
that both the existing governance processes,
coupled with future developments, are delivered.
– Strong solvency position has been maintained throughout the year.
– Solid delivery of outsourced services.
– Continued to develop our General Data Protection Regulation
(GDPR) readiness programme in advance of the legislation being
implemented in 2018.
– Delivered our inaugural Solvency and Financial Condition Report
(SFCR) and Regular Supervisory Report (RSR), reports required by
Solvency II rules.
– Planning commenced regarding the implementation of IFRS 17
’Insurance Contracts’, a new insurance accounting standard which
was issued in May 2017 and has an effective date of 1 January 2021.
I
S
S
E
N
S
U
B
G
N
I
T
S
I
X
E
M
O
R
F
E
U
L
A
V
E
S
M
X
A
M
I
I
01
24
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
The division has delivered against its objectives. The customer strategy plan is on track and delivering tangible
benefits to our customers and the division has continued to deliver strong financial results.
FUTURE PRIORITIES
KPIs
– Continue to identify, assess and subsequently deliver any
appropriate actions associated with managing the solvency
capital and valuation balance sheet of the division.
Economic Value
Underlying value growth
£m
48.0
48.0
113.0
143.5
173.5
297.3
271.8
232.2
239.6
255.5
2013
2014
2015
2016
2017
Cash generation
£m
Reported
Cumulative
value
dividends
Continued underlying growth in
economic value after removing the
impact of dividends.
54.1
2013
50.9
2014
42.5
2015
21.3
2016
34.5
2017
Cash generation of £34.5m continues to
support the group’s dividend strategy.
– Continuation of the customer strategy implementation
Policyholder fund performance:
plan. Key projects delivery in 2018 are:
• Roll-out of a new Countrywide Assured website;
• Roll-out first wave of refreshed key customer
communications to ensure ongoing compliance with
the most recent FCA guidelines;
• Deliver our updated approach to performing product
reviews.
– Continue to deliver competitive fund performance.
CA Pension managed
CWA Balanced managed pension
S&P Managed pension
Benchmark – ABI mixed inv
40%-85% shares
9.8%
9.5%
13.6%
9.5%
17.2%
15.8%
14.2%
13.4%
2017
2016
Our main managed funds continue to be in line with or exceed relevant benchmarks.
– Ensure we deliver our plans to meet the General Data
Protection Regulation (GDPR) well within the
timeframes of the regulatory deadline of 25 May 2018.
– Continue to support the FCA in its investigation.
– Continue to develop and start to deliver against
implementation plans for ’IFRS 17 Insurance Contracts’.
This will be a significant, multi-year project for both the
UK division and the wider group.
SOLVENCY RATIO: 155%
155%
34.1
(32.0)
128%
36.5
31 Dec 16
surplus
Surplus
generation
70.6
31 Dec 17
surplus
(pre-div)
Solvency remains robust.
The surplus generated
in year increases the
solvency position from
128% to 155%. After the
dividend, due to be paid
during 2018, the ratio
is 130%.
130%
38.6
2017 div
31 Dec 17
surplus
25
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 BUSINESS REVIEW • SWEDEN
Movestic is a life and pensions business based in Sweden, and is open to new business. From its Stockholm base,
Movestic operates as a challenger brand in the Swedish life insurance market. It offers transparent unit linked
pension and savings solutions through brokers and is well-rated within the broker community.
BACKGROUND INFORMATION
INITIATIVES & PROGRESS IN 2017
CAPITAL &
VALUE
MANAGEMENT
– Movestic creates value predominantly by
generating growth in the unit linked assets
under management (AuM) and by optimising
the income that the assets generate, whilst
assuring a high quality customer proposition.
AuM growth is dependent upon positive
client cash flows and positive investment
performance. Capital surplus is a factor of both
the value and capital requirements and hence
surplus can also be optimised by effective
management of capital.
– Economic value growth of £24.8m. This includes a £11.4m loss
relating to changes in future charge assumptions. This change
creates capacity to react, if commercial pressures were to drive
fee changes in the future, without there being an adverse profit
impact at the point of change.
– Cash generation, on constant exchange rates, of £22.1m.
– Growth in assets under management of 15.7% (£395m), driven
by new business and strong investment market returns.
– A new fund management company operating out of Luxembourg,
Movestic Fund Management S.A., was established, and funds
were migrated in June.
– Optimised cost efficiency through the new management company
by taking responsibility for additional parts of the value chain.
– The life and health business has reported favourable claims
development in the year.
– Embedded a mass lapse reassurance arrangement.
CUSTOMER
OUTCOMES
– Movestic places great importance on providing
quality service to both customers and brokers,
with simple, clear unit linked products, supported
by an attractive and broad investment fund
range. The aim of Movestic is to offer
policyholders a range of the best funds and
management services on the market.
– During the year, Movestic has improved its digital/web interfaces
with its end-customers and brokers. The focus on further
digitalisation will continue into 2018.
– Movestic has continued to develop its in-house advisory service
to take care of existing customers.
– Average fund performance has exceeded the Swedish
stock market.
– Movestic has continued to focus on its sustainable investments
proposition, and issued the industry’s first sustainability guide
to savers.
GOVERNANCE
– Movestic operates to exacting regulatory
– As part of its succession planning Movestic appointed a new
standards and adopts a robust approach to risk
management.
– Maintaining strong governance is a critical platform
to delivering the various value-enhancing initiatives
planned by the division.
CEO, Linnéa Ecorcheville, replacing Lars Nordstrand.
– During the year, Movestic delivered its inaugural Solvency II
narrative reports.
– Movestic has continued to deepen its understanding and analysis
of the Solvency II capital position. In particular, Movestic has
refined its solvency capital requirement calculation models through
improved investment data and more refined mass lapse modelling,
resulting in a positive SCR benefit of c£10m.
PROFITABLE
NEW
BUSINESS
– As an ‘open’ business, Movestic not only adds
value from sales but as it gains scale, it will become
increasingly cash generative which will fund
further growth or contribute towards the group’s
dividend strategy. Movestic has a clear sales
focus and targets a market share of 10 -15% of
the advised occupational pension market. This
focus ensures we are able to adopt a profitable
pricing strategy.
– New business profits of £11.8m have been generated in the year.
– Market shares continue to be within the target range.
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STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Movestic has delivered a positive set of results across key financial metrics. Its new business operation continues to
add value to the group and assets under management growth continues to support the division in achieving its
ambitions on scale. That said, the division is not complacent. MiFID II and the Insurance Distribution Directive (IDD)
are causing uncertainty in the broker community, the market remains price competitive, and the management team
has a busy period ahead in delivering its ongoing digitalisation programme.
FUTURE PRIORITIES
KPIs ALL COMPARATIVES HAVE BEEN PRESENTED USING 2017 EXCHANGE RATES
– Deliver against plans to continue to modernise and
automate processes. This is designed to give better
broker experience and deliver cost efficiencies.
– Provide a sustainable and predictable dividend
to Chesnara.
– Continue to focus on generating positive client cash
flows by:
• maintaining lapse levels within valuation assumptions;
and
• strategic pricing to maintain transfers-in to 2017 levels
or above.
Growth in assets under management:
£bn
2.0
1.6
2.2
2.5
0.2
0.2
2.9
2013
2014
2015
2016
Net client
cashflow
Investment
growth
2017
– Optimise the pricing model to changing market
conditions.
IFRS profit
£m
9.6
9.8
7.9
Underlying value growth
£m
Cumulative dividends
Reported value
2.7
3.9
2.1
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
120.7
149.9
189.6
227.4
249.5
– Fund range development in line with customer and
Broker assessment rating
market requirements.
– Deliver competitive unit linked fund returns.
– Improve digital business and the relationship with the
end user.
– Relaunch Life & Health business.
– Continue to deepen the understanding of the Solvency II
dynamics.
– Improve efficiency of regulatory reporting routines.
– Commence and deliver IFRS 17 ’Insurance contracts’
implementation programme.
2017 POLICYHOLDER AVERAGE
INVESTMENT RETURN:
8.2%
(SWEDISH STOCK MARKET 6.4%)
3.6
3.6
3.7
3.8
3.7
2013
2014
2015
2016
2017
SOLVENCY RATIO: 155%
140%
54.0
27.6
31 Dec 16
surplus
Surplus
generation
155%
81.6
31 Dec 17
surplus
(pre-div)
(2.8)
153%
78.8
2017 div
31 Dec 17
surplus
Solvency remains strong.
Surplus of £27.6m in the
year increases the
solvency ratio from 140%
to 155%. After the 2017
dividend, to be paid in
2018, the ratio is 153%.
– Continue to focus on writing new business within our
Occupational pension market share %
target range.
– Ongoing digitalisation of processes to improve broker
experience.
– Focus on increasing brand awareness.
New business profit
£m
13.7
12.6
11.7
13.2
11.6
6.7
9.1
6.7
12.3
11.8
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
27
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
BUSINESS REVIEW • NETHERLANDS
The Netherlands division includes the businesses of both Waard and Scildon, with Scildon being acquired during
the year. Since acquisition the priority has been to integrate Scildon into the wider group, with significant progress
in aligning the risk and governance frameworks, financial reporting processes and investment strategy. Scildon
sold a number of indirect investments in equity holdings as part of aligning its investment strategy, resulting in a
reduction in solvency capital requirements. Scildon has produced a solid set of results, including a modest
new business profit, and Waard has continued to deliver in line with expectations. Both businesses have strong
solvency ratios, supporting the payment of dividends to Chesnara.
BACKGROUND INFORMATION
INITIATIVES & PROGRESS IN 2017
CAPITAL &
VALUE
MANAGEMENT
– Both Waard and Scildon have a common
aim to make capital available to Chesnara to
fund further acquisitions or to contribute
to the dividend funding. Whilst their aims
are common, the dynamics by which the
businesses add value do differ:
– Post acquisition equity de-risk aligns the investment of
shareholder funds with group policy and risk appetite.
Consequence was a reduction in Scildon capital requirements.
– Guarantees have been removed from new business.
– Successful transfer of Hollands Welvaren Leven into Waard
Leven, thereby releasing capital.
• Waard is in run-off and has the benefit that
the capital requirements reduce over time
in-line with the attrition of the book.
• As an ’open business’ Scildon’s capital
– Waard and Scildon ended the period with healthy pre-dividend
solvency ratios of 613% and 258% respectively before deducting
the proposed 2017 year end dividends.
– EcV growth of £17.1m, consisting of £5.1m for Waard and £12.0m
position does not benefit from book run-off.
It therefore adds value and creates surplus
capital through writing new business and by
efficient operational management and
capital optimisation.
for Scildon since acquisition.
– Cash of £25.3m has been generated, with £10.5m from Waard
and £14.8m from Scildon.
– IFRS profits of £23.6m, including £18.4m earned by Scildon since
acquisition, largely due to favourable investment conditions which
have not been offset by reserve movements.
CUSTOMER
OUTCOMES
– Great importance is placed on providing
customers with high quality service and
positive outcomes.
– Scildon received awards for ’Best occupational pension insurer’ and
’Best annuity insurer’, and was rated second for term insurance,
according to the Dutch broker organisation, Adfiz.
– Whilst our ultimate priority is the end customer,
– The annual performance research for consumers shows high
in Scildon we also see the brokers who
distribute our products as customers and
developing processes to best support them is
a key focus.
scores.
– Scildon replaced some non-performing funds.
GOVERNANCE
– The Waard Group and Scildon operate in a
– Both companies have successfully delivered their inaugural
regulated environment and comply with rules
and regulations both from a prudential
and from a financial conduct point of view.
Solvency II reporting.
– Progressed the alignment of the Scildon governance and risk
management framework to Chesnara practices.
– Scildon appointed Gert Jan Fritzsche as CEO and Rene Tuitert
as CFO, who started in March 2018.
– Waard appointed Lorens Kirchner and Andy Schaut as CEO and
CFO respectively in 2017.
PROFITABLE
NEW BUSINESS
– The acquisition of Scildon has added a ’New
business’ dimension to the Dutch business
model. Scildon sells protection, individual
savings and group pensions contracts via a
broker-led distribution model. The aim is to
deliver meaningful value growth from realistic
market share. Having realistic aspirations
regarding volumes means we are able to
pursue a profitable pricing strategy. New
business also helps the business maintain scale
and hence contributes to unit cost management.
– LGN has been successfully rebranded to Scildon with no apparent
adverse impact on new business levels or broker support, as shown
by levels of Annual Premium Equivalent remaining consistent
between 2016 and 2017.
– There have been modest new business profits of £1.9m in the year.
– Market share for the core protection business is towards the middle
of our 5 - 10% range.
– New business processes have been reviewed with improvement
opportunities identified which will be mutually beneficial to brokers,
customers and profits. These smart process changes aim to create
more commercially meaningful levels of new business profit.
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28
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
2018 will see further development of the Scildon business, with the business planning process helping to identify
key strategic priorities to achieve this. These priorities include enhancing the profitable and scalable new business
operations and refining the product offering to meet the needs and demands of the market. Underpinning this,
system and process developments will be implemented to enhance the customer and broker experience thus
developing an organisation with a structure and culture that supports value generation.
FUTURE PRIORITIES
KPIs ALL COMPARATIVES HAVE BEEN PRESENTED USING 2017 EXCHANGE RATES
– Both businesses will pay a dividend to Chesnara in spring
Scildon value growth
2018 in respect of the 2017 year end.
– In line with our integration plan, areas of Scildon requiring
investment have been identified. This investment will
strengthen future cash generation and value growth and
one-off costs for these developments have been
provided for. Plans include:
• Process and value for money improvements such as
increased levels of ’straight through’ processing;
• Continuation of existing IT infrastructure developments
to facilitate efficient processes;
• Enhancing new business profitability and launching
appropriate products to market in a timely fashion; and
• Continual assessment of the business model to ensure
an optimal balance between returns generated versus
the solvency capital requirements.
Underlying value growth £m
46.1
82.5
119.8
119.8
Reported
Cumulative
value
dividends
293.6
269.3
241.4
224.1
221.1
2013
2014
2015
2016
2017
Scildon has a track record of delivering value growth enabling dividend distribution to
the parent company and will pay its first dividend to Chesnara plc in April 2018.
– Enhancing and developing existing processes and
Scildon client satisfaction rating
customer experiences and the underlying infrastructure.
– Organise discussions with brokers to support the
development of our processes in conjunction with their
requirements.
– Perform a customer assessment and use the outcome
to improve quality of service.
– Introduce chat-function on new website, improve
navigation to documents and disclose more relevant
information on-line.
– Continue to improve Scildon’s brand recognition.
– The continued focus is to fully align and integrate the
governance routines such as the Risk Management
Framework, Business Planning, MI production
and ensuring local processes conform to the Chesnara
governance map where appropriate.
7.3
7.5
7.4
7.6
2014
2015
2016
2017
SOLVENCY RATIO SCILDON: 258% SOLVENCY RATIO WAARD: 613%
204%
30.6
(22.2)
231%
258%
98.0
6 April 17
surplus
Surplus
generation
128.6
31 Dec 17
surplus
(pre-div)
106.4
74.4
2017 div
31 Dec 17
surplus
31 Dec 16
surplus
Surplus
generation
82.5
31 Dec 17
surplus
(pre-div)
710%
613%
8.1
(44.3)
483%
38.2
2017 div
31 Dec 17
surplus
Solvency is strong in both businesses. £30.6m and £8.1m of surplus have been generated
by Scildon and Waard respectively. After the 2017 dividend, including the interim dividend
paid by Waard to fund the LGN acquisition, solvency ratios are 231% and 483%.
– With solid new business foundations, management
Term assurance market share %
New business profit
£m
0.9
0.1
2.0
1.9
actions are planned over the next two years to
generate a more commercially meaningful level of new
business profit.
– One of the objectives of the actions is to move the market
share for protection business towards the top end of the
5-10% target range.
– Whilst maintaining the focus on protection, Scildon plan
to increase the assets under management for pension
business and remain market leader in the growing unit
linked market.
10.9
2013
5.0
6.6
5.9
7.3
(3.6)
2014
2015
2016
2017
2013
2014
2015
2016
2017
29
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 02
ACQUIRE LIFE & PENSIONS BUSINESSES
On 5 April 2017 we completed the acquisition of Legal
& General Nederland (subsequently renamed Scildon).
The completion of Scildon, which had an economic
value of €237.5m at the point of acquisition, results in
the group having 39% of its Economic Value in the
Netherlands.
This acquisition continues our acquisition strategy in
the Netherlands. We believe this deal leaves us with
sufficient scale and presence to progress further value
adding deals in the Dutch market.
HIGHLIGHTS OF LGN ACQUISITION:
– Completion purchase price of €161.2m
– Economic value of €237.5m at acquisition,
representing a purchase price discount of 32%
– The impact of the acquisition, after taking account of
the equity de-risk programme, is to increase the
solvency surplus of the group by £4.7m
– Integration plans progressing well, with equity de-risk
programme completed
ACQUISITION OF LEGAL & GENERAL NEDERLAND
IMPACT ON THE GROUP
About Scildon
– A long established, award winning specialist insurer in the Netherlands.
– Policy base predominantly individual protection and savings contracts.
– Writes new business and sells protection, individual savings and group
pensions contracts via a broker-led distribution model.
– Well-capitalised, with a solvency ratio of 204% at acquisition. It applies
the standard formula with no transitional measures.
204%
SOLVENCY
RATIO
174,000
POLICIES
€237.5M
EcV
149
EMPLOYEES
€2.2BN
AUM
Our post acquisition integration work is progressing very
well. For more information see the Netherlands Business
Review on p28 to 29.
CASH GENERATION
POLICY NUMBERS
– Post acquisition cash generation
expected to emerge at levels
which would more than cover
incremental funding costs,
thereby creating a net positive
impact on group cash.
VALUE
– Scildon was purchased at a 32%
discount to its economic value,
resulting in a day 1 gain of £65.4m.
– The Netherlands now makes up
39% of group EcV.
– Scildon’s 177,000 policies at
31 December 2017 result in the
group now managing a policy
base of over 1.1m, of which 27%
are in the Netherlands.
SOLVENCY
– The acquisition gives rise to an
increase in the absolute level
of group capital above its capital
requirements, after taking
account of the equity de-risk
programme.
CUSTOMER OUTCOMES
FUNDING AND CAPITAL
– Continuity of Scildon’s operating
model will ensure existing high
quality customer outcomes are
not compromised.
RISK APPETITE
– The risks associated with Scildon
align with the appetite of the
Chesnara group following the
equity de-risk activity.
– Our integration plans include
bringing Scildon within the group’s
risk management framework.
– Deal financed through £66.7m
of equity after costs, £49.0m of
incremental debt and £21.9m
of Chesnara’s own cash.
– Our group gearing ratio, now
19.8%, remains well within our
risk appetite.
– Further equity raising capacity
is expected to be available for
future deals.
ACQUISITION OUTLOOK
– Scildon contributes positively to the acquisition outlook due to increased
scale and presence in the Netherlands. We believe we are well-positioned
to take advantage of any future acquisition opportunities.
– Regarding the UK, we have seen a gradual increase in closed book
market activity which, in our view, is driven in part by reduced uncertainty
regarding Solvency II and regulatory developments.
– The environment in which European life insurance companies operate
continues to increase in complexity. For example, ‘IFRS 17 Insurance
Contracts’ was issued this year, which is a fundamental overhaul of the
way in which insurance contracts are accounted for. We believe this
additional complexity will potentially drive further consolidation as
institutions seek to remove operational complexity and potentially release
capital or generate funds from capital intensive life and pension businesses.
– Chesnara is a well-established life and pensions consolidator with a
proven track record. Our financial foundations are strong, we have a
proven and stringent acquisition assessment model, and we continue to
have strong support from shareholders and lending institutions to
progress our acquisition strategy. We believe our operating model has
the flexibility to accommodate a wide range of potential target books.
Our good network of contacts in the adviser community, who
understand the Chesnara acquisition model, ensures we are aware of
most viable opportunities in the UK and Western Europe. With this in
mind, we are confident that we are well positioned to continue the
successful acquisition track record in the future.
– To prepare for future deals, we have been working closely with our
current debt provider, RBS, to convert our existing debt arrangement
into a syndicated facility. This will provide access to higher levels of debt
financing from a wider panel of lenders, which in turn will enable us to
fulfill our appetite of financing future deals up to the maximum levels of
gearing set out in our debt and leverage policy, without being restricted
by the lending capacity of one individual institution. This new syndicated
facility is expected to be operational during April 2018.
30
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 CAPITAL MANAGEMENT • SOLVENCY II
WHAT IS SOLVENCY AND CAPITAL SURPLUS?
– Solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold.
– The value of the company is referred to as its ‘Own Funds’ (OF) and this is measured in accordance with the rules of
the Solvency II regime.
– The capital requirement is also defined by Solvency II rules and the primary requirement is referred to as the Solvency
Capital Requirement (SCR).
– Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF less SCR
SOLVENCY
SURPLUS
CASH
GENERATION
Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for
liquid resources available to fund matters such as dividends, acquisitions or business investment.
As such, Chesnara defines cash generation as the movement in surplus, above management
buffers, during the period.
MORE ABOUT OWN FUNDS
MORE ABOUT THE CAPITAL REQUIREMENT
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and includes
a value for future profits expected to arise from in-force policies.
WHAT IS CAPITAL REQUIREMENT?
The Solvency Capital Requirement can be calculated using a ‘standard
formula’ or ‘internal model’. Chesnara adopts the ‘standard formula’.
The Own Funds valuation is deemed to represent a
commercially meaningful figure with the exception of:
Contract boundaries
Solvency II rules do not allow for the recognition of future cash flows
on certain policies despite a high probability of receipt.
Risk margin
The Solvency II rules require a ‘risk margin’ liability which is deemed
to be above the realistic cost.
Restricted with-profit surpluses
Surpluses in the group’s with-profit funds are not recognised in
Solvency II Own Funds despite their commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted
for the items above. As such our Own Funds and EcV have many
common characteristics and tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term guarantee
package when Solvency II was introduced, are available to
temporarily increase Own Funds. Chesnara does not take advantage of
such measures.
HOW DO OWN FUNDS CHANGE?
Own Funds (and Economic Value) are sensitive to economic
conditions. In general, positive equity markets and increasing yields
lead to OF growth and vice versa. Other factors that improve Own
Funds include writing profitable new business, reducing the expense
base and improvements to lapse rates.
The standard formula requires capital to
be held against a range of risk categories.
The following chart shows the categories
and their relative weighting for Chesnara:
Market risk
Counterparty default risk
Life underwriting risk
Health underwriting risk
Operational risk
THERE ARE THREE LEVELS OF CAPITAL REQUIREMENT:
Minimum dividend paying requirement
The board sets a solvency level above the SCR which creates a more
prudent level applied when making dividend decisions.
Solvency capital requirement
Amount of capital required to withstand a 1 in 200 event. The SCR
acts as an intervention point for supervisory action including
cancellation or the deferral of distributions to investors.
Minimum capital requirement (MCR)
The MCR is between 45% and 25% of the SCR. At this point
Chesnara would need to submit a recovery plan which if not effective
within three months may result in authorisation being withdrawn.
HOW DOES THE SCR CHANGE?
Given the largest component of Chesnara’s SCR is market risk,
changes in investment mix or changes in the overall value of our assets
has the greatest impact on the SCR. For example, equity assets require
more capital than low risk bonds. Also, positive investment growth in
general creates an increase in SCR. Book run-off will tend to reduce SCR
but this will be partially offset by an increase as a result of new business.
CHESNARA GROUP OWN FUNDS
CHESNARA GROUP SCR
£m
615
505
443
31 Dec 2017
31 Dec 2016
31 Dec 2016
(excl. LGN
impact)*
Group solvency
ratio
Group solvency
surplus
£m
31 Dec 2017
31 Dec 2016
31 Dec 2016
(excl. LGN impact*)
146%
158%
144%
£193.4m
£184.7m
£134.8m
*Excluding impact of equity raise and acquisition costs for LGN acquisition.
422
321
309
31 Dec 2017
31 Dec 2016
31 Dec 2016
(excl. LGN
impact)*
31
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 CAPITAL MANAGEMENT • SOLVENCY II
(CONTINUED)
We are well capitalised at both a group and subsidiary level, and we have not used any elements
of the long term guarantee package.
SOLVENCY POSITION
SOLVENCY SURPLUS
£m
Chesnara
Group
146%
158%
144%
£m
151
42
615
422
a
r
a
n
s
e
h
C
p
u
o
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G
505
153
32
321
a
r
a
n
s
e
h
C
p
u
o
r
G
443
104
31
34.1
309
134.6
25.9
(3.8)
(8.0)
5.0
(30.1)
8.1
27. 5
193.4
31 Dec 2017
31 Dec 2016
31 Dec 2016
(excl. LGN impact)
THE COMMENTARY BELOW HIGHLIGHTS KEY POINTS IN THE
YEAR, STARTING WITH THE PRE-LGN STARTING POSITION
Surplus: The solvency position of the group remains strong, at 146%. The group
has £151m of distributable surplus over and above the internal capital
management policy. Each division has contributed positively to group surplus. The
graph shows that the Scildon acquisition has reduced the solvency surplus
available at a group level by £8.0m. This was expected and does not include the
impact of the equity de-risking, which was delivered post acquisition. Adjusting
for this, the ‘day 1’ impact of the Scildon acquisition has resulted a small positive
contribution to the overall group solvency position of £4.7m.
Dividends: The closing solvency position is stated after deducting the £19.6m
proposed dividend (31 December 2016: £19.0m), and also reflects the payment
of an interim dividend of £10.5m.
Divisional movement - £95.6m
CA
Movestic Waard
Scildon
Chesnara/
consol adj
Scildon
acquisition
impact
Exchange
rates
Dividends
Total
surplus
31/12/17
Group
surplus
31/12/16,
pre equity
raise
impact
Own Funds: A large contributor to the Own Funds growth of £172m is a £54m
‘day 1’ gain arising on the acquisition of Scildon, coupled with the equity raise to
support this acquisition of £62m. The operating companies have collectively
generated £88m of additional own funds. The own funds movement recognises
the full year dividend burden of £30.1m.
SCR: The SCR has increased by £111m in the year. £109m of this arose from
the ‘day 1’ acquisition impact of Scildon.
The graphs on this page present a divisional view of the solvency position which may differ to
the position of the individual insurance company(ies) within that division. Please note that prior
year figures have been restated using 31 December 2017 exchange rates.
UK
£m
130%
128%
13
26
11
26
167
128
166
130
31 Dec 2017
31 Dec 2016
Surplus: £13m above board’s capital
management policy.
SWEDEN
Dividends: The solvency position is
stated after deducting £32.0m
proposed dividend (31 December
2016: £30.0m).
Own Funds: Positive growth before
dividends of £32.4m, driven largely by
positive equity markets in the year.
SCR: Broadly flat for the year.
Insurance risk capital has reduced in
line with book run off, off-set by
increases in market risk capital driven
by equity growth.
£m
153%
140%
49
30
27
27
228
149
191
136
31 Dec 2017
31 Dec 2016
NETHERLANDS –
WAARD
Surplus: £28m above board’s capital
management policy.
NETHERLANDS –
SCILDON
£m
483%
712%
89
64
13
13
48
28
10
10
31 Dec 2017
31 Dec 2016
Dividends: The solvency position is
stated after deducting £13.0m
proposed year end dividend and
£32.1m paid in the year (31 December
2016: £nil).
Own Funds: Positive growth before
dividends of £6.8m, driven by solid
investment returns in the year and
refined assumptions.
SCR: SCR has reduced slightly,
largely due to decreased counterparty
exposure through reduced cash
holdings.
£m
231%
204%
25
81
81
188
200
4
98
98
31 Dec 2017
31 Mar 2017
KEY Own Funds (Post Div) SCR Buffer Distributable surplus above buffer
32
Surplus: £49m above board’s capital
management policy.
Dividends: The solvency position is
stated after deducting £2.8m
proposed dividend (31 December
2016: £2.7m).
Own Funds: Positive growth before
dividends of £39.9m, driven largely by
positive investment returns in the
year, offset by the negative impact of
changing assumptions regarding future
fee income.
SCR: Increased by £13m, largely due to
growth in assets under management.
Surplus: £25m above board’s capital
management policy.
Dividends: The solvency position is
stated after deducting £22.2m
proposed dividend (31 December
2016: £nil).
Own Funds: Positive post acquisition
growth before dividends of £10.0m.
Underlying growth owing to
favourable returns from fixed interest
assets, offset by some one-off post
acquisition expense strengthening.
SCR: Fall largely driven by reduction in
equity holdings.
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
CAPITAL MANAGEMENT • SENSITIVITIES
The group’s solvency position can be affected by a number of factors over time. As a consequence, the group’s EcV and
cash generation, both of which are derived from the group’s solvency calculations, are also sensitive to these factors.
The diagram below provides some insight into the immediate and longer term impact of certain sensitivities that the group is exposed to, covering solvency,
cash generation and economic value. As can be seen, EcV tends to take the ‘full force’ of adverse conditions whereas cash generation is often protected in the
short term and to a certain extent in the longer term due to compensating impacts on our required capital.
Solvency surplus
Cash generation
EcV
Impacts
Sensitivity scenario
Immediate impact
5 year impact
Immediate impact
20% sterling appreciation
25% equity fall
25% equity rise
10% equity fall
10% equity rise
1% interest rate rise
50bps credit spread rise
25bps swap rate fall
10% mass lapse
10% expense rise
+ 1% inflation rise
INSIGHT*
£0m to £15m
£15m to £30m
£30m to £50m
£50m to £90m
£90m to £140m
KEY
positive impact
negative impact
20% sterling appreciation
A material sterling appreciation reduces the value of surplus in our overseas
divisions, and hence has an immediate material day 1 impact on group
cash generation. It also reduces the value of projected Own Funds growth in
our overseas divisions and also reduces the value of overseas investments
CA holds in its linked funds.
Equity sensitives
The impact of an equity fall causes the Own Funds to fall and the SCR also
falls as the value of the funds exposed to risk is lower. Since the two
movements largely offset each other, the net impact on surplus is small. In an
equity rise, the Own Funds and SCR both rise and, again, the impact on
balance sheet surplus is small. The impacts are not symmetrical due to the use
of management actions and differences in the application of tax depending on
the direction of the stress. The EcV impacts are more intuitive as they are
more directly linked to the Own Funds impact. The impact on future growth
builds on the immediate impact as future returns are directly impacted
by the rise/fall in fund values under the sensitivity. The divisions that most
contribute to equity sensitivities are CA and Movestic due to their large
amounts of unit-linked business.
1% interest rate rise
An interest rate rise is generally positive across the group. The total cash
generation impact across the group of £42.1m is broadly equal across CA,
Movestic and Scildon.
50bps credit spread rise
A credit spread rise has a notable adverse impact on day 1 cash surplus and
future cash generation in Scildon, largely as a result of the extent of corporate
bond holdings that form part of the asset portfolios backing non-linked insurance
liabilities. The impact on the other divisions is far less severe.
25bps swap rate fall
This sensitivity measures the impact of a fall in the swap discount curve with
no change in the value of assets. The result is that liability values increase in
isolation. The most material impacts are on CA and Scildon due to the size of
the non-linked books.
10% mass lapse
For this sensitivity, there is only a small immediate impact on surplus as any the
reduction in Own Funds is negated by a reduction in the SCR. However, with
fewer policies on the books there is less potential for future profits. The division
most affected is Movestic, largely because as a unit-linked business the
loss in future AMCs following a mass lapse hits Own Funds by more than
the associated reduction in SCR.
10% expense rise + 1% inflation rise
The expense sensitivity hits the solvency position immediately as the increase
in future expenses and inflation is capitalised into the balance sheet. CA is
affected more than the other divisions owing to the governance structure of
the business.
*BASIS OF PREPARATION ON REPORTING
Although it is not a precise exercise, the general aim is that the sensitivities
modelled are deemed to be broadly similar (with the exception that the
10% equity movements are naturally more likely to arise) in terms of
likelihood. Whilst the sensitivities provide a useful guide, in practice, how
our results react to changing conditions is complex and the exact level of
impact can vary due to the interactions of events and the starting position.
33
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
FINANCIAL REVIEW
The key performance indicators are a reflection of how we have performed in delivering our three strategic
objectives and our core culture and values. 2017 has delivered strong results across all metrics, with cash generation,
pre-tax EcV earnings and IFRS profits all in excess of prior year and plan, with a closing EcV of £723.1m.
IFRS PRE-TAX PROFIT
£89.6m 2016: £40.7M
IFRS TOTAL COMPREHENSIVE INCOME
£86.9m 2016: £55.4M
Further detail on page 36
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.
Highlights
£m
2017
2016
CA
Movestic
Waard
Scildon
50.6
42 .7
Group
& consol
adj
Profit on
acquisition
Taxation
Forex
impact*
Why is it important?
IFRS 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
statutory measure used both internally and by our external stakeholders in
assessing the performance of the business. IFRS profit is an indicator of
how we are performing against our stated strategic objective of ‘maximising
value from the existing business’ 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 profit can be affected by a number of our principal risks and
uncertainties as set out on p43 to 45. In particular, volatility in equity
markets and bond yields can result in volatility in the IFRS pre-tax profit,
and foreign currency fluctuations can affect total comprehensive income.
9.8
8.7
5.2
6.2
18.4
20.3
20.1
8. 5
(14.7 ) (16.9)
(5.4)
(11.2)
*includes other comprehensive income
– Strong pre-tax results across all segments.
– IFRS pre-tax profit of £89.6m significantly ahead of prior year and plan.
Pre-tax profit, excluding the profit on acquisition of LGN, was £69.3m and
still represents a 70% uplift on prior year.
– Operating profits of £38.4m are the foundation of the result, supported by
economic earnings of £30.9m driven largely by equity markets.
– Total comprehensive income includes a foreign exchange gain of £8.3m
(2016: £20.1m gain) relating to sterling’s depreciation against both the euro
and Swedish krona.
CASH GENERATION
£28.6m 2016: £85.4M*
DIVISIONAL CASH GENERATION
£86.7m 2016: £34.3M
Further detail on page 37
What is it?
Cash generation is a measure of how much distributable cash has been
generated in the period. Cash generation is driven by the change in
solvency surplus in the period, taking into account board-approved capital
management policies.
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 existing business’. 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 43 to 45. Whilst cash generation is a function of the
regulatory surplus, as opposed to the IFRS surplus, they are impacted by
similar drivers, 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.
*Includes one-off impact of £48.9m in respect of LGN equity raise
Highlights
£m
34.5
11.1
24.9
16.2
86.7
(2.7)
(55.3)
28.6
UK
Sweden
Netherlands
Waard
Netherlands
Scilden
Divisional
cash
generation
Other
group
activities
Impact of
Scildon
acquisition
Total group
cash
Divisional cash
– Significant cash contributions from all businesses in the year.
– Overall divisional cash generation is in excess of prior year and plan,
underpinned by performance in the UK and Sweden.
Total cash generation
– The completion of the Scildon deal in isolation had a £55.3m negative
cash impact, because consideration exceeded the surplus acquired. This
is largely offset by the equity raised to fund the acquisition recognised
as a positive in the 2016 cash figures, resulting in an adverse end to end
impact of £6.4m.
34
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 These two pages provide a ‘snapshot’ of our key financial measures and some insight into what’s driving the
outcome in 2017. Further analysis can be found on pages 36 to 39.
ECONOMIC VALUE (ECV)
£723.1m 2016: £602.6M
What is it?
Economic Value (EcV) was introduced following the introduction of Solvency II at the start of
2016, with EcV being derived from Solvency II Own Funds. Conceptually, EcV is broadly similar
to EEV in that both reflect a market-consistent assessment of the value of existing insurance
business, plus adjusted net asset value of the non-insurance business within the group.
Highlights
£m
74.1
602 .6
Further detail on page 39
65.4
(29.4)
10.4
723.1
Why is it important?
EcV aims to reflect the market-related value of in-force business and net assets of the
non-insurance business and hence 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 economic value. Analysis of EcV provides additional
insight into the development of the business over time.
The EcV 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
and Dutch businesses) and the value of the company’s ability to acquire further businesses.
Risks
The Economic Value of the group is affected by economic factors such as equity and
property markets and yields on fixed interest securities. In addition, the EcV position of the
group can be materially affected by exchange rate fluctuations. For example a 20.0%
weakening of the Swedish krona and euro against sterling would reduce the EcV of the
group by 18.5%, based on the composition of the group’s EcV at 31 December 2017.
2016
Group EcV
EcV
earnings
Acquisition
Dividends
paid
Forex
gain
2017
Group EcV
– Economic value at the end of the year in excess £723m,
having increased by £120.5m during the period.
– Strong underlying earnings of £74.1m generated in the year.
– Overall growth includes a gain of £65.4m realised on the
acquisition of LGN in April.
– Foreign exchange gains also contribute to the overall growth,
offset by dividend payments.
– EcV earnings were underpinned by significant economic
results and the gain delivered on the acquisition of LGN.
ECV EARNINGS NET OF TAX
£139.5m 2016: £72.5M
Further detail on page 38
What is it?
In recognition of the longer-term nature of the group’s insurance and investment contracts,
supplementary information is presented that provides information on the Economic Value of
our business.
Highlights
£m
Underlying operating
earnings
22 . 5
The principal underlying components of the Economic Value result are:
– The expected return from existing business (being the effect of the unwind of the rates used
Exceptional operating
items
(19.2)
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; and
– The impact of acquisitions.
Economic earnings
Gain on acquisition
76.7
65.4
Why is it important?
By recognising the market-related value of in-force business (in-force value), a different
perspective is provided in the performance of the group and on the valuation of the business.
Economic Value earnings are an important KPI as they provide a longer-term measure of the
value generated during a period. The Economic Value 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, Economic Value
profit emergence from our existing businesses, and the Economic Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors, including those
highlighted within our principal risks and uncertainties and sensitivities analysis as set out on
pages 43 to 45 and 33 respectively. In addition to the factors that affect the IFRS pre-tax profit
and cash generation of the group, the EcV 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 EcV affect our long-term view of the future cash flows arising from
our books of business.
Other
(5.9)
Total EcV earnings
139. 5
– EcV earnings of £139.5m in the year, driven by a combination
of strong underlying economic earnings supported by the
substantial gain realised on the acquisition of LGN in April.
– Strong underlying operating profits were adversely affected by
two non-recurring items. The Movestic result includes an
£11.4m impact relating to changes in future charge assumptions
if, as expected, commercial pressures were to drive fee
changes in the future. In addition, we have provided £7.8m to
cover the Scildon development programme.
– Economic earnings primarily driven by strong equity market
performance and returns on assets across Europe in the period.
35
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 IFRS
IFRS PRE-TAX PROFIT
£89.6m 2016: £40.7M
IFRS TOTAL COMPREHENSIVE INCOME
£86.9m 2016: £55.4M
Executive summary
The group IFRS results reflect the natural dynamics of the segments of the
group, which can be characterised in three major components:
liabilities being reported and measured on a fair value basis. In addition to the strong
trading result, the Scildon purchase also generated a profit on acquisition of £20.3m in
the year.
IFRS results The financial dynamics of Chesnara, as described above, are
reflected in the following IFRS results:
Operating profit
Economic profit
(1) Stable core: At the heart of surplus, and hence cash generation, are the
core 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 closed books, 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: Included within the CA segment is the Save &
Prosper book. This can bring an element of short-term earnings volatility to
the group, with the results being particularly sensitive to investment market
movements due to product guarantees. The IFRS results of Scildon are
potentially relatively volatile although this is primarily due to reserving
methodology rather than ‘real world’ value movements.
(3) Growth operation: The long-term financial model of Movestic and
Scildon 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.
CA
Movestic
Waard Group
Scildon
Chesnara
Consolidation adjustments
Profit before tax and profit on acquisition
Profit on acquisition of Scildon
Profit before tax
Tax
Profit after tax
Foreign exchange translation differences
Other comprehensive income
Total comprehensive income
2017
£m
50.6
9.8
5.2
18.4
(12.1)
(2.6)
69.3
20.3
89.6
(11.2)
78.4
8.3
0.2
86.9
2016
£m
42.7
8.7
6.2
–
(9.7)
(7.2)
40.7
–
40.7
(5.4)
35.3
20.1
–
55.4
1
2
3
4
5
6
4
7
8
Note 1: The CA segment has reported results for the year in excess of those in 2016.
Positive economic conditions contributed £22.2m to the result, of which £11.9m
related to a reduction in the cost of guarantees within the S&P book. This was mainly
driven by favourable equity returns in the year and to a lesser extent valuation interest
rate movements.
Note 2: Movestic has reported a strong trading result, improving on the previous year.
This was principally driven by strong growth in assets under management which in turn
generated increased fund rebates and investment related fee income within the Pensions
and Savings division. This was further boosted by higher premium volumes and favourable
claims experience within the Life and Health division, offset slightly by an expense overrun,
due to the higher than expected use of consultant resource in the year.
Note 3: The Waard Group result is in line with expectations. The reduction in profit year
on year is primarily due to the fact that the 2016 result benefited from a one-off profit
arising on the sale of an investment asset. After taking this into consideration, the profit
emergence is in line with the run-off book profile.
Note 4: The Scildon division has posted a strong result for the nine months since
acquisition. Favourable economic factors have driven strong investment related returns.
This arises from the fact that the Scildon division measures the majority of its insurance
contract liabilities using historical rates of interest, as is customary in the Netherlands.
This can lead to increased volatility in IFRS profits by virtue of the assets that back the
36
Note 5: The Chesnara result represents holding company expenses. The 2017 result
reflects the adverse impact of creating a £2m provision in respect of the expected costs
of delivering the implementation of IFRS 17 at group level. It also reflects a foreign
exchange loss of £2.6m in respect of the Euro denominated loan taken out to part-fund
the Scildon acquisition.
Note 6: Consolidation adjustments relate to items such as the amortisation of intangible
assets. These are lower than previously reported, due to an increase in the write-back of
deferred acquisition costs arising from the Scildon acquisition and a one-off impairment
of acquisition costs within Movestic.
Note 7: As a result of sterling weakening against both the euro and Swedish krona in the
period, the IFRS result includes a large foreign exchange gain, albeit smaller sizeable
than the prior period.
Note 8: Other comprehensive income includes movements relating to the revaluation
of a defined benefit pension scheme and an investment property, both of which are held
within the Scildon division.
Profit before tax and profit on acquisition
Note
Profit on acquisition of LGN
Profit before tax
Tax
Profit after tax
Foreign exchange translation differences
Other comprehensive income
Total comprehensive income
2017
£m
38.4
30.9
69.3
20.3
89.6
(11.2)
78.4
8.3
0.2
86.9
Note
9
10
4
7
7
2016
£m
34.9
5.8
40.7
–
40.7
(5.4)
35.3
20.1
–
55.4
Note 9: The operating result demonstrates the strength and stability of the underlying
business, driving the generation of profit. Product based income and favourable
movements in operating experience in the UK, were offset slightly by the strengthening
of expense reserves to support future developments. Strong premium growth and
favourable claims experience supported the Movestic operating result, whilst Waard and
Scildon produced operating results broadly in line with expectations.
Note 10: Economic profit represents the components of the earnings that are directly
driven by movements in economic variables, e.g. the impact of yield movements on the
cost of guarantees reserves. During 2017, the economic profit is mainly driven by the
impact of positive equity markets.
Analysis of IFRS total comprehensive income (£m)
31 Dec 17 - £86.9m
31 Dec 16 - £55.4m
38.4
30.9
20.3
34.9
Operating
Economic
Profit on
acquisition
of Scildon
Tax
Forex
20.1
8.3
5.8
(11.2)
(5.4)
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
CASH GENERATION
GROUP CASH GENERATION
£28.6m 2016: £85.4M*
DIVISIONAL CASH GENERATION
£86.7m 2016: £34.3M
* The LGN acquisition had an adverse total end to end impact of £6.4m. A £48.9m one-off impact in respect of the equity raise was included in the 2016 result, with a subsequent negative impact of
£55.3m on completion in 2017.
The three territories have generated £86.7m cash in the period, with all four businesses making significant
contributions to the cash generation. Cash in the business is generated from increases in the group’s surplus funds.
Surplus funds represent the excess of assets held over management’s internal capital needs, as in the capital
management policies across the group. These are based on regulatory capital requirements, with the inclusion
of additional ‘management buffers’.
GROUP
– Before taking into account the ’day 1’ impact of the acquisition of LGN, cash
of £83.9m has been generated across the group, partly due to favourable
economic conditions and the positive impact of some non-recurring
management actions.
– Other group activities reflect the residual group expenses and the impact of
consolidation routines, specifically movements in capital requirements
determined at a group level. From a capital requirement perspective, this is
driven by movements in required capital at a Chesnara holding company level
coupled with consolidation adjustments. At a Chesnara holding company level,
capital is principally required to be held for the currency risk associated with
the Movestic, Scildon and Waard Group surplus assets.
– In line with expectations, the end to end impact of the acquisition of Legal &
General Nederland is to reduce surplus cash by £6.4m. The £6.4m cash impact
consists of an increase in own funds of £116.2m (£62.1m of equity raised net
of deal costs; £191.6m of own funds acquired; less purchase price of £137.6m)
offset by an increase in capital requirement of £122.6m (£88.4m of capital
required in Scildon itself, including management group buffer, plus additional
capital at group level of £34.3m). The £88.4m of capital required for Scildon
includes the reduction due to the equity de-risk post acquisition, which
amounted to £12.7m. Of the total impact, cash reduced by £55.3m in 2017,
consisting of the Own Funds acquired less the capital required and the
purchase price. The 2016 positive impact of £48.9m represents the element of
the equity raised before the 2016 year end.
£m
Movement in
own funds
2017
Movement in
management’s
capital
requirement
Forex
Cash
impact
generated
2016
Cash
generated
UK
Sweden
Netherlands – Waard Group
Scildon
Divisional cash
Other group activities
Group cash pre-Scildon
acquisition
Impact of Scildon acquisition
Total group cash
generation
32.4
37.3
5.4
10.5
85.6
(12.7)
72.9
54.1
127.0
2.1
(15.3)
5.1
4.3
(3.8)
10.0
6.2
(109.4)
–
2.8
0.6
1.4
4.9
–
4.9
–
34.5
24.9
11.1
16.2
86.7
(2.7)
83.9
(55.3)
21.3
(2.7)
15.7
–
34.3
2.2
36.5
48.9
(103.2)
4.9
28.6
85.4
UK
– The UK continues to generate significant
levels of cash, ahead of plan, supporting
the dividend payment.
– Own funds growth is the main driver of cash
generation in the UK, which has benefitted
from a reduction in the cost of guarantees
and increased investment return.
– Cash generation includes the benefit of a
£9.0m release of restricted surplus from
the with - profit funds.
– There has also been a reduction in
required capital due to changes in
investment portfolio and reduced
counterparty default risk.
SWEDEN
NETHERLANDS – WAARD & SCILDON
– Sweden had a positive cash generation of £24.9m due to
strong Own Funds growth.
– Own Funds have benefitted from growth in assets under
management, particularly in equity markets.
– Conversely, growth in assets has also had an adverse impact
on the level of capital the business is required to hold, driving
the increase in management capital requirement.
– Cash generation includes a one-off benefit of enhancing
our modelling for commission clawbacks amounting to £7.0m.
– 2016 included a one-off capital increase from a modelling
change for mass lapse risk.
– The Waard Group has continued the solid
cash generation witnessed in the prior year
with positive underlying movements in both
Own Funds and capital requirements.
– Movement in Own Funds was driven
– Scildon has reported positive cash
generation of £16.2m since acquisition.
– Positive economic experience, including
euro exchange gains against sterling,
support the increase in own funds.
by mortality experience and assumption
changes.
– A fall in counterparty default risk underpins
the reduction in the capital requirement.
– 2016 cash generation benefitted from an
exchange rate gain of £8.5m.
– The movement in capital requirement has
benefitted from the continuing capital
management programme that has been
initiated post acquisition.
37
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
ECV EARNINGS
ECV EARNINGS
£139.5m 2016: £72.5M
Driven by generally beneficial investment markets
throughout the year, with sterling depreciation
and volatile yet growing equity markets, the group has
reported significant underlying EcV earnings,
reflecting the resilience and diversity of the business.
In addition, there has been a one-off gain and post
acquisition gains from Scildon.
Analysis of the EcV result in the period by earnings source:
31 Dec
2017
£m
31 Dec
2016
£m
Note
Note 1 – Economic conditions: As with our previously reported EEV metric,
the EcV result is sensitive to investment market conditions. Key investment
market conditions in the period are as follows:
Expected movement in period
New business
Operating variances
Operating assumption changes
Other operating variances
Total underlying operating
earnings
Exceptional operating variances
Total operating earnings
Economic experience variances
Economic assumption changes
Total economic earnings
Other non-operating variances
Risk margin movement
Gain on acquisition
Tax
Total EcV earnings
12.0
12.4
1.2
(3.6)
0.5
22.5
(19.2)
3.3
74.6
2.2
76.8
1.2
4.0
65.4
(11.1)
139.5
6.0
11.9
22.7
0.6
(7.3)
33.9
–
33.9
77.9
(38.3)
39.6
0.8
(3.8)
–
2.0
72.5
2
1
3
Analysis of the EcV result in the year by business segment:
31 Dec
2017
£m
31 Dec
2016
£m
Note
UK
Sweden
Netherlands
Gain on acquisition
Group and group adjustments
EcV earnings before tax
Tax
EcV earnings after tax
54.5
24.0
21.8
65.4
(15.1)
150.6
(11.1)
139.5
42.2
30.8
5.9
–
(8.4)
70.5
2.0
72.5
4
5
6
7
8
– The FTSE All share index has increased by 9.0%;
– The Swedish OMX all share index has increased by 5.7%; and
– 10 year UK gilt yields have fallen from 1.28% to 1.26%.
Note 2 – Exceptional operating items: The Movestic result includes an
£11.4m impact relating to changes in future charge assumptions if, as
expected, commercial pressures were to drive fee changes in the future.
Also included was a £7.8m provision to cover the future Scildon
development programme.
Note 3 – Gain on acquisition of LGN: The acquisition of LGN resulted in a
‘day 1’ gain of £65.4m, representing the difference between the purchase
price of £137.6m and the EcV of LGN at the point of acquisition of £203.0m.
Note 4 – UK: The UK reported significant pre tax earnings of £54.5m for the
year. Solid operating earnings were supported by lower attrition rates and
lower payments in respect of with-profit contracts with guarantees. This offset
the adverse impact of the strengthening of assumptions in relation to
the expense base during the year. Economic profits of £41.1m underpin the
result, supported by market conditions. Key items driving the economic
result include the investment return on shareholder and non-linked assets
and returns driven by the impact of the higher unit prices versus static
guarantees on claims and AMCs. The interaction of changing yields and
inflation also contributed to this. The result also benefited from a £9.0m
release of previously trapped surplus from the with-profit funds.
Note 5 – Sweden: The Swedish division has reported another solid EcV
return in the year. Underlying operating earnings of £15.3m were
underpinned by strong new business performance, owing to transfer
volumes and increased average policy premiums. This was partially offset
by a non-recurring adverse movement in future charge assumptions (see
note 2). An economic profit of £20.0m was reported, driven by equity market
performance and strong returns on the unit linked investment portfolio,
closing on a considerable total annual return of 8.7% for 2017.
Note 6 – Netherlands: The Dutch division has reported earnings of £21.8m
in the period. Underlying operating earnings of £9.0m are offset by an
exceptional non-recurring item in respect of Scildon expense assumptions
(see note 2). Strong economic earnings underpin the result.
Note 7 – Group: In line with expectations, a loss has been reported in the
group component. This is includes the impact of costs incurred in relation
to the LGN acquisition, underlying group level expenses and consolidation
activities.
Note 8 – Tax: The business is reporting a tax expense of £11.1m in the year.
This is driven by a combination of current tax on the profit in the period and
movements in deferred tax relating to group level activities.
38
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 ECV
ECV
£723.1m 2016: £602.6M
The Economic Value (EcV) of Chesnara represents the
present value of future profits of the existing insurance
business, plus the adjusted net asset value of the
non-insurance business within the group. EcV is an
important reference point by which to assess Chesnara’s
intrinsic value.
Value movement: 1 Jan 2017 to 31 Dec 2017
£m
65.4
(29. 5)
EcV to Solvency II
£m
10.4
723.1
723.1
(47.4)
74.1
602 .6
(14.4)
(26. 5)
(19.6)
615.2
2016 Group
EcV
EcV earnings
Acquisition
Dividends
Forex gain
2017 Group
EcV
2017 Group
EcV
Risk margin
Contract
boundaries
Own Funds
restrictions
Dividends
SII Own Funds
EcV earnings: Positive EcV earnings have been reported in the
year, a result of solid underlying operating profits and significant
economic profits, driven by the net impact of equity market growth
and return on assets. Further detail can be found on page 38.
Our reported EcV is based on a Solvency II assessment of the value of the business,
but adjusted for certain items where it is deemed that Solvency II does not
reflect the commercial value of the business. The above waterfall graph shows the
key difference between EcV and SII, with explanations for each item below.
Acquisition: In April 2017, the group successfully completed the
purchase of LGN, delivering a ‘day 1’ acquisition gain of £65.4m.
This is reflected in the group closing EcV.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of £29.5m were paid during the
2017, being the final dividend from 2016 and interim 2017 dividend.
FX gain: The EcV of the group benefited from foreign
exchange gains that were reported in the period as a result of
sterling deprecation against both the euro and Swedish krona.
Risk margin: Solvency II rules require a significant ‘risk margin’ which is held on
the Solvency II balance sheet as a liability, and this is considered to be materially
above a realistic cost. We therefore reduce this margin for risk for EcV valuation
purposes from being based on a 6% cost of capital to a 2.75% cost of capital
(2016: 3.00%).
Contract boundaries: Solvency II rules do not allow for the recognition of future
cash flows on certain in-force contracts, despite the high probability of receipt.
We therefore make an adjustment to reflect the realistic value of the cash flows
under EcV.
Ring-fenced fund restrictions: Solvency II rules require a restriction to be placed
on the value of certain ring-fenced funds. These restrictions are reversed for EcV
valuation purposes as they are deemed to be temporary in nature.
EcV by segment at 31 Dec 2017
£m
Dividends: The proposed final dividend of £19.6m is recognised for SII regulatory
reporting purposes. It is not recognised within EcV until it is actually paid.
255. 5
249. 5
283.9
(65.8)
UK
Sweden
Netherlands
Other group activities
The above graph shows that the EcV of the group is diversified across
its different markets, demonstrating that we are well-balanced and not
over-exposed to one particular geographic market.
39
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 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
4. Management
actions
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
returns
4. Liquidity and
policyholder
returns
5. Maintain the
group as a going
concern
Group solvency
ratio 146%
2015-2017 TSR 33.6%
2017 dividend
yield 5.3%
Based on average 2017
share price and full year 2017
dividend of 20.07p.
Gearing ratio
of 19.8%
This does not include the
financial reinsurance within
the Swedish business.
Group remains a
going concern
(see page 41)
Policyholders’
reasonable
expectations
maintained
Asset liability
matching
framework
operated effectively
in the year
Sufficient liquidity
in the Chesnara
holding company
40
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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 19.8% at 31 December 2017 (13.4% at
31 December 2016).
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;
– current cash resources of the group;
– 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 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 twelve months from which the
Report & Accounts have been signed.
In performing this work, the board has considered the current cash
position of the group and company, coupled with the group’s and
company’s expected cash generation as 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, EcV and solvency. 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.
The information set out on page 32 indicates a strong solvency
position as at 31 December 2017 as measured at both the divisional
and group levels. 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.
Report on page 86, the Financial Statements have continued to be
prepared on a going concern basis.
3. Assessment of prospects
An understanding of the group’s strategy and business model is
central to assessing its prospects, and details can be found on pages
18 and 19.
Our business model provides resilience that is relevant to any
consideration of our prospects and viability. In CA in the UK and in
both Waard and Scildon in the Netherlands, we benefit from a largely
predictable and well understood source of cash generation. In addition,
Movestic and Scildon, provide a source of new business growth.
Our strategy of maximising value from our existing business,
acquiring life and pensions businesses and enhancing
value through profitable new business, is designed to support
long-term and sustainable cash generation.
We assess our prospects on a regular basis through our financial
planning process. Our three year medium term group business plan
forecasts the group’s profitability, cash generation, economic value
and solvency position and is reviewed by the board during the year.
The business plan is built from the bottom up forecasts of each of our
business segments, supplemented by items managed at group level
and assumptions to be used in the basis of preparation. The
performance of the group and our business segments against these
forecasts is monitored quarterly through a series of quarterly business
reviews performed by the group executive and internal management
information which is reviewed by the board.
The group also makes investments, such as life and pensions
business acquisitions and longer term business development
programmes that have a business case beyond our core three year
planning horizon. Significant expenditure of this nature is subject to a
detailed business case being prepared and approved by the board.
4. Longer-term viability statement
In accordance with provision C.2.2 of the 2014 revision of the UK
Corporate Governance Code, the directors have assessed the
prospects of the company over a longer period than the twelve
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.
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:
i. Equity market declines
ii. Reduction in yield curves
iii. Credit spread rise
iv. Swap rate fall
v. Adverse mortality and lapse experience
vi. Adverse expense experiences
vii. Reduced new business volumes
viii. Adverse exchange rate experience
In light of the above 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
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.
41
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
RISK MANAGEMENT
Managing risk is a key part of our business model. We achieve this by understanding
the current and emerging risks to the business, mitigating them where appropriate and ensuring
they are appropriately monitored and managed at all times.
HOW WE MANAGE RISK
RISK
MANAGEMENT
SYSTEM
The risk management system supports the identification, assessment, and reporting of
risks along with coordinated and economical application of resources to monitor and
control the probability and/or impact of adverse outcomes within the board’s risk appetite
or to maximise realisation of opportunities
STRATEGY
POLICIES
PROCESSES
REPORTING
The risk management strategy contains the objectives
and principles of risk management, the risk appetite, risk
preferences and risk tolerance limits.
The risk management policies implement the risk management
strategy and provide a set of principles (and mandated activities) for
control mechanisms that take into account the materiality of risks.
The risk management processes ensure that risks are
identified, measured/assessed, monitored and reported
to support decision making.
The risk management reports deliver information on the material
risks faced by the business and evidence that principal risks are
actively monitored and analysed and managed against risk appetite.
I
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42
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
RISK
PROCESS
Risk management processes are applied at a group, divisional and business unit
level and are documented within a set of board approved risk policies, for each
category of risk.
Chesnara adopts the ‘three lines of defence’ model across the group
taking into account size, nature and complexity, with a single set of risk
and governance principles applied consistently across the business.
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 the controls in
place to manage them. The processes are designed to manage the risk
profile within the board’s approved risk appetite.
Group and divisional risk management processes are enhanced by
stress and scenario testing, which evaluates the impact on the group of
certain adverse events occurring separately or in combination. The
results, conclusions and any recommended actions are included within
divisional and group ORSA Reports to the relevant boards. There is a
strong correlation between these adverse events and the risks identified
in ‘Principal risks and uncertainties’ (see p43 to p45). The outcome of
this testing provides context against which the group can assess
whether any changes to its risk appetite or to its management processes
are required.
cision
e
D
I d entify
A
s
s
e
s
s
Policies &
Governance
M
a
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r
o
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e
nage Monitor R
CHESNARA RISK PREFERENCES
The Chesnara board has approved a set of risk preferences which articulate, in simple terms, the desire to
increase, maintain, or reduce the level of risk taking for each main category of risk. The risk position of the
business is monitored against these preferences using risk tolerance limits, where appropriate, and they are
taken into account by the management teams across the group when taking strategic or operational decisions
that affect the risk profile.
PRINCIPAL RISKS AND UNCERTAINTIES
The table overleaf outlines the principal risks and uncertainties of the group and the controls in place to
mitigate or manage their impact. It has been drawn together following regular assessment performed by
the Audit and Risk Committee of the principal risks facing the group, including those that would threaten its
business model, future performance, solvency or liquidity. Given that the Scildon business risk profile is
similar to that of the Chesnara businesses prior to acquisition of Scildon, the description of the group’s risk
profile at this level is unchanged as a result of the integration of Scildon.
The impacts have not been quantified however by virtue of the risks being defined as principal, the impacts are
potentially large. Although this is a matter of judgement the risks and impacts are ordered based on probabilities
and impacts, putting the largest first.
43
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
RISK MANAGEMENT • PRINCIPAL RISKS AND UNCERTAINTIES
RISK
IMPACT
CONTROL
Exposure to
financial
losses or
value
reduction
arising from
adverse
movements in
investment
markets,
counterparty
defaults, or
through
inadequate
asset liability
matching
Adverse
changes in
industry
practice/
regulation, or
inconsistent
application of
regulation
across
territories
Market risk results from fluctuations in asset values,
foreign exchange rates and interest rates and has the
potential to affect the group’s ability to fund its
commitments to customers and other creditors, as
well as pay a return to shareholders.
Chesnara and each of its subsidiaries have obligations
to make future payments, which are not always known
with certainty in terms of timing or amounts, prior to
the payment date. This includes primarily the payment
of policyholder claims, reinsurance premiums, debt
repayments and dividends. The uncertainty of timing
and amounts to be paid gives rise to potential liquidity
risk, should the funds not be available to make payment.
Other liquidity issues could arise from counterparty
failures/credit defaults, a large spike in the level
of claims or other significant unexpected expenses.
Chesnara performs regular monitoring of movements in the market and
maintains matching programmes to ensure that exposure to any
mismatching is at an acceptable level, forecasting cash requirements and
adjusting investment management strategies to meet those requirements.
Chesnara seeks to limit the impacts of exposure to Market risks by:
– Maintaining a well-diversified asset portfolio;
– Holding a significant amount of surplus in highly liquid ‘Tier 1’ assets
such as cash and gilts;
– Utilising a range of investment funds and managers to avoid significant
concentrations of risk;
– Having an established investment governance framework to provide
review and oversight of external fund managers;
– Carrying out regular liquidity forecasts and asset and liability modelling; and
– Monitoring exchange rate movements. The group would consider
the cost/benefit of hedging the currency risk on cash flows when
appropriate.
In respect of a significant exposure to one major reinsurer, ReAssure
(formerly known as Guardian), the group has a floating charge over the
reinsurer’s related investment assets, which ranks the group equally with
ReAssure’s policyholders.
Through the Risk Management Framework, regulatory risk is monitored
and scenario tests are performed to understand the potential impacts of
adverse political, regulatory or legal changes, along with consideration of
actions that may be taken to minimise the impact, should they arise.
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;
– Maintaining strong open relationships with all regulators;
– Being a member of the ABI and utilising other means of joint industry
representation;
– Performing internal reviews of compliance with regulations; and
– Utilising external specialist advice and assurance, when appropriate.
In extremis, Chesnara could consider the re-domiciling of subsidiaries
or legal restructure of the business, should this result in a more
commercially acceptable business model in a changed operating
environment.
Chesnara currently operates in four 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 minimum requirements. Potential
consequences of this risk for Chesnara is the
constraining of efficient and fluid use of capital within
the group, or creating a non-level playing field with
respect to future new business/acquisitions.
The jurisdictions which Chesnara operates in are
currently subject to significant change arising from
political, regulatory and legal change. These may
either be localised or may apply more widely,
following from EU-based regulation and law, or the
potential unwinding of this following the UK’s decision to
leave the EU.
The group is therefore exposed to the risk of:
– incurring one-off costs of addressing regulatory
change as well as any permanent increases in the cost
base in order to meet enhanced standards;
– erosion in value arising from pressure or
enforcement to reduce future policy charges;
– erosion in value arising from pressure or
enforcement to financially compensate for past
practice; and
– regulatory fines or censure in the event that it is
considered to have breached standards, or fails to
deliver changes to the required regulatory standards
on a timely basis.
Failure to source
acquisitions that
meet Chesnara’s
criteria or the
execution of
acquisitions with
subsequent
unexpected
financial loses or
value reduction
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 suitable
acquisition opportunities within 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.
Through the execution of acquisitions, Chesnara is also
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
as part of the transaction.
Chesnara’s financial strength, strong relationships and reputation as
a ‘safe hands acquirer’ via regular contact with regulators, banks and
target companies enables the company to adopt a patient and
risk-based approach to assessing acquisition opportunities. Operating in
multiple territories provides some diversification against the risk of
changing market circumstances in one of the territories.
Chesnara seeks to limit any potential unexpected impacts of
acquisitions by:
– Applying a structured board approved risk-based acquisition process
including CRO involvement in the due diligence process and deal
refinement processes;
– Having a management team with significant and proven experience in
mergers and acquisitions; and
– Adopting a cautious risk appetite and pricing approach.
44
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 RISK
IMPACT
CONTROL
Adverse
demographic
experience
compared with
assumptions
In the event that demographic experience (rates of
mortality, morbidity, persistency etc.) varies from
the assumptions underlying product pricing and
subsequent reserving, more or less profit will accrue
to the group.
Significant
operational
failure /
business
continuity
event
Expense
overruns and
unsustainable
unit cost
growth
IT/data security
failures or
cyber crime
If mortality or morbidity experience is higher than that
assumed in pricing contracts (i.e. more death and
sickness claims are made than expected), this will
typically result in less profit accruing to the group.
If persistency is significantly lower than that assumed
in product pricing and subsequent reserving, this
will typically lead to reduced group profitability in the
medium to long-term, as a result of a reduction in
future income arising from charges on those products.
The effects of this could be more severe in the case
of a one-off event resulting in multiple withdrawals
over a short period of time (a ’mass lapse’ event).
The group and its subsidiaries are exposed to
operational risks which arise through daily activities
and running of the business. Operational risks may,
for example, arise due to technical or human errors,
failed internal processes, insufficient personnel
resources or fraud caused by internal or external
persons. As a result, the group may suffer financial
losses, poor customer outcomes, reputational damage,
regulatory intervention or business plan failure.
Part of the group’s operating model is to outsource
support activities to specialist service providers.
Consequently, a significant element of the operational
risk arises within its outsourced providers.
Chesnara ensures close monitoring of persistency levels across all groups
of business to support best estimate assumptions and identify trends.
There is also partial risk diversification in that the group has a portfolio
of annuity contracts where the benefits cease on death.
Chesnara seeks to limit the impacts of adverse demographic
experience by:
– Aiming to deliver good customer service and fair customer outcomes;
– Having effective underwriting techniques and reinsurance
programmes, including the application of ’mass lapse reinsurance’,
where appropriate;
– Carrying out regular investigations, and industry analysis, to support
best estimate assumptions and identify trends;
– Active investment management to ensure competitive policyholder
investment funds; and
– Maintaining good relationships with brokers which is independently
measured via yearly external surveys that considers brokers attitude
towards different insurers.
The group perceives operational risk as an inherent part of the
day-to-day running of the business and understands that it can’t be
completely eliminated. However, the group’s objective is to always
control or mitigate operational risks, and to minimise the exposure when
it’s possible to do so in a convenient and cost effective way. Chesnara
seeks to reduce the impact and likelihood of operational risk by:
– Monitoring key performance indicators and comprehensive
management information flows;
– Effective governance of outsourced service providers including a regular
financial assessment. 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;
– Regular testing of business continuity plans;
– Promoting the sharing of knowledge and expertise; and
– Complementing internal expertise with established relationships with
external specialist partners.
The group is exposed to expenses being higher than
expected as a result of one-off increases in the
underlying cost of performing key functions, or through
higher inflation of variable expenses.
For the closed funds, the group is exposed to the
impact on profitability of fixed and semi-fixed expenses,
in conjunction with a diminishing policy base.
For the companies open to new businesses, the group
is exposed to the impact of expense levels varying
adversely from those assumed in product pricing.
For all subsidiaries, the group maintains a regime of budgetary control:
– Movestic and Scildon assume growth through new business such that
the general unit cost trend is positive;
– The Waard Group pursues a low cost-base strategy using a designated
service company. The cost base is supported by service income from
third party customers;
– Countrywide Assured pursues a strategy of outsourcing functions
with charging structures such that the policy administration cost is
more aligned to the book’s run off profile; and
– The group has an ongoing expense management programme in place to
monitor and manage the overall expense base.
Cyber risk is a growing risk affecting all companies,
particularly those who are custodians of customer data.
The most pertinent risk exposure relates to information
security (i.e. protecting business sensitive and
personal data) and can arise from failure of internal
processes and standards, but increasingly companies
are becoming exposed to potential malicious cyber
attacks, organisation specific malware designed to
exploit vulnerabilities, phishing attacks etc. The extent
of Chesnara’s exposure to such threats also includes
third party service providers.
The potential impact of this risk includes financial
losses, inability to perform critical functions, disruption
to policyholder services, loss of sensitive data and
corresponding reputational damage or fines.
Chesnara seeks to limit the exposure and potential impacts from IT/
data security failures or cyber crime by:
– Embedding the Information Security Policy in all key operations and
development processes;
– Seeking ongoing specialist external advice, modifications to IT
infrastructure and updates as appropriate;
– Delivering regular staff training and attestation to the information
security policy;
– Conducting penetration and vulnerability testing, including third party
service providers; and
– Having established Chesnara and supplier business continuity plans
which are regularly monitored and tested.
Chesnara has undertaken further work during 2017 to deliver an
enhanced information security environment commensurate with the
increase in risk exposure and in preparation for the new General Data
Protection Regulation that applies from May 2018.
45
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017 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:
2017
2016
Male
Female Male
Female
Directors of Chesnara plc
Senior management of the group
Heads of business units and group
functions
5
7
20
2
2
6
Employees of the group
169
161
5
3
14
89
Total
201
171
111
2
–
5
83
90
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.
The group will make reasonable adjustments to give the disabled person
as much access to any services and ability to be employed, trained, or
promoted as a non-disabled person.
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.
The Hampton-Alexander report recommends a board diversity target of 30%
for FTSE 350 companies. Gender diversity forms an important part of the
board appointment process.
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.
Chesnara are committed to diversity and, over the last two years, five out
the six senior executive and non-executive appointments have been filled
by females. Our group Audit and Risk Committee and group Remuneration
Committee both have female chairmen and Movestic is now headed up by a
female CEO.
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. Chesnara has
only three members of staff who meet the Companies Act definition of senior
management. We therefore 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.
The principal reason for the movement in employee numbers during 2017 was
the impact of the acquisition of LGN.
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. In addition, as multinational group, we actively use
video-conferencing throughout our interactions.
‘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’.
46
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Whistleblowing
Across the group, we have in place whistleblowing policies, which comply
with local regulatory requirements. In the UK, the Audit & Risk Committee
Chairman is appointed as Whistleblowing Champion, whose responsibilities
meet the requirements of the Senior Insurance Managers Regime. Similar
arrangements are in operation within our overseas divisions.
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. This statement can be found on the
Chesnara plc website. The group welcomes the act and is committed to
the eradication of human trafficking and slavery. Slavery and human
trafficking are abuses of a person’s freedom and rights. We are totally
opposed to such abuses in our direct operations, our indirect operations and
our supply chain as a whole.
The operating model of Chesnara’s UK business is directed towards maintaining
shareholder value by outsourcing all support activities to professional
specialists. The activities typically include policy administration, systems
management, accounting, actuarial and investment management. This has
been provided by long-term contracts held with only reputable suppliers, and
as these are significant, the responsibility of oversight has remained with the
central governance.
We consider that the greatest risk of slavery and human trafficking would
be in our supply chain where operational and managerial oversight is out
of our direct control and we expect our partners to operate in line with our
corporate values.
Anti-Bribery and Corruption Policy
Chesnara has in place an Anti-Bribery and Corruption Policy which is
reviewed annually or more frequently by exception. Its scope includes all
directors, employees and third-parties operating on its behalf and the
company has a zero tolerance to all such matters. Controls operated in the
period include the maintenance and review of a Gifts & Hospitality Register,
the disallowance of any political contributions or inducements and careful
consideration of any charitable donations. The internal financial control
environment acts as a further monitoring and prevention system. There were
no instances of bribery or corruption in the period.
‘OUR APPROACH IS TO BE OPEN, ENTREPRENEURIAL
AND INCLUSIVE IN HOW WE OPERATE’.
Greenhouse gas reporting
Disclosure of emissions
Global GHG emissions data for the year to 31 December 2017:
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 CO2e per square metre of office
space occupied
Emissions reported above normalised to per tonne of product output
Tonnes of CO2e
2017
2016
–
–
193.8
94.7
229.3
132.4
0.063
0.074
The emission figures above reflect the inclusion of Scildon from the date of
acquisition. This has resulted in an overall increase in our total emissions
when compared with the prior year. The overall measure for tonnes of CO2e
per square metre of office space has reduced slightly from the prior year.
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.
There are 34 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.
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. ESOS operates on a four year compliance phase
with the next reporting / compliance date being December 2019.
Approved by the board on 28 March 2018 and signed on its behalf by:
Peter Mason
Chairman
John Deane
Chief executive officer
47
STRATEGIC REPORTCHESNARA ANNUAL REPORT & ACCOUNTS 2017
SECTION C:
CORPORATE
GOVERNANCE
48
CHESNARA ANNUAL REPORT & ACCOUNTS 2017 SECTION C • CORPORATE GOVERNANCE
50
52
53
58
60
62
80
86
89
Board profile and board of directors
Governance overview from the Chairman
Corporate Governance Report
Nomination and Governance
Committee Report
Remuneration Committee Chairman’s
Annual Statement
Directors’ Remuneration Report
Audit & Risk Committee Report
Directors’ Report
Directors’ Responsibilities Statement
Värmdö, Sweden
49
49
CHESNARA ANNUAL REPORT & ACCOUNTS 2017 CORPORATE GOVERNANCE
BOARD PROFILE
AND BOARD OF DIRECTORS
One key role for the Chesnara Board of Directors is to provide leadership
and maintain the highest possible standards of corporate governance.
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 on 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 show the
specific areas of specialism each member provides, with each letter correlating to the competency matrix on the right
Where a board member has a competency in blue this indicates a primary specialism. A 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 in 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
Committee membership: Nomination and Governance,
March 2004 and as Chairman in January 2009.
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:
– Movestic Livförsäkring AB, Chairman
– Chesnara Holdings BV, Chairman
– Countrywide Assured plc, Chairman
– Countrywide Assured Life Holdings Limited, Chairman
Skills and experience:
A
B C D E
F G H I
Current directorships/business interests:
– ZPG plc, Chairman
– Just Eat plc, Chairman Elect
– Chesnara Holdings BV, NED
– Countrywide Assured plc, NED
Skills and experience:
A
B C D E
F G H I
K
JANE DALE
NON-EXECUTIVE DIRECTOR AND CHAIRMAN
OF THE AUDIT & RISK COMMITTEE
JOHN DEANE
CHIEF EXECUTIVE
Appointment to the board: Appointed to the Chesnara plc
board in May 2016 and as Chairman of the Audit & Risk
Committee in December 2016.
Committee membership: Audit & Risk and Nomination
& Governance.
Current directorships/business interests:
– Countrywide Assured plc, Chairman of the Audit & Risk
Committee
– Covea Insurance plc, Chairman of the Audit Committee
– Covea Life Limited, Chairman of the Audit Committee
– British Gas Services Limited, NED
Skills and experience:
A
B D E
F
G H I
J
K
Appointment to the board: Appointed to the board in
December 2014 and 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
50
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
CORPORATE GOVERNANCE
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
• • • • • • •
• • • • • • •
• • • • •
• • • • • •
• • • • • •
• • • • • •
• • • • •
• • • • • • •
• • • • •
• • • •
• • • •
Annual assessment
confirms that our board
continues to hold
significant experience in
the insurance sector and
also have a range of
specialisms which ensure
all aspects of our
competency profile are
well covered.
In the above diagram, a blue symbol represents the number of individuals with a primary specialism in that area, with a grey symbol 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, Chairman of the
Risk Committee
– Hanley Mortgage Services Limited, NED
– Hanley Financial Services Limited, NED
– Sanlam Investment Holdings Limited, NED
– Sanlam UK Limited, NED
– Investment & Life Assurance Group Limited, NED
– Countrywide Assured plc, NED
board and the board of Movestic Livförsäkring AB in
January 2013.
Committee membership: Nomination & Governance and
Audit & Risk.
Current directorships/business interests:
– Exeter Friendly Society, Chairman of the Audit Committee
and Investment Committee
– Exeter Cash Plan Holdings Limited, NED
– Exeter Cash Plan Limited, NED
– Movestic Livförsäkring AB, Chairman of the Audit &
Risk Committee
– Countrywide Assured plc, NED
Skills and experience:
A
B H I
J
K
Skills and experience:
A
B C D
E
F
G H
DAVID RIMMINGTON
GROUP FINANCE DIRECTOR
Appointment to the board: Appointed as group finance
director with effect from May 2013.
Career, skills and experience: David trained as a chartered
accountant with KPMG, has over 20 years’ experience in
financial management within the life assurance and banking
sectors and has delivered a number of major acquisitions and
business integrations. Prior to joining Chesnara plc in 2011
as associate finance director, David held a number of financial
management positions within the Royal London Group
including 6 years as head of group management reporting.
Skills and experience:
A
B C D E
F
H J
51
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
GOVERNANCE OVERVIEW
FROM THE CHAIRMAN
GOOD GOVERNANCE IS THE FOUNDATION FOR HOW WE SHOULD OPERATE.
Dear Shareholder,
On behalf of the board, I am very pleased to present our Corporate Governance Report for the year ended
31 December 2017.
In 2016, the Company reported against the 2014 version of the UK Corporate Governance Code. The revised
Code published by the Financial Reporting Council in April 2016 (the ‘Code’) took effect for companies
with accounting periods beginning on or after 17 June 2016 and has applied to the company for the
financial year ending 31 December 2017. I am delighted to be able to report that the board considers
that the company has complied fully throughout the year with the provisions of the Code.
The board is accountable to our shareholders and wider stakeholders for generating and delivering
sustainable value through good management of the group’s business. The board plays a critical role in
ensuring that the tone for the group’s culture and values is set from the top. I firmly believe that a robust,
and effective, governance framework is essential to support management in delivering the company’s
strategy. We understand that good governance is fundamental to the effective management of the
business and its sustainability in both the short and the long-term.
This section of the Annual Report & Accounts sets out our governance policies and practices, and includes
details of how the company has, during 2017, applied the Code.
Current balance of executive
and non-executive directors
Chairman
Non-executive
Executive
Current gender diversity
of the board
Male
Female
Board tenure of NEDs
Over 6 years
2-6 years
0-2 years
2
2
1
4
5
1
1
3
The board is cognisant of the corporate governance reforms and
proposed changes in legislation that are intended to encourage
responsible corporate behaviour. The board is also mindful of
the company’s wider purpose, responsibilities and decision
making processes to a broader stakeholder group. In delivering
sustainable performance, the board is aware of the need to
consider and engage with the interests of its employees,
customers and suppliers. In 2017, the board continued to
engage with its shareholders to promote effective governance
through open and constructive two-way dialogue, and we
place great value on this engagement.
Significant progress has been made by managers and employees
during the year, not only in the delivery of the day-to-day
business, but also the integration of the newly acquired Scildon
business. We remain mindful of the strong relationship between
ethics and governance and the role the board plays in
demonstrating these. The group’s Governance Map, which sets
out the governance approach and framework, continues to be
developed and embedded across all divisions of the business
including Scildon.
In the year under review, the Audit & Risk Committee undertook
an external audit tender process, which resulted in the
recommendation by the committee of the re-appointment of
Deloitte LLP. Detail of the full tender process is described on
pages 82 to 83 in the Audit & Risk Committee Report.
Appointment of Deloitte LLP remains subject to shareholder
approval at the 2018 AGM.
This report demonstrates how the board and its committees
have fulfilled their governance responsibilities.
Peter Mason
Chairman
28 March 2018
52
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
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 62 to 79,
the Nomination & Governance Committee Report on pages 58 to 59, and the Audit & Risk
Committee Report on pages 80 to 85 describes how the principles set out in the UK
Corporate Governance Code 2016 (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 2017.
Compliance with the Code
The company has complied throughout the year with all of
the relevant provisions of the Code. The UK Corporate
Governance Code is available at www.frc.org.uk
The board
At 31 December 2017, the board comprised of a non-executive
Chairman, four other non-executive directors and two
executive directors.
Biographical details of directors are given on pages 50 and
51 and a board profile, which assesses the core competencies
required to meet the group’s strategic objectives, is provided
on page 51. 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 were also 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 divisions of the
group, 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 Regulatory Authority is the group supervisor and
maintains oversight of all divisions of the group through the
college of supervisors.
The roles of the Chairman and group chief executive
The division of responsibilities between the Chairman of the
board and the group chief executive 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
has direct charge of the group on a day-to-day basis and is
accountable to the board for the strategic, financial and
operational performance of the group.
Senior independent director
The board has designated Mike Evans as senior independent
director. The senior independent director supports the
Chairman in the delivery of the board’s objectives and to
ensure that the view of all shareholders and stakeholders
are conveyed to the board. Mike Evans 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.
The senior independent director also meets with the
non-executive directors, without the Chairman present,
at least annually, and conducts the annual appraisal of the
Chairman’s performance and provides feedback to the
Chairman and the board on the outputs of that appraisal.
Directors and directors’ independence
The board considers that all non-executive directors are
independent. The Chairman was independent at the date
of his appointment and that he was free from any business
or other relationship with the company which could have
materially influenced his judgement and he continues
to represent a strong source of advice and independent
challenge. There are currently four independent
non-executive directors on the board: Mike Evans, Veronica
Oak, David Brand and Jane Dale.
Other than their fees, and reimbursement of taxable expenses
which are disclosed on page 63, the non-executive
directors receive no remuneration from the company during
the year. 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.
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 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.
53
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
THE BOARD
DIRECTORS
RECEIVE REGULAR
UPDATES AS WELL
AS SPECIFIC
SPECIALIST AND
REGULATORY
TRAINING.
CORPORATE GOVERNANCE REPORT (CONTINUED)
Board effectiveness and performance evaluation
As part of the annual performance, an internal effectiveness
evaluation process of the board and its committees was
undertaken in the year. This was through an anonymous
questionnaire and individual meetings with each director to
obtain their views on what was working well and what could
be improved.
The discussions were wide-ranging, covering how well the
board operates, the process of decision making, the balance
between the focus on risk, fair customer outcomes and
running the business, the culture and dynamics of the board
ensuring its composition and that of its committees
are aligned. In addition, using similar methods to those
described above, the non-executive directors, led by
Mike Evans as senior independent director, met to conduct
a formal performance evaluation of the Chairman.
The outcome of the review of the board and its committees
indicated that they continue to be 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. A number of improvements
have been made in the year as a result of the actions
emanating from the effectiveness review undertaken in 2017.
In summary, the principal outputs of the review were that:
– the board should increase its employee and stakeholder
engagement;
– the board should keep under close review, across all
territories, the evolution of, and emerging trends in legislation
and regulation across, the life insurance industry;
– IFRS17 regulation should continue to receive focus and
monitoring of the implementation project; and
– focus should remain on the potential impact of the UK leaving
the European Union.
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, their responsibilities and duties
which is contained within the group’s 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 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 have
also been provided to the board, in particular IFRS17 and
European governance regulations. 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 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.
Information
Regular reports and information are circulated to the
directors in a timely manner in preparation for board and
committee meetings.
As stated above, the company’s directors are also variously
members of the boards of subsidiaries within the UK,
Dutch and Swedish divisions. These boards hold scheduled
meetings, at least quarterly, which are serviced by regular
reports and information, which cover all of the key areas
relevant to the direction and operation of those subsidiary
entities, including business development, key projects,
financial performance and position, actuarial assumptions
setting and results analysis, compliance, investments,
operations, customer care and communication, internal
audit, all aspects of the risk function and own risk and
solvency assessment.
All divisional entities monitor risk management procedures,
including the identification, measurement and control
of risk through the auspices of a Risk Committee. 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 a quarterly
risk report and an annual report on risk management and
internal control systems.
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.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
Directors’ conflicts of interest
The board has a policy and effective procedures in place for
managing and, where appropriate, approving conflicts or
potential conflicts of interest. This is a recurring agenda item
at all board meetings, giving directors the opportunity to
raise any conflicts of interest they may have or to update the
board on any changes to previously lodged interests.
A director may be required to leave a board meeting whilst
such matters are discussed.
The company secretary holds a register of interest, and a
log of all potential conflicts raised is maintained and
updated. Whenever a director takes on additional external
responsibilities, the Chairman considers any potential
conflicts that may arise and whether or not the director
continues to have sufficient time to fulfil his or her duties.
The board is empowered to authorise potential conflicts
and agree what measures, if any, are required to mitigate
or manage them. No new material conflicts of interest are
noted in 2017.
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. Al Lonie will take over
from Zoe Kubiak as company secretary on 1 April 2018.
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.
Remuneration Committee
Full details of the composition and work of the
Remuneration Committee are provided on pages 60 to 61.
Audit & Risk Committee
Full details of the composition and work of the Audit & Risk
Committee are provided on pages 80 to 85.
Nomination & Governance Committee
Full details of the composition and work of the Nomination &
Governance Committee are provided on pages 58 to 59.
55
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT (CONTINUED)
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
Peter Mason - Non-executive Chairman
John Deane - Executive director
Veronica Oak - Non-executive director
David Brand - Non-executive director
David Rimmington - Executive director
Jane Dale - Non-executive director
Mike Evans – Senior independent non-executive director
11 (11 )
11 (11 )
10 (11 )
11 (11 )
11 (11 )
11 (11 )
11 (11 )
5 (5 )
5 (5 )
4 (5 )
5 (5 )
n/a
5 (5 )
5 (5 )
4 (4 )
4 (4 )
4 (4 )
n/a
n/a
n/a
4 (4 )
8 (9 )
8 (9 )
9 (9 )
9 (9 )
9 (9 )
9 (9 )
9 (9 )
The figures in brackets indicate the maximum number of scheduled meetings in the period during which the individual was a
board or committee member.
Relations with shareholders
The group chief executive and the group finance director
meet with institutional shareholders 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 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 company’s
brokers on meetings the executive directors have held with
institutional shareholders. The company has a programme
of meetings with its larger shareholders which provides an
opportunity to discuss, on the basis of publicly available
information, the progress of the business.
Annual and interim reports are published 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
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
16 May 2018 can be found in the notice of the meeting on
pages 177 to 178.
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 and Accounts, and that the process is regularly
reviewed by the board and accords with the guidance.
In accordance with the regulatory requirements of the PRA
and SII, the relevant business divisions have maintained and
enhanced their 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, Waard
Group, Movestic and Scildon. The principal risks and
uncertainties of the group can be found on pages 43 to 45.
56
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
The maintenance of the principal risk registers is the
responsibility of senior management, who report on them
quarterly to the respective divisional Audit and Risk
Committees and to each Chesnara Audit & Risk Committee
meeting. The divisions maintain a risk and responsibility
regime which ensures that:
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 boards and group chief executive have responsibility for
ensuring that the organisation and management of the
operation are characterised by sound internal control, which
is responsive to internal and external risks and to changes
in them;
– the boards have responsibility for the satisfactory
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 are provided to the board before each
board meeting.
management and control of risks through the specification
of internal procedures; and
In relation to the preparation of the group financial statements,
the controls in place include:
– there is an explicit risk function, which is supported by
– the finance governance team review new developments in
reporting requirements and standards to ensure that these
are reflected in group accounting policies; and
– the finance governance team develop the group’s financial
control processes and procedures which are implemented
across the group.
The reporting process is supported by transactional and
consolidation finance systems. Reviews of the applications
of controls for external reporting purposes are carried out
by senior finance management. The results of these reviews
are considered by the board as part of its monitoring of the
performance of controls around financial reporting. The
Chesnara 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 88 and the Long-Term Viability
Statement is set out on page 41.
compliance and internal audit functions.
As an integral part of this regime a detailed risk register is
maintained, which identifies, monitors and assesses risk by
appropriate classification of risk.
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, Scildon 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 2017, and
that it has taken account of material developments between
that date and the date of approval of the Annual Report
and Accounts. The board confirms that these reviews took
account of reports by the Internal Audit 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 statutory audit work. Conclusions
of the Audit & Risk Committee annual review of effectiveness
of the group’s risk management and internal control systems
is reported in more detail in the Audit & Risk Committee
Report, set out on page 84. The board is not aware of any
significant deficiencies in the effectiveness of the group’s
systems of internal control and risk management for the
year under review. There has been no change of status to
this up to the date of approval of this report.
57
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
NOMINATION & GOVERNANCE
COMMITTEE REPORT
The main focus of the Nomination & Governance Committee considers the mix of
skills and experience that the board requires to be effective and with focus on
talent development and succession planning across the group.
Nomination & Governance Committee
During the period under review, the committee comprised
The composition of the board
After a number of director changes in recent years, the
Peter Mason, who also served as Chairman of the committee,
David Brand, Veronica Oak, Jane Dale and Mike Evans, all
of whom served throughout the period. The Chairman does
not chair or attend when the committee is considering
matters relating to his position, in which circumstances the
committee is chaired by an independent non-executive
director, usually the senior independent director. No individual
participates in discussion or decision making when the matter
under consideration relates to him or her.
committee has continued to focus on succession planning,
with a view to identifying the best composition for the board
and its committees for the next phase of development for
the business. In reviewing board composition, it was
noted that a number of directors were approaching six years
on the board and accordingly some changes would be
likely in the medium term. The review also identified areas
where the board should evolve to meet any expected future
business and strategic direction of the group.
The committee Chairman reports material findings and
The committee is mindful of the corporate governance
recommendations at the next board meeting.
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:
developments in the areas of diversity and gender balance
including the changes to the Disclosure and Transparency
Rules. This will be kept under review during 2018, and
any changes to the existing policies and objectives for board
and management diversity will be reported in the next
annual report.
– keep under review the balance, structure, size and
The Nomination & Governance Committee agrees the
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;
– manage the search process for new directors, recommending
appointments to the board; and
– evaluate the balance of skills, knowledge, experience and
diversity of the board.
importance of having diversity on the board, including female
representation and individuals with different experiences,
skills, background and expertise, to ensure an appropriate
board balance is maintained. During the year, the Nomination
& Governance Committee reviewed and recommended the
approval of the Chesnara Diversity Policy. The board currently
comprises five men and two women (28.5%). The key
objective of the policy is stated below:
Chesnara plc recognises and embraces the benefits of having
diversity at its board table in order to achieve and optimise
competitive advantage. The board will aim to include and
utilise directly, or through the board subsidiaries, differences
in the skills, background, ethnicity, gender, regional and
industry experience along with other qualities brought by its
directors and those of its subsidiaries. Such differences will
be considered in determining the optimum composition of
the board and will be re-balanced as appropriate and when
possible to ensure optimal and efficient stewardship.
This includes consideration of recommendations made by the
group chief executive officer for changes to the executive
membership of the board.
The organisation also recognises the benefits of behavioural
diversity, such as temperament and approach of individual
directors and seeks to build the right mix of such independent
character and judgement.
During the period, the committee met four times and
attendance at those meetings is shown on page 56 of the
Corporate Governance Report.
All board appointments are made on merit, in the context of
the skills and experience required for the board to operate
effectively as a unit and taking account of succession
planning. Candidates are assessed against pre-defined and
professional profile criteria. Chesnara remains committed to
meritocracy in the boardroom, which requires a diverse and
inclusive culture where directors believe that their view are
heard, their concerns are attended to and they serve in an
environment where bias, discrimination and harassment on
any matter are not tolerated.
58
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE The development of talent below board level is extremely
important and an area of focus for the board. The company
continues to build an internal leadership pipeline for senior
roles. The board believes by focusing on creating a pool of
internal talent that there is an increased probability of
employee retention and the building of internal capabilities
needed to support the growth of the business.
The biographical details of the board and the committee
membership for each director who served during 2017 can
be found on pages 50 and 51.
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 independent 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. As part of the
appointment process external recruitment consultants are
asked to provide candidates from a diverse range of
backgrounds. Candidates, who are deemed suitable, based
on merit and against objective criteria, are submitted to the
committee as a potential candidate. The committee will
review a short list of suitable candidates against the criteria,
and put forward for interview by the board and the executive
management team suitably qualified candidates. 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. The board maintains its practice of embracing
diversity and has therefore chosen, at this time, not to set
any measurable gender based targets.
The board and its committees undertook annual
effectiveness reviews and the respective Chairmen discussed
the findings in each forum. Other standard processes were
also undertaken, including Fit & Proper assessments, Board
Diversity Policy Review, NED succession planning and the
review of the effectiveness of the Chairman. Any areas
where increased focus was considered to be of potential
value will be taken into account as appropriate during 2018.
Succession planning
Succession planning is an important element of good
governance, ensuring that Chesnara is fully prepared for
planned or sudden departures from key positions throughout
the group. The committee, in the year, has reviewed the
succession plans for the board, the group executive
committee and senior executives across the group. During
the year, increased focus was given to talent and
succession development throughout the group and new
CEOs were appointed in Movestic, Scildon and Waard.
Non-executive director engagement
It is important to the board that non-executive directors
are provided with training and development both within the
business and at a group level. The board believes that
ongoing training is essential to maintaining an effective and
knowledgeable board. The company secretary supports the
Chairman in ensuring that all new directors receive a tailored
and comprehensive induction programme on joining the
board. Continuing education and development opportunities
are made available to all board members throughout the year.
In 2017, a number of development initiatives have
continued, these included one-to-one sessions with key
members of the senior management team and training
sessions given by external providers.
Directors standing for re-election
In accordance with the Code, all directors will offer
themselves for re-election at the Company’s 2018 AGM.
Following the annual board effectiveness reviews of
individual directors, as applicable and subject to re-election,
the Chairman considers that each non-executive director
remains independent and that each director:
– continues to operate as an effective member of the board;
– has the necessary skills, knowledge and experience to
enable them to discharge their duties and contribute to the
continued effectiveness of the board; and
– has sufficient time available to fulfil their duties.
The board, on the advice of the committee, recommends
the re-election of each director proposed for re-election at
the 2018 AGM. The full 2018 AGM notice can be found on
page 177.
Peter Mason
Chairman of the Nomination & Governance Committee
28 March 2018
59
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
REMUNERATION COMMITTEE
CHAIRMAN’S ANNUAL STATEMENT
Dear Shareholder,
I am pleased to present the 2017 Directors’
Remuneration Report, for which we seek your
support at our forthcoming Annual General
Meeting (AGM), in May 2018.
The remuneration policy, which for ease of reference is
Executive performance in 2017
appended to the remuneration report, was put to shareholders
for a binding vote at our AGM on 17 May 2017 and approved
by 97.93% of the votes cast, making it effective from that
date and no changes are proposed this year. For shareholders’
information, we have taken the opportunity to update the
illustration of the application of the policy with data for 2018
(see page 71).
In light of the performance of the executive team in 2017
relative to the financial targets and strategic objectives set,
the Remuneration Committee is satisfied that the reward
outcomes are appropriate. Our assessment of the
performance outcomes in 2017 under the STI can be found
on page 64.
2017 – Another year of delivery
Chesnara has a very clear focus, to recap:
1. Maximise value from existing business;
2. Acquire life and pension businesses that meet the
investment criteria of the company; and
3. Enhance value through profitable new business.
This clear strategic focus is underpinned by the culture,
values and risk environment of the group, which looks to
deliver solid investment returns and value for money for
our customers. From a remuneration perspective we seek
to achieve strong alignment between the interests of
shareholders and executive directors, and continue to operate
two executive incentive schemes: the Short-Term Incentive
Scheme (STI) and Long-Term Incentive Scheme (LTI).
In 2017 we have seen delivery against all three strategic
objectives at a level that has significantly enhanced
shareholder value. The full results are set out on page 8, of
note is:
1. Cash generation of £77.5m exceeding the funding
requirements of the dividend.
2. Completion of the acquisition of LGN at a 32% discount
to Economic Value, increasing the Economic Value of
Chesnara by 31.0% as shown in the half year results issued
in August 2017.
3. Movestic has delivered new business profits broadly in line
with the prior year. Importantly the profit of £11.8m is within
the challenging target range and represents a commercially
attractive return. Movestic has provided to Chesnara a
SEK31.5m (£2.8m) dividend payment which is a 5%
increase compared to 2016.
The second awards made under the 2014 LTI are due to
vest in April 2018 and apply to John Deane (GCEO) and
David Rimmington (GFD). The targets, performance
outcome and estimated value of awards can be found in
the table on page 66. Following shareholder feedback,
disclosure of the embedded value outcome now enables
comparison with opening values.
Changes to the directors’ salary
In line with our remuneration policy, it is our normal practice
to award executive directors, and indeed all employees, an
annual salary increase broadly in line with inflation.
UK employees received an average salary increase of 2% in
2017 and 2.5% in 2018. The salary of John Deane (GCEO)
has been increased in line with these. David Rimmington,
(GFD) has continued to develop in his role and has been
awarded an increase of 2.4% above the average (total 4.9%)
which the committee considers to be a merited increase,
resulting in a salary which is neither excessive relative to pay
internally or the market generally. The executive directors
remuneration for 2018 can be found on page 63.
In line with the average salary increase to staff, the board has
increased the base fee and committee chairmanship fees
for non-executive directors by 2.5%. The Chairman’s role has
expanded following the acquisition of Scildon in the
Netherlands and, in recognition of this extra time commitment,
the Chairman’s fees have increased by £9,500 to £120,000,
which includes an inflationary increase of 2.5%. By comparison
with businesses of a similar size, it is our assessment that
fees to the Chairman remain modest.
60
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
Review of incentive scheme performance measures
As noted in my report last year, we have considered the
performance targets used within the short-term and
long-term incentive schemes to ensure that they remain
effective and appropriate.
Short-Term Incentive Scheme – under this scheme, the
committee has discretion to determine with each award the
performance criteria in accordance with the remuneration
policy. No changes have been considered necessary and
consequently continue to be assessed against financial
targets and strategic objectives – see full details on page 71.
The Long-Term Incentive Scheme aims to align executive
and shareholder interests via two equally weighted metrics:
(1) Total Shareholder Return (TSR); and (2) Embedded Value
(EEV) / Economic Value (EcV) – these latter being a measure
of shareholder value. Following the advent of Solvency II,
EEV has been replaced with Economic Value (EcV).
Therefore, for performance years starting before 1/1/2016
the measure used is EEV, whilst EcV is the measure used
for performance years starting on or after 1/1/2016.
Shareholder engagement
The Directors’ Remuneration Report for the year ended
31 December 2017 comprises my Annual Statement as
Chairman of the Remuneration Committee and our Annual
Remuneration Report, which together are subject to an
advisory shareholder vote at the AGM in May 2018.
The voting outcome at the 2017 AGM in respect of the
Directors’ Remuneration Report for the year ended
31 December 2016 is set out on page 63 and reflects the
support of both private and institutional shareholders.
The committee will continue to be mindful to the interests
of shareholders and other stakeholders and I welcome
shareholder feedback.
Future developments
We have continued to monitor developments in the area of
remuneration, whether that is via enhancements to accepted
best practice, regulatory guidance or legal requirements.
Following publication of the Government’s response to the
Green Paper on Corporate Governance and Executive Pay in
autumn 2017, we are reviewing the reform proposals and
will consider changes as appropriate in line with the reforms
coming into effect. One of the proposals we have already
adopted is to present in our remuneration report a
comparison between the total pay received by our chief
executive and the average of total pay for our UK workforce.
This is set out on page 70.
I hope my annual statement, together with our remuneration
report, provides a clear account of the operation of the
Remuneration Committee during 2017 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
28 March 2018
61
CHESNARA ANNUAL REPORT & ACCOUNTS 2017 ANNUAL REMUNERATION REPORT
This section sets out how the Remuneration Committee has implemented its remuneration policy for executive directors during 2017.
Other than the single total figure of remuneration for each director tables on page 63, payments for loss of office and statement of
directors’ shareholding and share interests on pages 67 and 68, the information contained within this report has not been subject to audit.
Composition and activities of the Remuneration Committee
In accordance with its Terms of Reference, which can be viewed on the company’s website, the Remuneration Committee considered
matters relating to directors’ remuneration at each of its meetings in 2017. Members of the Remuneration Committee during the course of
the year were:
Committee Members
Role on the committee
Committee member since
Attendance in 2017
Veronica Oak
Peter Mason
Mike Evans
Committee Chairman
Committee member
Committee member
January 2013
March 2004
March 2013
4
4
4
Maximum possible
meetings in 2017
4
4
4
Peter Mason was not present when the Chairman’s fees were discussed. By invitation, the group chief executive attends Remuneration
Committees, but was not present when matters relating to his own remuneration were discussed.
The committee does not retain the services of external advisers.
Highlights 2017/2018
In 2017 the committee met four times and dealt with the following matters:
Area of focus
Matter considered
Executive director
remuneration and reward
The committee considered the scheme awards and performance targets for the awards made in 2017 under the 2014
STI Scheme and the 2014 LTI Scheme for executive directors. A half-year evaluation was also undertaken.
All employee and executive
remuneration
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.
Terms of Reference
The committee’s Terms of Reference were reviewed and it was concluded that they continue to be appropriate for
the activities of the committee.
Review of the
remuneration policy
The committee reviewed and updated the remuneration policy and recommended to the board that the policy be
put to shareholders at the 2017 AGM. Following approval at the AGM, the company’s remuneration policy
continued to be monitored during the course of the year and no changes were deemed necessary.
Committee evaluation
An evaluation of the committee’s performance by way of an internal questionnaire suggested that the committee
continued to operate well. To ensure adequate time allocation was provided to the meetings in 2017, the committee
changed to hold meetings on a separate day to all other meetings.
Annual salary review
The committee reviewed the salaries of the executive directors and made changes in line with its
remuneration policy.
Directors’ remuneration
reporting
The committee reviewed the draft Directors’ Remuneration Report for the 2017 Report & Accounts and
recommended their approval by the Chesnara board.
Performance against
strategic targets
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 – see page 65.
Directors’ minimum
shareholding
The committee reviewed and agreed that no changes be made at present in relation to the quantum of shares
required to be held by executive directors. The committee also reviewed the value of shares held by executives
relative to the minimum requirement.
Shareholder engagement
The chairman addressed various queries from shareholders in advance of the 2017 AGM. The committee sought
feedback from institutional investors in relation to the direction of voting at the 2017 AGM.
Chairman’s fees
The committee reviewed the level of fees payable to the Chairman and took into account the increased time
commitment arising from the Scildon acquisition as well as inflation and made its recommendation to the board.
Remuneration principles
The committee reviewed the Group Remuneration Principles, which guide the remuneration policies throughout
the group.
Solvency II
The committee reviewed the PRA’s Solvency II remuneration requirements and assessed the implications
for Chesnara.
Review against UK
Governance Code
A review was conducted by the committee and revealed that the Code had been complied with.
62
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE Statement of voting at general meeting
The following table sets out the voting in respect of the Directors’ Remuneration Report and remuneration policy at the 2017 AGM:
Report
Number
of votes
cast for
Percentage
of votes
cast for
Number
of votes
cast against
Percentage
of votes
cast against
Total
votes cast
Number
of votes
withheld
Remuneration report
Remuneration policy
93,524,042
92,417,545
99.06%
97.93%
884,070
1,958,029
0.94%
2.07%
94,408,112
94,375,574
32,919
65,457
Single total figure of remuneration for each director (audited information)
The remuneration of the executive directors for the years ended 31 December 2017 and 31 December 2016 is made up as follows:
Executive directors’ remuneration as a single figure - year ended 31 December 2017
Name of director
John Deane
David Rimmington
Total
Salary
and fees
£000
All taxable
benefits
£000
Non-taxable
benefits
£000
Annual
bonuses
£000
LTI
£000
Pension
£000
428
264
692
27
17
44
5
4
9
373
206
579
Executive directors’ remuneration as a single figure - year ended 31 December 2016
Name of director
John Deane
David Rimmington
Frank Hughes1
Total
Salary
and fees
£000
All taxable
benefits
£000
Non-taxable
benefits
£000
Annual
bonuses
£000
420
250
212
882
27
14
18
59
2
4
7
13
413
222
167
802
Total for
2017
£000
1,135
685
1,820
Total for
2016
£000
902
617
544
2,063
261
169
430
LTI3
£000
–
103
120
223
41
25
66
Pension2
£000
40
24
20
84
Notes:
1. Frank Hughes stepped down from the board effective 31 December 2016.
2. The pension component in the single figure table represents employer contributions. No directors were members of a defined benefit scheme.
3. These figures have been re-stated to reflect the actual share price at the date of vesting of 383.0 pence.
The remuneration of the non-executive directors for the years ended 31 December 2017 and 31 December 2016 is made up as follows:
Non-executive directors’ remuneration as a single figure - year ended 31 December 2017 and 2016
Name of director
Peter Mason
Peter Wright1
Veronica Oak
David Brand
Mike Evans
Jane Dale2
Total
2017
Benefits3
£000
1
–
1
1
1
1
5
Fees
£000
111
–
58
58
58
63
348
Total
£000
112
–
59
59
59
64
353
2016
Benefits3
£000
–
–
1
–
1
–
2
Fees
£000
108
65
55
55
55
34
372
Total
£000
108
65
56
55
56
34
374
Notes:
1. Peter Wright stepped down from the board effective 31 December 2016.
2. Jane Dale was appointed to the board effective 19 May 2016.
3. Benefits shown here relate to expenses grossed up for income tax, which is settled by the company for travel to Chesnara’s head office in Preston, which, for tax
purposes, is deemed to be the NEDs normal place of work.
63
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE ANNUAL REMUNERATION REPORT (CONTINUED)
Salary and fees
The Remuneration Committee usually reviews basic salaries annually. Assessments are made giving full regard to external factors such as earnings inflation
and industry benchmarks and to internal factors such as changes to the role by way of either structural reorganisations or enlargement of the group. In
addition, basic pay levels reflect levels of experience. The single earnings figures demonstrate the application of this assessment process.
The 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 directors’ remuneration, including the average level of salary increase being budgeted for the UK workforce. The
committee is also mindful of any changes to the pay and benefit conditions for employees more generally when considering directors’ pay.
Payments in respect of salary and pension benefits amounting to £47,392 were made to Frank Hughes who remained an employee until 30 April 2017,
following the cessation of his role as director on 31 December 2016. In addition, he received taxable benefits during this period of £5,574.
Taxable benefits
The taxable benefits for executive directors relate to the provision of a car, fuel allowance and medical insurance. For non-executive directors, the taxable
benefits represent the reimbursement of travelling expenses incurred in attending board meetings at the Preston head office. These amounts also include an
amount to compensate for the personal tax burden incurred.
Annual bonuses
The amounts reported as annual bonuses in 2017 derive from awards made under the 2014 STI. The amounts awarded to the executive directors under this
scheme are based on performance against three core measures; IFRS pre-tax profit, EcV operating profit and group strategic objectives. The table below
shows the outcome of each measure, the target set and the resulting award.
Upper
threshold for
minimum
performance
Percentage
award
for min
performance
On target
performance
Percentage
award for
on target
performance
Minimum
threshold for
maximum
performance
Percentage
award for
maximum
performance
Actual result
Actual
percentage
total award
Total award
(£)
Actual
percentage
award, as
%age of
salary
John Deane
IFRS pre-tax
result*
EcV operating
result**
£27.230m
0%
£36.307m*
15.0%
£72.614m
50.0%
£74.683m
50.0%
50.0%
214,200
£14.059m
0%
£15.621m
12.8%
£23.432m
30.0%
£18.500m
19.1%
19.1%
81,996
Group strategic
objectives
75% of
max
0%
100% of
max
10.0%
100%
20.0%
89.1% of
max
17.9%
17.9%
76,341
Total
David
Rimmington
IFRS pre-tax
result*
EcV operating
result**
37.8%
100.0%
87.0%
87.0%
372,537
£27.230m
0%
£36.307m*
13.5%
£72.614m
45.0%
£74.683m
50.0%
45.0%
118,800
£14.059m
0%
£15.621m
11.5%
£23.432m
27.0%
£18.500m
19.1%
17.2%
45,444
Group strategic
objectives
75% of
max
0%
100% of
max
9.0%
100%
18.0%
88.7% of
max
17.8%
16.0%
42,160
Total
34.0%
90.0%
86.9%
78.2%
206,404
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.
** Note – the EcV operating earnings before exceptional items on page 38 has been adjusted in line with the basis of the target. The result has been reduced to reflect the
exceptional item in Movestic but no adjustment has been made for investment in the Scildon development programme (see note 2 on page 38).
64
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE The following table details the requirements for delivery of the strategic objectives for 2017 and actual outcomes:
Objectives area
Objectives and performance
Outcome
John Deane
Governance
(20%)
Regulator
management
(20%)
Acquisition
and capital
management (30%)
Ensure a robust strategy and management reporting
process is in place.
Board papers consistently of a high standard and enhanced
through the year, including improvements to integration with the
strategy development process, actions on customer
communications and monitoring. Risk Management Framework
further developed.
Maintain strong and constructive relationships
with regulators.
Strong relationships maintained with all regulators. Scildon
capital plan and new plan for Waard agreed with the DNB in the
Netherlands and delivered all FCA information requests.
Support the investigation of acquisitions within risk
appetite.
Improve the consideration of capital management
within the divisions and across the group.
Acquisitions that have been investigated have followed a
defined risk based approach, with working parties established
to oversee that process.
Progressed in 2017 with further work identified for 2018.
Integration of
Scildon (20%)
Ensure that Scildon is integrated into Chesnara in line
with the governance map.
Good progress on the integration of Scildon in governance,
financial reporting and cost saving initiatives with Waard.
People (10%)
Support divisional CEOs in their roles.
Appointment of new CEOs for Waard and Scildon in March and
in Movestic in April with very smooth transitions.
David Rimmington
Divisional
oversight (20%)
Expense
management
(15%)
Acquisition
funding (10%)
Develop and embed with the 3 divisions.
2017 saw a significant expansion of the group but no reduction
in the effectiveness of reporting and oversight with
enhancements as necessary, delivered.
Develop enhanced group wide expense analysis and
reporting to enable appropriate management decisions
regarding expenses.
Established a working group to drive out opportunities along
with a review and revision of delegated authority levels that
will be embedded in 2018.
Develop multi bank consortium facilities to support
acquisition.
Negotiations successfully completed and effective from
April 2018.
Reporting (35%)
Further development of MI for the group and divisions
and production of SII reports.
Solvency II reporting delivered on time and to the quality
required. Group MI packs enhanced and have driven agendas
at Chesnara and board level.
Integration of
Scildon (20%)
Integrate Scildon into Chesnara in line with the
governance map.
Good progress on the integration of Scildon in governance,
financial reporting and cost saving initiatives with Waard.
65
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE ANNUAL REMUNERATION REPORT (CONTINUED)
Annual bonuses (continued)
In converting performance against the measures assessed for 2017 set out in the previous tables, the directors’ annual bonus awards are specified below:
Name of director
John Deane
David Rimmington
Total
Salary on
which award
based
£
Maximum
potential
award as
%age
of salary
Actual
award as
%age of
salary
428,400
264,000
100%
90%
86.96%
78.18%
Total
value of
award
£
372,537
206,404
578.941
35% of the above awards are granted as deferred share awards that will vest at the end of a three-year deferred period.
Long-Term Incentive Scheme Awards
The following table sets out the amounts that are due to vest on 28 April 2018 under the 2014 LTI, for which performance conditions were satisfied during
the year.
Individual
Measure
Weight
Ranges and targets
Actual outcome
Minimum
achievement
(as % of
target)
Target
achievement
Max
achievement
Opening
EcV
Closing
EcV
(Note 1)
Performance
achieved
% of
award
vesting
Value of
award £
John Deane
David Rimmington
TSR
EcV
TSR
EcV
50%
50%
50%
50%
=Median
21.28%
46.36%
33.62%
30.95%
100,412
= 89.0%
£478.6m
£545.8m
£417.2m
£733.4m
153.2%
50.0%
160,650
=Median
21.28%
46.36%
33.62%
30.95%
56,622
= 89.0%
£478.6m
£545.8m
£417.2m
£733.4m
153.2%
50.0%
91,473
The estimated value of the awards vesting disclosed above has been determined using the average share price over the three-month period prior to
the year-end (383.31p). The actual amounts upon vesting will be determined using the share price upon the vesting date.
Note 1: The closing value for EcV is based on that shown on page 39 with the addition of dividends paid out and the deduction of equity raised in the
performance period which is consistent with basis upon which the targets are set.
66
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE The table below sets out potential LTI interests that have accrued during the year, and each directors’ interest in that scheme:
Name of
executive director
Name of
scheme
Date award
was granted
Amount
of options
awarded1
John Deane
2014 LTI
28 April 2017
111,781
2014 LTI
28 April 2016
133,017
2014 LTI
28 April 2015
84,639
David Rimmington
2014 LTI
28 April 2017
61,996
2014 LTI
28 April 2016
71,259
2014 LTI
28 April 2015
47,727
Face value on the
date of grant2
% of award
vesting for
minimum
performance
Length of vesting period –
3 years
Date of vesting
£428,400
based on share price (383.25p)
£415,013
based on share price (312.00p)
£269,998
based on share price (319.00p)
£237,600
based on share price (383.25p)
£222,328
based on share price (312.00p)
£152,249
based on share price (319.00p)
12.5%
28 April 2020
12.5%
12.5%
28 April 2019
28 April 2018
12.5%
28 April 2020
12.5%
28 April 2019
12.5%
28 April 2018
Basis of awards and summary of performance measures and targets
2014 LTI:
Share options awarded are based on the share price at close of business on date of award and a percentage of basic salary as follows: John Deane; 75% in 2015, 100%
in 2016 and 2017. David Rimmington; 75% in 2014 and 2015, 90% in 2016 and 2017. Options have a nil exercise price.
Total Shareholder Return (TSR)
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/EcV growth target
The LTI Scheme has transitioned to Economic Value (EcV) as an equivalent post Solvency II replacement for Embedded Value (EEV). For performance years starting
before 1/1/2016 the measure will be EEV. For performance years starting on or after 1/1/2016 the measure is EcV. 50% of the award will vest subject to the EEV/EcV
outcome being within a certain range of its 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 an estimate of the maximum potential value on vesting.
Payments for loss of office (audited information)
No payments were made during the year for loss of office.
Statement of directors’ shareholding and share interests (audited information)
The remuneration policy, effective from the 2017 AGM, requires executive directors to build up a shareholding through the retention of shares to the value of their
basic salary. As at the reporting date this criteria had not yet been met. When the minimum holding level has not been achieved, directors may only dispose of shares
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.
67
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
ANNUAL REMUNERATION REPORT (CONTINUED)
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 2017 or the date of resignation.
No changes took place in the interests of the directors between 31 December 2017 and 28 March 2018.
Name of director
Shares held:
1 January
2017
Shares held:
31 December
2017
Options:
With
performance
measures
Options:
Without
performance
measures1
Options:
Vested but
unexercised
Options:
Exercised
during
the year
Options:
Percentage of
shareholding
target held2
John Deane
David Rimmington
Peter Mason
Veronica Oak
David Brand
Mike Evans
Jane Dale
Total
19,677
8,848
25,743
3,000
5,500
7,956
3,333
74,057
29,677
20,781
25,743
3,000
5,500
7,956
3,333
329,437
180,982
–
–
–
–
–
70,569
56,111
–
–
–
–
–
–
14,8563
–
–
–
–
–
–
26,944
–
–
–
–
–
85.4%
104.1%
–
–
–
–
–
95,990
510,419
126,680
–
–
–
Notes
1. The ‘options without
performance measures’ column
in the table does not include the
share options that will be awarded
as part of the mandatory deferral
rules under the 2014 STI in
respect of awards made in
relation to the 2017 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 2018
Annual Report and Accounts.
2. Calculated using the share price
of 389.25p at 31 December 2017.
3. Awarded under the 2014
LTI Scheme and vested on
20 May 2017.
Outstanding share options and share awards
Below are details of outstanding share options and awards for current and previous executive directors.
Name of
executive
director
Scheme
Grant
date
Exercise
price (p)
Number of
shares
under
option at
1 January
2017
Number
granted
during
year
Number
exercised
during the
year
Number
lapsed
during
the year
Number
waived
during
the year
Number of
shares under
option and
unexercised at
31 December
2017
End of
performance
period
Vesting
date
Performance
period
Date of
expiry of
option
E
N
A
E
D
N
H
O
J
D
I
V
A
D
N
O
T
G
N
M
M
R
I
I
K
N
A
R
F
*
S
E
H
G
U
H
2014 LTI
(2017 award)
2014 LTI
(2016 award)
2014 LTI
(2015 award)
2014 STI
(2016 award)
2014 STI
(2015 award)
Share save
2014 LTI
(2017 award)
2014 LTI
(2016 award)
2014 LTI
(2015 award)
2014 LTI
(2014 award)
2014 STI
(2016 award)
2014 STI
(2015 award)
2014 STI
(2014 award)
Share save
2014 LTI
(2016 award)
2014 LTI
(2015 award)
2014 LTI
(2014 award)
2014 STI
(2015 award)
2014 STI
(2014 award)
Share save
28/04/17
28/04/16
28/04/15
28/04/17
28/04/16
Nil
Nil
Nil
Nil
Nil
–
111,781
133,017
84,639
–
–
–
37,696
26,575
29/09/15
285.08
6,298
250,529
149,477
–
61,996
71,259
47,727
41,800
–
–
–
–
20,293
15,434
14,086
–
–
–
–
–
28/04/17
28/04/16
28/04/15
20/05/14
28/04/17
28/04/16
27/03/15
Nil
Nil
Nil
Nil
Nil
Nil
Nil
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(26,944)
(14,856)
–
–
–
–
–
–
–
–
29/09/15
285.08
6,298
196,604
82,289
(26,944)
(14,856)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
111,781
31/12/19
28/04/20
3 Years
28/04/27
133,017
31/12/18
28/04/19
3 Years
28/04/26
84,639
31/12/17
28/04/18
3 Years
28/04/25
37,696
26,575
6,298
400,006
61,996
71,259
47,727
n/a
28/04/20
n/a
28/04/26
n/a
28/04/19
n/a
28/04/25
n/a
01/11/18
n/a
n/a
31/12/19
28/04/20
3 Years
28/04/27
31/12/18
28/04/19
3 Years
28/04/26
31/12/17
28/04/18
3 Years
28/04/25
–
31/12/16
20/05/17
3 Years
20/05/24
20,293
15,434
14,086
6,298
237,093
n/a
28/04/19
n/a
28/04/25
n/a
28/04/19
n/a
28/04/25
n/a
n/a
27/03/18
01/11/18
n/a
20/05/24
n/a
n/a
28/04/16
28/04/15
20/05/14
28/04/16
27/03/15
Nil
Nil
Nil
Nil
Nil
50,364
48,399
48,443
14,027
15,237
29/09/15
285.08
6,298
182,768
–
–
–
–
–
–
–
–
–
–
–
(31,227)
(17,216)
–
–
–
–
(3,324)
(2,974)
(33,576)
16,788
31/12/18
28/04/19
3 Years
28/04/26
(16,133)
32,266
31/12/17
28/04/18
3 Years
28/04/25
–
–
–
–
–
31/12/16
20/05/17
3 Years
20/05/24
14,027
15,237
n/a
28/04/19
n/a
28/04/25
n/a
27/03/18
n/a
20/05/24
–
n/a
01/11/18
n/a
n/a
(34,551)
(20,190)
(49,709)
78,318
*Note: Frank Hughes stepped down from the board effective 31 December 2016.
6868
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
Chesnara – Total shareholder return, rebased
FTSE UK Life Insurance – Total Return Index, rebased
FTSE 350 Higher Yield – Total Return Index, rebased
Performance graph and
CEO remuneration table
The following graph 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
LTI, and the FTSE UK Life
Insurance Index has been
selected due to Chesnara’s
inclusion within this Index.
600
550
500
450
400
350
300
250
200
150
100
50
0
x
e
d
n
I
R
S
T
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan18
The table below sets out the details for the director undertaking the role of group chief executive:
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
Individual performing CEO role
John Deane
John Deane
John Deane
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
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% cap 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
accounted for the full 100% combined bonus cap.
CEO single figure
of total
remuneration
£000
Annual bonus
pay-out against
maximum
Long term incentive
vesting rates
against maximum
opportunity
1,135
902
596
712
702
612
384
631
502
86.96%
98.33%
81.96%
91.30%
100.00%
65.48%
17.39%
100.00%
94.27%
80.95%
–
–
34.52%
n/a
100.00%
n/a
n/a
n/a
Note
1
1
1
2
3
4
5
5
5
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 has generated the maximum potential value of £75,000 in 2012. The formal
2012 LTIP scheme has contributed no value to the total single remuneration figure as it
does not vest until performance criteria have been achieved in 2014.
Note 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 executive directors
The table below shows the percentage change in remuneration for the executive directors and the company’s employees as a whole between the years
2017 and 2016.
Percentage change in remuneration in 2017
compared with 2016
Salary and fees1
All taxable benefits
Annual bonuses
Group chief
executive
%
Group finance
director
%
Group
employees
%
2.00
0.81
(16.33)
5.60
0.19
(13.90)
7.18
3.94
37.18
69
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
ANNUAL REMUNERATION REPORT (CONTINUED)
Comparison of total remuneration for the group CEO and UK employees
Following review of the Government’s response to the Department of Business, Energy and Industrial Strategy Green Paper on Corporate Governance
Reform, and mindful of likely guidance and regulatory requirements to be presented in 2018, a comparison of total remuneration for the group chief
executive and an average of total remuneration for UK employees has been prepared for 2017.
Comparison of total remuneration in 2017
Group chief
executive
£
UK employees
(average total
remuneration)
£
Ratio of group
chief executive
remuneration to
UK employees
(average total
remuneration)
Total remuneration1
1,135,000
100,255
11.32
Note 1: This represents a single figure for total executive director remuneration in the year,
compared to the average total remuneration of the UK workforce.
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:
The increases in employee pay and acquisition and maintenance expenditure,
reflect the incremental costs in relation to Scildon, which was acquired in 2017.
The percentage increase in dividends is higher than the underlying increase in
dividends per share, as it incorporates the impact of having an increased
number of shares in issue, following the equity raising exercise in late 2016, to
support the Scildon acquisition.
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. This has been chosen as a comparator to give
an indication of the employee pay relative to the overall cost base. As can be
seen, the total employee pay is a relatively small component.
£m
100
90
80
70
60
50
40
30
20
10
0
2017 2016
+34%
+80%
+9%
25.8
14.3
94.7
70.5
30.1
27.6
Total employee
pay
Business
acquisition and
maintenance
expenditure
Dividends
70
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE Statement of Implementation of remuneration policy in the following financial year
The remuneration policy took effect following approval at the 2017 AGM. This section sets out how the policy will be implemented during 2018.
Salaries and fees
Executive directors
The salary of John Deane (GCEO) has been increased from £428.4k to £439.1k in line with the 2.5% average pay increase awarded to UK staff.
David Rimmington, (GFD) has continued to develop in his role and has been awarded an increase of 2.4% above the average (total 4.9%) which the committee
considers to be a merited increase resulting in a salary which is neither excessive relative to pay internally or the market generally. This translates to an
increase in salary from £264k to £277k.
Non-executive directors
In line with the average salary increase to staff, the board has increased the base fee and committee chairmanship fees for non-executive directors by
2.5%. The Chairman’s role has expanded following the acquisition of Scildon in the Netherlands and, in recognition of this extra time commitment, the
Chairman’s fees have increased by £9,500 to £120,000, which includes an inflationary increase of 2.5%.
The table below sets out the anticipated payments to non executive directors for 2018:
Peter Mason
Veronica Oak
David Brand
Mike Evans
Jane Dale
Total
Fees
£000
120.00
59.45
59.45
59.45
64.58
362.93
Benefits*
£000
1
1
1
1
1
5
Total
£000
121.00
60.45
60.45
60.45
65.58
367.93
* Benefits shown here relate to expenses grossed up for income tax which is settled by the company for travel to Chesnara’s head office in Preston, which, for tax
purposes, is deemed to be the NEDs normal place of work.
2018 award under the 2014 Short-Term Incentive Scheme
The Remuneration Committee proposes to grant awards to the executive directors under the 2014 Short-Term Incentive Scheme.
The table below and accompanying notes set out the performance measures, weightings and the potential outcomes for achieving minimum, on-target
and maximum performance. The actual targets for each measure are deemed to be commercially sensitive and whilst they are not disclosed at this stage,
they will be disclosed in 2018 together with the performance outcome relative to these targets.
Individual
Measures
Weighting
Ranges and targets
Potential outcomes in terms of % of basic salary
Minimum
achievement
(as % of target)
Target
achievement
(as % of target)
Max
achievement
(as % of target)
Minimum
achievement
Target
achievement
Max
achievement
John Deane
IFRS pre-tax profit
EcV operating profit
Group strategic objectives
David
Rimmington
IFRS pre-tax profit
EcV operating profit
Group strategic objectives
40.0%
40.0%
20.0%
40.0%
40.0%
20.0%
75.0%
90.0%
75.0%
75.0%
90.0%
75.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
200.0%
150.0%
125.0%
200.0%
150.0%
125.0%
nil
nil
nil
nil
nil
nil
12.0%
16.0%
10.0%
10.8%
14.4%
9.0%
40.0%
40.0%
20.0%
36.0%
36.0%
18.0%
The STI will be implemented and operated by the Remuneration Committee as set out within the remuneration policy.
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 EcV operating profit are recognised outputs from the
audited year-end financial statements, although it should be noted that the
Remuneration Committee is able to make discretionary adjustments if
deemed necessary. The 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 Remuneration Committee has set the weightings. The financial
measures that align most directly to shareholder benefit are generally
assigned a higher weighting.
Targets
The IFRS pre-tax profit and EcV 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, in accordance with
the scheme rules.
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.
71
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
ANNUAL REMUNERATION REPORT (CONTINUED)
2018 award made under the 2014 LTI
In 2018 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 EcV target is commercially sensitive and will not be disclosed until 2021 together with the actual
performance against those targets.
Individual
Measures
Weighting
Ranges and targets
Potential outcomes in terms of % of basic salary
Minimum
achievement
(as % of target)
Target
achievement
Max
achievement
(as % of target)
Minimum
achievement
Target
achievement
Max
achievement
John Deane
David
Rimmington
TSR
EcV
TSR
EcV
50%
50%
50%
50%
=Median
Median Upper quartile
=Median
Median Upper quartile
nil
nil
nil
nil
12.5%
11.3%
50.0%
50.0%
45.0%
45.0%
The 2018 award under the 2014 LTI will be implemented and operated by the Remuneration Committee as set out within the remuneration policy.
Measures
The two performance measures for the 2018 LTI award use performance
against the constituents of an index and an internal target. The external
measure compares the 3-year TSR of Chesnara plc with the TSR of the
companies comprising the FTSE 350 Higher Yield Index with averaging
over the first and last calendar months. The internal measure assesses
Economic Value growth which are set with due regard to the Board
approved business plan. Both measures seek to ensure an alignment
between executive director reward and shareholder value, with one
assessing relative performance to other investment opportunities and the
other assessing absolute performance. Both measures are based on a
3-year performance period ending 31 December 2020.
Weightings
For the 2018 award the two measures have been assigned equal weighting.
Targets
TSR: The Remuneration Committee proposes that the constituents of the
FTSE 350 Higher Yield Index represents the most appropriate peer group
for assessing the relative TSR performance. The award equates to 12.5%
and 11.3% of salary for achieving median performance for John Deane and
David Rimmington respectively, increasing on a straight-line basis to
50.0% and 45.0% of salary respectively for upper quartile performance.
EcV: The Economic Value target is an output from the Chesnara business plan
process. The figure is therefore subject to group board challenge and approval.
The projections assume a realistic expectation for investment returns and
incorporate challenging expectations for new business value from Movestic
and Scildon. The Remuneration Committee can make discretionary adjustments
to either the target or to the actual result for the year if it considers this to be
appropriate, in accordance with the scheme rules.
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.
Approval
This report was approved by the board of directors on 28 March 2018 and signed on its behalf by:
Veronica Oak
Chairman of the Remuneration Committee
72
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE REMUNERATION POLICY
The current Remuneration Policy was approved by our shareholders
at the Annual General Meeting held on 17 May 2017.
The Policy as approved by shareholders can be found on our website:
www.chesnara.co.uk/corporate-responsibility/governance-reports
Introduction
Remuneration policy
The policy has been developed by the committee to
provide a clear framework for reward linked to the strategy
of the company, aligned to the interests of executives and
shareholders.
In developing its policy and making decisions about
executive director remuneration, the committee has taken
into account the terms and conditions of employment
for employees throughout the company, together with the
strategy, objectives and KPIs for the business, and
developments in the external marketplace. The company
has not consulted with employees.
Alignment of incentives with strategy
Chesnara plc is a holding company engaged in the
management of life and pension books of business in the
UK, Sweden and the Netherlands with oversight and
governance being provided by a central governance team
based in the UK.
The schematic below illustrates how the company’s KPIs
align to its core strategic objectives and, in turn, how those
KPIs flow through into the performance measures of
the executive’s short and long-term incentives schemes.
Reading across the chart shows how the KPIs align to
Chesnara’s core strategic objectives. For example,
‘Maximise value from existing business’, ‘Enhance value
through profitable new business’ and; ’Acquire life and
pensions businesses’ will directly impact the Economic
Value growth of the group. Likewise progress against all
three objectives should have an impact on the Total
Shareholder Return to varying degrees.
The diagram demonstrates that the remuneration policy
aligns well to all aspects of the group’s objectives. For
illustration purposes the diagram below shows the KPIs that
the committee has most recently considered appropriate for
the incentive schemes but as will be seen on pages 73 to 79
the committee may change the KPIs and / or their weighting
for future awards. In addition to the KPIs shown, the
Short-Term Incentive Scheme includes objectives for the
executives covering key deliverables for the year ahead.
The company has three core strategic objectives:
1. Maximise value from existing business;
2. Acquire life and pension business; and
3. Enhance value through profitable new business.
The achievement of these objectives are considered
against the culture and risk environment of the company
to ensure that rewards do not encourage excessive risk
taking or an inappropriate culture to develop.
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.
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
I
F
R
S
p
r
o
fi
t
Enhance value through profitable new business
Chesnara culture and values
E
c
V
o
p
e
r
a
t
i
n
g
p
r
o
fi
t
E
c
o
n
o
m
i
c
V
a
l
u
e
g
r
o
w
t
h
T
o
t
a
l
s
h
a
r
e
h
o
d
e
r
l
r
e
t
u
r
n
73
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
REMUNERATION POLICY (CONTINUED)
The implementation of this policy involves:
– paying salaries that reflect individual roles, an individuals’ development in that role and sustained individual performance and contribution, taking account of
the external competitive market;
– enabling executives to enhance their earnings by meeting and out-performing stretching short and long-term targets in line with the group’s strategy;
– requiring executives to build and maintain shareholdings in the company;
– rewarding executives fairly and responsibly for their contribution and paying what is commensurate with achievement of these objectives; and
– including malus and clawback provisions, in the STI Scheme (including the deferred share award) and the LTI Scheme.
For the avoidance of doubt, the Directors’ Remuneration Policy includes authority for the company to honour any commitments entered into with current or
former directors that have been disclosed to shareholders in previous Remuneration Reports. Details of any payments to former directors will be set out in
the implementation section of this report as they arise.
The following tables give an overview of the company’s policy on the different elements of the remuneration package.
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
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.
Operation
Performance measures and maximum
Changes to responsibilities, increased complexity of the
organisation, personal and group performance is
taken into consideration when deciding whether a salary
increase should be awarded.
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
– the experience and skills of the jobholder on
commencement of the role and their development at
the review point
– 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
– 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 or significant changes in the jobholder’s
responsibilities).
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.
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 and fuel benefit.
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.
74
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
The Remuneration Future Policy table (continued)
Purpose and link
to strategy
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.
Short-Term Incentive Scheme (STI)
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.
Long-Term Incentive Scheme (LTI)
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.
Operation
Performance measures and maximum
The executive directors can participate in a defined
contribution pension scheme with employer contributions
being 9.5% of basic salary. If pension limits are reached,
the executive may elect to receive the balance of the
contribution as cash.
No performance measures attached.
The 2014 STI Scheme is discretionary. Awards are based
on the committee’s assessment and judgement of
performance against specific targets and objectives in
support of the group’s business plan which are 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 remuneration report.
The STI Scheme includes malus and clawback provisions.
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 remuneration report.
The LTI Scheme includes malus and clawback provisions.
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, but are not limited to, costs,
IFRS pre-tax profit, EcV 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 immediately following each performance
period. The committee may substitute, vary or waive the
performance measures in accordance with the scheme rules.
The maximum award is 100% of basic salary with each
participant being assigned a personal maximum to be
disclosed in the remuneration report with each award made.
Vesting is dependent on two weighted performance measures
which the committee for 2017 weights equally but may vary the
weighting and the Index as it considers appropriate in future years:
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 of this element 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 Economic Value: this target is commercially sensitive
and therefore, not disclosed upfront. Actual targets and results
will be disclosed in the Annual Report for the year in which an
award vests. The assumptions underpinning the calculations
are subject to independent actuarial scrutiny.
The committee may substitute, vary or waive the performance
measures in accordance with the Scheme rules.
The maximum award is up to 100% of basic salary, with each
participant being assigned a personal maximum to be
disclosed in the remuneration report with each award made.
75
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
REMUNERATION POLICY (CONTINUED)
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.
Performance measures and maximum
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.
Explanatory notes:
1. Why these performance measures were chosen and how performance
Short-Term Incentive Scheme (STI)
(i) based on a broad range of measures – including group objectives;
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 business plan and 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,
but are not limited to, costs, IFRS pre-tax profit, EcV operating profit, cash
generation, group 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 EcV) and a comparative measure (TSR). The
measures and targets are set by the committee. The maximum potential
award for the group EcV measure requires significant outperformance of
budgeted targets. The TSR measure uses the FTSE 350 Higher Yield
Index over a 3 year period with averaging during the first and last month.
The committee currently considers this to be an appropriate comparator
given Chesnara’s strategic aims and focus on dividend payments.
In setting targets for both schemes, the committee exercises its judgement
to try to ensure that there is a balance between stretch in the targets and
the company’s risk appetite. Full details of the performance measures,
weightings and targets and the corresponding potential awards are set
out in the remuneration report.
The 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.
(ii) p erformance measures and their weighting are determined by the
committee each year to help ensure there is focus on each of
the elements necessary to drive sustainable performance. The main
weighting will be given to financial measures (typically 80%);
(iii) maximum potential award up to 100% of salary with each participant
having a personal maximum which is to be disclosed in the remuneration
report for each award made;
(iv) award is part cash and part share award deferred for a further 3 years.
Currently the intention is to structure the award 65% cash and 35%
deferred into shares provided that the total award to a participant is at
least £20,000, otherwise the award is 100% cash with no deferral. The
committee may increase the weighting for the share award in future
years and adjust the de-minimis amount;
(v) unvested awards may be withheld under the terms of the malus
provision. Cash awards are subject to a 2 year clawback provision; and
(vi) it is the intention of the committee to make a new award each year.
Long-Term Incentive Scheme (LTI)
(i) a performance share plan;
(ii) uses absolute and comparative measures;
(iii) in making a new award, the committee will determine the measures,
their weighting and targets to maintain a clear focus on longer-term
strategic aims;
(iv) performance period is at least 3 years;
(v) maximum potential award is up to 100% of salary with each participant
having a personal maximum which is to be disclosed in the remuneration
report for each award made;
(vi) includes a malus provision and a 2 year clawback provision; and
(vii) it is the intention of the committee to make a new award each year.
76
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
Minimum shareholding requirement
In order to align the executive directors’ interests with those of shareholders, a
minimum shareholding requirement applies equal to one times salary.
There is no timescale attached and it may be achieved by participating in the
company’s share plans. It is a requirement that shares awarded under the STI
and LTI Schemes (net of shares sold to pay for any income tax and National
Insurance) must be retained if the minimum requirement has not been met.
Expenses
In line with the company’s Expenses Policy, all directors may receive
reimbursement of reasonable expenses incurred in connection with company
business and including settling any tax incurred in relation to these.
3. Other
The company currently operates an SAYE in the UK which expires in 2018.
A tax efficient all employee scheme in which executive directors are eligible
to participate.
Approach to remuneration on recruitment
T he following principles apply when recruiting executive directors:
– To offer a remuneration package that is sufficient to attract individuals with the
skills and experience appropriate to the role to be filled whilst also being
consistent with this Policy. In addition to salary and variable remuneration, this
may include pension, taxable benefits and other allowances such as relocation,
housing and education.
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.
– 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.
– Salary and fees: There are no differences in policy. The committee takes
– Each element of remuneration offered will be considered separately and collectively
in this context.
– The maximum awards in respect of the STI Scheme and LTI Scheme as set
out in the policy table 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.
into account the company’s overall salary budget and percentage
increases made to other employees.
– All taxable benefits: There are no differences in policy although the benefits
available vary by personnel and jurisdiction and with job role. For example
cars and health insurance benefits are broadly consistent with the equivalent
benefits when offered to UK non-director personnel. Executive directors
receive fuel allowances which is a benefit not offered to other grades receiving
a car allowance.
– 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 personal performance 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. In line with local regulations the remuneration
to employees within the Netherlands does not include any bonus element.
– Long-term plans: Only executive directors are currently 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. This may be reviewed as appropriate in the light of growth
in the company.
– Pension: The level of contribution made by the company to executive
directors is the same as that offered to other UK employees.
77
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
REMUNERATION POLICY (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. Regardless of whether a departing executive is deemed to be a ‘good leaver’ or ‘bad leaver’, the committee has discretion to pay a departing executive’s
legal fees subject to any such payment being made in accordance with the terms of a compromise agreement which waives all claims against the company.
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
By executive director or
company giving notice
(and where deemed to
be a bad leaver).
12 months
Cease on date
employment ends.
Payment may be made for
any unused holiday
entitlement.
By company summarily
(bad leaver).
None
Cease on date
employment ends.
Under special
circumstances: Good
Leaver Status whether
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.
None
prescribed
Normally cease on date
employment ends.
Payment may be made
for any unused holiday
entitlement.
Discretion for the
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.
If leaving by reason of
redundancy the payment
may include statutory
redundancy pay.
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.
Cease on
date
employment
ends.
Cease on
date
employment
ends.
Outstanding options must be exercised
within 6 months of date employment ends.
Outstanding options must be
exercised within 6 months of
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 6 months of date employment ends.
Unvested awards lapse on
date employment ends.
Outstanding options must be
exercised within 6 months of
date employment ends.
Discretion to make further grants during
a notice period where this is considered
to be in the company’s interests.
Where employment ends before
deferred share awards made, at the
discretion of the committee, the award
may be retained.
If retained, the committee has discretion
to allow the award to vest in accordance
with original terms, or determine award
is to vest on ceasing to be employed and
will also assess the extent to which
targets have been met.
In either case the award will be pro-rated
to reflect period of Performance Period
that has been worked and will be paid in
cash. The committee has discretion to
pro-rate using a longer period.
Where employment ends after deferred
share awards made, the award will
be retained and vest in accordance with
original terms. The committee has
discretion to allow the award to vest on
ceasing to be employed.
All outstanding options must be
exercised within 6 months of the date on
which employment ends or on which
they vest (whichever is later), unless the
committee specifies a longer period.
No further grants.
Where employment ends
before share awards vest, at
the discretion of the committee
the award may be retained. If
retained, the committee has
discretion to allow the award
to vest in accordance with
original terms or, by exception
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.
The committee has discretion
to pro-rate using a longer
period.
All outstanding options
must be exercised within
6 months of the date on which
employment ends or on
which they vest (whichever is
later) unless the committee
specifies a longer period.
78
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE Non-executive directors
Other directorships
– Appointments are made under a contract for services for
Executive directors may, if approved by the board, accept
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.
appointments as non-executive directors of suitable
organisations. Normally fees for such positions are paid to
the company, unless the board determines otherwise.
– Non-executive directors are typically expected to serve
two three-year terms but may be invited by the board to
serve for an additional period. Any renewal is subject to
board review and AGM re-election.
– The terms of an appointment are set out in a letter of
appointment which can be terminated by either party with
three months’ notice or immediately if termination is as a
result of not being elected at the AGM.
– 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, variable pay
should be no more than 200% of salary. 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 2017 policy applies throughout the period.
Group chief executive officer
£000’s
Long-term incentive
Short-term incentive
Fixed
806
16%
21%
512
1,390
32%
32%
100%
63%
36%
Group finance director
£000’s
Long-term incentive
Short-term incentive
Fixed
486
15%
19%
66%
319
100%
817
30%
30%
40%
Minimum
In line with
expectation
Maximum
Minimum
In line with
expectation
Maximum
In line with expectation performance assumes that the STI and LTI payments are at 37.8% and 29.2% of their maximum
respectively for the group chief executive and 34.0% and 26.3% of their maximum for the group finance director. The
targets are based on the measures outlined above but are not declared prior to the publication of the accounts for the
relevant year as they may be commercially sensitive.
Minimum
The table below analyses the constitution of the minimum remuneration projection for 2018:
Director
Group chief executive
Group finance director
Salary and fees
£000
Benefits
£000
Total fixed pay
£000
Total fixed pay
£000
439.1
277.0
31.6
16.2
41.7
26.3
512.4
319.5
The pension figure above is based on 9.5% of gross basic salary.
Statement of shareholder views
Given there is very little change in policy between this and our last remuneration policy the committee has not considered it
necessary to consult with shareholders.
79
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
AUDIT & RISK COMMITTEE REPORT
2017 has been a busy year, with special attention
provided to the completion and integration of the
Scildon acquisition and the external audit tender.
Chairman’s introduction
I am very pleased to introduce the report on the activities of
the Audit and Risk Committee during 2017, which was my
first full year as Chairman. There were no changes to the
membership of the committee in the year. In addition to the
regular activities of the committee we had a number of
significant new matters to consider, including a tender
process for our external auditors, overseeing the acquisition
of Scildon and the inaugural external reporting under
Solvency II. Together with the final publication of the new
insurance accounting standard, IFRS17, we have been kept
very busy.
Following the publication of IFRS17 standards, the
committee received training on the new standard to ensure
common understanding. Project planning commenced at the
end of the year and this is expected to be a significant area of
focus for the group and the committee during 2018 and 2019.
Risk management is an important part of the Committee’s
work and we received high quality information regarding the
group’s risk exposures and the actions taken to manage
these risks. Our group risk management system was rolled
out to Scildon following acquisition and good progress has
been made with embedding our requirements.
Full details of the external audit tender are set out on page
82. The process was thorough and considered a number of
criteria, including the requirements of the expanded
group following the acquisition of Scildon. The committee
members were unanimous in the decision to reappoint
Deloitte (and to replace EY at Scildon).
The committee wished to ensure that the acquisition of
Scildon was properly consolidated in the group accounts and
that there are strong controls in place for financial reporting
and risk management. We received a number of reports from
management supporting this during the year which received
appropriate scrutiny and challenge.
The company secretary undertook a questionnaire-based
performance evaluation of the committee at the end of the
year and I was pleased to note that we are comfortable that
we have a good mix of skills and experience, we challenge
in an open and constructive manner and have focused
on the right areas. We are not complacent however and have
identified a number of areas to progress during 2018.
The rest of this report sets out our activities in more detail.
The committee oversaw the production of the first public
report under Solvency II requirements, the Solvency &
Financial Condition Report (published in June 2017); this is
an annual report which will fall under the ongoing remit of
the committee.
Jane Dale
Chairman of the Audit & Risk Committee
28 March 2018
Role of the Audit & Risk Committee
The role of the audit and risk committee includes assisting the board in discharging its duties and responsibilities for
financial reporting, corporate governance and internal control. The scope of its responsibilities also includes focus on risk
management: accordingly it also assists the board in fulfilling its obligations in this regard. The committee is also
responsible for making recommendations to the board in relation to the appointment, re-appointment and removal of the
external auditor. The committee’s duties include keeping under review the scope and results of the audit work, its cost
effectiveness and the independence and objectivity of the external auditor. The full terms of reference of the audit and risk
committee are available on our website www.chesnara.co.uk
NUMBER OF MEETINGS
DURING YEAR: 9
MEMBERS:
- Chairman
Jane Dale
Mike Evans
- Member
David Brand - Member
Veronica Oak - Member
The requirements for the
composition of the Audit &
Risk Committee are detailed
within its terms of reference.
The composition of the
committee in accordance
with the requirements of the
UK Corporate Governance
Code and with DTR 7.1.1AR
and committee member
biographies are detailed on
pages 50 and 51.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE Introduction
The responsibilities of the Chesnara Audit and Risk Committee cover a combination of risk and audit matters relevant to Chesnara.
The following report has been structured to reflect this.
Audit responsibilities
This section of the report includes the following:
1. Activities during 2017: A summary of the work performed by the Audit and Risk Committee during the year.
2. External audit: Further detail of how the committee has overseen various aspects of the external audit during the year, including overseeing a
tender process.
3. Internal audit: The work performed by the committee in overseeing the internal audit of Chesnara.
4. Significant issues: Provides some insight into the significant issues that the committee has considered during the year in relation to the
financial statements and how these were addressed.
1. Activities during 2017
As part of its annual planning cycle the committee set its objectives for 2017 at the start of the year, focusing on the larger and more important
aspects that were expected to be delivered. This included overseeing the external audit tender, the review and approval of the inaugural Solvency II
narrative reports and various tasks associated with the acquisition of Scildon. The committee actively monitored the progress of these objectives
throughout the year. A summary of the activities performed is included in the table below.
– Solvency II narrative reporting: Supported the development of, and review of, the inaugural Chesnara group Solvency and Financial
Condition Report and Regular Supervisory Report.
– Financial performance: Monitored and scrutinised the financial performance of the group during the year, covering IFRS, Solvency, EcV and
Cash Generation.
– Actuarial assumptions: Reviewed and challenged the actuarial assumptions underpinning the quarterly financial reporting process.
See ‘Significant issues’ section on page 84 for further detail.
– Annual Report and Accounts: Reviewed all aspects of the annual report and accounts, including; compliance with accounting standards,
accounting policy appropriateness, consideration of financial reporting changes and emerging practice, whether they are fair, balanced and
understandable, disclosures surrounding going concern and longer-term viability (including any associated management supporting papers).
See ‘Significant issues’ section on page 84 for further details on certain aspects of the 2017 Annual Report and Accounts.
– Scildon acquisition: Oversaw the acquisition accounting for Scildon and the post acquisition financial reporting capability and controls.
See ‘Significant issues’ section on page 84 for further detail.
– Interim report: Reviewed and challenged the Chesnara interim financial report for the half year ended 30 June 2017.
– FRC updates: Actively monitored key publications issued by the Financial Reporting Council regarding financial reporting matters.
– External audit tender: Oversaw the external audit tender that took place during the year and made a recommendation to the board regarding
its outcome. See page 82 for further detail.
– External audit plans: Reviewed the group-wide plans of the external auditor, including consideration of the key audit risks. See page 84 for
further detail.
– External audit quality: Assessed the quality of the external auditor during the year, including consideration of feedback from management
and reports issued by the Financial Reporting Council.
– External audit reporting and feedback: Reviewed key findings reported by the external auditor on the annual report and accounts, half year
report and the Solvency and Financial Condition Report, including financial reporting judgments and control matters. As part of its interactions
with the external auditor the committee met with the external auditor without the presence of executive directors.
– External audit independence: Reviewed the assessment regarding the independence of the external auditor, with specific consideration given
to audit fees and also the nature / volume of the services delivered by the external auditor during the year.
– Review of plans: Reviewed and approved the plans of the internal audit functions across the group, via interactions with local Audit & Risk
Committees. See page 83 for more information.
– Review of internal audit findings: Received regular updates from local Audit & Risk Committees regarding key findings from divisional internal
audits that have been performed during the year. Reviewed the internal audit findings, management responses and tracking of required follow
up actions for Chesnara entity internal audits. See page 83 for more information.
– Feedback from divisional Audit and Risk Committees: Reviewed and challenged regular feedback provided by the group’s divisional Audit
and Risk Committees.
– Committee terms of reference: The committee reviewed its terms of reference during the year and also completed its annual assessment
of compliance with its terms of reference.
– Performance evaluation: The committee conducted a performance evaluation, completed by members and regular attendees regarding
various aspects of the committee’s performance.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
AUDIT & RISK COMMITTEE REPORT (CONTINUED)
2. External audit
External audit tender
Background
During the year the group held a tender for its external audit arrangements for the year ending 31 December 2018. The intention to tender was noted in the 2017
interim financial statements with no shareholder concerns identified or communicated. Deloitte was the incumbent auditor at the point of the tender, having been
the auditor of Chesnara since the year ended 31 December 2009. The audit partner, Stephen Williams, had been Chesnara’s external audit partner for one year at
the point of the tender. In line with regulations, a mandatory tender would have been required ten years from appointment (i.e. for the year ending 31 December
2019). As part of the implementation of a strong and robust governance framework for the group, and in line with a mandatory rotation in Sweden due shortly,
coupled with the fact that Scildon’s incumbent external auditor was EY, it was deemed appropriate to complete the tender earlier in the cycle.
Process and decision
The audit tender process took place during September to November and was the responsibility of the ARC. This was led throughout by the Chairman, Jane Dale.
Through Jane, the ARC had responsibility for initiating and supervising the audit tender process, making the recommendation to the board as to its first and
second choice candidates for appointment and providing feedback to the audit firms throughout the process.
The ARC led the design of the tender process and the detailed documentation requested. Jane was the ARC representative meeting the audit firms, with the
full committee reviewing the tender documents and attending the tender presentations.
The audit tender was designed to implement a selection process which was efficient, open, transparent, fair and effective. To achieve this, the tender was
managed through the following process:
Audit firm
selection
Three firms were invited to participate in the process; Deloitte, KPMG and EY. No firms were precluded from consideration,
including those firms outside of the ‘Big 4’. Due to the complexity of the group, both in terms of geographical spread and the
industry specialism, the selected participants were deemed the most suitable to ensure audit quality.
Request for
information
(RFI) issued
To ensure each firm was able to complete the external audit, each firm was asked to initially provide a response on the following
key areas:
– Details of challenges of appointment including conflicts, operational challenges and barriers to completing the work;
– Detail the proposed audit team, the rationale for those individuals and succession plans for all key service lines; and
– The latest relevant Audit Quality Report from the FRC and, if possible, the latest dealings with the Audit Quality Review Team
specific to the proposed audit team.
An assessment of the responses to the RFI was performed and it was concluded that there were no issues that restricted any of
the firms from completing the audit.
Request for
proposal
(RFP) issued
Following the RFI process, each firm was formally asked to submit a proposal document. The RFP specified that each proposal
document needed to include information covering: the team selection; the proposed group audit approach; the approach to transition;
thoughts on IFRS 17; how quality is ensured; independence and governance; and fees.
Management
meetings and data
room access
A data room was created that provided access to key corporate documents relevant to the audit service delivery. This covered
organisational, financial, regulatory, risk and governance aspects of the group and its divisions. In addition, each audit firm was
provided access to relevant group and divisional management through a structured schedule of meetings.
Following access to the data room and the completion of management meetings, each audit firm delivered their audit services
proposal document. These were subsequently presented to the Audit and Risk Committee.
With the primary goal of audit quality, the ARC met after the round of tender presentations to conduct a robust debate over
the relative strengths and weaknesses of the three teams. The decision drew from the experience of the committee through
the presentation process, the quality of the tender documentation and from each feedback provided by key group and divisional
management. The overall assessment focused on audit quality, specifically: understanding of the business; people; audit approach;
and general Audit firm quality, independence and fees.
A recommendation to reappoint Deloitte was made to the board and accepted in November 2017. Throughout the process, Deloitte
demonstrated their strength in ensuring continued audit quality across the group and the strength of the team to deliver the audit
and support the business through coming changes.
Whilst for the group audit mandatory rotation of audit firms is every twenty years, the reappointment means that:
– Mandatory rotation is required every ten years in Sweden and so there will be a transition to a new local auditor for Movestic for
the year ending 31 December 2019. This appointment will be subject to a separate process that will be determined in due course
by the Movestic Audit and Risk Committee.
– Mandatory rotation is required every ten years in the Netherlands and so there will be a transition to a new local auditor for Waard
for the year ending 31 December 2022. This appointment will be subject to a separate process that will be determined in due
course by the Waard Audit and Risk Committee.
It was concluded that these matters did not have an impact on the quality of the audit or on its operational effectiveness.
Proposal and
presentation
to ARC
ARC assessment
ARC
recommendation
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CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
Effectiveness of the audit process
The effectiveness of the external audit process was captured within the external audit tender process that took place in
the year. It had regard to the following factors:
– The quality of the background papers and verbal presentations to the committee on the audit planning process, interim and
final audit findings and compliance with independence criteria. The current audit engagement partner, Stephen Williams, was
appointed during 2016 and this will be his second year leading the Chesnara audit;
– The rationale put forward for the materiality limits established and the explanation given of the impact these have had on
the work performed;
– The views of the executive on the way in which the audit has been conducted;
– The report produced by the Financial Reporting Council dated June 2017 entitled ‘Deloitte LLP Audit Quality Inspection’.
The report was discussed with the auditor although the Chesnara plc audit was not in the population of those inspected; and
– The audit fees charged and the change in fees from the previous year. Changes in annual fees do, of course, need to
reflect change in the nature of the company’s business which has expanded over time.
It was concluded that the audit process was effective. The company is committed to putting its audit out to tender at
least every ten years, resulting in the next audit tendering process taking place at the latest during 2027, following the
2026 audit.
Provision of non-audit services and independence
The committee has in place a policy on the engagement of the audit firm for non-audit services. Approval is granted where the
service is clearly related to the process of audit services, including regulatory returns. In other cases the approval of the
committee is required and documented governance processes are followed.
The committee regularly monitors the level of fees paid for non-audit services to ensure, over a period of years, that these
represent a low proportion of total fees paid. Reports from the auditor on independence are also reviewed annually and
discussed with the auditor. It should be noted that total fees paid by the company are not material in the context of the overall
business of the auditor.
Details of the fees paid to Deloitte, and its associates, for both audit and non-audit services during the year have been provided
below, with associated commentary for significant non-audit services.
Audit fees
Audit services
Assurance services
Non-audit services
Total
2017
£000
647
413
-
% proportion
61
39
-
2016
£000
587
719
532
1,060
100
1,838
% proportion
32
39
29
100
Non-audit services
There were no other non-audit services in 2017 aside from the assurance services as detailed above. Non-audit services in
2016 related to fees associated with the proposed acquisition of Scildon. We do not believe that the level of non-audit service
fees compromised the objectivity or independence of the auditors.
In addition €255,500 was paid to Ernst & Young in respect of the audit of Scildon.
3. Internal audit
Chesnara has chosen to adopt a devolved, federal, model for Internal Audit. This means that each subsidiary company is
responsible for the oversight of its own Internal Audit work, supervised by each local Audit & Risk Committee. As a result,
the group utilises a mix of outsourced and in-house capabilities, adapted to meet the specific needs of each local market.
Chesnara believes this model is suitable for a group operating across different territories, in different languages. The Chesnara
Audit & Risk Committee maintains oversight of each subsidiary via regular updates from each local Audit & Risk Committee.
Chesnara believes that this model remains appropriate even as the group continues to grow but seeks opportunities to
enhance its effectiveness where appropriate; for example we are currently reviewing the Waard and Scildon models to seek
operational synergies. The Chesnara Audit & Risk Committee will also be seeking to evaluate the effectiveness of the model
during 2018, including ensuring that overall consistency of approach and reporting is achieved.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
AUDIT & RISK COMMITTEE REPORT (CONTINUED)
4. Significant issues:
The table below provides information regarding the significant issues that the committee has considered in relation to the preparation of these financial statements:
Area of
focus
Reporting
issue
Role of
the committee
Conclusion/
action taken
Scildon
acquisition
The financial statements need to appropriately reflect the
acquisition of Scildon. In particular the financial statements need
to include:
– Acquisition accounting and associated disclosure: The
acquisition has resulted in the recognition of an intangible asset,
representing the value of the in-force insurance policies at the
point of acquisition. This asset is being amortised over the
expected profit emergence profile of the acquired policies. See
note 7 of the IFRS financial statements.
– Risk disclosures: The risk disclosures in the report and accounts
need to be updated to capture any incremental principal risks
arising from the Scildon acquisition. See pages 42 to 45.
– Scildon defined benefit scheme: Scildon introduces a defined
benefit pension scheme to the group, which requires accounting
treatment and disclosures in compliance with IAS19. Special
attention has been required to ensure that the associated
reporting disclosures are appropriate. See note 35 of the financial
statements.
The committee reviewed and
challenged various accounting
papers provided by
management supporting the
accounting for the Scildon
acquisition.
Regarding risk disclosures,
the Audit and Risk Committee
was provided with papers
highlighting the impact of
Scildon on the group’s
principal risks.
For the Scildon pension
scheme, the committee has
received a number of papers
on both the scheme itself and
associated accounting
disclosure.
The committee concluded that:
– the judgments underpinning the
acquisition account of Scildon are
acceptable;
– the risk disclosures appropriately reflect
the risks of Scildon; and
– the disclosures regarding the Scildon DB
scheme are appropriate and articulate the
nature of the scheme.
Segmental
reporting
The acquisition of Scildon prompted the group to re-consider
the operating segments in the IFRS financial statements. This
concluded that Scildon will be reported as a separate segment
and the previously reported two UK segments of CA and S&P
will be condensed into one segment. This reflects the way in
which the Chesnara board reviews the results.
Reporting
of alternative
performance
measures
(APMs)
During November 2017 the Financial Reporting Council (FRC)
issued the results of its thematic review over the reporting of
Alternative Performance Measures. The report emphasised
where companies still have work to do. Chesnara has always
sought to be clear and transparent regarding the use of
alternative performance measures (such as Solvency II), but
has considered the findings and has sought to improve
disclosures in this regard (see pages 10 to 11).
The committee reviewed and
challenged the paper prepared
by management regarding the
updated segmentation.
The committee concluded that the updated
segment classification is appropriate and
complies with the requirements of IFRS 8
‘Operating Segments’.
The committee has read the
FRC’s thematic review and
noted that improved APM
disclosures have been
provided in this year’s report.
The Report and Accounts have a new
section (see pages 10 to 11) which defines
our KPIs and APMs. This more clearly
sign-post to other sections of the report and
accounts to provide linkage between the
measures and the outcomes. Where
appropriate, reconciliations back to the
reported IFRS metrics have been
introduced.
Business
model – key
relationships
Viability and
prospects
Draft amendments to ‘Guidance on the strategic report’ were
issued during 2017, which were subject to a consultation period
that closed in October. Whilst the new guidelines have not yet
been issued in final form, they included a useful reminder of
the need for the annual report to include information relating to
sources of value that are not recognised in the financial
statements.
The committee has reviewed
management’s summary and
response to the key points
from the updated guidance.
The committee has reviewed
the updated disclosures in the
annual report.
The Annual Report now includes further
information regarding the sense of purpose
of the group and provides further
information throughout regarding its key
stakeholders. In particular, the Chairman’s
statement on page 15 contains a section
dedicated to this matter.
The FRC is advising companies to consider developing their
reporting on longer term prospects and viability in two stages,
encouraging companies to separate prospects from viability and
differentiate the time horizons used for those assessments. The
FRC also calls for companies to revisit their assessment of the
risks and ongoing uncertainties regarding the effects of the EU
referendum, making appropriate disclosures to reflect their
latest analysis and how this has developed over the year.
The committee has reviewed
the disclosures in the financial
statements and management’s’
paper supporting the
disclosures that have been
made. It was concluded that the
disclosures were appropriate.
The group’s longer-term viability statement
has been refreshed and is included on
page 41.
We have also provided an update on our
current thinking regarding the impact of
Brexit on our business (page 15).
Actuarial
assumptions
The valuation of insurance liabilities in the financial statements
are underpinned by key actuarial assumptions. These are
inherently judgmental in nature and as a result require the
committee’s approval. In particular, the assumptions include
the group’s approach to valuing liabilities for products with
guarantees, which sit within the UK business.
The committee reviewed and
approved the actuarial basis of
assumptions report
underpinning the valuation of
insurance liabilities.
The committee concluded that the actuarial
assumptions were appropriate. Disclosures
over key judgments are included in on pages
note 3 and note 31 of the IFRS financial
statements. In addition, the external audit
report makes reference to certain actuarial
judgements (see pages 92 to 97).
84
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE Risk responsibilities
This section of the report provides information regarding the risk oversight responsibilities of the Audit and Risk Committee. Overall the committee is
responsible for:
– the group’s risk management and internal control systems and their effectiveness;
– overseeing the group’s risk profile in the context of its current and future strategy;
– discussing and recommending to the board for approval, the group’s risk appetite statement, reverse stress testing and scenario stress testing;
– advising the board on proposed changes to the group’s risk appetite statement where this is deemed appropriate;
– monitoring risk exposures across the group and advising the board where such exposures do not appear to accord with the group’s risk appetite statement;
– reviewing the group’s capability to identify and manage emerging and new risk types;
– challenging the regular stress and scenario testing of the group’s business;
– determining whether there is a sufficient level of risk mitigation in place;
– overseeing due diligence of a major strategic transaction, including any proposed acquisition or disposal, prior to the board taking a decision to proceed with a
view to ensuring that the board is aware of all material risks associated with the transaction;
– considering the adequacy and effectiveness of the technology infrastructure and supporting documentation in the risk management system and framework;
– considering and approving the remit of the risk function and ensuring it has adequate resources and appropriate access to information to enable it to perform
its function effectively and in accordance with the relevant professional standards;
– providing qualitative and quantitative advice to the Remuneration Committee on risk weightings to be applied to any performance objectives; and
– considering and recommending to the board for approval, the group’s risk related regulatory submissions, including the ORSA.
The table below provides some further information regarding the specific activities that the committee has performed during the year in discharging its risk
oversight responsibilities:
Principal risk definition: Reviewed and challenged the group’s definition of principal risks for the purpose of reporting and monitoring against these
risks, including how they are mitigated through the group’s internal control framework. This resulted in an increase in materiality levels to reflect the
enlarged group including Scildon.
Risk plan review and sign off: The committee reviewed and approved the group and divisional risk plans and associated resourcing needs. One of the
key focus areas of the 2018 plan is to ensure that Scildon is fully integrated into the group’s risk management framework.
Quarterly risk reporting: During the year, the committee reviewed the quarterly group and divisional risk reports on the identification, evaluation and
management of principal risks across the group, including any emerging risks. As part of this process, it flagged any items of concern or clarification
requiring follow up. The quarterly risk reporting included ‘in focus’ sections as required, including for example the impact of the Scildon acquisition on the
group’s risk profile as well as various changes in the regulatory and political environment with potential to change the risk profile.
Internal control report: The committee reviewed and approved the annual internal controls assessment report.
Systems of governance review: A review of the effectiveness of the systems of governance review was facilitated by the risk function. This considered a
number of areas of the overall system of governance including its completeness, effectiveness, its use and the overall culture. This concluded there were
no major areas of concern. Any areas for improvement have been built into the 2018 plans, with suitable priorities attached.
ORSA review: The committee reviewed the 2017 ORSA during the year, and made a formal recommendation to the board to approve it. The ORSA
includes the outcome of the group’s stress and scenario testing. The stresses that are modelled are reviewed and approved as part of the ORSA planning
process, and the results are included in the final ORSA report
Risk appetite: Reviewed and approved developments to the group’s risk appetite framework, as the group continues to seek the optimal way to
articulate its preferences towards taking, or not taking risks.
Review divisional Audit & Risk Committee progress: Received and challenged updates provided by divisional Audit & Risk Committees.
Continuous solvency monitoring: Reviewed the output from the group’s continuous solvency monitoring activities. There were no issues arising from
this process during the year.
ORSA Policy: Reviewed and approved the ORSA Policy. The main change arising from the policy was to provide additional clarity over the division of
responsibility/activities between the Audit and Risk Committee and board over the ORSA process.
Standard formula assessment: As part its annual cycle, the actuarial function performs an assessment of the appropriateness of the standard formula
for the purposes of calculating the group’s capital requirements under Solvency II. The work and associated findings was reviewed and challenged by the
Audit and Risk Committee.
Jane Dale
Chairman of the Audit & Risk Committee
28 March 2018
85
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE DIRECTORS’ REPORT
The directors present their Annual Report and the audited consolidated financial
statements of Chesnara plc (‘Chesnara’) for the year ended 31 December 2017.
The Corporate Governance Report on pages 53 to 57 forms part of the
Directors’ Report.
The following information, that has been included by way of
a cross reference to other areas of the Annual Report and
Accounts, is required by the Companies Act to be included
within the Directors’ Report:
Requirements/reference
Financial risk management objectives and policies
The ‘Financial management’ section on pages 40 to 41 and
the ‘Risk management’ section on pages 42 to 45.
Exposure to price risk, credit risk, liquidity risk and cash flow
risk
Note 6 ‘Management of financial risk’ to the IFRS
Financial Statements.
Likely future developments
The ‘Business review’ section on pages 24 to 29.
Greenhouse gas reporting
The ‘Corporate and social responsibility’ section on pages
46 to 47.
Environmental, employee and social community matters
The ‘Corporate and social responsibility’ section on page 46.
Directors
Full information of the directors who served in 2017 is detailed
in the Corporate Governance Report on pages 53 to 57.
Detail of the non-executive directors who served as chairmen
and members of the board committees of the board are set
out in the Corporate Governance Report on pages 53 to 57.
Information in respect of the Chairman and members of the
Remuneration Committee and in respect of directors’
service contracts is included in the Remuneration Report on
pages 62 to 79, which also includes details of directors’
interests in shares and share options. The Chairman and all
the non-executive directors will retire at the Annual General
Meeting and, being eligible, offer themselves for re-election.
All the executive directors have service contracts with the
company of no more than one year’s duration and will offer
themselves for re-election at least every three years.
The service contracts of all the directors are retained at the
company’s office, and will be available for inspection for
15 minutes prior to the Annual General Meeting. In addition,
no director had any material interest in any significant
contract with the company or with any of the subsidiary
companies during the year.
Director appointments
With regard to the appointment and replacement of directors,
the company follows the UK Corporate Governance Code
2016 and is governed by its Articles of Association, the
Companies Act 2006 and related legislation. The Articles of
Association may be amended by special resolution. There
were no new appointments made in the year.
Share capital
Details of the issued share capital, together with details of
movements in the issued share capital of Chesnara plc during
the year are shown in note 41 to the IFRS Financial Statements
which is incorporated by reference and deemed to be part of
this report.
The company has one class of ordinary share which carries
no right to fixed income. Each share carries the right to
one vote at general meetings of the company. The ordinary
shares are listed on the Official List and traded on the
London Stock Exchange. As at 31 December 2017, the
company had 149,885,761 ordinary shares in issue, of
which 86,040 were held as treasury shares with a nominal
value of £4,302. During the year, the maximum number of
treasury shares held was 147,535 with a nominal value
£7,377. The number of treasury shares disposed of during
the year was 61,495, with a nominal value of £3,075.
In order to retain maximum flexibility, the company proposes
to renew the authority granted by ordinary shareholders at
the Annual General Meeting in 2018, to repurchase up to just
under 10% of its issued share capital. Further details are
provided in the notice of this year’s Annual General Meeting.
At the Annual General Meeting in 2017, shareholders approved
resolutions to allot shares up to an aggregate nominal value
of £4,213,496 and to allot shares for cash other than pro rata
to existing shareholders. Resolutions will be proposed at this
year’s Annual General Meeting to renew these authorities.
No person has any special rights of control over the
company’s share capital and all issued shares are fully paid.
There are no specific restrictions on the size of holding nor on
the transfer of shares which are both governed by the general
provisions of the Articles of Association and prevailing
legislation. The directors are not aware of any agreements
between holders of the company’s shares that may result in
restrictions on the transfer of securities or voting rights. The
directors have no current plans to issue shares.
The directors benefited from qualifying third party indemnity
provisions in place during the years ended 31 December 2016
and 31 December 2017 and the period to 28 March 2018.
Articles of Association
The Company’s Articles of Association may only be amended
by special resolution of the company at a general meeting of
its shareholders.
Director evaluations
During the year, the Chairman evaluated the performance
of the directors in one-to-one meetings and the senior
independent director evaluated the performance of the
Chairman. It was confirmed that each director continued
to make effective contributions to their role and the board
as a whole.
Conflicts of interest
Procedures are in place to ensure compliance with the directors’
conflict of interest duties as set out in the Companies Act
2006. The company has complied with these procedures
during the year and the board considers that the procedures
operated effectively. During the year, details of any new
conflicts or potential conflicts were advised and submitted to
the board for consideration, and where appropriate, approved.
Chesnara plc -
Company No. 4947166
86
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
Results and dividends
The consolidated statement of comprehensive income for the year ended 31 December 2017, prepared in accordance with International
Financial Reporting Standards adopted by the EU and set out on page 98 shows:
Profit for year attributable to shareholders
2017
£000
2016
£000
78,434
35,280
An interim dividend of 7.00p per ordinary share was paid by Chesnara on 11 October 2017. The board recommends payment of a final dividend
of 13.07p per ordinary share on 23 May 2018 to shareholders on the register at the close of business on 13 April 2018.
The Chesnara dividend policy is directly influenced by two key factors. We recognise that our shares are predominantly held as a source of
predictable and sustainable income. Our primary aim is therefore to provide an attractive yield with steady growth where possible.
Our aim to satisfy investor expectations cannot and will not be delivered at the expense of financial security and solvency. As such, dividend
capacity is assessed giving full regard to our Group Capital Management policy which currently prohibits dividends to be declared that would
result in Chesnara having a solvency ratio below 110%.
Total dividend as a ratio of cash generated
Considerations
Dividend growth
£30.1m
£27.6m
£22.5m
£24.0m
53%
2014
54%
2015
76%
2016
41%
2017
Over the past 4 years, £104m of dividends have
been paid at an average annual yield of 6% (based
on average annual share prices) representing 53%
of the cash generated over the period.
Cash
generation
Historical and projected cash generation levels need to support
any dividend payment although there is no explicit requirement
for the current year’s cash generation to cover the dividend.
Solvency
Dividends will not be paid if they were to result in a breach in
our Capital Management policy which currently sets
a minimum dividend paying solvency constraint of 110%.
Acquisition
strategy
The Chesnara business model is based upon making future
acquisitions and any dividend payments consider the financial
requirements to continue to deliver our acquisition strategy.
Investor
expectations
In addition to a stable and attractive dividend yield, our investors
value predictability and sustainability of earnings. As such, under
normal circumstances, ‘special dividends’ are unlikely.
The board makes dividend decisions with reference to a range of management information, reports and policies including the group ORSA,
group business plan, solvency analysis including sensitivities, analysis of historical financial results and the Group Capital Management policy.
87
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE DIRECTORS’ REPORT (CONTINUED)
Substantial shareholdings
Information provided to the company by major shareholders pursuant to the FCA’s Disclosure and Transparency Rules
(DTR), is published via a regulatory information service and is available on the company’s website. The company had
been notified under Rule 5 of the DTR of the following interests in voting rights in its shares as at 31 December 2017
and 21 March 2018:
Name of substantial shareholder
HSBC Global Custody Nominees (UK) Ltd
Standard Life Aberdeen plc
Invesco Ltd
Prudential plc group of companies
Total number of ordinary
shares held
Percentage of the
issued share capital
as at 31 December 2017
19,814,044
18,058,396
7,601,155
6,547,370
13.23%
12.05%
5.07%
4.37%
Subsequent to 31 December 2017 there have been changes to this position and the holdings as at 21 March 2018 are shown
below. No other person holds a notifiable interest in the issued share capital of the company.
Name of substantial shareholder
Standard Life Aberdeen plc
HSBC Global Custody Nominees (UK) Ltd
Invesco Ltd
Prudential plc group of companies
Total number of ordinary
shares held
Percentage of the
issued share capital
as at 21 March 2018
21,365,374
19,814,044
7,601,155
6,547,370
14.26%
13.23%
5.07%
4.37%
Related party transactions and significant contracts
During the year ended 31 December 2017, the company did
not have any material transactions or transactions of an
unusual nature with, and did not make loans to, related
parties in which any director has or had a material interest.
There were no significant contracts with substantial
shareholders during the year.
the going concern basis in the preparation of the financial
statements as stated in note 2 to the IFRS Financial
Statements. Detailed analysis of relevant risks and other
factors is included within the Risk Management section on
page 42 to 45, within the Financial Management section
on pages 40 to 41 and within notes 5 and 6 to the IFRS
Financial Statements.
Post balance sheet events
There have been no post balance sheet events that either
require adjustment to the financial statements or are
important in the understanding of the company’s current
position, financial performance or results.
Charitable donations
Charitable donations made by group companies during
the year ended 31 December 2017 were £nil (2016: £nil).
No political contributions were made during the year
ended 31 December 2017 (2016: £nil).
Disclosure of information to auditor
The directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware,
there is no relevant audit information of which the company’s
auditor is unaware; and each director has taken all the steps
that he or she ought to have taken as a director to make
himself or herself aware of any relevant audit information and
to establish that the company’s auditor is aware of that
information. This information is given and should be
interpreted in accordance with the provisions of section 418
of the Companies Act 2006.
Employees
The average number of employees during the year was
329 (2016: 201), the material increase reflecting the
acquisition of Scildon.
Employee involvement
The group believes that employee communication and
consultation is important in enhancing the company culture
and connectivity, and in motivating and retaining employees.
An open communications programme enables all
employees to understand key strategies and other matters
of interest and importance, quickly and efficiently. The
communication includes face-to-face briefings, open
discussion forums with senior management and email.
Going concern statement
After making appropriate enquiries, the directors confirm
that they are satisfied that the company and the group
have adequate resources to continue in business for the
foreseeable future. Accordingly, they continue to adopt
Auditor
The Audit and Risk Committee, in the year, undertook an
external audit tender process. The conclusion and
recommendation to the board was for the re-appointment of
Deloitte LLP as auditor of the company. Full details and
results of the audit tender undertaken are in the Audit and
Risk Committee Report, on pages 82 to 83. A resolution
for the re-appointment of Deloitte LLP as auditor of the
company is to be proposed at the forthcoming Annual
General Meeting.
Approved by the board on 28 March 2018 and signed on its
behalf by:
David Rimmington
Group finance director
88
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE DIRECTORS’ RESPONSIBILITIES STATEMENT
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law, the directors
are required to prepare the group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of
the IAS Regulation and have also chosen to prepare the parent
company financial statements under IFRSs as adopted by
the EU. Under company law, the directors must not approve
the accounts unless they are satisfied that they give a true
and fair view of the state of affairs of the company and of the
profit or loss of the company for that period. In preparing
these financial statements, International Accounting Standard 1
requires that directors:
– properly select and apply accounting policies;
– present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
– provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance; and
– make an assessment of the company’s ability to continue as
Responsibility statement
We confirm that to the best of our knowledge:
– the financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the company and the undertakings included in the
consolidation taken as a whole;
– the Strategic Report includes a fair review of the
development and performance of the business and the
position of the company and the undertakings included in
the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they
face; and
– the Annual Report and financial statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
company’s performance, business model and strategy.
Peter Mason
Chairman
John Deane
Group Chief Executive Officer
a going concern.
28 March 2018
28 March 2018
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company’s
transactions and disclose with reasonable accuracy at any
time the financial position of the company and enable
them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for
safeguarding the assets of the company and hence for taking
reasonable steps for the prevention and detection of fraud
and other irregularities.
The directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
89
CHESNARA ANNUAL REPORT & ACCOUNTS 2017CORPORATE GOVERNANCE
SECTION D:
IFRS FINANCIAL
STATEMENTS
SECTION D • IFRS FINANCIAL STATEMENTS
92
Independent Auditor’s Report to the
members of Chesnara plc
98 Consolidated Statement of
Comprehensive Income
99 Consolidated Balance Sheet
100 Company Balance Sheet
101 Consolidated Statement of Cash Flows
102 Company Statement of Cash Flows
103 Consolidated Statement of Changes
in Equity
103 Company Statement of Changes in Equity
104 Notes to the Consolidated
Financial Statements
The Lancashire coast, England, UK
91
Report on the audit of the financial statements
Opinion
In our opinion
– the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2017 and of the
group’s profit for the year then ended;
– the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by
the European Union;
– the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied
in accordance with the provisions of the Companies Act 2006; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements of Chesnara plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise:
– the consolidated statement of comprehensive income;
– the consolidated and parent company balance sheets;
– the consolidated and parent company statements of changes in equity;
– the consolidated and parent company cash flow statements;
– the statement of accounting policies; and
– the related notes 1 to 52.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the
parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements
in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance
with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
– Accuracy of the Save & Prosper cost of guarantees;
– Scildon Liability Adequacy Test; and
– Valuation of the Scildon AVIF intangible asset.
Materiality
Scoping
The materiality that we used in the current year was £11.6m (2016: £8.9m) which was determined on the basis of 3% of
adjusted net assets.
We focused our group audit scope on the audit work at three UK geographic locations where the group’s policies are
administered, three overseas geographic locations where the group’s policies are also administered, and in Luxemburg
where the group undertake certain fund management activities.
Significant changes in
our approach
In the prior year, our audit report included two key audit matters which are not included in our report this year: credit risk
adjustment and Protection Life AVIF.
In relation to the credit risk adjustment , this is no longer identified as a key audit matter, as we have monitored the
adjustment since the previous year-end date, and have noted that there had been minimal movement in the key assumptions
and in the credit spreads. Furthermore, there have been no significant changes to the key assumptions on the Protection Life
AVIF and we noted sufficient headroom on the intangible asset at the year-end date. These matters were therefore no longer
considered key audit matters.
We have also included two new key audit matters which were not included in the prior year audit report: the Scildon Liability
Adequacy Test and the Valuation of the Scildon AVIF intangible asset. These have been included as a result of the acquisition
of the Scildon business during the year, and the key audit risks that have been identified in this respect as outlined below.
92
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC Conclusions relating to principal risks, going concern and viability statement
Going concern
We have reviewed the directors’ statement in note 2c to the financial statements about whether they considered it
appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material
uncertainties to the group’s and company’s ability to continue to do so over a period of at least 12 months from
the date of approval of the financial statements.
We confirm that we have
nothing material to report,
add or draw attention to
in respect of these matters.
We are required to state whether we have anything material to add or draw attention to in relation to that statement
required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained
in the audit.
Principal risks and viability statement
Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge
we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment
of the group’s and the company’s ability to continue as a going concern, we are required to state whether we have
anything material to add or draw attention to in relation to:
– the disclosures on pages 43-45 that describe the principal risks and explain how they are being managed or mitigated;
– the directors' confirmation on page 56 that they have carried out a robust assessment of the principal risks facing the
group, including those that would threaten its business model, future performance, solvency or liquidity; or
– the directors’ explanation on page 41 as to how they have assessed the prospects of the group, over what period
they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures drawing attention to any necessary qualifications
or assumptions.
We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing
Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
Accuracy of Save and Prosper cost of guarantees
Key audit matter
description
The assessment of the cost of guarantee reserves for policies written by Save and Prosper is complex and material, including the
use of a stochastic model based on a variety of possible economic scenarios.
Historically, the residual cost to shareholders arising from the cost of guarantees has fluctuated as a result of movements in bond
yields and equity markets with a value of £19.3m at 31 December 2017 (31 December 2016: £35.7m). This movement is mainly
due to high asset returns over 2017, which increased policyholder asset shares, and reduce the residual cost to shareholders. The
value is determined by a third party actuarial consultant, and the directors compare this valuation against an in-house derived
estimate using an approximation model to validate its reasonableness.
Due to the highly judgemental nature of this balance, we identified manipulation of this estimate as an area of potential fraud.
See note 3e for management’s consideration of critical accounting judgment and key sources of estimation and uncertainty, note
31c for disclosure of the calculation methodology and the charge to income for the current and prior year and the Audit & Risk
Committee report on page 84.
We assessed the design and implementation of the internal controls in place to monitor and manage the risks associated with
the cost of guarantee reserve.
We assessed the competence of the actuarial consultant. Such an assessment includes a direct challenge of the actuarial
consultant’s working papers and a challenge of the historical accuracy of modelling when compared with actual experience.
We used actuarial specialists within our audit team to challenge the appropriateness of assumptions input into the model and
benchmark against external actuarial data. Sensitivity analysis was also performed to assess potential management bias.
We developed an independent expectation of how the assumptions impact the model and challenged management’s
explanation and analysis to support any variations.
How the scope of our
audit responded to the
key audit matter
Key observations
Based on the audit procedures performed, we consider that the S&P residual cost of guarantees is not materially misstated.
93
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED)
Valuation of the Scildon acquired value in-force (‘Scildon AVIF’) business intangible
Key audit matter
description
Following the acquisition of Scildon in 2017, the group have recorded an AVIF intangible asset on the group balance sheet,
reflecting the capitalised future profit in the Scildon life insurance business. There is significant judgement involved in the
initial valuation of the AVIF, as well as in the discount rate used in the calculation.
Management is required to assess the impairment of the Scildon AVIF intangible balance at least annually, which also
involves significant judgement.
See note 3a for management’s consideration of significant accounting judgements. The accounting policy adopted by the
Group is documented within note 2(o) to the financial statements and the acquired in-force business intangible is disclosed
in note 20.
How the scope of our
audit responded to the
key audit matter
We assessed the design and implementation of the internal controls in place to monitor and manage the risks associated
with the capitalisation of the AVIF intangible.
We constructed an independent discount rate and compared this to the discount rate used by management.
We interrogated the policy cash flows which form the basis of the AVIF calculation through a combination of data analytics
and tests of controls, to gain assurance over their completeness and accuracy.
We have also assessed the reasonableness of the valuation adjustments made to the base VIF.
We have challenged the amortisation profile produced by management for the future run off of the Scildon book.
Key observations
Based on the audit procedures performed, we consider the assumptions in the base VIF, and the calculation and magnitude
of the adjustments thereof, and the resultant AVIF to be reasonable. We conclude that the discount rate used and
amortisation profile are appropriate.
Scildon reserving adjustment
Key audit matter
description
Scildon measures the majority of its life insurance contract liabilities using historical market rates of interest, along with a
number of other parameters and assumptions.
IFRS 4 requires an insurer, at the end of each reporting period, to assess whether its recognised insurance liabilities are
adequate, using current estimates of future cash flows (the ‘Liability adequacy test’ or ‘LAT’).
Given Scildon’s accounting policy makes use of historical market interest rates, there is a heightened risk that its insurance
liabilities are not adequate. We therefore considered the liability adequacy test to be a key audit matter, specifically in relation
to the mortality, lapse and expense assumptions which feed into this test, given that the insurance liabilities are most sensitive
to these factors.
The accounting policy adopted by the group is documented within Note 2h iv to the financial statements.
How the scope of our
audit responded to the
key audit matter
The following specific procedures have been performed:
– Evaluation of the design and implementation of the key controls over the setting of the assumptions feeding in to the LAT;
– Performing analytical checks on policy cash flows to identify outliers and movements compared to the prior period, which
were then investigated;
– For a sample of policies, ran the policy cash flows through a model to test that the calculations within management’s model
are accurate; and
– Assessed the results of the experience investigations carried out by management to determine whether they provide support
for the assumptions.
Key observations
Based on the audit procedures performed, we found that the Liability Adequacy Test performed by management was
reasonable, supporting the adequacy of Scildon’s insurance contract liabilities.
94
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 IFRS FINANCIAL STATEMENTS
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
£11.6m (2016: £8.6m)
£9.7m (2016: £7.7m)
Basis for determining
materiality
3% of adjusted Q3 net assets
We use 90% of the benchmark to determine materiality due to the level of inherent volatility in equity prices in the net asset
amount so that materiality does not exceed 3% of the year end net asset figure.
Rationale for the
benchmark applied
In our judgement we believe that a net assets measure is more closely aligned to the objectives of capital solvency and
efficiency, dividend payments and ultimately cash generation that is relevant for this business model. This represents a
stable long-term measure of value in a business which has a significant closed insurance book.
Q3 adjusted net assets
Group materiality
Q3 adjusted net assets £385.8m
Group materiality £11.6m
Component materiality range
(excl. parent company) £5.8m to £6.4m
Audit & Risk Committee reporting
threshold £0.6m
Excluding the parent company, the component materiality levels set by the group auditor range from £5.8m to £6.4m (2016: £4.3m to £5.6m). The movement
in range in the year arises due to foreign exchange movements impacting the re-translated group balance sheet.
We agreed with the Audit & Risk Committee that we would report to the committee all audit differences in excess of £578,000 (2016: £427,000), as well as
differences below that threshold that, in our view, warranted reporting on qualitative grounds. The change in the reporting threshold has been made following
our reassessment of what matters require communicating. We also report to the Audit & Risk Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material
misstatement at the group level.
Based on this assessment, we focused our group audit scope primarily on the audit work at seven (2016: five) geographic locations where the group’s policies
are administered. Three (2016: three) relate to Countrywide Assured plc and are in the United Kingdom, and the remaining four (2016: two) locations are in the
Netherlands and Sweden and relate to Waard Leven, Hollands Welvaren Leven, Waard Schade, Movestic Livförsäkring AB, Movestic Fund Management S.A., and
Scildon. All components were subject to a full scope audit.
The group audit team performed the audit work directly at three of the seven locations. The remaining four locations involved the use of component audit teams,
and included a programme of planned visits that has been designed so that the senior statutory auditor and a senior member of the group audit team visited
each of the locations at least once in the financial year, except for Luxemburg which was not considered to be material for group reporting purposes.
95
CHESNARA ANNUAL REPORT & ACCOUNTS 2017 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED)
Other information
The directors are responsible for the other information. The other information comprises the information included in the
annual report & accounts, other than the financial statements and our auditor’s report thereon.
We have nothing to report in
respect of these matters.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly
stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained
in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there
is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the
work we have performed, we conclude that there is a material misstatement of this other information, we are required to
report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other
information include where we conclude that:
– Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders
to assess the group’s position and performance, business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or
– Audit & Risk Committee reporting – the section describing the work of the Audit & Risk Committee does not appropriately
address matters communicated by us to the Audit & Risk Committee; or
– Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required
under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions
specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the
group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities This description forms part of our auditor’s report.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with chapter 3 of part 16 of the Companies Act 2006. Our audit work has
been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members
as a body, for our audit work, for this report, or for the opinions we have formed.
96
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with
the financial statements; and
– the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not
identified any material misstatements in the strategic report or the directors’ report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
– we have not received all the information and explanations we require for our audit; or
– adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
– the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in
respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration
have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting
records and returns.
We have nothing to report
arising from these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit & Risk Committee, we were appointed by group’s board with effect from 1 October 2009 to audit the financial
statements for the year ending 31 December 2009 and subsequent financial periods. Following a competitive tender process, we were reappointed as auditor
of the company for the period ending 31 December 2018 and subsequent financial periods. The period of total uninterrupted engagement including previous
renewals and reappointments of the firm is 9 years, covering the years ending 2009 to 2017.
Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the Audit & Risk Committee we are required to provide in accordance with ISAs (UK).
Stephen Williams FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
28 March 2018
97
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December
Insurance premium revenue
Insurance premium ceded to reinsurers
Net insurance premium revenue
Fee and commission income
Net investment return
Total revenue net of reinsurance payable
Other operating income
Total income net of investment return
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders
Net decrease in insurance contract provisions
Reinsurers’ share of claims and benefits
Net insurance contract claims and benefits
Change in investment contract liabilities
Reinsurers’ share of investment contract liabilities
Net change in investment contract liabilities
Fees, commission and other acquisition costs
Administrative expenses
Other operating expenses
Charge for amortisation of acquired value of in-force business
Charge for amortisation of acquired value of customer relationships
Other
Total expenses net of change in insurance contract provisions and investment contract liabilities
Total income less expenses
Share of profit of associate
Profit recognised on business combination
Financing costs
Profit before income taxes
Income tax expense
Profit for the year
Items that will not be reclassified to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign operations
Revaluation of pension obligations
Revaluation of investment property
Total comprehensive income for the year
Basic earnings per share (based on profit for the year)
Diluted earnings per share (based on profit for the year)
The notes and information on pages 104 to 173 form part of these financial statements.
Note
2017
£000
2016
£000
231,515
(54,191 )
109,450
(44,900 )
177,324
113,848
531,817
822,989
17,242
64,550
72,932
515,681
653,163
17,614
840,231
670,777
(465,729 )
51,033
49,449
(365,247 )
(293,603 )
3,681
(289,922 )
(24,405 )
(70,269 )
(13,271 )
(101 )
(4,239 )
(346,117 )
11,392
62,364
(272,361 )
(274,724 )
5,617
(269,107 )
(23,838 )
(46,615 )
(10,419 )
(236 )
(4,394 )
(767,454 )
(626,970 )
72,777
949
20,319
(4,443 )
89,602
(11,168 )
43,807
150
–
(3,272 )
40,685
(5,405 )
78,434
35,280
8,274
124
90
86,922
(20,114 )
–
–
55,394
52.38p
27.67p
52.13p
27.56p
9
10
11
12
12
12
13
13
14
15
16
16
16
24
7
17
8
18
8
4
35
47
47
98
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
CONSOLIDATED BALANCE SHEET
31 December
Assets
Intangible assets
Deferred acquisition costs
Acquired value of in-force business
Acquired value of customer relationships
Goodwill
Software assets
Property and equipment
Investment in associates
Investment properties
Reinsurers’ share of insurance contract provisions
Amounts deposited with reinsurers
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
Policyholders’ funds held by the group
Mortgage loan portfolio
Insurance and other receivables
Prepayments
Derivative financial instruments
Total financial assets
Reinsurers’ share of accrued policyholder claims
Income taxes
Cash and cash equivalents
Total assets
Liabilities
Insurance contract provisions
Other provisions
Financial liabilities
Investment contracts at fair value through income
Liabilities relating to policyholders’ funds held by the group
Borrowings
Derivative financial instruments
Total financial liabilities
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance and investment contracts
Deferred income
Income taxes
Other payables
Bank overdrafts
Total liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Treasury shares
Other reserves
Retained earnings
Total shareholders’ equity
The notes and information on pages 104 to 173 form part of these financial statements.
Approved by the board of directors and authorised for issue on 28 March 2018 and signed on its behalf by:
Peter Mason
Chairman
John Deane
Chief executive officer
Company Number: 04947166
Note
2017
£000
2016
£000
19
20
21
22
23
24
31
32
25
25
25
25
25/26
25/27
25
25/28
38
29
31
32
33
34
28
36
37
38
39
40
29
61,858
119,039
641
806
6,358
4,327
6,407
1,199
233,154
38,776
512,724
5,202,772
1,628,817
265,729
48,106
59,448
7,325
1,682
7,726,603
25,888
7,681
210,647
48,318
62,943
736
–
6,560
519
5,433
245
254,859
37,437
485,165
4,104,602
474,091
229,397
54,756
39,646
5,271
2,773
5,395,701
19,307
3,352
260,353
8,443,384
6,095,763
3,962,279
1,098
3,420,273
265,729
129,202
22,494
3,837,698
22,794
11,406
97,163
4,701
8,514
44,984
1,091
2,242,446
823
3,028,269
229,397
86,843
1,348
3,345,857
5,420
6,899
61,416
5,438
8,624
23,657
1,622
7,991,728
5,702,202
8
451,656
393,561
41
41
42
43
44
43,766
141,983
(98 )
27,664
238,341
43,766
142,058
(161 )
19,300
188,598
451,656
393,561
99
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
COMPANY BALANCE SHEET
31 December
Assets
Non-current assets
Financial assets
Investments in subsidiaries
Deferred tax asset
Total non-current assets
Current assets
Financial assets
Holdings in collective investment schemes at fair value through income
Receivables and prepayments
Income taxes
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Borrowings
Other payables
Total current liabilities
Non-current liabilities
Borrowings
Total non-current liabilities
Total liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Treasury shares
Other reserves
Retained earnings
Total shareholders’ equity
Note
2017
£000
2016
£000
25
354,720
338
249,234
202
355,058
249,436
25
29
29,091
3,060
3,032
11,867
72,939
3,007
2,279
44,183
47,050
122,408
402,108
371,844
34
40
22,029
4,651
52,697
4,785
26,680
57,482
34
67,428
67,428
–
–
94,108
57,482
308,000
314,362
41
41
42
43
44
7,494
141,983
(98)
50
158,571
7,494
142,058
(161)
50
164,921
308,000
314,362
The notes and information on pages 104 to 173 form part of these financial statements.
The profit for the financial year of the parent company was £22.5m (2016: £22.3m).
The financial statements of Chesnara plc (registered number 4947166) were approved by the board of directors and authorised for issue on 28 March 2018 and
signed on its behalf by:
Peter Mason
Chairman
John Deane
Chief executive officer
100
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December
Profit for the year
Adjustments for:
Depreciation of property and equipment
Amortisation of deferred acquisition costs
Amortisation of acquired value of in-force business
Amortisation of acquired value of customer relationships
Amortisation of software assets
Share based payment
Tax paid
Interest receivable
Dividends receivable
Interest expense
Fair value gains on financial assets
Profit arising on business combination
Share of profit of associate
Increase in intangible assets related to insurance and investment contracts
Interest received
Dividends received
Changes in operating assets and liabilities (excluding the effect of acquisitions)
Changes in operating assets and liabilities:
Increase in financial assets
Decrease in reinsurers’ share of insurance contract provisions
Increase in amounts deposited with reinsurers
Decrease in insurance and other receivables
Decrease in prepayments
Decrease in insurance contract provisions
Decrease/(increase) in investment contract liabilities
(Increase)/decrease in provisions
Increase/(decrease) in reinsurance payables
Increase/(decrease) in payables related to direct insurance and investment contracts
(Decrease)/increase in other payables
Net cash generated from/(utilised by) operations
Income tax paid
Net cash generated from/(utilised by) operating activities
Cash flows from investing activities
Business combinations
Development of software
Disposal/(purchases) of property and equipment
Net cash utilised by investing activities
Cash flows from financing activities
(Loss)/Proceeds from issue of share capital
Net proceeds from borrowings
Sale of treasury shares
Dividends paid
Interest paid
Net cash generated from financing activities
Net decrease in net cash and cash equivalents
Net cash and cash equivalents at beginning of year
Effect of exchange rate changes on net cash and cash equivalents
Note
2017
£000
2016
£000
78,434
35,280
23
19
20
22
17
7
24
35
698
14,506
13,271
101
2,218
(159 )
11,209
4,785
(4,619)
4,443
(210,706 )
(20,319 )
(949 )
(28,634 )
4,560
4,336
124
(145,613 )
17,074
(1,339 )
11,317
12,722
(91,110 )
414,014
272
4,424
2,432
(935 )
173
12,162
10,408
172
794
623
5,405
(20,882 )
(30,209 )
3,272
(205,870 )
–
(150 )
(16,448 )
20,281
29,446
–
(283,944 )
34,177
(3,496 )
10,294
1,795
(16,530 )
362,641
(1,306 )
(3,660 )
(2,114 )
2,808
86,987
(27,480 )
(54,878 )
(4,709 )
59,507
(59,587 )
7
(117,993 )
(928 )
(314 )
–
(3,502 )
948
(119,235 )
(2,554 )
(75 )
42,022
63
(29,484 )
(4,266 )
66,708
4,268
–
(24,181 )
(3,095 )
8,260
43,700
(51,468 )
258,731
2,293
(18,441 )
259,911
17,261
Net cash and cash equivalents at end of the year
29
209,556
258,731
Note: Net cash and cash equivalents includes overdrafts.
The notes and information on pages 104 to 173 form part of these financial statements.
101
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
COMPANY STATEMENT OF CASH FLOWS
Year ended 31 December
Profit for the year
Adjustments for:
Tax recovery
Interest receivable
Share based payment
Dividends receivable
Increase in financial assets
Changes in operating assets and liabilities:
(Increase)/decrease in loans and receivables
(Increase)/decrease in prepayments
Increase in other payables
Net cash generated from/(utilised by) operating activities
Income tax received
Net cash generated from/(utilised by) operating activities
Cash flows from investing activities
Business combinations
Dividends received from subsidiary company
Net cash (utilised by)/generated from investing activities
Cash flows from financing activities
Net proceeds from the issue of share capital
Redemption of redeemable preference share
Sale of treasury shares
Net proceeds from borrowings
Dividends paid
Interest paid
Net cash generated from financing activities
Net (decreases)/increase in net cash and cash equivalents
Net cash and cash equivalents at beginning of year
Note
2017
£000
2016
£000
22,465
22,311
(1,860 )
1,683
669
(32,701 )
43,848
(213 )
24
(23 )
(1,498 )
1,641
478
(30,500 )
(67,927 )
621
(55 )
3,351
33,892
996
(71,578 )
900
34,888
(70,678 )
(105,486 )
32,701
–
30,500
(72,785 )
30,500
–
(75 )
63
36,760
(29,484 )
(1,683 )
66,708
–
–
–
(24,181 )
(1,464 )
5,581
41,063
(32,316 )
44,183
885
43,298
Net cash and cash equivalents at end of the year
29
11,867
44,183
Note: Net cash and cash equivalents includes overdrafts.
The notes and information on pages 104 to 173 form part of these financial statements.
102
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2017
Equity shareholders’ funds at 1 January 2017
Profit for the year
Dividends paid
Foreign exchange translation differences
Revaluation of pension obligations
Revaluation of investment property
Share based payment
Sale of treasury shares
Note
4
Share
capital
£000
43,766
–
–
–
–
–
–
–
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
142,058
–
–
–
–
–
–
(75 )
19,300
–
–
8,274
–
90
–
–
(161 )
–
–
–
–
–
–
63
188,598
78,434
(29,484 )
–
124
–
669
–
Total
£000
393,561
78,434
(29,484 )
8,274
124
90
669
(12 )
Equity shareholders’ funds at 31 December 2017
43,766
141,983
27,664
(98 )
238,341
451,656
Year ended 31 December 2016
Equity shareholders’ funds at 1 January 2016
Profit for the year
Dividends paid
Foreign exchange translation differences
Share based payment
Issue of new shares
Note
4
Share
capital
£000
42,600
–
–
–
–
1,166
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
76,516
–
–
–
–
65,542
(814 )
–
–
20,114
–
–
(161 )
–
–
–
–
–
177,021
35,280
(24,181 )
–
478
–
Total
£000
295,162
35,280
(24,181 )
20,114
478
66,708
Equity shareholders’ funds at 31 December 2016
43,766
142,058
19,300
(161 )
188,598
393,561
The notes and information on pages 104 to 173 form part of these financial statements.
COMPANY STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2017
Share
capital
£000
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Equity shareholders’ funds at 1 January 2017
Profit for the year
Dividends paid
Share based payment
Sale of treasury shares
7,494
–
–
–
–
142,058
–
–
–
(75 )
Equity shareholders’ funds at 31 December 2017
7,494
141,983
50
–
–
–
–
50
(161 )
–
–
–
63
164,921
22,465
(29,484 )
669
–
(98 )
158,571
308,000
Year ended 31 December 2016
Share
capital
£000
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Equity shareholders’ funds at 1 January 2016
Profit for the year
Dividends paid
Share based payment
Issue of new shares
6,328
–
–
–
1,166
76,516
–
–
–
65,542
Equity shareholders’ funds at 31 December 2016
7,494
142,058
50
–
–
–
–
50
The notes and information on pages 104 to 173 form part of these financial statements.
(161 )
–
–
–
–
166,313
22,311
(24,181 )
478
–
(161 )
164,921
314,362
103
Total
£000
314,362
22,465
(29,484 )
669
(12 )
Total
£000
249,046
22,311
(24,181 )
478
66,708
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 General information
Chesnara plc (Registered number 4947166) (the company) is a limited liability company, incorporated in the United Kingdom and registered in England and Wales.
The company is limited by shares and has a primary listing on the London Stock Exchange. The address of the registered office is 2nd Floor, Building 4, West Strand
Business Park, West Strand Road, Preston, England, PR1 8UY, UK.
The company and its subsidiaries, together forming the group, comprise UK, Swedish and Dutch life and pensions businesses.
The UK business is represented by the CA segment, as described in note 8. Its activities are performed entirely in the UK, where it underwrites life risks such
as those associated with death, disability and health and provide a portfolio of investment contracts for the savings and retirement needs of customers through
asset management. It is substantially closed to new business, such that new insurance contracts are only issued to existing customers, dependent on their
changing needs.
The Swedish business, which comprises the Movestic segment, described in note 8, the activities of which are performed predominantly in Sweden, underwrites
life, accident and health risks and provides a portfolio of investment contracts. It is open to new business, securing distribution of its products principally through
independent financial advisers.
The Dutch business, which comprises the Waard Group and Scildon segments, is described in note 8. These represent the group’s Dutch life and general
insurance businesses. The Waard Group consists of three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a
servicing company, Tadas Verzekering. During the year, the book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard
Leven via a Part VII transfer. 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 Scildon segment represents the Group’s latest Dutch life insurance business,
which was acquired on 5 April 2017. Scildon’s policy base is predominantly made up of individual protection and savings contracts. It is open to new business and
sells protection, individual savings and group pension contracts via a broker-led distribution model.
These financial statements are presented in pounds sterling, which is the functional currency of the parent company. Foreign operations are included in accordance
with the policies set out in note 2. The financial statements were authorised for issue by the directors on 28 March 2018.
2 Significant accounting policies
In the information which follows distinction is made, where necessary, in respect of the applicability of certain policies, or as to their clarification:
(i) as between the UK business, the Swedish business, which comprises the Movestic segment and the Dutch business which comprises the Waard Group
and Scildon.
(a) Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (`IFRSs’) as adopted by the European
Union (‘Adopted IFRSs’) and therefore comply with Article 4 of the EU IAS Regulation. Both the parent company financial statements and the group financial
statements have been prepared and approved by the directors in accordance with Adopted IFRSs.
At the date of authorisation of these financial statements the following standards and interpretations, which are applicable to the group and which have not been
applied in these financial statements, were in issue but not yet effective (and in some cases have not been adopted by the EU):
Title
IFRIC 22
Amendments to IFRS 10, IFRS 12 and IAS 28 (Dec 2014)
Amendments to IFRS 10 and IAS 28 (Sept 2014)
IFRS 16
IFRS 9
IFRS 17
Subject
Foreign currency transactions and advance consideration
Investment entities: applying the consolidation exception
Sale or contribution of assets between an investor and its associate or joint venture
Leases
Financial instruments
Insurance contracts
The directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the group in future periods,
except as follows:
– IFRS 9 will impact both the measurement and disclosures of Financial Instruments. An exemption has been granted to life insurers to delay the implementation
of IFRS 9 until the earlier of the introduction of IFRS 17 (insurance contracts) and 2021.
– IFRS 16 is effective for annual periods beginning on or after 1 January 2019 and the impact on the financial statements of the group will be assessed in due course.
– IFRS 17 (insurance contracts) was issued in May 2017 and will be effective from 2021. The company has commenced its IFRS 17 implementation programme,
but has yet to quantify the financial impact of its adoption.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.
In publishing the parent company financial statements together with the group financial statements the company has taken advantage of the exemption in s408
of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The parent
company profit for the year has been disclosed in note 44.
104
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
(b) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the company and of entities controlled by the company (its subsidiaries), made up
to 31 December each year. Control is achieved where the company has the power to govern the financial and operating policies of an investee entity so as to
obtain benefits from its activities. The parent company financial statements present information about the company as a separate entity and not about its group.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the group’s equity therein. Non-controlling interests consist of
the amount of those interests at the date of the original business combination and the non-controlling interest’s share of changes in equity since the date of the
combination.
Profit or loss and each component of other comprehensive income are attributed to the company and to the non-controlling interests. Total comprehensive income is
attributed to the company shareholders and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Comprehensive Income from the effective date
of acquisition or up to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting
policies used into line with those used by the group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
(c) Basis of preparation
The consolidated and parent company financial statements have been prepared on a going concern basis. The directors believe that they have a reasonable
expectation that the group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the directors have
taken into consideration the points as set out in the Financial Management section under the heading ‘Going Concern’.
The financial statements are presented in pounds sterling, rounded to the nearest thousand and are prepared on the historical cost basis except that the following
assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments at fair value through income, assets and liabilities held for
sale, investment property and investment contract liabilities at fair value through income.
Assets and liabilities are presented on a current and non-current basis in the notes to the financial statements. If assets are expected to be recovered or liabilities
expected to be settled within a year, they are classified as current. If they are expected to be recovered or settled in more than one year, they are classified
as non-current. The company balance sheet is also presented in this manner.
The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate
is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. Judgments made
by management in the process of applying the group’s accounting policies that have a significant effect on the financial statements and estimates with a significant
risk of material adjustment in the next year are set out in note 3.
The accounting policies set out below, unless otherwise stated, have been applied consistently to all years presented in these consolidated financial statements.
In accordance with IFRS 4, Insurance Contracts, on adoption of IFRS the group applied existing accounting practices for insurance and participating investment
contracts, modified as appropriate to comply with the IFRS framework and applicable standards, introducing changes only where they provide more reliable and
relevant information.
(d) Business combinations
The group uses the purchase method of accounting for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at the date of exchange. Expenses directly attributable to the acquisition are expensed as incurred.
The acquiree’s identifiable assets, liabilities, and contingent liabilities, which meet the conditions for recognition under IFRS 3, are measured initially at their fair
values at the acquisition date. Gains arising on a bargain purchase, where the net fair value of the identifiable assets, liabilities and contingent liabilities of the
acquiree exceeds the cost of acquisition, is recognised in the Consolidated Statement of Comprehensive Income at the acquisition date.
The non-controlling interest in the acquiree is initially measured at the non-controlling interest’s proportion of the net fair value of the assets, liabilities and
contingent liabilities recognised.
(e) Investments in associates
An associate is an entity over which the group is in a position to exercise significant influence, but not control or joint control, through participation in the financial
and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but
is not control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates
are carried in the balance sheet at cost as adjusted by post-acquisition changes in the group’s share of the net assets of the associate, less any impairment in
the value of individual investments.
Where a group company transacts with an associate of the group, profits and losses are eliminated to the extent of the group’s interest in the associate. Losses
may provide evidence of an impairment of assets transferred, in which case appropriate provision is made for impairment.
105
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 Significant accounting policies (continued)
(f) Foreign currencies
The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates, being its
functional currency. For the purpose of these consolidated financial statements, the results and financial position of each group company are expressed in pounds
sterling, which is the functional currency of the parent company and the presentation currency of the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency, being foreign currencies,
are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities which are denominated in
foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value, which are denominated in foreign
currencies, are translated at the rates prevailing when the fair value was determined. Exchange differences are recognised in the Consolidated Statement of
Comprehensive Income in the year in which they arise, except when they relate to items for which gains and losses are recognised in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the group’s foreign operations are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year, unless exchange rates fluctuate
significantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classified as equity and
are recognised in the group’s foreign currency translation reserve. Such translation differences are recognised as income or as expense in the year in which the
operation is disposed of.
Transactions relating to business combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date.
(g) Product classification
The group’s products are classified at inception as either insurance or investment contracts for accounting purposes. Insurance contracts are contracts which
transfer significant insurance risk and remain as insurance contracts until all rights and obligations are extinguished or expire. They may also transfer financial risk.
Investment contracts are contracts which carry financial risk, with no significant insurance risk. Where contracts contain both insurance and investment components
and the investment components can be measured reliably, the contracts are unbundled and the components are separately accounted for as insurance contracts
and investment contracts respectively.
In some insurance contracts and investment contracts the financial risk is borne by the policyholders. Such contracts are usually unit-linked contracts.
With-profits contracts, which subsist only within the UK business, all contain a discretionary participation feature (‘DPF’) which entitles the holder to receive, as a
supplement to guaranteed benefits, additional benefits or bonuses, which may be a significant portion of the total contractual benefits.
In respect of the S&P component of the CA segment, the amount and timing of such contractual benefits are at the discretion of the group and are contractually
based on realised and/or unrealised investment returns on a specified pool of assets held by the group. The terms and conditions of these contracts, together
with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary benefits are based and within which the group
may exercise its discretion as to the quantum and timing of their payment to contract holders.
In respect of the original CA book, all such contracts are wholly reinsured with ReAssure Limited (ReAssure - previously Guardian Assurance plc), and the amount
or timing of the additional payments are contractually at the discretion of the reinsurer and are contractually based on:
(i)
the performance of a specified pool of contracts or a specified type of contract; or
(ii) realised and/or unrealised investment returns on a specified pool of assets held by the reinsurer; or
(iii) the profit or loss of the reinsurer.
All contracts with discretionary participation features are classified as insurance contracts.
(h) Insurance contracts
There are fundamental differences between the nature of the insurance contracts subsisting in the UK, Swedish and Dutch businesses, including inter alia contract
longevity: the related product characteristics are set out for the separate UK, Swedish and Dutch businesses in note 5. As a consequence, the alignment
of income and expense recognition with the underlying assumption of risk leads to the adoption of separate accounting policies appropriate to each business,
as follows:
(i) Premiums
Across all four businesses, premiums are accounted for when due, or in the case of unit-linked insurance contracts, when the liability is recognised, and
exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due.
In Sweden written premiums for non-life (general) insurance business comprise the premiums on contracts incepting in the financial year. Written premiums
are stated gross of commission payable to intermediaries and exclusive of taxes and duties paid on premiums.
Unearned premiums are those proportions of the premium which relate to periods of risk after the balance sheet date. Unearned premiums are calculated
on a straight-line basis according to the duration of the policy underwritten.
(ii) Claims and benefits
Claims are accounted for in the accounting year in which they are due or notified. Surrenders are accounted for in the accounting year in which they are paid.
Claims include policyholder bonuses allocated in anticipation of a bonus declaration. Reinsurance recoveries are accounted for in the same period as the
related claim.
Swedish non-life claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions
for claims incurred but not yet reported and related expenses, together with any adjustments to claims from previous years.
Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred
but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claims provisions are not discounted.
Provisions are calculated gross of any reinsurance recoveries.
All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing
claims provisions, it is likely that the final outcome will prove to be different from the original liability established.
The estimation of outstanding claims provisions is described in note 31.
106
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 (iii) Acquisition costs
In the UK, Swedish and Scildon segments, acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. They
are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is
established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At 31 December each year, such costs that are deferred to
future years are reviewed to ensure they do not exceed available future margins.
Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred.
(iv) Measurement of insurance contract provisions
In the UK and Dutch businesses, insurance contract provisions are measured using accounting policies having regard to the principles laid down in Council
Directive 2002/83/EC.
Insurance contract provisions are determined following an annual actuarial investigation of the long-term funds and are calculated initially on a statutory basis in
order to comply with the reporting requirements of the Prudential Sourcebook for Insurers and the Dutch Central Bank respectively. This valuation is then
adjusted to remove certain contingency reserves and to remove excess prudence from other reserves. In accordance with this, the provisions are calculated
on the basis of current information, using the specific valuation methods set out below.
Unit-linked provisions are measured by reference to the value of the underlying net asset value of the group’s unitised investment funds, determined on a bid
value basis, at the balance sheet date.
For immediate annuities in payment the provision is calculated as the discounted value of the expected future annuity payments under the policies, allowing
for mortality, including projected improvements in future mortality, interest rates and expenses. For certain temporary annuities in payment no allowance
for mortality or mortality improvement has been made.
In respect of CA (S&P book), for those classes of non-linked business with a discretionary participation feature, a gross premium method has been used to
value the liability, whereby expected income and costs have been projected, allowing for mortality, interest rates and expenses.
For the other classes of non-linked business the provision is calculated on a net premium basis, being the level of premium consistent with a premium
stream, the discounted value of which, at the outset of the policy, would be sufficient to cover exactly the discounted value of the original guaranteed
benefits at maturity, or at death if earlier, on the valuation basis. The provision is then calculated by subtracting the present value of future net premiums
from the present value of the benefits guaranteed at maturity, or death if earlier, as a result of events up to the balance sheet date. Negative provisions do not
arise under the net premium method, which makes no allowances for voluntary discontinuances by policyholders, and which only implicitly allows for future
policy maintenance costs.
In respect of CA (original book) for those classes of non-linked and unit-linked business where policyholders participate in profits the liability is wholly reassured
to ReAssure. The liability is calculated on a net premium basis, but is then increased to the realistic liability as a result of the liability adequacy test.
Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash flows and comparing this amount to the carrying
value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identified, an additional provision is made and
the group recognises the deficiency in income for the year. Insurance contract provisions can never be definitive as to their timing or the amount of claims
and are therefore subject to subsequent reassessment on a regular basis.
In Sweden, provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims
incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claim provisions are not discounted
other than for income protection and waiver of premium benefits, where payments may be made for a considerable period of time.
All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing
claims provisions, it is likely that the final outcome will prove to be different from the original liability established.
107
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 Significant accounting policies (continued)
(i) Investment contracts
(i) Amounts collected
Amounts collected on investment contracts, which primarily involve the transfer of financial risk such as long-term savings contracts, are accounted for using
deposit accounting, under which the amounts collected, less any initial fees deducted, are credited directly to the balance sheet as an adjustment to the
liability to the investor.
(ii) Amounts deposited with reinsurers
Amounts deposited with reinsurers under reinsurance arrangements, which primarily involve the transfer of financial risk, are entered directly to the balance
sheet as amounts deposited with reinsurers. These assets are designated on initial recognition as at fair value through income.
(iii) Benefits
For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting
period in which they are paid.
(iv) Acquisition costs
Acquisition costs relating to investment contracts comprise directly attributable incremental acquisition costs, which vary with, and are related to, securing
new contracts, and are recognised as an asset to the extent that they represent the contractual right to benefit from the provision of investment management
services. The asset is presented as a deferred acquisition cost asset and is amortised over the expected term of the contract, as the fees relating to the
provision of the services are recognised. All other costs are recognised as expenses when incurred.
(v) Liabilities
All investment contract liabilities are designated on initial recognition as held at fair value through income. The group has designated investment contract
liabilities at fair value through income as this more closely reflects the basis on which the businesses are managed.
The financial liability in respect of unit-linked contracts is measured by reference to the value of the underlying net asset value of the unitised investment funds,
determined on a bid value, at the balance sheet date.
For the UK business, deferred tax on unrealised capital gains and for the Swedish business a yield tax in respect of an estimate of the investment return on
the underlying investments in the unitised funds are also reflected in the measurement of the respective unit-linked liabilities.
Investment contract liabilities are managed together with related investment assets on a fair value basis as part of the documented risk management strategy.
The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts.
(j) Reinsurance
The group cedes reinsurance in the normal course of business for the purpose of avoiding the retention of undue concentration of risk on any one life, policyholder
or loss event (for example multiple losses under a group Life contract). Assets, liabilities and income and expense arising from ceded reinsurance contracts are
presented separately from the related assets, liabilities, income and expenses from the related insurance contracts because the reinsurance arrangements do
not relieve the group from its direct obligations to its policyholders.
Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets, which comprise amounts due from
insurance companies for paid and unpaid losses and ceded life policy benefits. Rights under contracts that do not transfer significant insurance risk are accounted
for as financial instruments and are presented as amounts deposited with reinsurers.
The net premiums payable to a reinsurer may be more or less than the reinsurance assets recognised by the group in respect of the reinsurance cover purchased.
Any gain or loss is recognised in the income statement in the period in which the reinsurance premiums are payable.
Rights under reinsurance contracts comprising the reinsurers’ share of insurance contract provisions and accrued policyholder claims are estimated in a manner
that is consistent with the measurement of the provisions held in respect of the related insurance contracts and in accordance with the terms of the reinsurance
contract. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the group may not
recover all amounts due and the event has a reliably measurable impact on the amounts that the group will receive from the reinsurer. Impairment losses reduce
the carrying value of the related reinsurance assets to their recoverable amount and are recognised as an expense in the income statement.
The group enters into certain financing arrangements, which are established in the form of a reinsurance contract, but which are substantively in the form of a
financial instrument. Such arrangements are classified and presented as borrowings within financial liabilities.
(k) Fee and commission income
Fees charged for investment management services provided in connection with investment contracts are recognised as revenue as the services are provided.
Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which
services will be provided.
Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned.
For both insurance and investment contracts, initial fees, annual management charges and contract administration charges are recognised as revenue on an
accruals basis. Surrender charges are recognised as a reduction to policyholder claims and benefits incurred when the surrender benefits are paid.
Benefit-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity benefits are recognised as revenue on an
accruals basis.
For insurance and investment contracts, commissions received or receivable which do not require the group to render further services are recognised as
revenue by the group on the effective commencement or renewal dates of the related contract. However, when it is probable that the group will be required to
render further services during the life of the contract, the commission, or part thereof, is deferred and recognised as revenue over the period in which services
are rendered.
108
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 (l) Investment income
Investment income comprises income from financial assets and rental income from investment properties.
Income from financial assets comprises dividend and interest income, net fair value gains and losses (both unrealised and realised) in respect of financial assets
classified as fair value through income, and realised gains on financial assets classified as loans and receivables.
Dividends are accrued on an ex-dividend basis. Interest received and receivable in respect of interest-bearing financial assets classified as fair value through
income is included in net fair value gains and losses. For loans and receivables and cash and cash equivalents interest income is calculated using the effective
interest method.
Rental income from investment properties under operating leases is recognised in the Consolidated Statement of Comprehensive Income on a straight-line basis
over the term of each lease. Lease incentives are recognised in the Consolidated Statement of Comprehensive Income as an integral part of the total lease income.
(m) Expenses
(i) Operating lease payments
Leases where a significant proportion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made
under operating leases are recognised in the Consolidated Statement of Comprehensive Income on a straight-line basis over the term of the lease. Lease
incentives received are recognised in the income statement as an integral part of the total lease expense.
(ii) Financing costs
Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the
effective interest rate method.
(n) Income taxes
Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the Consolidated Statement of Comprehensive Income.
Tax that relates directly to transactions reflected within equity is also presented within equity.
(i) Current tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
(ii) Deferred tax
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of
realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(iii) Policyholders’ fund yield tax
Certain of the group’s policyholders within the Swedish business are subject to a yield tax which is calculated based on an estimate of the investment return
on underlying investments within their unitised funds. The group is under an obligation to deduct the yield tax from the policyholders’ unitised funds and to
remit these deductions to the tax authorities. The remittance of this tax payment is included in other operating expenses as it does not comprise a tax charge
on group profits.
(o) Acquired value of in-force business
Acquired in-force insurance and investment contracts arising from business combinations are measured at fair value at the time of acquisition.
The difference between the fair value of insurance contracts and the liability measured in accordance with the group’s accounting policies for the contracts is
recorded as acquired present value of in-force business. The present value of in-force business is carried gross of tax and is amortised against income on a time
profile which, it is intended, will broadly match the profile of the underlying emergence of surplus as anticipated at the time of acquisition. The present value of
in-force insurance contracts is tested for recoverability/impairment as part of the liability adequacy test.
The present value of in-force investment contracts is stated at cost less accumulated amortisation and impairment losses. The initial cost is deemed to be the fair
value of the contractual customer relationships acquired. The acquired present value of the in-force investment contracts is carried gross of tax and is amortised
against income on a time profile which, it is intended, will broadly match the profile of the underlying emergence of profit from the contracts. The recoverable
amount is estimated at each balance sheet date. If the recoverable amount is less than the carrying amount, an impairment loss is recognised in the Consolidated
Statement of Comprehensive Income and the carrying amount is reduced to its recoverable amount.
(p) Acquired value of customer relationships
The acquired value of customer relationships arising from business combinations is measured at fair value at the time of acquisition. This comprises the discounted
cash flows relating to new insurance and investment contracts which are expected to arise from existing customer relationships. These are carried gross of tax,
are amortised in accordance with the expected emergence of profit from the new contracts and are tested periodically for recoverability.
(q) Software assets
An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met:
(i) an asset is created that can be identified;
(ii) it is probable that the asset created will generate future economic benefits; and
(iii) the development costs of the asset can be measured reliably.
Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
Software assets, including internally developed software, are amortised on a straight-line basis over their estimated useful life, which typically varies between
3 and 5 years.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 Significant accounting policies (continued)
(r) Property and equipment
Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.
Depreciation is charged to the Consolidated Statement of Comprehensive Income on a straight-line basis over the estimated useful economic lives of the property
and equipment on the following basis:
Computers and similar equipment
Fixtures and other equipment
3 to 5 years
5 years
Assets held under finance leases are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the
relevant lease.
(s) Investment property
Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. On initial recognition investment properties
are measured at cost including attributable transaction costs, and are subsequently measured at fair value. Independent external valuers, having an appropriate
recognised professional qualification and recent experience in the location and category of property being valued, value the portfolio every 12 months.
The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation
between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently
and without compulsion.
Any gain or loss arising from a change in fair value is recognised in the Consolidated Statement of Comprehensive Income. Rental income from investment property
is accounted for as described in accounting policy (l).
(t) Financial assets
Investments in subsidiaries are carried in the company balance sheet at cost less impairment.
Financial assets are classified into different categories depending on the type of asset and the purpose for which it is acquired. Currently four different categories
of financial assets are used: ‘financial assets at fair value through income’, ‘mortgage loan portfolio’, ‘prepayments’ and ‘loans and receivables’. Financial assets
classified as at fair value through income comprise financial assets designated as such on initial recognition and derivative financial instruments.
All financial assets held for investment purposes other than the Waard mortgage loan portfolio and derivative financial instruments are designated as at fair value
through income on initial recognition since they are managed, and their performance is evaluated, on a fair value basis in accordance with documented investment
and risk management strategies. This designation is also applied to the group’s investment contracts, since the investment contract liabilities are managed together
with the investment assets on a fair value basis as part of the documented risk management strategy. Purchases and sales of ‘regular way’ financial assets are
recognised on the trade date, which is when the group commits to purchase, or sell, the assets.
All financial assets are initially measured at fair value plus, in the case of financial assets not classified as fair value through income, transaction costs that are
directly attributable to their acquisition.
Subsequent to initial recognition, financial assets classified as at fair value through income are measured at their fair value without any deduction for transaction
costs that may be incurred on their disposal.
The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date.
Financial assets classified as insurance and other receivables are stated at amortised cost less impairment losses. A provision for the impairment of loans and
receivables is established when there is objective evidence that the group will not be able to collect all the amounts due according to the original contract terms
after the date of the initial recognition of the asset and when the impact on the estimated cash flows of the financial asset can be reliably measured.
The mortgage loan portfolio held by the Waard Group is stated at amortised cost less impairment losses and incorporates the effective interest rate calculation method.
Prepayments are held at cost and are amortised over the relevant time period.
Financial assets not recognised at fair value through income are regularly reviewed for objective evidence of impairment. In determining whether objective evidence
exists, the group considers, among other factors, the financial stability of the counterparty, current market conditions and fair value volatility.
Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred
together with substantially all the risks and rewards of ownership.
(u) Derivative financial instruments
Derivative financial instruments are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss. Hedge
accounting has not been applied.
The fair value of interest rate swaps is the estimated amount that the group would receive or pay to terminate the swap at the balance sheet date, taking into
account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market
price at the balance sheet date, being the present value of the quoted forward price.
The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
Embedded derivatives which are not closely related to their host contracts and which meet the definition of a derivative are separated and fair valued through income.
110
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 (v) Policyholders’ funds held by the group and liabilities relating to policyholders’ funds held by the group
Policyholders’ funds held by the group and liabilities relating to policyholders’ funds held by the group are recognised at fair value.
(i) Policyholders’ funds held by the group
The policyholders’ funds held by the group represent the assets associated with an Investment product in the Swedish business, where the assets are held
on behalf of the policyholder and where all the risks and rewards associated with the assets are the policyholders’ not the group’s.
The policyholders’ funds held by the group are held for investment purposes on behalf of the policyholders and are designated as at fair value through
income. The fair values of the policyholders’ funds held by the group are the accumulation of the bid prices of the underlying assets at the balance sheet
date. Transactions in these financial assets are recognised on the trade date, which is when the group commits (on behalf of the policyholder) to purchase, or
sell the assets.
(ii) Liabilities relating to policyholders’ funds held by the group
The liability relating to policyholders’ funds held by the group represents the liability that matches the asset policyholders’ funds held by the group. As stated
previously, the risk and rewards associated with the investment product (and its underlying assets and matching liability) lie with the policyholders, not
the group.
(w) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as having a
short maturity of three months or less at their acquisition.
(x) Assets held for sale and liabilities held for sale
Assets and liabilities are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction that is highly likely to complete
within one year from the date of classification, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value and
are classified separately from other assets in the balance sheet. Assets and liabilities are not netted. In the period where a non-current asset or disposal group is
recognised for the first time, the balance sheet for the comparative prior period is not restated.
(y) Impairment
The carrying amounts of the group’s assets other than reinsurance assets (refer to (j) above) and assets which are carried at fair value are reviewed at each balance
sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets’ recoverable amount is estimated in order to
determine the extent of the impairment loss, if any. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount
and impairment losses are recognised in the Consolidated Statement of Comprehensive Income. The recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money.
Impairment losses are reversed through the Consolidated Statement of Comprehensive Income if there is a change in the estimates used to determine the
recoverable amount. Such losses are reversed only to the extent that the assets’ carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortisation where applicable, if no impairment loss had been recognised.
(z) Provisions
Provisions are recognised when the group has a present, legal or constructive obligation as a result of past events such that it is probable that an outflow of
economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the effect of the time value
of money is material, the amount of the provision is the present value of the expenditure expected to be required to settle the obligation. The group recognises
provisions for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under
the contract.
(aa) Borrowings
Borrowings are recognised initially at fair value, less transaction costs, and are subsequently measured at amortised cost using the effective interest rate method,
with interest expense recognised in the Consolidated Statement of Comprehensive Income on an effective yield basis. The effective interest rate method is a
method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate
that exactly discounts future cash payments through the expected life of the financial liability.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 Significant accounting policies (continued)
(bb) Employee benefits
(i) Pension obligations
UK businesses
Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which group companies
pay fixed contributions. There are no legal or constructive obligations on group companies to pay further contributions if the fund does not hold sufficient
assets to pay employee benefits relating to service in current and prior periods. Accordingly, group companies have no further payment obligations once the
contributions have been paid. Contributions to defined contribution pension schemes are recognised in the Consolidated Statement of Comprehensive
Income when due.
Swedish business
The group participates in a combined defined benefit and defined contribution scheme for the benefit of its employees. However, the scheme is a multi-employer
scheme, with the associated assets and liabilities maintained on a pooled basis. There is limited information available to the group to allow it to account for
the scheme as a defined benefit scheme and, in accordance with IAS19 Employee Benefits, it is, therefore, accounted for as a defined contribution scheme.
Contributions paid to the scheme are recognised in the Consolidated Statement of Comprehensive Income when due.
Dutch business (Waard)
Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which group companies
pay fixed contributions. There are no legal or constructive obligations on group companies to pay further contributions if the fund does not hold sufficient
assets to pay employee benefits relating to service in current and prior periods. Accordingly, group companies have no further payment obligations once
the contributions have been paid. Contributions to defined contribution pension schemes are recognised in the Consolidated Statement of Comprehensive
Income when due.
Dutch business (Scildon)
Scildon has a defined benefit plan. The pension scheme is administered by Stichting Pensionfonds Legal & General Nederland. The company has agreed to
contribute to the premium for the unconditional part of the pension. Part of the plan consists of a defined contribution scheme. The company pays a contribution
to the scheme and subsequently has no further financial obligations with respect to this part of the scheme. Further disclosure can be found in note 35.
Net liability for defined benefit obligations on page 156.
(ii) Bonus plans
The group recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the company’s shareholders
after certain adjustments. The expense is recognised in the Consolidated Statement of Comprehensive Income on an accruals basis.
(cc) Share-based payments
The value of employee share options and other equity settled share based payments is calculated at fair value at the grant date using appropriate and recognised
option pricing models. Vesting conditions, which comprise service conditions and performance conditions, other than those based upon market conditions, are
not taken into account when estimating the fair value of such awards but are taken into account by adjusting the number of equity instruments included in
the ultimate measurement of the transaction amount. The value of the awards is recognised as an expense on a systematic basis over the period during which
the employment services are provided. Where an award of options is cancelled by an employee, the full value of the award (less any value previously recognised)
is recognised at the cancellation date.
(dd) Share capital and shares held in treasury
(i) Share capital
Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity
instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments, as
consideration for the acquisition of a business, are included in the cost of acquisition.
(ii) Shares held in treasury
Where the company purchases its own equity share capital, the consideration paid, including directly attributable costs, is deducted from total shareholders’
equity and shown separately as `treasury shares’ until they are cancelled. Where such shares are subsequently sold, any consideration received is credited to
the share premium account.
(ee) Dividends
Dividend distributions to the company’s shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by
the company’s shareholders at the Annual General Meeting.
(ff) Other payables and payables related to direct insurance and investment contracts
Insurance and investment contract payables and other payables are recognised when due and are measured on initial recognition at the fair value of the consideration
paid. Subsequent to initial recognition, payables are measured at amortised cost using the effective interest rate method.
112
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 3 Critical accounting judgments and key sources of estimation and uncertainty
The group makes estimates and assumptions that affect the reported amounts of assets and liabilities and also makes critical accounting judgments in applying
the group’s accounting policies. Such estimates and judgments are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable. The more critical areas, where accounting estimates and judgments are made, are set out below.
Each item identifies the business segments, as described in note 8, to which it is relevant.
Critical accounting judgments
(a) Classification of long-term contracts (CA, Movestic, Waard Group and Scildon)
The group has exercised judgment in its classification of long-term business between insurance and investment contracts, which fall to be accounted for differently
in accordance with the policies set out in note 2 Significant Accounting Policies. Insurance contracts are those where significant risk is transferred to the group
under the contract and judgment is applied in assessing whether the risk so transferred is significant, especially with regard to pensions contracts, which are
predominantly, but not exclusively, created for investment purposes. Refer to note 2(g) – Product Classification on page 106.
(b) Accounting for pension plans (Movestic)
The group participates in a defined benefit pension scheme on behalf of its Swedish employees. The scheme is a multi-employer plan to which a number of third
party employers also contribute. The underlying assets and liabilities of the scheme are pooled and are not allocated between the contributing employers. As a
result, information is not available to account for the scheme as a defined benefit scheme and the group has accounted for the scheme as a defined contribution
scheme. Refer to note 2(bb) – Employee Benefits on page 112.
(c) Accounting for pension plans (Scildon)
Scildon has a defined benefit plan. The pension scheme is an indexed average pay scheme with a pension of 1.7% per year of service. Indexation is conditional
since 1 January 2013. The pension scheme is administered by Stichting Pensionfonds Legal & General Nederland. The company has agreed to contribute to the
premium for the unconditional part of the pension. Apart from the obligations which may arise from the collective agreement provisions, the company is not
obliged to make additional contributions to the claims brought under the pension fund. The company is not entitled to refunds or discounts. Part of the plan
consists a defined contribution scheme. The company pays a contribution to the scheme and subsequently has no further financial obligations with respect to
this part of the scheme. This contribution is recognised as an expense when paid. Refer to note 2(bb) – Employee Benefits on page 112.
Key sources of estimation and uncertainty
(a) Acquired value of in-force business (CA, Movestic, Waard Group and Scildon)
The group applies accounting estimates and judgments in determining the fair value, amortisation and recoverability of acquired in-force business relating to
insurance and investment contracts. In the initial determination of the acquired value of in-force business, the group uses actuarial models to determine the
expected net cash flows (on a discounted basis) of the policies acquired. The key assumptions applied in the models are driven by the expected behaviour of
policyholders on termination rates, expenses of management and age of individual contract holders as well as global estimates of investment growth, based on
recent experience at the date of acquisition. The assumptions applied within the models are considered against historical experience of each of the relevant
factors. Refer to accounting policy note 2(o) on page 109 and note 20 on page 138.
The acquired value of in-force business is amortised on a basis that reflects the expected profit stream arising from the business acquired at the date of acquisition.
Acquired value of in-force business is tested for recoverability by reference to expected future income and expense levels. Such impairment testing requires a
degree of estimation and judgment. In particular the value is sensitive to the rate at which future cash flows are discounted and to the rates of return on invested
assets, based on applying a range of discount rates, which have been determined with reference to our review of the current market assessment of the true
value of money and the risks specific to the asset for which the cash flows have not been adjusted. The rates used for the purpose of the impairment testing were
4%, 6%, 8%, 10% and 12%.
From the results of the most recent impairment tests, we can conclude that we have sufficient headroom between the AVIF carrying values and the underlying
value of in-force business, to make the sensitivity with regard to discount rate movements irrelevant for the foreseeable future.
As at 31 December 2017, the carrying value of acquired in-force business, net of amortisation, was £11.2m in respect of CA (as at 31 December 2016: £16.9m),
£4.0m in respect of S&P (31 December 2016: £4.5m), £32.8m in respect of Movestic (as at 31 December 2016: £36.0m), £5.0m in respect of Waard Group
(31 December 2016: £5.5m) and £66.1m in respect of Scildon.
(b) Deferred acquisition costs and deferred income – investment contracts (CA, Movestic and Scildon)
The group applies judgment in deciding the amount of direct costs that are incurred in acquiring the rights to provide investment management services in
connection with the issue of investment contracts. Judgment is also applied in establishing the amortisation of the assets representing these contractual rights
and the recognition of initial fees received in respect of these contracts. The assets are amortised over the expected lifetime of the investment management
service contracts and deferred income, where applicable, is amortised over the expected period over which it is earned. Estimates are applied in determining the
lifetime of the investment management service contracts and in determining the recoverability of the contractual rights assets by reference to expected future
income and expense levels. This test for recoverability is performed using best estimates of future cash flows, using a market consistent estimate of future
investment returns. Refer to accounting policy 2(k) on page 108 and note 19 on page 137.
As at 31 December 2017, the carrying values of deferred acquisition costs, net of amortisation, and of deferred income, in respect of CA, were £2.5m and £4.7m
respectively (as at 31 December 2016: £2.9m and £5.4m respectively). The impact on the above numbers of a one year movement in the estimated lifetime of the
management services contract or amortisation period is not material.
As at 31 December 2017, the carrying values of deferred acquisition costs, net of amortisation, in respect of Movestic, was £55.2m (as at 31 December 2016:
£45.4m). An increase in the length of the amortisation period by one year would have increased profit before tax for the year ended 31 December 2017 by £2.9m
and shareholders’ equity as at 31 December 2017 by £2.3m.
As at 31 December 2017, the carrying values of deferred acquisition costs, net of amortisation, in respect of Scildon, was £12.3m. An increase in the length
of the amortisation period by one year would have increased profit before tax for the year ended 31 December 2017 by £0.4m and shareholders’ equity as at
31 December 2017 by £0.3m.
113
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 Key sources of estimation and uncertainty (continued)
(c) Estimates of future benefits payments arising from long-term insurance contracts (CA and Scildon)
The group makes estimates of the expected number of deaths for each of the years that it is exposed to risk. These estimates are based on either standard
mortality tables or reinsurers’ rate tables as appropriate, adjusted to reflect the group’s own experience. For contracts without fixed terms the group has assumed
that it will be able to increase charges to policyholders in future years, in line with emerging mortality experience.
The group has offered guaranteed annuity options within certain contracts. Estimates have been made of the number of contract holders who will exercise these
options, in order to measure their value. Changes in investment conditions could result in significantly more contract holders exercising their options than the
group has assumed in determining the liabilities arising from these contracts.
The group makes estimates of future deaths, voluntary contract terminations, investment returns and administration expenses at the inception of long-term
insurance contracts with fixed and guaranteed terms. These estimates, which are reconsidered annually, form the assumptions used to calculate the liabilities
arising from these contracts.
When assessing assumptions relating to future investment returns the group makes estimates of the impact of defaults on the related financial assets. The
estimates are reassessed annually. The assumptions used to establish insurance contract liabilities and appropriate sensitivities relating to variations in critical
assumptions are disclosed in note 31 on page 148.
(d) Estimates of future maintenance expenses (CA)
Future expense levels are a key variable that influence the value of insurance contract provisions. Under normal circumstances the nature of the cost base
underpinning CA means that future expenses are relatively predictable and hence assumptions made for actuarial reserving purposes are not subject to material
levels of judgment. This is because asset management and policy administration in the UK are outsourced and hence the future costs are defined in contractual
arrangements. In addition, governance overheads are by their nature relatively stable and predictable. The sensitivity in respect of a 10% increase maintenance
expenses is quantified in note 31 on page 153.
(e) Contracts which contain discretionary participation features (S&P)
All S&P with-profits contracts contain a discretionary participation feature (‘DPF’) which entitles the holder to receive, as a supplement to guaranteed benefits,
additional benefits or bonuses:
– that may be a significant portion of the total contractual benefits;
– whose amount or timing is contractually at the discretion of the group; and
– that are contractually based on realised and/or unrealised investment returns on a specified pool of assets held by the group.
The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional
discretionary benefits are based and within which the group may exercise its discretion as to the quantum and timing of their payment to contract holders.
As at 31 December 2017, the carrying value of insurance contract liabilities which contain S&P discretionary participation features was £229.4m (31 December 2016:
£297.5m).
(f) Insurance claim reserves (Movestic)
Provisions are determined by Management based on experience of claims settled and on statistical models which require certain assumptions to be made
regarding the timing, incidence and amount of claims. In order to calculate the total provision required, the historical development of claims is analysed using
statistical methodology to extrapolate, within acceptable parameters, the value of outstanding claims.
For more recent underwriting years the provisions will make more use of techniques that incorporate expected loss ratios. As underwriting years mature,
the reserves are increasingly driven by methods based on actual claims experience. The data used for statistical modelling is internally generated. Actual claims
experience may differ from the historical pattern on which the estimate is based and the cost of individual claims may exceed that assumed.
Liabilities carried in respect of waiver of premium and income protection policies are sensitive to the group’s assessment of the length of period in which benefits
will be paid to policyholders (which can be significant). Estimates are made based on the sex, age and occupation of the claimant as well as the length of time the
claimant has been claiming on the policy.
As at 31 December 2017, the carrying value of the insurance claim reserves, gross of reinsurance, was £81.5m (as at 31 December 2016: £81.6m). The key sensitivities
in respect of insurance claim reserves are considered in note 31 on page 153.
(g) Insurance claim reserves – reinsurance recoverable (Movestic)
A significant proportion of the insurance claims arising within Movestic are ceded to reinsurers. In preparing the financial statements the directors have made an
assessment as to whether claims ceded to reinsurers are recoverable. As at 31 December 2017, such claims ceded to reinsurers and reflected on the balance sheet
were £54.1m (31 December 2016: £54.9m). The application of a 10% bad debt provision on the reinsurance balance would reduce 2017 profit before tax by £5.4m
and shareholders’ equity by £4.2m.
4 Exchange rates
The group’s principal overseas operations during the year were located within Sweden and the Netherlands.
The results and cash flows of these operations have been translated into Sterling at an average rate for the year of £1 = SEK 11.00 (2016: £1 = SEK 11.57) for the
Swedish business and £1 = EUR 1.14 (2016: £1 = EUR 1.22) for the Dutch business.
The average rate used for the post acquisition of Scildon for the period to 31 December 2017 was £1 = EUR 1.13.
Assets and liabilities have been translated at the year end rate of £1 = SEK 11.07 (31 December 2016: £1 = SEK 11.14) for the Swedish business and £1 = EUR 1.13
(31 December 2016: £1 = EUR 1.17) for the Dutch business.
Total foreign currency exchange rate movements for the year ended 31 December 2017 resulted in a profit recognised in the Consolidated Statement of Comprehensive
Income of £8.3m (year ended 31 December 2016: profit of £20.1m).
114
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 5 Management of insurance risk
The group’s management of insurance risk is a critical aspect of its business. The primary insurance activity carried out by the group comprises the assumption
of the risk of loss from persons that are directly subject to the risk. Such risks in general relate to life, accident, health and financial perils that may arise from an
insurable event. As such, the group is exposed to the uncertainty surrounding the timing and severity of claims under the related contracts. The principal risk is
that the frequency and severity of claims is adverse to that expected. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance
contracts. Insured events are, by their nature, random, and the actual number and size of events during any one year may vary from those estimated using
established statistical techniques. The risk under assurance policies is partly naturally hedged by risks under annuity policies where the exposure is to the risk
of longevity.
The group manages its insurance risk through adoption of underwriting strategies, the aim of which is to avoid the assumption of undue concentration of risk,
approval procedures for new products, pricing guidelines and adoption of reinsurance strategies, the aim of which is to reinforce the underwriting strategy by
avoiding the retention of undue concentration of risk on any one life.
Notwithstanding that the group pursues common overarching objectives and employs similar techniques in managing these risks, the disparate characteristics of
the products and of the market and regulatory environments of the UK, Swedish and Dutch businesses are such that insurance risk is managed separately for
the separate businesses. Accordingly, the information which follows differentiates these businesses. The UK and Waard businesses which are substantially closed
to new business, are differentiated in the information provided below, where necessary. The Swedish and Dutch businesses, which are open to new business,
comprises the Movestic and Scildon segments respectively.
(a) UK business
Terms and conditions of insurance contracts
The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance
contracts are set out in the product analyses below, which give an assessment of the main products of the UK businesses and of the ways in which the associated
risks are managed.
Sums assured/benefits per annum – gross and net of reinsurance
31 December
Long-term unit-linked without DPF (sums assured)
Long-term non-linked without DPF (sums assured)
Immediate annuities (benefits per annum)
Deferred annuities with DPF (benefits per annum)
Long-term with DPF (sums assured)
2017
2016
Gross
£000
Net
£000
Gross
£000
2,414,486
10,276,621
5,683
2,035
325,162
2,147,432
1,371,461
5,647
2,035
315,422
2,643,702
11,086,146
5,800
1,755
336,745
Net
£000
2,320,059
1,511,001
5,764
1,755
326,812
Long-term unit-linked and non-linked insurance contracts – without discretionary participation features
Product features
The UK business has written both unit-linked and non-linked contracts, which include death and morbidity benefits on a whole life, endowment and term assurance
basis. In addition there are immediate annuities primarily written from vesting pensions.
For contracts where death is the insured risk, the most significant factors that could increase risk are epidemics or widespread changes in lifestyle, such as eating,
smoking and exercise habits, resulting in earlier or more claims than expected.
Management of risks
Unit-linked insurance contracts are contracts where charges are made for insurance risk and administration charges and the primary purpose of which is to provide
an investment return to policyholders. In addition, the policyholder is insured against death and serious injury. Unit-linked contracts operate by investing the
policyholders’ premiums into pooled investment funds of the UK business, the policyholders’ share of the fund being represented by units. The benefit is payable
on death, or maturity if earlier, the amount payable on death being subject to a guaranteed minimum amount. For these contracts, all of the investment risk is
borne by the policyholder as investment performance directly affects the value of the unit fund and hence the benefits payable. Therefore, there is exposure to
insurance risk only insofar as the value of the unit-linked fund is lower than the guaranteed minimum death benefit. For a material portion of the business, the
charges taken for mortality and morbidity costs are reviewable, which allows the company to mitigate some of its insurance risk.
Non-linked business contains three distinct groups of products:
(i)
A number of products representing approximately 73% of sums assured, provide fixed and guaranteed benefits and have fixed future premiums. For these
there are no mitigating terms and conditions that reduce the insurance risk accepted;
(ii) Immediate annuities provide regular income payments generally during the outstanding life of the policyholder, and in some cases that of a surviving spouse or
partner. In certain cases payments may be guaranteed for a minimum period. These expose the business to longevity risk, though to some extent this
provides a hedge to the mortality risk taken on other products; and
(iii) For the remainder of the business, which is operated on a quasi-linked basis, charges are made for mortality risk on a monthly basis and these charges may
be altered based on mortality experience, thereby minimising the exposure to mortality risk. In the light of charges made for insurance risk and administration
services and of the investment performance of the assets notionally backing these contracts, the premium payable may be altered at regular intervals.
A number of these contracts also include Permanent Health Insurance (PHI) benefits which have reviewable charges, which may be altered based on morbidity
experience, thereby minimising the exposure to morbidity risk. Delays in implementing increases in charges and market or regulatory restraints over the extent
of the increases may reduce this mitigating effect.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5 Management of insurance risk (continued)
(a) UK business (continued)
Reinsurance is used extensively on the business described above to mitigate concentrations of insurance risk. The insurance risk is further managed through
pricing, product design and, for non-linked and quasi-linked contracts, appropriate investment strategy.
Concentration of insurance risk
Through the use of reinsurance exposures to material insurance risks on individual cases are avoided, with 95.3% of the business having retained sums assured of
less than £250,000.
Long-term insurance contracts – with discretionary participation features – CA
Product features
CA historically wrote with-profits business in the UK, where the policyholder benefits comprise a guaranteed sum assured payable on death or at maturity, to which
may be added a discretionary annual bonus and a discretionary terminal bonus.
Management of risks
This business is wholly reassured to ReAssure and hence the only risk retained by CA for this business is the risk of default by the reinsurer. This risk is detailed
in the Credit Risk Management section of note 6.
Long-term insurance contracts – with discretionary participation features – CA (S&P)
Product features
At retirement the with-profits deferred annuity contracts provide for guaranteed minimum pensions and the with-profits endowments provide for guaranteed
minimum lump sums. With-profits whole of life policies guarantee a minimum amount payable on death. The guaranteed annuities or lump sums represent
investment returns on contributions mainly at 5% p.a. A terminal bonus may be paid at maturity or retirement, and on death, depending on the investment
performance of the with-profits policyholder assets when the policyholder receives the higher of the asset share and the minimum guaranteed amount. The asset
share is based on the contributions invested plus an allocation of investment return less a fixed charge for expenses, and certain direct expenses. In accordance
with the Principles and Practices of Financial Management for its with-profits business S&P may make a deduction of up to 1.5% per annum from the asset shares
of with-profits policyholders to meet the future cost of guarantees. The amount deducted remains part of the assets in the with-profits policyholder funds. The
size of the deduction is reassessed at least annually. In the event of a policyholder choosing to transfer out, the amount payable is not guaranteed and is based
on the asset share.
Management of risks
For life endowment and whole of life policies mortality risk is material. This risk is mitigated to some extent by the use of reinsurance. The risk is to increases in
mortality rates, which are most likely to be from epidemics or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier
or more claims than expected.
For deferred annuity contracts, the risk is to improving mortality. The risk is managed through the initial pricing, and technical provisions are assessed allowing for
future mortality improvements based on industry available information on mortality experience.
Concentration of insurance risk
Through the use of reinsurance exposures to material insurance risks on individual cases are avoided, with 98.5% of the business having retained sums of less
than £250,000.
Other risks on insurance contracts
Apart from financial risks relating to the financial assets, which support life assurance contracts, as set out in note 6, there are other significant types of risk
pertaining to life insurance contracts written by the UK business, as follows:
Expense risk
The strategy of the UK business is to outsource the majority of operational activities to third party administrators in order to reduce the significant expense
inefficiencies that would arise with fixed and semi-fixed costs on a diminishing policy base. There are, however, risks associated with the use of outsourcing. In
particular, there will be a need in future to renegotiate the terms of the outsourcing arrangements as the existing agreements expire. There is also a risk that, at
some point in the future, third party administrators could default on their obligations. The UK business monitors the financial soundness of third party administrators
and has retained step-in rights on the more significant of these agreements. There are also contractual arrangements in place which provide for financial penalties
in the event of default by the administration service provider.
Persistency risk
Persistency risk is the risk that the investor cancels the contract or discontinues paying new premiums into the contract, thereby exposing the UK business to a
loss resulting from an adverse movement in the actual experience compared to that expected in the product pricing. Although changes in the levels of persistency
would not adversely affect the result in the short-term they would reduce future profits available from the contract.
Assumptions and sensitivities
The assumptions and sensitivities relating to insurance contract provisions for the UK business are set out in note 31 Insurance Contract Provisions.
116
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 (b) Swedish business
The terms and conditions of insurance contracts which have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance
contracts are set out in the product analyses below, which give an assessment of the main products of Movestic and of the ways in which the associated risks
are managed. The breakdown of the insurance products of Movestic, by gross and net premiums written and by claims outstanding, which reflects the scale of
business written, is as follows:
Premiums
Year ended 31 December
Group
Sweden
Norway
Individual
Death
Waiver of premium
Income protection
Claims outstanding
As at 31 December
Group
Sweden
Norway
Individual
Death
Waiver of premium
Income protection
Gross
£000
22,343
19
3,534
3,373
7,656
2017
2016
Net
£000
6,630
4
1,529
986
6,520
Gross
£000
21,005
24
3,200
3,288
7,715
Net
£000
6,011
5
1,448
961
6,644
36,925
15,669
35,232
15,069
Gross
£000
44,995
1,103
721
10,359
24,895
2017
2016
Net
£000
Gross
£000
13,057
238
293
3,444
12,991
41,927
2,975
821
9,812
26,052
Net
£000
11,337
535
327
3,217
13,536
82,073
32,023
81,587
28,952
Terms and conditions
Product features – group contracts
Group contracts insure policyholders in respect of death with the option to include additional accident and disability benefits. Policyholders may also include their
spouse and children (up to the age of 25) on the policy.
Policies are sold in Sweden and have been sold in Norway in the past via intermediaries. Group contracts sold in Sweden allow the policyholder to choose the
sum assured level. Contracts sold in Norway have sum assured levels that are normally determined by the policyholders’ employer and apply to all members of
that company scheme.
The Swedish product typically provides a maximum coverage of insured benefits up to 40 times a base amount (31 December 2017: SEK 44,800, being approximately
£4,044) although most policies are between 6 to 15 times the base amount.
The Norwegian product provides a maximum coverage of insured benefits up to 80 times a base amount (31 December 2017 NOK: 93,634, being approximately
£8,453) although most policies are between 5 to 10 times the base amount.
All contracts are for an annual period.
117
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5 Management of insurance risk (continued)
(b) Swedish business (continued)
Product features – individual contracts
In relation to individual contracts, Movestic writes contracts, which include death and morbidity benefits on term assurance with disability, waiver of premium
and income protection options. Policies are sold in Sweden and all sales are intermediated.
In relation to the income protection and the waiver of premium benefits within the individual contracts, the monthly benefits upon a claim may be payable to the
policyholders over a long period up to their retirement. The contracts have been unbundled as between insurance and investment contracts. Risk in respect of
investment contracts is described in note 6. All insurance contracts are for an annual period and payments are made on a monthly basis.
Management of risk
The main risk associated with the group and individual contracts is the frequency and size of claims (for either death or accident or sickness). Claims experience
can be variable, with the main factors being the age, sex and occupation of the policyholder.
In addition, for the group contracts, Movestic is exposed to a single loss event that covers a number of employees of an organisation.
The key risks are managed through appropriate product design and pricing of the policies to ensure that the potential cost to Movestic of these events (and
associated expenses of underwriting and administration) are reflected in the price charged to the policyholder. Key controls implemented include a defined pricing
structure based on the characteristics of the policyholder and the regular review of management information on the type and frequency of accidents.
Group contracts are issued on an annual basis which means that Movestic’s exposure runs for a period of 12 months, after which Movestic has the option to
decline to renew or can increase the price on renewal.
Individual contracts are long-term contracts but Movestic has the option to review the premiums on an annual basis.
For both the group and individual contracts, between 30% to 90% of the premiums and claims relating to this product are ceded to a reinsurer which reduces the
overall insurance risk exposure to Movestic. The claim portfolio arising from the acquisition of the business of Aspis Liv, a small Swedish Life and Health insurer
in 2010, is reinsured for approximately 80% of the claims amount.
In addition, for the majority of the group contracts, the loss arising from a single event to multiple employees is reinsured. The reinsurance provides indemnity for
a single loss between SEK 5m (approximately £0.5m) and SEK 120m (approximately £10.8m).
Concentration of insurance risk
Concentration of insurance risk is determined by reference to benefits assured for individual contracts and by estimated maximum loss for group contracts.
Regarding benefits assured for individual contracts, the combined effect of reinsurance and the fact that the vast majority of the total benefit assured relates to
numerous small value contracts, limit the level of concentration risk. Through the use of reinsurance exposures to material insurance risks on individual cases
are avoided, with 99.7% of the business having retained sums assured of less than £250,000.
In respect of group contracts, the business is exposed to multiple employees of the same organisation being involved in a single loss event. Movestic forecasts
that its maximum loss would be approximately SEK 150m (approximately £13.5m) gross of reinsurance and SEK 5m (approximately £0.5m) after reinsurance.
Assumptions and sensitivities for group contract and individual contract insurance contract provisions
Information relating to insurance contract provisions assumptions and sensitivities for the Swedish business is set out in note 31 Insurance Contract Provisions.
(c) Waard Group
Sums assured/benefits per annum – gross and net of reinsurance
31 December
Long-term unit-linked without DPF (sums assured)
Long-term non-linked without DPF (sums assured)
2017
2016
Gross
£000
Net
£000
Gross
£000
Net
£000
22,198
2,221,481
22,198
2,107,479
28,997
2,499,291
28,997
2,260,004
Protection
Product feature
The division mainly wrote term life, sold as a single premium policy in combination with a loan or mortgage. Policy conditions allow for a surrender value at lapse. In
addition, similar types of policies covering the risk of disability, unemployment and accident were written. The most significant factors that could increase risk are
epidemics and changes in lifestyle and the social security environment.
Management of risks
The portfolio is in run-off and no significant underwriting occurs. For the existing portfolio, the division entered into an excess of loss and catastrophe (Life) and
quota share (Health) reinsurance agreement to mitigate the risk in excess of risk appetite for mortality, disability and unemployment.
Concentration of insurance risk
Waard did not write group life and health contracts and an excess of loss limit of €100,000 is applied for life risk, hence concentration risk is limited.
118
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Unit-linked
Product features
The division wrote unit-linked business, with policies paying out 90% of the unit-value at death of the policyholder and 100% at expiry. Early surrender triggers
smaller charges for policyholders.
Persistency and expense risk
The portfolio is small and very mature. To mitigate the expense risk, management may also consider the possibility of merging the portfolio into a larger scale one,
keeping cost levels appropriate. Persistency levels are moderate and largely depend on investment performance.
Assumptions and sensitivities
The assumptions and sensitivities relating to insurance contract provisions for Waard are set out in note 31 Insurance Contract Provisions.
(d) Scildon
Sums assured/benefits per annum – gross and net of reinsurance
31 December
Long-term unit-linked without DPF (sums assured)
Long-term non-linked without DPF (sums assured)
Immediate annuities (benefits per annum)
2017
2016
Gross
£000
Net
£000
Gross
£000
Net
£000
2,885,027
22,925,387
91,639
2,281,513
13,484,481
8,188
–
–
–
–
–
–
Protection
Product feature
The division mainly wrote term life, sold as a regular premium policy. Older policy profit sharing conditions (before 2011) allow for a surrender value at lapse or
profit sharing at maturity. The current Mass market product has no surrender value or profit sharing. The most significant factors that could increase risk are
epidemics and changes in lifestyle leading to higher mortality.
Management of risks
The product is the main new business product, significant underwriting occurs. Reinsurance agreements, quota share with a maximum retention per policy, to
mitigate the risk in excess of risk appetite for mortality at the moment of underwriting are in place. The national NHT cover in case of terrorism is in place but no
additional catastrophe or stop loss reinsurance is in place.
Concentration of insurance risk
Scildon does write group pensions contracts (SME segment) with an excess of loss limit of €200,000 per life, hence concentration risk is limited.
Unit-linked
Product features
Scildon writes unit-linked and index linked business, with most policies paying out 0%, 90% or 110% of the unit-value at death of the policyholder and 100% at
expiry. Early surrender triggers smaller charges for policyholders. Index linked policies contains either explicit of or implicit guarantees triggers smaller charges for
policyholders. Group pension is also unit-linked based.
Persistency and expense risk.
The portfolio is large, but slowly decreasing. To mitigate the expense risk, management may also consider the possibility of merging the portfolio into a larger scale
one, keeping cost levels appropriate. Persistency levels are moderate, due to the guarantees given for some policies the risk is high persistency.
Assumptions and sensitivities
The assumptions and sensitivities relating to insurance contract provisions for Scildon are set out in note 31 Insurance Contract Provisions.
119
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk
The group is exposed to a range of financial risks, principally through its insurance contracts, financial assets, including assets representing shareholder assets,
financial liabilities, including investment contracts and borrowings, and its reinsurance assets. In particular, the key financial risk is that, in the long-term, proceeds
from financial assets are not sufficient to fund the obligations arising from its insurance and investment contracts and borrowings. The most important components
of this financial risk are market risk (interest rate risk, equity and property price risk, foreign currency exchange risk and liquidity risk), and credit risk, including
the risk of reinsurer default. Further, the group has significant foreign currency exchange rate risk in relation to movements between the Swedish krona and the
euro against sterling, arising from its ownership of Movestic, Scildon and the Waard Group.
The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance
contracts are set out in note 5. The terms and conditions of investment contracts that have a material effect on the amount, timing and uncertainty of future cash
flows arising from investment contracts are as follows:
The group provides two types of investment contract: unit-linked savings and unit-linked pensions predominantly written in the UK and Sweden.
(i)
Unit-linked savings are single or regular premium contracts, with the premiums invested in a pooled investment fund, where the policyholder’s investment is
represented by units or trust accounts where the policyholder decides where to invest. On certain contracts there is a small additional benefit payable on
death which is deemed not to transfer significant insurance risk to the business for these contracts. The benefits payable at maturity or surrender of the
contracts are the underlying value of the investment in the unit-linked funds or trust accounts, less surrender charges where applicable.
(ii) Unit-linked pensions are single or regular premium contracts with features similar to unit-linked savings contracts. Benefits are payable on transfer, retirement
or death.
(iii) No investment contracts exist within the Dutch business.
Market risk management
(i) General
The group businesses manage their market risks within asset liability matching (ALM) frameworks that have been developed to achieve long-term investment
returns at least equal to their obligations under insurance and investment contracts, with minimal risk. Within the ALM frameworks the businesses periodically
produce reports at legal entity and asset and liability class level, which are circulated to the businesses’ key management. The principal technique of the ALM
frameworks is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to policyholders, with
separate portfolios of assets being maintained for each distinct class of liability.
For unit-linked contracts the group’s objective is to match the liabilities, both insurance and investment contract liabilities, with units in the assets of the funds
to which the value of the liabilities is linked, such that the policyholder bears the market risk. This minimises the impact of market risks on these contracts, such
that the remaining primary exposure to market risk is the risk of volatility in asset-related fees due to the impact of interest rate, equity price and foreign currency
movements on the fair value of the unit-linked assets, on which asset-related fees are based.
For non unit-linked business, the group’s objective is to match the timing of cash flows from insurance and investment contract liabilities with the timing of cash
flows from assets subject to identical or similar risks. By matching the cash flows of liabilities with those of suitable assets, market risk is managed effectively,
whilst liquidity risk is minimised. These processes to manage the risks, which the group has not changed from previous periods, ensure that the group is able to
meet its obligations under its contractual liabilities as they fall due.
With respect to CA (S&P) there is significant additional risk insofar as investment returns on policyholder with-profits assets supporting the with-profits business
may result in insufficient policyholder assets to meet contractual obligations to with-profits policyholders, because of the impact of contract guarantees.
120
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 The notes below explain how market risks are managed using the categories utilised in the businesses’ (Asset Liability Matching) ALM frameworks. In particular,
the ALM frameworks require the management of interest risk, equity price risk, and liquidity risk at the portfolio level, so that the appropriate risks for each portfolio
may be managed in an effective way. The following tables reconcile the classes and portfolios used in the businesses’ ALM frameworks to relevant items in the
consolidated balance sheet and are followed by a portfolio-by-portfolio description of the nature of the related market risk and how that risk is managed.
31 December 2017
Assets
Property and equipment
Investment in associates
Investment properties
Reinsurers’ share of insurance contract provisions
Amounts deposited with reinsurers
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
Mortgage loan portfolio
Insurance and other receivables
Prepayments
Derivative financial instruments
Total financial assets
Reinsurers’ share of accrued policyholder claims
Income taxes
Cash and cash equivalents
Total assets
Liabilities
Insurance contract provisions
Other provisions
Financial liabilities
Investment contracts at fair value through
Income
Borrowings
Derivative financial instruments
Total financial liabilities
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance and investment contracts
Income taxes
Other payables
Bank overdrafts
*Insurance
Unit-linked
contracts
£000
contracts Annuities in
payment
with DPF
£000
£000
Other
non-linked
contracts
£000
–
–
245
40,410
38,776
512,710
4,860,152
691,412
–
14,431
188
76
6,078,969
8,933
–
89,765
–
–
–
39,897
–
6
216,980
155,341
–
1,555
32
559
374,473
–
–
1,922
–
–
–
–
–
–
–
192,713
–
731
–
–
193,444
–
–
4,667
4,327
6,407
1,760
152,847
–
8
125,640
589,351
48,106
42,731
7,105
1,047
813,988
16,955
7,681
114,293
Total
£000
4,327
6,407
2,005
233,154
38,776
512,724
5,202,772
1,628,817
48,106
59,448
7,325
1,682
7,460,874
25,888
7,681
210,647
6,257,098
416,292
198,111
1,118,258
7,989,759
2,774,427
–
349,541
–
111,547
–
726,764
3,098
3,962,279
3,098
3,415,666
–
22,421
3,438,087
–
372
32,122
–
7,099
259
–
–
73
73
–
8
5,061
–
516
5
–
–
–
–
–
–
1,050
–
–
–
4,607
129,202
–
133,809
22,794
11,026
58,930
8,514
35,369
827
3,420,273
129,202
22,494
3,571,969
22,794
11,406
97,163
8,514
42,984
1,091
Total liabilities
6,252,366
355,204
112,597
1,001,131
7,721,298
*Insurance contract with DPF include shareholder funds within the CA (S&P) with-profits funds.
121
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
31 December 2016
Assets
Property and equipment
Investment in associates
Investment properties
Reinsurers’ share of insurance contract provisions
Amounts deposited with reinsurers
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
Mortgage loan portfolio
Insurance and other receivables
Prepayments
Derivative financial instruments
Total financial assets
Reinsurers’ share of accrued policyholder claims
Income taxes
Cash and cash equivalents
Total assets
Liabilities
Insurance contract provisions
Other provisions
Financial liabilities
Investment contracts at fair value through income
Borrowings
Derivative financial instruments
Total financial liabilities
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance and investment contracts
Income taxes
Other payables
Bank overdrafts
*Insurance
Unit-linked
contracts
£000
contracts Annuities in
payment
with DPF
£000
£000
Other
non-linked
contracts
£000
–
–
245
63,649
37,437
485,153
3,702,355
157,600
–
10,331
560
315
4,356,314
12,789
–
89,766
–
–
–
40,474
–
5
252,194
120,193
–
3,024
229
33
375,678
46
–
1,849
–
–
–
–
–
–
–
112,479
–
–
–
–
112,479
–
–
4,566
519
5,433
–
150,736
–
7
150,053
83,819
54,756
26,291
4,482
2,425
321,833
6,472
3,352
164,172
Total
£000
519
5,433
245
254,859
37,437
485,165
4,104,602
474,091
54,756
39,646
5,271
2,773
5,166,304
19,307
3,352
260,353
4,560,200
418,047
117,045
652,517
5,747,809
1,445,438
2
3,023,340
–
97
3,023,437
–
500
27,978
–
9,954
148
360,493
36
115,502
–
321,013
785
–
–
1,251
1,251
–
8
5,605
–
390
97
–
–
–
–
–
–
875
–
–
–
4,929
86,843
–
91,772
5,420
6,391
26,958
8,624
13,313
1,377
2,242,446
823
3,028,269
86,843
1,348
3,116,460
5,420
6,899
61,416
8,624
23,657
1,622
Total liabilities
4,507,457
367,880
116,377
475,653
5,467,367
*Insurance contract with DPF include shareholder funds within the CA (S&P) with-profits funds.
122
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Unit-linked contracts
For unit-linked contracts, which may be insurance or investment contracts, the group matches the financial liabilities, with units in the financial assets of the
funds to which the value of the liabilities is linked, such that the policyholders bear the principal market risk (being interest rate, equity price and foreign currency
risks) and credit risk. Accordingly, this approach results in the group having no significant direct market or credit risk on these contracts. Its primary exposure to
market risk is the risk of volatility in asset-related fees due to the impact of interest rate, equity price and foreign exchange rate movements on the fair value of
the assets held in the linked funds, on which asset-related fees are based.
There is residual exposure to market risk on certain unit-linked contracts where the group provides to policyholders guarantees as to fund performance or
additional benefits which are not dependent on fund performance. This exposure is mitigated to the extent that the group matches the obligations with suitable
financial assets external to the unit-linked funds, such that the residual exposure is not considered to be material.
Insurance contracts with discretionary participation features
Insurance contracts with discretionary participation features subsist entirely within the UK businesses in the form of with-profits policies.
For the CA business, where the policyholder benefits comprise a discretionary annual bonus and a discretionary terminal bonus, the with-profits business is
wholly reinsured to ReAssure and hence there is no market risk for this class of business. Policyholders have the option, for a small element of the with-profits
business, to invest a portion of their investment in unit-linked funds as an alternative to the with-profits fund. In this case, a portion of the business is retained,
with the management of financial risks of this portion being the same as described under ‘Unit-linked Contracts’ above.
For the CA (S&P) business the primary investment objective of the with-profits policyholder funds is that the guaranteed minimum benefits of the with-profits
policyholders should be met entirely from the policyholder funds. The secondary investment objective is, where possible, to provide a surplus in excess of the
guaranteed minimum benefits. The entire surplus in the policyholder fund accrues to the with-profits policyholders. Any deficit in the policyholder fund is ultimately
borne by shareholders. Therefore the group has a significant exposure to market risk in relation to with-profits business should the with-profits policyholder assets
be unable to fully meet the cost of guarantees. To achieve the investment objectives, the funds may invest in a range of asset classes including property, equities,
fixed interest securities, convertibles, cash and derivatives, both in UK and overseas. Such exposure may be achieved by investment in collective investment
schemes (including such schemes with total or absolute return objectives or which include investments in commodities). Investment guidelines restrict the
level of exposure for certain asset categories. In respect of derivatives, these may only be used for the purposes of reduction of investment risks and efficient
portfolio management.
Annuities in payment
These are contracts which pay guaranteed financial benefits, generally monthly, for the lifetime of the policyholder, and in some cases of their spouse. The financial
component of these contracts is a guaranteed fixed interest rate: accordingly the group’s primary financial risk on these contracts is the risk that interest income
and capital redemptions from the fixed interest debt securities backing the liabilities are insufficient to fund the benefits payable. The group manages the interest
rate risk by matching closely new contracts written with fixed interest debt securities of a suitable duration and quality. Regular monitoring of the interest rate
risk is carried out by analysis of expected cash flows from the financial assets held with those for the liabilities, which are determined by means of projecting
expected cash flows from the contracts using prudent estimates of mortality.
Other non-linked contracts and shareholder funds
These categories, in which market risk is borne by shareholders, consist of non-linked insurance contracts without DPF and of net shareholder assets representing
shareholders’ equity. The group manages market risks by setting investment guidelines which restrict market exposures.
Non-linked contracts without DPF include contracts which pay guaranteed benefits on death or other insured events, the terms being fixed at the inception of
the contract. Exposure to market price risk is minimised by generally investing in fixed-interest debt securities, while interest rate risk is generally managed by
closely matching contracts written with financial assets of suitable yield and duration. To the extent that the group is unable to fully match its interest rate risk, it
makes provision in respect of assumed shortfalls on guaranteed returns to policyholders.
Shareholder funds at both group parent company and operating subsidiary level, in accordance with corporate objectives and, in some instances, in accordance
with local statutory solvency requirements, are invested in order to protect capital and to minimise market and credit risk. Accordingly they are generally invested
in assets of a shorter-term liquid nature, which gives rise to the risk of lower returns on these investments due to changes in short-term interest rates.
123
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
(ii) Liquidity risk
Liquidity risk is the risk that adequate liquid funds are not available to settle liabilities as they fall due and is managed by forecasting cash requirements and by
adjusting investment management strategies to meet those requirements. Liquidity risk is generally mitigated by holding sufficient investments which are readily
marketable in sufficiently short timeframes to allow the settlement of liabilities as they fall due. Where liabilities are backed by less marketable assets, for example
investment properties, there are provisions in contractual terms which allow deferral of redemptions in times of adverse market conditions. The group’s substantial
holdings of money market assets also serve to reduce liquidity risk.
The tables below present a maturity analysis of the group’s liabilities, showing balance sheet carrying value and distinguishing between investment contracts and
insurance contracts and other liabilities.
31 December 2017
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
Annuities in payment
Other non-linked
Investment contract liabilities
Unit-linked
Other
Derivatives
Other liabilities
2,772,893
349,541
111,548
713,877
3,415,407
4,867
22,794
330,371
2,772,893
197,293
26,534
411,658
3,415,407
4,867
324
330,371
–
80,819
22,456
282,146
–
–
22,470
–
–
58,936
18,146
163,817
–
27,688
13,841
81,912
–
8,145
18,506
44,249
–
–
–
–
–
–
–
–
–
–
–
–
2,772,893
372,881
99,483
983,782
3,415,407
4,867
22,794
330,371
Total
7,721,298
7,159,347
407,891
240,899
123,441
70,900
8,002,478
31 December 2016
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
Annuities in payment
Other non-linked
Investment contract liabilities
Unit-linked
Other
Derivatives
Other liabilities
1,445,438
360,493
115,502
321,013
3,023,340
4,929
1,348
195,305
1,445,438
196,328
27,206
171,288
3,023,340
4,929
1,348
195,305
–
82,172
23,290
71,767
–
67,846
19,085
41,985
–
35,706
14,790
17,732
–
11,160
20,369
8,262
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,445,438
393,212
104,740
311,034
3,023,340
4,929
1,348
195,305
Total
5,467,368
5,065,182
177,229
128,916
68,228
39,791
5,479,346
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 ReAssure 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 126. The maturity analysis in respect of the CA (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.
124
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
(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; and
(ii) its investment in Waard and Scildon, the assets and liabilities of which are principally denominated in euros.
The group’s currency risk through its ownership of Movestic, Scildon and Waard Group is reflected in:
(i)
foreign exchange translation differences arising on the translation into sterling and consolidation of Movestic, Scildon and 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 cash
flows from Movestic, Scildon and Waard to Chesnara by way of dividend payments and the acquisition of LGN, the purchase consideration of which is
denominated in euros. 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 assets/(liabilities)
2017
£000
2016
£000
3,127,868
(3,057,590 )
2,700,944
(2,638,100 )
70,278
62,844
2,312,577
(1,976,235 )
207,940
(122,655 )
336,432
85,285
968
(1,312 )
(344 )
528
(106 )
422
2,473
(2,427 )
46
128
–
128
125
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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 equity and property values;
(ii) a 100 basis point increase and decrease in per annum market rates of interest; and
(iii) 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 below.
Variation in/arising from
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*
2017
2016
Profit before
tax
£m
Shareholders ’
equity
£m
Profit before
tax
£m
Shareholders ’
equity
£m
(46.8 )
45.8
11.9
(12.8 )
1.1
(0.9 )
2.5
(2.1 )
(35.2 )
34.3
9.5
(10.2 )
7.8
(6.4 )
37.4
(30.6 )
(3.4 )
0.3
12.7
(13.1 )
1.0
(0.8 )
0.6
(0.5 )
(2.7 )
0.3
10.1
(10.5 )
7.0
(5.7 )
9.4
(7.7 )
*The 10% favourable and adverse movement for euros includes the Scildon post acquisition values.
(v) 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.
126
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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
Mortgage loan portfolio
Insurance and other receivables
Reinsurers’ share of accrued policyholder claims
Income taxes
2017
Balance
2016
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
5,155,886
751,393
82,322
1,123
–
–
–
38,941
10,267
–
46,886
877,424
128,325
559
233,154
38,776
48,106
20,507
15,621
7,681
5,202,772
1,628,817
210,647
1,682
233,154
38,776
48,106
59,448
25,888
7,681
4,015,093
142,875
75,264
2,740
–
–
–
22,975
–
–
89,509
331,216
185,089
33
254,859
37,437
54,756
16,671
19,307
3,352
Balance
sheet
carrying
value
£000
4,104,602
474,091
260,353
2,773
254,859
37,437
54,756
39,646
19,307
3,352
Total
6,039,932
1,417,039
7,456,971
4,258,947
992,229
5,251,176
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 2017
Reinsurers share of insurance contract liabilities
Holdings in collective investment schemes
Amounts deposited with reinsurers
Debt securities at fair value through income
Mortgage loan portfolio
Insurance and other receivables
Reinsurers share of accrued policyholder claims
Derivative financial instruments
Income taxes
Cash and cash equivalents
AAA
£000
–
–
–
92,796
–
1,139
–
–
–
–
AA
£000
139,258
–
–
258,910
–
9,600
5,906
–
7,198
54,906
A
£000
Below A
£000
Unrated
£000
–
42,961
–
188,279
–
1,242
48
559
–
69,459
4,991
–
–
301,201
–
3,333
732
–
–
1,428
88,905
3,925
38,776
36,238
48,106
5,193
8,935
–
483
2,532
Total
£000
233,154
46,886
38,776
877,424
48,106
20,507
15,621
559
7,681
128,325
Total
93,935
475,778
302,548
311,685
184,987
1,417,039
As at 31 December 2016
Reinsurers share of insurance contract liabilities
Holdings in collective investment schemes
Amounts deposited with reinsurers
Debt securities at fair value through income
Mortgage loan portfolio
Insurance and other receivables
Reinsurers share of accrued policyholder claims
Derivative financial instruments
Income taxes
Cash and cash equivalents
–
–
–
127,786
–
1,261
–
–
2,956
–
133,154
–
–
175,745
–
9,312
5,107
–
–
40,952
2,171
82,789
–
12,190
–
76
967
32
–
94,827
5,155
–
–
14,469
–
951
374
–
–
49,310
114,380
6,720
37,437
1,026
54,756
5,071
12,858
1
396
–
254,860
89,509
37,437
331,216
54,756
16,671
19,306
33
3,352
185,089
Total
132,003
364,270
193,052
70,259
232,645
992,229
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 £98.0m as at 31 December 2017 (31 December 2016: £124.0m) to ReAssure, which does not have a published credit rating.
Of this amount £71.0m (31 December 2016: £96.0m) is in respect of currently guaranteed benefits. This counterparty exposure has been mitigated by ReAssure
granting to CA a floating charge over related investment assets, which ranks that company equally with ReAssure policyholders. In order to monitor the ongoing
creditworthiness of ReAssure, CA reviews the financial statements and regulatory returns submitted by ReAssure to the PRA on an annual basis. No credit limits
were exceeded during the year ended 31 December 2017 and 31 December 2016.
127
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
Financial assets that are past due or impaired
In 2008, a cash deposit with Kaupthing Singer & Friedlander (‘KSF’) was written down by its full amount of £1,091,000 as a result of KSF entering administration.
During 2017, further interim distributions totalling £13,590 (2016: £19,072) were made from the administrators in respect of the deposit.
There are no other group financial assets that are impaired, would otherwise be past due, or impaired, whose terms have been negotiated or past due but
not impaired.
7 Business combinations
On 5 April 2017, Chesnara plc acquired the entire issued share capital (100%) of Legal & General Nederland Levensverzekering Maatschappij N.V. (Legal & General
Nederland) an open book life assurance company based in the Netherlands, from Legal & General Group plc, a UK based financial services group for a total
consideration of €161.2m (approximately £137.5m), comprising €160.0m base consideration plus interest for the period to completion of €1.2m. On 11 April 2017,
it was announced that the newly acquired company was to be re-branded as Scildon. Scildon’s policy base is predominantly made up of individual protection and
savings contracts. It is open to new business and sells protection, individual savings and group pension contracts via a broker-led distribution model. The acquisition
creates scale and presence in the Dutch market and leaves us well positioned to take advantage of any further value adding opportunities that may arise.
The acquisition of this shareholding has given rise to a profit on acquisition of £20.3m calculated as follows:
Assets
Intangible assets
Deferred acquisition costs
Acquired value of in-force business
Software assets
Property and equipment
Investment properties
Reinsurers’ share of insurance contract provisions
Financial assets:
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
Deferred tax asset
Defined benefit pension scheme surplus
Income taxes
Cash and cash equivalents
Total assets
Liabilities
Insurance contract provisions
Derivatives
Deferred tax liabilities
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
Provisional
fair value
Book value adjustments
£000
£000
Fair value
£000
11,763
–
1,002
4,022
981
1,314
811,715
1,058,393
15,567
12,647
1,898,322
8,168
1,056
127
19,533
(11,763 )
66,296
–
–
–
–
–
–
–
–
–
–
–
–
–
–
66,296
1,002
4,022
981
1,314
811,715
1,058,393
15,567
12,647
1,898,322
8,168
1,056
127
19,533
1,946,288
54,533
2,000,821
1,736,953
23,725
10,919
31,967
10,183
15,595
–
–
13,634
–
–
–
1,736,953
23,725
24,553
31,967
10,183
15,595
1,829,342
13,634
1,842,976
116,946
40,899
157,845
157,845
(137,526 )
20,319
The assets and liabilities at the acquisition date in the table above 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. We stated in our interim financial statements that we planned to consider the alignment of the
IFRS reserving methodology within Scildon with that of the wider Chesnara group. After considering this further in the context of the introduction of the new
insurance contract liability standard, IFRS 17, we have decided to defer this proposed alignment until the new standard becomes effective in 2021.
128
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Acquired receivables: Within the net assets acquired are reinsurance related and other receivable balances totalling £16.9m, 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 £1.3m is discounted as a result of the long-term nature of this asset.
Acquired value of in-force business: The acquisition has resulted in the recognition of net of tax intangible asset amounting to £49.8m, 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 £20.3m 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, Legal & General was following a strategic plan to dispose of non-core
businesses, which included its Dutch operation. In the opinion of the Directors, this resulted in a disposal pricing strategy for Legal & General Nederland that
sought to offer an attractive investment opportunity for potential buyers.
Acquisition-related costs: The costs in respect of the transaction amounted to £8.1m. £4.1m of these costs have been included in Administration Expenses,
of which £3.8m was recognised within the Consolidated Statement of Comprehensive Income in 2016, with the remainder recognised in the current period.
Transaction costs of £3.3m were incurred in respect of the equity fund-raising and were deducted from equity in 2016. Debt fund-raising costs amounted to
£0.8m and will be amortised over the life of the loan using the effective interest rate method of amortisation.
Results of Scildon: The results of Scildon have been included in the consolidated financial statements of the Group with effect from 5 April 2017. Net insurance
premium revenue for the period was £119.8m, with contribution to overall consolidated profit before tax of £18.4m, before the amortisation of the AVIF and
deferred acquisition cost intangible assets. Had Scildon been consolidated from 1 January 2017, the Consolidated Statement of Comprehensive Income would
have included net insurance premium revenue of £178.0m, and would have contributed £16.6m 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 2017 comprise:
CA: This segment represents 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 Save & Prosper Insurance Limited which was acquired on 20 December
2010 and its then subsidiary Save & Prosper Pensions Limited. The S&P business was transferred to CA during 2011. This segment also contains the business of
Protection Life, which was purchased on 28 November 2013 and the business of which was transferred to CA effective from 1 January 2015. CA is responsible
for conducting 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’.
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.
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. During the year, the
book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard Leven via a Part VII transfer. 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
Scildon: This segment represents the Group’s latest Dutch life insurance business, which was acquired on 5 April 2017. Scildon’s policy base is predominantly
made up of individual protection and savings contracts. It is open to new business and sells protection, individual savings and group pension contracts via a
broker-led distribution model.
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 2017.
129
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 Operating segments (continued)
(i) Segmental income statement for the year ended 31 December 2017
Net insurance premium revenue
Fee and commission income
Net investment return
Total revenue (net of reinsurance payable)
Other operating income
CA
£000
Movestic
£000
39,036
29,009
251,041
15,438
49,155
223,310
319,086
13,985
287,903
3,215
Waard
Group
£000
Other group
activities
£000
Scildon
£000
2,227
20
7,349
9,596
42
120,623
35,664
50,016
206,303
–
–
–
101
101
–
Total
£000
177,324
113,848
531,817
822,989
17,242
Segmental income
333,071
291,118
9,638
206,303
101
840,231
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
(191,524 )
(66,969 )
(1,368 )
–
–
(21,678 )
(952 )
(4 )
–
(5,447 )
(222,953 )
(31,959 )
(2,052 )
(292 )
(13,485 )
(3,302 )
(2,756 )
949
(1,051 )
–
(331 )
–
(52 )
(3,015 )
–
–
–
(167,225 )
–
(1,494 )
(124 )
(229 )
(18,813 )
1
–
–
–
–
–
–
–
(10,528 )
14
(1,683 )
–
(365,247 )
(289,922 )
(35,152 )
(2,176 )
(573 )
(67,520 )
(4,239 )
(4,443 )
949
Profit before tax and consolidation adjustments
50,576
9,821
5,189
18,419
(12,096 )
71,908
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
(6,224 )
–
–
(3,527 )
(101 )
6,601
(662 )
–
–
(2,858 )
–
4,146
–
–
–
(13,271 )
(101 )
10,747
Segmental income less expenses
44,352
12,794
4,527
19,707
(12,096 )
69,283
Profit arising on business combination
–
–
–
–
20,319
20,319
Profit before tax
Income tax (expense)/credit
Profit after tax
44,352
(7,085 )
12,794
71
4,527
(1,068 )
19,707
(4,946 )
8,223
1,860
89,602
(11,168 )
37,267
12,865
3,459
14,761
10,083
78,434
Further analysis of the segmental profit before tax and consolidation adjustments can be found on page 36 of the Financial Review section.
(ii) Segmental balance sheet as at 31 December 2017
CA
£000
Movestic
£000
Waard
Group
£000
Other group
activities
£000
Scildon
£000
Total
£000
3,020,489
(2,849,557 )
3,148,135
(3,057,934 )
166,803
(109,421 )
2,060,569
(1,881,301 )
47,388
(93,515 )
8,443,384
(7,991,728 )
170,932
90,201
57,382
179,268
(46,127 )
451,656
–
–
6,407
23,836
–
313
–
3,719
–
–
6,407
27,868
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
130
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(iii) Segmental income statement for the year ended 31 December 2016
Net insurance premium revenue
Fee and commission income
Net investment return
Total revenue (net of reinsurance payable)
Other operating income
CA
£000
Movestic
£000
46,989
31,610
337,903
14,903
41,296
169,130
416,502
13,360
225,329
3,751
Waard Other group
activities
Group
£000
£000
2,658
26
8,464
11,148
503
–
–
184
184
–
Total
£000
64,550
72,932
515,681
653,163
17,614
Segmental income
429,862
229,080
11,651
184
670,777
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
(263,202 )
(100,599 )
(1,664 )
–
–
(20,460 )
(1,204 )
(2 )
–
(7,695 )
(168,508 )
(25,089 )
(1,243 )
(197 )
(12,800 )
(3,209 )
(1,629 )
150
(1,464 )
–
(330 )
–
–
(3,664 )
–
–
–
–
–
–
–
–
(8,251 )
19
(1,641 )
–
(272,361 )
(269,107 )
(27,083 )
(1,243 )
(197 )
(45,175 )
(4,394 )
(3,272 )
150
Profit before tax and consolidation adjustments
42,731
8,860
6,193
(9,689 )
48,095
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
(6,247 )
–
–
(3,554 )
(236 )
3,245
(618 )
–
–
–
–
–
(10,419 )
(236 )
3,245
Segmental income less expenses
36,484
8,315
5,575
(9,689 )
40,685
Profit before tax
Income tax (expense)/credit
Profit after tax
36,484
(6,663 )
8,315
(7 )
5,575
(1,721 )
(9,689 )
2,986
40,685
(5,405 )
29,821
8,308
3,854
(6,703 )
35,280
(iv) Segmental balance sheet as at 31 December 2016
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
CA
£000
Movestic
£000
Waard Other group
activities
Group
£000
£000
Total
£000
3,047,490
(2,883,575 )
2,718,156
(2,638,490 )
207,160
(122,655 )
122,957
(57,482 )
6,095,763
(5,702,202 )
163,915
79,666
84,505
65,475
393,561
–
–
5,433
11,894
–
–
–
–
5,433
11,894
131
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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
2017
£000
43,519
48,386
14,585
737
(64 )
107,163
6,685
2016
£000
13,696
36,391
16,226
774
(59 )
67,028
5,904
Total fee and commission income
113,848
72,932
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
Net investment return
2017
£000
39,855
34,189
15
442,445
6,306
9,007
2016
£000
30,444
21,047
893
392,726
72,021
(1,450 )
531,817
515,681
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 2016: £nil).
11 Other operating income
Year ended 31 December
Investment management fee rebate
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.
2017
£000
13,991
2,963
288
2016
£000
13,749
3,194
671
17,242
17,614
132
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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
Total increase in investment contract liabilities
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
2017
£000
2016
£000
465,729
(51,033 )
346,117
(11,392 )
414,696
(49,449 )
334,725
(62,364 )
365,247
272,361
2017
£000
266,344
27,259
2016
£000
261,180
13,544
293,603
(3,681 )
274,724
(5,617 )
289,922
269,107
2017
£000
2016
£000
12,904
(12,167 )
11,009
(7,048 )
737
3,961
24,836
(15,644 )
20,810
(13,064 )
9,192
7,746
8,177
6,329
(30 )
7,326
4,837
(32 )
24,405
23,838
133
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 Administrative expenses
Year ended 31 December
Personnel-related costs
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
Note
45
2017
£000
30,919
7,580
2,218
698
13,295
15,559
2016
£000
17,998
6,213
794
197
11,518
9,895
70,269
46,615
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***
Total
*Includes Ernst & Young audit fees in respect of the Scildon audit.
**Includes the audit of regulatory returns submitted to the UK regulator in both years.
***2016 relates to the fees associated with the proposed acquisition of LGN.
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
2017
£000
50
743
462
–
2016
£000
50
537
719
532
1,255
1,838
2017
£000
2016
£000
13,271
10,419
101
236
–
2
(14 )
3,286
965
1
56
(19 )
3,194
1,162
4,239
4,394
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.
134
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
17 Financing costs
Year ended 31 December
Interest expense on bank borrowings
Interest expense on financial reinsurance
Other interest
Total financing costs
2017
£000
1,687
2,674
82
2016
£000
1,644
1,516
112
4,443
3,272
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 and other group activities – net expense
Movestic – net credit
Waard Group – net expense
Scildon – net expense
Total net expense
UK Business
CA 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
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 19.25% (2016: 20.0%)
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 provided in previous years
Total income tax expense
There has been a change in tax rate during the year, due to a reduction in the corporation tax rate from 20% to 19%.
2017
£000
(5,225 )
71
(1,068 )
(4,946 )
2016
£000
(3,862 )
37
(1,580 )
–
(11,168 )
(5,405 )
2017
£000
(6,220 )
(480 )
–
2016
£000
(5,155 )
(524 )
167
(6,700 )
(5,512 )
1,475
1,650
(5,225 )
(3,862 )
2017
£000
2016
£000
32,256
26,795
(6,209 )
(468 )
1,753
(6 )
(390 )
48
47
–
(5,359 )
(441 )
2,008
80
(426 )
75
35
166
(5,255 )
(3,862 )
135
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 Income tax (continued)
Movestic
Movestic
Year ended 31December
Current tax
Current year expense*
Adjustments for prior years
Net credits
Deferred tax
Origination and reversal of temporary differences
Total income tax credit
2017
£000
2016
£000
(6 )
(9 )
(15 )
86
71
(7 )
–
(7 )
44
37
*Tax in Sweden is levied as against the value of policyholder unit-linked funds and is borne by the policyholder. This results in a small residual direct corporation
tax charge.
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
Impact of different tax rate for subsidiaries
Non-taxable fair value adjustment
Temporary differences
Permanent differences
Unrecognised tax recoverable
Non-deductible expenses
Under provided in prior years
Total income tax credit
Waard Group
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
136
2017
£000
2016
£000
12,794
8,315
(2,815 )
2,242
(578 )
698
41
461
72
(41 )
(9 )
(1,829 )
2,053
–
(44 )
–
(93 )
(8 )
(42 )
–
71
37
2017
£000
2016
£000
(1,243 )
55
(2,575 )
(31 )
(1,188 )
(2,606 )
(120 )
1,026
(1,068 )
(1,580 )
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Waard Group (continued)
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%
Impact of different tax rate for subsidiaries
Permanent differences
Over/(Under) provided in prior years
Total income tax expense
Scildon
Scildon
Year ended 31 December
Current tax
Current year expense
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%
Non-deductible expenses
Over provided in prior years
Total income tax expense
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).
2017
£000
2016
£000
4,527
5,574
(1,132 )
9
–
55
(1,393 )
–
(156 )
(31 )
(1,068 )
(1,580 )
2017
£000
(3,014 )
–
(3,014 )
(1,932 )
(4,946 )
2017
£000
19,707
(4,927 )
(28 )
9
(4,946 )
2016
£000
–
–
–
–
–
2016
£000
–
–
–
–
–
2017
£000
48,318
27,685
(14,506 )
361
2016
£000
36,061
20,132
(12,163 )
4,288
61,858
48,318
6,191
55,667
5,362
42,956
61,858
48,318
137
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
2017
£000
2016
£000
151,617
66,296
3,288
143,409
–
8,208
221,201
151,617
88,674
13,271
217
75,068
10,408
3,198
102,162
88,674
62,943
68,341
119,039
62,943
13,428
105,611
9,498
53,445
119,039
62,943
The amortisation charged to the Consolidated Statement of Comprehensive Income is recognised in Other Operating Expenses (see note 16).
21 Goodwill
The goodwill is arising from the purchase of Sparplatsen by the Movestic business.
22 Software assets
31 December
Cost:
Balance at 1 January
Additions – acquisition of subsidiary
Additions
Disposals
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
Impairment write-down
Foreign exchange translation difference
Balance at 31 December
Carrying amounts at 31 December
Current
Non-current
Total
138
2017
£000
2016
£000
21,061
1,069
928
–
160
15,962
–
3,525
(441 )
2,015
23,218
21,061
14,501
67
2,218
–
74
11,242
–
794
1,039
1,426
16,860
14,501
6,358
6,560
2,260
4,098
1,991
4,569
6,358
6,560
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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
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 at 31 December 2017
Associates at 49%
Modernac S.A
Total at 31 December 2017
2017
£000
2,303
8,825
211
(36 )
500
2016
£000
2,235
–
91
(307 )
284
11,803
2,303
1,784
4,803
698
(19 )
210
1,677
–
197
(306 )
216
7,476
1,784
4,327
723
3,604
4,327
2017
£000
5,433
949
25
6,407
Assets
£000
Liabilities
£000
Revenues
£000
43,862
30,786
9,454
43,862
30,786
9,454
519
176
343
519
2016
£000
4,707
150
576
5,433
Profit
£000
1,923
1,923
Equity
at 100%
£000
Equity
at 49%
£000
49% share
of profit
£000
13,076
6,407
13,076
6,407
949
949
139
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25 Financial instruments
Group
Financial assets by measurement category at 31 December
Fair value through income
Designated at fair-value through income on initial recognition
Derivative financial instruments
Mortgage loan portfolio
Insurance and other receivables
Prepayments
Total
2017
£000
2016
£000
7,610,042
1,682
48,106
59,448
7,325
5,293,255
2,773
54,756
39,646
5,271
7,726,603
5,395,701
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 2017
Financial assets
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
Investment contracts at fair value through income
Liabilities related to policyholders’ funds held by the group
Derivative financial instruments
Total
Level 1
£000
Level 2
£000
Level 3
£000
512,724
5,202,772
961,194
631,416
6,005
1,598,615
265,729
–
–
–
30,202
–
–
30,202
–
1,682
7,598,840
31,884
–
265,729
22,170
3,420,272
–
324
287,899
3,420,596
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£000
512,724
5,202,772
991,396
631,416
6,005
1,628,817
265,729
1,682
7,611,724
5,048,130
2,563,594
7,611,724
3,420,272
265,729
22,494
3,708,495
140
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Fair value measurement at 31 December 2016
Financial assets
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
Investment contracts at fair value through income
Liabilities related to policyholders’ funds held by the group
Derivative financial instruments
Total
Level 1
£000
Level 2
£000
Level 3
£000
485,165
4,104,602
322,870
120,302
1,562
444,734
229,397
–
–
–
29,357
–
–
29,357
–
2,773
5,263,898
32,130
–
229,397
–
3,028,269
–
1,348
229,397
3,029,617
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£000
485,165
4,104,602
352,227
120,302
1,562
474,091
229,397
2,773
5,296,028
2,749,699
2,546,329
5,296,028
3,028,269
229,397
1,348
3,259,014
The debt securities classified as Level 2 at 2016 and 2017 are traded in active markets with less depth or wider-bid ask spreads. This does not meet the classification
as Level 1 inputs. The fair values of debt securities not traded in active markets are determined using broker quotes or valuation techniques with observable
market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes.
These assets were valued using counterparty or broker quotes and were 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.
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
2017
£000
2016
£000
Fair value
2017
£000
2016
£000
129,202
86,843
132,204
87,196
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.
141
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25 Financial instruments (continued)
Company
Fair value measurement at 31 December
Holdings in collective investment schemes
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
Capital contribution to Chesnara Holdings B.V.*
Balance at 31 December
Current
Non-current
Total
2017
£000
2016
£000
29,091
72,939
29,091
72,939
29,091
–
72,939
–
29,091
72,939
2017
£000
2016
£000
249,234
105,486
249,234
–
354,720
249,234
–
354,720
–
249,234
354,720
249,234
*During the year Chesnara plc provided a capital contribution to Chesnara Holding B.V of £105.5m to part fund the acquisition of Scildon. The remainder of the
acquisition cost of £137.5m was funded by a dividend from Chesnara Holdings B.V. of £32.0m.
A list of investments in subsidiaries held by the group is disclosed in note 52.
26 Mortgage loan portfolio
Year ended 31 December
Loans and receivables at amortised cost
Current
Non-current
Total
The mortgage loan portfolio was acquired in 2016 by the Waard Group and is stated at amortised cost.
2017
£000
2016
£000
48,106
54,756
18,476
29,630
9,827
44,929
48,106
54,756
142
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
27 Insurance and other receivables
Group
Insurance and other receivables
31 December
Receivables arising from insurance contracts
Brokers
Policyholders
Receivables arising from investment contracts
Other
Other receivables
Loan to associated companies
Accrued interest income
Receivables from fund management companies
Initial margin payments on derivatives
Other
Total
Current
Non-current
Total
2017
£000
711
4,260
2016
£000
–
2,479
10,042
10,084
697
15,898
7,711
3,621
16,508
673
7,942
5,637
6,545
6,286
59,448
39,646
57,941
1,507
38,186
1,460
59,448
39,646
The carrying amount is a reasonable approximation of fair value.
28 Derivative financial instruments
The group does not hold derivatives outside the unit-linked and with-profits funds, except for an option to repay a financial reinsurance contract early, which
comprises an embedded derivative and interest rate swaps within the Scildon business.
31 December
Interest rate swaps
Exchange-traded futures
Financial reinsurance embedded derivative
Total
Current
Non-current
Total
2017
2016
Asset
£000
Liability
£000
Asset
£000
Liability
£000
–
635
1,047
(22,170 )
(324 )
–
–
349
2,424
–
(1,348 )
–
1,682
(22,494 )
2,773
(1,348 )
898
784
(22,494 )
–
957
1,816
(1,348 )
–
1,682
(22,494 )
2,773
(1,348 )
143
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28 Derivative financial instruments (continued)
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 25.
Exchange-traded futures (by geographical investment market)
31 December
Australia
Canada
Switzerland
Europe
UK
Hong Kong
Japan
USA
Denmark
Total
2017
2016
Asset
£000
Liability
£000
Asset
£000
Liability
£000
2
6
–
5
62
28
154
378
–
(23 )
–
(3 )
(73 )
(197 )
–
(16 )
(11 )
(1 )
16
–
3
28
277
–
10
15
–
–
–
(25 )
(171 )
–
(64 )
(51 )
(1,034 )
(3 )
635
(324 )
349
(1,348 )
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 25.
Derivatives within the CA (S&P with-profits funds)
As part of its investment management strategy, CA enters into a limited range of derivative instruments to manage its exposure to various risks.
CA 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. CA 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.
CA 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 25.
Derivatives within the Scildon
Scildon uses various interest rate derivatives to hedge some of the risk of changes in value of its obligations under insurance contracts in non-linked funds.
144
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
29 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
2017
£000
86,545
40,011
84,091
2016
£000
134,055
38,851
87,447
210,647
260,353
(1,091)
(1,622 )
209,556
258,731
The effective interest rate on short-term bank deposits was 0.20% (2016: 0.18%), with an average maturity of 31 days (2016: 35 days). All deposits included in
cash and cash equivalents were due to mature within 3 months of their acquisition.
Included in cash and cash equivalents held by the group are balances totalling £89.8m (2016: £89.8m) 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
30 Capital management
(a) Regulatory context:
2017
£000
1,259
546
10,062
2016
£000
6,009
23,049
15,125
11,867
44,183
Solvency II
The Chesnara group is required to comply with the Solvency II capital regime. Solvency II came into force on 1 January 2016 and is a EU insurance legislation
that aims to unify the EU insurance market and enhance consumer protection. The Solvency II regime includes rules over the quantity and quality of capital (known
as ‘own funds’) that insurance companies and groups need in order to meet the regime’s required level of capital (known as the ‘Solvency Capital Requirement’).
The Chesnara group operates exclusively within the EU and as a result the Solvency II regime applies to the group and all regulated insurance companies within
the group. The regulators responsible for the supervision of the group and its subsidiaries have been shown in section (c)(i).
The Solvency II regime has specific rules regarding how own funds are recognised and valued. In a number of cases, the IFRS and Solvency II value of an asset
and liability are the same, but in some cases there are differences. In particular, liabilities for insurance and investment contracts are valued differently, with IFRS
remaining largely based on the previous Solvency I regime. In addition, Solvency II has differing treatments for certain intangible assets. A high level reconciliation
between the IFRS net assets and Solvency II own funds of the group and its subsidiaries has been provided in part (c)(ii) of this note.
Regarding the Solvency Capital Requirement (SCR) of the Chesnara group and its subsidiaries, the group has elected to use the ‘standard formula’ approach for
its calculation, which means we are applying the formulae as included in the Solvency II framework. The calculations within the standard formula have been
designed such that, on the basis that an insurance company holds own funds that are at least equal to its SCR, it will be able to withstand a 1 in 200 year event.
An alternative would have been to use an ‘internal model’ but this was not deemed appropriate for the size and complexity of the Chesnara group.
Company law
As well as complying with the Solvency II regime, each company within the group is required to comply with relevant company law capital and distribution rules.
(b) Objectives, policies and processes for managing capital
(i) Objectives
To manage compliance with the externally imposed capital requirements the group and its subsidiaries have established capital management policies in place.
The objectives of these policies are:
– to ensure that capital is managed in a way that is consistent with the business strategy of the group and its subsidiaries, in that they:
– promote fair customer outcomes through protecting policyholders;
– provide protection to shareholders through ensuring that the business is adequately protected against stress events; and
– provide a framework to support the decision making process for returns to shareholders via dividends.
– to ensure that capital of the group and its subsidiaries is managed in accordance with the board’s risk appetite, in particular each board’s aversion for own funds
to fall below the SCR.
145
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30 Capital management (continued)
(b) Objectives, policies and processes for managing capital (continued)
(ii) Policies
In light of the objectives for the group’s and its subsidiaries’ capital management policies, the following quantitative limits for managing own funds are applied
across the group:
Region
Dividend paying limit: Own funds stated as % of SCR
Management actions limit: Own funds stated as % of SCR
CA
Movestic
120%
110%
120%
110%
Waard
Group
200%
175%
Scildon
Group
200%
175%
110%
105%
Dividend paying limit: This is the point at which a dividend would cease to be paid, until at such time the solvency position was restored above this point.
This limit is set by the relevant board in each division with reference to its respective risk appetite, as articulated in each divisions’ capital management policy.
Management actions limit: This is the point at which, should own funds fall below this level, additional management actions would be taken to restore own
funds back above this level. In essence this represents an internal ‘ladder of intervention limit’ that is set by the group and divisional boards.
To put the above table and definitions in context, and taking group as an example, this means that the group will not pay a dividend should the payment of the
dividend take the group own funds to below 110% of its SCR. Should own funds fall below 105% of SCR additional management actions will be taken.
(iii) Process for management of capital
The following key processes and procedures are in place across the group to manage adherence to the capital management policies in place:
– Internal solvency reporting: A number of internal reports are produced that focus on the solvency position of the group/company. These include the Own Risk &
Solvency Assessment (ORSA) report, a quarterly actuarial report and a quarterly finance report. All of these are presented to and approved by the board.
– Production of projections: On at least an annual basis, solvency projections are produced for the group and its subsidiaries. These projections are included in both
the business plans and the ORSA report, and show how management anticipates the solvency position to develop over time. The projections process includes
assessing the impact of a number of different stress scenarios to ensure that the sensitivities of the business are understood. Both the ORSA and the business
plans are presented to and approved by the board.
– Regular review of internal limits in place: On at least an annual basis, the limits described in (b)(ii) of this note are reviewed and assessed, having regard to the
developments of the business and any other changes that may have affected the group’s/divisions’ risk appetite.
– Recovery management protocol: A protocol for management actions has been designed which, in effect, represents an internally set ‘ladder of intervention’. The
protocol includes items such as solvency monitoring frequency, what level of escalations are required and what management actions need to be considered.
– Trigger monitoring: On at least a monthly basis specific key risk indicators are monitored against pre-defined trigger points. The trigger points are set having
regard for the sensitivity of the group to certain scenarios. Trigger points and the list of risk indicators being monitored are assessed at least annually.
(iv) Compliance during year
The group, and all insurance companies within the group, have held own funds above their respective Solvency Capital Requirements at all times during the year.
(c) Quantitative analysis
(i) Group solvency position
The solvency position of the group and its divisions at 31 December 2017 and at 31 December 2016, which is unaudited, has been shown in the tables below.
They present a view of the solvency position which may differ to the position of the individual insurance company(ies) within that division.
31 December 2017 (unaudited)
Region
Own funds (pre dividends)
Proposed dividend
Own funds (post dividends)
SCR
Solvency surplus
Solvency ratio
Dividend paying limit (% of SCR)
Dividend paying limit (£)
Surplus over dividend paying limit
146
CA
£m
Movestic
£m
198.7
(32.0 )
230.7
(2.8 )
166.7
227.8
128.1
38.6
149.0
78.8
Waard
Group
£m
61.2
(13.0 )
48.2
10.0
38.2
130%
153%
483%
231%
120%
153.7
13.0
120%
178.9
49.0
200%
20.0
28.2
200%
162.8
25.0
Other
group &
consolidation
Scildon adjustments
£m
£m
210.0
(22.2 )
(65.8 )
50.5
187.8
(15.3 )
81.4
53.3
106.4
n/a
n/a
n/a
n/a
n/a
Group
£m
634.8
(19.6 )
615.2
421.8
193.4
146%
110%
464.0
151.2
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
31 December 2016
Region
Own funds (pre dividends)
Proposed dividend
Own funds (post dividends)
SCR
Solvency surplus
Solvency ratio
Dividend paying limit (% of SCR)
Dividend paying limit (£)
Surplus over dividend paying limit
Other
group &
Waard consolidation
Group adjustments
£m
£m
CA
£m
Movestic
£m
196.3
(30.0 )
192.3
(2.7 )
166.3
189.6
129.8
36.5
135.6
54.0
86.6
–
86.6
12.2
74.4
128%
140%
712%
120%
155.8
10.5
120%
162.7
26.9
200%
24.3
62.3
49.2
13.7
62.9
43.1
n/a
n/a
n/a
n/a
n/a
(ii) Reconciliation between Solvency II own funds and IFRS net assets (unaudited)
The tables below show the key differences between the Solvency II own funds reported in part (c)(i) and the group’s IFRS net assets.
31 December 2017 (unaudited)
Region
Solvency II own funds (post dividends)
Add Back: Ring-fenced fund surplus restrictions
Add Back: Intangible assets
Add Back: Foreseeable dividends
Add Back: Difference in valuation of technical provisions
Add Back: Difference in deferred tax
Add Back: Other valuation differences
CA
£m
Movestic
£m
166.7
26.6
11.5
32.0
(78.5 )
12.4
0.2
227.8
–
94.1
2.8
(233.6 )
–
(0.9 )
Waard
Group
£m
48.2
–
63.1
13.0
(10.7 )
(10.4 )
(2.1 )
Other
group &
consolidation
Scildon adjustments
£m
£m
187.8
–
12.3
22.2
(111.2 )
24.7
–
(15.3 )
–
1.6
(50.5 )
24.0
(6.4 )
0.2
IFRS Net Assets
170.9
90.2
101.1
135.8
(46.3 )
451.7
31 December 2016 (unaudited)
Region
Solvency II own funds (post dividends)
Add Back: Ring-fenced fund surplus restrictions
Add Back: Intangible assets
Add Back: Foreseeable dividends
Add Back: Difference in valuation of technical provisions
Add Back: Difference in deferred tax
Add Back: Other valuation differences
CA
£m
Movestic
£m
166.3
10.6
19.1
30.0
(71.3 )
8.9
0.3
189.6
–
88.8
2.7
(199.2 )
(0.3 )
(1.9 )
IFRS Net Assets
163.9
79.7
Other
group &
Waard consolidation
Group adjustments
£m
£m
62.9
0.2
–
(13.7 )
20.6
(4.0 )
(0.5 )
86.6
–
5.5
–
(8.6 )
3.3
(2.3 )
84.5
Group
£m
524.4
(19.0 )
505.4
320.7
184.7
158%
110%
352.8
152.6
Group
£m
615.2
26.5
182.6
19.6
(410.0 )
20.3
(2.5 )
Group
£m
505.4
10.8
113.4
19.0
(258.5 )
7.9
(4.4 )
65.5
393.6
147
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Insurance contract provisions
(a) Analysis of insurance contract provisions by operating segment
31 December
CA
Movestic
Waard Group
Scildon
2017
Gross Reinsurance
£000
£000
1,992,705
86,271
100,329
1,782,974
173,718
54,149
4,413
874
Net
£000
1,818,987
32,122
95,916
1,782,100
2016
Gross Reinsurance
£000
£000
2,041,761
85,951
114,734
–
194,765
54,926
5,168
–
Net
£000
1,846,996
31,025
109,566
–
Total insurance contract provisions
3,962,279
233,154
3,729,125
2,242,446
254,859
1,987,587
Current
Non-current
Total
243,326
3,718,953
39,087
194,067
204,239
3,524,886
286,720
1,955,726
86,518
168,341
200,202
1,787,385
3,962,279
233,154
3,729,125
2,242,446
254,859
1,987,587
(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
2017
Gross Reinsurance
£000
£000
Net
£000
2016
Gross Reinsurance
£000
£000
2,242,446
1,736,389
186,260
(59,961 )
(410,873 )
30,304
(26,070 )
170,646
93,138
254,859
1,314
15,053
(1,555 )
(55,286 )
17,856
(17,128 )
3,273
14,768
1,987,587
1,735,075
171,207
(58,406 )
(355,587 )
2,232,083
–
75,126
(24,226 )
(320,807 )
12,448
(8,942 )
167,373
78,370
25,226
(18,870 )
197,054
76,860
282,628
–
24,523
(1,773 )
(105,846 )
16,173
(12,127 )
9,412
41,869
Net
£000
1,949,455
–
50,603
(22,453 )
(214,961 )
9,053
(6,743 )
187,642
34,991
Balance at 31 December
3,962,279
233,154
3,729,125
2,242,446
254,859
1,987,587
(c) Basis and assumptions for calculating insurance contract provisions
UK
(i) Basis
The process used to determine the assumptions underlying the calculation of IFRS 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.
The technical provision for CA (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 ReAssure. When performing
the gross liability adequacy test allowance is made for expected future bonuses paid by ReAssure. This is based on the realistic liabilities of the underlying policies
reinsured, as provided to CA by ReAssure.
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 the PL component of CA, 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.
148
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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.
(ii) Principal assumptions:
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.
For CA (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*
2017
2016
SPI
SPP
SPI
SPP
2.625%
3.000%
2.625%
3.750%
2.625%
3.000%
2.625%
3.375%
–
4.000%
–
4.000%
*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 2017 for the material product types, these
lay between 0.20% and 2.05% (31 December 2016: between 0.40% and 1.70%).
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 CA funds.
Taxation
It has been assumed that current tax legislation and tax rates will not change.
The sensitivities of technical provisions to changes in assumptions are set out overleaf.
149
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Insurance contract provisions (continued)
(c) Basis and assumptions for calculating insurance contract provisions (continued)
UK (continued)
(iii) Valuation of options and guarantees
Contracts with discretionary participation features
The principal financial options and guarantees in CA (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.
Provisions for CA (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 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 cost of guaranteeing a minimum investment return on participating contracts 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.
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/(credit) to income
At the end of year
2017
£000
35,746
16,511
2016
£000
37,156
(1,410 )
19,235
35,746
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 £696,000 as at 31 December 2017 (31 December 2016: £644,000).
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 3.6% 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 2017 was £4.2m (31 December 2016: £4.5m). 485 policies invested in the fund (31 December 2016: 498), of which
36 (31 December 2016: 37) were paying premiums (for a total of approximately £10,000 per annum (31 December 2016: £10,000)).
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:
2.94% pa
Rate of return on cash:
Discount rate:
Retirement age:
0.47% pa
0.30% pa
90% of business with policyholders retiring at age 65
10 % of business with policyholders retiring at age 70
Terminations before retirement:
3% pa
The reserve for the guarantee as at 31 December 2017 was £0.2m (31 December 2016: £0.3m).
150
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
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 2017 was £10.0m (31 December 2016: £9.1m).
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 2017 was £0.1m (31 December 2016: £0.1m).
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 2017 was £0.3m (31 December 2016: £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 2017 is £0.1m (31 December 2016: £0.2m).
Sweden
(i) Basis
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.
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.
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.
151
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Insurance contract provisions (continued)
(c) Basis and assumptions for calculating insurance contract provisions (continued)
Sweden (continued)
(ii) Principal assumptions:
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.
(iii) Analysis of claims development – gross
2012
£000
27,889
18,710
17,861
16,997
15,369
14,813
14,813
(12,194 )
2,620
2012
£000
10,367
5,389
4,860
4,918
2,813
2,759
2,759
(2,014 )
2013
£000
29,240
23,494
20,775
18,936
17,090
2014
£000
28,798
21,971
18,670
15,656
2015
£000
28,926
22,047
19,617
2016
£000
34,712
25,341
17,090
(13,258 )
3,832
15,656
(8,964 )
6,692
19,617
(9,055 )
10,562
25,341
(10,454 )
14,888
2013
£000
11,644
7,686
6,873
4,070
3,414
2014
£000
13,895
7,419
4,722
3,628
2015
£000
11,078
5,993
5,181
2016
£000
11,127
6,961
2017
£000
32,303
32,303
(7,009 )
25,294
17,592
81,479
2017
£000
11,406
3,414
(2,331 )
3,628
(1,537 )
5,181
(1,858 )
6,961
(2,063 )
11,406
(1,363 )
745
1,083
2,092
3,323
4,899
9,383
7,623
29,806
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
152
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Netherlands (Waard Group)
(i) Basis
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 a 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.
(ii) Principal assumptions
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.
Netherlands (Scildon)
(i) Basis
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.
For other policies, a discounted value of claims/benefits is used.
(ii) Principal assumptions
The technical reserve uses assumptions for mortality, expenses and discounting that were used in the contract pricing, reflecting a book reserve approach.
For the annuity portfolio mark to market interest assumptions are used. Term policies written after 2015 are reserved on best estimate market value reserves.
(d) Sensitivity to changes in assumptions
Impact on reported profits and equity to changes in key variables:
CA
Change in net of tax
profits and equity
2017
£m
2016
£m
Scildon
Change in net of tax
profits and equity
2017
£m
2016
£m
Movestic
Change in net of tax
profits and equity
2016
2017
£m
£m
Change in variable
100 basis point increase credit spreads
100 basis point increase in Investment return
100 basis point decrease in Investment return
10% increase in mortality/morbidity
10% increase in mortality alone
10% increase in morbidity alone
10% increase in policy maintenance expenses
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
n/a
(1.1 )
(1.7 )
1.5
2.9
(0.6 )
(4.4 )
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
(2.0 )
(0.5 )
1.0
1.6
(0.7 )
(4.7 )
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
(19.2 )
(30.5 )
33.1
(0.1 )
(0.1 )
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
(3.2 )
(1.2 )
3.2
1.2
–
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
(3.2 )
(1.1 )
3.2
1.1
–
–
–
–
153
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 Insurance contract provisions (continued)
UK businesses (CA)
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 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 31(d) table presented 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.
The 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 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 and subject to treating customers fairly.
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.
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.
Dutch business (Waard Group)
The most material sensitivity within Waard Group is interest rates. Due to the fact that Waard measures its insurance contract liabilities using historical rates of
interest, a rise in interest rates results in a fall in the value of fixed-interest assets with no change in the value of liabilities. The impact on net of tax profits and
equity at 2017 is negative £2.1m.
Dutch business (Scildon)
The key sensitivity within Scildon is interest rates. Similarly to Waard Group, Scildon measures the majority of its insurance contract liabilities using historical
rates of interest. This means that a rise in interest rates results in a fall in the value of fixed-interest assets with only a small reduction in the value of liabilities.
The impact on net of tax profits and equity at 2017 is negative £30.5m.
32 Investment contracts at fair value through income and amounts deposited with reinsurer
Analysis by operating segment
31 December
CA
Movestic
Total
Current
Non-current
Total
Investment
contract
liability
£000
2017
Amount
deposited
with
reinsurer
£000
Investment
contract
liability
£000
Net
£000
2016
Amount
deposited
with
reinsurer
£000
Net
£000
776,551
2,643,722
38,776
–
737,775
2,643,722
758,559
2,269,710
37,437
–
721,122
2,269,710
3,420,273
38,776
3,381,497
3,028,269
37,437
2,990,832
797,615
2,662,658
38,776
–
758,839
2,622,658
108,795
2,919,474
372
37,065
108,423
2,882,409
3,420,273
38,776
3,381,497
3,028,269
37,437
2,990,832
The fair values of the groups’ investment contract liabilities have been disclosed according to a three-level valuation hierarchy in note 25.
154
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
33 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
2017
£000
229,397
52,449
(2,095 )
10,453
1,093
(25,568 )
2016
£000
189,919
44,276
(1,669 )
13,544
23,621
(40,294 )
265,729
229,397
16,210
249,519
13,993
215,404
265,729
229,397
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 25.
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 25.
34 Borrowings
Group
31 December
Bank loan
Amount due in relation to financial reinsurance
Total
Current
Non-current
Total
Company
31 December
Bank loan
Current
Non-current
Total
2017
£000
89,457
39,745
2016
£000
52,697
34,146
129,202
86,843
32,379
96,823
61,471
25,372
129,202
86,843
2017
£000
2016
£000
89,457
52,697
22,029
67,428
52,697
–
89,457
52,697
The bank loan as at 31 December 2017 comprises the following:
– on 3 April 2017 tranche one of a new facility was drawn down, amounting to £40.0m. This facility is unsecured and is repayable in 10 six-monthly instalments on
the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.00 percentage points above the London Inter-Bank Offer
Rate and is repayable over a period which varies between one and six months at the option of the borrower. The proceeds of this loan facility were utilised,
together with existing group cash, to repay in full, the pre-existing loan facilities totalling £52.8m.
– on 3 April 2017 tranche two of the new loan facility was drawn down, amounting to €71.0m. As with tranche one, this facility is unsecured and is repayable in
10 six-monthly instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.00 percentage points above
the European Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower.
The fair value of the sterling denominated bank loan at 31 December 2017 was £35.0m (31 December 2016: £52.8m).
The fair value of the euro denominated bank loan at 31 December 2017 was £55.0m (31 December 2016: nil).
The fair value of amounts due in relation to financial reinsurance was £42.2m (31 December 2016: £34.4m).
Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.
155
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECTION D
35 Defined benefit obligations
Scildon operates a defined benefit pension scheme for the benefit of its present and past employees. A summary of the scheme assets and liabilities as at the
balance sheet date and the movements in the post-acquisition period are provided below.
The amount included in the balance sheet arising from the obligations in respect of the scheme is as follows:
As at period ended
Present value of defined benefit obligations
Fair value of plan assets
Surplus
Effect of asset ceiling test
Net liability arising from defined benefit obligation
31 December
2017
£000
47,459
(48,354 )
(895 )
895
–
6 April
2017
£000
44,864
(45,813 )
(949 )
949
–
As at 31 December 2017, there was a surplus in the Pension Fund of £0.9m. The Scildon defined benefit scheme is accounted for under the provisions of IAS 19.
As such, pension surplus assets are not recognisable on the face of the balance sheet and as a consequence are subject to an asset ceiling test, which
effectively reduces the asset value to nil. The company is unable to recognise the surplus position in terms of potential refunds of past contributions made or
through lower future contributions to the scheme.
Amounts recognised in income in respect of the scheme are as follows:
Post acquisition movement
Service cost:
– Current service cost
– Past service cost
Net interest income
Components of defined benefit costs recognised in profit or loss
The costs charged to the profit and loss account are recorded under operating expenses as personnel costs.
Amounts recognised in the statement of comprehensive income are as follows:
Post acquisition movement
The return on plan assets (excluding amounts included in net interest expense)
Actuarial gains and losses arising from changes in assumptions
Actuarial gains and losses arising from experience adjustments
Adjustment for the effect of asset ceiling test
Foreign exchange translation
Tax effect
Total profit for the year not recognised in income
2017
£000
1,413
(438 )
(3 )
972
2017
£000
(365 )
626
794
(895 )
5
(41 )
124
156
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
IFRS FINANCIAL STATEMENTS
Movements in the present value of defined benefit obligations in the period since acquisition were as follows:
Post acquisition movement
Balance 6 April
Current service cost
Interest cost
Contributions from the plan participants
Actuarial gains and losses arising from changes in assumptions
Actuarial gains and losses arising from experience adjustments
Benefits paid
Individual settlements
Past service pension costs
Foreign exchange translation
Balance 31 December
Movements in the fair value of plan assets in the period since acquisition were as follows:
Post acquisition movement
Balance 6 April
Benefits paid
Contributions from the employer
Contributions from the plan participants
Assets distributed on settlements
Interest income
The return on plan assets (excluding amounts included in net interest expense)
Foreign exchange translation
Balance 31 December
The cost of defined benefit pension amounts:
Post acquisition movement
Pension costs
Current service pension costs
Past service pension costs
Total pension costs
Net interest
Interest cost on the present value of promised retirement benefits
Interest income on assets
Interest costs by applying ‘Asset Ceiling’
Net interest on the net liability defined benefit
Special events
Past service cost
Total charged to profit and loss account
2017
£000
44,864
1,413
648
270
(626 )
(794 )
(329 )
640
(438 )
1,811
47,459
2017
£000
45,813
(329 )
(176 )
270
640
651
(365 )
1,850
48,354
2017
£000
1,413
–
1,413
648
(651 )
–
(3 )
–
(438 )
972
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
157
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
35 Defined benefit obligations (continued)
The principal actuarial assumptions applied to the scheme valuation are as follows:
Discount rate
Interest income on assets
General salary increases
Deferred pension increases
Inflation
From the point of acquisition to 31 December 2017, there has been no change to the discount rate.
Distribution of plan assets:
Equity type instruments
Fixed interest instruments – Government bonds
Cash
Other
Total
Period ended 31 December
Equity type instruments
Fixed interest instruments – Government bonds
Cash
Other
Total
31 December
2017
6 April
2017
1.90%
1.90%
2.00%
0.60%
2.00%
1.90%
1.90%
2.00%
0.60%
2.00%
31 December
2017
8,253
39,527
196
378
6 April
2017
7,413
37,484
742
174
48,354
45,813
Quoted market price
in an active market
2017
£000
8,253
39,527
196
378
Not
quoted
–
–
196
378
Quoted
8,253
39,527
–
–
48,354
574
47,780
The plan assets do not include investments that are issued by the company and do not include assets used by the company.
Post acquisition movement
Actual return on plan assets
2017
£000
286
158
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
The risks faced by the company in connection with the pension commitments are determined by the duration of these obligations. The table below shows how
these obligations are distributed among active and non-active participants.
As at 31 December 2017
Active members
Deferred members
Wholly or partially disabled members
Pensioners
Total
Cash value
of defined
benefit
Duration
26,264
10,461
1,908
8,826
47,459
29.5
24.4
18.6
12.0
24.7
The present value of the defined benefit obligations is sensitive to a change in the assumptions used. The table below shows the sensitivity of the value of
pension rights and service costs, to changes in the underlying assumptions used:
As at 31 December 2017
Discount rate
Plus
Minus
Salary increase
Plus
Minus
Mortality
Age set back
Defined
benefit
obligation
change
Funding
cost
change
Change
0.50%
0.50%
0.50%
0.50%
(5,364 )
6,324
792
(783 )
1 year
1,566
(309 )
373
89
(88)
67
The pension fund holds investments which take account of the risk profile of the underlying scheme liabilities, as part of the asset and liability management
employed by the scheme.
The employer contribution expected to be paid in respect of 2018 is £1.9m.
Risks associated with the Scildon defined benefit scheme are not considered by the group to be material.
36 Deferred tax assets and liabilities
Deferred tax liabilities comprise:
31 December
Net deferred tax liabilities:
CA and other group activities
Movestic
Waard Group
Scildon
Total
Current
Non-current
Total
2017
£000
(2,976 )
(302 )
(455 )
(19,061 )
2016
£000
(4,476 )
(387 )
(557 )
–
(22,794 )
(5,420 )
(1,184 )
(21,610 )
(916 )
(4,504 )
(22,794 )
(5,420 )
159
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
36 Deferred tax assets and liabilities (continued)
CA 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
Total
Comprising:
Net deferred tax liabilities
Total
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
Total
Comprising:
Net deferred tax liabilities
Total
2016
Assets/
(liabilities )
£000
(Charge )
credit
in year
£000
2017
Assets/
(liabilities )
£000
(1,237 )
(469 )
877
(3,849 )
(23,042 )
23,042
202
229
81
(138 )
1,192
(20)
20
136
(1,008 )
(388 )
739
(2,657 )
(23,062 )
23,062
338
(4,476 )
1,500
(2,976 )
(4,476 )
1,500
(2,976 )
(4,476 )
1,500
(2,976 )
2015
Assets/
(liabilities )
£000
(Charge )
credit
in year
£000
2016
Assets/
(liabilities )
£000
(1,507 )
(572 )
1,052
(5,167 )
(14,859 )
14,859
73
270
103
(175 )
1,318
(8,183 )
8,183
129
(1,237 )
(469 )
877
(3,849)
(23,042 )
23,042
202
(6,121 )
1,645
(4,476 )
(6,121 )
1,645
(4,476 )
(6,121 )
1,645
(4,476 )
Note (i) 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
2017
£000
2016
£000
1,500
1,645
160
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
(b) Items for which no deferred tax asset is recognised
31 December
BLAGAB transitional amounts
Unrelieved expenses
Total
2017
£000
2,382
87,136
2016
£000
2,858
117,517
89,518
120,375
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.
Movestic
Recognised deferred tax assets and liabilities
As at the balance sheet date, Movestic had a recognised deferred tax liability of £0.3m (31 December 2016: £0.4m), in respect of fair value adjustments arising
upon acquisition. Unrecognised deferred tax assets of £0.2m existed at the balance sheet date in respect of corporation tax recoverable (31 December 2016: £0.1m).
Waard Group
Recognised deferred tax assets and liabilities
31 December
Fair value adjustment on acquisition
Valuation differences
Total
Comprising:
Net deferred tax liabilities
Total
Scildon
Recognised deferred tax assets and liabilities
31 December
Fair value adjustment on acquisition
Deferred acquisition costs
Defined benefit pension scheme obligations
Valuation differences on technical provisions
Valuation differences on investments at FV through P&L
Untaxed reserves
Property and equipment
Total
Comprising:
Net deferred tax liabilities
Total
2016
assets/
Arising on
business
(liabilities ) combination
£000
£000
(Charge )
/credit
in year
£000
Foreign
exchange
translation
difference
£000
2017
Assets/
(liabilities )
£000
(1,378 )
821
(557 )
(557 )
(557 )
–
–
–
–
–
(165 )
(45 )
120
120
120
(45 )
27
(18 )
(18 )
(18 )
(1,258 )
803
(455 )
(455 )
(455 )
Arising on
business
combination
£000
(Charge ) Recognised
through
equity
£000
/credit
in year
£000
Foreign
exchange
translation
difference
£000
2017
Assets/
(liabilities )
£000
(13,634 )
6,587
139
(5,488 )
707
(4,136 )
(560 )
(322 )
(708 )
(102 )
(453 )
24
(401 )
30
–
–
(41 )
–
–
–
(30 )
(555 )
262
4
(222 )
29
(168 )
(23 )
(14,511 )
6,141
–
(6,163 )
760
(4,705 )
(583 )
(16,385 )
(1,932 )
(71 )
(673 )
(19,061 )
(16,385 )
(1,932 )
(16,385 )
(1,932 )
(71 )
(71 )
(673 )
(19,061 )
(673 )
(19,061 )
161
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
37 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.
38 Payables related to direct insurance and investment contracts
2017
£000
10,746
14
646
2016
£000
6,264
15
620
11,406
6,899
11,406
–
6,179
720
11,406
6,899
31 December
Accrued claims
Intermediaries’ liabilities
Policyholder premium liabilities
Other
Total
Current
Non-current
Total
2017
Gross Reinsurance
£000
£000
66,785
3,650
23,378
3,350
25,888
–
–
–
Net
£000
40,897
3,650
23,378
3,350
2016
Gross Reinsurance
£000
£000
57,781
635
418
2,582
19,307
–
–
–
Net
£000
38,474
635
418
2,582
97,163
25,888
71,275
61,416
19,307
42,109
97,163
–
25,888
–
71,275
–
61,416
–
19,307
–
42,109
–
97,163
25,888
71,275
61,416
19,307
42,109
The carrying value of payables related to the direct insurance and investment contracts is a reasonable approximation of fair value.
39 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).
162
2017
£000
5,438
(737 )
2016
£000
6,212
(774 )
4,701
5,438
634
4,067
694
4,744
4,701
5,438
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
40 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
2017
£000
13,876
53
3,240
27,815
2016
£000
11,931
103
824
10,799
44,984
23,657
44,984
–
23,657
–
44,984
23,657
2017
£000
2,274
2,377
2016
£000
3,275
1,510
4,651
4,785
4,651
–
4,785
–
4,651
4,785
The carrying value of other payables is a reasonable approximation of fair value.
41 Share capital and share premium
Group
31 December
Share capital
149,885,761
43,766
149,885,761
43,766
2017
2016
Number
of shares
issued
Share
capital
£000
Number
of shares
issued
Share
capital
£000
Share
premium
£000
141,983
Share
premium
£000
142,058
The number of shares in issue at the balance sheet date included 86,040 shares held in treasury (31 December 2016: 147,535).
163
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
41 Share capital and share premium (continued)
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 £41.5m, 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 15 December 2016, 23.3m new shares were issued to new and existing shareholders, as part of a fund raising exercise in respect of the proposed acquisition
of LGN. The gross amount of new equity raised was £70.0m. Transaction costs of £3.3m were incurred in respect of the fund raising and have been deduced
from equity.
Company
31 December
Authorised:
Ordinary shares of 5p each
Issued:
Ordinary shares of 5p each
2017
2016
Number
of shares
Share
capital
£000
Number
of shares
Share
capital
£000
201,000,000
10,050
201,000,000
10,050
149,885,761
7,494
149,885,761
7,494
Share
premium
£000
141,983
Share
premium
£000
142,058
The number of shares in issue at the balance sheet date included 86,040 shares held in treasury (31 December 2016: 147,535).
42 Treasury shares
Group and company 31 December
Balance at 31 December
43 Other reserves
Group
31 December
Capital redemption reserve
Foreign exchange translation reserve
Balance at 31 December
Company
31 December
Capital redemption reserve
164
2017
£000
98
2016
£000
161
2017
£000
50
27,614
2016
£000
50
19,250
27,664
19,300
2017
£000
50
2016
£000
50
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
44 Retained earnings
Group
31 December
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January
Profit for the year
Revaluation of pension obligations
Share based payment
Dividends
Final approved and paid for 2015
Interim approved and paid for 2016
Final approved and paid for 2016
Interim approved and paid for 2017
Balance at 31 December
2017
£000
2016
£000
188,598
78,434
124
669
–
–
(19,002 )
(10,482 )
177,021
35,280
–
478
(15,586 )
(8,595 )
–
–
238,341
188,598
The interim dividend in respect of 2015, approved and paid in 2016 was paid at the rate of 6.80p per share. The final dividend in respect of 2016, approved and paid
in 2017, was paid at the rate of 12.69p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended
31 December 2016 was made at the rate of 19.49p per share.
A final dividend of 13.07p per share in respect of the year ended 31 December 2017 payable on 23 May 2018 to equity shareholders of the parent company
registered at the close of business on 13 April 2018, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final
dividend of £19.6m has not been provided for in these financial statements and there are no income tax consequences.
The interim dividend in respect of 2017, approved and paid in 2017, was paid at the rate of 7.00p per share to equity shareholders of the parent company registered
at the close of business on 8 September 2017, the dividend record date.
The following summarises dividends per share in respect of the year ended 31 December 2017 and 31 December 2016:
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 2015
Interim approved and paid for 2016
Final approved and paid for 2016
Interim approved and paid for 2017
Balance at 31 December
Details of dividends, approved and paid, are set out in the ‘group’ section above.
2017
P
7.00
13.07
2016
P
6.80
12.69
20.07
19.49
2017
£000
164,921
22,465
669
–
–
(19,002 )
(10,482 )
2016
£000
166,313
22,311
478
(15,586 )
(8,595 )
–
–
158,571
164,921
165
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
45 Employee benefit expense, including directors
Year ended 31 December
Wages and salaries
Social security costs
Pension costs–defined contribution plans
Pension costs–defined benefit plans
CA
£000
2,104
255
137
–
Movestic
£000
9,061
3,295
1,804
–
Waard
Group
£000
1,084
153
105
–
Other group
activities
£000
Scildon
£000
7,343
986
–
806
3,190
387
209
–
2017
£000
22,782
5,076
2,255
806
2016
£000
12,248
3,679
2,071
–
Total
2,496
14,160
1,342
9,135
3,786
30,919
17,998
Monthly average number of employees
Company
Subsidiaries
Total
Directors
Note 46 provides detail of compensation to directors of the company.
UK
UK-based employees are all employed by Chesnara plc.
34
295
329
29
172
201
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 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 46 – Share Based Payments on page 167.
Waard
The Waard business participates in a defined contribution scheme.
Scildon
Scildon has a defined benefit plan. The pension scheme is an indexed average pay scheme with a pension of 1.7% per year of service. Indexation is conditional
since 1 January 2013. The pension scheme is administered by Stichting Pensionfonds Legal & General Nederland. The company has agreed to contribute to the
premium for the unconditional part of the pension. Apart from the obligations which may arise from the collective agreement provisions, the company is not
obliged to make additional contributions to the claims brought under the pension fund. The company is not entitled to refunds or discounts.
Part of the plan consists a defined contribution scheme. The company pays a contribution to the scheme and subsequently has no further financial obligations
with respect to this part of the scheme. This contribution is recognised as an expense when paid.
The costs of the defined benefit plan are calculated using the projected unit credit method. This means that the cost of providing pensions charged to the income
statement are placed over the service lives of employees, according to actuarial calculations. The obligations are calculated as the difference between the present
value of pension obligations, net of the fair value of the existing plan assets.
The present value of pension liabilities is determined by discounting the expected future retirement benefits at the rate of return on high quality corporate bonds in
euros, which have a similar remaining period to when the pension payments are expected to be incurred. Any deficiency is recognised as a liability in the
consolidated balance sheet. Any surplus is recognised as a receivable. A claim however, will only be considered if the company can enforce law in the form of
refunds or reductions in future contributions.
Actuarial gains and losses arising from deviations from expected outcomes are recognised as revaluations under IFRS through other comprehensive income and
recognised directly in equity.
The company commissions Milliman to produce an annual scheme valuation report. The last available valuation report was as at 31 December 2017.
Further information is shown in note 35 Defined benefit obligations.
166
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
Movestic
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 2016, totalled £3.1m. During 2017, further contributions of £0.6m were made.
The employers within the Scheme are collectively responsible 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 2016.
The annual report states that the Scheme’s surplus is £162.5m (£117.6m as at 31 December 2016).
As at 31 December 2016, the fund had assets under management of £1.3bn (£1.3bn as at 31 December 2016). During 2016, there have been 126 (129) employer
insurance companies participating in the Scheme and 26,000 (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.
46 Share-based payments
The group issues equity-settled share-based payments to the two 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 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)
(b) Long-Term Incentive Scheme (LTI)
The STI scheme is based upon a one year performance period measured against IFRS, EcV operating profit and strategic group objectives. In relation to 2017,
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 Economic Value and total shareholder return (‘TSR’).
For schemes with market performance criteria, the number of options expected to invest 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 Economic 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 and is deemed to be a ‘bad’ leaver.
(a) 2017 award under the Short-Term Incentive Scheme (STI)
Details of the short-term incentive awards made in the year are as follows:
2017 Short-Term Incentive Scheme
Awards made in year
Amount paid as cash bonus through the income statement (65%)
Amount deferred into shares for three years and subject to forfeiture (35%)
Total bonus award for the year
Amount of deferred expense recorded in the current year
2017
£000
376
203
579
48
2016
£000
521
281
802
66
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.
167
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
46 Share-based payments (continued)
(b) 2017 award made under the Long-Term Incentive (LTI) Scheme
In April 2017, the group granted 174,000 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 382.75p, which was the share price as at 28 April 2017, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2017 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
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 £0.1m related to equity-settled share based payments transactions in 2017.
(c) 2016 award made under the Short-Term Incentive (STI) Scheme
The group has recorded an expense of £66,000 with regards to the 35% element that has been deferred over the vesting period.
Weighted
average
exercise
price
£
Options
number
000
–
174
174
–
–
–
–
–
Monte Carlo
382.75
Nil
211.73
26.97
3 years
0.70%
0%
168
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
(d) 2016 award made under the Long-Term Incentive Scheme (LTI)
In April 2016, the group granted 255,000 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 312.00p, which was the share price as at 28 April 2016, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2016 Long-Term Incentive Scheme
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
2017
Weighted
average
exercise
price
£
Options
number
000
2016
Weighted
average
exercise
price
£
Options
number
000
255
(34 )
–
–
221
–
–
–
–
–
–
–
–
255
–
–
255
–
–
–
–
–
–
–
Monte Carlo
312.00
Nil
179.72
28.07
3 years
0.86%
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 £0.2m related to equity-settled share based payments transactions in 2017.
(e) 2015 award under the Short-Term Incentive Scheme (STI)
The group has recorded an expense of £40,000 with regards to the 35% element that has been deferred over the vesting period.
(f) 2015 award made under the Long-Term Incentive Scheme (LTI)
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
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.
2017
Weighted
average
exercise
price
£
Options
number
000
2016
Weighted
average
exercise
price
£
Options
number
000
181
–
(16 )
–
165
–
–
–
–
–
–
–
–
181
–
–
181
–
–
–
–
–
–
–
169
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
46 Share-based payments (continued)
(f) 2015 award made under the Long-Term Incentive Scheme (LTI) (continued)
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
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 £0.2m related to equity-settled share based payments transactions in 2017.
(g) 2014 award under the Short-Term Incentive Scheme (STI)
The group has recorded an expense of £21,000 with regards to the 35% element that has been deferred over the vesting period.
(h) 2014 award made under the Long-Term Incentive Scheme (LTI)
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
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
2017
Weighted
average
exercise
price
£
Options
number
000
2016
Weighted
average
exercise
price
£
Options
number
000
91
–
(33 )
(58 )
–
–
–
–
396.74
–
–
–
91
–
–
–
91
–
–
–
–
–
–
–
Monte Carlo
310.25
nil
183.08
32.10%
3 years
1.46%
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 £31,000 related to equity-settled share based payments transactions in 2017.
170
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
47 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
2017
2016
78,434
149,749,517
52.38p
52.13p
35,280
127,488,681
27.67p
27.56p
The weighted average number of ordinary shares in respect of the years ended 31 December 2017 is based upon 149,885,761 shares in issue less 86,040 own
shares held in treasury. The weighted average number of ordinary shares in respect of the years ended 31 December 2017 was based upon 149,885,761 shares
in issue less 147,535 own shares held in treasury.
There were 877,000 share options outstanding at 31 December 2017 (2016: 526,000). Accordingly, there is dilution of the average number of ordinary shares in
issue in respect of 2016.
48 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
922
815
60
–
Expenses recognised in the year in respect of operating leases
1,071
2017
Motor
vehicles
£000
139
142
99
–
188
Non-
investment
properties
£000
953
798
868
–
976
Total
£000
1,061
957
159
–
1,259
2016
Motor
vehicles
£000
196
141
129
–
146
Total
£000
1,149
939
997
–
1,122
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.
49 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.
50 Capital commitments
There were no capital commitments as at 31 December 2017 or as at 31 December 2016.
51 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;
(iv) other companies over which the directors have significant influence; and
(v) transactions with persons related to key management personnel
171
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
51 Related parties (continued)
(b) Related party transactions
(i) Transactions with key management personnel.
Key management personnel comprise of the directors of the company. Key management compensation is as follows:
Short-term employee benefits
Post-employment benefits
Total
2017
£000
1,324
66
2016
£000
1,849
84
1,390
1,933
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)
2017
£000
376
2016
£000
521
These amounts have been included in accrued expenses as disclosed in note 40. The amounts payable under the annual bonus scheme were payable within one year.
(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
2017
£000
3,272
2016
£000
3,470
2017
£000
(9,667 )
5,820
(2,843 )
2016
£000
(9,245 )
4,983
1,761
(6,690 )
(2,501 )
(2,442 )
(3,570 )
Movestic Livförsäkring AB had the following amounts outstanding at the balance sheet date:
2017
2016
Amounts
owed by
associate
£000
Amounts
owed to
associate
£000
Amounts
owed by
associate
£000
Amounts
owed to
associate
£000
Modernac S.A.
–
2,442
–
3,570
These amounts have been included in other payables as disclosed in note 40 and other receivables as disclosed in note 27.
(iv) Transactions with persons related to key management personnel
During the year, the company engaged the professional services of Clare Rimmington, who is related to David Rimmington. Clare Rimmington is an on-line
marketing expert with many years of experience developing and managing web based solutions in the financial services sector.
In the year an amount of £20,708 was paid by the company to Clare Rimmington for web-site related consultancy services. These amounts have been included
in administration expenses in note 15.
172
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
52 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
Ownership
interest
31 December
2017
100% of all share
capital (1)
100% of all share
capital
100% of all share
capital
100% of all share
capital
Ownership
interest
31 December
2016
100% of all share
capital (1)
100% of all share
capital
100% of all share
capital
100% of all share
capital
Functional
Currency
Sterling
Sterling
Sterling
Sterling
Registered address
2nd Floor, Building 4, West Strand Business Park
West Strand Road, Preston, Lancashire PR1 8UY
Movestic Livförsäkring AB
Movestic Kapitalforvältning AB
Registered address
Box 7853, S-103 99 Stockholm, Sweden
Sweden
Sweden
100% of all share
capital
100% of all share
capital (2)
100% of all share
capital
100% of all share
capital (2)
Swedish krona
Swedish krona
Modernac S.A.
Luxembourg
49% of all share
capital (2)
49% of all share
capital (2)
Swedish krona
Registered address
BP 593 L-2015 Luxemburg, Luxembourg
Chesnara Holdings B.V.
Waard Leven N.V.
Waard Schade N.V.
Tadas Verzekering
Hollands Welvaren Leven N.V.
Registered address
Geert Scholtenslaan II 1687 CL Wognum, Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
100% of all share
capital (3)
100% of all share
capital (4)
100% of all share
capital (4)
100% of all share
capital (4)
100% of all share
capital (5)
100% of all share
capital (3)
100% of all share
capital (4)
100% of all share
capital (4)
100% of all share
capital (4)
100% of all share
capital (5)
Scildon N.V
Netherlands
100% of all share
capital (4)
100% of all share
capital (4)
Registered address
Laapersveld 68 Hilversum, Netherlands
Euro
Euro
Euro
Euro
Euro
Euro
(1) Held indirectly through Countrywide Assured Life Holdings Limited.
(2) Held indirectly through Movestic Livförsäkring AB.
(3) Company formed on 25 November 2014.
(4) Held indirectly through Chesnara Holdings B.V.
(5) Held indirectly through Waard Leven N.V.
173
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2017
SECTION E:
ADDITIONAL
INFORMATION
SECTION E • ADDITIONAL INFORMATION
176 Financial calendar
176 Key contacts
177 Notice of Annual General Meeting
179 Explanatory notes to the notice of
Annual General Meeting
184 Reconciliation of metrics
185 Glossary
186 Notes on terminology
Amsterdam, Netherlands
175
ADDITIONAL INFORMATION
FINANCIAL CALENDAR
29 March 2018
Results for the year ended 31 December 2017 announced
16 May 2018
Annual General Meeting
12 April 2018
Ex dividend date
13 April 2018
Dividend record date
17 April 2018
Published Report & Accounts issued to shareholders
23 May 2018
Dividend payment date
30 August 2018
Half year results for the 6 months ending
30 June 2018 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
www.chesnara.co.uk
Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
One St Peter’s Square
Manchester
M2 3DE
Auditor
Deloitte LLP
Statutory Auditor
2 Hardman Street
Manchester
M3 3HF
Registrars
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Joint stockbrokers
Panmure Gordon
One New Change
London
EC4M 9AF
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8th Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds 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
Shore Capital Stockbrokers Limited
Bond Street House
14 Clifford Street
London
W1S 4JU
176
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
ADDITIONAL INFORMATION
NOTICE OF THE 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 advisor.
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.
Chesnara plc has a policy of not paying to have access to governance and sustainability analysts’ databases
on which voting recommendations and reports are produced. We encourage early, open and timely
engagement to ensure the accuracy of the information contained in any analysis and reports issued in respect
of Chesnara plc.
Company No. 4947166
(a) to make donations to political parties or independent
Notice is given that the 2018 Annual General Meeting of
Chesnara plc will be held at the offices of Panmure Gordon
(UK) Limited, One New Change, London EC4M 9AF on
16 May 2018 at 11am. 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.
1. To receive and adopt the audited accounts for the financial
year ended 31 December 2017, together with the reports
of the directors and auditor thereon.
2. To approve the Directors’ Remuneration Report (other than
the part of it which contains the Directors’ Remuneration
Policy) for the year ended 31 December 2017.
3. To declare a final dividend of 13.07 pence per ordinary share
for the financial year ended 31 December 2017.
4. To re-elect John Deane as a director.
5. To re-elect David Rimmington as a director.
6. To re-elect Jane Dale as a director.
7. To re-elect Peter Mason as a director.
8. To re-elect Veronica Oak as a director.
9. To re-elect David Brand as a director.
10. To re-elect Mike Evans as a director.
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.
12. To authorise the directors to determine the auditor’s
remuneration.
13. That, from the passing of this resolution 13 until the earlier
of the close of business on 28 June 2019 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:
election candidates;
(b) to make donations to political organisations other than
political parties; and
(c) to incur political expenditure up to an aggregate total
amount of £50,000, with the individual amount authorised
for each of (a) to (c) above being limited to £50,000.
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.
14. That the directors be and they are hereby generally and
unconditionally authorised in accordance with section 551 of
the Companies Act 2006 (the ‘Act’), to exercise all the
powers of the company, to allot shares in the company and/
or to grant rights to subscribe for or to convert any security
into shares in the company (‘Allotment Rights’):
(a) comprising equity securities up to an aggregate nominal
amount of £2,495,637 such amount to be reduced by
the nominal amount of any equity securities allotted
pursuant to the authority in paragraph (b) below in
excess of £2,495,637; and
(b) comprising equity securities (as defined by section 560
of the Act) up to an aggregate nominal amount of
£4,991,274 (such amount to be reduced by the nominal
aggregate amount of any shares allotted or rights
granted pursuant to the authority in paragraph (a) above)
in connection with an offer by way of a rights issue:
(i) to holders of ordinary shares in proportion (as nearly
as may be practicable) to their respective holdings;
and
(ii) to holders of other equity securities as required by
the rights of those securities or as the directors
otherwise consider necessary,
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
177
ADDITIONAL INFORMATION
NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
company may make any offer or agreement which would
or might require equity securities to be allotted after
such expiry and the directors may allot equity securities
under any such offer or agreement as if the power had
not expired.
17. That the company be and is hereby generally and
unconditionally authorised for the purposes of section 701 of
the Companies Act 2006 (‘the Act’) to make one or more
market purchases (as defined in section 693(4) of the Act) of
ordinary shares in the capital of the company, provided that:
(a) the maximum aggregate number of ordinary shares
hereby authorised to be purchased is 14,988,576;
(b) the minimum price (exclusive of expenses) which may
be paid for such ordinary shares is its nominal value;
(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 at the
conclusion of the company’s next Annual General
Meeting to be held in 2019 (or, if earlier, at the close of
business on 28 June 2019); and
(e) the company may enter into contracts 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.
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
PR1 8UY
28 March 2018
but subject to such exclusions or other arrangements as the
directors may deem necessary or expedient in relation to
treasury shares, fractional entitlements, record dates, legal
or practical problems in or under the laws of any territory or
the requirements of any regulatory body or stock exchange,
provided that this authority shall, unless renewed, varied
or revoked by the company, expire at the conclusion of the
2018 Annual General Meeting (or, if earlier, at the close of
business on the date which is 15 months after the date on
which this resolution is passed) save that the company may,
before such expiry, make offers of agreements which would
or might require securities to be allotted and the directors
may allot securities in pursuance of such offer or agreement
notwithstanding that the authority conferred by this
resolution.
15. That, subject to the passing of resolution 14 in this notice,
the directors be and are hereby empowered pursuant to
section 570 of the Companies Act 2006 (‘the Act’) to allot
equity securities (as defined in section 560 of the Act) for
cash, pursuant to the authority conferred on them by
resolution 14 of this notice or by way of a sale of treasury
shares as if section 561 of the Act did not apply to any such
allotment, provided that this power is limited to:
(a) the allotment of equity securities 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 (other than pursuant
to paragraph (a) above) with an aggregate nominal value
of £374,346.
16. That, subject to the passing of resolution 14 of this notice
and, in addition to the power contained in resolution 15 of
this notice, the directors be and are hereby empowered
pursuant to section 570 of the Companies Act 2006 (‘the
Act’) to allot equity securities (as defined in section 560 of
the Act) for cash, pursuant to the authority conferred on
them by resolution 14 of this notice or by way of sale of
treasury shares as if section 561 of the Act did not apply to
any such allotment, provided that this power is:
(a) limited to the allotment of equity securities up to an
aggregate nominal value of £374,346; and
(b) used only for the purposes of financing (or refinancing, if
the power is to be exercised within six months after the
date of the original transaction) a transaction which the
directors determine to be an acquisition or other capital
investment of a kind contemplated by the Statement of
Principles on Disapplying Pre-Emption Rights most
recently published by the Pre-Emption Group prior to the
date of the notice of this meeting, and shall expire on
the revocation or expiry (unless renewed) of the
authority conferred on the directors by resolution 14 of
this notice save that, before the expiry of this power, the
178
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
ADDITIONAL INFORMATION
EXPLANATORY NOTES TO THE NOTICE OF
ANNUAL GENERAL MEETING
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. You will not receive a form of proxy for the AGM in the post.
Instead, you will receive instructions to enable you to vote
electronically and how to register to do so. You will still be
able to vote in person at the AGM, and may request a
physical copy proxy form directly from the registrars, Link
Asset Services, 34 Beckenham Road, Beckenham, BR3 4TU
(telephone number: 0781 664 0300). The return of the form
of proxy will not, however, prevent you from attending the
Meeting and voting, in person, should you wish to do so.
3. 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. Members may
appoint a proxy online by following the instructions for the
electronic appointment of a proxy at www.signalshares.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
11am on Monday 14 May 2018. 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.
4. 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 11am on Monday 14 May 2018, which
is acting as the company’s ‘issuer’s agent’. After this time,
any change of instruction to a proxy appointed through the
CREST system should be communicated to the appointee
through other means. The time of the message’s receipt will
be taken to be when (as determined by the timestamp
applied by the CREST Applications Host) the issuer’s agent
is first able to retrieve it by enquiry through the CREST
system in the prescribed manner. Euroclear does not make
available special procedures in the CREST system for
transmitting any particular message. Normal system timings
and limitations apply in relation to the input of CREST proxy
appointment instructions. It is the responsibility of the
CREST member concerned to take (or, if the CREST member
is a CREST personal member or a CREST sponsored
member or has appointed any voting service provider(s), to
procure that his CREST sponsor or voting service provider(s)
take(s)) such action as is necessary to ensure that a
message is transmitted by means of the CREST system by
any particular time. CREST members and, where applicable,
their CREST sponsors or voting service providers should
take into account the provisions of the CREST Manual
concerning timings as well as its section on ‘Practical
limitations of the system’. In certain circumstances, the
company may, in accordance with the Uncertificated
Securities Regulations 2001 or the CREST Manual, treat a
CREST proxy appointment instruction as invalid.
5. 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
179
EXPLANATORY NOTES TO THE NOTICE OF ANNUAL GENERAL MEETING (CONTINUED)
ADDITIONAL INFORMATION
6. The time by which a person must be entered on the register
11. 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
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:
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
close of business on Monday 14 May 2018. 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.
7. 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.
8. As at 23 March 2018 (being the last practicable date prior to
the publication of this document), the company’s issued
share capital consisted of 149,885,761 ordinary shares,
carrying one vote each. 83,679 shares were held by the
company in treasury. Therefore, the total voting rights in the
company as at 23 March 2018 (being the last practicable date
prior to the publication of this document) were 149,802,082.
9. 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
may not be used to communicate with the company for any
purposes other than those expressly stated.
10. 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.
180
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
ADDITIONAL INFORMATION
Resolution 1:
Resolutions 4 – 10 inclusive:
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 2017.
Resolution 2:
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 2017. The Directors’ Remuneration Report
can be found on pages 62 to 79 of the 2017 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 set out on
pages 73 to 79. The vote on this resolution is advisory only
and the directors’ entitlement to remuneration is not
conditional on it being passed. The Companies Act 2006
requires the Directors’ Remuneration Policy to be put to
shareholders for approval annually unless the approved
policy remains unchanged, in which case it need only be
put to shareholders for approval at least every three years.
The company is not proposing any changes to the Directors’
Remuneration Policy approved at the Annual General Meeting
in 2017.
Resolution 3:
Final dividend
The declaration of the final dividend requires the approval of
shareholders in general meeting. If the 2018 Annual General
Meeting approves resolution 2, the final dividend of
13.07 pence per share will be paid on 23 May 2018 to ordinary
shareholders who are on the register of members at the close
of business on 13 April 2018 in respect of each ordinary share.
Election and re-election of directors
The company’s Articles of Association provide that any director
who has not been elected or re-elected by the shareholders at
either of the two preceding Annual General Meetings is required
to retire at the next annual general meeting. Additionally, the
Articles of Association require such further directors to retire
at the Annual General Meeting as would bring the total
number of directors retiring up to one-third of their number.
Notwithstanding the provisions of the company’s Articles of
Association, the board of directors has determined that all the
directors shall retire from office at this year’s Annual General
Meeting in line with best practice recommendations of the
UK Corporate Governance Code. Each of the directors intends
to stand for re-election by the shareholders. Biographical
details of each director can be found on pages 50 and 51
of this document. The Chairman confirms that each of the
directors proposed 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 directors be
re-elected as a director of the company.
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 auditor
In the group’s Half-Year Report issued on 31 August 2017, the
board announced its intention to put the company’s external
audit contract out to tender during the second half of 2017.
A formal competitive tender process was completed in
November, overseen by the group’s Audit & Risk Committee.
On the recommendation of the Audit & Risk Committee, the
board is proposing to shareholders the re-appointment of
Deloitte LLP as the company’s auditor to undertake the audit
of the group’s financial statements for the financial year
ending 31 December 2018.
Resolution 11, therefore, proposes Deloitte’s reappointment
as auditor to hold office until the next general meeting at
which the company’s accounts are laid before shareholders.
Resolution 12 authorises the directors to determine the
auditor’s remuneration. Details of the tender process and the
Committee’s recommendation are provided in the Audit &
Risk Committee’s Report on page 82 of this document.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
181
EXPLANATORY NOTES TO THE NOTICE OF ANNUAL GENERAL MEETING (CONTINUED)
ADDITIONAL INFORMATION
Resolution 13:
Resolution 15 and 16:
Disapplication of statutory pre-emption rights
The directors are currently authorised, subject to certain
limitations, to issue shares for cash without first offering
them to existing shareholders in proportion to their existing
shareholdings. That authority will expire at the conclusion of
the 2018 Annual General Meeting and, in accordance with
the Statement of Principles issued by the Pre-Emption
Group, resolutions 15 and 16 (which will be proposed as
special resolutions) seek to renew the directors’ authority to
disapply pre-emption rights as referenced below.
Resolution 15, if passed, will allow the directors to (a) allot
shares in the company for cash in connection with a rights
issue or other pre-emptive offer; and (b) otherwise allot
shares in the company for cash up to a maximum aggregate
nominal value of £374,346, in each case as if the pre-emption
rights of section 561 of the Companies Act 2006 did not
apply. This aggregate nominal amount equates to
approximately 5% of the issued ordinary share capital of the
company (excluding treasury shares) as at 23 March 2018
(being the latest practicable date prior to the publication of
this notice of annual general meeting).
Resolution 16 is proposed as a separate special resolution.
In line with the Pre-Emptions Group’s Statement of Principles,
the company is seeking authority, to issue up to an additional
5% of its issued ordinary share capital for cash without
pre-emption rights applying. In accordance with the Statement
of Principles, the company will only allot shares under this
additional authority in connection with an acquisition or specific
capital investment (within the meaning given in the Statement
of Principles) which is announced contemporaneously with
the allotment, or which has taken place in the preceding
six-month period and is disclosed in the announcement of
the allotment.
The board also confirms its intention to follow the provisions
of the Statement of Principles regarding cumulative usage of
authorities within a rolling three year period. Those provisions
provide that no more than 7.5% of the issued share capital
will be issued for cash on a non pre-emptive basis during any
rolling three-year period, other than to existing shareholders,
without prior consultation with shareholders. This limit
excludes any ordinary shares issued pursuant to a general
disapplication of pre-emption rights in connection with an
acquisition or specified capital investment.
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 (‘the Act’) imposes
restrictions on companies making political donations to any
political party or other political organisation or to any
independent election candidate unless they have been
authorised to make donations at a general meeting of the
company. Whilst the company has no intention of making
such political donations, the Act includes broad and
ambiguous definitions of the terms ‘political donation’ and
‘political expenditure’ which may apply to some normal
business activities which would not generally be considered
to be political in nature.
The directors therefore consider that, as a purely
precautionary measure, it would be prudent to obtain the
approval of the shareholders to make donations to political
parties, political organisations and independent election
candidates and to incur political expenditure up to the
specified limit. The directors intend to seek renewal of this
approval at future Annual General Meetings, but wish to
emphasise that the proposed resolution is a precautionary
measure for the above reason and that they have no intention
of making any political donations or entering into party
political activities.
Resolution 14:
Power to allot shares
The Companies Act 2006 provides that the directors may
only allot shares if authorised by shareholders to do so.
The directors current allotment authority is due to lapse at
the 2018 Annual General Meeting. The board is, therefore,
seeking to renew its authority over shares having an
aggregate nominal amount of £2,495,637, representing
approximately one-third of the issued ordinary share capital
of the company (excluding treasury shares) as at 23 March
2018 (being the latest practicable date prior to the publication
of this document). The board is also seeking authority to allot
shares having an aggregate nominal amount of £4,991,274,
representing approximately two-thirds of the issued share
capital of the company (excluding treasury shares) as at
23 March 2018 by way of a rights issue.
The allotment authority sought is in line with the Share
Capital Management guidelines issued by the Investment
Association. For the avoidance of doubt, the authority sought
pursuant to this resolution will give the directors the ability to
allot shares (or grant rights to shares) up to a maximum
aggregate nominal amount of £4,991,274.
As at 23 March 2018, the company held 83,679 treasury
shares, being approximately 0.05% of the total ordinary
share capital in issue (calculated exclusive of treasury shares).
The authority will expire at the earlier of the conclusion of the
2019 Annual General Meeting of the company and the close
of business on 28 June 2019.
Passing resolution 14 will ensure that the directors have
flexibility to take advantage of any appropriate opportunities
that may arise. At present the directors have no intention of
exercising this authority.
182
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
ADDITIONAL INFORMATION
Resolution 17:
Resolution 18:
Authority to purchase own shares
This resolution, which will be proposed as a special resolution,
seeks to renew the company’s authority to purchase its own
shares. It specifies the maximum number of shares which
may be acquired as 10% of the company’s issued ordinary
share capital (excluding treasury shares) as at 23 March 2018,
being the latest practicable date prior to the publication of
this document, and specifies the minimum and maximum
prices at which shares may be bought.
The directors will only use this authority if, in the light of
market conditions prevailing at the time, they believe that the
effect of such purchases will be (where such shares are to be
purchased for cancellation) to increase earnings per share,
and that taking into account other investment opportunities,
purchases will be in the best interests of the shareholders
generally. Any shares purchased in accordance with this
authority will be cancelled or held in treasury for subsequent
transfer to an employee share scheme. The directors have no
present intention of exercising this authority, which will
expire at the earlier of the conclusion of the 2019 Annual
General Meeting and the close of business on 28 June 2019.
The company has options and awards outstanding under
existing share schemes over an aggregate of 715,417
ordinary 5p shares, representing 0.48% of the company’s
issued ordinary share capital (excluding treasury shares) as
at 23 March 2018 (the latest practicable date prior to the
publication of this document). This would represent
approximately 0.53% of the company’s issued share capital
(excluding treasury shares) if the proposed authority being
sought at the Annual General Meeting to buy back
14,988,576 ordinary shares was exercised in full (and all of
the repurchased ordinary shares were cancelled).
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 once again approve the calling of meetings on not less
than 14 clear days’ notice. Resolution 17 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
statutory requirements for electronic voting 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.
Directors’ recommendation
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 (save in respect of those matters
in which they are interested), and consider that all resolutions
are in the best interests of the company and its shareholders
as a whole.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
183
ADDITIONAL INFORMATION
RECONCILIATION OF METRICS
Within these Report & Accounts and as described on page 10, we use alternative performance measures
to detail the position and performance of the group and its divisions. We believe that these measures are
of greater commercial relevance than IFRS to the users of the Report & Accounts.
The diagram below shows the interaction between the measures:
FINANCIAL STATEMENTS
ADDITIONAL METRICS
IFRS profits
I
R
Capital requirements
Solvency capital
requirement
Management
buffer
IFRS net assets
Solvency II valuation
(Own Funds)
P
I
R
B
Solvency
STAKEHOLDER FOCUS:
P
I
R
B
Policyholders
Investors
Regulators
Business partners
Percentage
Absolute
I
Economic Value
I
B
Cash generation
Key performance indicators
Balance sheet
Earnings
Group
Divisional
As shown above, the key interaction between our statutory reporting rules under IFRS and the alternative performance measures is with the Solvency II
valuation and the Own Funds balance. A reconciliation from IFRS net assets to Solvency II Own Funds is shown below:
£m
31 Dec
2017
31 Dec
2016
Rationale
Group IFRS net assets
451.7
393.6
Removal of intangible assets; AVIF, DAC and DIL
(182.6)
(113.4)
Removal of IFRS reserves, net of reinsurance
7,378.9
5,208.4
Inclusion of SII technical provisions, net of reinsurance
(6,968.9)
(4,949.8)
Intangible assets that cannot be sold separately have no intrinsic value under
Solvency II rules.
Actuarial reserves are calculated differently between the two methodologies
and hence IFRS reserves are replaced with Solvency II technical provisions.
The main differences in methodology are discussed further below.
Other valuation differences
2.5
4.4
Other immaterial valuation differences
Deferred tax valuation differences
(20.3)
(7.9)
These are the deferred tax impacts as a result of the adjustments above.
Foreseeable dividends
(19.6)
(19.0)
Ring-fenced surpluses
(26.5)
(10.6)
Group Solvency II Own Funds
615.2
505.6
Under Solvency ll rules, future ‘foreseeable dividends’ are required to be
recognised within own funds. Under IFRS rules, dividends are recognised
when paid.
Solvency ll requires that own funds are reduced by any surpluses that are
restricted. For Chesnara this relates to surpluses within the two S&P
with-profits funds, which are temporarily restricted. These restrictions are
removed through periodic capital transfers.
The main differences between the two methodologies for calculating actuarial reserves are as follows:
– IFRS reserves continue to be largely based on the Solvency I regimes in place in each of the divisions. The main difference between IFRS and Solvency I is
the inclusion of an additional cost of guarantee reserve in each of the with-profit funds in CA plc.
– IFRS assumptions contain prudence margins, whereas the Solvency II assumptions are best estimate.
– Solvency II requires the establishment of contract boundaries to determine whether an insurance obligation or reinsurance obligation is to be treated as
existing or future business, with only existing business considered in scope for the calculation of technical provisions.
– Solvency II requires the inclusion of a risk margin to reflect inherent uncertainties within the estimated liabilities.
– Other valuation differences, such as IFRS future liability cash flows are discounted using a valuation rate of interest based on the risk-adjusted yield on held
assets, whereas Solvency II uses a swaps-based risk-free discount curve, as prescribed by EIOPA.
184
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
ADDITIONAL INFORMATION
GLOSSARY
AGM
ALM
APE
CA
CALH
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.
BAU Cash
Generation
This represents divisional cash generation plus the impact of
non-exceptional group activity.
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. Cash
generation is reported at a group level and also at an underlying
divisional level reflective of the collective performance of each of
the divisions prior to any group level activity.
Divisional Cash This represents the cash generated by the three operating
divisions of Chesnara (UK, Sweden and the Netherlands),
Generation
exclusive of group level activity.
DNB
DPF
Dutch
Business
EcV
FCA
FI
Form of
Proxy
FSMA
De Nederlandsche Bank is the central bank of the Netherlands
and is the regulator of our Dutch subsidiaries.
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.
Scildon and the Waard Group, consisting of Waard Leven N.V.,
Hollands Welvaren Leven N.V., Waard Schade N.V. and Waard
Verzekeringen B.V.
Economic Value is a financial metric that is derived from Solvency
II own funds that is broadly similar in concept to European
Embedded Value. It provides a market consistent assessment of
the value of existing insurance businesses, plus adjusted net
asset value of the non-insurance business within the group.
Financial Conduct Authority.
Finansinspektionen, being the Swedish Financial Supervisory
Authority.
The form of proxy relating to the General Meeting being sent to
Shareholders with this document.
The Financial Services and Markets Act 2000 of England and
Wales, as amended.
Group
The company and its existing subsidiary undertakings.
Group
Own Funds
Group SCR
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.
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.
Group
Solvency
Group Solvency is a measure of how much the value of the
company exceeds the level of capital it is required to hold in
accordance with Solvency II regulations.
HCL
IFRS
IFA
KPI
HCL Insurance BPO Services Limited.
International Financial Reporting Standards.
Independent Financial Adviser.
Key Performance Indicator.
LGN
LGN or Legal & General Nederland refers to the legal entity
Legal & General Nederland Levensverzekering Maatschappij N.V
acquired by Chesnara in April 2017.
London Stock
Exchange
LTI
London Stock Exchange plc.
Long-Term Incentive Scheme – A reward system designed to
incentivise executive directors’ long-term performance.
Movestic
Movestic Livförsäkring AB.
Modernac
Modernac SA, an associated company which is 49% owned
by Movestic.
New business
The present value of the expected future cash inflows arising
from business written in the reporting period.
Official List
The Official List of the Financial Conduct Authority.
Ordinary Shares Ordinary shares of five pence each in the capital of the company.
Own Funds
Own Funds – 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.
ORSA
Own Risk and Solvency Assessment.
PRA
QRT
Prudential Regulation Authority.
Quantitative Reporting Template.
ReAssure
ReAssure Limited.
Resolution
The resolution set out in the notice of General Meeting set out in
this document.
RMF
Risk Management Framework.
Scildon
Scildon.
Shareholder(s) Holder(s) of Ordinary Shares.
Solvency II
A fundamental review of the capital adequacy regime for the
European insurance industry. Solvency II aims to establish a set of
EU-wide capital requirements and risk management standards
and has replaced the Solvency I requirements.
SICAV
STI
SCR
A type of open-ended investment fund in which the amount of
capital in the fund varies according to the number of investors.
Shares in the fund are bought and sold based on the fund’s
current net asset value.
Short-Term Incentive Scheme – A reward system designed to
incentivise executive directors’ short-term performance.
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.
Swedish
Business
Movestic and its subsidiaries and associated
companies.
S&P
TCF
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 fair outcomes.
Total Cash
Generation
This represents the absolute cash generation for the period at
total group level, comprising divisional cash generation as well as
both exceptional and non-exceptional group activity.
TSR
UK
Total Shareholder Return, measured with reference to both
dividends and capital growth.
The United Kingdom of Great Britain and Northern Ireland.
UK Business
CA and S&P.
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
185
ADDITIONAL INFORMATION
NOTE ON TERMINOLOGY
As explained in Note 8 to the IFRS financial statements, the principal reporting segments of the group are:
CA
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; S&P 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; 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;
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 a service company, Tadas Verzekering; and
Scildon which was acquired on 5 April 2017; and
Other
group
Activities
which represents the functions performed by the parent company, Chesnara plc. Also included in this
segment are consolidation adjustments.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2017
ADDITIONAL INFORMATION
NOTES
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
187
ADDITIONAL INFORMATION
NOTES
188
CHESNARA ANNUAL REPORT & ACCOUNTS 2017
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
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