WELCOME TO THE
CHESNARA ANNUAL
REPORT & ACCOUNTS
FOR YEAR ENDED 31 DECEMBER 2019
SECTION AXXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED) OUR COMPANY HISTORY
2004
2005
2009
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.
Chesnara makes its first
acquisition - City of
Westminster Assurance,
adding £30.3m of
Embedded Value.
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
2013
2015
The acquisition of Save and
Prosper takes the group’s
assets under management to
over £4 billion.
Direct Line’s life assurance
business is acquired and
by the end of 2014, total
group Embedded Value
rises above £400m.
Expansion into a new territory
with the acquisition of the
Waard Group (a closed-book)
in the Netherlands.
2016
2017
2019
Building upon our entry to
the Dutch market we
announce the acquisition
of Legal & General Nederland,
an open business.
Completion of Legal &
General Nederland acquisition,
renamed Scildon, at a 32%
discount to its Economic
Value of £202.5m.
Completion of the acquisition
of a portfolio of 6,000 policies
from Monuta Insurance, under
Waard Group.
Announcement of the acquisition
of 44,000 policies from the
Dutch branch of Argenta Bank,
also under Waard Group.
SYMBOL GUIDE
Throughout the Report & Accounts the following symbols are used to help distinguish between the various
financial and non-financial measures reported:
IFRS IFRS
Economic Value Earnings
Cash generation
Solvency
£
Economic Value
Customer
Operational
performance
Dividend/Total
Shareholder Return
Compliance
Acquisitions
Risk appetite
XXXXXXXXXXXXXXXXXXX
CONTENTS
SECTION A • OVERVIEW
SECTION D • IFRS FINANCIAL STATEMENTS
106 Independent Auditor’s Report to the
members of Chesnara plc
114 Consolidated Statement of
Comprehensive Income
115 Consolidated Balance Sheet
116 Company Balance Sheet
117 Consolidated Statement of Cash Flows
118 Company Statement of Cash Flows
119 Consolidated Statement of Changes
in Equity
119 Company Statement of Changes in Equity
120 Notes to the Consolidated
Financial Statements
SECTION E • ADDITIONAL INFORMATION
198 Financial calendar
198 Key contacts
199 Notice of the Annual General Meeting
201 Explanatory notes to the notice of the
Annual General Meeting
205 Reconciliation of metrics
206 Glossary
207 Note on terminology
06 An introduction to Chesnara
08 Delivering our strategy
10 2019 highlights
12 Measuring our performance
14 Chairman’s Statement
SECTION B • STRATEGIC REPORT
20 Overview of our strategy, culture & values
and business model
22 Our strategy
24 Our culture & values
26 Section 172
32 Business review
39 Capital management
42 Financial review
49 Financial management
51 Risk management
58 Corporate and social responsibility
SECTION C • CORPORATE GOVERNANCE
64 Board profile and Board of Directors
66 Governance overview from the Chairman
68 Corporate Governance Report
72 Nomination & Governance Committee Report
74 Directors’ Remuneration Report
94 Audit & Risk Committee Report
100 Directors’ Report
103 Directors’ Responsibilities Statement
SECTION A :
OVERVIEW
04
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
06 An introduction to Chesnara
08 Delivering our strategy
10 2019 highlights
12 Measuring our performance
14 Chairman’s Statement
Uddevalla, Sweden
CHESNARA ANNUAL REPORT & ACCOUNTS 2019 05
XXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED) AN INTRODUCTION TO CHESNARA
We aim to provide value for money to our customers and competitive
returns to our investors in a compliant manner.
Chesnara plc is a life assurance and pensions
consolidator. It has operations in the UK,
Sweden and the Netherlands.
Our primary focus is the efficient management
of life assurance and pension policies to give fair
outcomes to our customers, whilst generating
profits to provide attractive dividends and value
growth to our investors. Periodically we seek to
create further value and sustain our dividend
policy by acquiring new companies or books of
business. Our acquisition strategy primarily
focuses on the territories in which we operate,
though we will consider opportunities in other
European countries where there is sufficient
value and strategic and cultural fit.
The group comprises both open-book and
closed-book operations. We write new business
where we are confident that conditions will
ensure the sales are value adding. The new
business operations will always be based on
realistic market share expectations and hence
the writing of new business will not detract from
our core objective of managing in-force books
to provide good returns to customers and investors.
Chesnara’s long established culture and values
underpin the delivery of our core strategic
objectives. Risk and solvency management are
at the heart of our robust governance framework
and the group is well capitalised. Throughout its
history, Chesnara has aimed to deliver fair
outcomes and returns for customers whilst
providing consistent returns for shareholders.
WHO WE ARE
– 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 8 for further detail on our
history and businesses.
WHAT WE DO
RESPONSIBLE
RISK BASED
MANAGEMENT
06
CHESNARA ANNUAL REPORT & ACCOUNTS 2019OVERVIEW HOW WE OPERATE
HOW WE CREATE VALUE
– 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.
Customer
– Effective customer service operations, clear communication
and competitive fund performance, with full regard to
all regulatory matters, support our aim to ensure customers
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.
UK
FUNDS UNDER MANAGEMENT
£2.5bn
POLICIES
c260,000
SWEDEN
FUNDS UNDER MANAGEMENT
£3.2bn
POLICIES
c350,000
NETHERLANDS
FUNDS UNDER MANAGEMENT
£2.1bn
POLICIES
c290,000
07
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION A OVERVIEW
DELIVERING OUR STRATEGY
Our company history has helped shape our business, which in
turn enables us to deliver against our objectives.
DIVIDEND HISTORY
£
VALUE GROWTH
15 SUCCESSIVE YEARS OF DIVIDEND GROWTH
314% OF VALUE GROWTH SINCE 2004
We recognise the importance of providing stable and attractive
dividends to our shareholders. A full year 2019 dividend of
21.30p per share represents an increase of 3% on the prior
year and is Chesnara’s 15th successive year of dividend growth.
Value growth is achieved through a combination of efficient
management of the existing policies, acquisitions and writing
profitable new business. The growth since incorporation
includes £148m of new equity since 2004 but is net of
£329m of cumulative dividend payments. The value of the
group is affected by investment market conditions at any
given point in time.
Dividend per share history Pence per share
Value history £m
2019
2018
2017
2016
2015
21.3
2019
20.7
20.1
19.5
18.9
2018
2017
2016
2015
670
626
723
603
455
08
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION A
What we’ve done
7 successful acquisitions across 3 territories
Our deals demonstrate flexibility and creativity
where appropriate:
We are not willing to compromise on quality, value
or risk. All deals have:
– From value enhancing ‘bolt-on’ deals to more transformative
– Been at a competitive discount to value
deals
– Open minded regarding deal size
– Satisfied our dual financial requirements of generating
medium-term cash and enhancing long-term value
– Capability to find value beyond the UK
– Been within Chesnara’s risk appetite
– Flexible and efficient deal funding solutions
– Been subject to appropriate due diligence
– Ability to find expedient solutions to de–risk where required
– Been either neutral or positive in terms of customer outcomes
– Supported Chesnara’s position as an income investment
CASH GENERATION
CUSTOMERS
CASH GENERATION CONTINUES
TO SUPPORT DIVIDENDS
OUR PRIMARY RESPONSIBILITIES REMAIN
TO OUR CUSTOMERS
Ultimately the group needs to generate cash to service its
dividends. We define cash generation as the movement in
the group’s surplus own funds above the group’s internally
required capital. Cumulative cash generation over the last
five years represents 174% of the total dividends over the
same period.
– Customers can be confident that they hold policies with a
well capitalised group where financial stability is central to our
culture and values.
– Our investment returns remain competitive across the group.
– We deliver good customer service levels across the group.
Business as usual cash generation £m
Dividend
2019
2018
2017
2016
2015
31.9
36.7
30.4
30.1
47.8
27.6
36.5
24.0
44.2
84.0
The chart 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. This reflects the underlying
effectiveness of the core business in funding the dividend.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
09
XXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED) 2019 HIGHLIGHTS
Financial highlights
IFRS
IFRS
£96.1m IFRS PRE-TAX PROFIT
2018 £27.0m
The 2019 result includes £49.1m of profits relating to economic
market conditions, predominantly asset growth in Scildon.
Conversely, economic conditions created a £15.5m loss in 2018.
£60.6m TOTAL COMPREHENSIVE INCOME
2018 £23.7m
The 2019 result includes a foreign exchange loss of £18.7m
(2018: loss of £0.8m).
Financial review p48
SOLVENCY
155% GROUP SOLVENCY
2018 158%
We are well capitalised at both group and subsidiary level under Solvency II. We have applied the volatility adjustment for the
first time in 2019 in both of our Dutch subsidiaries (see page 40 for more detail).
Capital management p40
ECONOMIC VALUE
£670.0m ECONOMIC VALUE
2018 £626.1m
Movement in the year is stated after dividend distributions of
£31.3m and includes a foreign exchange loss of £28.8m.
Financial review p47
£104.0m ECONOMIC VALUE EARNINGS
2018 £(60.9)m
The result includes £121.1m of earnings resulting from
investment market movements (2018: investment market
loss of £(49.7)m).
Financial review p46
CASH GENERATION
£14.4m COMMERCIAL NEW BUSINESS PROFIT
2018 £15.4m Note 1 – page 11
This new metric is deemed to better reflect the commercial
impact of writing new business than the previous measure that
was based more directly on Solvency II rules. Scildon has
reported a 65% year on year improvement due to record term
assurance policy sales and a reduction in acquisition costs.
Pricing pressures and changes in transfer regulations have driven
a 37% reduction in Movestic’s new business value.
Business review p34 to 37
£36.7m GROUP CASH GENERATION
£50.8m DIVISIONAL CASH GENERATION
2018 £47.8m
2018 £63.9m
The 2019 result includes a cash strain of £24.7m from the
symmetric adjustment impact Note 2 page 11. Enhanced cash analysis
on page 45 identifies the material components of this headline
cash result. The prior year benefited from a positive symmetric
adjustment impact and £20m of net releases from the
with-profits fund (2019: £5.1m net growth in restricted surplus).
Operational and capital optimisation management actions
together with modestly beneficial economic conditions have
resulted in a strong divisional cash outcome.
Financial review p44
Financial review p44
10
CHESNARA ANNUAL REPORT & ACCOUNTS 2019OVERVIEW
Operational & Strategic highlights
DIVIDEND
FULL YEAR DIVIDEND INCREASE
Total dividends for the year increased by 3% to 21.30p per share (7.43p interim and 13.87p proposed final). This compares with
20.67p in 2018 (7.21p interim and 13.46p final).
£
ECONOMIC BACKDROP
2019 SAW EQUITY MARKET GROWTH, FALLING INTEREST RATES, STERLING RECOVERY
The financial results for 2019 reflect rising equity markets and narrowing bond spreads which have supported significant
investment returns and economic earnings. The economic conditions, including further downward pressure on interest rates,
have been less beneficial for cash generation and in particular the rising equity markets driving a negative symmetric adjustment.
A strengthening of sterling against the euro and Swedish krona has led to foreign exchange translation losses.
DUTCH ACQUISITIONS
EXPANSION IN THE NETHERLANDS WITH TWO PORTFOLIO ACQUISITIONS
Operations in the Netherlands continued to grow following the successful completion and integration of our first small policy
portfolio acquisition from Monuta Insurance and the announcement of a more significant portfolio acquisition from Argenta
Bank (subject to regulatory approval), at a discount to EcV of c22%.
Notes
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 on page 12 and
in further detail within the Financial Review section on pages 42 to 48.
1. During the year we have assessed our new business profitability measurement criteria. This review was initiated to
ensure the figures reported, which were previously directly linked to the Solvency II measurement regime, are in fact a fair
commercial reflection of value being added. As part of the assessment we also compared how our peers report new
business profits to ensure market consistency. As a result of the assessment we have made two changes to how we
quantify new business profits. Firstly, we now base the future cash flows on assuming a modest level of return over and
above risk-free returns. No premium to risk-free was applied in the past. Secondly, we now exclude the incremental risk
margin that Solvency II modelling assigns to the new business. We believe the revised profitability measurement better
reflects the value of the best estimate cash flows we expect to emerge from new business written. The 2018 comparatives
have been restated to the new basis.
We now adopt the more commercially relevant figures within our business and financial performance reviews of the report
and accounts, including the Chairman’s Statement, as well our internal reporting. Within the Solvency II and EcV analysis
sections, where the guidelines have to be applied, the impact of new business on movements during the year will remain on
the technically imposed basis.
2. Symmetric adjustment: the Solvency II capital requirement calculation includes an adjusting factor that reduces or increases
the level of the equity capital required depending on historical market conditions. Following periods of market growth, the factor
tends to increase the level of capital required and conversely, in falling markets the capital requirement becomes less onerous.
11
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION A
OVERVIEW
MEASURING OUR PERFORMANCE
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, this Report & Accounts adopts 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 (Sll) 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 net assets
*
Solvency II valuation
(Own Funds)
(Own Funds)
I
R
Capital requirements
Solvency Capital
Requirement
SCR plus
management
buffer
IFRS profits
Economic Value
I
P
I
R
B
Solvency
Stakeholder focus:
P
I
R
B
Policyholders
Investors
Regulators
Business partners
Key performance indicators
SOLVENCY
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).
Balance sheet
Earnings
Percentage
Absolute
New business
I
B
Cash generation
EcV
Commercial
Group
Divisional
ECONOMIC VALUE
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.
An element of the EcV earnings each period is
the economic value of new business. Factoring in
the real world investment returns and removing
the impact of risk margins is used by the group to
determine the value of new business on a
commercial basis.
* See page 205 for a reconciliation between IFRS net
assets and Solvency II Own Funds
CASH GENERATION
Cash generation is used by the group as a
measure of assessing how much dividend
potential has been generated, subject to ensuring
other constraints are managed.
Group cash generation is calculated as the
movement in the group’s surplus own funds
above the group’s internally required capital, as
determined by applying the group’s capital
management policy, which has Solvency II rules
at its heart.
Divisional cash generation represents the
movement in surplus own funds above local
capital management policies within the three
operating divisions of Chesnara. Divisional cash
generation is used as a measure of how much
dividend potential a division has generated,
subject to ensuring other constraints are managed.
Further details on p39 to 41
Further details on p46 to 47
Further details on p44 to 45
12
CHESNARA ANNUAL REPORT & ACCOUNTS 2019 OPERATIONAL AND OTHER PERFORMANCE MEASURES
In addition to the financial performance measures this Report & Accounts includes measures that consider and
assess the performance of all our key stakeholder groups. The diagram below summarises the performance measures
adopted throughout the Report & Accounts.
SECTION A
KEY STAKEHOLDERS
r
e
d
l
o
h
y
c
i
l
o
P
s
r
o
t
a
l
u
g
e
R
s
s
e
n
i
s
u
B
*
r
e
n
t
r
a
p
r
o
t
s
e
v
n
I
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
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.
32-37
Broker satisfaction is important because they sell our 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 fare in industry performance awards in the Netherlands.
34-37
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.
32-37
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.
32-37
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.
34-35
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 seeks 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.
7
49
34-37
34-37
49
64-65
*For the purposes of this key performance indicator assessment business partners refers to major suppliers and outsource partners.
Key:
Primary interest
Secondary interest
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
13
OVERVIEW
CHAIRMAN’S STATEMENT
I’m pleased to report a further
3% growth in the
proposed annual dividend.
I join Chesnara very much aware of its
enabled us to recommend a 3% increase in
impressive track record, in particular regarding
total dividend.
dividend growth. My predecessor, Peter
Mason, has been a huge part of Chesnara’s
success to date and Peter and the board have
created a culture which ensures customer, risk
and stakeholder impact are at the heart of all
Management teams have been extremely
busy across all the divisions delivering our
digitalisation, effi ciency improvement and
customer communication programmes.
decisions. Based on my initial observations,
Chesnara takes its environmental
I inherit a strong balance sheet, a healthy risk
responsibilities very seriously and we have
profi le, good cash reserves, experienced
taken meaningful steps during the year to
management teams across the group and a
minimise any adverse impact our operations
robust approach to governance. I am
have on the environment. As a result, I am
confi dent that the foundations are strong and
proud to announce that Chesnara has gained
we can continue to deliver positive outcomes
carbon neutrality for its 2019 emissions.
for all our stakeholders in the future.
Against a backdrop of continued falling interest
Against a backdrop of continued falling interest
rates, I am particularly pleased to report a 7%
post dividend growth in Economic Value and
post dividend growth in Economic Value and
a cash generation to dividend ratio of 115%,
despite the impact of currency fl uctuations.
Our divisions are proposing total dividends to
Our divisions are proposing total dividends to
the parent company of £50.1m. I am pleased
to report that the fi nancial performance has
LUKE SAVAGE
CHAIRMAN
14 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION A
Against a backdrop of continuing political uncertainty over the year, further
downward pressure on interest rates and during a period of
significant operational development, the Chesnara business model has
performed robustly.
Economic Value has increased by 7%, with earnings of £104.0m significantly
exceeding the payment of the total 2019 dividend and a foreign exchange
loss of £28.8m. From an IFRS results perspective, the profit before tax of
£96.1m is significantly up on the comparative result in 2018 of £27.0m.
This is predominantly due to the strong Scildon results, which benefited
from valuation gains in its bond portfolio as a result of narrowing spreads.
At the heart of Chesnara’s proposition as a reliable income stock, the UK
book has continued to generate sufficient cash to support the Chesnara
dividend. This, combined with a total positive cash contribution from the
overseas divisions, has resulted in a solid group cash generation of £36.7m
(2018: £47.8m).
The dynamics of this year’s cash result are particularly complex, and the
total result represents the net impact of many individually significant
items. In light of this and given the importance of cash, we have included
enhanced cash analysis on page 45. This analysis shows an adjusted cash
result, which excludes the impact of technical items such as the
‘symmetric adjustment’ and other non-recurring modelling and technical
items, of £75.3m.
The Solvency II standard formula capital model is more onerous regarding
capital requirements for equity exposure during a period of strong equity
market recovery as has been the case in 2019. This dynamic, termed the
‘symmetric adjustment’ is therefore a key feature of the cash result in the
year having increased capital requirements during the period, with a
corresponding cash strain of £24.7m. During the final quarter of 2018
when equity markets fell sharply, we experienced a material opposite
positive impact from the ‘symmetric adjustment’.
01
MAXIMISE VALUE FROM EXISTING
BUSINESS
The financial performance of our divisions
has enabled all of them to propose dividend
payments to group. The total expected
dividends of £50.1m represents 157% coverage
of the total 2019 shareholder dividend.
See pages 32 to 37 for further information.
Cash generated is reassuring especially considering the material adverse
impact (c£36.5m) of continued reductions in interest rates. Excluding the
impact of the ‘symmetric adjustment’ and foreign exchange losses, all divisions
have made positive cash contributions which in turn has enabled all divisions
to propose dividend payments to Chesnara with a total value of over £50m.
The UK business has generated £33.6m of cash, which continues to more
than fund the dividend strategy.
On a cumulative basis Scildon has generated £21.0m of cash since it was
acquired in 2016, which confirms our initial assessment that through a
combination of business performance and capital management actions the
division would make a meaningful contribution to Chesnara dividend funding
requirements.
In Movestic, excluding the impact of the ‘symmetric adjustment’ and foreign
exchange losses, the underlying result is a gain of £11.5m. This together
with the positive cash outcomes in 2017 and 2018, has enabled Movestic to
propose a record dividend of £6.2m.
Segmental analysis of the cash result is shown on pages 44 to 45.
Total new business profits of £14.4m Note 1 page 11 are slightly lower than
the prior year (2018: £15.4m). The Scildon contribution has continued to
improve as the business improvement programme begins to have a
positive impact on volumes and profitability. Movestic has maintained
volumes in a competitive market but fee pressures and the impact of
regulatory changes have led to a reduction in their total new business
profit. We retain our expectation to replace a meaningful proportion of the
value lost from payment of the dividend through writing new business.
All divisions have made material positive contributions to the overall
Economic Value earnings of £104.0m. Much of the improvement is driven by
an increase in equity and fixed interest investment valuations. It is pleasing
to see the Economic Value losses in 2018 being more than fully recovered.
Movestic has delivered 11% growth despite fully recognising the adverse
future impact of regulatory changes regarding policy transfer processes and
charges. The total pre dividend growth in Economic Value of £75.2m
includes foreign exchange losses of £28.8m.
The resilience of the closed book business units creates a strong
foundation to support the continued development programme in Scildon
and Movestic.
I will now report on how we have delivered against our three strategic
objectives in a little more detail:
02
ACQUIRE LIFE AND PENSIONS
BUSINESSES
The acquisition of Argenta Insurance in the
Netherlands, is expected to add c£6.9m
of Economic Value and future cash potential
when it completes in 2020.
See page 38 for further information.
ANNOUNCEMENT OF OUR ACQUISITION OF
ARGENTA INSURANCE AT A 22% DISCOUNT TO
ECONOMIC VALUE CONFIRMS OUR PRESENCE IN
THE DUTCH MARKET AND THAT DEALS ARE
AVAILABLE WITHIN OUR PRICING CRITERIA
We have seen a rise in seller’s valuations and prices paid for potential targets.
Against this backdrop and following our acquisition and transfer of a small
portfolio in the Netherlands, we were pleased to announce a further addition
to our Dutch portfolio, acquired at a 22% discount to Economic Value. This
confirms that it remains feasible to do deals whilst retaining our price discipline.
15
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
OVERVIEW
CHAIRMAN’S STATEMENT (CONTINUED)
We are committed to maintaining our discipline when assessing potential
acquisitions and ensuring that any offer we make is in the interests of all of our
stakeholders, with suitable reward for the additional risks taken on. Chesnara
has strong support from shareholders and lending institutions to progress our
acquisition strategy. We also believe that our operating model has the
flexibility to accommodate a wide range of potential target books. We believe
our good network of contacts in the adviser community, who understand the
Chesnara acquisition model, ensures that we are aware of most viable
opportunities in the UK and Western Europe. With this in mind, we are well
positioned to continue the successful acquisition track record in the future.
Scildon are not yet delivering to their full potential regarding new business
profits. That said, further improvements in performance in the period
combined with adopting a more commercially meaningful assessment of
new business profits (Note 1 page 11) does mean that current new business value
represents a meaningful contribution to replacing dividend payments. The
new business profit for 2019 of £7.5m has improved by 65% from the prior
year with positive development in both volumes and operational efficiency.
There remains much to do but seeing some real rewards from the hard work
to date gives cause for optimism that increasingly meaningful new business
profits are attainable.
03
ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
New business profits of £14.4m Note 1 page 11
See pages 34 to 37 for further information.
TOTAL NEW BUSINESS PROFITS OF £15.1M NOTE 1 PAGE 11
REPLACE 46% OF THE REDUCTION IN ECV CAUSED
BY THE DIVIDEND PAYMENTS IN THE YEAR
Chesnara writes new business in both Sweden and the Netherlands. The
ultimate aim is to create sufficient annual profits, either through returns on
the existing business, or through writing new business, to replace a
significant proportion of the Economic Value lost by way of dividend
payments. Movestic continues to deliver within its target volume range
although profits of £6.9m Note 1 page 11 for 2019 are lower than the prior year
(2018: £10.9m Note 1 page 11). This is due to several factors, including a shift
away from single premium transfers, pressure on fee levels and legislative
changes regarding transfer-out charges and processes. Movestic has
progressed several key initiatives during the year and these are expected to
help protect the business from any future price pressures and enhance
volumes by modernising the customer and broker experience. These
include:
– Further roll-out of the ongoing digitalisation programme with the specific
objective to enhance the broker experience e.g. extending access to robot
advice functionality to brokers;
– Adding new funds and functionality, including the recent launch of funds
with protected return features and the plan to launch further products to
broaden the customer offering; and
– Simplifying the corporate structure.
16
Solvency
The group continues to show a robust solvency ratio of 155% at 31 December
2019 (31 December 2018:158%). To continue to manage capital effectively
and as a result of the ongoing volatility that has been witnessed in bond
spreads over recent periods, we have applied the Volatility Adjustment for the
first time within Scildon’s and Waard’s results, which has had a modest
positive impact and will also help protect against future volatility. The closing
solvency position is stated after recognising the £20.8m cost of the final
dividend, which will be paid in June 2020.
Regulation and governance
IFRS 17
Our programme has progressed well in the year, with our immediate focus
being on assessing the key areas of technical judgement and identifying the
necessary operational changes. From an operational and risk management
perspective, the further proposed one-year implementation delay helps
due to the complexity of the implementation but we believe it could cause
additional costs.
We continue to be of the view that IFRS 17 should not have any significant
bearing on the commercial assessment of Chesnara, with our expectation that
capital management decision making will continue to be driven by regulatory
solvency and Economic Value as opposed to our IFRS results and position.
Regulatory compliance
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.
Governance framework
We continue to maintain a strong risk and governance culture across the
group. Our current focus is on enhancing our operational resilience to
improve understanding of any vulnerabilities and to strengthen and test our
contingency options, providing greater assurance that all important business
services can continue following any unexpected disruption.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019 SECTION A
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.
Corporate purpose and Section 172 reporting
Chesnara has always assessed its corporate purpose by considering the
following eight aspects of our business and by looking at the business from
the perspective of all stakeholders. Increased emphasis on reporting in line
with Section 172 of the Companies Act (S172) has therefore not required any
notable change in our approach to decision making. It has however formalised
the requirement to consider and report how we ensure we act in a way to
fi nd an optimal long-term balance for stakeholder outcomes. The Report &
Accounts include a new section at page 26 that demonstrates how we comply
with S172 requirements and how our governance framework and culture
considers the interests of all stakeholders. The new section also provides
detailed insight into the major decisions the board has made during the year
and reports how we have assessed the long-term impact on our 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 fi nancial 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 Dutch and Swedish
operations, there is a continued positive shift towards an increased focus on
sustainable fund investments.
– The nature of our business is such that in general we have a relatively low
carbon footprint, even so we choose to fully offset our carbon emissions.
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 detailed in our tax strategy, we adopt a responsible and open approach to
taxation and, consequently, pay the appropriate taxes throughout the group.
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 benefi cial. Our instinct and natural preference is
to maintain established long-term supplier relationships where they remain
commercially competitive and operationally viable.
Local community
– In the UK our investment and continued commitment to the North West
and Preston in particular creates high quality fi nancial services roles outside
of London.
– All divisions support local community initiatives to the extent deemed
appropriate given our fi nancial responsibilities as a PLC.
OUR VIEW IS THAT CHESNARA FULFILS
A POSITIVE CORPORATE PURPOSE.
Outlook
Since the end of 2019, Covid-19 has emerged as a pandemic. This has had a
signifi cant impact on investment markets and society in general, and we have
been closely assessing the impact on Chesnara and our stakeholders. Whilst
the market impacts have been extreme, the scale of impact remains within
the ranges we test as a matter of course within our established governance
procedures. It is also useful to note that the Solvency II regime is designed
specifi cally to ensure that we hold suffi cient capital to withstand the kind of
adverse conditions we are currently experiencing. Chesnara remains well
capitalised and, based on the closing market position on 31 March 2020,
our solvency cover ratio is estimated at approximately 163%, after allowing
for payment of our proposed fi nal dividend. The estimate does not allow for
any increase in insurance claims because analysis suggests the increase in
the level of claims experience will not be material.
Whilst the solvency position post year end has held up well, the Economic
Value of the group is estimated to have dropped by approximately c£90m, in
line with our reported sensitivities.
The Chesnara parent company had cash and near cash balances at the end of
2019 of over £75m. This balance had built in part as a result of our disciplined
historical dividend strategy whereby we have prioritised the ability to sustain
the dividend during diffi cult times over the payment of special dividends. In
addition to this, these accounts show that we are foreseeing dividend income
from our divisions during 2020 of £50.1m. Based on divisional solvency and
liquidity estimates as at 31 March 2020 this amount is still expected to be
paid during the second quarter, although we will await the results from our
full quarter one valuation prior to making the payments. There is a degree of
risk that following the deferral period and on reassessment a proportion of
the total expected divisional dividends is not paid. Even assuming a realistic
worst case outcome regarding divisional dividends Chesnara retains a
healthy post dividend cash balance.
It remains too early to quantify the potential long-term impact on our fi nancial
performance arising from Covid-19, although we continue to have a strong
and viable business. At this point, we remain focused on supporting our
customers and colleagues while maintaining our fi nancial and operational
resilience. To date, our operations in all divisions and at group have
undertaken a fairly smooth transition to remote working conditions, with no
signifi cant or prolonged disruption to key business services anticipated.
Beyond the Covid-19 situation, based on my early assessment of the
business, Chesnara has a clear strategic direction and the ability to deliver
against its objectives, which in turn fund our well-established dividend
strategy. In particular:
– value and cash are expected to continue to emerge from our existing books
of business, both in the UK and our overseas divisions;
– we have suffi cient 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 benefi ts would need to
outweigh the inherent challenge of adding another regulatory environment
into our business model; and
– we remain committed to writing new business in both Sweden and the
Netherlands with a view to replacing a meaningful proportion of the dividend
strain through our new business operations.
From a Brexit perspective, the structure of the group, with established
regulated entities in three European countries, together with the fact we do
not trade or share resource across territories, means I share the previously
stated Chesnara 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 am confi dent that after we have overcome the
short-term challenges from Covid-19 including doing everything in our
power to keep colleagues and business partners safe and sound, Chesnara
is well positioned to continue to provide value to policyholders and
shareholders and I look forward to working with a business that has been
handed over to my Chairmanship in such good condition.
handed over to my Chairmanship in such good condition.
Luke Savage
Luke Savage
Chairman
14 April 2020
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
17
SECTION B:
STRATEGIC
REPORT
18
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
CHESNARA ANNUAL REPORT & ACCOUNTS 2019XXXXXXXXXXXXXXXXXXXSTRATEGIC REPORTXXXXXXXX • XXXXXXX (CONTINUED) 20 Overview of our strategy, culture & values
and business model
22 Our strategy
24 Our culture & values
26 Section 172
32 Business review
39 Capital management
42 Financial review
49 Financial management
51 Risk management
58 Corporate and social responsibility
Preston Dock
CHESNARA ANNUAL REPORT & ACCOUNTS 2019 19
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION BXXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED)
OVERVIEW OF OUR STRATEGY, CULTURE & VALUES
AND BUSINESS MODEL
Our strategy focuses on delivering value to customers 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
Financial stability and
regulatory compliance
Stakeholder objectives
Fair outcomes
Competitive return
Cash generation and Economic Value growth
UK
Division
NETHERLANDS
Division
SWEDEN
Division
Operating company
Operating company
Operating company
Countrywide
Assured
Waard
Group
Scildon
Movestic
Strategic objectives
Strategic objectives
Strategic objectives
01
02
01
02
01
03
01
02
03
Read more on p32
Read more on p36
Read more on p36
Read more on p34
Culture & values
Responsible risk-based management for the benefit of our stakeholders
20
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT OUR STRATEGIC OBJECTIVES
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
TREAT
CUSTOMERS
FAIRLY
PROVIDE A
COMPETITIVE
RETURN TO
SHAREHOLDERS
ROBUST
REGULATORY
COMPLIANCE
A
C
Q
U
I
R
E
L
I
F
E
A
N
D
02
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
01
02
03
MAXIMISE 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.
21
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
STRATEGIC REPORT
OUR STRATEGY
STRATEGIC
OBJECTIVE
MA XIMISE
VALUE FROM
EXISTING
BUSINESS
01
WHY THIS MAT TERS
HOW WE DELIVER OUR
BUSINESS MODEL
The existing books of policies 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 ensure robust and consistent governance across the group.
Operating autonomy is devolved to the divisions to ensure we
benefi t from our strong divisional management teams. The UK
business adopts an outsourced business model. Core operations
are not outsourced in Sweden or the Netherlands.
ACQUIRE LIFE
AND PENSION
BUSINESSES
Well considered and appropriately
priced acquisitions maintain the
effectiveness of the operating model,
create a source of value enhancement
and sustain the longer-term 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 fi nancial benefi ts are viewed in the context of the impact
the deal will have on the enlarged group’s risk profi le.
– 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 fl ows of each opportunity.
– Our acquisition strategy includes both UK and non-UK markets.
02
ENHANCE
VALUE THROUGH
PROFITABLE
NEW BUSINESS
03
The primary focus of our operations is
to ensure we manage the existing
policy base in an effi cient and
compliant manner. That said, the
Chesnara fi nancial model supports
modest incremental value generation
through writing new business. New
business profi ts 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 largely through IFAs, and has a profi tability model
based upon realistic market shares. Scildon sells protection
products, individual savings and group pensions contracts via a
broker-led distribution model, and as with Movestic, new
business operations assume realistic market shares. 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 profi table.
22 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION B
HOW WE MEASURE DELIVERY
RISKS:
WHAT CAN STOP US
MEETING THIS OBJECTIVE
RISKS:
WHAT CAN WE DO
ABOUT THIS
UPDATE
Cash generation
Cash generated by the existing business is an
important measure for how the business is performing.
It is defi ned as the movement in the surplus of capital
resources over capital requirements set by the board.
As such cash can be generated by either profi ts arising
in the period or a reduction in capital requirements.
Value optimisation
Value generation is measured by reference to the
movement in Economic Value over the period.
Customer outcomes
This is measured through monitoring:
– customer service metrics;
– policyholder fund performance against industry and
market expectations;
– customer complaint levels; and
– our compliance with regards to regulatory conduct
matters.
– Adverse investment market
– Where appropriate, active
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 fulfi lling the guarantees.
– Increased lapses on cash generative
/ value enhancing products.
– Loss of key brokers can result in
increases in the level of customers
moving to competitors.
– Regulatory change can potentially
impact the cash fl ows arising from
the existing business.
– Expenditure levels could exceed
those assumed.
– Foreign currency fl uctuations can
impact the sterling value emerging
from overseas operations.
investment management with the
aim of delivering competitive
investment returns for
policyholders.
– Outsourcer service levels that
ensure strong customer service
standards.
– Expense assumptions are deemed
to be realistic and the cost base is
well controlled, predictable and
within direct management
infl uence.
– 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.
UK
Pages 32-33
Sweden
Pages 34-35
Netherlands
Pages 36-37
Cash generation
Collectively our future acquisitions must be suitably cash
generative to continue to fund the Chesnara dividend
strategy.
Value enhancement
Acquisitions are required to have a positive impact on the
Economic Value per share under best estimate and certain
more adverse scenarios.
Customer outcomes
Acquisitions must ensure we protect, or ideally enhance,
customer interests.
Risk appetite
Acquisitions should normally align with the group’s
documented risk appetite. If a deal is deemed to sit
outside our risk appetite the fi nancial returns must be
suitably compelling.
Value enhancement
We measure the amount of Economic Value added
through selling new contracts. The value added takes
full account of all costs incurred to ensure the profi t
represents true incremental value.
– There is the risk that if a lack of
– Operating in three territories
Page 38
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 fi nancial
strength of the group.
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 divisional dividend
fl ows provide an element of
management control over the
sterling value of cash infl ows.
– Each acquisition is supported by a
fi nancial deal assessment model
which includes high quality fi nancial
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 infl uenced by economic
conditions, politics and the media.
– 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 and develop
more direct to customer capabilities.
– Ensure high quality of service to
existing network of intermediaries.
– Focus on other margin drivers
beyond product pricing, such as the
fund management operation.
– In the Netherlands, enhance
business processes and product
offering to be attractive to brokers
and consumers.
Sweden
Pages 34-35
Netherlands
Pages 36-37
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
23
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
WHY IMPORTANT ?
FAIR TREATMENT
OF CUSTOMERS
RESPONSIBLE RISK-BASED
MANAGEMENT FOR
THE BENEFIT OF ALL OF
OUR STAKEHOLDERS
PROVIDE A COMPETITIVE
RETURN TO OUR
SHAREHOLDERS
ROBUST REGUL ATORY
COMPLIANCE
24
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 39 to 41.
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
guidance and requirements set out by
our local regulators, we place a high
priority on taking account of the fair
treatment of our customers.
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.
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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT WHAT WE HAVE DONE
THE OUTCOMES
– Across the group, we have continued to deliver a good standard of
customer service.
– Generally low level of complaints across the group has continued.
– Improved customer communications, supporting better customer
– The UK division is finalising the implementation of its customer strategy
outcomes.
in support of regulatory guidelines.
– Service standards and customer outcomes in Sweden mean we
– The UK’s administrative outsource service partners have delivered
continue to meet our targets for market share range.
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 the Netherlands, Scildon has again received an award from Afdiz,
the Dutch broker organisation. In 2019, the business was awarded
‘Best Investment Policy Provider’ continuing a long run of winning
awards across its product range.
– The recently launched mortgage term product in the Netherlands won
a five-star rating and best product award from independent research
agency, MoneyView.
– Continued to enhance our Own Risk and Solvency Assessments
(ORSAs), further supporting the group and divisions in making
informed risk-based decisions.
– Strengthened controls, reducing risk likelihood and impact of adverse
outcomes for shareholders and policyholders.
– Constructive dialogue with regulators across the different territories in
– Delivered our continuous improvement regime regarding how we
which the group operates.
manage risk across the group, supported by our annual systems of
governance review.
– We have assessed the capital efficiency of the assets held by Scildon
– Continued improvement in the understanding of the group’s Solvency II
balance sheet, which provides a stronger linkage between risk, capital
and strategy aiding more risk-based decision-making.
and de-risked assets held.
– We have agreed with the Dutch regulator, the DNB, to reduce the
internal capital management buffer for the Dutch entities from 100%
to 85%.
– Continued our dividend strategy of increasing our dividend each year,
even during turbulent investment market conditions.
– Maintained a robust solvency position in all divisions and at group
level which supports the continued dividend strategy.
– Dividend track record continues, with 3% dividend growth in 2019.
– Over the past five years, £144.0m of dividends have been paid.
– Maintenance of robust levels of solvency throughout the group and all
– Ongoing constructive relationships with UK, Swedish and Dutch
divisions throughout the year.
regulators.
– Continued to place a high priority on compliance and maintaining an
– Continued adherence to internal governance policies and principles.
open dialogue with our regulators.
25
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B SECTION 172 • THE BOARD’S APPROACH
Section 172 reporting is a new requirement for the Report & Accounts this year. It was introduced through amendments
to the Companies (Miscellaneous Reporting) Regulations 2018. Whilst the requirement for directors to consider the matters
within Section 172 of the Companies Act is not new, the disclosure of how this has been applied in practice is.
Section 172 statement
The directors of Chesnara believe that they have acted in a way that they consider, in good faith, would be most likely to promote the success of the company
for the benefit of its members as a whole, and in doing so have had regard (amongst other matters) to:
a) the likely consequences of any decision in the long term;
b) the interests of the company’s employees;
c) the need to foster the company’s business relationships with suppliers, customers and others;
d) the impact of the company’s operations on the community and the environment;
e) the desirability of the company to maintain a reputation for high standards of business conduct; and
f) the need to act fairly as between members of the company.
The following disclosures provide further insight supporting the above statement over the course of 2019. The disclosures have been split into three key sections:
The board’s approach
The overall approach taken by the board in ensuring that the requirements of Section 172 are met.
Key stakeholders
This covers the key stakeholders that the board considers are important to the long-term success of the company; how the
company depends on these stakeholders; how key stakeholders are impacted by the decisions of the company; and how we
engage with those stakeholders.
Significant decisions
This covers the significant decisions made by the board during the year and how the directors have considered key
stakeholders in making these decisions.
THE BOARD’S APPROACH
Role of the Chairman
As described on page 68 within the Corporate Governance Report, it is the role of the Chairman to lead the board in the determination of the group’s
strategy, to ensure that the board is furnished with sufficient information in order to support its decision making, and to ensure that relevant stakeholders
have been taken into account when making decisions.
Business planning
The principal process supporting the longer-term decision making of the board, the group business planning process. This is a three-stage process that takes
place throughout the course of the year, as follows:
STAGE 1
Strategic planning
STAGE 2
STAGE 3
Review and challenge of divisional and
group operational plans
Detailed business plans supported
by financial projections
The first stage of the business planning
process incorporates reviewing and
challenging the strategy of the group as a
whole. It presents an opportunity to ‘stand
back’ and review the overall strategy of the
group. Approving the strategy provides a
framework for the group and its subsidiaries
to prepare more detailed operational plans.
Following completion of the group driven
strategic planning process, and any
associated feedback to the operating
divisions of the group, operational plans are
developed and critically reviewed by the
group. The key objectives within the
operational plans are explicitly linked to the
strategic objectives of the group in order to
ensure that the key management actions
that have been identified support delivery of
the group strategy.
Following review and feedback from the
operational planning stage, final business
plans are produced at both a divisional and
group level. These include the final
operational deliverables for the short to
medium term and their associated
consequences, alongside the projected
financial outcomes of delivering the plans.
26
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
This section of the strategic report is therefore designed to provide insight into how the directors of Chesnara have
discharged their responsibilities under Section 172 of the Companies Act, and in particular having had regard to the
matters set out in Section 172 (1) (a) to (f) when performing their duties.
The business planning process for 2019 confirmed that the board wishes to continue to pursue the following strategy:
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.
The strategy of the group is executed whilst ensuring that the group conducts its affairs in line with the following core culture and value principles:
– Fair treatment of customers
– Responsible risk-based management for the benefit of all of our stakeholders
– Provide a competitive return to our shareholders
– Robust regulatory compliance
– Maintain adequate financial resources
These are described in more detail on pages 22 to 25.
Each key objective within the group business plan is supported by relevant information
in order to support the review and challenge process by the board, having regard to the
factors required by Section 172 (1) (a) to (f).
Further information on how the board considers each key stakeholder group is provided
on pages 28 to 29.
As referred to above, business plans are supported by associated financial budgets and
projections. This helps to ensure that both the shorter term and longer-term financial
consequences of following the plan are appropriately considered in the context of all our
stakeholders, in particular our shareholders. The key financial items / metrics that are
projected include those shown to the right.
Having a clear view of all of these metrics supports the directors in assessing whether
the business plan is expected to meet the expectations of our stakeholders.
Key financial metrics in the business planning process:
£
ECONOMIC VALUE
CASH GENERATION
SOLVENCY
IFRS
IFRS PROFITS
DIVISIONAL AND GROUP DIVIDENDS
£
EXPENSES
NEW BUSINESS PROFIT EXPECTATIONS
Corporate governance and responsibilities map
Complementing the business planning process for making decisions is the existence of the ‘Chesnara Corporate governance and responsibilities map’, which
operates at both a group board and divisional board level. The objectives of the maps are to ‘…set out the mechanisms of governance for Chesnara and the
framework of governance requirements to be observed across the group, including principles, policies, delegations of authority and decision-making
arrangements.’ Each map contains a framework that supports decision making and includes relevant guidance on what decisions can be made locally and what
requires escalation to the Chesnara board. It also provides guidance on what information is required to support board decision making.
Board papers and matters discussed
The board agenda and associated supporting documents are designed to support the board in directing the business, which includes, amongst other things,
discharging its responsibilities in relation to Section 172 (1) (a) to (f). For each meeting, a suite of relevant board papers is produced, with one of the key
sources of information produced for the board, over and above the group business planning process, being the group’s quarterly MI pack. This is designed to
be a ‘one stop’ holistic view of the group as a whole and covers, amongst other things, the following items of relevance to the requirements of Section 172:
– Divisional updates, including financial results, business plan progress, key customer initiatives, regulatory interactions, key outsourcer / supplier matters etc.;
– Matters pertaining to investor relations;
– Consolidated financial results across various different metrics;
– Investment performance analysis, covering both customer and shareholder returns;
– Progress updates on key objectives within the business plan;
– Risk matters affecting the group;
– Regulatory updates across the group; and
– Internal audit matters.
27
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
STRATEGIC REPORT
SECTION 172 • KEY STAKEHOLDERS
The following table identifi es the key stakeholders that the board considers are important to the long-term success of the company,
primarily because of the businesses’ dependencies on the stakeholder group (as explained in column 2 of the table). It provides some
insight into how the company engages with these stakeholders and how they are considered when making strategic decisions. This
statement is intended to provide visibility of the considerations by the directors in the performance of their duty. It is worth noting
that not all stakeholders have the same interests and whilst there is considerable overlap, they can at times confl ict. The board’s role
is to weigh these factors up when setting the strategy and operational plans of the business.
DEPENDENCIES OF BUSINESS
ON STAKEHOLDER
IMPACT OF BUSINESS ON
STAKEHOLDER
HOW WE ENGAGE
WITH STAKEHOLDER
Our customers are key to the
long-term success of the group,
both in terms of retaining existing
customers and attracting new ones
to our open books of business.
Without our customers, Chesnara
would cease to exist.
Our primary concern is ensuring that
our customers have policies with a
fi nancially strong company that treats
them fairly and meets their
expectations and needs. Our
fi nancial management, culture and
values statements ensure that this is
embedded across the group. We
closely manage all aspects of the
customer journey, covering customer
experience, communications,
policyholder expectations, product
value for money, and our solvency.
Having a strong and stable
shareholder base is seen as critical
for the long-term success of the
group. Our shareholder support
facilitates pursuing our long-term
strategy, including the potential for
raising new capital for acquisition
purposes.
Any business decision that is made
that affects either the future dividend
payments of the group, or its
long-term sustainability will be of
signifi cant interest to our
shareholders. If either of those
elements are put under pressure, it is
likely to reduce confi dence in the
group, and could lead to a reduction
in shareholder returns.
Our primary engagement with customers comes from a combination
of outward communication from the company, coupled with the
company dealing with customer contact, be it through policy changes,
queries or claims.
From an outwards communication perspective, our aim is to ensure
we provide transparent and understandable information to our
customers, be it in the form of regular written letters / booklets,
information available on our website or through any other material
made available to customers.
From the perspective of responding to customer contact, we seek to
make our processes as helpful to the customer as possible, mindful of
different customer group preferences. This involves ensuring that our
customer contact staff are well trained for telephony or email
correspondence and making other technology available where feasible
(such as the use of apps).
We obtain feedback from on the way we engage with our customers
through periodic market research or customer focus groups.
We primarily engage with shareholders through the following key
channels:
– Formal public fi nancial reporting, which we produce every six months.
– Public and private presentations to shareholders immediately after
issuing our fi nancial results.
– Our Annual General Meeting.
– Periodically, we hold ‘investor days’ with our shareholders, which are
designed to provide further insight into our business and give
shareholders an opportunity to meet a wider range of Chesnara
senior management.
– Periodically, we will contact shareholders for feedback in advance of
formal publication of particular matters, such as material changes to
our remuneration policy.
In the event that we are looking to raise additional equity our
shareholders are engaged at the appropriate point in the process.
Maintaining a strong relationship with
our banks is key. This helps to ensure
that day-to-day banking remains
effi cient and cost effective, longer
term lending remains accessible and
compliant and potential new
facilities are competitive and readily
available. We are required to
manage our fi nances in such a way
that complies with the covenants
attached to our debt facilities.
The new business operations of
Scildon and Movestic utilise
intermediaries in order to distribute
their products, with most new
business being derived from this
channel rather than directly sales to
the end customer. As a result we
rely on good quality intermediaries
who understand our products and
customers well.
The banks earn a return on the
facilities that are provided to the
group. Chesnara’s role is to ensure
that we manage our fi nances and
strategy in a way that minimises the
risk of loss to our lenders, whilst also
enabling further funding
opportunities by continuing to grow
our business.
Our regular engagement with banks takes the form of quarterly
covenant compliance reporting, which is required for our existing
debt arrangements. On a more ad-hoc basis we will engage with our
bankers in the event of a change in our business or to seek new
funding, say to support an acquisition. In the event of an acquisition
where we would like to secure more funding, we work with our
bankers to ensure that we are providing relevant information in order
to support the banks’ loan decision making process.
Selling our products will be a source
of revenue for our intermediaries.
When dealing with the end customer,
intermediaries will rely on quality
information being provided by is in a
timely manner.
We strive to work closely with our intermediaries, engaging in
a number of ways. In Movestic, all intermediaries have access to a
partner web site, where they can administer customer processes
and obtain information as required. Regularly intermediary
newsletters are issued, providing information on current matters,
such as new products or regulatory updates. The Swedish division also
host an annual conference to engage with intermediaries, facilitating
two-way discussion around products, services and market
developments. Other areas of engagement include frequent meetings
with intermediaries, on an individual basis.
S
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28 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION B
S
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C
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DEPENDENCIES OF BUSINESS
ON STAKEHOLDER
IMPACT OF BUSINESS ON
STAKEHOLDER
HOW WE ENGAGE
WITH STAKEHOLDER
Outsourcers play a signifi cant
part in the day to day operations
of our activities, especially in
the UK. Without our outsourcers
operating effectively, we may
see an impact on our
performance, and our
relationship with customers,
which could lead to potential
regulatory issues.
Our outsourcers have an opportunity to
share in the growth of the group
through further acquisitions or portfolio
transfers. Our outsourcers rely on the
ongoing fi nancial stability of the group
in order to ensure that the services
provided under any existing
arrangements continue to be paid for
by Chesnara.
We view having strong, open and honest relationships with our outsourcers
as key to the long-term success of our business. We engage with our
outsourcers through various scheduled meetings, focusing on a
combination of specifi c function-driven relationship meetings and wider
meetings focusing on the overall relationship. We view it as important
that our outsource partners are suitably informed regarding business
developments in Chesnara, and that Chesnara is aware of any relevant
business changes in our outsourcers. This ongoing communication
enhances the relationships and works towards maintaining the longer-term
success of the group.
Our people are our greatest
assets and create and deliver
the strategy of the group. We
recognise that to be able to
meet the expectations that we
have set ourselves, we need
to ensure that we continue to
attract, promote and retain the
best candidates. Without high
performing and motivated staff
Chesnara would not be able to
deliver against its strategic aims.
The group has a signifi cant impact on
its employees, be it through its short
term and long-term fi nancial success,
its strategy, operational plans and
operating model. We aim to provide a
place of work that supports and
develops the group’s employees and
we recognise that the group’s
day-to-day culture and its overall
remuneration and benefi ts package
also has a signifi cant effect on
employees.
Compliance with regulatory
requirements is fundamental
to the success of the group.
Without it, we would not be
able to maintain our existing
status as a life and pensions
provider.
The manner in which Chesnara manages
itself, both from a prudential and conduct
perspective, will dramatically affect how
regulators view and interact with
Chesnara and its subsidiaries. The higher
risk that the group is deemed to be to the
regulator, the more focus that Chesnara
and its subsidiaries are deemed to require.
In addition, through being a member of
the ABI, Chesnara also has the potential
opportunity to respond to and shape
future regulatory change in the UK.
Chesnara, and its subsidiaries have various mechanisms in place to ensure
appropriate levels of engagement exist with employees. This involves:
– Completing staff feedback surveys.
– Holding regular update briefi ngs covering matters such as business
performance, policy updates or any other matters that are relevant
to employees.
– Holding regular employee forums to discuss any employee related matters.
– Having an appointed non-executive director who is responsible for
employee-related matters.
– Ensuring that we have relevant employee policies in place and that these
are available to our employees.
– Having a robust and transparent performance management framework.
Our corporate and social responsibility statement on pages 58 to 61
provides further information.
Our engagement with regulators generally takes the following forms:
– Regulators across the group typically have regular routines and practices
in place to support the delivery of their oversight objectives. This typically
takes the form of periodic meetings with management, and also involves
the group furnishing regulators with relevant information. Chesnara fully
supports this process.
– The submission of quarterly and annual fi nancial and risk reporting.
– Chesnara management will also typically engage with regulators as and
when required should there be a business update that would warrant so,
for example at the appropriate point during an acquisition process.
The group has a relatively small
but stable set of suppliers, who
provide quality and effi ciency,
and whom we rely upon. Most
of our suppliers are those
providing professional services
to which the group rely upon
high quality support and advice.
For those key suppliers of Chesnara,
we are likely to be an important source
of revenue, and therefore Chesnara’s
ongoing success in terms of delivering
its growth plans and remaining
fi nancially stable will be of signifi cant
interest to our suppliers.
A number of Chesnara’s suppliers take the form of the provision of a
service or advice as opposed to the supply of goods. For these suppliers
our engagement focuses on ensuring that the service or advice is fi t
for purpose and meets the intended scope. This typically involves up front
interaction in scoping the work, coupled with close monitoring of
progress throughout the duration of the services.
The group ensures that it adheres to supplier payment terms.
The environment and more
specifi cally the impact of climate
change, is an emerging risk that
is high up on our radar, as the
risk of climate change and
global warming affects Chesnara
like all other organisations.
Primarily, our operations have an
impact on the environment, through
carbon emissions. As documented on
page 61, our impact is broadly split into
energy use from our offi ces and
emissions from both business travel
and commuting.
Chesnara’s aim is to take reasonable steps to minimise the impact that its
day to day operations have on the environment. This involves consideration
of initiatives such as only making essential business travel and offsetting
our carbon emissions through the planting of trees (carbon offsetting).
We also encourage a paperless offi ce wherever possible. We have taken
steps to become a carbon neutral group during the year.
Climate change is recognised as an emerging risk, and so is monitored/
reported as part of the risk management function also.
For policyholders who choose where they invest, we provide access to a
range of ethical and environmentally sustainable funds.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
29
STRATEGIC REPORT
SECTION 172 • SIGNIFICANT DECISIONS
As referred to on page 26, the principal process that the board uses to make shorter-term and longer-term decisions is
the group business planning process. Key decisions also arise outside of the business planning process depending
on how the business develops during the year and the challenges and opportunities that it faces. The table below lists
the key decisions made by the board during the year and how the directors have considered the factors required by
Section 172 in making these decisions.
SIGNIFICANT
DECISION
DESCRIPTION OF DECISION AND IMPACT ON DIFFERENT STAKEHOLDER GROUPS
S
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– Overview: The longer-term dividend strategy of the group is set as part of the annual business planning process. Prior to actually paying a dividend,
consideration of actual performance, supported by a revised outlook, is made.
– Key considerations and decision The key considerations made by the board prior to the approval of the dividend are cash generation; solvency;
the acquisition strategy; and investor expectations. Further information on each of these considerations is provided on page 103. Based on all of the
above, during 2019 the board approved the continuation of the current dividend growth strategy, which resulted in an uplift of 3% on the total
dividend compared with the prior year.
– Primary benefi ciary: Dividends are made for the benefi t of Chesnara shareholders.
– Other stakeholder considerations:
• Regulators and customers: These are considered by the board in the context of ensuring that the solvency position post dividend remains robust.
– Overview: During the course of 2019 the following key acquisition related decisions have been made:
• the decision to acquire and transfer part of the term life and endowment portfolio of Monuta Insurance into the Waard Group; and
• the decision to acquire a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep
N.V, which is due to complete in summer 2020.
Several other acquisition opportunities were also considered but were not pursued through to completion.
– Key considerations and decision: Each acquisition was separately considered in the context of our primary acquisition assessment criteria, which are
cash generation, value enhancement, customer outcomes and risk appetite (see page 38 for further information). In light of these considerations, the
board approved the decisions to enter into a sale and purchase agreement with Argenta Bank and to enter into the asset purchase agreement with Monuta
Insurance.
– Primary benefi ciary: The above acquisitions were performed for the benefi t of our shareholders.
– Other stakeholder considerations:
• Banks: Our banks were considered as part of these processes in order to ensure that the security over existing debt arrangements is not
compromised.
• Regulators: Considered by the board largely from the perspective of ensuring the regulator is aware of the transaction at the appropriate time, and is
appraised of the solvency consequences and hence policyholder protection.
• Staff: The impact on staff is considered in the context of delivering the acquisition and ensuring appropriate resourcing is in place, coupled with the
impact of the staff in the book or company being sold. In relation to the latter, on these two acquisitions no staff are expected to transfer from the
seller to Chesnara. From the perspective of existing staff, on a longer-term basis, acquisitions lead to longevity of the business as a whole and
therefore provided additional job security to our staff.
• Customers: Customers are expected to benefi t from these acquisitions. The terms of the transferring policies will remain intact, the policies are being
transferred into a very solvent company, and the overall per policy costs of running the enlarged book will reduce, which help keep the policy
administration costs low, which will ultimately benefi t customers.
– Overview: The group has decided that it should continue with its ongoing investment in various aspects of its IT infrastructure across the group. This
includes replacing the current policyholder administration system in Scildon to support achieving the longer-term plans of the business and developing
more automated processes in our Swedish business to support its overall operating effi ciency and hence competitiveness.
– Key considerations and decision: The board considered the pros and cons of these two key IT and process developments, including the associated
risks, the fi nancial impact and viable alternatives. Based on this, the board decided to progress with updating the Scildon policyholder administration
system and to continue with the digitalisation of Movestic’s processes.
– Primary benefi ciaries: There are two primary benefi ciaries:
• Shareholders: The ongoing investment in IT is designed to provide value enhancements to the business and hence our shareholders. The target IT
infrastructure is designed to be more robust and more effi cient to run.
• Customers: Of equal prominence is the benefi t to customers. The new system will support a more digitalised service, increasing speed, optionality
and effi ciency for the customer.
– Other stakeholder considerations:
• Employees: The staff impact was appropriately considered by the board in making this decision, both in terms of the delivery of the programme and
the target employee operating model.
• Suppliers: Having reliable suppliers to support the implementation and, where relevant, ongoing maintenance of any new systems is an important
consideration when making this decision.
30 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION B
SIGNIFICANT
DECISION
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DESCRIPTION OF DECISION AND IMPACT ON DIFFERENT STAKEHOLDER GROUPS
– Overview: During the year some key decisions have been made relating to the mix of assets that Scildon has in place to back its long-term insurance
liabilities.
– Key considerations and decision: One of the group’s objectives is to seek to optimise its capital effi ciency from a risk and reward perspective. As
part of this ongoing process, facilitated by support from a third-party consultancy, some changes to the asset mix of Scildon were agreed. It was
decided that it would be benefi cial to sell some BBB corporate bonds holdings and some Italian government bonds to support investing in the Aegon
mortgage fund. Overall this change in investment mix is expected to yield similar returns but under the Solvency II rules will require lower levels of
capital to be held. In addition to this and driven by the perception that there was increased potential for future bond downgrades, a re-balancing of the
credit risk within the overall corporate bond portfolio took place, thereby increasing the overall portfolio quality.
– Primary benefi ciaries: There are two primary benefi ciaries:
• Shareholders: The refi nements to the asset mix have been made largely for the benefi t of the shareholders through, improvements to the solvency
position and future solvency surplus generation potential.
• Suppliers: The administrator of the Aegon mortgage fund will also have benefi ted from the decision to invest in the Aegon mortgage fund.
– Other stakeholder considerations:
• Regulators: Given the impact that key asset mix decisions can have on the solvency position, it is also important that our regulators are aware of the
impact of our decisions in this regard.
– Overview: The UK business uses various fund managers to manage its day to day fund management requirements. During the year it was decided to
assess the benefi ts of rationalising the number of fund managers that are used.
– Key considerations and decision: A review of several potential new suppliers was performed. Several factors were assessed for each fund manager,
including ongoing costs, costs of moving to a new model, service levels and choice of funds available to customers. Following this review, a proposal
was put to the board to move to a single fund manager for managing the UK’s unit-linked funds, which was approved. The target operating model is
expected to be fully implemented by the end of 2020.
– Primary benefi ciaries: The primary benefi ciaries are shareholders largely driven by the extra value that is expected to emerge from the reduced cost
of the revised investment management operating model.
– Other stakeholder considerations:
• Customers: The impact on customers was a key consideration when making the decision. The assessment concluded that the customer impact is
expected to be neutral or benefi cial as a result of this decision.
• Suppliers: The decision making process factored in the long-standing relationships that we have with our current investment managers.
– Overview: In November 2019, the board were presented with a paper proposing that the group engage in carbon offsetting to completely offset the
carbon emissions that were generated as a result of the group’s activities.
– Key considerations and decision: The paper considered the various options available to the group, the likely cost implications and the risks involved
with verifying the offsetting method selected, along with mitigations where possible. Following review and challenge, the board approved the approach
of offsetting our 2019 emissions. See our corporate and social responsibilities statement on pages 58 to 61 for more information.
– Primary benefi ciaries: The primary benefi ciary of this decision is the environment.
– Other stakeholder considerations:
• Employees: Employees were a further consideration, with this initiative supporting those employees who are environmentally conscious.
– Overview: During 2019 an assessment was made as to the benefi ts of applying the Solvency II volatility adjustment in the Netherlands, which is a
solvency management tool that is designed to reduce solvency volatility arising from movements in interest rates.
– Key considerations and decision: The pros and cons were considered in the context of the benefi t of applying the volatility adjustment and any extra
costs that might be required to manage its initial and ongoing application. It was agreed that benefi ts outweighed the relatively minor additional costs
of applying the volatility adjustment.
– Primary benefi ciaries: The primary benefi ciary of applying the volatility adjustment is the shareholder as it reduces our solvency volatility and hence
cash generation.
– Other stakeholder considerations:
• Regulator: Our regulators were also considered when making this decision, largely in the context of ensuring there is clear visibility of the rationale
and impact of this decision.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
31
BUSINESS REVIEW UK
The UK division is principally made up of the insurance company Countrywide Assured plc. The company manages
c256,000 policies and is in run-off. Countrywide Assured 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 2019
01
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.
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 division has continued to generate value in the year, driven by a
combination of market-driven factors and operational deliverables.
– One of the key value initiatives that has progressed in the year is the
consolidation of our fund manager arrangements from the current four to
one. A selection process has taken place and the preferred supplier has
been chosen. The division has plans in place to deliver the required
operational change during 2020, and the work is progressing to plan. The
2019 results reflect the benefit of the expected future cost savings arising
from the revised arrangements, amounting to £12.4m pre-tax.
– The division has benefited from positive lapse experience during the year,
which has continued to support the emergence of value.
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.
– Further improvements to the Countrywide Assured website were made
during the year. This included a new fund centre, coupled with additional
content to support the customer in understanding their products.
Subsequent customer research in relation to these changes has been
positive.
– As part of the division’s customer strategy programme the following was
also delivered during the year:
• Completed our initial programme for contacting customers that have
‘gone away’. This has involved a full screening of our policy base.
• Revised some key written communications to our customers in order to
meet good practice, including annual statements and retirement
communications across all our books.
– Maintained good levels of customer satisfaction during the year.
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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 delivery of the division’s business as usual governance
responsibilities, including open and constructive dialogue with our
regulators.
– The operational resilience programme has progressed well. This programme
has been established in order to ensure that we comply with the high
standards expected by our regulators, who have issued further guidance
during the year to support their objective of maintaining operational
resilience in the financial services sector as a whole.
– Good progress made on the division’s IFRS 17 programme.
– Further to the introduction of the Master Trust Authorisation & Supervision
Regime, a decision was taken to wind-up five Master Trust Schemes and
assign members’ benefits into their own individual arrangement. We
engaged with tPR and obtained legal advice to complete this with limited
customer impact. Mailing to confirm the wind-up will complete in 2020.
32
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
Covid-19 is not deemed to invalidate any of the future priorities reported below. There is, however, an over-arching
priority to ensure business continuity through the crisis. Revised working practices and other operational challenges
are not expected to have a permanent material impact on the benefits expected but delivery timeframes are likely
to be extended.
KPIs
Economic Value
£m
2019
204.6
2018
214.7
2017
255.5
2016
239.6
2015
232.2
Cash generation
£m
151.5 356.1
2019
33.6
92.5
307.2
2018
55.8
60.5 316.0
2017
34.5
30.5 270.1
2016
21.3
232.2
2015
42.5
FUTURE PRIORITIES
Reported value
Cumulative dividends
– Completion of the division’s fund manager
rationalisation programme during 2020.
– Retaining the division’s focus on maintaining an
efficient and cost-effective operating model.
– Continue to support Chesnara in identifying and
delivering UK acquisitions.
– Continue to ensure that our investment strategy
and associated asset mix is delivering the risk and
rewards that we expect as the book runs off.
Policyholder fund performance
17.9%
16.4%
17.8%
15.5%
CA pension managed
CWA balanced managed pension
S&P managed pension
Benchmark - ABI Inv Mixed 40%-85% shares
(5.5)%
(4.9)%
(7.8)%
(6.2%)
12 months ended 31 December 2019
12 months ended 31 December 2018
SOLVENCY RATIO: 160%
35.8
160%
64.9
£m
130%
29.1
(32.0)
131%
32.9
Surplus generated in
the period increases
solvency ratio from
130% to 160%. After the
dividend, due to be paid
in 2020, the ratio is 131%.
31 Dec 18
surplus
Surplus
generation
31 Dec 19
surplus
(pre-div)
2019
dividend
31 Dec 19
surplus
– Roll out the remaining updates to written
customer communications.
– Key business as usual activities include:
• Continuing to complete product reviews which
are designed to support our assessment of
providing fair outcomes to our customers. Deliver
any resultant remediation activity as required.
• Implementing a new routine process for
continuing to stay in touch with customers who
have not provided us with their most recent
contact details. This will build on the one-off
exercise we have completed.
– Continue to focus on ensuring we manage our
policyholders in a way that minimises risk of any
customer complaints and, in the instance a
customer is not happy with our service, deal with
these in an appropriate manner.
– 2020 will see a focus on the operational impact
of the IFRS 17 programme, including a planned
software supplier selection process, coupled
with planning and starting to implement the
process changes that will be required to embed
the selected solution into our financial reporting
routines.
33
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B 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 an innovative brand in the Swedish life insurance market. It offers personalised unit-linked
pension and savings solutions through brokers and is well-rated within the broker community.
BACKGROUND INFORMATION
INITIATIVES & PROGRESS IN 2019
01
CAPITAL & VALUE MANAGEMENT
Movestic creates value predominantly by generating growth in the
unit-linked assets under management (AuM), whilst assuring a high
quality customer proposition and maintaining an efficient operating
model. 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.
– The operational changes that were made last year have led to a 9% reduction
in internal operational expenses.
– Negative transfer ratio with transfers out exceeding transfers in, with new
government legislation making the transfer process easier for customers.
– Despite the adverse transfer ratio, positive net client cash flows
together with investment growth contributed to a 24.8% increase in assets
under management.
– Positive renegotiation of reinsurance arrangements.
– Corporate structure changes in the form of progressing the acquisition of the
full ownership of Modernac, an associate holding and repatriating SICAV asset
management operations from Luxembourg will create future value.
– Asset data enhancements have resulted in a reduction in capital
requirements of £2.5m.
– Proposed record dividend payment to Chesnara of £6.2m.
CUSTOMER OUTCOMES
Movestic provides personalised long-term savings, insurance policies
and occupational pensions for individuals and business owners. We
believe that recurring independent financial advice increases the
likelihood of a solid and well-planned financial status, hence we are
offering our products and services through advisors and licenced brokers.
– Policyholder average investment return of 18.9% in the year (2018: -6.0%).
– Launch of Movestic Avancera into the Swedish market, a new type of product
linked to a fund with capital protection, in co-operation with Morgan Stanley.
– Launch of a digital occupational pension solution for SMEs.
– New website for partners and customers launched in 2019.
– Launch of a new claims system.
GOVERNANCE
Movestic operates to exacting regulatory 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.
– Introduction of digital invoice handling.
– Movestic has successfully implemented the second phase of the Insurance
Distribution Directive (IDD) which applied from 1 October 2019.
– The IFRS 17 project has progressed well with delivery of first dry-run and a
study of the potential effects on operations and business architecture.
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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 6% -10%
of the advised occupational pension market. This focus ensures we are
able to adopt a profitable pricing strategy.
– Fee and lapse pressures have led to a reduction in new business profits with
2019 new business profits of £4.3m on our EcV and of £6.9m on our more
commercially realistic metric (as detailed on page 11).
– Launch of a digital life insurance product through partnership with an
insurtech company. This will be used in the broker and direct channel and as
a cross selling product.
– We have remained resilient to the harsh competitive environment, with
market shares remaining within long-term target throughout the year.
– An improved profitability measurement model has been implemented, as well
as developing an enhanced pricing strategy with further profitability focus.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
Covid-19 is not deemed to invalidate any of the future priorities reported below. There is, however, an over-arching priority
to ensure business continuity through the crisis. Revised working practices and other operational challenges are not
expected to have a permanent material impact on the benefits expected but delivery timeframes are likely to be extended.
KPIs (ALL COMPARATIVES HAVE BEEN RESTATED USING 2019 EXCHANGE RATES)
FUTURE PRIORITIES
Economic Value
£m
2019
251.8
2018
211.5
2017
223.5
2016
205.0
2015
171.0
Broker assessment rating
2019
3.5
2018
3.8
2017
3.7
2016
3.8
2015
3.7
7.7
259.5
Reported value
Cumulative dividends
5.0
216.4
2.4
225.9
205.0
171.0
– Continue the journey of digitalising and
automating processes, with a view to improving
both efficiency and control.
– Continue to develop more digitalised and
individualised customer proposition and
experience.
– Provide a predictable and sustainable dividend
to Chesnara.
– Continue to develop new solutions and tools to
support the brokers value enhancing customer
proposition.
– Further work on the direct distribution channels.
POLICYHOLDER
AVERAGE INVESTMENT
RETURN:
18.9%
SOLVENCY RATIO 159%
£m
174%
6.0
159%
(6.2)
81.9
87.9
155%
81.7
Solvency remains strong.
After the dividend, due to
be paid in 2020, the ratio
is 155%.
31 Dec 18
surplus
Surplus
generation
31 Dec 19
surplus
(pre-div)
2019
dividend
31 Dec 19
surplus
– Design and implement a target business
architecture to support the group in complying
with IFRS 17.
– Implementation of a sub ledger which aims to
improve and automate the process for reporting
to the supervisory authority.
– Continue to deliver compliance with the new
Insurance Distribution Directive (IDD). The IDD
seeks to strengthen consumer protection and
transparency within the distribution of insurance-
based products.
Occupational pension market share %
New business profit
– Continue to write new business within the
2019
6.5
2018
6.6
2017
7.6
2016
8.3
£m*
2019
6.9
2018
10.9
2017
10.8
2016
11.2
2015
6.1
target range.
– Ongoing digitalisation of processes to improve
customer and broker experience.
– Focus on increasing brand awareness.
– Enhance processes around cross selling.
– Develop a new pricing strategy.
– Further develop a pension draw down proposition.
*2019 and 2018 new business figures have been calculated
using the commercially realistic metric, as detailed
on page 11. Values prior to this are retained at that which
they were previously reported.
35
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B BUSINESS REVIEW NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through their dual closed and open book approach and
through the group acquisition strategy will integrate portfolios and businesses into their operations.
BACKGROUND INFORMATION
INITIATIVES & PROGRESS IN 2019
CAPITAL & VALUE MANAGEMENT
Both Waard and Scildon have a common aim to make capital available
to the Chesnara group to fund further acquisitions or to contribute to
the dividend funding. Whilst their aims are common, the dynamics by
which the businesses add value differ:
– Waard is in run-off and has the benefit that the capital requirements
reduce in-line with the attrition of the book.
– As an ‘open business’, Scildon’s capital 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.
– The Scildon improvement plan has taken steps to reduce the cost base and
headcount and enacted a new reinsurance treaty, with full year benefits
expected in 2020.
– Reductions in the internal capital management buffer for both Dutch
companies from 100% to 85% were approved by the DNB as at
31 December 2019.
– Waard has completed a portfolio acquisition of c6,000 policies from Monuta
Insurance in October and announced the acquisition of a portfolio of term
life and savings products from Argenta Bank, which is expected to complete
during 2020.
– Scildon has optimised its risk-based return through de-risking its asset
portfolio and investing into mortgage funds.
– Continuation of the dividend policy with dividends of £11.9m proposed.
CUSTOMER OUTCOMES
Great importance is placed on providing customers with high quality
service and positive outcomes.
Whilst the ultimate priority is the end customer, in Scildon we also see
the brokers who distribute our products as being customers and hence
developing processes to best support their needs is a key focus.
– The recently launched mortgage term product won a five-star rating and
best product award from independent research agency, MoneyView.
– Scildon has continued to engage with its IFA network and has again received
an award from Afdiz, the Dutch broker organisation. In 2019, the business
was awarded ‘Best Investment Policy Provider’ continuing a long run of
winning awards across its product range.
– Scildon continues work on the migration and digitalisation of its policy
administration system, which is expected to complete in 2021.
01
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GOVERNANCE
Waard and Scildon operate in a regulated environment and comply with
rules and regulations both from a prudential and from a financial conduct
point of view.
– We continued to support our governance structures with a new Supervisory
Board chair, Haik de Jong, and with the Group CEO, John Deane, becoming
a member.
– The IFRS 17 project has progressed well with delivery of first dry-run and a
study of the potential effects on operations and business architectures.
Scildon brings a ‘New business’ dimension to the Dutch division.
– Increased new business profits in the year on both our EcV and more
Scildon sell 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 adopt a profitable pricing
strategy. New business also helps the business maintain scale and
hence contributes to unit cost management.
commercially realistic metrics (as detailed on page 11). This has been partly
delivered through cost saving initiatives as detailed above.
– Average term market share for 2019 was 11.6% compared to 7.6% in 2018. In
isolation, the market share for December 2019 was 13.7%.
– The number of policies managed by Scildon increased by 6%.
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36
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
Covid-19 is not deemed to invalidate any of the future priorities reported below. There is, however, an over-arching priority
to ensure business continuity through the crisis. Revised working practices and other operational challenges are not
expected to have a permanent material impact on the benefits expected but delivery timeframes are likely to be extended.
KPIs (ALL COMPARATIVES HAVE BEEN RESTATED USING 2019 EXCHANGE RATES)
FUTURE PRIORITIES
Scildon Economic Value
£m
2019
168.8
2018
162.1
2017
211.8
2016
214.7
2015
231.2
61.8
230.7
56.9
219.1
35.7
247.5
35.7
250.4
231.2
Reported value
Cumulative dividends
– Continue to provide dividends to group.
– Complete the Scildon improvement plan covering
cost management, process efficiency and
business model assessments.
– Continue to actively manage the investment
strategy and expand the Scildon holding in
mortgage funds.
– Progress capital management and cash
generation initiatives across the group,
particularly in Scildon.
Client satisfaction rating
2019
7.8
2018
7.7
2017
7.6
2016
7.4
2015
7.5
SOLVENCY RATIO SCILDON: 220%
SOLVENCY RATIO WAARD: 555%
Solvency is robust in both businesses, with post-dividend solvency ratios of 210%
and 501% for Scildon and Waard respectively.
£m
203%
8.6
220%
(7.0)
77.4
86.0
£m
210%
79.0
624%
2.8
555%
(4.9)
38.6
41.3
501%
36.5
31 Dec 18
surplus
Surplus
generation
31 Dec 19
surplus
(pre-div)
2019
dividend
31 Dec 19
surplus
31 Dec 18
surplus
Surplus
generation
31 Dec 19
surplus
(pre-div)
2019
dividend
31 Dec 19
surplus
Term assurance market share %
New business profit
2019
11.6
2018
7.6
2017
7.3
2016
5.9
2015
6.6
£m*
2019
7.5
2018
4.5
2017
1.8
2016
1.9
2015
0.1
– Regular engagement with its customers to
improve service quality and to enhance and
develop existing processes, infrastructure and
customer experiences.
– Continue with the migration and digitalisation of
the Scildon IT platform.
– Continue to engage with its broker network to
develop our processes in line with their
requirements.
– IFRS 17 implementation to continue with further
dry runs, technical decisions and operational
implementations, including expected local
migration to Dutch GAAP for Scildon.
– Continuously enhance the governance and risk
management framework.
– Continue to deliver product innovation and cost
management actions to ensure we meet our full
potential in terms on new business value.
– Consider alternative routes to market that do not
compromise our existing broker relationships,
such as product white labelling.
*2019 and 2018 new business figures have been calculated
using the commercially realistic metric, as detailed
on page 11. Values prior to this are retained at that which
they were previously reported.
37
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B STRATEGIC REPORT
BUSINESS REVIEW • ACQUIRE LIFE & PENSIONS BUSINESS
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.
How we deliver our acquisition strategy
– Identify potential deals through an effective network of advisers and
industry associates, utilising both group and divisional management
expertise as appropriate.
– We primarily focus on acquisitions in the UK and Netherlands, although will
consider other territories should the opportunity arise.
– We assess deals applying well established criteria which consider the
impact on cash generation and Economic Value under best estimate and
stressed scenarios.
HOW WE ASSESS DEALS
– 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 a combination of debt, equity or cash depending on the
size and cash flows of each opportunity.
Cash generation
Collectively our future acquisitions must be suitably cash generative to continue to fund the Chesnara dividend strategy.
Value optimisation
Acquisitions are required to have a positive impact on the Economic Value per share under best estimate and certain
more adverse scenarios.
Customer outcomes
Acquisitions must ensure we protect, or ideally enhance, customer interests.
Risk appetite
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.
RISKS
– 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.
WHAT WE CAN DO ABOUT THIS
– 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
– There is the risk that we make an inappropriate acquisition that adversely
strategic objectives.
impacts the financial strength of the group.
– Flexibility over the timing of subsequent divisional 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.
INITIATIVES AND PROGRESS IN 2019
ACQUISITION OUTLOOK
During 2019, the group entered into two transactions:
1. Monuta transaction
On 3 October 2019, Chesnara announced the completion of the acquisition
and transfer of a term life and endowment portfolio of 6,000 policies from of
Monuta Insurance, a large provider of funeral insurance products in the
Netherlands.
The transaction was enacted through the Waard Group. The consideration was
a nominal €1 and entailed the transfer of assets of £28.1m and liabilities of
£25.7m, resulting in a reported immediate EcV gain of £2.4m.
2. Argenta transaction
On 22 November 2019, Chesnara announced the agreement to acquire a
portfolio of life insurance business in run-off from the Dutch branch of
Belgian-owned Argenta Bank-en Verzekeringsgroep N.V. The transaction is
expected to be both earnings and EcV accretive on completion. Chesnara
estimates that the acquired portfolio will have a positive cumulative cash
generation profile over its remaining life.
The transaction, which is expected to complete in 2020, will involve the
transfer of a portfolio of approximately 44,000 term and savings policies, for
a consideration of €29.2m (approximately £24.8m), to be paid in cash. The
consideration represents a discount of 17% to the acquired portfolio’s
Solvency II own funds, calculated on a Chesnara-consistent basis, and a 22%
discount (c.€8.0m gain) to Chesnara’s estimate of Economic Value as at
30 June 2019. As at 30 June 2019, the acquired portfolio had gross assets of
c.€380m (c.£323m at 31 December 2019 exchange rates).
– Overall, we have witnessed an increase in acquisition activity in the year.
This increase has coincided with, what we perceive to be, a rise in seller’s
valuations and prices paid for potential targets.
– In light of this, it is worth reiterating that Chesnara continues to measure
potential targets against its stringent acquisition assessment model which
takes into account; (a) the price compared to the EcV; (b) the cash generation
capability; (c) the strategic fit; and (d) the risks within the target. We are
committed to maintaining our discipline when assessing potential
acquisitions.
– The environment in which European life insurance companies operate
continues to increase in complexity, such as the forthcoming application of
IFRS 17. 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.
– We continue to have strong support from shareholders and lending
institutions to progress our acquisition strategy, and we also believe that
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 that 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.
38
CHESNARA ANNUAL REPORT & ACCOUNTS 2019XXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED)
CAPITAL MANAGEMENT • SOLVENCY II
Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for liquid resources
available to fund items such as dividends, acquisitions or business investment. As such, Chesnara defines cash
generation as the movement in surplus, above management buffers, during the period.
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.
CHESNARA GROUP OWN FUNDS
CHESNARA GROUP SCR
Group solvency
ratio
Group solvency
surplus
31 Dec 2019
31 Dec 2018
155%
158%
£210.8m
£202.4m
£591m
31 Dec 2019
£553m
31 Dec 2018
£380m
31 Dec 2019
£350m
31 Dec 2018
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 chart below shows the categories and their relative
weighting for Chesnara:
Total market risk
Total life underwriting risk
Capital requirements for the other sub
Counterparty default risk
Total health underwriting risk
Operational risk
There are three levels of capital requirement:
Minimum dividend paying requirement/risk appetite requirement
The board sets a minimum solvency level above the SCR which means a
more prudent level is 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
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.
39
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B CAPITAL MANAGEMENT • SOLVENCY II
We are well capitalised at both a group and subsidiary level. We have applied the volatility adjustment in our Dutch
businesses for the first time in this period but have not used any other elements of the long-term guarantee package
within the group. The volatility adjustment is an optional measure that can be used in solvency calculations to reduce
volatility arising from large movements in bond spreads.
SOLVENCY POSITION
SOLVENCY SURPLUS MOVEMENT * *pre intragroup dividends
Chesnara group £m
155%
158%
173
38
168
35
591
380
553
350
£m
35.8
6.1
2.9
8.9
(0.2)
(13.6)
(31.9)
203.0
210.8
Divisional movement - £53.6m
31 Dec 2019
31 Dec 2018
Group
surplus
31 Dec 2018
CA
Movestic Waard
Scildon Chesnara/
consol adj
Exchange
rates
Dividends
Group
surplus
31 Dec 2019
Surplus: The group has £172.8m of surplus over and above the internal
capital management policy, compared to £168.0m at the end of 2018.
The group solvency ratio has decreased slightly, from 158% to 155%.
The growth in surplus has arisen from a rise in Own Funds, which have
increased more than the rise in required capital.
Own Funds: Own Funds have risen by £70.3m (pre-dividends). This is
driven largely by equity market and spread narrowing gains during the year.
In addition, management actions such as Fund Manager Rationalisation, a
with-profit capital extraction and the Monuta Insurance portfolio transfer
have resulted in Own Funds growth.
Dividends: The closing solvency position is stated after deducting the
£20.8m proposed dividend (31 December 2018: £20.2m), and reflects the
payment of an interim dividend of £11.1m.
SCR: The SCR has risen by £30.5m this year. The key movements underlying
this are increases in equity risk, currency risk and lapse risk, partially offset
by reduced spread risk, in part due to Scildon de-risking activities.
The graphs on this page present the divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within the consolidated numbers. Note that
year end 2018 figures have been restated using 31 December 2019 exchange rates in order to aid comparison at a divisional level.
UK £m
SWEDEN £m
131%
11
22
130%
10
19
140
108
126
97
31 Dec 2019
31 Dec 2018
Surplus: £11.4m above board’s capital
management policy.
155%
Dividends: Solvency position stated after
£32.0m proposed dividend (2018: £59.0m).
Own Funds: Increased by £46.8m
(pre-dividend) due to asset returns over the
period, the impact of FMR and with-profits
capital extraction, partially offset by the
negative impact of the fall in the yield curve.
SCR: Increased by £11.0m, driven by
market risk rise. Equity risk has increased,
due to equity market gains (with knock-on
impacts on currency).
52
30
150
174%
193
60
22
111
231
31 Dec 2019
31 Dec 2018
Surplus: £51.8m above board’s capital
management policy.
Dividends: Solvency position stated after
£6.2m proposed dividend (2018: £2.7m).
Own Funds: Growth of £45.0m
(pre-dividend) due to investment returns
over the period, in particular gains in
equity markets. Partially offset by adverse
assumption changes for transfer rates, future
fund management income and fund rebates.
SCR: Capital requirements have risen by
£39.0m. Equity risk is the main driver due to
the equity market gains during the year.
NETHERLANDS – WAARD £m
NETHERLANDS – SCILDON £m
501%
624%
46
29
8
9
46
31
7
7
31 Dec 2019
31 Dec 2018
Surplus: £28.7m above board’s capital
management policy (£1.4m rise due to
buffer reduction: 100% to 85%).
Dividends: Solvency position stated after
£4.9m proposed dividend (2018: £3.1m).
Own Funds: Growth of £4.5m (pre-
dividend) due to positive returns, Monuta
Insurance acquisition, mortality experience
and revised mortality assumptions.
SCR: Increased by £1.7m, due to
acquisition and rise in equity and currency
risk, due to equity gains.
210%
203%
18
61
72
151
2
75
75
152
31 Dec 2019
31 Dec 2018
Surplus: £17.9m above board’s capital
management policy (£10.8m rise due to
buffer reduction: 100% to 85%).
Dividends: Solvency position stated after
£7.0m proposed dividend (2018: £4.9m).
Own Funds: Growth of £5.4m (pre-
dividend) due to significant spread returns
and the introduction of the volatility
adjustment, partially offset by yield curve
movements.
SCR: Decreased by £3.2m, driven by fall in
spread risk following de-risking exercises.
KEY
Own Funds (Post Div)
SCR
Buffer
Surplus above buffer
40
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT 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 to the right 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.
KEY
Positive impact
Negative impact
Impacts
£0m to £15m
£15m to £30m
£30m to £50m
£50m to £90m
£90m to £140m
INSIGHT *
Solvency surplus
Cash generation
EcV
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
1% interest rate fall
50bps credit spread rise
25bps swap rate fall
10% mass lapse
10% expense rise
+ 1% inflation rise
10% mortality increase
20% sterling appreciation
A material sterling appreciation reduces the value of surplus in our overseas
divisions and hence has an immediate 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 in CA.
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 book.
Equity sensitivities
The equity rise sensitivities cause both Own Funds and SCR to rise, as the
value of the funds exposed to risk is higher. The increase in SCR is larger
than Own Funds, resulting in an immediate impact on surplus. Conversely, in
an equity fall, Own Funds and SCR both fall. The extent to which the SCR
reduction offsets the Own Funds depends on the stress applied. The impacts
are not symmetrical due to management actions and tax. The change in
symmetric adjustment has a significant impact (25% equity fall: -£19m to the
SCR, 25% equity rise: +£39m to SCR). The EcV impacts are more intuitive as
they are more directly linked to Own Funds impact. CA and Movestic
contribute the most due to their large amounts of unit-linked business.
Interest rate sensitivities:
An interest rate rise is generally positive across the group. An interest rate
fall results in a larger impact on Own Funds than an interest rate rise,
given the current low interest rate environment. CA, Movestic and Scildon
all contribute towards the total group cash generation impact.
50bps credit spread rise
A credit spread rise has an adverse impact on surplus and future cash
generation, particularly in Scildon due to corporate and non-local government
bond holdings that form part of the asset portfolios backing non-linked
insurance liabilities. Scildon’s sensitivity has reduced due to the asset de-risk
but is still significant. The impact on the other divisions is less severe.
10% mass lapse
This sensitivity has a small impact on surplus as the reduction in Own Funds
is largely offset by the SCR fall. However, with fewer policies on the books
there is less potential for future profits. The division most affected is
Movestic; the loss in future fee income following a mass lapse hits Own
Funds by more than the 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.
10% mortality increase
This sensitivity has an adverse impact on surplus and cash generation,
particularly for Scildon due to their term products.
*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 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 starting position.
41
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
FINANCIAL REVIEW
The key performance indicators are a reflection of how the business has performed in delivering its three strategic
objectives. These two pages provide a ‘snapshot’ of our key financial measures and some insight into what is driving the
outcome in 2019. Further analysis can be found on pages 44 to 46.
IFRS
IFRS PRE-TAX PROFIT £96.1M
2018: £27.0m
TOTAL COMPREHENSIVE INCOME £60.6M
2018: £23.7m
Further detail on p48
What is it?
Presentation of the results in accordance with International Financial
Reporting Standards (IFRS) aims to recognise the profit arising from the
longer-term insurance and investment contracts over the life of the policy.
Why is it important?
Whilst the IFRS results form the core of reporting 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.
Risks
The IFRS profit can be affected by a number of our principal risks and
uncertainties as set out on pages 53 to 57. 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. The IFRS
results of Scildon are potentially relatively volatile, in part, due to the
different approach used by the division for valuing assets and liabilities, as
permitted under IFRS 4.
Highlights £m
2019
2018
CA
Movestic
Waard
Scildon
47.9
28. 2
41.6
Group
& consol
adj
Profit on
acquisition
Taxation
Forex
& other*
13. 2
9. 3
4.9
3. 5
0.8
–
(1.1)
(12 . 2)
(12 .9)
(3.0)
(0. 3)
(17.0)
(18. 5)
*includes other comprehensive income
– Strong results in the UK and Scildon drive substantial profits in 2019,
with positive contributions from all operating businesses.
– Significant earnings have been generated from both operating items
(£46.2m) and economic (£49.1m) factors.
– The Waard result benefited from a one-off gain of £0.8m following the
acquisition of a policy portfolio from Monuta Insurance.
– Total comprehensive income includes a foreign exchange loss of £18.7m
relating to sterling’s appreciation against both the euro and Swedish krona.
GROUP CASH GENERATION £36.7M
2018: £47.8m
DIVISIONAL CASH GENERATION £50.8M
2018: £63.9m
Further detail on p44
What is it?
Cash generation is calculated as being the movement in Solvency II Own
Funds over the internally required capital. The internally required capital is
determined with reference to the group’s capital management policies,
which have Solvency II rules at their heart. Cash generation is used by the
group as a measure of assessing how much dividend potential has been
generated, subject to ensuring other constraints are managed.
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 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 53 to 57. Whilst cash generation is a function of the
regulatory surplus, as opposed to the IFRS surplus, it is 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.
Highlights £m
22.6
50.8
(14.1)
33.6
(6.2)
0.8
36.7
UK
Sweden
Netherlands-
Waard
Netherlands-
Scildon
Divisional
cash
Other group
activities
Total group
cash
Divisional cash generation
– Cash generation from both the UK and Scildon support the divisional result,
with cash being utilised in Sweden.
– The UK contribution was delivered through significant growth in Own Funds,
whilst the main driver in Scildon was asset optimisation and reduction in
capital requirements.
– Movestic also delivered substantial growth in Own Funds, although this was
outweighed by the increases in capital requirements, resulting in cash
utilisation for the year.
– The result also includes the non-recurring benefit of a £7.9m capital transfer
from restricted with-profit funds in the UK (net movement is c£5.1m growth
in restricted surplus, 2018: net £20m release).
Group cash generation
– Total group cash generation includes the impact of other group activities,
primarily the impact of group expenses on own funds and a reduction in
capital requirements upon consolidation of divisions.
42
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
£
ECONOMIC VALUE (ECV) £670.0M
2018: £626.1m
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.
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 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, yields on fixed interest securities and bond spreads. 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 within a range
of £90m-£140m, based on the composition of the group’s EcV at 31 December 2019.
EcV EARNINGS £104.0M
2018: £(60.9)m
Further detail on p47
Highlights £m
104.0
(31.3)
(28.8)
670.0
626.1
2018
Group EcV
EcV
earnings
Dividends
Forex
2019
Group EcV
– Economic value rose by 7% to £670.0m in 2019.
– Group EcV earnings of £104.0m, supported by
substantial economic profits across the divisions.
– The movement in EcV since the start of the year
includes the impact of the payment of the final 2018
and interim 2019 dividends.
– Foreign exchange losses stemmed from the translation
of the Dutch and Swedish divisional results,
representing the strengthening of sterling against the
euro and Swedish krona since the start of the year.
Further detail on p46
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
Material other operating items
4.1
1.5
The principal underlying components of the Economic Value earnings are:
– The expected return from existing business (being the effect of the unwind of the rates used to
discount the value in-force);
– Value added by the writing of new business;
– Variations in actual experience from that assumed in the opening valuation;
– The impact of restating assumptions underlying the determination of expected cash flows; and
– The impact of acquisitions.
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 EcV 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, EcV profit emergence from our existing businesses, and the EcV
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 53 to 57. 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.
Economic earnings
121.1
Other
(22.7)
Total EcV earnings
104.0
– Total EcV earnings of £104.0m were generated in 2019.
– Economic earnings drive the result, primarily equity
market returns and the narrowing of bond spreads.
– Underlying operating activities were modest, suffering
from the impact of the strengthening of assumptions
in Movestic and operating experience in Scildon. The
UK and Waard delivered positive operating earnings.
– Material other operating items relate to one-off
strengthening of assumptions in Movestic, following
changes to the transfer process and changes to local
transfer legislation. This was offset by subsequent
changes to trail commission expectations. Also
included is a gain on completion of the acquisition of
a policy portfolio from Monuta Insurance (£2.4m),
under the Waard Group.
– Other mostly relates to tax and changes in risk margin.
43
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
FINANCIAL REVIEW • CASH GENERATION
The UK and Scildon have delivered significant cash contributions, driving a total divisional cash generation of £50.8m
for the year. Cash is generated from increases in the group’s solvency surplus, which is represented by the excess of
own funds held over management’s internal capital needs. These are based on regulatory capital requirements, with
the inclusion of additional ‘management buffers’.
GROUP CASH GENERATION £36.7M
2018: £47.8m
DIVISIONAL CASH GENERATION £50.8M
2018: £63.9m
Definition: Defining cash generation in a Life and Pensions business is complex and there is no reporting framework defined by
the regulators. This leads to inconsistency across the sector. We define cash generated as being the movement in Solvency II
surplus over and above the SCR, plus management buffers.
Implications of our cash definition:
Positives
– Creates a strong and transparent alignment to a regulated framework.
– Positive cash results can be approximated to increased dividend potential.
– Cash is a factor of both value and capital and hence management are
focused on capital efficiency in addition to value growth and indeed the
interplay between the two.
Challenges and limitations
– In certain circumstances the cash reported may not be immediately
distributable by a division to group or from group to shareholders.
– Brings the technical complexities of the SII framework into the cash results
e.g. symmetric adjustment, with-profit fund restrictions, model changes, etc,
and hence the headline results do not always reflect the underlying
commercial or operational performance.
2019 £m
UK
Sweden
Netherlands – Waard Group
Netherlands – Scildon
Divisional cash generation/(utilisation)
Other group activities
Group cash generation/(utilisation)
GROUP
Movement in
Own Funds
Movement in
management’s
capital requirement
Forex
impact
Cash
generated/
(utilised)
2018 £m
Cash generated/
(utilised)
46.8
45.8
4.6
5.5
102.7
(5.3)
97.4
(13.2)
(47.6)
(2.1)
17.8
(45.1)
(3.2)
(48.3)
–
(4.4)
(1.7)
(0.7)
(6.8)
(5.5)
(12.3)
33.6
(6.2)
0.8
22.6
50.8
(14.1)
36.7
55.8
18.1
7.8
(17.8)
63.9
(16.1)
47.8
– The headline cash results of £36.7m more than covers the annual dividend.
– Divisional cash generation supports the total proposed dividends to the Chesnara parent company of £50.1m
– The headline cash result is heavily impacted by technical matters such as the symmetric adjustment, with-profit restrictions, and model enhancements. An
adjusted cash result which looks through such items, shows an underlying ‘commercial cash’ result of £75.3m (see adjacent page).
– The commercial cash result is made up of £37.5m from changing economic conditions, £43.3m from management actions and a residual balance of £(5.5)m
from operating performance.
UK
– Good value growth significantly outweighs an increase in SCR resulting in
solid cash generation that more than covers the Chesnara dividend. The
prior year comparison benefitted from an unusually high release from the
with-profits fund.
SWEDEN
– As a predominately unit linked business with a high proportion of equity
investments, strong equity performance has created significant asset value;
however this has created a corresponding increase in SCR. The SCR
increase includes £13.3m arising from the symmetric adjustment, whilst in
2018 the adjustment was a reduction in SCR. This explains much of the year
on year cash movement.
NETHERLANDS – WAARD
NETHERLANDS – SCILDON
– Although Waard has reported a further strong growth in Own funds, unlike in
previous years the capital requirement has also increased during the year.
Much of the capital requirement increase is due to the acquisition of a policy
portfolio from Monuta Insurance. Excluding the acquisition impact and before
foreign exchange losses on the opening surplus, the underlying cash of £3.6m
remains towards the top end of the range for steady state expectations.
– Scildon is less exposed to equity markets. Unlike the other divisions, the
Scildon cash result is dominated by a large reduction in management’s
capital requirements primarily as a result of a shift to a more capital efficient
investment strategy. The Scildon result incorporates a significant loss
resulting from further downward pressure on yields. Considering the yield
pressures, it is reassuring to note that the Scildon cash profit in 2019 more
than covers the prior year loss with cumulative cash generation of £21.0m
since acquisition being in line with expectations.
44
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
FINANCIAL REVIEW • CASH GENERATION – ENHANCED ANALYSIS
Cash generation, alongside EcV growth, is critical to the Chesnara investment case. It is therefore important that the
dynamics beneath the headline results are understood. Unlike other metrics such as the IFRS results, there is no
prescribed disclosure framework for cash reporting. We have therefore produced some enhanced analysis with the
disclosure format being broadly based upon how Embedded Value profits were historically reported.
COMMERCIAL CASH £75.3M
ECONOMIC CASH GENERATION £37.5M
All operating divisions delivered positive commercial cash generation in 2019.
The format of the analysis draws out components of the cash results relating to technical complexities, modelling issues or exceptional corporate activity
(e.g. acquisitions). The result excluding such items is deemed to better reflect the underlying commercial outcome (commercial cash). This commercial result
is then analysed to show the key drivers of that result. In particular, the analysis draws out the extent by which the result is due to external economic conditions.
The analysis also highlights the impacts of management actions and exceptional items. There are a number of approximations in the analysis, and as such each
individual line item should only be used as a guide to the factors that have influenced cash generation in the year.
Insight
UK
SWEDEN
NETHERLANDS
WAARD
NETHERLANDS
SCILDON
GROUP ADJ
TOTAL
Base cash generation
Symmetric adjustment
With-profits restrictions
Acquisition activity
Lapse SCR reversal
Model changes
Commercial cash
Analysed as:
Economic
Equities
Spreads
Forex
Yields
Other economics
Operating
Material other operating items
Other
Management actions & other exceptional
FMR
Asset de-risking
Buffer reduction
Asset data enhancements
Impact of volatility adjustment
Insight
33.6
9.7
5.1
–
–
3.8
52.2
31.1
22.9
6.4
–
(1.6)
3.6
15.0
–
0.9
5.2
5.2
–
–
–
–
1
2
3
4
5
6
7
8
a
b
c
d
(6.2)
13.3
–
–
–
–
7.1
17.5
19.3
3.3
(4.4)
2.5
(3.2)
(1.1)
(6.6)
(5.2)
2.5
–
–
–
2.5
–
0.8
0.3
–
1.1
–
–
2.3
(0.6)
0.2
1.1
(1.7)
(1.2)
1.1
2.6
–
(1.5)
1.7
–
–
1.4
–
0.3
22.6
1.4
–
–
10.9
2.8
37.6
(4.6)
(0.3)
26.1
(0.7)
(30.5)
0.8
(6.6)
–
6.5
42.2
–
24.1
11.1
–
7.1
(14.1)
–
–
1.0
(10.9)
–
(23.9)
(6.0)
–
(0.2)
(5.5)
3.3
(3.6)
(9.0)
–
(0.7)
(8.2)
–
–
(8.2)
–
–
36.7
24.7
5.1
2.1
–
6.6
75.3
37.5
42.1
36.5
(12.3)
(27.6)
(1.3)
1.0
(6.6)
0.1
43.3
5.2
24.1
4.3
2.5
7.3
1. Symmetric adjustment increases capital requirements during periods of equity growth (see Note 2, page 11).
2. Surplus that builds up in the with-profit funds is restricted for solvency assessment purposes. This adjustment looks through this temporary restriction.
3. Reduced interest rates led to a sharp increase in capital required to cover lapse risk in Scildon. This increase reverses out on consolidation.
4.The cash result is sensitive to four main economic variables: equity values; country and corporate bond spreads; sterling exchange rates against the euro and Swedish krona, and
yields. In summary, during 2019 the overall economic cash, including the symmetric adjustment, is only £12.8m. Despite the symmetric adjustment, equity growth created a
£42.1m gain with sizeable gains from narrowing spreads broadly offsetting losses due to yield reductions and foreign exchange losses.
5. Modest operating cash of £1.0m includes the operating loss in Scildon, which relates largely to the effectiveness of reinsurance arrangements. Addressing this issue is a
management priority in 2020. The loss under group activities stems largely from group level expenses.
6. Material other operating items are where we have drawn out the adverse impact of non-recurring regulatory changes in Sweden.
7. Other generally relates to tax and movements in risk margin.
8. Management actions have had a notable positive impact during the year:
a) CA have initiated a project to rationalise from the existing four external fund managers to a single partner.
b) During the year we have assessed the capital efficiency of the assets held by Scildon. The resultant shift to more capital efficient and generally lower risk assets has reduced
the capital requirement materially.
c) Continued work to improve the classification of assets in Movestic has resulted in less being defaulted to more onerous capital requirement categories.
d) The application of the volatility adjustment in our Dutch divisions delivered a material increase in the value of Own Funds.
45
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
FINANCIAL REVIEW • EcV EARNINGS
The group has reported significant EcV earnings in 2019, largely by equity growth and bond spreads narrowing since the
start of the year. Growth has been seen across all operating divisions.
Note
Notes
1. Economic conditions: The EcV result is sensitive to investment market
conditions, as reflected by the £121.1m of economic earnings in the year. A significant
proportion of these earnings were driven by favourable movement in equities and
corporate bonds. Key movements in investment market conditions during the year are
as follows:
– The FTSE All share index has increased by 14.2% (12 months to 31 December 2018:
decreased by 13.0%);
– The Swedish OMX all share index has increased by 29.6% (12 months to 31 December
2018: decreased by 7.7%);
– The Netherlands AEX all share index has increased by 20.3% (12 months to 31 December
2018: increased by 11.6%); and
– 10 year UK gilt yields have decreased from 1.32% to 0.84%.
2
1
2. Material other operating items: This includes operating items that were
individually material and have therefore been separately analysed to aid an understanding
of the operating result. In Movestic a strengthening of assumed transfer rates (£6.0m)
was undertaken to reflect recent changes in the transfer out process and to align
with changes to local legislation. There was a further one-off negative adjustment of
(£3.5m) relating to transfer fee modelling, also a consequence of the changes to transfer
legislation. This was largely offset by a positive revision to future trail commission
expectations, following the IDD legislative changes (£9.3m). The other component
relates to the gain on completion of the acquisition of a policy portfolio from Monuta
Insurance (£2.4m), under the Waard Group.
3. UK: The UK delivered growth of £48.9m in the year. Solid operating earnings of
£22.6m stemmed from favourable movements in both mortality experience and fee
income. Lower than expected rates of attrition across the books of business, resulted
in higher assumed future fee income. The result also includes the benefit arising from
the fund manager rationalisation exercise undertaken by the division (£12.4m pre-tax),
primarily through a reduction in assumed future expenses. Economic profits of
£36.6m underpin the result, supported by market conditions. The key component
driving the economic result is investment returns achieved, predominantly on equity
holdings offset by a fall in the yield curve.
4. Sweden: Movestic recorded substantial earnings of £43.8m in 2019, with the result
underpinned by investment market returns. Economic earnings of £55.3m predominantly
arose from growth in equity investments. This was reflected by average policyholder
investment returns of 18.9% (2018: -6.0%). While operating experiences were favourable,
the strengthening of other assumptions resulted in operating losses. The main assumption
changes include increased lapse rates resulting from legislative changes regarding
procedures for processing transfers, regulatory changes to transfer-out charges and
reductions in assumed future performance fees and fund rebates. New business profits
on an EcV basis were modest (£4.3m) and reflective of the challenging market, with lower
volumes of single premiums and transfers-in, coupled with margin pressures.
5. Netherlands: The Dutch division has reported earnings of £16.7m for the year.
Scildon contributed earnings of £12.0m following valuation gains in its bond portfolio and
the narrowing of spreads, offsetting operational losses driven by lapse, expense and
reinsurance experience. Waard delivered earnings of £4.7m, which included a £2.4m gain
on acquisition of the Monuta Insurance policy portfolio. Underlying operating profits
benefitted from favourable mortality experience and subsequent assumption changes,
whilst economic earnings stemmed from bond performance and equity market returns.
6. Group: This component includes costs incurred at group level and the impact of
consolidation activities, with a loss reported for the year.
ECV EARNINGS £104.0M
2018: £(60.9)m
Analysis of the EcV result in the period by earnings source:
31 Dec
2019
£m
31 Dec
2018
£m
Expected movement in period
New business
Operating experience variances
Operating assumption changes
Other operating variances
Total underlying operating
earnings
Material other operating items
Total operating earnings
Economic experience variances
Economic assumption changes
Total economic earnings
Other non-operating variances
Risk margin movement
Tax
Total EcV earnings
(0.4)
7.8
(6.8)
3.8
(0.3)
4.1
1.5
5.6
143.1
(22.0)
121.1
(5.2)
(7.0)
(10.5)
104.0
(0.8)
10.6
(9.0)
–
(0.8)
–
(22.8)
(22.8)
(50.3)
0.6
(49.7)
1.5
(1.9)
12.0
(60.9)
Analysis of the EcV result in the year by business segment:
UK
Sweden
Netherlands
Group and group adjustments
EcV earnings
31 Dec
2019
£m
48.9
43.8
16.7
(5.3)
104.0
Note
31 Dec
2018
£m
3
4
5
6
(8.7)
(11.6)
(27.7)
(12.9)
(60.9)
46
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT FINANCIAL REVIEW • EcV
The Economic Value 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.
£
ECONOMIC VALUE (EcV) £670.0M
2018: £626.1m
Value movement: 1 Jan 2019 to 31 Dec 2019 £m
EcV to Solvency II £m
104.0
(31.3)
(28.8)
626.1
670.0
670.0
(43.5)
(4.0)
(10.8)
(20.8)
591.0
EcV
31 Dec 2018
EcV
earnings
Dividends
Forex
EcV
31 Dec 2019
EcV
31 Dec 2019
Risk
margin
Contract
boundaries
Own Funds
restrictions
Dividends
SII Own
Funds
31 Dec 2019
EcV earnings: Earnings of £104.0m have been reported for the year. The
primary driver of this were the significant economic profits arising from
market conditions in the year, particularly the impact of equity growth,
return on assets and the narrowing of spreads. Further detail can be found
on page 46.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £31.3m were paid during the period, being the final
dividend from 2018 and the 2019 interim dividend.
Foreign exchange: The EcV of the group suffered a foreign exchange loss
in the period, a consequence of the sterling appreciation against the euro
and Swedish krona.
EcV by segment at 31 Dec 2019 £m
UK
204.6
Sweden
251.8
Netherlands
220.1
Other group activities
(6.6)
The above chart shows that the EcV of the group is diversified across its different markets.
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 shows
the key difference between EcV and SII, with explanations for each item below.
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
3.25% cost of capital.
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 surpluses that exist within certain ring-fenced funds.
These restrictions are reversed for EcV valuation purposes as they are deemed
to be temporary in nature.
Dividends: The proposed final dividend of £20.8m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
47
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
STRATEGIC REPORT
FINANCIAL REVIEW • IFRS
The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three
major components: stable core, variable element and growth operation.
IFRS
IFRS PRE-TAX PROFIT £96.1M
2018: £27.0m
IFRS TOTAL COMPREHENSIVE INCOME £60.6M
2018: £23.7m
Executive summary
Stable core: At the heart of surplus, and hence cash generation, are the core CA (excluding the S&P book) 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.
Variable element: Included within the CA segment is the S&P 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, in part, due to reserving methodology rather than ‘real world’ value movements.
Growth operation: The long-term financial models of Movestic and Scildon are based on growth, with levels of new business and premiums from existing business
being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:
2019
£m
47.9
13.2
4.1
41.6
(6.4)
(5.1)
95.3
0.8
96.1
(17.0)
79.1
(18.7)
0.2
60.6
46.2
49.1
95.3
0.8
96.1
(17.0)
79.1
(18.7)
0.2
60.6
Note
1
2
3
4
5
6
3
2018
£m
28.2
9.3
3.5
(1.1)
(5.5)
(7.4)
27.0
–
27.0
(2.9)
24.1
(0.8)
7
0.3
23.7
42.5
(15.5)
27.0
–
27.0
(2.9)
24.1
(0.8)
0.3
23.7
8
9
3
7
31 Dec 2019 - £60.6m
31 Dec 2018 - £23.7m
46.2
42.5
49.1
(15.5)
0.8
(17.0)
(18.7)
–
(2.9)
(0.8)
Operating
Economic
Profit recognised on portfolio acquisition
Tax
Forex
Notes
1. The CA segment result has outperformed 2018, with a particularly strong year on year
movement emerging within the more variable S&P book. This is mainly reflective of the
positive equity markets in 2019 which recovered from the large falls recorded in late
2018. Overall economic profits were consequently circa £22m higher year on year.
Operating profits of £24.8m are slightly below the prior year.
2. Movestic continues to contribute positively to the overall group IFRS result, posting an
increase in profits when compared to 2018. Higher investment returns due to favourable
market factors, together with positive claims development and reduced operational
expenses were the main drivers.
3. The Waard Group result was slightly ahead of expectations, in line with favourable
investment market performance. Waard also made a one-off gain of £0.8m on the
acquisition of a policy portfolio which completed during the year.
4. Scildon has delivered a strong result driven mainly by positive investment returns
arising from narrowing spreads and favourable yield movements. Operational expense
savings have also contributed to the result for the year.
5. The Chesnara result largely represents holding company expenses. The current year
loss is marginally higher than last year largely due to 2019 including larger one-off items
such as project related expenditure.
6. Consolidation adjustments relate to items such as the amortisation of intangible
assets. These are lower than last year largely due to a non-recurring adjustment to the
impairment of acquisition costs within Movestic in 2018.
7. Sterling strengthened against both the euro and Swedish krona in the period,
resulting in a sizeable exchange loss in 2019.
8. The IFRS operating result demonstrates the stability of the underlying business.
Product based income and favourable movements in operating experience in the UK,
were offset slightly by the marginal strengthening of expense reserves to support future
developments. Higher transfer fees, fund rebates and positive claims development
experience in the year supported the Movestic operating result. Both the Waard Group
and Scildon continue to report solid operating results.
9. Economic profit represents the components of the earnings that are directly driven by
movements in economic variables. During 2019, all divisions benefited from favourable
prevailing market conditions.
CA
Movestic
Waard Group
Scildon
Chesnara
Consolidation adjustments
Profit before tax and profit
on acquisition
Profit recognised on
portfolio acquisition
Profit before tax
Tax
Profit after tax
Foreign exchange translation
differences
Other comprehensive income
Total comprehensive income
Operating profit
Economic profit
Profit before tax and profit
on acquisition
Profit recognised on
portfolio acquisition
Profit before tax
Tax
Profit after tax
Foreign exchange
Other comprehensive income
Total comprehensive income
48
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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:
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:
OBJECTIVES
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
In order to meet our obligations we employ and undertake a number of methods. These are centred on:
HOW WE DELIVER TO OUR OBJECTIVES
1. Monitor and control
risk and solvency
2. Longer-term
projections
3. Responsible
investment
management
4. Management
actions
Key outcomes from our financial management process, in terms of meeting our objectives, are set out below:
OUTCOMES
1. Solvency
2. Shareholder
3. Capital structure
returns
4. Liquidity and
policyholder
returns
5. Maintain the
group as a going
concern
Group solvency
ratio: 155%
2017-2019
TSR (0.71)%
Gearing ratio
of 11.0%
2019 dividend
yield 6.6%
This does not include the
financial reinsurance within
the Swedish business.
Based on average 2019 share
price and full year 2019
dividend of 21.30p.
Group remains a
going concern.
(see page 50)
Policyholders’
reasonable
expectations
maintained.
Asset liability
matching
framework
operated effectively
in the year.
Sufficient liquidity
in the Chesnara
holding company.
49
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
STRATEGIC REPORT
FINANCIAL MANAGEMENT (CONTINUED)
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. The debt gearing (excluding financial reinsurance in Sweden) was 11.0% at 31
December 2019 (15.6% at 31 December 2018).
The business plans include underlying operational deliverables, an assessment of the
business model (see page 22) and the financial consequences of following the plans.
Our plans also consider the principal risks and uncertainties that the group faces (see
pages 53 to 57) and how these might affect our financial prospects.
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; and
– repayment of existing debt.
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 whether the financial statements should continue to be
prepared on a going concern basis. This has included an assessment as to whether the
group is expected to be able to meet its liabilities as they fall due for a period of at least
12 months from the date that the financial statements have been signed. The assessment
has paid close attention to the group’s position at 31 December 2019, how the group
has developed since then, and how it is expected to develop subsequent to the signing
of the financial statements. In particular, this work has considered the impact of Covid-19
on the group’s operations, regulatory position, solvency position and liquidity position.
– Solvency: The group and its divisions are well capitalised, and our analysis has shown
that we expect to remain well capitalised over the business planning horizon, even after
the significant equity market falls, widening of bond spreads and falls in bond yields that
were witnessed since year end. This assessment has leveraged the work from the
group’s most recent business plan and Own Risk and Solvency Assessment (ORSA),
which includes financial projections on both a base case and some stressed scenarios.
The stressed scenarios included:
• Equity market declines;
• Reduction in yield curves;
• Credit spread rise;
• Swap rate fall;
• Adverse mortality and lapse experience;
• Adverse expense experiences;
• Reduced new business volumes; and
• Adverse exchange rate experience.
– Liquidity: The group and its divisions have strong levels of cash and high quality
short-term government bonds such that we do not have concerns in being able to fulfil
our cash commitments over both the shorter term and the business planning horizon.
At a Chesnara level we have sufficient levels of liquidity in order to meet our dividend
and loan repayment commitments, and we continue to expect to receive the foreseeable
dividends that have been referred to in this set of accounts. There, however, is a
degree of risk as a result of Covid-19 that a proportion of the total expected divisional
dividends is not paid. Even assuming a realistic worst-case outcome regarding
divisional dividends Chesnara expects to retain a healthy post dividend level of liquidity.
– Regulatory position: Group and divisional teams have performed an assessment of
the impact of Covid-19 and have confirmed that they expect to continue to meet their
regulatory and contractual requirements. We have responded to any enquiries that our
regulators have asked to date regarding management’s assessment of the impact of
Covid-19 on our solvency and operations.
– Operations: Covid-19 has had an impact on how we operate. We have been required
to draw on our well-established business continuity plans, including those of our key
suppliers/outsourcers, to ensure that we can continue to deliver our critical business
services across the group, focusing largely on our customers services. In this
environment, the board have recognised that the group will need to adjust its client
service and operational capabilities as events unfold in the period ahead, and are in
response upscaling our ability to deliver core services from the home environment, and
executing plans to minimise the risk of transmission from within the group‘s office
space. Whilst delivering some of these short-term changes has caused some level of
disruption, we have continued to deliver our critical business services, and expect to
continue to do so over the foreseeable future.
In light of the above, the board has concluded that it remains appropriate to continue to
adopt the going concern assumption when preparing the financial statements.
3. Assessment of prospects
Our prospects are primarily considered through the annual business planning process,
updated for key events that may occur in-between business plans. This covers a
three-year horizon and captures the operating plans required to meet the group’s
strategic objectives.
A more detailed assessment of our prospects has been shown below, updated for our
consideration of the impact of Covid-19. This has been structured around our three key
strategic objectives:
Value from in-force book
The group has c900,000 policies in force at 31 December 2019. These are generally
long-term policies, and the associated policy cash flows can, at an overall portfolio
level, be reasonably well predicted on base case and stressed scenarios. The group is
well capitalised at both a group and divisional level and we have high quality assets
backing our insurance liabilities. From a Covid-19 perspective, although solvency is well
protected from the impact of equity market falls, sustained depressed market values
do adversely impact fee income streams and therefore if markets do not recover then
profitability prospects reduce. Similarly further reductions in yields would adversely impact
prospects. Temporary market volatility is however a natural feature of investment
markets and our financial model is well positioned to withstand difficult conditions
without creating any permanent harm to the longer-term profitability prospects.
Acquisition Strategy
The outlook and prospects of continuing to deliver against this strategic objective is
covered on page 38. From a Corona virus outbreak perspective there is no reason to
believe that the impact of Covid-19 will reduce the propensity for vendors to bring
businesses or portfolios to the market. The financial position of the Group continues to
support financing deals through the use of our own resources or by raising debt however
in the short term equity funding would likely be less attractive.
Value from new business
Chesnara is in a fortunate position in that its prospects do not fundamentally rely on
the ability to sustain new business volumes. The expectation is that in the short-term
new business levels will suffer as a result of Covid 19. In the medium to long term we
have no reason to believe the market for Term assurance and Pension savings contracts
will not recover to pre Covid 19 levels.
4. Assessment of viability
The board’s assessment of the viability of the group is performed through a combination
of the three-year business plan and the Own Risk and Solvency Assessment (ORSA)
process (see page 52). The board has assessed that being financially viable includes
continuing to pay an attractive and sustainable level of dividends to investors and
meeting all other financial obligations, including debt repayments. This is assessed
through performing projections of the group’s solvency and liquidity positions on a base
case and a number of stressed scenarios. The scenarios that are assessed include:
– Equity market declines;
– Reduction in yield curves;
– Credit spread rise;
– Swap rate fall;
– Adverse mortality and lapse experience;
– Adverse expense experiences;
– Reduced new business volumes; and
– Adverse exchange rate experience.
Due to the group’s strong capital position and the group’s business model, although
the Covid-19 outbreak has caused significant global economic disruption, these
scenarios have demonstrated that the group and the company remain well capitalised,
and has sufficient liquidity. As such we can continue to remain confident that, even if
the negative financial market impact of Covid-19 is sustained, the group will continue
to be viable over the three year period of the business plan.
Underpinning the base case and stressed scenario process outlined above are a
number of assumptions. The key ones include:
– We do not assume that a future acquisition needs to take place to make this assessment
– We make long term investment return assumptions on equities and fixed income
securities
– The base case scenario assumes exchange rates remain stable, and the impact of
adverse rate changes are assessed through scenario analysis.
– Levels of new business volumes and margins are assumed to remain in line with most
recent plans.
– The projections apply the actuarial assumptions, such as mortality and morbidity, lapse
and expense assumptions from our most recent business plan. This is deemed
appropriate given our assessment that Covid-19 will have an immaterial impact on
those assumptions.
From a Covid-19 perspective our viability assessment has assumed that the equity
price falls seen in 2020 will not recover over the 3 year planning horizon. Whilst there
has been some short-term operational disruption from dealing with the restricted
operating environment in light of Covid-19, our assessment has shown that both our
internal functions and those operated by our key outsourcers and suppliers can adapt
to these restrictions and do not cause concern as to our viability.
5. Viability statement
Based on the results of the analysis above, 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.
50
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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.
SECTION B
How we manage risk
The risk management system supports the identifi cation, 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.
RISK
MANAGEMENT
SYSTEM
RISK MANAGEMENT SYSTEM REVIEW AND DEVELOPMENT
CLEAR ACCOUNTABILITIES AND RESPONSIBILITIES
STRATEGY
The risk management
strategy contains the objectives
and principles of risk management,
the risk appetite, risk preferences and
risk tolerance limits.
POLICIES
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.
PROCESSES
The risk management processes ensure that risks are identifi ed, measured/ assessed, monitored
and reported to support decision making.
REPORTING
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.
Chesnara adopts the ‘three lines of defence’ model adjusted as appropriate 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 signifi cance 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 profi le within the board’s approved risk appetite.
t
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 identifi ed in ’Principal risks and uncertainties’ (pages 53 to 57). 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
51
RISK MANAGEMENT • ROLE OF THE BOARD
The Chesnara board is responsible for the adequacy of the design and implementation of the group’s risk
management and internal control system and its consistent application across divisions. All significant decisions
for the development of the group’s risk management system are the group board’s responsibility.
Risk and Control Policies
Chesnara has a set of Risk and Control Policies that set out the key policies,
processes and controls to be applied. The Chesnara board approves the review,
updates and attestation of these policies at least annually.
Strategy and Risk Appetite
Chesnara group and its divisions have a defined risk strategy and supporting
risk appetite framework to embed an effective risk management framework,
culture and processes at its heart and to create a holistic, transparent and
focused approach to risk identification, assessment, management, monitoring
and reporting.
The Chesnara board approves 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.
Risk Identification
The group maintains a register of risks which are specific to its activity and
scans the horizon to identify potential risk events (e.g. political; economic;
technological; environmental, legislative & social).
On an annual basis the board approves the materiality criteria to be applied
in the risk scoring and in the determination of what is considered to be a
principal risk. At least quarterly the principal and emerging risks are reported
to the board, assessing their proximity, probability and potential impact.
Own Risk and Solvency Assessment (ORSA)
On an annual basis, or more frequently if required, the group produces a
group ORSA Report which aggregates the divisional ORSA findings and
supplements these with an assessment specific to group activities. The
group and divisional ORSA policies outline the key processes and contents
of these reports.
The Chesnara board is responsible for approving the ORSA, including steering
in advance how the assessment is performed and challenging the results.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of and attestation
to the effectiveness of the risk management system. The assessment
considers the extent to which the risk management system is embedded.
The Chesnara board is responsible for monitoring the Risk Management
System and its effectiveness across the group. The outcome of the annual
review is reported to the group board which make decisions regarding its
further development.
52
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT RISK MANAGEMENT • PRINCIPAL RISKS AND UNCERTAINTIES
The following tables outline 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 & Risk Committee, of the principal risks facing the group,
including those that would threaten its business model, future performance, solvency or liquidity. The impacts are not quantified in the tables.
However, by virtue of the risks being defined as principal, the impacts are potentially significant. Those risks with potential for a material
financial impact are covered within the sensitivities (page 41). The information below has been updated in consideration of the Covid-19
pandemic which emerged post year end. Overall, Covid-19 has not introduced any new principal risks.
INVESTMENT AND LIQUIDITY RISK
DESCRIPTION
RISK APPETITE
Exposure to financial losses or value reduction arising from adverse movements in investment markets, counterparty defaults, or
through inadequate asset liability matching.
The group accepts this risk but has controls in place to prevent any increase or decrease in the risk exposure beyond set levels.
These controls will result in early intervention if the amount of risk approaches those limits.
POTENTIAL
IMPACT
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.
KEY CONTROLS
RECENT CHANGE
– Regular monitoring of exposures and performance;
– Asset liability matching;
– 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;
– Regular liquidity forecasts;
– Considering the cost/benefit of hedging when appropriate;
– Actively optimising the risk / return trade-off between yield on fixed interest assets compared
with the associated balance sheet volatility and potential for defaults or downgrades; and
– Giving due consideration (and discussing appropriate strategies with fund managers) to longer
term global changes that may affect investment markets, such as climate changes.
Sustained low interest rates combined with increasingly
volatile credit spreads provides an additional challenge
in terms of achieving a suitable return on fixed interest
investments relative to risk. It has also increased the
perceived risk of downgrades or defaults on lower
grade credit assets.
The global Covid-19 pandemic at the beginning of 2020,
and corresponding concerns about the economic
impact of government intervention, has led to increased
market volatility leading to reduced equity asset values,
spreads widening, and reductions in yields.
REGULATORY CHANGE RISK
DESCRIPTION
RISK APPETITE
POTENTIAL
IMPACT
The risk of adverse changes in industry practice/regulation, or inconsistent application of regulation across territories.
The group aims to minimise any exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk
as a result of carrying out business.
Chesnara currently operates in four regulatory domains (including Movestic’s asset management company in Luxembourg, due to
be closed in 2020) and is therefore exposed to potential for 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 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.
53
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B RISK MANAGEMENT • PRINCIPAL RISKS AND UNCERTAINTIES (CONTINUED)
REGULATORY CHANGE RISK (CONTINUED)
KEY CONTROLS
RECENT CHANGE
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.
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.
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.
Chesnara continues to monitor the outcome of Brexit and the
ongoing negotiations between the UK and the EU. The group has
considered any restructuring which could be required to align to
changes in the requirements of cross border regulatory supervision.
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 will monitor the consultation and discussions arising
under EIOPA’s Solvency II 2020 Review, and in the context of
Brexit and the UK’s ultimate position regarding SII equivalence.
We have assessed that Covid-19 does not materially increase the
level by which Chesnara is exposed to this risk.
ACQUISITION RISK
DESCRIPTION
RISK APPETITE
POTENTIAL
IMPACT
The risk of failure to source acquisitions that meet Chesnara’s criteria or the execution of acquisitions with subsequent unexpected
financial loses or value reduction.
Chesnara has a patient approach to acquisition and generally expects acquisitions to enhance EcV and expected Cash Generation in
the medium term (net of external financing), though each opportunity will be assessed on its own merits.
The acquisition element of Chesnara’s 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.
KEY CONTROLS
RECENT CHANGE
Chesnara has completed the agreement to purchase two portfolio
acquisitions in the Netherlands during 2019 whilst maintaining the
established disciplines within the Acquisition Policy.
We have assessed that Covid-19 does not materially increase the
level by which Chesnara is exposed to this risk.
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 multi-territories provides some diversification against
the risk of changing market circumstances in one of the territories. Consideration
of additional territories within Western-Europe remains on the agenda, if the
circumstances of entry meet Chesnara’s stated criteria.
Chesnara seeks to limit any potential unexpected adverse impacts of acquisitions by:
– Applying a structured board approved risk-based Acquisition Policy 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.
.
54
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
DEMOGRAPHIC EXPERIENCE RISK
DESCRIPTION
Risk of adverse demographic experience compared with assumptions.
RISK APPETITE
The group accepts this risk but restricts its exposure, to the extent possible, through the use of reinsurance and other controls. Early
warning trigger monitoring is in place to track any increase or decrease in the risk exposure beyond a set level, with action taken to
address any impact as necessary.
POTENTIAL
IMPACT
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.
The effect of recognising any changes in future demographic assumptions at a point in time would be to crystallise any expected
future gain or loss on the balance sheet.
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).
KEY CONTROLS
RECENT CHANGE
Chesnara performs 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:
New legislation was passed in Sweden on 13 November 2019
making it easier for customers to transfer policies. This resulted
(even before the legislation passed) in higher transfer activity in the
market, particularly driven by brokers. Movestic has adjusted its
future transfer assumptions to reflect an expectation of increased
transfers out.
– 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.
EXPENSE RISK
Covid-19 is likely to increase the number of deaths arising in 2020.
The effect of this is expected to be more pronounced in older
lives rather than in the typical ages of the assured lives in the
Chesnara books. Therefore, in the period since the balance sheet
date Chesnara has not been required to subsequently revise the
valuation assumptions that existed at the 2019 year end date, to
reflect any material increase in mortality costs.
DESCRIPTION
Risk of expense overruns and unsustainable unit cost growth.
RISK APPETITE
The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk
as a result of carrying out business.
POTENTIAL
IMPACT
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.
A key underlying source of potential increases in regular expense is the additional regulatory expectations on the sector.
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. Similar, for acquisitions, there is a risk that the assumed costs of running the acquired business allowed
for in pricing are not achieved in practice, or any assumed cost synergies with existing businesses are not achieved.
55
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
RISK MANAGEMENT • PRINCIPAL RISKS AND UNCERTAINTIES (CONTINUED)
EXPENSE RISK (CONTINUED)
KEY CONTROLS
RECENT CHANGE
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
– With an increased current level of operational and strategic change within the
business, a policy of strict project budget accounting discipline is being upheld by
the group for all material projects.
The group has an ongoing expense management programme in place
to monitor and manage the overall expense base. Under this
programme, Scildon and Movestic have both delivered significant cost
savings in 2019 (Movestic building on those savings already achieved
in 2018) and continue to focus on operational efficiency going forward.
Delivery of two portfolio acquisitions within the Waard Group
provides support towards ongoing fixed costs.
As governments intervene to stabilise their economies in response
to Covid-19, there is potential to shift towards high inflation, once
social distancing measures are relaxed and the economy kicks back
into gear. Higher inflation would increase Chesnara’s expected
longer-term cost base.
OPERATIONAL RISK
DESCRIPTION
Significant operational failure/business continuity event.
RISK APPETITE
POTENTIAL
IMPACT
The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk
as a result of carrying out business.
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.
KEY CONTROLS
RECENT CHANGE
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 company’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 of 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.
All parts of the business continue to strengthen aspects of
operational resilience as part of their annual business plans, and
have documented robust plans for operational resilience covering:
– Alternate physical working locations;
– Data back-ups (with suitable network isolation);
– Alternate systems/applications;
– Crisis Management Team Terms of Reference; and
– Crisis communication strategies.
In response to Covid-19, Chesnara, its subsidiaries and outsourced
service providers have all adapted to remote working conditions,
utilising communication technology as required While the transition
has so far been a smooth one, there is inevitably an increased level
of operational risk and potential for an impact on operational
efficiency. However, with all the steps taken to improve the way we
work, and additional controls implemented, Chesnara is well placed
to manage the additional risk.
56
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT
IT / DATA SECURITY & CYBER RISK
DESCRIPTION
RISK APPETITE
POTENTIAL
IMPACT
Risk of IT/ data security failures or impacts of malicious cyber-crime on continued operational stability.
The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk
as a result of carrying out business.
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.
KEY CONTROLS
RECENT CHANGE
Chesnara seeks to limit the exposure and potential impacts from IT/data security
failures or cyber-crime by:
During 2019, Chesnara’s UK Head Office changed its Outsourced
IT provider and has completed an assurance exercise.
– 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.
The move to remote working has the potential to increase cyber risk
and therefore various steps have been taken to enhance security,
processes and controls to protect against this.
57
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B STRATEGIC REPORT
CORPORATE AND SOCIAL RESPONSIBILITY
Our goal 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.
OUR EMPLOYEES
Equal opportunities
We need to ensure that, 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 (as at the year-end):
2019
2018
Male
Female Male
Female
Directors of Chesnara plc
Senior management of the group
Heads of business units & group functions
5
6
18
2
2
7
5
7
16
2
2
7
Employees of the group
141
149
161
155
Total Note1
Gender split %
170
160
189
166
51.5% 48.5% 52.5% 47.5%
Note 1. the number of staff reported in the table above is based on the number
of employees employed at the year end. This differs to the employee note which is
calculated based on average FTE’s during the course of the year.
There have been a number of small changes between the 2018 and 2019 analysis to
standardise the approach across divisions.
The Hampton-Alexander report recommends a board diversity target of 33% for
FTSE 350 companies. Gender diversity forms an important part of the board
appointment process. Our board diversity ratio for 2019 was 71% male and 29%
female. Chesnara are committed to diversity: our group Audit and Risk Committee
and group Remuneration Committee both have female chairmen and Movestic is
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 have 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.
During the course of 2019, Chesnara has enhanced its UK maternity
policy from offering 12 weeks at 90% pay, followed by statutory maternity
pay up until the 39th week, to 26 weeks at 90% pay, followed by
statutory maternity pay. This change is to ensure that we offer high
quality benefits to our staff and show our commitment to our people both
inside and outside the workplace.
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.
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 company 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.
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.
‘OUR PEOPLE ARE OUR GREATEST ASSETS.
WE RECOGNISE THAT TO BE ABLE TO MEET THE
EXPECTATIONS WE HAVE SET OURSELVES, WE
NEED TO ENSURE WE CONTINUE TO ATTRACT,
PROMOTE AND RETAIN THE BEST PEOPLE’.
58 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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. Chesnara plc welcomes the act and with its
subsidiaries (together ‘Chesnara’) 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
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 CUSTOMERS
Our offering
Understanding our customer’s point of view is one way of making sure
we provide a service that makes sense. We do this by paying attention to
customer calls and letters, and by regularly asking for feedback. We share
our learning with our staff, and in particular, our call centre teams, which
motivates and inspires them to give our customers the help they need as
efficiently as possible. For those occasions where we don’t get it right
first time, we aim to address any concerns or complaints painlessly and
promptly. Our ambition is to not only consistently achieve the industry
service standards, but also to exceed them.
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.
Reuniting customers with lost policies
We understand that it is easy for customers to lose touch with their
policies through acquisitions and name changes, so we actively follow
these up wherever possible. This is particularly a primary focus for our UK
division, Countrywide Assured.
Digitalisation
We constantly strive to enhance our digital offering to customers to
ensure we stay in line with customer expectations and the manner in
which customers want to communicate with us. This underpins a number
of our key objectives for the group over the coming years in our business
plans. That said, these initiatives do not seek to replace existing methods,
as we understand how vitally important they are, but instead, we want to
broaden our offering.
OUR COMMUNITIES
In the UK, our investment and continued commitment to the North West
and Preston in particular creates high quality financial services roles
outside of London. Also, as part of our carbon offsetting activity, we have
supported the planting of 1,500 trees in the North West of England.
All divisions support local community initiatives to the extent deemed
appropriate given our financial responsibilities as a public limited company.
‘THE GROUP HAS FULLY OFFSET ITS CARBON
EMISSIONS FOR 2019 AND SO IS CARBON NEUTRAL’.
ENVIRONMENTAL AND ETHICAL ISSUES
Climate change
Climate change is one of the most significant and potentially irreversible
risks the world faces, and because of this, its importance is paramount.
Our business, like all businesses, are directly affected by the effects of
climate change and because of this, it features high on our radar with
actions being taken where possible, to mitigate the group’s impact on
climate change.
Being primarily office-based financial services companies, it is the board’s
belief 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, of which carbon offsetting is one example.
For 2019, the group board supported a strategy of fully offsetting our
residual carbon emissions, and as a result of this, the group achieved
carbon neutrality. This is detailed further on page 61.
In addition, as multinational group, we actively use video conferencing
throughout our interactions.
Climate change risk is embedded into our risk framework and our board
reporting.
Governance
Strategy
Risk
management
Key metrics
& targets
Source: TCFD
59
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION B
CORPORATE AND SOCIAL RESPONSIBILTY (CONTINUED)
ENVIRONMENTAL AND ETHICAL ISSUES (CONTINUED)
ENVIRONMENTAL AND ETHICAL ISSUES (CONTINUED
GOVERNANCE
Our board is involved in decisions regarding Chesnara’s influence on climate change and we have a plan to enhance that engagement
over the coming years.
There are a number of key activities that factor climate change and are reported through to our board:
– Climate change and related scenario testing in the ORSA and supporting narrative – climate change risk is included within the ORSA as
an emerging risk and shows links to elements of the stress testing.
– Risk reporting – as an emerging risk, climate change is included within the routine risk reporting process.
– Investment committee - ESG is now a regular agenda item at the IC meetings and fund managers are being actively engaged with to
understand and gain sufficient governance understanding of their approach to the wider ESG subject, including climate change
approach to their investment approach and risk assessment. The intention is also to incorporate ESG into the formal Investment Policy
at some stage soon when further clarity of what is required emerges.
– Carbon offsetting
STRATEGY
Climate change weaves its way into each of the group’s strategic pillars and we believe our approach works towards maintaining our
longer term sustainability. That said, we still recognise that there is work we can do to further improve our position.
As a group, we actively try to mitigate the effects of carbon emissions and climate change. This is done by both working towards
reducing the emissions we generate and offsetting those emissions that we do generate, with some of the key activities being:
– Our business travel for the group in 2019 has seen a small reduction (1%), however, within this was a significant shift towards more
travel by rail. Based on the Defra 2019 rates, rail travel is significantly more efficient than travelling by car or by air. This is through a
proactive approach to not only limiting the amount of travel across the group, but also giving consideration to the method. The
biggest contributor to this shift to trains is from our Swedish division.
– Our employee forum in the UK is actively considering ways to reduce commuting mileage and promoting this across the UK
workforce.
– Scildon have replaced a number of cars with electric vehicles, to actively mitigate carbon emissions.
– As a group, we know that it is currently unlikely that we will be able to operate with zero emissions, but we take steps to reduce
them wherever possible, as noted above. To further mitigate our impact, we have engaged in carbon offsetting activity, and fully
neutralized the remaining emissions for 2019.
The PRA classifies two types of risk relating to climate change:
1. Physical Risks – these are the direct impact of events such as heatwaves, flood, wildfire, storms, increased weather variability, rising
mean temperature and sea level rises.
2. Transition Risks – these come from the process of change towards a low carbon economy. A range of factors may influence this,
including: climate related developments in policy and regulation, technological change (e.g. electric vehicles), shifting sentiment and
social attitudes, climate related litigation against firms that fail to mitigate, adapt or disclose climate related financial risks.
As the group is primarily life insurance and not general insurance, it is not directly exposed to the underwriting risks associated with
the above (albeit there may be some small mortality/morbidity impacts). However, it is expected that the group could be exposed to
market and credit risks associated with transition risk, or to a lesser degree, physical risks.
It is our conclusion that climate change risks have the potential to affect the asset side of the group balance sheet, but the direct
liabilities are unlikely to be materially impacted.
Climate change risk is recognised as an emerging risk and remains on the group risk radar. It is also considered as part of the
sensitivities, albeit indirectly through the stresses on economic risk factors, as we believe this would be the most likely area of impact
if the risk materialised.
Our primary climate related target is to fully offset our carbon emissions, which has been achieved for 2019.
RISK
MANAGEMENT
METRICS &
TARGETS
60
CHESNARA ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORT SECTION B
Greenhouse gas reporting
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 fi nancial control method, which captures the sources that fall
within our consolidated Financial Statements, has been used.
The group’s carbon reporting falls under three scopes as shown in the table
below. In previous years, scope 3 has excluded the impact of employee
commuting under the assumption that this mileage was personal mileage
and not a direct consequence of the employment within the group. This
year, we have chosen to include an estimate of the commuting emissions
for our staff (including contractors) and outsourcers as we feel that, even
though these are personal emissions, they are indirectly linked to the group
and therefore we want to recognise that impact.
Disclosure of emissions
Global GHG emissions data for the year to 31 December 2019:
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)
Commuting* (scope 3)
Total gross emissions
Carbon offsetting
Total net emissions
Company’s chosen intensity measurement
= tonnes of CO2e per square metre of offi ce space
occupied (excluding commuting)
Company’s chosen intensity measurement
= tonnes of CO2e per square metre of offi ce space
occupied (including commuting)
Emissions reported above normalised to per tonne of product output
Tonnes of CO2e
2019
2018
–
–
192.8
202.2
183.6
225.1
1,042.6
–
1,419.0
427.3
(1,419.0)
–
–
427.3
0.056
0.064
0.212
0.064
*2019 includes an estimate of the carbon emissions that arise from the annual
commuting miles for all staff and outsourcers across the whole group.
The overall measure for tonnes of CO2e per square metre of offi ce space (excluding
commuting) has reduced when compared to the prior year, this is due to a combination
of lower emissions, and lower conversion rates (Defra 2019 v 2018). If the commuting
mileage is included for 2019, the intensity measurement increases from 0.056 to 0.212.
There are 14 company-leased vehicles in total across the group which are
used primarily for commuting and not business-related activities.
– Scope 1 – there are no emissions that fall under the category of scope 1
for the group, which is activities controlled by the organisation that
release emissions into the atmosphere such as from combustion on
owned controlled boilers and furnaces.
– Scope 2 – the emissions that fall within this category are related to the
energy usage for the group’s offi ces. This excludes the usage of the
outsourcers as they do not work exclusively for the group and therefore
we have not been able to estimate the impact. The Defra conversion
factors are used to calculate the carbon emissions based on the kWh of
gas and electricity used during the course of 2019. We believe this is a
prudent approach in estimating the emissions for the overseas divisions
as data suggests that Sweden and the Netherlands generate their energy
in a more effi cient manner than the UK.
– Scope 3 – comprises of the emissions incurred through direct business
travel, alongside an estimate of the commuting emissions incurred by our
staff and our outsourcers. The Defra conversion factors are used to
calculate the carbon emissions based on the miles travelled dependent on
the travel method (air, rail and car).
Basis of preparation – inherent within the calculations in the table above
are a number of assumptions that we believe provide a comfortable level
of prudence, particularly in the commuting estimates and the estimation
of emissions from the overseas offi ces. However, this is partly offset by
other minor areas such as being unable to estimate the mileage impact
from employees using taxis in the course of business travel.
Carbon offsetting
Although we continue to make endeavours to reduce our carbon emissions,
we recognise that it is unlikely that we will be able to fully mitigate them
through normal activities. To ensure we minimise our impact on the
environment, the group has decided to become carbon neutral by fully
offsetting our remaining emissions. To do this, the group has invested in a
tree buddying scheme. Through the scheme, we have offset the
emissions we have produced during 2019 by:
– Paying for the planting of 1,500 trees in the north west of England; and
– For every tree planted in the UK, a tonne of carbon will also be saved via a
project to minimise deforestation in Brazil.
More information can be found at www.carbonfootprint.com
Energy Saving Opportunity Scheme Regulations 2014
The company has 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 2018 to 31 December 2019. 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 2023.
Luke Savage
Luke Savage
Chairman
John Deane
John Deane
Chief Executive Offi cer
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
61
SECTION C:
CORPORATE
GOVERNANCE
62
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
64 Board profile and Board of Directors
66 Governance overview from the Chairman
68 Corporate Governance Report
72 Nomination & Governance Committee Report
74 Directors’ Remuneration Report
94 Audit & Risk Committee Report
100 Directors’ Report
103 Directors’ Responsibilities Statement
Stockholm Sweden
CHESNARA ANNUAL REPORT & ACCOUNTS 2019 63
XXXXXXXXXXXXXXXXXXX.XXXXXXXX • XXXXXXX (CONTINUED)SECTION C 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
LUKE SAVAGE
CHAIRMAN
(from 14 February 2020)
Non-executive Chairman of the board, Luke 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 board and as
Chairman in February 2020.
Committee membership: Nomination & Governance
(Chairman) and a member of the Remuneration Committee
(from February 2020).
Current directorships/business interests:
– Numis Corporation plc, Chairman of the Audit & Risk
Committee
– DWF Group plc, Chairman of the Audit Committee
– Liverpool Victoria Financial Services Limited, Chairman of
the Audit Committee
– Queen Mary University, Chairman of the Finance and
Investment Committee
Skills and experience:
B D E
F G H I
J
PETER MASON
CHAIRMAN
(until 14 February 2020)
Peter stepped down from the Chesnara plc board effective
13 February 2020. Prior to this date he acted as Chairman of
the board, a position he had held since 2009, and was also
Chairman of the Nomination & Governance Committee,
Movestic Livförsäkring AB (until 31 December 2019) and a
member of the Remuneration Committee.
Current directorships/business interests:
– Countrywide Assured plc, Chairman
– Countrywide Assured Life Holdings Limited, Chairman
JANE DALE
SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
AND CHAIRMAN OF THE AUDIT & RISK COMMITTEE
JOHN DEANE
GROUP 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. Appointed as the board’s
Senior Independent Non-Executive Director in October 2018.
Committee membership: Audit & Risk (as Chairman from
December 2016) 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
– Bizspace Holdings Ltd, NED, Chairman of the Audit
Committee
Skills and experience:
A B D E
F G
H
I
J
K
64 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
Appointment to the board: Appointed to the board
in December 2014 and as Group Chief Executive in
January 2015.
Career, skills and experience: John is a qualified Actuary
and has over 35 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
.
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
• • • • • •
• • • • • • •
• • • •
• • • • • •
• • • • • •
• • • • • •
• • • • •
• • • • • • •
• • • • • •
• • • • • •
• • •
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.
SECTION C
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.
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.
board in January 2013.
Committee membership: Nomination & Governance, Audit
& Risk and Remuneration (as Chairman from May 2013).
Committee membership: Nomination & Governance, Audit
& Risk and Remuneration.
H
Current directorships/business interests:
– Countrywide Assured plc, NED
– Sanlam Investment Holdings Limited, NED
– Investment & Life Assurance Group Limited, NED
Skills and experience:
A
B H I
J
K
Current directorships/business interests:
– Countrywide Assured plc, NED
– 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 (from 1 January 2020)
Skills and experience:
A
B C D
E
F
G H
DAVID RIMMINGTON
GROUP FINANCE DIRECTOR
MARK HESKETH
NON-EXECUTIVE DIRECTOR
Appointment to the board: Appointed as Group Finance
Director with effect from May 2013.
Appointment to the board: Appointed to the Chesnara plc
board in December 2018.
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 six years as Head of Group Management Reporting.
Skills and experience:
A
B
C
D E
F
H
I
J
Committee membership: Nomination & Governance and
Audit & Risk.
Current directorships/business interests:
– Countrywide Assured plc, NED
– Chesnara Holdings BV (from 3 June 2019)
– Cornerstone International Holdings Ltd, NED
– Stonebridge International Insurance Limited, NED
– Centre for Ageing Better, NED
– Bethany Christian Trust, NED
– Powza Limited, NED
Skills and experience:
A
B C D E
F
G H
I
J
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
65
XXXXXXXXXXXXXXXXXXX.XXXXXXXX • XXXXXXX (CONTINUED)SECTION C
CORPORATE GOVERNANCE
GOVERNANCE OVERVIEW FROM THE CHAIRMAN
‘Good governance is the
foundation
of how we operate’.
Dear Shareholder,
On behalf of the board, I am very pleased to
The board is accountable to our shareholders
present our Corporate Governance Report for
and wider stakeholders for generating and
the year ended 31 December 2019. In doing so,
delivering sustainable value through good
I would like to thank Peter Mason for his service
management of the group’s business. The
to the company since his appointment to the
board plays a critical role in ensuring that the
Board in March 2004 and as Chairman in
tone for the group’s culture and values is set
January 2009. Peter’s tenure as Chair exceeded
from the top. I firmly believe that a robust,
the length of time recommended in the UK
and effective, governance framework is
Corporate Governance Code (2018) (the ‘Code’)
essential to support management in delivering
but his continuation in the role, particularly
the company’s strategy. We understand
following the departure of Mike Evans as Senior
that good governance is fundamental to the
Independent Director in October 2018, was in
effective management of the business
the best interests of the company and approved
and its sustainability in both the short and the
by shareholders at the AGM each year.
long-term.
I am delighted to be able to report that the
This section of the Annual Report & Accounts
board considers that the company has, in all
sets out our governance policies and practices,
other respects, complied fully throughout the
and includes details of how the company has,
year with the provisions of the Code.
during 2019, applied the Code.
66
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION C
SECTION C
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 2018, 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.
Signifi cant progress has been made by managers and employees during the year. 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.
The Audit & Risk Committee undertook an external audit tender process in 2017 and the appointment
of Deloitte LLP received shareholder approval at the 2018 AGM.
This report demonstrates how the board and its committees have fulfi lled their governance
responsibilities.
Luke Savage
Chairman
14 April 2020
Current balance of executive and
non-executive directors
Current gender diversity of
the board
Board tenure of NEDs
1
2
2
2
2
4
5
Chairman
Non-executive
Executive
Male
Female
1
Over 6 years
2-6 years
0-2 years
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
67
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE REPORT
It is essential to have a well designed and effective governance framework to ensure that stakeholders’ investments
are safeguarded.
Compliance with the Code
The company has complied throughout the year with all of the relevant
provisions of the Code, aside from the tenure of Peter Mason, as
highlighted on the previous page. The UK Corporate Governance Code is
available at www.frc.org.uk
The board
At 31 December 2019, the board comprised of a non-executive Chairman,
four other non-executive directors and two executive directors.
Biographical details of current directors are given on pages 64 and 65 and a
board profile, which assesses the core competencies required to meet the
group’s strategic objectives, is provided on page 65. The board, which plans
to meet at least eight times during the year, has a schedule that it reviews
annually of matters reserved for its consideration and approval. These
matters include:
– setting corporate strategy;
– approving the annual budget and medium-term projections;
– reviewing operational and financial performance;
– approving acquisitions, investments and capital expenditure;
– reviewing the group’s system of financial and business controls and risk
management and setting risk appetite parameters;
– approving appointments to the board and to its committees;
– appointment of the Company Secretary; and
– approval of policies relating to directors’ remuneration.
In addition:
i) the directors of the company during the year were also directors of Countrywide
Assured plc.;
ii) three directors of the company, being Messrs Mason and Deane (throughout
the year) and Hesketh (from 3 June 2019), were also directors of Chesnara
Holdings BV; and
iii) four directors of the company, being Messrs Mason, Deane, Brand and
Rimmington (throughout the year), were also directors of Movestic
Livförsäkring AB.
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 Regulation Authority is the group
supervisor and maintains oversight of all divisions of the group through the
college of supervisors.
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.
Provision-17
68 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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
Jane Dale, who has been a non-executive board member since May 2016,
was appointed as the senior independent director in October 2018. The
senior independent director supports the Chairman in both the delivery of
the board’s objectives and in ensuring that the view of all shareholders
and stakeholders are conveyed to the board. Jane Dale 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. In 2019, Jane also led the search for the new Chairman.
Directors and directors’ independence
During 2019 a review was conducted to assess independence of the board
as a whole when set against a matrix of key measures set out in the Code.
The table below shows the results of that review when set against the Code
provisions 11, 12 and 17 and Principle G.
Code
Consideration
ProvisIons-
11 & 12
Questions
1. Are at least half the board, excluding the chair, NEDs whom
Y
the Board considers to be independent?
2. Has the board appointed one of the independent NEDs to
be the Senior Independent Director (SID) to provide a
sounding board for the chair and serve as an intermediary
for the other directors and shareholders?
Principle-G
3. Does the board include an appropriate combination of
Y
Y
Y
Y
Y
Y
Executive and Non-Executive (and, in particular,
independent non-executive) directors, such that no one
individual or small group of individuals dominates the
Board’s decision-making?
4.
Is there a clear division of responsibilities between the
leadership of the board and the executive leadership of the
company’s business?
5. Has the board established a Nomination Committee to lead
the process for appointments, ensure plans are in place for
orderly succession to both the board and senior management
positions, and oversee the development of a diverse pipeline
for succession?
6. Are a majority of members of the Nomination Committee
independent NEDs?
7.
Is the Nomination Committee chaired by an individual
other that the chair of the board when it is dealing with the
appointment of their successor?
The following statement, together with the Directors’ Remuneration Report on pages 74 to 93, the Nomination &
Governance Committee Report on pages 72 to 73, and the Audit & Risk Committee Report on pages 94 to 99 describes
how the principles set out in the UK Corporate Governance Code 2018 (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 2019.
SECTION C
The review went further and, based on Code Provision 10, assessed each
NED against a list of ten Yes/No questions, where, for each, a ‘No’ is
determined to be a positive assessment of independence.
The table below shows the results of that review
Questions:
Has the Non-Executive Director?
PM JD
DB MH VO
1. Been an employee of the company or group
within the last five years?
N
N
N
N
N
2a. Had within the last three years, a material
business relationship with the company: -
Directly?
2b. Had within the last three years, a material
business relationship with the company:
As a partner, shareholder, director or
senior employee of a body that has such a
relationship with the company?
N
N
N
N
N
N
N
N
N
N
3. Received additional remuneration from the
company apart from a director’s fee?
N
N
N
N
N
4. Participated in the company’s share option
or performance-related pay scheme?
5. A member of the company’s pension scheme?
6. Close family ties with any of the company’s
advisers, directors or senior employees?
7. Held cross-directorships or had significant
links with other directors through
involvement in other companies or bodies?
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
8. Represented a significant shareholder?
N
N
N
N
N
9. Served on the board for more than nine years
from the date of their first appointment?
Y
N
N
N
N
Whilst the review concluded that Peter Mason had a ‘Yes’ flag, the board
nonetheless considers that the Chairman was independent at the date of his
appointment, was free from any business or other relationship with the
company which could have materially influenced his judgement and he
represented a strong source of advice and independent challenge. It is noted
that Luke Savage was considered to be independent on appointment.
As a result of this review the board considers that all non-executive directors
were independent during the year under review.
Other than their fees, and reimbursement of taxable expenses, which are
disclosed on page 77, the non-executive directors received 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.
No independent professional advice of this nature was utilised in the year.
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.
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
as 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 and
executive team training, 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.
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,
Brand, Hesketh and Rimmington, through their membership of the divisional
boards, between them displayed considerable knowledge and experience of
the Swedish and/or 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.
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.
Also, 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.
‘THE BOARD DIRECTORS RECEIVE REGULAR
UPDATES AS WELL AS SPECIFIC SPECIALIST AND
REGULATORY TRAINING’.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
69
CORPORATE GOVERNANCE REPORT (CONTINUED)
Board effectiveness and performance evaluation
As part of the annual performance, an internal effectiveness evaluation 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 Jane Dale 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.
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. 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 2019.
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 taking
into account the policy on executive directors’ external appointments. No
new significant external appointments are noted in 2019.
Customer/Third Party conflicts of interest
The board has a policy in place to manage customer and third-party conflicts
of interest. This policy sets out how the company and its regulated
subsidiaries manage conflicts of interest fairly, both between the relevant
company and its customers, between groups of customers and between
customers, suppliers and shareholders.
No material conflicts of interest are noted in 2019.
Employee engagement
As part of our on-going review of corporate governance and how we meet
the requirements set out in the Code, in 2019 the board looked at how best
to improve engagement and communication between the board and our UK
workforce (both employees and contractors). This included review of feedback
from Deloitte on their observations about workforce culture and engagement.
As a relatively small UK workforce of currently 36 people, all based in
Preston, we enjoy an ease of communication and engagement between
board, management and other staff that is harder to achieve in larger
organisations. That said, we took the view that current arrangements would
be enhanced with the creation of a Workforce Engagement NED role. The
terms of reference for this role, which also include maintaining a line of
communication to our non-UK workforce, have been developed and approved
by the board and Veronica Oak has been appointed alongside her existing
roles on the board.
An employee forum has also been introduced for our UK workforce, meeting
monthly with members representing each functional area to discuss issues
arising, with similar arrangements in place within our overseas business units.
The board has a standard agenda item at each of its meetings to cover
culture and stakeholder, including workforce engagement. This has helped
highlight workforce and other stakeholder matters as part of board discussion
and decision-making.
We continue to invest in the development of our employees through
individual and group training and development plans. All UK employees
(subject to minimum service requirement) also have access to our SAYE
scheme, improving employee engagement with company performance and
directly linking a proportion of employee benefits to our performance.
We are also conscious that through our outsourcing arrangements we
indirectly utilise the services of a much larger workforce and we seek to
ensure that our suppliers are similarly adopting appropriate arrangements for
communication and engagement with their own workforce as part of the way
in which we manage and work with our outsource suppliers.
As an acquisitive company, we are acutely aware of the need to consider the
interests of the workforce that may be affected by any plans to buy a
company or book of business. This is factored into our acquisition policy and
will be reported upon to the board to assist its deliberations on any potential
acquisition.
Customer/supplier engagement
During 2019 the board requested our Group Chief Executive to conduct a
review of our customer/supplier engagement across all areas of our group.
The reports received covered our operations in the UK, Sweden and the
Netherlands and detailed our extensive engagement via a number of
methods. Whilst the board remains vigilant to ensure the importance of such
engagement remains high on agendas, the board did not feel that any
additional actions were required at this stage.
Company Secretary
Al Lonie 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.
.
70
CHESNARA ANNUAL REPORT & ACCOUNTS 2019CORPORATE GOVERNANCE
Remuneration Committee
Full details of the composition and work of the Remuneration Committee are provided on pages 74 to 76.
Audit & Risk Committee
Full details of the composition and work of the Audit & Risk Committee are provided on pages 94 to 99.
Nomination & Governance Committee
Full details of the composition and work of the Nomination & Governance Committee are provided on pages 72 to 73.
The attendance record of each of the directors at scheduled board and committee meetings for the period under review is:
Peter Mason - Non-executive Chairman
John Deane - Executive director
Veronica Oak - Non-executive director
David Brand - Non-executive director
David Rimmington - Executive director
Jane Dale - Non-executive director
Mark Hesketh – Non-executive director
Scheduled
board1
Nomination &
Governance
Committee
Remuneration
Committee
Audit & Risk
Committee
10 (10 )
10 (10 )
10 (10 )
10 (10 )
10 (10 )
10 (10 )
10 (10 )
4 (4 )
n/a
4 (4 )
4 (4 )
n/a
4 (4 )
4 (4 )
5 (5 )
n/a
5 (5 )
5 (5 )
n/a
n/a
n/a
n/a
n/a
9 (9 )
9 (9 )
n/a
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.
Note 1 The number of scheduled board meetings includes two meetings that were called at short notice to discuss ad hoc/subject specific matters.
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, with
support from the senior independent director as appropriate, 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.
At our AGM on 14 May 2019 all resolutions were passed, with votes for
ranging from 100% to 95.53% (votes against ranging from 0% to 4.47%).
Our next AGM is on 26 May 2020 and details of the resolutions to be
proposed can be found in the notice of the meeting on pages 199 to 200.
The Chairmen of the board committees will be available to answer such
questions as appropriate.
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 on-going process for identifying, evaluating and managing the significant
risks faced by the group. This process has been in place for the year under
review and up to the date of approval of the Annual Report & Accounts. 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 53 to 57.
The maintenance of the principal risk registers is the responsibility of senior
management, who report on them quarterly to the respective divisional Audit
& Risk Committees and to each Chesnara Audit & Risk Committee meeting.
The divisions maintain a risk and responsibility regime, which ensures that:
– 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 management and control of
risks through the specification of internal procedures; and
71
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION C
CORPORATE GOVERNANCE
REPORT (CONTINUED)
NOMINATION & GOVERNANCE
COMMITTEE REPORT
– there is an explicit risk function, which is supported by 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.
As at 31 December 2019, all Chesnara directors were 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 plc 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 2019, and that it has taken account of material developments
between that date and the date of approval of the Annual Report & Accounts.
The board confirms that these reviews took account of reports by the Internal
Audit and Compliance functions on the operation of controls, internal financial
controls, and management assurance on the maintenance of controls and
reports from the external auditor on matters identified in the course of
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 as set out on
pages 94 to 99. 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.
.
Financial reporting
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting. These controls are designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes.
The group has comprehensive planning, budgeting, forecasting and
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.
Nomination & Governance Committee
During the period under review, the committee comprised Peter Mason,
who also served as Chairman of the committee, David Brand, Veronica
Oak, Jane Dale and Mark Hesketh. The Chairman did not chair or attend
when the committee was considering matters relating to his position, in
which circumstance the committee was chaired by an independent
non-executive director, usually the senior independent director. No
individual participated in discussion or decision-making when the matter
under consideration related to him or her.
The committee Chairman reports material findings and
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:
– keep under review the balance, structure, size and composition of the
board and its committees, ensuring that they remain appropriate;
– assess the independence of each NED and any circumstances that are
likely to impair, or could impair, their independence;
– 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;
– scrutinise and hold to account the performance of the executive
directors against agreed performance objectives and advise the
remuneration committee of their assessments;
– 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.
In relation to the preparation of the group financial statements, the controls
in place include:
This includes consideration of recommendations made by the Group
Chief Executive for changes to the executive membership of the board.
– the finance governance team review new developments in reporting
requirements and standards to ensure that these are reflected in group
accounting policies; and
– the finance governance team develop the group’s financial control processes
and procedures which are implemented across the group.
The reporting process is supported by transactional and consolidation
finance systems. Reviews of the applications of controls for external
reporting purposes are carried out by senior finance management. The
results of these reviews are considered by the board as part of its
monitoring of the performance of controls around financial reporting. The
Audit & Risk Committee reviews the application of financial reporting
standards and any significant accounting judgements made by management.
Going Concern and Viability Statement
The Directors’ Statement on Going Concern is included in the Directors’ Report
on page 102 and the Long-Term Viability Statement is set out on page 50.
During the period, the committee met four times and attendance at
those meetings is shown on page 71 of the Corporate Governance
Report. By invitation, the GCEO attends the Nomination & Governance
Committee, but was not present when matters relating to his own
performance were discussed.
The composition of the board
After a number of director changes in recent years, the 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. The review also identified areas where
the board should evolve to meet any expected future business and
strategic direction of the group.
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 that, by
focusing on creating a pool of internal talent, there is an increased
probability of employee retention and the building of internal capabilities
needed to support the growth of the business.
72
CHESNARA ANNUAL REPORT & ACCOUNTS 2019CORPORATE GOVERNANCE 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.
SECTION C
Board appointment process
The committee adopts a formal and transparent procedure for the
appointment of new directors to the board.
The board’s typical process may include the use of independent external
recruitment consultants for appointing directors. The company will provide a
brief of the candidate desired, along with a role profi le, to the recruitment
consultant. As part of the appointment process, these external recruitment
consultants would be 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 criteria and put forward for interview by the board and the executive
management team suitably qualifi ed candidates. Any candidate deemed
suitable for appointment will, if necessary, fi rst have to go through the fi t
and proper process as outlined in the Senior Managers & Certifi cation
Regime (SMCR).
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 on-going 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 2019, 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, and in the case of Luke Savage for election, at the company’s AGM
on 26 May 2020. Following the annual board effectiveness reviews of
individual directors, as applicable and subject to re-election, the Chairman
considers that each director:
The board process set out above was followed in 2019 and led in early 2020
to the appointment of Luke Savage as Chairman. The board engaged the
services of Odgers Berndtson as independent external recruitment
consultants. No directors have any link with Odgers Berndtson and they
were not used for any other work in 2019.
– 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 suffi cient time available to fulfi l their duties.
The board, on the advice of the committee, recommends the re-election/
election of each director so proposed at the 2020 AGM. The full 2020 AGM
Notice can be found on page 199.
Luke Savage
Chairman of the Nomination & Governance Committee
14 April 2020
Diversity
The committee is mindful of the corporate governance 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 2020.
The board recognises the benefi ts of having diversity across all areas of the
group. When considering the make-up of the board, the benefi ts of diversity
group. When considering the make-up of the board, the benefi ts 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.
disability, age, nationality and other contributions that individuals may make.
In identifying suitable candidates, the committee will seek candidates from a
In identifying suitable candidates, the committee will seek candidates from a
range of backgrounds, with the fi nal decision being based on merit against
the role criteria set. The board maintains its practice of embracing diversity
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 currently comprises 5 men and 2 women (28.5%).
based targets. The board currently comprises 5 men and 2 women (28.5%).
Review of effectiveness
The board and its committees undertook annual effectiveness reviews and
the respective Chairmen discussed the fi ndings in each forum. Other
standard processes were also undertaken, including Fit & Proper
assessments, Board Diversity Policy review, NED succession planning, the
review of the effectiveness of the Chairman and a gap analysis against the
new provisions of the UK Corporate Governance Code 2018.
Any areas where increased focus and/or action was considered to be of
potential value has either been taken in 2019 or will be taken into account as
appropriate during 2020.
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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
73
CORPORATE GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
REMUNERATION COMMITTEE CHAIRMAN’S ANNUAL STATEMENT
Dear Shareholder,
I am pleased to present the 2019 Directors’ Remuneration Report, for which we seek your support
at our forthcoming Annual General Meeting, in May 2020. It is three years since shareholders
last approved the Remuneration Policy and we have taken this opportunity to review our Policy
and make appropriate changes following our review of the UK Corporate Governance Code
2018 and shareholder views generally on remuneration. Our revised Remuneration Policy will be
put to shareholders for a binding vote at our AGM on 26 May 2020 and, if approved, will be
effective from that date.
2019 – A year of solid 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
Executive performance in 2019
In light of the performance of the executive team in 2019 relative to the financial
targets and strategic objectives set, the Remuneration Committee is satisfied
that the reward outcomes are appropriate and that our remuneration Policy
worked as intended without need for the Committee to use its discretionary
powers to make adjustments.
3. Enhance value through profitable new business.
Our assessment of the performance outcomes in 2019 under the STI can be
This clear strategic focus is underpinned by the culture, values and risk
found on page 78.
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).
The awards made in April 2017 under the 2014 LTI are due to vest in April 2020
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 80. As in 2019, disclosure of the economic value outcome now
enables comparison with opening values.
In 2019 we have seen delivery against:
Changes to the directors’ salary
1. Cash generation of £36.7m exceeding the funding requirements of the dividend.
2. Movestic has delivered modest new business profits of £6.9m, which is
reflective of the challenging market, with lower volumes of single premiums
and transfers-in, coupled with margin pressures. Movestic has provided to
Chesnara a SEK33.1m (£2.7m) dividend payment.
3. Scildon has delivered increased new business profits of £7.5m. This has been
partly delivered through cost saving initiatives and Scildon taking a larger market
share of a reducing term market, increasing sales above 2018. Average term
market share for 2019 was 11.6% compared to 7.6% in 2018. In isolation, the
market share for December 2019 was 13.7%. Scildon has provided to Chesnara
a EUR5.8m (£5.0m) dividend payment in the year.
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 2.2% in 2019 and 2%
in 2020. The salaries of John Deane and David Rimmington have been
increased by the same percentages in both years. The executive directors’
remuneration for 2020 can be found on page 77.
In 2019 the board increased the base fee and committee chairmanship fees
for non-executive directors by 2.2%. In 2020 no increase has been applied and
the only change to non-executive director remuneration is related to an
increase in responsibility arising from the introduction of the new Workforce
NED role, details of which can be found on page 70.
74 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
74
CHESNARA ANNUAL REPORT & ACCOUNTS 2019XXXXXXXXXXXXXXXXXXX.
SECTION C
Review of Incentive Scheme performance measures
As noted in my report last year, we have considered the performance
Shareholder engagement
The Directors’ Remuneration Report for the year ended 31 December
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. In 2019 the Remuneration
Committee reviewed whether the weightings and measures continued
to be appropriate and made changes to better reflect achievement of an
overall assessment of company financial performance when determining
executive director bonus payments – see full details on page 85.
2019 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 2020; and
– the proposed Remuneration Policy, which will be subject to a binding
shareholder vote at the AGM in May 2020.
During preparation of my Annual Statement, I have engaged in dialogue
with major shareholders about the proposed changes to the Policy and
during the year under report we also responded to questions/queries
raised by shareholders.
The Long-Term Incentive Scheme aims to align executive and
shareholder interests via two equally weighted metrics: (1) Total
Shareholder Return (TSR); and (2) Economic Value (EcV) – the latter
being a measure of shareholder value.
Directors’ Remuneration Policy (the ‘Policy’)
We reviewed the composition of the Executive’s remuneration and are
confident that the current arrangements remain appropriate and are
giving rise to outcomes that we hope investors will agree are aligned to
the objectives we set ourselves and their interests. So, in summary,
remuneration for our Executives will continue to comprise basic salary,
benefits, including pension contributions, an annual Short-Term
Incentive Scheme (STI) and a Long-Term Incentive Scheme (LTI). We
have also continued to monitor developments in the area of
remuneration, whether that is via enhancements to accepted best
practice, regulatory guidance or legal requirements. Of particular note
has been the committee’s review of the new UK Corporate Governance
Code 2018 (the ‘Code’). The proposed Policy can be found on pages 87
to 93 and the existing policy is in the Governance Reports section of
the company’s website: www.chesnara.co.uk
The voting outcome at the 2019 AGM in respect of the directors’
remuneration report for the year ended 31 December 2018 is set out
on page 86 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.
I hope my annual statement, together with our Remuneration Report,
provides a clear account of the operation of the Remuneration
Committee during 2019 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.
The key changes within the proposed Policy relate to:
– clarification that executive director pension contributions are the same
Veronica Oak
Chairman of the Remuneration Committee
14 April 2020
as those made for all UK employees;
– an update to the Policy to reflect the introduction made last year of a
two-year ‘holding’ period to apply after the three-year ‘performance’
period for LTI awards, effective for awards made from 2019;
– an update to the Policy to reflect the strengthening of the malus and
clawback provisions that already exist in the rules for the executive LTI
and STI awards;
– changes to our minimum shareholding requirements for executive
directors, including the introduction of a two-year post-employment
requirement;
– introduction of the consideration of Environmental, Social and
Governance (ESG) risks and performance as part of non-financial
targets in executive director compensation plans; and
– further comment and hopefully reassurance for investors about the
ability of the Remuneration Committee to exercise discretion,
particularly when determining outcomes arising from incentive
schemes.
75
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION C
DIRECTORS’ REMUNERATION REPORT
ANNUAL REMUNERATION REPORT
This section sets out how the Remuneration Committee has implemented its remuneration policy for executive
directors during 2019. Other than the single total figure of remuneration for each director tables on page 77, statement
of directors’ shareholding and share interests on pages 81 and 82, 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 2019. Members of the Remuneration Committee during the course of the year were:
Committee members3
Veronica Oak1
Peter Mason2
David Brand
Notes.
Role on the
committee
Committee chairman
Committee member
Committee member
Committee member
since
Attendance
in 2019
Maximum possible
meetings in 2019
January 2013
March 2004
September 2018
5
5
5
5
5
5
1. Veronica Oak joined the committee in January 2013 and became the chairman in May 2013.
2. Peter Mason was not present when the chairman’s fees were discussed.
3. By invitation, the GCEO attends the Remuneration Committee, but was not present when matters relating to his own remuneration were discussed.
The Committee does not retain the services of external advisers but, in Q1 2019, commissioned a brief review by PwC of the LTI rules to reflect the addition of a holding period. PwC had
no other connections with the company or its directors during 2019.
Highlights 2019
In 2019, the committee met five times and dealt with the following matters:
Area of focus
Matter considered
Executive director
remuneration and reward
Assessed and recommended to the Board approval of the outcome of awards made in 2018 under the STI Scheme and in 2017 under
the LTI Scheme having given due consideration to the risk report provided by the Audit and Risk Committee.
Approved the targets and the grant of share awards to Executives in 2019 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
Review of the
remuneration policy
The Committee’s Terms of Reference were reviewed and revision made to ensure that they continue to be appropriate for the
activities of the Committee and provide adequate scope to cater for the expectations set by the Code.
The Committee reviewed the remuneration policy last approved by shareholders in 2017. Determined that the current
remuneration structure for Executives remains appropriate for the objectives set out therein and made a number of changes
primarily to address requirements stemming from the new Code. These proposed changes are to be presented to
shareholders at the AGM in May 2020.
Review of new UK Corporate
Governance Code and other
remuneration practices
The Committee considered the requirements of the Code and as a result brought the executives’ Long Term Incentive Scheme
into compliance by adding a holding period of two years, which will be effective for awards made from 2019, amended the
Committee’s Terms of Reference to slightly broaden the responsibilities of the Committee and also identified a number of
changes to our remuneration policy.
Committee evaluation
An evaluation of the Committee’s performance by way of an internal questionnaire suggested that the Committee continued
to operate well.
Annual salary review
The Committee reviewed the salaries of the executive directors and senior management and made changes in line with its
remuneration policy and with due reference to staff salaries generally.
Directors’ remuneration
reporting
The Committee reviewed the draft directors’ remuneration report for the 2018 Report & Accounts and recommended its approval
by the Chesnara board.
Performance against
strategic objective
Directors’ minimum
shareholding
The Committee reviewed the executive directors’ performance against objectives set.
The Committee reviewed the value of shares held by executives relative to the minimum requirement.
Shareholder engagement
Responded to questions/queries raised by shareholders and prepared for consultation with major shareholders on proposed
changes to Remuneration Policy in Q1 2020.
Chairman’s fees
The Committee reviewed the level of fees payable to the Chairman.
Remuneration principles
The Committee reviewed the Group Remuneration Principles, which guide the remuneration policies throughout the group.
76
CHESNARA ANNUAL REPORT & ACCOUNTS 2019CORPORATE GOVERNANCE
Single total figure of remuneration for each director (audited information)
The remuneration of the executive directors for the years ended 31 December 2019 and 31 December 2018 is made up as follows:
Executive directors’ remuneration as a single figure - year ended 31 December 2019
Name of director
John Deane
David Rimmington
Total
Salary
and fees
£000
All taxable
benefits1
£000
Non-taxable
benefits
£000
Annual
bonuses
£000
LTI2
£000
Pension3
£000
449
283
732
46
12
58
6
5
11
443
251
694
124
61
185
43
27
70
Executive directors’ remuneration as a single figure - year ended 31 December 2018
Name of director
John Deane
David Rimmington
Total
Salary
and fees
£000
All taxable
benefits1
£000
Non-taxable
benefits
£000
439
277
716
27
20
47
5
5
10
Annual
bonuses
£000
136
79
215
LTI2&4
£000
Pension3
£000
305
194
499
42
26
68
Notes.
1. Includes amounts paid in lieu of accrued dividends and interest arising upon the exercise of share options under the 2014 STI Scheme.
2. Includes amounts paid in lieu of accrued dividends and interest arising upon the exercise of share options under the 2014 LTI Scheme.
3. The pension component in the single figure table represents employer contributions. No directors were members of a defined benefit scheme.
4. These figures have been re-stated to reflect the actual share price at the date of vesting of 358.5 pence.
The remuneration of the non-executive directors for the years ended 31 December 2019 and 31 December 2018 is made up as follows:
Non-executive directors’ remuneration as a single figure - year ended 31 December 2019 and 2018
Name of director
Peter Mason
Veronica Oak
David Brand
Mike Evans5
Jane Dale
Mark Hesketh6
Total
Fees
£000
123
61
66
_
67
61
378
2019
Benefits7
£000
1
1
1
–
1
1
5
Total
£000
124
62
67
–
68
62
383
Fees
£000
120
59
59
45
65
5
353
2018
Benefits7
£000
1
1
1
2
1
–
6
Total for
2019
£000
1,111
639
1,750
Total for
2018
£000
954
601
1,555
Total
£000
121
60
60
47
66
5
359
Notes.
5. Mike Evans stepped down from the board effective 1 October 2018.
6. Mark Hesketh was appointed to the board effective 17 December 2018.
7. 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.
77
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION C DIRECTORS’ REMUNERATION REPORT • 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), which was
renewed this year.
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.
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 2019 derive from awards made under the 2014 STI scheme. The amounts awarded to the executive directors
under this scheme are based on performance against three core measures; cash generation, EcV operating profit and group strategic objectives. Cash
generation replaced IFRS pre-tax profit in the year as a core measure. The reason for this change is explained on page 85. 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
Cash
generation1
EcV operating
result2
Group strategic
objectives
Total
David
Rimmington
Cash
generation1
EcV operating
result2
Group strategic
objectives
Total
£31.396m
0%
£39.245m1
12.0%
£51.019m
40.0%
£88.562m1
40.0%
40.0%
179,508
£11.900m
0%
£17.000m
16.0%
£25.500m
40.0%
£102.600m
40.0%
40.0%
179,508
60% of max
0%
80% of max
10.0%
100%
20.0%
94% of max
18.8%
18.8%
84,328
38.0%
100.0%
98.8%
98.8%
443,344
£31.396m
0%
£39.245m1
12.0%
£51.019m
40.0%
£88.562m1
40.0%
36.0%
101,914
£11.900m
0%
£17.000m
16.0%
£25.500m
40.0%
£102.600m
40.0%
36.0%
101,914
60% of max
0%
80% of max
10.0%
100%
20.0%
92% of max
18.4%
16.6%
46,850
38.0%
100.0%
98.4%
88.6%
250,678
For results between the performance thresholds, a straight-line basis applies.
Notes.
1. This is stated after certain adjustments, such as consolidation adjustments. The actual results are also adjusted in the same manner.
2. The EcV operating earnings before exceptional items on page 46 has been adjusted in line with the basis of the target.
78
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
The following table details the requirements for delivery of the strategic objectives for 2019 and actual outcomes:
Objectives area
Objectives and performance
Outcome
John Deane
Scildon organisation
and IT (45%)
Organisation design and development delivered in line
with plan.
Organisational design completed and implemented with support of
the works council.
IT strategy set and 2019 deliveries as target.
IT strategy design completed and outsourcing option selected.
Balance sheet
optimisation (25%)
Ensure clarity of SII balance sheet optimisation
opportunities, and risks, and associated prioritisation and
delivery of agreed actions.
Action taken in Movestic, Scildon and group to optimise the balance
sheet and 2020 priorities developed.
Acquisitions (20%)
Lead the investigation and delivery of acquisitions within
risk appetite processes.
Two acquisitions announced in the Netherlands which evidence
our ability to accept portfolios into Waard.
People (10%)
Development of management teams and maintenance of an
open culture.
The management teams have continued to develop with employee
engagement and an open culture being areas of focus.
David Rimmington
Statutory reporting (20%)
Ensure improvements in reporting processes to meet new
deadlines for SII reports (QRTs and narratives at group and
divisional level).
Processes developed to ensure delivery to the shorter deadlines
with no impact on the quality of deliveries.
Support Scildon in their
organisational change
project (30%)
Support the finance function transformation.
Support the wider operational design work.
Finance operation redesign has been implemented and the wider
organisational design is well under way.
Business support (15%)
Deliver Audit & Risk Committee objectives.
Delivered EQA improvements identified and delivered against plan.
Support delivery of EQA improvements.
Deals continue to be assessed against our investment criteria.
Discharge acquisition responsibilities in accordance with the
Chesnara plc acquisition processes.
Management reporting
and financial analysis (20%)
Further enhancements in MI reporting and analysis to support
capital and balance sheet management and decision-making.
Enhanced reporting delivered at group and subsidiaries.
IFRS 17 (15%)
Planning and delivery of IFRS 17 across group and divisions.
Programme plan and resourcing fully established and delivery in
line with the ARC approved plan.
79
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019 DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT (CONTINUED)
Annual bonuses (continued)
In converting performance against the measures assessed for 2019 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
448,770
283,094
100%
90%
98.79%
88.55%
Total
value of
award
£
443,344
250,678
694,022
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 2020 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
EcV1
Performance
achieved
% of
award
vesting
Value of
award £
John Deane
David Rimmington
TSR
EcV
TSR
EcV
50%
50%
50%
50%
=Median
14.98%
55.65%
(0.71)%
0%
–
=89.0%
£741.6m
£845.4m
£602.6m
£762.2m
102.8%
19.9%
62,472
=Median
14.98%
55.65%
(0.71)%
0%
–
=89.0%
£741.6m
£845.4m
£602.6m
£762.2m
102.8%
18.0%
31,254
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 (280.41p). 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 47 with the addition of dividends paid out and the deduction of equity raised in the performance period which is
consistent with the basis upon which the targets are set. The closing value for EcV on this basis was £762.2m.
80
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
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 2019
125,180
2014 LTI
28 April 2018
107,100
2014 LTI
28 April 2017
111,781
2014 LTI
28 April 2016
133,017
David Rimmington
2014 LTI
28 April 2019
71,070
2014 LTI
28 April 2018
60,805
2014 LTI
28 April 2017
61,996
2014 LTI
28 April 2016
71,259
Face value on the
date of grant2
% of award
vesting for
minimum
performance
Length of vesting period
– 3 years
Date of vesting
£448,770
based on share price (358.50p)
£439,110
based on share price (410.00p)
£428,400
based on share price (383.25p)
£415,013
based on share price (312.00p)
£254,785
based on share price (358.50p)
£249,300
based on share price (410.00p)
£237,600
based on share price (383,25p)
£222,328
based on share price (312.00p)
10.0%
10.0%
12.5%
12.5%
10.0%
10.0%
12.5%
12.5%
28 April 20223
28 April 2021
28 April 2020
28 April 2019
28 April 20223
28 April 2021
28 April 2020
28 April 2019
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, 2017, 2018 and 2019. David Rimmington; 75% in 2014 and 2015, 90% in 2016, 2017, 2018 and 2019. Options have a nil exercise price.
Total Shareholder Return
50% of the award will vest subject to the TSR target being in a certain range, with the range being the ranking of the TSR of Chesnara against the TSR of the individual
companies in the FTSE 350 Higher Yield Index. The award will be made on a sliding scale from nil if the Chesnara TSR is below the median to full if the Chesnara TSR
is in the upper quartile.
EEV/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.
For awards granted prior to 2018, 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.
For awards granted in 2018 onwards, 50% of the award will vest subject to the EcV outcome being within a certain range of its target. The award granted in 2019 will
be made on a sliding scale with nil being paid out if the outcome is less than or equal to 95.7% of target, up to a maximum pay-out if the outcome is greater than or
equal to 104.1% of target.
Notes.
1. No awards are made if performance is below the minimum criteria.
2. The face value is reported as an estimate of the maximum potential value on vesting.
3. LTI awards from 2019 onwards are subject to a two-year holding period in addition to the three-year performance period.
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 requires executive directors to build up a shareholding through the retention of shares to the value of their basic salary. As at 31
December 2019 this criterion has 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.
81
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019
DIRECTORS’ REMUNERATION REPORT • 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 2019 or the date of resignation.
No changes took place in the interests of the directors between 31 December 2019 and 28 March 2020.
Shares held:
1 January 2019
Shares held:
31 December 2019
Options:
With performance
measures
Options:
Without
performance
measures1
Options:
Vested but
unexercised
Options:
Exercised during
the year
Options:
Percentage of
shareholding
target held2
35,975
50,632
25,743
3,000
5,500
3,333
–
124,183
131,066
72,281
25,743
3,000
5,500
3,333
5,000
245,923
434,500
193,871
–
–
–
–
–
628,371
90,878
69,164
–
–
–
–
–
90,4393
15,4343
–
–
–
–
–
95,091
48,449
–
–
–
–
–
160,042
105,873
143,540
214.3%
148.9%
–
–
–
–
–
–
Name of director
John Deane
David Rimmington
Peter Mason
Veronica Oak
David Brand
Jane Dale
Mark Hesketh
Total
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 2019 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 2020 Annual Report & Accounts.
2. Calculated using the share price of 316.00p at 31 December 2019.
3. Awarded under the 2014 LTI Scheme and vested on 28 April 2019.
Outstanding share options and share awards
Below are details of outstanding share options and awards for current executive directors.
Name of
executive
director Scheme
Grant
date
Exercise
price (p)
Number of
shares
under
option at
1 January
2019
Number
granted
during
year
Number
exercised
during
year
Number
lapsed
during
year
Number of
shares under
option and
unexercised at
31 December
2019
End of
performance
period Vesting date
Performance
period1
Date of
expiry of
option
2014 LTI
(2019 award)
2014 LTI
(2018 award)
2014 LTI
(2017 award)
2014 LTI
(2016 award)
2014 LTI
(2015 award)
2014 STI
(2019 award)
2014 STI
(2018 award)
2014 STI
(2017 award)
2014 STI
(2016 award)
Share save
E
N
A
E
D
N
H
O
J
28/04/19
28/04/18
28/04/17
28/04/16
28/04/15
28/04/19
28/04/18
28/04/17
28/04/16
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
–
125,180
107,100
111,781
133,017
68,516
–
–
–
–
–
13,323
31,802
37,696
26,575
–
–
–
24/09/19
223.40
–
8,057
Share save
28/09/18
304.80
5,905
–
–
–
–
–
(68,516)
–
–
–
(26,575)
–
–
–
–
–
125,180
31/12/21
28/04/22
3 Years
28/04/29
107,100
31/12/20
28/04/21
3 Years
28/04/28
111,781
31/12/19
28/04/20
3 Years
28/04/27
(42,578)
90,439
31/12/18
28/04/19
3 Years
28/04/26
–
–
–
–
–
–
–
–
31/12/17
28/04/18
3 Years
28/04/25
13,323
31,802
37,696
–
8,057
5,905
n/a
n/a
n/a
n/a
n/a
n/a
28/04/22
28/04/21
28/04/20
28/04/19
01/11/22
01/12/21
n/a
n/a
n/a
n/a
n/a
n/a
28/04/29
28/04/28
28/04/27
28/04/26
01/05/23
01/06/22
522,392
146,560
(95,091)
(42,578)
531,283
2014 LTI
(2019 award)
2014 LTI
(2018 award)
2014 LTI
(2017 award)
2014 LTI
(2016 award)
2014 STI
(2019 award)
2014 STI
(2018 award)
2014 STI
(2017 award))
2014 STI
(2016 award)
28/04/19
28/04/18
28/04/17
28/04/16
28/04/19
28/04/18
28/04/17
28/04/16
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
–
71,070
60,805
61,996
71,259
–
–
–
–
7,760
17,620
20,293
15,434
–
–
–
Share save
24/09/19
223.40
–
8,057
–
–
–
–
–
–
71,070
31/12/21
28/04/22
3 Years
28/04/29
60,805
31/12/20
28/04/21
3 Years
28/04/28
61,996
31/12/19
28/04/20
3 Years
28/04/27
(48,449)
(22,810)
–
31/12/18
28/04/19
3 Years
28/04/26
–
–
–
–
–
–
–
–
–
–
7,760
17,620
20,293
15,434
8,057
n/a
n/a
n/a
n/a
n/a
28/04/22
28/04/21
28/04/20
28/04/19
01/11/22
n/a
n/a
n/a
n/a
n/a
28/04/29
28/04/28
28/04/27
28/04/26
01/05/23
247,407
86,887
(48,449)
(22,810)
263,035
N
O
T
G
N
M
M
R
I
I
I
D
V
A
D
82
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
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.
650
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
Jan19
Jan20
The table below sets out the details for the director undertaking the role of Group Chief Executive Officer:
Year
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Individual performing GCEO role
GCEO single figure
of total remuneration
£000
Annual bonus pay-out
against maximum
Long-term incentive
vesting rates against
maximum opportunity
John Deane
John Deane
John Deane
John Deane
John Deane
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
1,111
965
1,142
902
596
712
702
612
384
631
98.79%
31.08%
86.96%
98.33%
81.96%
91.30%
100.00%
65.48%
17.39%
100.00%
19.93%
67.99%
80.95%
–
–
34.52%
n/a
100.00%
n/a
n/a
Note
1
1
1
1
1
2
3
4
5
5
Notes.
1. John Deane was appointed GCEO on 1 January 2015.
2. During 2014 an LTIP that was granted to the CEO in 2012 vested. The LTIP included a
condition such that the sum of the LTIPs and annual bonuses awarded in that year could
not exceed 100% of the CEO’s salary. The annual bonus in 2012 amounted to 65.48% of
salary. When the performance measurements for the 2012 LTIP were assessed, the award
was required to be restricted due to the operation of the 100% combined cap, such that
the 2012 LTIP paid out 34.52% of the salary at the time of award. During 2014 the annual
bonus that was awarded represented 68.5% of the CEO’s salary. The maximum payable
was up to 75% of the CEO’s salary, resulting in a 91.3% pay-out with reference to the
maximum potential award.
3. During 2013 no LTIP value was earned because the annual bonus in isolation accounted
for the full 100% combined bonus cap.
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.
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
2019 and 2018.
Percentage change in remuneration in 2019
compared with 2018
Group Chief Executive
%
Group Finance Director
%
Group employees
%
Salary and fees
All taxable benefits
Annual bonuses
2.20
1.771
224.89
2.20
1.131
215.38
Note 1. All taxable benefits include amounts paid in lieu of accrued dividends and interest arising upon the exercise of share options under the 2014 STI Scheme.
2.20
2.38
2.50
83
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019
DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT (CONTINUED)
Comparison of total remuneration for the group CEO and UK employees
Our 2018 remuneration report provided a comparison of total remuneration for the GCEO and an average of total remuneration for UK employees
We set out here our analysis on CEO pay ratio reporting as required by The Companies (Miscellaneous Reporting) Regulations 2018. This analysis
has been conducted using ‘Option A’ as set out in the Regulations and has consisted of:
– Determining the total FTE remuneration of all UK employees for the 2019 financial year;
– Ranking all those employees based on their total FTE remuneration from low to high; and
– Identifying the employees whose remuneration places them at the 25th, 50th (median) and 75th percentile points of this ranking.
The analysis is then presented to show the ratio of the GCEO’s 2019 single total figure of remuneration to the:
– Median (i.e. 50th percentile) FTE remuneration of our UK employees;
– 25th percentile FTE remuneration of our UK employees; and
– 75th percentile FTE remuneration of our UK employees.
Comparison of total remuneration
2019
2018
25th percentile
pay ratio (FTE UK
employees total
remuneration)
Median pay ratio
(FTE UK employees
total remuneration)
75th percentile
pay ratio (FTE UK
employees total
remuneration)
15.7 : 1
15.2 : 1
11.8 : 1
9.8 : 1
6.6 : 1
6.4 : 1
The Remuneration Committee considers that the ratio is consistent with our remuneration policy and that no actions arise from this analysis.
Relative importance of spend on pay
The graph to the right shows the actual expenditure of the group and change
between the current and previous years:
Due to Chesnara adopting a strategy of outsourcing much of its activities,
the level of total employee pay is relatively low in comparison to dividends. In
addition, the graph shows a comparison with the group’s total acquisition
and maintenance expenditure. 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
120
100
80
60
40
20
0
2019 2018
-7%
97.9
91.1
-8%
+3%
27.2
29.4
31.9
31.0
Total employee
pay
Business
acquisition and
maintenance
expenditure
Dividends
Statement of Implementation of Remuneration Policy in the following financial year
The current remuneration policy took effect following approval at the 2017 AGM and, subject to shareholder approval, will be succeeded by the
Policy, which is being put to shareholders at the 2020 AGM. The following states how the policy will be implemented during 2020, assuming that
it is approved.
Salaries and fees
Will be set in accordance with the company’s policy.
Executive directors
The salary of John Deane (GCEO) has been increased from £448.8k to £457.8k and the salary of David Rimmington, (GFD) has been increased
from £283.1k to £288.8k, both in line with the 2% average pay increase awarded to UK staff.
Non-executive directors
No increase has been applied and the only change to non-executive director remuneration is related to an increase in responsibility arising from
the introduction of the new Workforce NED role, which Veronica Oak has taken responsibility for.
84
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019 The table below sets out the anticipated payments to non-executive directors for 2020:
Luke Savage (from 14 February 2020)
Peter Mason (to 13 February 2020)
Veronica Oak
David Brand
Jane Dale
Mark Hesketh
Total
Fees
£000
122.6
20.4
62.3
66.0
66.0
60.8
398.1
Benefits1
£000
1.0
–
1.0
1.0
1.0
1.0
5.0
Total
£000
123.6
20.4
63.3
67.0
67.0
61.8
403.1
Note 1. 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 non-executive director’s normal place of work.
2020 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 2021 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)
Maximum
achievement
(as % of target)
Minimum
achievement
Target
achievement
Maximum
achievement
John Deane
Cash generation
EcV profit
Group strategic objectives
David
Rimmington
Cash generation
EcV profit
Group strategic objectives
40.0%
40.0%
20.0%
40.0%
40.0%
20.0%
80.0%
70.0%
75.0%
80.0%
70.0%
75.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
130.0%
150.0%
125.0%
130.0%
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 policy.
Measures
Following review by the Remuneration Committee, changes were approved
for 2019 to remove the IFRS component used in prior years and base
performance assessment on cash generation and EcV profit metrics both
with appropriate adjustments and Group strategic objectives. The two
financial measures are deemed to be complementary when operated
together, to encourage sensible executive behaviour and better reflect an
overall assessment of company financial performance. Our assessment
measures 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 financial measures are recognised outputs from the audited
year-end Financial Statements, although it should be noted that the
Remuneration Committee is, in accordance with the Policy, able to make
discretionary adjustments if deemed necessary. As agreed in advance by the
Remuneration Committee, the financial results for the year are adjusted to
look through any impact of the symmetric adjustment and WP transfers/
restrictions, be they negative or positive. Also, again as agreed in advance,
the results for STI purposes exclude the impact of any acquisition activity in
the year. Successful acquisitions are rewarded through separate elements of
the broader STI and LTI Scheme.
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.
The latest approved Remuneration Policy can be found on the company
website (www.chesnara.co.uk). Whilst the policy makes several specific
reference to IFRS profit as being one of the key financial metrics, it also
refers to the fact that ‘targets may include, but are not limited to costs,
IFRS pre-tax profit, EcV operating profit, cash generation, group strategic
objectives and personal performance’. As such, the proposed shift in focus
in 2019 from IFRS profit and EcV operating profit to cash generation and
total EcV profits is deemed to be in accordance with our approved policy.
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 cash generation and EcV 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.
85
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019 DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT (CONTINUED)
2020 award made under the 2014 LTI
In 2020 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 2023 together with the actual
performance against those targets
Individual
Share award
Measures
Weighting
Ranges and targets
Vesting rates
% of basic
salary
Minimum
achievement
(as % of target)
Target
achievement
Maximum
achievement
(as % of target)
Minimum
achievement
Target
achievement
Maximum
achievement
John Deane
100%
David
Rimmington
90%
TSR
EcV
TSR
EcV
50%
50%
50%
50%
=Median
Median
Upper quartile
=Median
Median Upper quartile
nil
nil
nil
nil
12.5%
12.5%
50.0%
50.0%
50.0%
50.0%
The 2020 award under the 2014 LTI will be implemented and operated by the Remuneration Committee as set out within the Policy.
Measures
The two performance measures for the 2020 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 2022.
Weightings
For the 2020 award the two measures have been assigned equal weighting.
Holding period
Following the Remuneration Committee’s review of the UK Corporate
Governance Code 2018, a two-year holding period has been introduced to
the LTI Scheme, to follow the three-year performance period.
Targets
TSR: The Remuneration Committee proposes that the constituents of the
FTSE 350 Higher Yield Index represent the most appropriate peer group
for assessing the relative TSR 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 and the Policy.
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.
The following table sets out the voting in respect of the Directors’ Remuneration Report at the 2019 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
97,012,184
99.23%
749,940
0.77%
97,762,124
432
The following table sets out the voting in respect of the Directors’ 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 Policy
92,417,545
97.93%
1,958,029
2.07%
94,375,574
65,457
Approval
This report was approved by the board of directors on 14 April 2020 and signed on its behalf by:
Veronica Oak
Chairman of the Remuneration Committee
86
CHESNARA ANNUAL REPORT & ACCOUNTS 2019CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • REMUNERATION POLICY
SECTION C
Remuneration Policy (Policy)
The Policy has been developed by the Remuneration Committee
(Committee) to provide a clear framework for reward linked to the
strategy of the company, aligned to the interests of executive
directors and shareholders.
In developing its Policy and making decisions about executive
director (executive) remuneration, the Committee has taken into
account the terms and conditions of employment for employees
throughout the company, together with the strategy, objectives and
Key Performance Indicators (KPIs) for the business, and
developments in the external marketplace. The company has not
consulted with employees.
The Policy also sets out the principles applied in the consideration
of fees for the non executive directors.
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 into the
performance measures of the executives’ 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. And likewise, progress against all three of these objectives
will have an impact on Total Shareholder Return to varying
degrees.
The diagram demonstrates that the Policy aligns to all aspects of
the group’s objectives. For illustration purposes, the diagram
shows the KPIs that the Committee has most recently considered
appropriate for the incentive schemes but, as will be seen on pages
87 to 93 (page references refer to the 2019 Annual Report & Accounts
in which this policy is proposed), 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 strategic deliverables for the year ahead.
The company has three core strategic objectives:
– to maintain a consistent and stable remuneration strategy based on
Overall Remuneration Policy aims are:
1. Maximise value from existing business;
2. Acquire life and pension businesses; 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.
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 that both executive and shareholder reward
are 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
Enhance value through profitable new business
Chesnara culture and values
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87
CHESNARA ANNUAL REPORT & ACCOUNTS 2019SECTION C
DIRECTORS’ REMUNERATION REPORT • REMUNERATION POLICY (CONTINUED)
The implementation of this Policy involves:
– paying salaries that reflect individual roles, an individual’s personal development in their role and sustained individual performance and contribution, taking
account of the external competitive market;
– enabling executives to enhance their earnings by meeting and then outperforming stretching short and long term targets in line with the group’s strategy;
– requiring executives to build and maintain shareholdings in the company during employment and for two years post-employment;
– rewarding executives fairly and responsibly for their contribution and paying what is commensurate with achievement of their objectives; and
– including malus and clawback provisions in the Short-term Incentive Scheme (STI Scheme), including the deferred share award, and the Long-term Incentive
Scheme (LTI Scheme).
For the avoidance of doubt, the 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 Policy table
Executive remuneration
The following tables give an overview of the company’s Policy on the different elements of the executives’ remuneration package.
Purpose and link to strategy
Operation
Performance measures and maximum
Basic salary
To recruit and retain individuals
with the skills and experience
needed for a given role in which
they will contribute to the success
of the group.
In setting basic 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:
Changes to responsibilities, increased complexity of
the organisation, personal and group performance
are taken into consideration when deciding whether a
salary increase should be awarded.
– assessment of the responsibilities of the role;
– the experience and skills of the jobholder on their
commencement and their development in it 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 rates for roles of a similar size and
accountability;
– inflation and salaries across the company; and
– the balance between fixed and variable pay to help ensure
good risk management disciplines.
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 and
development in the role.
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 a jobholder’s
responsibilities).
Taxable benefits
To recruit and retain individuals
with the skills and experience needed
for a given role in which they will
contribute to the success of the
group and to reduce the potential
for ill health to undermine executives’
performance.
Executives receive life assurance, a company car, fuel
benefit and private medical insurance. A cash equivalent
may be paid in lieu of car and fuel benefits.
Benefits may be changed in response to changing
circumstances, whether personal to an executive or
otherwise, subject to the cost of any changes being
largely neutral.
No performance measures attached.
The executives can participate in a defined contribution
pension scheme at the same level as all employees 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. Maximum
pension contribution expressed as a percentage of
basic salary to be the same as that awarded to other
UK staff.
Pensions
To recruit and retain individuals with
the skills and experience needed for a
given role in which they will
contribute to the success of the group
and to encourage responsible
provision for retirement.
88
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION C
The Policy table (continued)
Purpose and link to strategy
Operation
Performance measures and maximum
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
executives with those of shareholders.
Long-Term Incentive Scheme (LTI)
To incentivise the delivery of the
longer-term strategy of the group by
the setting of stretching targets based
on shareholder value, and to help to
retain executives and increase their
share ownership in the company.
Approved by shareholders in 2014, the STI Scheme is
discretionary. Awards are based on the Committee’s
assessment and judgement of personal and corporate
performance against specific targets and objectives in
support of the group’s business plan. These are assessed
over each financial year.
Provided the minimum performance criteria is judged to
have been achieved, 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
making a total of four years after the award grant; and the
balance in cash.
Dividend equivalents accrue in cash with interest thereon in
respect of the deferred share awards between the date the
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.
Approved by shareholders in 2014, the LTI Scheme is
discretionary. Awards are made under a performance share
plan, with nil price. The right to receive share awards will
be based on achievement of performance conditions over a
minimum three-year period.
Dividend equivalents accrue in cash with interest thereon
in respect of the share awards between the date the 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.
Awards made from 2019 will not be permitted to be exercised
by executives until they have held them for a further 2-year
holding period beyond the 3-year performance period, making
a total of five years after the grant date.
The LTI Scheme includes malus and clawback provisions.
Non-executive directors’ remuneration
Fees & expenses
To recruit and retain independent
individuals with the skills, experience
and qualities relevant to the non-
executive 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 deliberation). Non-executive director fees are
determined by the Chairman and the executives.
Fees are reviewed periodically. In their setting, 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 individual roles.
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 personal 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, including consideration of
Environmental, Social and Governance risks and
performance, and personal performance.
STI Scheme targets are commercially sensitive and
therefore are 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 and will document its use of such discretion for
the purposes of transparency.
The maximum award is 100% of basic salary with each
participant being assigned a personal maximum to be
disclosed in the corresponding Remuneration Report
with each award made.
Vesting is dependent on two performance measures,
the weighting of which the Committee may vary as it
considers appropriate:
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 as set-out by externally produced analysis.
2. Group Economic Value: this target is commercially
sensitive and therefore not disclosed in advance. 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 and will document its use of such discretion for the
purposes of transparency.
The maximum award is up to 100% of basic salary, with
each participant being assigned a personal maximum to
be disclosed in the corresponding Remuneration Report
with each award made.
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.
89
CHESNARA ANNUAL REPORT & ACCOUNTS 2019 DIRECTORS’ REMUNERATION REPORT • REMUNERATION POLICY (CONTINUED)
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-wide
targets are set
objectives;
STI Scheme - The performance measures for the STI Scheme reflect the
main financial contributors to sustaining returns for shareholders and the
group strategic objectives. This ensures that executives are incentivised
on the important deliverables needed to support the business plan and
strategy. The 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 which may include, but are not
limited to, costs, IFRS pre-tax profit, EcV operating profit, cash
generation, group objectives, including consideration of Environmental,
Social and Governance risks and performance, and personal objectives.
Where relevant, targets will be set with reference to board approved
budgets. The maximum potential award requires significant
outperformance against the targets set.
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 (Total
Shareholder Return (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 or an appropriate substitute. The
Committee currently considers this to be an appropriate comparator given
Chesnara’s strategic aims and focus on sustained dividend generation.
In setting targets for both schemes, the Committee exercises its
judgement in an effort to align the stretch in the targets with the
company’s risk appetite. Full details of the performance measures,
weightings, targets and corresponding potential awards are set out in
the Annual Remuneration Report. The Committee exercises discretion
when determining outcomes as opposed to relying solely on formulaic
outturns and utilises assurance inputs in so doing.
The Policy table notes that all of 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 selecting the optimal measures and targets for
the alignment of executive interests with those of shareholders even if
these are not capable of being disclosed in advance.
(ii) performance measures and their weighting are determined by
the Committee each year to help ensure that 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 corresponding Remuneration Report for each
award made;
(iv) award is part cash and part share award which is deferred for a
further 3 years. Currently the award is structured 65% cash and
35% deferred shares. This is 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 and adjust the de-minimis amount;
(v) unvested awards may be withheld under the terms of the malus
provision. Notwithstanding any other provision of the rules,
the Committee has the power to, at any time before an award
has vested, reduce the number of shares subject to the relevant
award or any cash amounts which may be paid pursuant to the
relevant award (including to nil) in the circumstances of:
• Discovery of a material misstatement in the audited
consolidated accounts of the Company or the audited
accounts of any group member or subsidiary; and/or
• An action or omission by a group member or subsidiary in breach
of any regulations applicable to the group which results in
material financial or reputational harm to the group; and/or
• Discovery of an error in the assessment of the extent to which a
Performance target applicable to any award has been satisfied;
and/or
• Action or conduct of the award holder which, in the reasonable
opinion of the Committee, amounts to fraud or gross misconduct.
In determining the reduction which should be applied, the
Committee shall act fairly and reasonably but its decision shall
be final and binding.
For the avoidance of doubt, any reduction may be applied on an
individual basis as determined by the Committee.
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.
90
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
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, plus a further 2 year
holding period;
(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) Awards made from 2019 will not be permitted to be exercised
by executives until they have held them for a period of five
years after the grant date;
(vii) includes a malus provision. Notwithstanding any other
provision of the rules, the Committee has the power to, at any time
before an award has vested, reduce the number of shares subject to
the relevant award or any cash amounts which may be paid pursuant to
the relevant award (including to nil) in the circumstances of those set
out under point (v) above for the STI Scheme;
(viii) A 2 year clawback provision applies; and
(ix) It is the intention of the Committee to make a new award each year.
Minimum shareholding requirement
In order to align the executives’ interests with those of shareholders, a
minimum shareholding1 requirement (the ‘MSR’) applies which is
currently equal to 100% of basic salary. Both salary and shareholding
values are calculated before tax. The requirement is expected to be
achieved within five years of appointment. It may be achieved by
participating in the company’s share plans and the Committee may, in
assessing progress towards the minimum, take into account vesting
levels and personal circumstances. Aside from shares that are chosen
to be sold to pay for income tax and National Insurance liabilities,
shares awarded under the STI and LTI Schemes must be retained if the
minimum shareholding has not yet been met.
Post-employment provisions exist which require a departing executive
to retain a post-employment minimum shareholding. For a period of 12
months commencing on the date of departure, this will be equal to the
lower of 100% of basic salary on departure or the level of shareholding
attained on the date of departure. For a subsequent period of 12 months,
the post-employment minimum shareholding to apply will be equal to
the lower of 50% of basic salary on departure or the level of
shareholding attained on the date of departure.
In determining the post-employment minimum shareholding, only
awards made since the date of the approval of this Policy shall be
included. Both salary and shareholding values are before tax and shares
bought by the executive in the open market and from their own
resources are not subject to the post employment provision.
With only two executives, the Committee is taking an approach to
enforcement of the policy which it considers to be proportionate.
Executives will be required to attest to comply with the policy as part of
accepting an award.
Note 1. Full provisions are set out in the Minimum Shareholding Policy
that the Committee reviews annually.
Expenses
In line with the company’s Expenses Policy, all directors may receive
reimbursement of reasonable expenses incurred in connection with
company business, including settling any tax incurred in relation to these.
Differences in policy compared with other employees:
The following note outlines any differences in the company’s policy on
executive director remuneration from other employees of the group.
– Salary and fees: There are no differences in policy. The Committee takes
into account the company’s overall salary budget and percentage increases
made to other employees. It also sets the remuneration for senior
management, that being the first layer of management below board level.
– All taxable benefits: There are no differences in policy although the
benefits available vary by role and jurisdiction. For example, executive
cars and health insurance benefits are broadly consistent with the
equivalent benefits when offered to other UK personnel but executives
receive a fuel allowance which is a benefit not offered to other staff
who receive 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 regulation, 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. Since 1/1/19 there has no longer been a bonus scheme
for the Netherlands businesses. The Scildon Scheme in place at the
time of purchase has been closed.
– Long-term plans: Only Chesnara’s executives 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
group and the delivery of returns to shareholders. This may be reviewed
as appropriate in the light of growth and/or other changes in the company.
– Pension: The level of contribution made by the company to executives
is the same as that offered to other UK employees.
2.Other
The company operates a Save As You Earn (SAYE) Share Scheme in the
UK. This is a tax efficient, HMRC-recognised, all-employee scheme in
which executive directors are eligible to participate.
Approach to remuneration on recruitment
The following principles apply when recruiting executives:
– To offer a remuneration package that is sufficient to attract individuals
with the skills and experience appropriate to the role being filled whilst
also being consistent with all aspects of this Policy. In addition to salary
and variable remuneration, this may include pension, taxable benefits
and other allowances such as relocation, housing and education.
– Pay levels will be set taking account of remuneration across the
company including other senior appointees and the salary offered for
similar roles by other companies of similar size and complexity.
– Each element of remuneration offered will be considered separately and
collectively in this context.
– The maximum awards in respect of the STI Scheme and LTI Scheme, as
set out in the Policy table, apply in recruitment situations. By exception,
the company may award a one-off compensatory bonus or LTI award
where the new joiner would lose a bonus or long-term award relating to
his or her former role. In the event that such a payment is made, full
details will be disclosed in the Annual Report on remuneration for the
relevant year.
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SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019
DIRECTORS’ REMUNERATION REPORT • REMUNERATION POLICY (CONTINUED)
Service contracts and loss of office
Executives
Our policy is for executives to have service contracts with a rolling 12-month notice period exercisable by either party.
The table below summarises the notice periods and other termination rights of the executives 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
By executive 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
Committee, the sale
of employing
business, or other
special circumstances
(such as terminal
illness) 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.
Outstanding options must be exercised
within 6 months of date employment ends.
No grants following service
of notice.
Unvested awards lapse on
date employment ends.
Outstanding options must be
exercised within 6 months of
date employment ends.
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 the period of the
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.
Nature of
termination
By executive or
company giving
notice (and
where deemed
to be a Bad
Leaver).
By company
summarily
(Bad Leaver).
Under special
circumstances:
Good Leaver
Status whether
leaving by
reason of death,
injury or
disability,
redundancy,
retirement with
the agreement
of the
Committee,
the sale of
employing
business, or
other special
circumstances
(such as
terminal
illness) at the
discretion of
the Committee.
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CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
Non-executive directors
– Appointments are made under a contract for services for an initial term of
three years subject to election by shareholders at the first Annual General
Meeting following their appointment and annual re-election thereafter.
– Non-executive directors are typically expected to serve two three year
terms but may be invited by the board to serve for an additional period.
Any renewal is subject to board review and AGM re-election.
– The terms of an appointment are set out in a letter of appointment which
can be terminated by either party with three months’ notice 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.
Executives’ other directorships
Executives may, if approved by the board, accept appointments
as non-executive directors of suitable organisations. Normally
fees for such positions are paid to the company, unless the board
determines otherwise.
Illustration of the application of the 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 following charts provide estimates of the potential future reward
opportunities for each executive, and the potential split between the
different elements of remuneration under four different performance
scenarios: ‘Minimum’, ‘In line with expectation’, ‘Maximum’ and ‘50%
share price increase’. The illustration assumes that the Policy applies
throughout the period
Group Chief Executive Officer
£000’s
Long-term incentive
Annual variable
Fixed
892
20%
20%
535
1,680
41%
1,451
32%
32%
27%
Group Finance Director
£000’s
Long-term incentive
Short-term incentive
Fixed
537
19%
19%
334
984
40%
854
30%
30%
26%
100%
60%
36%
32%
100%
62%
40%
34%
Minimum
In line with
expectation
Maximum
50% share
price increase
Minimum
In line with
expectation
Maximum
50% share
price increase
Performance in line with expectation assumes that the STI and LTI payments are at 37.8% and 29.2% of their maximum respectively for the
Group Chief Executive Officer and 34.0% and 26.3% of their maximum for the Group Finance Director. The targets relate to 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.
The estimate of the maximum remuneration receivable assuming the company’s share price increases by 50% over the performance period for
any long-term incentive is reflected in the 4th column of the charts above.
Minimum
The table below analyses the constitution of the minimum remuneration projection for 2020
Director
Group Chief Executive Officer
Group Finance Director
Salary and fees
£000
457.8
288.8
Benefits
£000
33.3
17.4
Pension
£000
Total fixed pay
£000
43.5
27.4
534.6
333.6
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.
93
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019 AUDIT & RISK COMMITTEE REPORT
The committee has delivered
its busy agenda against a
backdrop of continued
economic and political volatility
and regulatory change.
NUMBER OF MEETINGS
DURING YEAR: 9
MEMBERS:
Jane Dale
David Brand
Veronica Oak
Mark Hesketh
- Chairman
- Member
- Member
- 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 64 and 65.
Chairman’s introduction
Welcome to the 2019 Audit & Risk Committee Report. This introduction
allows me to draw out some of the highlights of the work that the
committee has delivered during the year. As can be seen below, we have
been quite busy overseeing work over and above our routine
responsibilities.
Brexit: Closely monitoring the developments of Brexit was a key piece of
work for the committee. Our role was to assess whether any of the
emerging developments would be deemed to introduce any new risks to the
business and if so, the extent to which these can be mitigated. No such
mitigating actions were required and further information on our position on
Brexit can be found on page 17.
Systems of governance: We performed our routine group-wide review of
the effective operation of our systems of governance, and it was pleasing to
see positive results from this work across all divisions. The review is a
powerful tool for the committee and supports not only giving comfort that
risk is being managed across the group, but also helps to identify any areas
for targeted improvement.
Financial reporting developments: These Report & Accounts incorporate
a number of financial reporting updates, notably the directors’ statement of
compliance with the requirements of Section 172 of the Companies Act, the
application of the most recent UK Corporate Governance Code and IFRS 16
‘Leases’. The committee has naturally paid close attention to these new areas.
IFRS 17: Overseeing the IFRS 17 implementation programme has been a key
objective for the committee during the year and will continue to be so in
coming years. I attended our group-wide conference in December and was
pleased to see the level of progress and engagement across the divisions of
the group. It gave me a chance to engage directly with divisional stakeholders
in relation to their own projects as we begin to move towards the operational
implementation phase of the programme.
Specific accounting matters: Part of the committee’s role is to ensure that
any one-off transactions are appropriately reflected in the financial
statements. This year end we have paid close attention to the transfer of the
Scildon defined benefit scheme to a defined contribution scheme; and have
also focused on the accounting and disclosure relating to the transfer of a
small portfolio of policies from Monuta Verzekeringen N.V. to the Waard
Group on 1 October 2019.
Internal Audit EQA: During 2018 the committee engaged with an external
firm to perform a quality assessment of the group’s internal audit function,
which culminated in some observations being brought to the committee’s
attention. Overall the findings were not significant, although some useful
recommendations were made which were captured in an action plan and
delivered over the course of 2019. Further information is provided in the
following pages.
FRC developments: One of the committee’s roles is to stay abreast of key
publications from the Financial Reporting Council. One particularly pleasing
publication was the FRC Lab’s Report on ‘Disclosures on the sources and
uses of cash’ in which Chesnara’s 2018 Report & Accounts were used,
amongst others, as examples of useful disclosure. I feel this reflects the
committee’s objectives of providing clear and understandable financial
reporting.
Audit profession review: The committee has been keeping abreast of
developments in the audit profession over the year. There continues to be
uncertainty into the level of reform that will materialise from the various external
reviews that have taken place covering audit standards, choice and competition,
the resilience of the audit sector, and auditor procurement and remuneration.
The committee is continuing to monitor these developments closely.
Acquisition oversight: The committee’s responsibilities include overseeing
the application of Chesnara’s risk-based due diligence process. During the year
the Committee oversaw the acquisition of a book of business from the Dutch
branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V, which
was announced in November 2019, and is expected to complete in 2020.
Regulatory risk consultations: Consultations have been issued on
Operational Resilience, Climate change and Liquidity risk during 2019. The
committee has provided oversight, prioritisation and direction to guide the
business’s response to these.
Covid-19: The emergence of Covid-19 as a pandemic subsequent to the
balance sheet date has resulted in additional disclosures being made in
appropriate places within the Annual Report & Accounts. The Committee
has paid close attention to these disclosures, and any associated underlying
work, in order to ensure they fairly reflect the impact on the group.
Looking ahead there will be plenty to keep the committee busy. Much of
what has been mentioned above will continue to impact the work of the
committee during 2020.
94
Jane Dale
Chairman of the Audit & Risk Committee
14 April 2020
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019 THE RESPONSIBILITIES OF THE CHESNARA AUDIT & 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 2019: A summary of the work performed by the Audit & Risk Committee during the year.
2. External audit: Further detail of how the committee has overseen various aspects of the external audit process.
3. Internal audit: The work performed by the committee in overseeing the internal audit function 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 2019
The committee’s activity during the calendar year is driven by a combination of ‘business as usual’ items and non-standard areas that the committee has decided to
pay particular attention to. The non-standard areas that have been considered during the year have included, amongst other things, the ongoing monitoring of the
IFRS 17 ‘Insurance contracts’ programme, monitoring Brexit developments, and keeping fully abreast of potential developments in the audit profession.
A summary of all the activities performed by the committee during the year in relation to its audit responsibilities is included in the table below.
– Solvency II narrative reporting: Supported the further development of, and review of, the Chesnara group Solvency and Financial Condition Report and Regular
Supervisory Report and the supporting quantitative reporting templates.
– 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, covering IFRS, Solvency II
and EcV. See ‘Significant issues’ section on pages 97 to 98 for further detail.
– Annual Report & Accounts: Reviewed all aspects of the Annual Report & Accounts, including; compliance with accounting standards, accounting policy
appropriateness, consideration of financial reporting changes and emerging practice, whether they are fair, balanced and understandable and disclosures
surrounding going concern, prospects and longer-term viability (including any associated management supporting papers). See ‘Significant issues’ section on
pages 97 to 98 for further details on certain aspects of the 2019 Annual Report & Accounts.
– Interim Report: Reviewed and challenged the Chesnara Interim Financial Report for the half year ended 30 June 2019.
– IFRS 17: Oversaw the group’s IFRS 17 programme. The programme has continued to involve partnering with a consultancy firm for some aspects, with a particular
focus during 2019 on planning the required changes in the operational aspects of our finance and actuarial reporting routines.
– FRC updates: Actively monitored key publications issued by the Financial Reporting Council regarding financial reporting matters.
– External audit plans: Reviewed the group-wide plans of the external auditor, including consideration of the key audit risks. See page 96 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 & Accounts and half year report, including
financial reporting judgements 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 96 for more information.
– Oversight of external quality assurance review: During 2018 the committee oversaw the delivery of an external quality assessment over the internal audit
function of Chesnara. During 2019 the committee focused on delivering relevant recommendations. The ‘internal audit’ section below includes further detail.
– 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 96 for more information.
– Feedback from divisional Audit & Risk Committees: Reviewed and challenged regular feedback provided by the group’s divisional Audit & 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 regarding various aspects of the committee’s performance.
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Role of the Audit & Risk Committee
The role of the Audit & Risk Committee includes assisting the board in discharging its duties and responsibilities for financial reporting, corporate governance
and internal control. The scope of its responsibilities also includes focus on risk 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
95
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019
AUDIT & RISK COMMITTEE REPORT (CONTINUED)
Audit responsibilities (continued)
2. External audit
Effectiveness of the audit process
The effectiveness of the external audit process is performed on an annual basis and 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 fourth 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 July 2019 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 10 years, having completed its
last external audit tender during 2017. The next audit tendering process will need to take 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 (‘assurance services’). 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.
Audit fees
Audit services
Assurance services
Non-audit services
Total
Percentage
proportion
79%
21%
–
2019
£000
814
239
–
1,053
Percentage
proportion
77%
23%
–
2018
£000
808
235
–
1,043
Audit services
The fees charged for audit services have increased slightly when compared with 2018. Although audit fees have reduced in Sweden, as Deloitte no longer
performs the local audit of Movestic as a result of mandatory auditor rotation rules in Sweden, this has been offset by an annual inflationary uplift and a revision
to the Scildon audit fees, to better reflect the scope of the audit work performed.
Assurance services
The cost of assurance services performed by the external auditor has also increased slightly compared with the prior year. The key reason for this is again due to
an inflationary uplift.
Non-audit services
There were no other non-audit services in 2019 aside from the assurance services as detailed above.
3. Internal audit
During the year, Chesnara has continued to adopt its 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. The Chesnara Audit & Risk Committee maintains oversight of each
subsidiary via regular updates from each local Audit & Risk Committee.
At the start of 2019 the Committee assessed the findings, which were not significant, from the group-wide external quality assessment that took place
during 2018. This then shaped an action plan that was devolved to the local management teams to implement in line with agreed timescales. The Audit &
Risk Committee have overseen the implementation of this action plan with the main changes delivered being:
– Agreeing how Internal Audit would be organised and delivered across the group given the stated intention of having a devolved model.
– Agreeing what information will be provided from each division to the Chesnara Audit & Risk Committee in respect of annual planning, as well as formulating
what management information will be required throughout the year.
– Enhancements to the annual planning process and accompanying paperwork in the UK and Sweden; and
– Being clear on when external resources were required to help deliver specialist audits.
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CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019
4. Significant issues:
The table below provides information regarding the significant issues that the committee has considered in relation to the preparation of the Annual Report & Accounts:
Area of focus
Reporting issue
Role of the committee
Conclusion/action taken
New
accounting
standards
During the year the group applied IFRS 16 ‘Leases’ for the
first time. This is a far-reaching accounting standard for those
companies that make significant use of operating lease
arrangements or have contracts that include significant right
of use assets.
Section 172
reporting
A new disclosure requirement applies for the first time in the
strategic report of this Annual Report & Accounts in relation to
providing additional disclosures as to how the directors of the group
have had regard to the matters set out in Section 172 of the
Companies Act. Whilst Section 172, which deals with the directors’
duty to promote the success of the company, is not new, the
requirement to disclose how the directors have delivered against
this responsibility is.
Application of
updated
corporate
governance code
A revised UK Corporate Governance Code was published in July
2018. At the heart of the Code is an updated set of principles that
emphasise the value of good corporate governance to long-term
sustainable success. By applying the principles, following the more
detailed provisions and using the associated guidance, companies
are required to demonstrate throughout their reporting how the
governance of the company contributes to its long-term sustainable
success and achieves its wider objectives.
The committee is satisfied, based on an
assessment performed by management,
that the Chesnara group does not make
extensive use of leases, either through
direct lease arrangements or through
the use of assets that form part of
wider contractual arrangements, and
as a result the impacts on the balance
sheet and income statement are not
significant. The most material leases
within the group relate to occupied
office space. See Note 2(a) of the
financial statements for further
information on the application of the
standard.
The committee has concluded that the
new Section 172 disclosure
requirements, introduced through
s414CZA (1) of the Companies
(Miscellaneous Reporting) Regulations
2018, are satisfactory and meet the new
requirements. The additional
disclosures have been made on pages
26 to 31.
The committee is satisfied that pages
68 to 72 of the corporate governance
section of this Annual Report &
Accounts appropriately reflects the new
disclosure requirements of the UK
Corporate Governance Code.
The committee’s involvement
has centred around ensuring that
a robust assessment has been
made by management covering
all lease arrangements that exist
within the group and all contracts
that have the potential to include
embedded lease arrangements
through the existence of right of
use assets.
The committee’s focus has been
to (a) ensure that it fully
understands the disclosure
requirements; and (b) to perform
a focused review of the
disclosures that have been
included in this Annual Report &
Accounts. Part of delivering (a)
has been to ensure that relevant
members of the committee have
attended relevant educational
sessions that cover this new
reporting requirement.
The committee’s role has been to;
(a) ensure that it has fully
understood the new corporate
governance code and how
Chesnara has complied with it;
and (b) to understand the new
disclosure requirements in the
Annual Report & Accounts
and ensure that the corporate
governance section appropriately
covers the new requirements.
Scildon acquired
value in-force
intangible asset
The purchase of Scildon resulted in the recognition of a material
intangible asset, representing the value of the policies that were
in-force at the point of acquisition. As part of the process for
preparing the financial statements, an impairment review over the
carrying value of the intangible asset was performed.
The committee has ensured
that a review of the carrying
value of the Scildon AVIF asset
was performed.
The committee concluded that the
carrying value of the intangible AVIF
asset was not impaired.
Covid-19
emerging as
a pandemic
post year end
Covid-19 emerging as a pandemic post year end has resulted
in a need to assess its impact on the group and to put associated
disclosures in the Annual Report & Accounts.
The committee’s role was
to review the additional
disclosures, including:
– The chairman’s statement
– Going concern, prospects and
long term viability
– Principal risks and uncertainties
– Post balance sheet events note.
The committee concluded that the
additional disclosures in relation to
Covid-19 are fair and reflect the
underlying circumstances and impact
on the group.
97
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019
AUDIT & RISK COMMITTEE REPORT (CONTINUED)
Audit responsibilities (continued)
4. Significant issues (continued):
Area of focus
Reporting issue
Role of the committee
Conclusion/action taken
Actuarial
assumptions
– A key aspect of the Audit & Risk Committee’s role is to review
and challenge the actuarial assumptions that underpin the
valuation of the policyholder liabilities in the financial statements.
The assumptions are inherently judgemental and are updated at
least annually to reflect the facts and circumstances available at
the time. The assumptions are underpinned by a combination of
internally observed experience coupled with data that is available
at a market level. The key assumptions include estimates over:
– future mortality and morbidity rates;
– future lapse assumptions;
– future expense required to manage the policies in force;
– policyholder options and guarantees;
– ensuring that the liability adequacy test is met under IFRS 4.
The committee reviewed and
approved the actuarial basis of
assumptions report
underpinning the valuation of
insurance liabilities. This
included specific consideration
of the Countrywide Assured
cost of guarantees, actuarial
reserves in Scildon and also
capitalised DAC in Movestic.
Accounting and
reporting of the
portfolio
transfer from
Monuta
Verzekeringen
NV
On 1 October 2019 the Waard Group completed the transfer of
a small portfolio of policies from Monuta Verzekeringen N.V.
The completion took place following the signing of an Asset
Purchase Agreement on 7 March 2019. The transaction resulted
in some cash and policies being transferred to the Waard Group
on 1 October, with the Waard Group assuming the liabilities of
the polices from this point forward.
The committee’s role is to
ensure that this transaction is
appropriately accounted for
and disclosed in the financial
statements.
The committee concluded that the
actuarial assumptions were appropriate.
Disclosures over key judgements are
included in Note 3 and Note 30 of the
IFRS financial statements.
The committee reviewed the accounting
paper prepared by management relating
to this transaction. The committee
concluded that this reflects the underlying
substance of the transaction and has
been appropriately reported in the
financial statements. Note 51 of the IFRS
financial statements provides more
information.
Accounting for
Scildon pension
scheme
Effective from 1 October 2019 the employees of Scildon agreed
to a change of the pension scheme, moving from a defined
benefit scheme to a plan that is based on defined contributions.
The company and the employees also agreed on a change of
the funding of the plan. This change has resulted in the
company no longer bearing any risks relating to the funding of
the plan.
The role of the committee has
been to ensure that the
accounting and associated
financial reporting disclosure
appropriately reflect the new
pension arrangements.
The committee is satisfied that the
Annual Report & Accounts
appropriately reflect the transfer of
the Scildon defined benefit scheme to
a defined contribution scheme. Further
information has been provided in Note
35 to the IFRS Financial Statements.
Risk responsibilities
This section of the report provides information regarding the risk oversight responsibilities of the Audit & Risk Committee
General responsibilities
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 ensure 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.
98
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019 Risk responsibilities (continued)
Regular activities performed during the year
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:
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 flags any items of concern or clarification
requiring follow up. The quarterly risk reporting included ‘in focus’ sections as required, including amongst other things;
• Brexit; in particular, the potential impact on the solvency regime in which the group operates;
• Operational resilience; following the group-wide operational resilience survey that was performed during 2018, 2019 has seen the Audit & Risk
Committee focusing on overseeing the actions that resulted from the survey. In addition, the Audit & Risk Committee has been monitoring emerging
practice in this area as further guidance emerges.
• Emerging risks; ensuring that the Audit & Risk Committee is appropriately informed of emerging risks across the group.
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.
Risk plan review and sign off: The committee reviewed and approved the group and divisional risk plans and associated resourcing needs.
Internal control report: The committee reviewed and approved the annual internal controls assessment report, which concluded that the controls
across the group are operating effectively.
Systems of governance review: An annual 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 2020 plans, with suitable priorities attached.
ORSA review: The committee reviewed the 2019 group ORSA 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, which was improved to more clearly and consistently
articulate risk-taking preferences across the group and to increase alignment of the key risk indicators / tolerance limits with stakeholder interests and
key business performance measures.
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.
Standard formula assessment: As part of 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 committee.
Ad-hoc activities performed during the year
The table below provides some further information regarding the more ad-hoc activities that the committee has performed during the year in discharging its
risk oversight responsibilities:
Acquisition oversight: Acquisition opportunities progressed to the due diligence phase during 2019, two of which resulted in transactions being
agreed with the seller. The committee provided oversight to the due diligence process and challenge and review to the conclusions, risk assessment
and major findings of that due diligence.
IT System proposals:: The committee reviewed the risk assessments for two separate material IT project development proposals brought to the board
during the year by two of the subsidiaries, one to replace the UK/Preston IT platform and one to replace Scildon’s administrative IT infrastructure.
IT System proposals: The committee reviewed the risk assessments for two separate material IT project development proposals brought to the board
during the year by two of the subsidiaries, one to replace the UK/Preston IT platform and one to replace Scildon’s administrative IT infrastructure.
Additional ORSA scenario analysis: Following an action agreed as part of the 2018 ORSA, the committee provided review and challenge to some
additional scenario analysis that explored the effectiveness of recovery actions in the event of extreme economic scenarios.
Regulatory consultations: Various regulators in the UK and Europe have issued consultations during 2019 covering a wide range of subjects including
operational resilience, climate change and liquidity risk. The committee has provided the required support, prioritisation and guidance to the
management team in terms of Chesnara’s response to these, including any development work planned for 2020.
Jane Dale
Chairman of the Audit & Risk Committee
14 April 2020
99
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019
DIRECTORS’ REPORT
Chesnara plc - Company No. 4947166
The directors present their Annual Report and the audited consolidated financial statements of Chesnara plc
for the year ended 31 December 2019. The Corporate Governance Report on pages 68 to 72 forms part of the
Directors’ 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 2019, the company had
150,061,567 ordinary shares in issue, of which none were held as treasury
shares. During the year, no treasury shares were held or traded.
In order to retain maximum flexibility, the company proposes to renew the
authority granted by ordinary shareholders at the Annual General Meeting in
2020, 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 2019, shareholders approved resolutions to
allot shares up to an aggregate nominal value of £4,996,965 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.
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.
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.
The following information, that has been included by way of a cross
reference to other areas of the Annual Report & 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 49 to 50 and the ‘Risk
management’ section on pages 51 to 57.
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 32 to 38.
Greenhouse gas reporting
The ‘Corporate and social responsibility’ section on pages 58 to 61.
Environmental, employee and social community matters
The ‘Corporate and social responsibility’ section on pages 58 to 61.
Directors
Full information of the directors who served in 2019 is detailed in the Corporate
Governance Report on pages 68 to 72.
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 68 to 72. 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 76 to 93, 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.
The directors benefited from qualifying third party indemnity provisions in place
during the years ended 31 December 2018 and 31 December 2019 and the period
to 14 April 2020.
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.
.
Director appointments
With regard to the appointment and replacement of directors, the company
follows the UK Corporate Governance Code 2018 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. In February 2020, Luke
Savage was appointed to the board following the departure of Peter Mason who
stepped down as Chairman of the board on 14 February 2020.
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.
100
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019 Results and dividends
The consolidated statement of comprehensive income for the year ended 31 December 2019, prepared in accordance with International
Financial Reporting Standards adopted by the EU and set out on page 114 shows:
Profit for year attributable to shareholders
2019
£000
2018
£000
79,142
24,124
An interim dividend of 7.43p per ordinary share was paid by Chesnara on 11 October 2019. The board recommends payment of a final dividend
of 13.87p per ordinary share on 2 June 2020 to shareholders on the register at the close of business on 24 April 2020.
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
£31.9m
£31.0m
£30.1m
£27.6m
£24.0m
54%
2015
76%
2016
36%
2017
64%
2018
85%
2019
Over the past 5 years £145m of dividends have
been paid at an average annual yield of 5.7% (based
on average annual share prices) representing 58%
of the cash generated over the period.
Cash
generation
Historic 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 historic financial results and the Group Capital Management Policy
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 2019 and 31 March 2020:
101
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2019 DIRECTORS’ REPORT (CONTINUED)
Name of substantial shareholder
Total number of ordinary shares held
Percentage of the issued share capital
as at 31 December 2019
Aberdeen Standard Investments
Columbia Threadneedle Investments
Invesco Ltd
M&G Investment Management
Canaccord Genuity Wealth Management
Hargreaves Lansdown Asset Management
Janus Henderson Investors
Interactive Investor
Royal London Asset Management
20,255,889
19,616,225
10,005,521
8,755,921
8,396,127
7,418,419
5,639,332
5,143,920
4,843,273
13.50%
13.07%
6.67%
5.83%
5.60%
4.94%
3.76%
3.43%
3.23%
Subsequent to 31 December 2019 there have been changes to this position and the holdings as at 31 March 2020 are shown below. No other person holds a
notifiable interest in the issued share capital of the company.
Name of substantial shareholder
Total number of ordinary shares held
Percentage of the issued share capital
as at 31 March 2020
Aberdeen Standard Investments
Columbia Threadneedle Investments
Invesco Ltd
M&G Investment Management
Canaccord Genuity Wealth Management
Hargreaves Lansdown Asset Management
Janus Henderson Investors
Royal London Asset Management
Interactive Investor
Related party transactions and significant contracts
During the year ended 31 December 2019, 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.
Post balance sheet events
The directors consider the emergence of Covid-19 as a pandemic during
2020, and the associated government measures both in the UK and
overseas in response, as a non-adjusting post balance sheet event. Further
detail can be found in note 52 on page 195.
Charitable donations
Charitable donations made by group companies during the year ended
31 December 2019 were £5,000 (2018: £14,000).
No political contributions were made during the year ended 31 December
2019 (2018: £nil).
Employees
The average number of employees during 2019 was 316 (2018: 363).
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.
Business relationships
Throughout the year the directors have had regard for the need to foster the
company’s business relationships with suppliers, customers and others, and
the effect of that regard, including on the principal decisions taken by the
company during the financial year. Information supporting this is provided in
the Section 172 disclosures on pages 26 to 31.
102
20,959,007
19,647,337
9,173,088
8,976,051
8,473,627
7,037,903
5,753,779
5,260,861
4,910,351
13.97%
13.09%
6.11%
5.98%
5.65%
4.69%
3.83%
3.51%
3.27%
Going concern statement
After making appropriate enquiries, including detailed consideration of the
impact of Covid-19 on the group’s operations and financial position and
prospects the directors confirm that they are satisfied that the company and
the group have adequate resources to continue in business for the
foreseeable future. Accordingly, they continue to adopt the going concern
basis in the preparation of the financial statements as stated in Note 2 to the
IFRS Financial Statements. Detailed analysis of relevant risks and other
factors is included within the Risk Management section on page 51 to 57,
within the Financial Management section on pages 49 to 50 and within
Notes 5 and 6 to the IFRS Financial Statements.
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.
Auditor
A resolution for the re-appointment of Deloitte LLP as Auditor of the
company is to be proposed at the forthcoming Annual General Meeting.
Approved by the board on 14 April 2020 and signed on its behalf by:
David Rimmington
Group Finance Director
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2019 DIRECTORS’ RESPONSIBILITIES STATEMENT
SECTION C
The directors are responsible for preparing the Annual Report and the fi nancial
statements in accordance with applicable law and regulations.
Responsibility statement
We confi rm that to the best of our knowledge:
Company law requires the directors to prepare fi nancial statements for each
fi nancial year. Under that law the directors are required to prepare the group
fi nancial 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 fi nancial
statements under IFRSs as adopted by the EU. Under company law the
directors must not approve the accounts unless they are satisfi ed that they
give a true and fair view of the state of affairs of the company and of the profi t
or loss of the company for that period. In preparing these fi nancial 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 specifi c
requirements in IFRSs are insuffi cient to enable users to understand the
impact of particular transactions, other events and conditions on the entity’s
fi nancial position and fi nancial performance; and
– make an assessment of the company’s ability to continue as a going concern.
– the fi nancial statements, prepared in accordance with International Financial
Reporting Standards, give a true and fair view of the assets, liabilities,
fi nancial position and profi t 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 fi nancial 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.
The directors are responsible for keeping adequate accounting records that
are suffi cient to show and explain the company’s transactions and disclose
with reasonable accuracy at any time the fi nancial position of the company
and enable them to ensure that the fi nancial 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.
Luke Savage
Chairman
14 April 2020
The directors are responsible for the maintenance and integrity of the corporate
and fi nancial information included on the company’s website. Legislation in
the United Kingdom governing the preparation and dissemination of fi nancial
statements may differ from legislation in other jurisdictions.
John Deane
Chief Executive Offi cer
14 April 2020
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
103
SECTION D:
IFRS FINANCIAL
STATEMENTS
104 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
106 Independent Auditor’s Report to the
members of Chesnara plc
114 Consolidated Statement of
Comprehensive Income
115 Consolidated Balance Sheet
116 Company Balance Sheet
117 Consolidated Statement of Cash Flows
118 Company Statement of Cash Flows
119 Consolidated Statement of Changes
in Equity
119 Company Statement of Changes in Equity
120 Notes to the Consolidated
Financial Statements
Morecambe Bay, Lancashire
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
105
IFRS FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC
Report on the audit of the financial statements
Opinion
In our opinion
– the financial statements of Chesnara plc (the ‘parent company’) and its subsidiaries (the ‘group’) give a true and fair view of the state of the group’s and of the parent
company’s affairs as at 31 December 2019 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, which comprise:
– the Consolidated Statement of Comprehensive Income;
– the Consolidated and Parent Company Balance Sheets;
– the Consolidated and Parent Company Statements of Cash Flows;
– the Consolidated and Parent Company Statements of Changes in Equity;
– the Statement of Accounting Policies; and
– the related Notes 1 to 52 excluding the capital disclosures calculated in accordance with the Solvency II regime in Notes 29 and 52, which are marked as unaudited.
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
Financial Reporting Council’s (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. The non-audit services provided to the group and parent company for the year are disclosed in Note 14 to the financial statements. 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:
– Impact of COVID-19 post balance sheet event;
– Valuation of insurance liabilities, pinpointed to the valuation of the Save & Prosper (‘S&P’) Cost of Guarantees,
and the adequacy of Scildon reserves;
– Valuation of the Scildon Acquired Value In-Force (‘AVIF’) intangible asset; and
– Valuation of the Movestic Deferred Acquisition Costs (‘DAC’) balance.
Within this report, key audit matters are identified as follows:
Increased level of risk
Similar level of risk
Newly identified
Materiality
Scoping
The materiality that we used for the group financial statements was £12.8m, determined on the basis of 3% of adjusted net assets at 30 June 2019.
We focused our group audit scope on the audit work at three UK locations and three overseas locations where the group’s policies are administered.
Significant changes
in our approach
We have identified a new key audit matter in the period in relation to the valuation of the Movestic DAC balance. In light of changes brought about
by the Insurance Distribution Directive and ensuing changes in management’s assumptions, the impairment assessment for the Movestic DAC
balance necessitates a greater level of judgement.
Given the rapid spread of Coronavirus (‘COVID-19’,‘the virus’) and the ongoing uncertainty surrounding its impact after the balance sheet date, and due
to the inherent management judgement in determining the appropriateness of related post balance sheet event disclosures, we have enhanced our
risk assessment and focused a greater degree of audit effort over the appropriateness of such disclosures in the financial statements. In accordance
with this greater level of audit effort, we have identified a new key audit matter in the period relating to the appropriateness of the COVID-19 post
balance sheet event disclosures.
We have removed the valuation of specific Level 2 financial instruments, a key audit matter in the prior year, in response to the conclusions drawn
through the procedures performed in the prior period.
106
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
Conclusions relating to going concern, principal risks 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 considered as part of our risk assessment the nature of the group, its business model and related risks including where relevant the
impact of the COVID-19 pandemic and Brexit, the requirements of the applicable financial reporting framework and the system of internal
control. We evaluated the directors’ assessment of the group’s ability to continue as a going concern, including challenging the underlying
data and key assumptions used to make the assessment, and evaluated the directors’ plans for future actions in relation to their going
concern assessment.
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 49 – 55 that describe the principal risks, procedures to identify emerging risks, and an explanation of how these
are being managed or mitigated;
– the directors’ confirmation on pages 65 – 69 that they have carried out a robust assessment of the principal and emerging risks facing
the group, including those that would threaten its business model, future performance, solvency or liquidity; or
– the directors’ explanation on page 48 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.
SECTION D
SECTION D
Going concern is the basis of
preparation of the financial
statements that assumes an
entity will remain in operation for
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.
Viability means the ability of
the group to continue over the
time horizon considered
appropriate by the directors.
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.
Impact of COVID-19 post balance sheet event
Key audit matter description
Subsequent to the balance sheet date a global pandemic of a new strain of Coronavirus has emerged. The virus, and responses taken by organisations and governments to manage its
spread in markets to which the group and company is exposed have led to increased volatility and economic disruption. The matter is a non-adjusting event since it is indicative of
conditions that arose after the reporting period.
Management have ensured that the measurement of assets and liabilities reflects only the conditions that existed at the reporting date.
Subsequent to the year end, management have performed procedures to assess the financial and operational impacts of COVID -19, at a component and group level, including:
– An assessment of operational resilience, challenging internal control and governance, critical business functions, crisis management, and the impact on key stakeholders;
– Considerations of solvency, and liquidity projections, including further assessment of the exposure across the group to equity market risk, widening credit spreads, falls in yields and
the ability of components and the group to make dividend payments; and
– A review of balance sheet asset, and liability valuations. Through this review management challenged the exposure of financial assets to equity, interest and credit risk, susceptibility
of reinsurers to credit risk, and sensitivity of technical reserves to adverse mortality, and expense assumptions.
The assessment of the impact of COVID-19 on the company, and the group, requires management judgement and consideration of a range of factors. Management have placed a particular
focus on the level of capital surplus that has been maintained post year end, the risks associated with liquidity, and the credit quality of assets.
Having considered the results of the activities described above, management believes that the group and the company continues to be a going concern due to having a stable solvency
position and appropriate plans to manage liquidity and credit risks. The group’s business continuity plans have also been initiated and management believe that these will enable them
to continue to deliver critical business services across the group.
The group and company have made disclosures throughout the annual report and financial statements to reflect the results of its assessment, in line with applicable accounting standards,
the company law and corporate governance code provisions. Due to the inherent management judgement in, and the increased level of audit effort focused on the appropriateness
of, the financial statements disclosures, we considered these to be a key audit matter. Refer to management’s disclosure in Notes 2 and 52 of the financial statements. Further detail
is included on page 50 of the Strategic Report.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
107
IFRS FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED)
Impact of COVID-19 post balance sheet event (continued)
How the scope of our audit responded to the key audit matter
We evaluated management’s approach to assessing the impact of COVID -19 on the group and the company, and challenged the financial statement disclosures by performing the
following procedures:
– Evaluated management’s stress and scenario testing, and challenged management’s key assumptions. In conjunction with internal actuarial specialists, we reviewed the governance
over, and the production of solvency monitoring information, and considered its consistency with other available information and our understanding of the business;
– Reviewed the actions that came out of the various governance committee meetings which considered COVID-19 in advance of reporting;
– Challenged group, and divisional management around the assessment performed around the impact of COVID -19 at each location;
– Evaluated management’s assessment of the risks across the group including solvency risk, liquidity risk, and operational matters;
– Assessed the mitigating actions management have put in place and further plans they have if required, due to further deterioration of the wider UK and Global economy;
– Assessed the post balance sheet event disclosures made by management in the financial statements; and
– Checked consistency of the post balance sheet event disclosures, and those in the Strategic Report relating to going concern and viability, with our knowledge of the group based
on our audit.
Key observations
Based on the procedures performed above, and the evidence obtained, we consider that, in relation to the potential impact of COVID -19, the post balance sheet event disclosures in
the financial statements are appropriate, and the disclosures in the Strategic Report relating to going concern are consistent with our knowledge of the group based on our audit.
Valuation of the Movestic Deferred Acquisition Costs
Key audit matter description
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.
There are a number of judgement areas within this balance, both in terms of the amortisation period selected for the DAC, and also in assessing the asset for impairment.
The introduction of the Insurance Distribution Directive and resultant changes in assumptions necessitate management making greater use of judgement.
Movestic applies judgement in deciding the amount of direct costs incurred in acquiring the rights to provide investment management services through the issue of
investment contracts.
Judgement is also applied in establishing the amortisation profile, including estimates of the expected lifetime of the investment management service contracts, deferred income,
and the recoverability of the contractual rights assets by reference to expected future income and expense levels.
Due to the potential for management to introduce inappropriate bias to judgements made in the impairment assessment, we have determined that there is a risk of misstatement
due to fraud.
As at year end 2019, the DAC balance held on the group balance sheet totalled £63.9m. Of the group balance, deferred acquisition costs relating to the Movestic component
amounted to £53.3m. The quantum of the component balance, in conjunction with changes in the Swedish regulatory environment has resulted in the audit team pinpointing the
key audit matter to the Movestic DAC.
The accounting policy relating to deferred acquisition costs has been presented through Note 2h (iii), with details of the balance and movement within Note 18.
How the scope of our audit responded to the key audit matter
In respect of the Movestic DAC:
– We gained an understanding of, and assessed, the internal controls in place around the setting of the amortisation profile, and the impairment test;
– We have assessed the rationale for the expense ledger balances capitalised, and performed tests of detail around contracts to assess the valuation of the DAC;
– We have agreed the DAC sub-ledger to the General Ledger, and created an expectation of the DAC balances, also performing a subsequent investigation into any differences;
– We have worked with actuarial specialists to challenge the amortisation profile adopted my management, and performed a benchmarking exercise against other insurers in Sweden; and
– We have worked with actuarial specialists to challenge the reasonableness of managements assumptions within the impairment test, including; mortality, transfers, surrenders,
and expenses.
Key observations
Through the procedures performed, we consider the assumptions in determining the DAC valuation to be appropriate.
108
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
Valuation of insurance contract liabilities
Key audit matter description
Across the group, there are two matters relating to insurance liabilities which we have identified as key audit matters:
a) Valuation of Save & Prosper Cost of Guarantees:
The matter relating to insurance contract liabilities, which we have identified as a key audit matter, is the valuation of Save & Prosper (‘S&P’) Cost of Guarantees (‘CoG’). The key
audit matter identified has been classified as a fraud risk due to the complexity in the valuation of this liability.
The assessment and calculation of the CoG reserves for policies written by S&P is complex and can lead to material impacts on the valuation of the CoG, including the use of a
stochastic model based on a variety of possible economic scenarios. The stochastic model used to calculate the CoG is sensitive to the inherent volatility in bond and equity markets,
which are the key inputs into the model.
Historically, the residual cost to shareholders arising from the CoG has fluctuated as a result of movements in bond yields and equity markets with a value of £17.3m at 31 December
2019 (31 December 2018: £23.1m). This decrease was primarily due to higher asset returns over 2019, which increased policyholder asset shares, and therefore reduced the
residual cost to shareholders. Management’s third party actuarial expert determines the value, and management compare this valuation against an in-house derived estimate using
an approximation model to validate its reasonableness.
b) Adequacy of Scildon reserves
Scildon measures the majority of its 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. There is also a risk of fraud, due to management overriding internal controls around the setting of the parameters used to calculate the reserves at inception.
We therefore view the initial parameter setting process and liability adequacy test as key audit matters, specifically in relation to the mortality, lapse and expense assumptions which
feed into the test, given that the insurance liabilities are most sensitive to these factors.
The accounting policy adopted by the group is documented within Note 2h to the financial statements.
How the scope of our audit responded to the key audit matter
In respect of the Accuracy of Save & Prosper Cost of Guarantees:
– We gained an understanding of, and assessed, the internal controls around the reserving process, with specific reference to the S&P CoG;
– We performed procedures to assess the objectivity, competence and independence of management’s actuarial expert;
– We challenged the key movements in the S&P CoG reserve over the period, as well as any changes in the approach taken by management’s actuarial expert in determining
the reserve. We tested the movements in the CoG analysis of change by considering market and policy value movements in the period between 31 December 2018 and
31 December 2019;
– We challenged management’s actuarial expert on the testing performed on the Economic Scenario Generator (‘ESG’) model output used as an input to the CoG model. Together
with our actuarial specialists we assessed the economic inputs to the model for reasonableness; and
– We tested management’s estimation model at each quarter-end since the 31 December 2018 audited position. We then independently sourced and reconciled inputs to the model
for each of the periods and confirmed that the result produced by management using this estimation model is within an acceptable tolerance at each quarter. Where manual
adjustments have been made by management we have challenged the derivation and purpose of such adjustments.
In respect of the adequacy of Scildon reserves:
– We gained an understanding of, and assessed, the key controls around the setting of the assumptions feeding in to the LAT;
– Performed analytics on policy cash flow data, in order to identify outliers and movements compared to the prior period;
– For a sample of policies, we recalculated the reserve at a policy level, using our independent replication model, and compared the results to those produced by management;
– We worked with actuarial specialists to challenge the mortality, lapse and expense assumptions which feed into the test, given that the insurance liabilities are most sensitive to
these factors; and
– We worked with actuarial specialists to challenge the results of the experience investigations carried out by management. Through our challenge of assumptions, we have
performed benchmarking against industry studies and other sources of evidence.
Key observations
Based on the audit procedures performed, we consider that the S&P Cost of Guarantees reserve is materially appropriate.
We also concluded that the initial parameter setting process and Liability Adequacy Test performed by management were reasonable, supporting the adequacy of Scildon’s insurance
contract liabilities.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
109
IFRS FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED)
Valuation of the Scildon AVIF intangible asset
Key audit matter description
Following the acquisition of Scildon, Chesnara recorded an Acquired Value In Force (AVIF) intangible asset of £66.0m on the group balance sheet, reflecting the capitalised future
profit in the Scildon business. The carrying value of the intangible asset at the balance sheet date was £56.0m.
Management is required to assess the impairment of the Scildon AVIF intangible balance at least annually, in line with IAS 36 Impairment of assets for investment contracts or, for
insurance contracts, under the IFRS 4 Insurance Contracts liability adequacy test, which involves significant judgement.
Our key audit matter is pinpointed to the discount rate used by management to discount the future policyholder cash flows underpinning the VIF.
Due to the highly judgemental nature of this balance, we identified manipulation of this assessment as an area of potential fraud.
See Note 3a for management’s consideration of significant accounting judgements. The accounting policy adopted by the group is documented within Note 2o to the financial
statements and the acquired in-force business intangible is disclosed in Note 19.
How the scope of our audit responded to the key audit matter
In respect of the Scildon AVIF we performed the following procedures:
– We gained an understanding of, and assessed, the internal controls in place to monitor and mitigate the risk of inappropriate management adjustments to the key assumptions;
– We engaged impairment specialists to challenge management’s assessment;
– We have constructed a range of independent discount rates based on alternative industry data in order to challenge the rate applied by management; and
– We have worked with actuarial specialists to challenge the model parameters used to generate the Scildon cashflows as used within management’s impairment assessment.
Key observations
Based on the audit procedures performed, we consider the discount rate used in the base VIF, which is used to assess the impairment of the Scildon AVIF intangible balance,
to be appropriate.
Our application of materiality
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
£12.8m (2018: £12.0m)
£10.5m (2018: £10.5m)
Basis for determining
materiality
3% of adjusted 2019 30 June 2019 net assets
We apply an adjustment of 10% to the net asset benchmark to factor in the inherent volatility in equity prices within the net asset amount.
The purpose of the adjustment is that materiality does not exceed 3% of the net asset figure as at 31 December 2019. The parent company
materiality is calculated on the same basis.
Rationale for the
benchmark applied
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 that has a significant
closed insurance book.
Net assets
Group materiality
Net assets £476.9m
Group materiality £12.8m
Component materiality range
£7.0m to £6.4m
Audit committee reporting
threshold £0.64m
Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the
financial statements as a whole. Group performance materiality was set at 70% of materiality for the 2019 audit (2018: 70%). In determining performance materiality, we considered
the following:
– Quality of the control environment. We assessed entity level controls and noted no issues as part of our assessment; and
– Quantum of audit adjustments identified in the prior period. We note that historically there has been a low number of corrected and uncorrected misstatements.
Error reporting threshold
We agreed with the Audit & Risk Committee that we would report to the Committee all audit differences in excess of £640k (2018: £600k), as well as differences below that threshold
that, in our view, warranted reporting on qualitative grounds. We also report to the Audit & Risk Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
110
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
An overview of the scope of our audit
Identification and scoping of components
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.
The risk assessment and scoping for the group has been performed centrally by the group audit team. Referral instructions have been provided to each of the component audit
teams detailing the procedures to be performed to support the group opinion. The procedures performed by the group audit team specifically relate to the parent company, and
group consolidation.
Based on this assessment and consistent with the prior year, we focused our group audit scope primarily on the audit work at six locations where the group’s policies are administered.
Three relate to Countrywide Assured plc and are in the United Kingdom, and the remaining three locations in the Netherlands and Sweden relate to Waard Leven, Waard Schade,
Movestic Livförsäkring AB, and Scildon. All components were subject to a full scope audit.
Excluding the parent company, the component materiality levels set by the group auditor range from £6.4m to £7.0m (2018: £4.8m to £6.0m). The movement in range in the year arises
due to foreign exchange movements impacting the re-translated group balance sheet.
Working with other auditors
The audit at each location involved the use of component audit teams. The group audit team have visited each of the component audit teams various times throughout the period, with
the attendance of Senior group audit team members at key component meetings. Furthermore, the group audit team have reviewed the audit files of each component team, focussing
on the following areas;
– Independence and continuance;
– Controls work around key audit matters, and financial reporting;
– Legal and regulatory compliance; and
– Assessment of key audit matters and significant risks.
In addition to the review of the component audit files, the group audit team has challenged the component responses to the referral instructions ensuring that the planned procedures
have been performed appropriately.
Upon receipt of the component financials from the component audit teams, the group audit team challenge management around the Chesnara group consolidation process.
Other information
The directors are responsible for the other information. The other information comprises the information included in the Annual Report,
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 committee reporting – the section describing the work of the audit committee does not appropriately address matters
communicated by us to the audit 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.
111
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 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.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and non-compliance with laws and regulations are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities This description forms
part of our auditor’s report.
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform audit procedures responsive to those
risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:
– the nature of the industry and sector, control environment and business performance including the design of the group’s remuneration policies, key drivers for directors’ remuneration,
bonus levels and performance targets;
– results of our enquiries of management, internal audit, and the audit and risk committee about their own identification and assessment of the risks of irregularities;
– any matters we identified having obtained and reviewed the group’s documentation of their policies and procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
– the matters discussed among the audit engagement team, including significant component audit teams and involving relevant internal specialists, including tax, valuations, pensions,
IT, and actuarial specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud, and identified the greatest potential for fraud in the
following areas: Valuation of insurance liabilities, pinpointed to the valuation of the Save & Prosper (‘S&P’) Cost of Guarantees, and the adequacy of Scildon reserves, valuation of the
Scildon Acquired Value In-Force (‘AVIF’) intangible asset and valuation of the Movestic Deferred Acquisition Costs balance (‘DAC’). In common with all audits under ISAs (UK), we are
also required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the group operates in, focusing on provisions of those laws and regulations that had a direct effect on
the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing
Rules, pensions legislation, and tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the
group’s ability to operate or to avoid a material penalty. These included the group’s regulatory solvency requirements and compliance with the requirements of the Financial Conduct
Authority and Prudential Regulatory Authority.
Audit response to risks identified
As a result of performing the above, we identified the valuation of insurance liabilities, pinpointed to the valuation of the Save & Prosper (‘S&P’) Cost of Guarantees, and the adequacy
of Scildon reserves, the valuation of the Scildon Acquired Value In-Force (‘AVIF’) intangible asset, and valuation of the Movestic Deferred Acquisition Costs (‘DAC’) balance as key audit
matters related to the potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed
in response to those key audit matters.
Our procedures to respond to risks identified included the following:
– reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having
a direct effect on the financial statements;
– enquiring of management, the Audit & Risk Committee and external legal counsel concerning actual and potential litigation and claims;
– performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;
– reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC, PRA, FCA and FRC;
– in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements
made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal
course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and significant component audit
teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
112
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED) SECTION D
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 in
respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit & Risk Committee, we were appointed by the group’s board on 1 October 2009 to audit the financial statements for the year ending
31 December 2009 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 11 years, covering
the years ended 2009 to 2019.
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 committee we are required to provide in accordance with ISAs (UK).
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.
Stephen Williams FCA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
14 April 2020
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
113
IFRS FINANCIAL STATEMENTS
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 (increase)/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
Note
2019
£000
2018
£000
268,331
(44,215 )
274,916
(55,536 )
224,116
92,895
1,090,640
219,380
101,783
(335,035 )
1,407,651
37,838
(13,872 )
41,236
1,445,489
27,364
(445,265 )
(176,541 )
38,064
(583,742 )
(664,463 )
5,424
(659,039 )
(21,750 )
(67,811 )
(10,445 )
(70 )
(5,635 )
(471,205 )
351,812
43,648
(75,745 )
196,940
(1,611 )
195,329
(28,158 )
(69,795 )
(12,093 )
(83 )
(4,840 )
8
9
10
1 1
1 1
1 1
12
12
13
14
15
15
15
Total (expenses)/income net of change in insurance contract provisions and investment contract liabilities
(1,348,492 )
4,615
Total income less expenses
Share of profit/(loss) of associate
Profit recognised on portfolio acquisition
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 120 to 195 form part of these financial statements.
23
51
16
7
17
7
4
35
46
46
96,997
1,072
788
(2,751 )
96,106
(16,964 )
31,979
(616 )
–
(4,351 )
27,012
(2,888 )
79,142
24,124
(18,684 )
–
144
(783 )
56
277
60,602
23,674
52.77p
16.10p
52.47p
16.01p
114
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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 fi nancial instruments
Total fi nancial 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
Lease contract liabilities
Borrowings
Derivative fi nancial instruments
Total fi nancial 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
Other reserves
Retained earnings
Total shareholders’ equity
SECTION D
Note
2019
£000
2018
£000
18
19
20
21
22
23
30
31
24
24
24
24
24/25
24/26
24
24/27
38
28
30
31
32
33
34
27
36
37
38
39
40
28
63,885
90,823
431
43
5,988
7,043
6,481
1,020
188,452
37,330
432,645
5,524,504
1,458,917
299,375
32,187
53,936
8,353
2,076
7,811,993
14,132
5,394
107,956
65,039
106,609
537
781
5,711
4,293
5,840
1,299
213,369
34,349
413,851
4,835,621
1,521,616
259,836
41,191
55,849
7,309
446
7,135,719
17,640
10,702
215,212
8,340,971
7,817,100
3,610,415
521
3,569,014
882
3,694,316
299,375
2,527
88,163
547
4,084,928
22,500
3,207
87,136
3,907
9,964
41,728
1,174
3,235,519
259,836
–
109,202
22,714
3,627,271
19,463
10,535
91,229
3,948
3,428
44,756
958
7,865,480
7,371,484
7
475,491
445,616
41
41
42
43
43,767
142,053
8,618
281,053
43,767
142,053
27,158
232,638
475,491
445,616
The Notes and information on pages 120 to 195 form part of these fi nancial statements.
Approved by the board of directors and authorised for issue on 14 April 2020 and signed on its behalf by:
Luke Savage
Luke Savage
Chairman
John Deane
John Deane
Chief Executive Offi cer
Company number: 04947166
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
115
IFRS FINANCIAL STATEMENTS
COMPANY BALANCE SHEET
31 December
Assets
Non-current assets
Financial assets
Investments in subsidiaries
Deferred tax asset
Total non-current assets
Current assets
Property and equipment
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
Lease contract 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
Other reserves
Retained earnings
Total shareholders’ equity
Note
2019
£000
2018
£000
24
354,720
521
354,720
388
355,241
355,108
24
28
263
–
74,758
855
2,440
769
47,288
2,486
2,665
7,990
79,085
60,429
434,326
415,537
34
40
253
14,849
4,190
–
15,306
2,811
19,292
18,117
34
37,676
54,274
37,676
54,274
56,968
72,391
377,358
343,146
41
41
42
43
7,495
142,053
50
227,760
7,495
142,053
50
193,548
377,358
343,146
The Notes and information on pages 120 to 195 form part of these fi nancial statements.
The profi t for the fi nancial year of the parent company was £64.9m (2018: £64.9m).
The fi nancial statements of Chesnara plc (registered number 4947166) were approved by the board of directors and authorised for issue on 14 April 2020 and
signed on its behalf by:
Luke Savage
Chairman
John Deane
Chief Executive Offi cer
116 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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
Depreciation on right of use assets
Interest on lease liabilities
Share based payment
Tax paid
Interest receivable
Dividends receivable
Interest expense
Fair value gains on financial assets
Share of (profit)/loss 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)/decrease in financial assets
Decrease in reinsurers’ share of insurance contract provisions
(Increase)/decrease in amounts deposited with reinsurers
Decrease in insurance and other receivables
Increase in prepayments
Increase/(decrease) in insurance contract provisions
Increase/(decrease) in investment contract liabilities
Decrease in provisions
Decrease in reinsurance payables
Decrease in payables related to direct insurance and investment contracts
Decrease in other payables
Net cash (utilised by)/generated from operations
Income tax paid
Net cash (utilised by)/generated from operating activities
Cash flows from investing activities
Development of software
(Purchases)/disposal of property and equipment
Net cash utilised by investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Proceeds from the issue of share premium
Repayments of borrowings
Repayment of lease liabilities
Sale of treasury shares
Dividends paid
Interest paid
Net cash utilised by financing activities
SECTION D
Note
2019
£000
2018
£000
79,142
24,124
22
18
19
21
22
16
16
23
538
11,547
10,445
70
1,442
704
63
593
16,494
(1,596 )
(2,250 )
2,688
(201,937 )
(1,072 )
(14,058 )
2,011
2,942
–
(799,774 )
23,809
(2,981 )
7,640
(1,474 )
145,907
685,502
(307 )
(6,912 )
(2,472 )
(3,119 )
647
13,629
12,093
83
1,671
–
–
501
2,888
(4,796 )
(2,939 )
4,351
(205,410 )
616
(18,457 )
5,360
1,579
56
715,390
26,462
4,427
11,937
(86 )
(409,405 )
(102,577 )
(180 )
(792 )
(5,947 )
(2,549 )
(46,415 )
(878 )
72,676
(12,104 )
(47,293 )
60,572
(3,097 )
(98 )
(1,839 )
71
(3,195 )
(1,768 )
–
–
(18,465 )
(646 )
–
(31,316 )
(2,570 )
1
70
(18,974 )
–
98
(30,384 )
(4,174 )
(52,997 )
(53,363 )
Net (decrease)/increase 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
Net cash and cash equivalents at end of the year
28
(103,485 )
214,254
(3,987 )
5,441
209,556
(743 )
28
106,782
214,254
Note. Net cash and cash equivalents includes overdrafts.
The Notes and information on pages 120 to 195 form part of these financial statements.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
117
IFRS FINANCIAL STATEMENTS
COMPANY STATEMENT OF CASH FLOWS
Year ended 31 December
Profit for the year
Adjustments for:
Tax recovery
Interest receivable
Share based payment
Dividends receivable
Depreciation on right of use assets
Increase in financial assets
Changes in operating assets and liabilities:
Decrease in loans and receivables
Decrease/(increase) in prepayments
Increase in provisions
Increase/(decrease) in other payables
Net cash utilised by operating activities
Income tax received
Net cash utilised by operating activities
Cash flows from investing activities
Dividends received from subsidiary company
Purchases of property and equipment
Net cash generated from investing activities
Cash flows from financing activities
Net proceeds from the issue of share capital
Net proceeds from the issue of share premium
Sale of treasury shares
Repayment of borrowings
Repayment of lease liabilities
Dividends paid
Interest paid
Net cash utilised by financing activities
Net decreases in net cash and cash equivalents
Net cash and cash equivalents at beginning of year
Note
2019
£000
2018
£000
64,939
64,860
(1,704 )
1,362
593
(69,772 )
9
(27,470 )
1,426
76
266
1,508
(1,044 )
2,394
501
(69,320 )
–
(18,197 )
559
(35 )
–
(1,792 )
(28,767 )
1,796
(22,074 )
1,363
(26,971 )
(20,711 )
69,772
(266 )
69,320
–
69,506
69,320
–
–
–
(17,055 )
(19 )
(31,320 )
(1,362 )
1
70
98
(19,877 )
–
(30,384 )
(2,394 )
(49,756 )
(52,486 )
(7,221 )
7,990
(3,877 )
11,867
Net cash and cash equivalents at end of the year
28
769
7,990
Note. Net cash and cash equivalents includes overdrafts.
The Notes and information on pages 120 to 195 form part of these financial statements.
118 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
Total
£000
445,616
79,142
(31,320 )
(18,684 )
144
593
STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2019
Equity shareholders’ funds at 1 January 2019
Profit for the year
Dividends paid
Foreign exchange translation differences
Revaluation of investment property
Share based payment
Note
4
Share
capital
£000
43,767
–
–
–
–
–
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
142,053
–
–
–
–
–
27,158
–
–
(18,684 )
144
–
232,638
79,142
(31,320 )
–
–
593
–
–
–
–
–
–
–
Equity shareholders’ funds at 31 December 2019
43,767
142,053
8,618
281,053
475,491
Year ended 31 December 2018
Equity shareholders’ funds at 1 January 2018
Profit for the year
Dividends paid
Foreign exchange translation differences
Revaluation of pension obligations
Revaluation of investment property
Share based payment
Issue of share capital
Issue of share premium
Sale of treasury shares
Note
4
Share
capital
£000
43,766
–
–
–
–
–
–
1
–
–
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
141,983
–
–
–
–
–
–
–
70
–
27,664
–
–
(783 )
–
277
–
–
–
–
(98 )
–
–
–
–
–
–
–
–
98
238,341
24,124
(30,384 )
–
56
–
501
–
–
–
Total
£000
451,656
24,124
(30,384 )
(783 )
56
277
501
1
70
98
Equity shareholders’ funds at 31 December 2018
43,767
142,053
27,158
–
232,638
445,616
COMPANY STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2019
Share
capital
£000
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Equity shareholders’ funds at 1 January 2019
Profit for the year
Dividends paid
Share based payment
7,495
–
–
–
142,053
–
–
–
Equity shareholders’ funds at 31 December 2019
7,495
142,053
50
–
–
–
50
–
–
–
–
–
193,548
64,939
(31,320 )
593
227,760
377,358
Year ended 31 December 2018
Share
capital
£000
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Equity shareholders’ funds at 1 January 2018
Profit for the year
Dividends paid
Share based payment
Issue of share capital
Issue of share premium
Sale of treasury shares
7,494
–
–
–
1
–
–
141,983
–
–
–
–
70
–
Equity shareholders’ funds at 31 December 2018
7,495
142,053
50
–
–
–
–
–
–
50
The Notes and information on pages 120 to 195 form part of these financial statements.
(98 )
–
–
–
–
–
98
158,571
64,860
(30,384 )
501
–
–
–
–
193,548
343,146
Total
£000
343,146
64,939
(31,320 )
593
Total
£000
308,000
64,860
(30,384 )
501
1
70
98
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
119
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 General information
Chesnara plc (Registered number 4947166) (the company) is a limited liability company, incorporated 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 7. Its activities are performed almost entirely in the UK, where it underwrites life risks
such as those associated with death, disability and health and provides 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 comprises the Movestic segment, as described in Note 7. Its activities are performed predominantly in Sweden, where it 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 comprises the Waard Group and Scildon segments, as described in Note 7. These represent the group’s Dutch life and general insurance
businesses. The Waard Group originally consisted of three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and
a servicing company, Waard Verzekering. During 2017, the book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard
Leven and the company was subsequently de-registered on 19 December 2018. 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. During 2019, the Waard
Group acquired a portfolio of term life and endowment policies from Monuta. 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 14 April 2020.
2 Significant accounting policies
In the information which follows, distinction is made, where necessary, in respect of the applicability of certain policies to the UK business, the Swedish business
and the Dutch business.
(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.
IFRS 9
‘IFRS 9 Financial Instruments’ is effective from 1 January 2018 and replaces ‘IAS 39 Financial Instruments: Recognition and Measurement’. The group has
however elected to defer the application of IFRS 9 in the consolidated financial statements, applying the temporary exemption available under ‘Amendments to
IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4’. The temporary exemption is available to reporting entities whose activities are
predominantly connected with insurance and the IASB has recommended that the exemption applies until the earlier of the introduction of ‘IFRS 17 Insurance
Contracts’ and 1 January 2023.
An assessment of the group’s liabilities has been made as at 31 December 2017, the year-end following the most recent significant acquisition. The assessment
determined that the proportion of liabilities connected within scope of IFRS 4, together with other liabilities connected with insurance was greater than 90%
of the total liabilities of the group as at that date. Other liabilities connected with insurance include non-derivative investment contract liabilities measured at fair
value under IAS 39, with a value of £3,420.3m at 31 December 2017. Certain disclosures are required as a result of deferring the application of IFRS 9 and these
disclosures are contained in Note 5 and Note 24 to the financial statements.
Chesnara plc (the company) does not meet the qualifying criteria for temporary exemption from applying IFRS 9 as a stand-alone reporting entity. Therefore, IFRS 9
has been applied to the parent company financial assets within these financial statements. Within the group, Movestic Kapitalforvältning AB, has also applied
IFRS 9 to its individual financial statements and these are available at www.movestic.se
IFRS 16
IFRS 16 Leases became effective from 1 January 2019. IFRS 16 replaces IAS 17 Leases. The new standard removes the classification of leases as either operating
or finance leases for the lessee, thereby treating all leases as finance leases. This results in the recognition of a right of use asset and a lease liability for all of the
group’s previously classified operating leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements.
The group has initially adopted the IFRS 16 Leases from 1 January 2019 using the modified retrospective approach, under which the cumulative effect of initial
applications is recognised in the retained earnings as at 1 January 2019. Accordingly, the comparative information presented for 2018 has not been restated.
The details of the change in accounting policy are disclosed below.
The group has a number of lease arrangements in place, predominantly in relation to rented office space and equipment used within the business operations.
The group has a single investment property where it acts as a lessor.
The group assesses whether a contract is or contains a lease, at inception of the contract. The group recognises a right-of-use asset and a corresponding lease
liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the
rate implicit in the lease. If this rate cannot be readily determined, the group uses an incremental borrowing rate, appropriate for each division.
120
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
Lessee accounting
IFRS 16 changes how the group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet. Applying IFRS 16, for
all leases, the group now recognises right-of-use assets and lease liabilities in the consolidated balance sheet, initially measured at the present value of the future
lease payments.
Lease incentives are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under IAS 17 they resulted in the recognition
of a lease incentive liability, amortised as a reduction of rental expenses on a straight line bases.
Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This replaces the previous requirement to
recognise a provision for onerous lease contracts.
Under IFRS 16, the group recognises depreciation of right-of-use assets and interest on lease liabilities in the consolidated income statement, whereas under
IAS 17 operating leases previously gave rise to a straight-line expense in other expenses.
Under IFRS 16 the group separates the total amount of cash paid for leases that are on the balance sheet into a principal portion (presented within financing
activities) and interest (presented within operating activities) in the consolidated cash flow statement. Under IAS 17 operating lease payments were presented
as operating cash outflows.
The main differences between IFRS 16 and IAS 17 with respect to assets formerly held under a finance lease is the measurement of the residual value guarantees
provided by the lessee to the lessor. IFRS 16 requires that the group recognises as part of its lease liability only the amount expected to be payable under a
residual value guarantee, rather than the maximum amount guaranteed as required by IAS 17. This change did not have a material effect on the group consolidated
financial statements.
Lessor accounting
The group enters into lease agreements as a lessor with respect to an investment property in the Scildon division.
Leases for which the group is a lessor are classified as finance or operating leases. Whenever the terms of the lease transfer substantially all the risks and rewards
of ownership to the lessee, the contract is classified as a finance lease. All other leases are classified as operating leases.
When the group is an intermediate lessor, it accounts for the head lease and the sub-lease as two separate contracts. The sub-lease is classified as a finance or
operating lease by reference to the right-of-use asset arising from the head lease.
Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term.
Amounts due from lessees under finance leases are recognised as receivables at the amount of the group’s net investment in the leases. Finance lease income
is allocated to accounting periods so as to reflect a constant periodic rate of return on the group’s net investment outstanding in respect of the leases.
When a contract includes both lease and non-lease components, the group applies IFRS 15 to allocate the consideration under the contract to each component.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
121
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 Significant accounting policies (continued)
(a) Statement of compliance (continued)
Financial impact
The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of right-of-use assets and lease liabilities.
The group has chosen to use the table below to set out the adjustment recognised at the date of initial application of IFRS 16.
Property and equipment
Deferred tax asset
Other assets
Total assets
Lease liabilities
Deferred tax liability
Other liabilities
Total liabilities
Net assets
As previously
reported at
31 December
2018
£000
Impact of
IFRS 16
£000
As restated
at 1 January
2019
£000
4,293
–
7,812,807
3,016
513
–
7,309
513
7,812,807
7,817,100
3,529
7,820,629
–
(19,463 )
(7,352,021 )
(3,016 )
(513 )
–
(3,016 )
(18,950 )
(7,352,021 )
(7,371,484 )
(3,529 )
(7,375,013 )
445,616
–
445,616
Of the total right-of-use assets of £3.0m recognised at 1 January 2019, £2.6m related to leases of property and £0.4m to leases on equipment.
The table below presents a reconciliation from operating lease commitments disclosed on 31 December 2018 to lease liabilities recognised at 1 January 2019.
Operating lease commitments disclosed under IAS 17 at 31 December 2018
Short-term and low value lease commitments straight-line expensed under IFRS 16
Effect of discounting
Payments due in periods covered by extension options that are included in the lease term
Finance lease liabilities recognised under IAS 17 at 31 December 2018
Lease liabilities recognised at 1 January 2019
As at
1 January
2019
£000
3,486
64
(534 )
–
–
3,016
In terms of the income statement impact, the application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and
interest expenses compared to IAS 17. During the year ended 31 December 2019, in relation to leases under IFRS 16 the group recognised the following amounts
in the consolidated income statement:
As at
1 January
2019
£000
(358 )
(30 )
317
31
–
Depreciation charge
Interest expenses
Variable lease payments
Short-term lease expense
Low-value lease expenses
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CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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 23
Amendments to IFRS 9 (Oct 2017)
Amendments to IAS 28 (Oct 2017)
Subject
Uncertainty over income tax treatments
Prepayment features with negative compensation
Long-term interests in associates and joint ventures
Annual improvements to IFRS Standards 2015 - 2017 cycle (Dec 2017)
Annual improvements to IFRSs: 2015 - 17 cycle
Amendments to IAS 19 (Feb 2018)
Plan amendment, curtailment or settlement
Amendments to references to the conceptual framework in IFRS Standards Amendments to references to the conceptual framework in IFRS Standards
Amendments to IFRS 3 (Oct 2018)
Amendments to IAS 1 and IAS 8 (Oct 2018)
Definition of business
Definition of material
Amendments to IFRS 9, IAS 39 and IFRS 7 (Sept 2019)
Interest rate benchmark reform
IFRS 17
Insurance contracts
Amendments to IFRS 10 and IAS 28 (Sept 2014)
Sale or contribution of assets between an investor and its associate or joint venture
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 17 was issued in May 2017 and will replace IFRS 4, the current insurance contract accounting standard. In March 2020, the IASB recommended a further
1 year extension to the implementation date for the standard to 1 January 2023. The new standard will significantly change how the group measures and reports
its insurance contracts. An initial assessment of the technical and operational implications of the standard was performed during 2019 and implementation activities
are ongoing. These activities will continue throughout 2020 and the financial impact of adopting the standard will continue to be assessed.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until further work is performed.
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 43 and page 115.
(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.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 2 Significant accounting policies (continued)
(c) Basis of preparation
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 judgements, estimates and assumptions that affect the application
of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience
and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate
is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. Judgements
made by management in the process of applying the group’s accounting policies that have a significant effect on the financial statements and estimates with a
significant risk of material adjustment in the next year are set out in Note 3.
The accounting policies set out below, unless otherwise stated, have been applied consistently to all years presented in these consolidated financial statements.
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.
Going concern
The consolidated and parent company financial statements have been prepared on a going concern basis. After making enquiries, including detailed consideration
of the impact of COVID-19 on the group’s operations and financial position and prospects, the directors believe that they have a reasonable expectation that the
group has adequate resources to continue in operational existence for the foreseeable future. Further detail on the key considerations made by the directors in
making this assessment has been included in the Financial Management section of the Annual Report & Accounts on page 50 under the heading ‘Maintain the
group as a going concern’.
(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.
(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.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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, 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 30.
(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. 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.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 2 Significant accounting policies (continued)
(h) Insurance contracts (continued)
(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), 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.
(i) Investment contracts
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.
(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.
126
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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
In accordance with IFRS 15, fees charged for investment management services provided in connection with investment contracts are recognised as revenue
over time, 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 over time in which services will be provided.
Initial fees charged for investment management services provided in connection with insurance contracts are recognised over time as revenue when earned.
For both insurance and investment contracts, initial fees, annual management charges and contract administration charges are recognised over time 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 over time 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 over time 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 over time as revenue over the period in which
services are rendered.
(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
Under IFRS 16, the deprecation of right-of-use assets is recognised in the Statement of Comprehensive Income as an administration expense. Payments made
in relation to lease commitments are reflected in the balance sheet as a reduction to the corresponding lease liability.
(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. Under IFRS 16, interest on lease liabilities is recognised in the Statement of Comprehensive Income as finance costs.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 2 Significant accounting policies (continued)
(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.
(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 leases, as right of use assets, are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the
term of the relevant lease. These include office buildings, office and IT equipment and motor vehicles.
128
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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.
(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.
129
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 2 Significant accounting policies (continued)
(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 3 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 1 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) on page 127) 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.
(bb) Leases
The group assesses whether a contract is or contains a lease, at inception of the contract. The group recognises a right-of-use asset and a corresponding lease
liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less)
and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the group recognises
the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the
time pattern in which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate
implicit in the lease. If this rate cannot be readily determined, the group uses its incremental borrowing rate. Lease payments included in the measurement of the
lease liability comprise:
– Fixed lease payments
– Variable lease payments
– The amount expected to be payable by the lessee under residual value guarantees
– The exercise price of purchase options
– The payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease
The lease liability is presented as a separate line in the consolidated balance sheet.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by
reducing the carrying amount to reflect the lease payments made.
The group re-measures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
– The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is re-measured by discounting
the revised lease payments using a revised discount rate.
– The lease payments change due to changes in an index rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability
is re-measured by discounting the revised lease payments using the initial discount rate (unless the lease payment change is due to a floating interest rate, in
which case a revised discount rate is used).
– A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is measured by discounting the
revised lease payments using a revised discount rate.
The group did not make any such adjustments during the periods presented.
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any
initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.
130
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfer’s ownership of the underlying
asset or the cost of the right-of-use asset reflects that the group expects to exercise a purchase option, the related right-of-use asset is depreciated over the
useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The group does not have any leases that include purchase
options or transfer ownership of the underlying asset.
The right-of-use assets are presented within the same line item as that within which the corresponding underlying assets would be presented if these were
owned. For the group this is ‘Property and Equipment’.
For short-term leases (lease of than 12 months or less) and leases of low-value assets (such as personal computers and office furniture) the group has opted to
recognise a lease expense on a straight-line basis as permitted by IFRS 16. This expenses is presented within ‘Other operating expenses’ in the consolidated
income statement.
As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components
as a single arrangement. The group has not used this practical expedient.
Transition
The group has applied IFRS 16 using a modified retrospective approach without restatement of the comparative information. In respect of those leases the
group previously treated as operating lease, the group has elected to measure its right-of-use assets using the approach set out in IFRS 16.C8(b)(ii). Under IFRS
16.C8(b)(ii) right-of-use assets are measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating
to that lease recognised in the balance sheet immediately before the date of initial application.
The groups’ weighted average incremental borrowing rate applied to lease liabilities as at 1 January 2019 is 2.8% for the UK and Swedish division and 2.0% for
the Netherlands division.
The group has not made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease.
As part of the groups’ adoption of IFRS 16 and applications of the modified retrospective approach to transition, the group also elected to use the following
practical expedients:
– A single discount rate has been applied to portfolios of leases with reasonable similar characteristics; and
– Hindsight has been used in determining the lease term.
(cc) Employee benefits
(i) Pension obligations
UK businesses
Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which group companies
pay fixed contributions. There are no legal or constructive obligations on group companies to pay further contributions if the fund does not hold sufficient
assets to pay employee benefits relating to service in current and prior periods. Accordingly, group companies have no further payment obligations once the
contributions have been paid. Contributions to defined contribution pension schemes are recognised in the 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 IAS 19 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 had a defined benefit plan which was closed and transferred into a defined contribution pension plan during 2019. The defined Benefit Pension
Scheme was administered by Stichting Pensionfonds Legal & General Nederland. The company had agreed to contribute to the premium for the unconditional
part of the pension. Part of the plan consisted of a defined contribution scheme. The company paid a contribution to the Scheme and subsequently had
no further financial obligations with respect to this part of the Scheme.
Scildon’s defined benefit plan was closed during 2019 and transferred into a defined contribution scheme. The 2018 values for the now closed defined benefit
scheme were calculated in the following manner. The pension scheme was an indexed average pay scheme with a pension of 1.75% per year of service.
Indexation was conditional since 1 January 2013. The pension scheme was administered by Stichting Pensionfonds Legal & General Nederland. The company
had agreed to contribute to the premium for the unconditional part of the pension. Apart from the obligations which may have arisen from the collective
agreement provisions, the company was not obliged to make additional contributions to the claims brought under the pension fund. The company was not
entitled to refunds or discounts. Part of the plan consisted of a defined contribution scheme. The company paid a contribution to the scheme and subsequently
had no further financial obligations with respect to this part of the scheme. This contribution was recognised as an expense when paid. Further disclosure can
be found in Note 35.
During 2019, a new defined contribution pension scheme was established for the benefit of Scildon employees.
(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.
131
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 2 Significant accounting policies (continued)
(dd) 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.
(ee) 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.
(ff) 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.
(gg) 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.
3 Critical accounting judgements 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 judgements in applying
the group’s accounting policies. Such estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable. The more critical areas, where accounting estimates and judgements are made, are set out
below. Each item identifies the business segments, as described in Note 7, to which it is relevant.
During the year, the company continued to assess the potential operational and financial impacts of the Brexit outcome. This is discussed in more detail in the
key sources of estimation and uncertainty section below.
Critical accounting judgements
(a) Classification of long-term contracts (CA, Movestic, Waard Group and Scildon)
The group has exercised judgement 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 judgement is applied in assessing whether the risk so transferred is significant, especially with regard to pensions contracts,
which are predominantly, but not exclusively, created for investment purposes. Refer to Note 2(g) – Product Classification on page 125.
(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(cc) – Employee Benefits on page 131.
132
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 judgements in determining the fair value, amortisation and recoverability of acquired in-force business relating to
insurance and investment contracts. In the initial determination of the acquired value of in-force business, the group uses actuarial models to determine the
expected net cash flows (on a discounted basis) of the policies acquired. The key assumptions applied in the models are driven by the expected behaviour of
policyholders on termination rates, expenses of management and age of individual contract holders as well as global estimates of investment growth, based on
recent experience at the date of acquisition. The assumptions applied within the models are considered against historical experience of each of the relevant
factors. Refer to accounting policy Note 2(o) on page 128 and Note 19 on page 158.
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 judgement. 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 2019, material carrying values of acquired in-force business, net of amortisation, are £23.9m in respect of Movestic (31 December 2018: £28.6m)
and £56.0m in respect of Scildon (31 December 2018: £63.0m).
A 100bps increase in the effective discount rate would reduce the underlying value of in-force business by £1.2m for Movestic and £2.4m for Scildon. A 10% fall in
projected future profits would reduce the underlying value of in-force business by £2.4m for Movestic and £7.1m for Scildon.
(b) Deferred acquisition costs and deferred income – investment contracts (CA, Movestic and Scildon)
The group applies judgement in deciding the amount of direct costs that are incurred in acquiring the rights to provide investment management services in
connection with the issue of investment contracts. Judgement is also applied in establishing the amortisation of the assets representing these contractual rights
and the recognition of initial fees received in respect of these contracts. The assets are amortised over the expected lifetime of the investment management
service contracts and deferred income, where applicable, is amortised over the expected period over which it is earned. Estimates are applied in determining the
lifetime of the investment management service contracts and in determining the recoverability of the contractual rights assets by reference to expected future
income and expense levels. This test for recoverability is performed using best estimates of future cash flows, using a market consistent estimate of future
investment returns. Refer to accounting policy 2(k) on page 127 and Note 18 on page 157.
As at 31 December 2019, the carrying values of deferred acquisition costs, net of amortisation, and of deferred income, in respect of CA, were £1.7m and £3.3m
respectively (as at 31 December 2018: £2.1m and £3.9m 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 2019, the carrying values of deferred acquisition costs, net of amortisation, in respect of Movestic, was £53.3m (as at 31 December 2018:
£55.0m). An increase in the length of the amortisation period by 5 year would have increased profit before tax for the year ended 31 December 2019 by £10.2m
and shareholders’ equity as at 31 December 2019 by £10.2m.
As at 31 December 2019, the carrying values of deferred acquisition costs, net of amortisation, in respect of Scildon, was £9.9m (as at 31 December 2018: £8.0m).
An increase in the length of the amortisation period by one year would have increased profit before tax for the year ended 31 December 2019 by £1.0m and
shareholders’ equity as at 31 December 2019 by £0.8m.
(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 30 on page 168.
(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 judgement. 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 30 on page 173.
133
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 3 Critical accounting judgements and key sources of estimation and uncertainty (continued)
Key sources of estimation and uncertainty (continued)
(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 2019, the carrying value of insurance contract liabilities which contain S&P discretionary participation features was £265.0m (31 December
2018: £286.4m).
(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 2019, the carrying value of the insurance claim reserves, gross of reinsurance, was £43.5m (as at 31 December 2018: £80.4m). The key
sensitivities in respect of insurance claim reserves are considered in Note 30 on page 173.
(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 2019, such claims ceded to reinsurers and reflected on the balance
sheet were £26.3m (31 December 2018: £53.2m). The application of a 10% bad debt provision on the reinsurance balance would reduce 2018 profit before tax by
£2.6m and shareholders’ equity by £2.1m.
(h) Brexit
Other than the fact that Brexit could impact the investment markets to which our results are sensitive (see sensitivities on page 41) we consider that our
operating model is relatively unaffected by Brexit. We do not trade across borders nor do we share resource between our European businesses. Each division
operates to autonomous local regulatory frameworks and we believe we have the flexibility to change our regulatory structure if Brexit results in potentially
adverse regulatory outcomes in the UK.
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 12.07 (2018: £1 = SEK 11.60) for the
Swedish business and £1 = EUR 1.14 (2018: £1 = EUR 1.13) for the Dutch business.
Assets and liabilities have been translated at the year-end rate of £1 = SEK 12.29 (31 December 2018: £1 = SEK 11.43) for the Swedish business and £1 = EUR 1.18
(31 December 2018: £1 = EUR 1.11) for the Dutch business.
Total foreign currency exchange rate movements for the year ended 31 December 2019 resulted in a loss recognised in the Consolidated Statement of Comprehensive
Income of £18.8m (year ended 31 December 2018: loss of £0.8m).
134
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECTION D
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 business 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)
2019
2018
Gross
£000
Net
£000
Gross
£000
Net
£000
1,879,757
8,801,168
5,428
1,846
295,031
1,684,485
1,098,518
5,392
1,846
286,888
2,047,087
9,504,793
5,577
1,949
310,102
1,826,007
1,232,298
5,541
1,949
300,962
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 75% 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
135
5 Management of insurance risk (continued)
(a) UK business (continued)
Reinsurance is used extensively on the business described overleaf 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
Exposures to material insurance risks, on individual cases are avoided, through the use of reinsurance.
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
Exposures to material insurance risks, on individual cases, are avoided through the use of reinsurance.
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 30 Insurance Contract Provisions.
136
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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:
SECTION D
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
2019
2018
Gross
£000
Net
£000
Gross
£000
5,953
1 1
2,568
2,385
6,003
1,353
2
1,301
697
5,086
19,821
16
3,343
2,896
6,779
Net
£000
6,032
3
1,488
847
5,749
16,920
8,439
32,855
14,119
2019
2018
Gross
£000
Net
£000
Gross
£000
38,850
840
29,588
182
44,142
996
565
8,574
20,945
309
3,101
10,903
837
9,696
23,583
Net
£000
12,494
215
324
3,249
12,230
69,774
44,083
79,254
28,512
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 2019: SEK 46,500, being
approximately £3,784) 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 2019 NOK: 99,858, being approximately
£8,126) although most policies are between 1 to 19 times the base amount.
All contracts are for an annual period.
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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
137
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5 Management of insurance risk (continued)
(b) Swedish business (continued)
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 80% 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 £0.4m) and SEK 150m (approximately £12.0m).
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 97.7% 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 £12.2m) gross of reinsurance and SEK 5m (approximately £0.4m) 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 30 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)
2019
2018
Gross
£000
Net
£000
Gross
£000
Net
£000
10,930
1,453,159
10,930
1,391,754
14,571
1,638,362
14,571
1,607,050
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. The policies acquired from Monuta are mainly term life and endowments with some
profit sharing conditions.
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.
138
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
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 30 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)
Deferred annuities
2019
2018
Gross
£000
Net
£000
Gross
£000
Net
£000
3,278,940
33,800,425
38,319
4
1,992,386
17,691,985
26,119
4
2,891,183
24,247,953
88,790
–
1,738,948
8,009,496
77,611
–
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 which impact our insured demographic and changes in lifestyle leading to higher mortality.
Management of risks
Term assurances are the main new business product type and 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 30 Insurance Contract Provisions.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
139
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.
140
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SECTION D
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 2019
*Insurance
Unit-linked
contracts
£000
contracts Annuities in
payment
with DPF
£000
£000
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
–
–
–
9,085
37,330
432,645
5,077,043
132,095
–
19,390
260
123
5,661,556
6,112
–
44,580
–
–
–
40,267
–
–
190,696
133,047
–
2,036
36
1,953
327,768
59
–
1,283
–
–
–
–
–
–
–
109,191
–
–
–
–
109,191
–
–
1,248
Other
non-linked
contracts
and other
shareholder
£000
7,043
6,481
1,020
139,100
–
–
256,765
1,084,584
32,187
32,510
8,057
–
1,414,103
7,961
5,394
60,845
Total
£000
7,043
6,481
1,020
188,452
37,330
432,645
5,524,504
1,458,917
32,187
53,936
8,353
2,076
7,512,618
14,132
5,394
107,956
Total assets
5,758,663
369,377
110,439
1,641,947
7,880,426
Liabilities
Insurance contract provisions
Other provisions
Financial liabilities
Investment contracts at fair value through income
Lease liabilities
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
2,498,328
–
3,690,272
–
–
118
3,690,390
–
394
23,965
–
2,612
206
321,183
–
107,024
–
683,880
521
3,610,415
521
–
–
–
365
365
–
8
5,122
–
304
176
–
–
–
–
–
–
–
1,468
–
–
–
4,044
2,527
88,163
64
94,798
22,500
2,805
56,581
9,964
38,812
792
3,694,316
2,527
88,163
547
3,785,553
22,500
3,207
87,136
9,964
41,728
1,174
Total liabilities
6,215,895
327,158
108,492
910,653
7,562,198
*Insurance contracts with DPF include shareholder funds within the CA (S&P) with-profits funds.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
141
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
(i) General (continued)
31 December 2018
*Insurance
Unit-linked
contracts
£000
contracts Annuities in
payment
with DPF
£000
£000
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
–
–
245
6,668
34,349
413,851
4,498,553
123,909
–
19,274
315
75
5,055,977
6,487
–
92,801
–
–
–
37,486
–
–
181,378
139,005
–
2,192
135
136
322,846
–
–
2,694
–
–
–
–
–
–
–
100,584
–
–
–
–
100,584
–
–
5,380
Other
non-linked
contracts
and other
shareholder
£000
4,293
5,840
1,054
169,215
–
–
155,690
1,158,118
41,191
34,383
6,859
235
1,396,476
1 1,153
10,702
1 14,337
Total
£000
4,293
5,840
1,299
213,369
34,349
413,851
4,835,621
1,521,616
41,191
55,849
7,309
446
6,875,883
17,640
10,702
215,212
Total assets
5,196,527
363,026
105,964
1,713,070
7,378,587
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
2,424,881
–
323,603
–
104,710
–
715,820
882
3,569,014
882
3,231,314
–
259
3,231,573
–
328
24,452
–
8,633
231
–
–
1,264
1,264
–
8
4,690
–
538
90
–
–
–
–
–
–
1,254
–
–
–
4,205
109,202
21,191
134,598
19,463
10,199
60,833
3,428
35,585
637
3,235,519
109,202
22,714
3,367,435
19,463
10,535
91,229
3,428
44,756
958
Total liabilities
5,690,098
330,193
105,964
981,445
7,107,700
*Insurance contracts with DPF include shareholder funds within the CA (S&P) with-profits funds.
142
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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.
143
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 IFRS FINANCIAL STATEMENTS
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 2019
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
2,498,328
321,183
107,024
683,880
2,498,328
148,291
25,159
41 1,161
–
74,387
20,801
273,353
–
48,914
16,250
160,781
–
15,371
11,848
74,343
–
6,185
14,143
43,888
2,498,328
293,148
88,201
963,526
3,690,272
4,044
547
256,920
3,690,272
4,044
547
256,920
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,690,272
4,044
547
256,920
Total
7,562,198
7,034,722
368,541
225,945
101,562
64,216
7,794,986
31 December 2018
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
2,424,881
323,603
104,710
715,820
2,424,881
142,977
25,946
444,722
–
75,618
21,726
290,279
–
54,537
17,285
165,678
–
21,095
12,886
78,815
–
7,478
15,994
42,813
2,424,881
301,705
93,837
1,022,307
3,231,314
4,205
22,714
280,453
3,231,314
4,205
22,714
280,453
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,231,314
4,205
22,714
280,453
Total
7,107,700
6,577,212
387,623
237,500
112,796
66,285
7,381,416
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 147. 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.
The undiscounted contractual cash flows stated above, are based upon the cash flows payable directly to customers and hence do not include an estimate of
future expenses incurred, as is the case in the balance sheet carrying values.
144
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
(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. 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
2019
£000
2018
£000
3,451,070
(3,372,372 )
3,016,091
(2,942,005 )
78,698
74,086
2,183,080
(1,889,425 )
2,149,809
(1,865,796 )
293,655
284,013
1,340
(825 )
515
1,051
(616 )
435
687
–
687
682
(223 )
459
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
145
IFRS FINANCIAL STATEMENTS
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. We believe these risk variables represent the ones that are most reasonably possible to occur in the future, to which the group results
are sensitive.
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
2019
2018
Profit before
tax
£m
Shareholders ’
equity
£m
Profit before
tax
£m
Shareholders ’
equity
£m
(59.5 )
60.3
12.3
(13.3 )
1.5
(1.2 )
5.6
(4.6 )
(44.9 )
45.3
9.9
(10.7 )
8.7
(7.2 )
32.6
(26.7 )
(37.3 )
38.6
15.5
(13.7 )
1.0
(0.8 )
0.2
(0.2 )
(27.9 )
28.8
13.5
(1 1.0 )
8.2
(6.7 )
31.5
(25.8 )
(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.
146
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
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
2019
Balance
2018
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
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
5,427,225
132,095
49,655
123
–
–
–
35,891
62
–
97,279
1,326,822
58,301
1,953
188,452
37,330
32,187
18,045
14,070
5,394
5,524,504
1,458,917
107,956
2,076
188,452
37,330
32,187
53,936
14,132
5,394
4,766,342
123,909
101,958
75
–
–
–
38,889
4,226
–
69,279
1,397,707
1 13,254
371
213,369
34,349
41,191
16,960
13,414
10,702
Balance
sheet
carrying
value
£000
4,835,621
1,521,616
215,212
446
213,369
34,349
41,191
55,849
17,640
10,702
Total
5,645,051
1,779,833
7,424,884
5,035,399
1,910,596
6,945,995
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 2019
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
–
–
–
350,598
–
823
–
–
–
–
AA
£000
131,748
–
–
507,626
–
10,877
7,286
–
–
9,012
A
£000
–
92,469
–
266,670
–
1,371
125
1,953
–
48,426
BBB
£000
Unrated
£000
Total
£000
4,437
–
–
168,231
–
1,342
474
–
–
863
52,267
4,810
37,330
33,697
32,187
3,632
6,185
–
5,394
–
188,452
97,279
37,330
1,326,822
32,187
18,045
14,070
1,953
5,394
58,301
Total
351,421
666,549
411,014
175,347
175,502
1,779,833
As at 31 December 2018
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
–
–
–
271,884
–
881
–
–
519
–
138,090
–
–
514,447
–
8,491
4,486
–
1,669
12,883
1,315
65,168
–
209,165
–
1,165
1,065
136
–
97,389
4,861
–
–
363,225
–
2,516
951
–
–
2,982
69,103
4,1 1 1
34,349
38,986
41,191
3,907
6,912
235
8,514
–
213,369
69,279
34,349
1,397,707
41,191
16,960
13,414
371
10,702
113,254
Total
273,284
680,066
375,403
374,535
207,308
1,910,596
The ‘Mortgage Loan Portfolio’ and ‘Insurance and other receivables’ assets in the credit risk rating table are not held at fair value or managed on a fair value basis.
The cash flows for all of these assets consist solely of payments of principal and interest. These assets are not considered to have a low credit rating as defined
by IFRS 9 as at 31 December 2019.
There were no holdings of assets that were below BBB in 2019 and 2018.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
147
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 Management of financial risk (continued)
(v) Credit risk management (continued)
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 £78.0m as at 31 December 2019 (31 December 2018: £72.0m) to ReAssure, which does not have a published credit rating.
Of this amount £50.0m (31 December 2018: £48.0m) 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 2019 and 31 December 2018.
Policyholder Policyholder Non-linked/
shareholder
£000
linked with-profit
£000
£000
–
–
2,081
1,620
–
–
7,704
–
–
–
102,839
11,668
–
–
1,382
–
–
–
641
–
–
–
125,769
1,165
39,144
34,195
240,900
254,801
58,515
20,780
99,150
642
2,972
44,746
193,749
110,125
Total
£000
39,144
34,195
244,363
256,421
58,515
20,780
107,495
642
2,972
44,746
422,357
122,958
125,912
128,957
1,099,719
1,354,588
2,377
2,069
–
1,781
983
–
–
75,194
3,813
4,158
78,246
3,813
4,446
2,764
79,007
86,217
632
488
617
532
405
389
8,228
–
6,821
9,392
893
7,827
1,737
1,326
15,049
18,112
132,095
133,407
1,193,775
1,458,917
Debt securities
As at 31 December 2019
Austria
Belgium
France
Germany
Italy
Ireland
Netherlands
Poland
Portugal
Spain
UK
Other
Europe
Canada
USA
Other
North America
Australia
Singapore
Other
Asia Pacific
Total
148
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
Debt securities
As at 31 December 2018
Austria
Belgium
France
Germany
Italy
Ireland
Netherlands
Poland
Portugal
Spain
UK
Other
Europe
Canada
USA
Other
North America
Australia
Singapore
Other
Asia Pacific
Total
SECTION D
Total
£000
41,626
53,581
245,465
200,595
93,226
23,699
137,006
–
1,219
59,433
414,194
124,049
Policyholder Policyholder Non-linked/
shareholder
£000
linked with-profit
£000
£000
–
–
2,584
2,146
–
–
7,932
–
–
–
95,262
7,547
–
–
1,452
181
–
–
747
–
–
–
130,769
892
41,626
53,581
241,429
198,268
93,226
23,699
128,327
–
1,219
59,433
188,163
115,610
115,471
134,041
1,144,581
1,394,093
1,366
5,212
–
843
2,955
–
2,309
94,856
2,498
4,518
103,023
2,498
6,578
3,798
99,663
110,039
680
531
649
467
360
339
10,918
171
3,369
12,065
1,062
4,357
1,860
1,166
14,458
17,484
123,909
139,005
1,258,702
1,521,616
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 2019, further interim distributions totalling £3,805 (2018: £2,718) 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 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 2019 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 (CA) 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 closed Dutch life and general insurance business, which was acquired on 19 May 2015 and comprised the
three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Waard Verzekering. During 2017,
the book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard Leven and consequently Hollands Welvaren Leven N.V.
was deregistered on 19 December 2018. 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. On 1 October, the Waard Group acquired a small portfolio of c6,000
policies from Monuta insurance, which consists of term and savings policies.
Scildon: This segment represents the group’s open 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
149
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 Operating segments (continued)
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 2019.
(i) Segmental income statement for the year ended 31 December 2019
Net insurance premium revenue
Fee and commission income
Net investment return
CA
£000
Movestic
£000
28,941
25,376
310,711
9,329
21,291
563,534
Total revenue (net of reinsurance payable)
Other operating income
365,028
11,690
594,154
26,148
Waard
Group
£000
1,943
16
6,838
8,797
–
Other group
activities
£000
Scildon
£000
183,903
46,212
209,037
439,152
–
–
–
520
520
–
Total
£000
224,116
92,895
1,090,640
1,407,651
37,838
Segmental income
376,718
620,302
8,797
439,152
520
1,445,489
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
(211,479 )
(95,876 )
(1,015 )
–
–
(19,775 )
(702 )
(1 )
–
(2,848 )
(563,163 )
(22,665 )
(1,405 )
(121 )
(1 1,673 )
(4,941 )
(1,384 )
1,072
(278 )
–
(234 )
–
(52 )
(3,326 )
–
(4 )
–
(369,137 )
–
(2,666 )
(206 )
(464 )
(25,086 )
–
–
–
–
–
–
(583,742 )
(659,039 )
(26,580 )
–
–
(5,703 )
8
(1,362 )
–
(1,611 )
(637 )
(65,563 )
(5,635 )
(2,751 )
1,072
Profit/(loss) before tax and consolidation adjustments
47,870
13,174
4,903
41,593
(6,537 )
101,003
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
(3,226 )
–
–
(2,769 )
(70 )
2,350
(663 )
–
–
(3,787 )
–
2,480
–
–
–
(10,445 )
(70 )
4,830
Segmental income less expenses
44,644
12,685
4,240
40,286
(6,537 )
95,318
Profit arising on portfolio acquisition
–
–
788
–
–
788
Profit/(loss) before tax
Income tax (expense)/credit
44,644
(7,555 )
12,685
(438 )
5,028
(1,428 )
40,286
(9,247 )
(6,537 )
1,704
96,106
(16,964 )
Profit/(loss) after tax
37,089
12,247
3,600
31,039
(4,833 )
79,142
Further analysis of the segmental profit before tax and consolidation adjustments can be found on page 48 of the Financial Review section.
(ii) Segmental balance sheet as at 31 December 2019
CA
£000
Movestic
£000
Waard
Group
£000
Other group
activities
£000
Scildon
£000
Total
£000
2,669,705
(2,532,017 )
3,466,925
(3,372,615 )
148,289
(103,275 )
1,977,223
(1,801,519 )
78,829
(56,054 )
8,340,971
(7,865,480 )
137,688
94,310
45,014
175,704
22,775
475,491
–
–
6,481
13,511
–
391
–
4,623
–
–
6,481
18,525
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
150
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
(iii) Segmental income statement for the year ended 31 December 2018
Net insurance premium revenue
Fee and commission income
Net investment return
Total revenue (net of reinsurance payable)
Other operating income
CA
£000
Movestic
£000
34,028
28,143
(112,960 )
13,663
23,567
(165,091 )
(50,789 )
12,792
(127,861 )
28,444
Waard
Group
£000
1,698
19
629
2,346
–
Other group
activities
£000
Scildon
£000
169,991
50,054
(57,870 )
162,175
–
–
–
257
257
–
Total
£000
219,380
101,783
(335,035 )
(13,872 )
41,236
Segmental (expense)/income
(37,997 )
(99,417 )
2,346
162,175
257
27,364
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 loss from associates
59,945
30,321
(1,215 )
–
–
(22,034 )
(838 )
(4 )
–
(5,018 )
165,008
(29,563 )
(1,463 )
(126 )
(13,578 )
(3,991 )
(1,953 )
(616 )
4,419
–
(293 )
–
(52 )
(2,903 )
–
–
–
(135,091 )
–
(1,907 )
(208 )
(468 )
(25,607 )
–
–
–
–
–
–
–
–
(3,356 )
(1 1 )
(2,394 )
–
(75,745 )
195,329
(32,978 )
(1,671 )
(646 )
(67,478 )
(4,840 )
(4,351 )
(616 )
Profit/(loss) before tax and consolidation adjustments
28,178
9,283
3,517
(1,106 )
(5,504 )
34,368
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
(4,497 )
–
–
(3,106 )
(83 )
1,137
(669 )
–
–
(3,821 )
–
3,683
–
–
–
(12,093 )
(83 )
4,820
Segmental income less expenses
23,681
7,231
2,848
(1,244 )
(5,504 )
27,012
Profit/(loss) before tax
Income tax (expense)/credit
23,681
(3,125 )
7,231
(944 )
2,848
(642 )
(1,244 )
779
(5,504 )
1,044
27,012
(2,888 )
Profit/(loss) after tax
20,556
6,287
2,206
(465 )
(4,460 )
24,124
(iv) Segmental balance sheet as at 31 December 2018
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
CA
£000
Movestic
£000
Waard
Group
£000
Other group
activities
£000
Scildon
£000
Total
£000
2,636,499
(2,476,949 )
3,033,654
(2,942,300 )
137,640
(90,585 )
1,948,490
(1,789,841 )
60,817
(71,809 )
7,817,100
(7,371,484 )
159,550
91,354
47,055
158,649
(10,992 )
445,616
–
–
5,840
14,480
–
21
–
6,140
–
–
5,840
20,641
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
151
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 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
2019
£000
41,477
33,871
12,516
687
(140 )
88,411
4,484
2018
£000
44,823
36,398
13,614
753
(54 )
95,534
6,249
Total fee and commission income
92,895
101,783
9 Net investment return
Year ended 31 December
Dividend income
Interest income
Rental income from investment properties
Net fair value gains and losses
Equity securities designated as at fair value through income on initial recognition
Debt securities designated as at fair value through income on initial recognition
Derivative financial instruments
Investment properties
2019
£000
38,057
31,933
5
944,598
82,280
(6,269 )
36
2018
£000
47,285
31,643
7
(365,159 )
(46,882 )
(2,017 )
88
Net investment return
1,090,640
(335,035 )
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 2018: £nil).
10 Other operating income
Year ended 31 December
Investment management fee rebate
Charges to policyholder funds for yield tax
Other
Total other operating income
2019
£000
34,045
3,728
65
2018
£000
37,023
3,971
242
37,838
41,236
152
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
11 Insurance contract claims and benefits
Year ended 31 December
Claims and benefits paid to insurance contract holders
Increase/(decrease) in insurance contract provisions
Total insurance contract claims and benefits
Reinsurer’s share of claims and benefits
SECTION D
2019
£000
445,265
176,541
621,806
(38,064 )
2018
£000
471,205
(351,812 )
119,393
(43,648 )
Net insurance contract claims and benefits incurred
583,742
75,745
12 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
626,432
38,031
(182,053 )
(14,887 )
2019
£000
2018
£000
Total increase/(decrease) in investment contract liabilities
Reinsurers’ share of investment contract liabilities
Net increase/(decrease) in investment contract liabilities
Investment contract benefits comprise benefits accruing to holders of investment contracts issued by the group.
13 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
664,463
(5,424 )
(196,940 )
1,611
659,039
(195,329 )
2019
£000
2018
£000
9,576
(4,393 )
14,654
(6,055 )
5,183
8,599
15,409
(10,362 )
18,362
(12,401 )
5,047
5,961
3,333
8,214
(27 )
2,400
11,229
(31 )
21,750
28,158
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
153
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 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
Depreciation of right-of-use assets
Other goods and services
Total
Note
44
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**
Total
2019
£000
33,418
5,099
1,442
538
11,336
704
15,274
2018
£000
34,395
5,718
1,671
647
12,549
–
14,815
67,811
69,795
2019
£000
211
709
302
2018
£000
200
608
235
1,222
1,043
*Includes £169k (2018: nil) audit fees in respect of the Movestic audit in the year performed by EY.
** Chesnara plc and Countrywide Assurance plc are now exempt from audit for the regulatory returns following PRA legislation introduced in 2018.
15 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
Recovery of cash deposit
Payment of yield tax relating to policyholder funds
Other
Total
2019
£000
2018
£000
10,445
12,093
70
83
–
(8 )
3,728
1,915
(3 )
(3 )
3,971
875
5,635
4,840
The recovery of cash deposit represents interim distributions received from the administrators of Kaupthing Singer & Friedlander relating to a cash deposit,
previously written down and charged to operating expenses.
154
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
16 Financing costs
Year ended 31 December
Interest expense on bank borrowings
Interest expense on financial reinsurance
Interest expenses on lease liabilities
Other interest
Total financing costs
SECTION D
2019
£000
1,363
1,300
63
25
2018
£000
2,398
1,899
–
54
2,751
4,351
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.
17 Income tax
Year ended 31 December
Total income tax comprises:
CA and other group activities – net expense
Movestic – net expense
Waard Group – net expense
Scildon – net (expense)/credit
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 19.0% (2018: 19.25%)
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
2019
£000
(5,851 )
(438 )
(1,428 )
(9,247 )
2018
£000
(2,081 )
(944 )
(642 )
779
(16,964 )
(2,888 )
2019
£000
2018
£000
(6,101 )
(605 )
(28 )
(2,369 )
(616 )
(76 )
(6,734 )
(3,061 )
883
980
(5,851 )
(2,081 )
2019
£000
2018
£000
38,107
18,177
(7,240 )
342
1,509
(26 )
(529 )
98
23
(28 )
(3,453 )
(2 )
1,998
(71 )
(498 )
22
(1 )
(76 )
Total income tax expense
(5,851 )
(2,081 )
There has been no change in tax rate during the year (tax rate 19%).
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
155
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17 Income tax (continued)
Movestic
Movestic
Year ended 31 December
Current tax
Current year expense
Adjustments for 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 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
Over/(under) provided in prior years
2019
£000
2018
£000
(498 )
13
(485 )
47
(599 )
(384 )
(983 )
39
(438 )
(944 )
2019
£000
2018
£000
12,685
7,231
(2,715 )
2,497
(2 )
(73 )
–
14
–
(173 )
14
(1,591 )
1,505
2
(412 )
–
(12 )
–
(52 )
(384 )
Total income tax expense
(438 )
(944 )
Waard Group
Waard Group
Year ended 31 December
Current tax
Current year expense
Adjustment to prior years
Net expenses
Deferred tax
Origination and reversal of temporary differences
Total income tax expense
156
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2019
£000
2018
£000
(2,308 )
(12 )
(2,320 )
892
(924 )
1
(923 )
281
(1,428 )
(642 )
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
(Under)/over provided in prior years
Total income tax expense
Scildon
Scildon
Year ended 31 December
Current tax
Adjustments for prior year
Net expense
Deferred tax
Origination and reversal of temporary differences
Impact to changes in tax rates
Total income tax (expense)/credit
Reconciliation of effective tax rate on profit before tax
Year ended 31 December
Profit/(loss) before tax
Income tax using the domestic corporation tax rate of 25%
Permanent differences
Non-deductible expenses
Under provided in prior years
Total income tax (expense)/credit
18 Deferred acquisition costs
Year ended 31 December
Balance at 1 January
Additions arising from new business
Amortisation charged to income
Impairment losses
Foreign exchange translation difference
Balance at 31 December
Current
Non-current
Total
SECTION D
2019
£000
2018
£000
5,028
2,848
(1,257 )
(159 )
(12 )
(712 )
69
1
(1,428 )
(642 )
2019
£000
(2,034 )
(1,310 )
2018
£000
(1,490 )
(14 )
(3,344 )
(1,504 )
(6,720 )
817
(9,247 )
1,785
498
779
2019
£000
2018
£000
40,287
(1,244 )
(10,072 )
8
817
–
(9,247 )
2019
£000
65,039
15,131
(11,547 )
(19 )
(4,719 )
311
–
498
(30 )
779
2018
£000
61,858
18,541
(13,629 )
–
(1,731 )
63,885
65,039
10,803
53,082
7,822
57,217
63,885
65,039
The amortisation charged to income is recognised in fees, commission and other acquisition costs (see Note 13).
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
157
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19 Acquired value of in-force business (AVIF)
Year ended 31 December
Cost:
Balance at 1 January
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Amortisation for the year
Foreign exchange translation difference
Balance at 31 December
Carrying amounts:
At 1 January
At 31 December
Current
Non-current
Total
2019
£000
2018
£000
219,956
(8,592 )
221,201
(1,245 )
211,364
219,956
113,347
10,445
(3,251 )
102,162
12,093
(908 )
120,541
113,347
106,609
119,039
90,823
106,609
17,006
73,817
15,286
91,323
90,823
106,609
The amortisation charged to the Consolidated Statement of Comprehensive Income is recognised in Other Operating Expenses (see Note 15).
20 Goodwill
The goodwill is arising from the purchase of Sparplatsen, a Sweden based software developer by the Movestic business, in order to gain access to the use of
an automated investment advisory tool, including risk assessment, asset allocation model and investment guidance tool, for use by the company’s customers
and IFA network.
21 Software assets
31 December
Cost:
Balance at 1 January
Additions
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Amortisation charge for the year
Impairment charge
Foreign exchange translation difference
Balance at 31 December
Carrying amounts at 31 December
Current
Non-current
Total
158
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2019
£000
2018
£000
25,069
3,097
(2,392 )
23,218
1,839
12
25,774
25,069
19,358
1,442
982
(1,996 )
16,860
1,671
650
177
19,786
19,358
5,988
2,042
3,946
5,988
5,711
1,579
4,132
5,711
22 Property and equipment
31 December
Cost:
Balance at 1 January
Additions
Disposals
Revaluation
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Depreciation charge for the year
Disposals
Foreign exchange translation difference
Balance at 31 December
Carrying amounts at 31 December
Current
Non-current
Total
SECTION D
2019
£000
2018
£000
12,348
3,579
(1,854 )
520
(1,046 )
11,803
262
(102 )
–
385
13,547
12,348
8,055
1,242
(2,362 )
(431 )
7,476
647
(80 )
12
6,504
8,055
7,043
4,293
685
6,358
186
4,107
7,043
4,293
The group leases several assets including office buildings, office and IT equipment and motor vehicles. The average lease term is 3 years.
Right-of-use assets
Non-investment
property
£000
Property &
equipment
£000
Motor
vehicles
£000
Hardware
£000
Software
£000
Other
£000
Carrying amounts at 1 January
Additions
Disposals
Depreciation charge
Foreign exchange translation difference
Carrying amounts at 31 December
2,655
239
–
(547 )
(133 )
2,214
85
27
–
(17 )
(4 )
91
165
94
(18 )
(83 )
(6 )
152
92
6
–
(49 )
(1 )
48
–
–
–
–
–
–
19
–
–
(8 )
(1 )
10
Current
Non-current
Total
Amount recognised in profit and loss
Non-investment
property
£000
Property &
equipment
£000
Motor
vehicles
£000
Hardware
£000
Software
£000
Other
£000
Interest expense on lease liabilities
Fixed lease expense
Short-term lease expense
Low-value asset lease expense
Variable lease expense
Total cash outflow for leases
57
549
37
–
–
643
2
18
2
–
–
22
3
81
9
–
–
93
1
45
–
–
–
46
–
–
–
–
–
–
–
8
–
–
–
8
2019
Total
£000
3,016
366
(18 )
(704 )
(145 )
2,515
1,137
1,378
2,515
2019
Total
£000
63
701
48
–
–
812
During 2020, Movestic will enter into a new agreement in regards to its office floor space, which will impact the right-of-use asset and lease liability value.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
159
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23 Investment in associate
31 December
Balance at 1 January
Share of profit/(loss)
Foreign exchange translation difference
Balance at 31 December
Associates at 100%
Modernac S.A.
Total at 31 December 2019
Associates at 49%
Modernac S.A
Total at 31 December 2019
24 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
2019
£000
5,840
1,072
(431 )
2018
£000
6,407
(616 )
49
6,481
5,840
Assets
£000
Liabilities
£000
Revenues
£000
18,211
4,981
18,211
4,981
4
4
Profit
£000
2,187
2,187
Equity
at 100%
£000
Equity
at 49%
£000
49% share
of profit
£000
13,230
6,481
1,072
13,230
6,481
1,072
2019
£000
2018
£000
7,715,441
2,076
32,187
53,936
8,353
7,030,924
446
41,191
55,849
7,309
7,811,993
7,135,719
Financial assets that are not held at fair value or managed on a fair value basis consist of the ‘Mortgage Loan Portfolio’, ‘Insurance and other receivables’
and ‘Prepayments’. The cash flows for all of these assets are solely of payments of principal and interest. The fair value of the Mortgage Loan Portfolio as at
31 December 2019 was £34.0m and the change in fair value in the year was an decrease of £8.8m. For the ‘Insurance and other receivables’ and ‘Prepayments’
assets, the carrying value is considered to be a reasonable approximation of fair value. All other financial assets are held on a fair value basis and have a value of
£7,717.5m as at 31 December 2019 with a change in fair value in the year of an increase of £686.1m.
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 opposite 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).
160
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
Fair value measurement at 31 December 2019
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
Fair value measurement at 31 December 2018
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
SECTION D
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
432,645
5,483,162
949,641
476,904
6,380
1,432,925
299,375
–
–
41,342
25,647
345
–
25,992
–
2,076
7,648,107
69,410
–
299,375
–
3,694,316
–
547
299,375
3,694,863
–
–
–
–
–
–
–
–
–
–
–
–
–
432,645
5,524,504
975,288
477,249
6,380
1,458,917
299,375
2,076
7,717,517
2,176,844
5,540,673
7,717,517
3,694,316
299,375
547
3,994,238
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
413,851
4,835,621
806,019
678,942
5,987
1,490,948
259,836
–
–
–
30,668
–
–
30,668
–
446
7,000,256
31,114
–
259,836
–
3,235,519
–
22,714
259,836
3,258,233
–
–
–
–
–
–
–
–
–
–
–
–
–
413,851
4,835,621
836,687
678,942
5,987
1,521,616
259,836
446
7,031,370
4,858,901
2,172,469
7,031,370
3,235,519
259,836
22,714
3,518,069
The debt securities classified as Level 2 at 2018 and 2019 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
161
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24 Financial instruments (continued)
Group (continued)
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 overleaf.
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
Fair value
2019
£000
2018
£000
2019
£000
2018
£000
88,163
109,202
90,124
1 1 1,456
Borrowings consist of bank loans and an amount due in relation to financial reinsurance. The fair value of the bank loans are taken as the principal outstanding at
the balance sheet date. The amount due in relation to financial reinsurance is fair valued with reference to market interest rates at the balance sheet date.
There were no transfers between Levels 1, 2 and 3 during the year. The group holds no Level 3 liabilities as at the balance sheet date.
Company
Fair value measurement at 31 December
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
Balance at 31 December
Current
Non-current
Total
A list of investments in subsidiaries held by the group is disclosed in Note 50.
25 Mortgage loan portfolio
Year ended 31 December
Loans and receivables at amortised cost
Current
Non-current
Total
The mortgage loan portfolio is stated at amortised cost.
162
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2019
£000
2018
£000
74,758
47,288
74,758
47,288
74,758
–
47,288
–
74,758
47,288
2019
£000
2018
£000
354,720
354,720
354,720
354,720
–
354,720
–
354,720
354,720
354,720
2019
£000
2018
£000
32,187
41,191
2,151
30,036
9,950
31,241
32,187
41,191
26 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
SECTION D
2019
£000
746
2,033
2018
£000
726
2,543
17,459
11,695
665
1 1,527
8,068
3,958
9,480
705
12,803
12,108
4,644
10,625
53,936
55,849
53,129
807
55,084
765
53,936
55,849
The carrying amount is a reasonable approximation of fair value.
27 Derivative financial instruments
The group does not hold derivatives outside the unit-linked and with-profits funds, except for an option to repay a financial reinsurance contract early, which
comprises an embedded derivative.
31 December
Interest rate swaps
Exchange-traded futures
Financial reinsurance embedded derivative
Total
Current
Non-current
Total
2019
2018
Asset
£000
Liability
£000
Asset
£000
Liability
£000
–
2,076
–
–
(483 )
(64 )
–
210
236
(21,191 )
(1,523 )
–
2,076
(547 )
446
(22,714 )
2,076
–
(500 )
(47 )
269
177
(22,714 )
–
2,076
(547 )
446
(22,714 )
Derivatives within unit-linked funds
As part of its investment management strategy, the group purchases derivative financial instruments as 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 24.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
163
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27 Derivative financial instruments (continued)
Derivatives within unit-linked funds (continued)
Exchange-traded futures (by geographical investment market)
31 December
Australia
Canada
Switzerland
Europe
UK
Hong Kong
Japan
USA
Denmark
Sweden
Total
2019
2018
Asset
£000
Liability
£000
Asset
£000
Liability
£000
35
–
21
107
86
58
183
1,585
–
1
(29 )
–
(18 )
(13 )
(37 )
(6 )
(36 )
(344 )
–
–
15
–
–
4
65
32
4
90
–
–
(19 )
(66 )
(3 )
(192 )
(34 )
(28 )
(293 )
(882 )
(6 )
–
2,076
(483 )
210
(1,523 )
Financial reinsurance embedded derivative
In respect of Movestic, the group has a reinsurance contract with a third party that has an element that is deemed to transfer significant insurance risk and an
element 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 24.
Derivatives within 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 24.
Derivatives within Scildon
During the year, Scildon exited its interest rate swap and therefore no longer hold derivatives in non-linked funds.
28 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
2019
£000
54,307
23,650
29,999
2018
£000
104,015
46,465
64,732
107,956
215,212
(1,174 )
(958 )
106,782
214,254
The effective interest rate on short-term bank deposits was 0.36% (2018: 0.29%), with an average maturity of 34 days (2018: 24 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 £44.6m (2018: £92.8m) held in unit-linked policyholders’ funds.
164
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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
31 December
SECTION D
2019
£000
672
97
–
2018
£000
2,808
97
5,085
769
7,990
1 January
2019
£000
Financing
cash flows
£000
exchange
Foreign Amortisation
of loan
translation arrangement
fees
differences
£000
£000
New
leases
£000
Other 31 December
2019
£000
changes (ii )
£000
Bank loan
Financial reinsurance
Lease liabilities
69,580
39,622
3,016
(15,214 )
(1,235 )
(646 )
(1,976 )
(2,749 )
(172 )
Total
112,218
(17,095 )
(4,897 )
135
–
–
135
–
–
266
266
–
–
63
63
52,525
35,638
2,527
90,690
(i)
The cash flows from bank loans and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the cash
flow statement.
(ii) Other changes include interest accruals and payments.
29 Capital management
(a) Regulatory context
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 an EU insurance legislation
that aims to unify the EU insurance market and enhance consumer protection. This regime currently remains applicable to the UK post Brexit. 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 UK and 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
165
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
29 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
185%
175%
Scildon
Group
185%
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.
– Monthly solvency monitoring: Full solvency calculations are performed on a quarterly basis. For intra quarter months a monthly solvency estimate is produced.
Where full estimation routines are not practical intra valuation solvency can be monitored through trigger monitoring and sensitivity analysis. In addition to the
Group level indicators, the Chesnara board will remain close to any indications of divisional solvency movements by means of divisional MI and quarterly business
reviews. 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, held Own Funds above their respective Solvency Capital Requirements at all times during the year.
(c) Quantitative analysis
(i) Group solvency position
The unaudited solvency position of the group and its divisions at 31 December 2019 and at 31 December 2018, 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 2019 (unaudited)
Region
Own Funds (pre dividends)
Proposed dividend
CA
£m
Movestic
£m
172.5
(32.0 )
237.6
(6.2 )
Waard
Group
£m
50.4
(4.9 )
Other
group and
consolidation
Scildon adjustments
£m
£m
157.8
(7.0 )
(6.6 )
29.3
Group
£m
611.7
(20.8 )
Own Funds (post dividends)
140.5
231.4
45.5
150.8
22.7
590.9
SCR
Solvency surplus
Solvency ratio
Dividend paying limit (% of SCR)
Dividend paying limit (£)
Surplus over dividend paying limit
107.6
32.9
131%
120%
129.1
1 1.4
149.7
9.1
81.7
36.4
71.8
79.0
155%
500%
210%
120%
179.6
51.8
185%
16.8
28.7
185%
132.8
18.0
41.9
n/a
n/a
n/a
n/a
n/a
380.1
210.8
155%
110%
418.1
172.8
166
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
31 December 2018 (unaudited)
Region
CA
£m
Movestic
£m
Waard
Group
£m
Other
group and
consolidation
Scildon adjustments
£m
£m
Own Funds (pre dividends)
Proposed dividend
184.7
(59.0 )
210.0
(2.9 )
51.7
(3.2 )
166.0
(5.2 )
(39.6 )
50.1
SECTION D
Group
£m
572.8
(20.2 )
Own Funds (post dividends)
125.7
207.1
48.5
160.8
10.5
552.6
SCR
Solvency surplus
Solvency ratio
Dividend paying limit (% of SCR)
Dividend paying limit (£)
Surplus over dividend paying limit
96.6
29.1
119.1
7.8
88.0
40.7
79.2
81.6
130%
174%
624%
203%
120%
115.9
9.8
120%
142.9
64.2
200%
15.6
32.9
200%
158.4
2.4
46.9
349.6
n/a
n/a
n/a
n/a
n/a
203.0
158%
110%
384.6
168.0
(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 2019 (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
140.5
10.8
4.5
32.0
(61.0 )
10.6
0.3
231.5
–
83.2
6.2
(226.9 )
1.2
(0.8 )
Other
group and
consolidation
Scildon adjustments
£m
£m
150.8
–
64.9
7.0
(39.7 )
(7.2 )
(0.1 )
22.6
–
1.4
(29.3 )
35.4
(7.7 )
0.3
Waard
Group
£m
45.5
–
2.8
4.9
(10.6 )
4.1
(1.7 )
Group
£m
590.9
10.8
156.8
20.8
(302.8 )
1.0
(2.0 )
IFRS Net Assets
137.7
94.4
45.0
175.7
22.7
475.5
31 December 2018 (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
125.7
5.7
7.7
59.0
(46.3 )
7.5
0.3
207.1
–
89.2
2.9
(205.7 )
0.5
(2.6 )
Other
group and
consolidation
Scildon adjustments
£m
£m
160.8
–
70.9
5.2
(77.5 )
(0.7 )
(0.1 )
10.5
–
1.3
(50.1 )
34.4
(7.0 )
(0.3 )
Waard
Group
£m
48.5
–
4.4
3.2
(1 1.8 )
4.1
(1.3 )
Group
£m
552.6
5.7
173.5
20.2
(306.9 )
4.4
(4.0 )
IFRS Net Assets
159.6
91.4
47.1
158.6
(11.2 )
445.5
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
167
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30 Insurance contract provisions
(a) Analysis of insurance contract provisions by operating segment
31 December
CA
Movestic
Waard Group
Scildon
2019
Gross Reinsurance
£000
£000
1,711,548
70,761
92,789
1,735,317
160,342
26,291
2,815
(996 )
Net
£000
1,551,206
44,470
89,974
1,736,313
2018
Gross Reinsurance
£000
£000
1,702,207
84,296
83,801
1,698,710
156,309
53,174
3,827
59
Net
£000
1,545,898
31,122
79,974
1,698,651
Total insurance contract provisions
3,610,415
188,452
3,421,963
3,569,014
213,369
3,355,645
Current
Non-current
Total
205,587
3,404,828
15,492
172,960
190,095
3,231,868
209,910
3,359,104
23,198
190,171
186,712
3,168,933
3,610,415
188,452
3,421,963
3,569,014
213,369
3,355,645
(b) Analysis of movement in insurance contract provisions
Year ended 31 December
Balance at 1 January
Arising on portfolio acquisition
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
2019
Gross Reinsurance
£000
£000
Net
£000
2018
Gross Reinsurance
£000
£000
3,569,014
25,492
239,550
(64,883 )
(389,053 )
14,730
(18,835 )
335,674
(101,274 )
213,369
–
29,818
(1,416 )
(23,921 )
6,845
(28,713 )
3,107
(10,637 )
3,355,645
25,492
209,732
(63,467 )
(365,132 )
3,962,279
–
215,417
(67,666 )
(432,529 )
7,885
9,878
332,567
(90,637 )
26,263
(21,030 )
(122,557 )
8,837
233,154
–
12,119
(1,457 )
(44,819 )
16,424
(13,520 )
(1,969 )
13,437
Net
£000
3,729,125
–
203,298
(66,209 )
(387,710 )
9,839
(7,510 )
(120,588 )
(4,600 )
Balance at 31 December
3,610,415
188,452
3,421,963
3,569,014
213,369
3,355,645
(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.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
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*
2019
2018
SPI
SPP
SPI
SPP
2.063%
2.813%
2.625%
3.750%
2.625%
3.000%
3.000%
4.125%
–
5.000%
–
5.000%
*Trustee Investment Contract, a unit-linked contract (‘TIC’).
Discount rates
CA uses appropriate rates of interest, for different product types, in discounting projected liabilities. As at 31 December 2019 for the material product types, these
lay between 0.55% and 2.15% (31 December 2018: between 0.50% and 2.10%).
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
A
40%
45%
Baa
50%
Ba
65%
B
Caa+
75%
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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
169
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30 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
(Credit)/charge to income
At the end of year
2019
£000
23,097
(5,775 )
2018
£000
19,235
3,862
17,322
23,097
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 £904,000 as at 31 December 2019 (31 December 2018: £1,124,000).
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 20% and allowing for future investment returns, including presumed future equity investment return of 3.10% 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 2019 was £3.8m (31 December 2018: £3.9m). 436 policies invested in the fund (31 December 2018: 459), of which 27
(31 December 2018: 30) were paying premiums (for a total of approximately £8,000 per annum (31 December 2018: £9,000)).
For the valuation of contract liabilities the following are projected for each future year: – the benefit outgo from the fund;
– the investment return from the assets backing the fund; and
– the difference between these items.
These differences are then discounted and summed to establish the GGF loss reserve.
The following assumptions are used for calculating the loss reserve:
Rate of growth of liability
Rate of return on cash
Discount rate
Retirement age
2.44% pa
0.68% pa
0.60% 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 2019 was £0.1m (31 December 2018: £0.1m).
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CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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 65 for Personal Retirement Account and age 70 for Guaranteed Plus Retirement Plans. The reserve for this option as at 31 December 2019 was £3.6m
(31 December 2018: £9.7m).
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 2019 was £0.1m (31 December 2018: £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 2019 was £0.3m (31 December 2018: £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 2019 is £0.1m (31 December 2018: £0.1m).
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.
171
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2019 IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30 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
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
25,965
19,809
16,833
14,115
13,190
12,546
12,546
8,848
2014
£000
2015
£000
2016
£000
2017
£000
2018
£000
26,080
19,878
17,687
15,187
14,798
31,297
22,848
19,991
19,343
29,125
21,611
21,026
26,665
17,463
2019
£000
17,755
14,798
9,372
19,343
11,328
21,026
10,440
17,463
7,538
17,755
5,500
In balance sheet
21,394
24,170
30,671
31,466
25,001
23,255
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
18,641
68,546
2019
£000
8,736
2016
£000
2017
£000
10,033
6,276
5,296
9,362
10,284
1,862
10,100
2018
£000
8,763
9,521
9,362
3,987
10,100
3,455
9,521
2,677
8,736
2,041
2014
£000
12,528
6,689
4,257
3,271
3,136
5,575
5,575
2,929
2015
£000
9,988
5,404
4,671
4,020
6,792
6,792
3,048
In balance sheet
8,504
9,840
13,349
13,555
12,198
10,777
Provision for prior years
Liability in balance sheet
11,357
43,306
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CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
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 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 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:
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
CA
Change in net of tax
profits and equity
2019
£m
2018
£m
Scildon
Change in net of tax
profits and equity
2019
£m
2018
£m
Movestic
Change in net of tax
profits and equity
2018
2019
£m
£m
(1.6 )
(3.2 )
0.7
2.3
2.9
(0.6 )
(3.5 )
n/a
n/a
n/a
n/a
(2.2 )
0.9
(1.9 )
2.0
2.6
(0.6 )
(4.5 )
n/a
n/a
n/a
n/a
(32.5 )
(38.1 )
42.8
(0.6 )
(0.6 )
–
n/a
n/a
n/a
n/a
n/a
(37.5 )
(26.9 )
29.5
(0.3 )
(0.3 )
–
n/a
n/a
n/a
n/a
n/a
n/a
(0.1 )
(0.0 )
n/a
n/a
n/a
n/a
(2.7 )
(1.7 )
2.7
1.7
n/a
0.4
(0.6 )
n/a
n/a
n/a
n/a
(3.9 )
(1.1 )
3.1
1.1
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
173
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
30 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 table presented above 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 above sensitivities are calculated as an expected impact on IFRS-based profits, net of reinsurance and tax and the analysis has been prepared for a change
in the stated variable, with all other assumptions remaining constant. The sensitivities to the changes in investment returns are calculated taking into account
the consequential changes to valuation assumptions.
The sensitivities to mortality and morbidity (critical illness) rates shown above are calculated on the assumption that there would be no consequential change in
rates to policyholders. In practice, group policy is to pass costs on to policyholders where it is contractually permitted and where it considers that the impact of
the change is significant 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 overleaf.
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 2019 is negative £3.5m.
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 2019 is negative £38.1m.
31 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
2019
Amount
deposited
with
reinsurer
£000
Investment
contract
liability
£000
Net
£000
2018
Amount
deposited
with
reinsurer
£000
Net
£000
739,819
2,954,497
37,330
–
702,489
2,954,497
692,318
2,543,201
34,349
–
657,969
2,543,201
3,694,316
37,330
3,656,986
3,235,519
34,349
3,201,170
96,191
3,598,125
37,330
–
58,861
3,598,125
98,788
3,136,731
34,349
–
64,439
3,136,731
3,694,316
37,330
3,656,986
3,235,519
34,349
3,201,170
The fair values of the groups’ investment contract liabilities have been disclosed according to a three-level valuation hierarchy in Note 24.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2019
32 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
SECTION D
2019
£000
2018
£000
259,836
62,092
(2,672 )
38,031
(19,204 )
(38,708 )
265,729
64,093
(2,941 )
(14,887 )
(8,098 )
(44,060 )
299,375
259,836
3,193
296,182
10,243
249,593
299,375
259,836
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 24.
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 24.
33 Leases liabilities
The group leases several assets including office buildings, office and IT equipment and motor vehicles.
Maturity Analysis
31 December 2019
Non-investment property
Property and equipment
Motor vehicles
Hardware
Software
Other
Total
Current
Non-current
Total
Carrying value
£000
0-1 year
£000
1-2 years
£000
2-5 years
£000
5-10 years
£000
>10 years
£000
2,220
91
158
48
–
10
536
19
68
23
–
8
998
41
60
27
–
2
2,527
654
1,128
734
34
38
–
–
–
806
93
–
–
–
–
–
93
–
–
–
–
–
–
–
Total
£000
2,361
94
166
50
–
10
2,681
1,118
1,409
2,527
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
175
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
2019
£000
52,525
35,638
2018
£000
69,580
39,622
88,163
109,202
24,024
64,139
25,785
83,417
88,163
109,202
2019
£000
2018
£000
52,525
69,580
14,849
37,676
15,306
54,274
52,525
69,580
The bank loan as at 31 December 2019 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 ten 6-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 1 and 6 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
ten 6-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 1 and 6 months at the option of the borrower.
– in April 2018 we converted our existing debt arrangement with RBS 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 fulfil 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 facility enables Chesnara to access an increased level of funds
efficiently, which in turn supports our acquisition strategy.
The fair value of the sterling denominated bank loan at 31 December 2019 was £21.0m (31 December 2018: £27.0m).
The fair value of the euro denominated bank loan at 31 December 2019 was £31.7m (31 December 2018: £42.8m).
The fair value of amounts due in relation to financial reinsurance was £37.5m (31 December 2018: £41.6m).
Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.
176
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
SECTION D
35 Defined benefit obligations
Scildon operated a defined Benefit Pension Scheme (Scheme) for the benefit of its present and past employees. This Scheme was closed during 2019 and
transferred into a defined contribution scheme. From 1 October 2019, Scildon no longer bears any risks relating to the funding of the plan and all pension assets
will be transferred to another administrator during 2020. Until that point, Scildon continues to bear only the fund administration costs. A summary of the defined
Benefit Pension Scheme assets and liabilities as at the balance sheet date and the movements in the 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
2019
£000
–
75
75
–
75
2018
£000
50,781
(50,886 )
(105 )
105
–
As at 31 December 2019, there was no surplus in the Pension Fund due to the closure and transfer of the Scheme. The remaining liability within the Scheme is
in relation to the remaining fund administration costs. The Scheme was accounted for under the provisions of IAS 19. As such, pension surplus assets were not
recognisable on the face of the balance sheet and as a consequence were subject to an asset ceiling test, which effectively reduces the asset value to nil. Scildon
was 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:
Service cost:
Current service cost
Past service cost
Net interest income
Special event – past service cost
Components of defined benefit costs recognised in profit or loss
The costs charged to the income statement are recorded under operating expenses as personnel costs.
Amounts recognised in the Consolidated Statement of Comprehensive Income are as follows:
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
Plan amendments, impact on asset ceiling
Foreign exchange translation
Tax effect
Total profit for the year not recognised in income
2019
£000
2018
£000
1,422
–
(21 )
117
1,780
–
(20 )
–
1,518
1,760
2019
£000
6,796
(936 )
(577 )
103
(5,385 )
(1 )
–
–
2018
£000
(598 )
(423 )
302
789
–
5
(19 )
56
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
177
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
35 Defined benefit obligations (continued)
Movements in the present value of defined benefit obligations in the period were as follows:
Balance 1 January
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
Expected defined benefit obligation end of period
Past service pension costs
Transfer out of the defined benefit scheme
Foreign exchange translation
2019
£000
50,781
1,434
267
673
936
577
(397 )
–
(9 )
5,271
(58,395 )
(1,138 )
2018
£000
47,459
1,790
895
359
423
(302 )
(480 )
83
–
–
–
554
Balance at 31 December
–
50,781
Movements in the fair value of plan assets in the period were as follows:
Balance 1 January
Benefits paid
Contributions from the employer
Contributions from the plan participants
Assets distributed on settlements
Settlement
Interest income
Other costs
The return on plan assets (excluding amounts included in net interest expense)
Foreign exchange translation
2019
£000
50,886
(397 )
1,221
267
–
(58,395 )
694
(9 )
6,796
(1,138 )
2018
£000
48,354
(480 )
1,701
359
83
–
915
–
(598 )
552
Balance at 31 December
(75 )
50,886
The cost of defined benefit pension amounts:
Pension costs
Current service pension costs
Total pension costs
Net interest
Interest cost on the present value of promised retirement benefits
Interest income on assets
Net interest on the net liability defined benefit
Special event – past service cost
Total charged to profit and loss account
178
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2019
£000
2018
£000
1,422
1,780
1,422
1,780
673
(694 )
(21 )
117
895
(915 )
(20 )
–
1,518
1,760
SECTION D
31 December 31 December
2018
2019
1.25%
2.00%
2.00%
0.00%
2.00%
2.00%
2.00%
2.00%
0.80%
2.00%
31 December 31 December
2018
£000
2019
£000
–
–
–
(75 )
7,587
42,871
46
382
(75 )
50,886
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
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
Quoted
market
price in an
active
market
2019
£000
–
–
–
–
–
Quoted
market
price in an
active
market
2018
£000
7,587
42,871
–
–
2018
£000
7,587
42,871
46
382
Not
quoted
–
–
46
382
50,886
428
50,458
2019
£000
Not
quoted
–
–
–
(75 )
(75 )
–
–
–
–
–
The plan assets do not include investments that are issued by Scildon and do not include assets used by Scildon.
Actual return on plan assets
2019
£000
2018
£000
7,261
317
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
179
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
35 Defined benefit obligations (continued)
The risks faced by Scildon 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 2019
Active members
Deferred members
Wholly or partially disabled members
Pensioners
Total
Cash value
of defined
benefit
number
Duration
years
–
–
–
–
–
–
–
–
–
–
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 2019
Discount rate
Plus
Minus
Salary increase
Plus
Minus
Mortality
Age set back
Defined
benefit
obligation
change
Funding
cost
change
–
–
–
–
–
(4 )
7
–
–
–
Change
0.50%
0.50%
0.50%
0.50%
1 year
The Pension Fund held 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 2020 is £nil (2019: £1.2m).
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
180
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2019
£000
2018
£000
(1,113 )
(195 )
700
(21,892 )
(1,996 )
(253 )
(175 )
(17,039 )
(22,500 )
(19,463 )
(706 )
(21,794 )
(904 )
(18,559 )
(22,500 )
(19,463 )
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
Right of use-assets/lease liabilities
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
SECTION D
2018
Assets/
(liabilities )
£000
Credit/
(charge )
in year
£000
2019
Assets/
(liabilities )
£000
(806 )
(322 )
616
(1,872 )
(11,477 )
11,477
388
–
208
62
(102 )
582
10,746
(10,746 )
129
4
(598 )
(260 )
514
(1,290 )
(731 )
731
517
4
(1,996 )
883
(1,113 )
(1,996 )
(1,996 )
883
883
(1,113 )
(1,113 )
2017
Assets/
(liabilities )
£000
Credit/
(charge )
in year
£000
2018
Assets/
(liabilities )
£000
(1,008 )
(388 )
739
(2,657 )
(23,062 )
23,062
338
202
66
(123 )
785
11,585
(11,585 )
50
(806 )
(322 )
616
(1,872 )
(11,477 )
11,477
388
(2,976 )
980
(1,996 )
(2,976 )
980
(1,996 )
(2,976 )
980
(1,996 )
Note (i) The deferred tax credit to the Consolidated Statement of Comprehensive Income for the year is classified as follows:
Year ended 31 December
Income tax credit
2019
£000
2018
£000
883
992
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
181
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
36 Deferred tax assets and liabilities (continued)
(b) Items for which no deferred tax asset is recognised
31 December
BLAGAB transitional amounts
Unrelieved expenses
Total
2019
£000
1,430
82,197
2018
£000
1,906
132,241
83,627
134,147
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
(c) Recognised deferred tax assets and liabilities
As at the balance sheet date, Movestic had a recognised deferred tax liability of £0.2m (31 December 2018: £0.3m), in respect of fair value adjustments arising
upon acquisition. Unrecognised deferred tax assets was nil at the balance sheet date in respect of corporation tax recoverable (31 December 2018: nil).
Waard Group
(d) Recognised deferred tax assets and liabilities
31 December
Intangible assets
Fair value adjustment on acquisition
Valuation differences
Total
Comprising:
Net deferred tax asset
Total
Scildon
(e) Recognised deferred tax assets and liabilities
31 December
Fair value adjustment on acquisition
Deferred acquisition costs
Defined benefit pension scheme obligations
Revaluation of buildings and investment properties
Valuation differences on technical provisions
Valuation differences on investments at fair value through profit and loss
Total
Comprising:
Net deferred tax liabilities
Total
182
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2018
Assets/
(liabilities )
£000
Credit/
(charge )
in year
£000
Foreign
exchange
translation
difference
£000
2019
Assets/
(liabilities )
£000
(947 )
772
(175 )
(175 )
(175 )
113
779
892
892
892
46
(63 )
(17 )
(17 )
(17 )
(788 )
1,488
700
700
700
2018
Assets/
(liabilities )
£000
Credit/ Recognised
through
(charge )
equity
in year
£000
£000
Foreign
exchange
translation
difference
£000
2019
Assets/
(liabilities )
£000
(14,630 )
4,508
(14 )
(553 )
(9,707 )
3,357
327
(264 )
14
(45 )
1,359
(7,294 )
(17,039 )
(5,903 )
(17,039 )
(5,903 )
(17,039 )
(5,903 )
–
–
–
–
–
–
–
–
–
754
(228 )
–
30
448
46
(13,549 )
4,016
–
(568 )
(7,900 )
(3,891 )
1,050
(21,892 )
1,050
(21,892 )
1,050
(21,892 )
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
SECTION D
2019
£000
2,998
13
196
2018
£000
10,299
14
222
3,207
10,535
3,207
–
10,535
–
3,207
10,535
31 December
Accrued claims
Intermediaries’ liabilities
Policyholder premium liabilities
Other
Total
Current
Non-current
Total
2019
Gross Reinsurance
£000
£000
65,330
1,313
19,029
1,464
14,132
–
–
–
Net
£000
51,198
1,313
19,029
1,464
2018
Gross Reinsurance
£000
£000
65,216
1,140
23,388
1,485
17,640
–
–
–
Net
£000
47,576
1,140
23,388
1,485
87,136
14,132
73,004
91,229
17,640
73,589
87,136
–
14,132
–
73,004
–
91,229
–
17,640
–
73,589
–
87,136
14,132
73,004
91,229
17,640
73,589
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
Additions
Release to income
Balance at 31 December
Current
Non-current
Total
The release to income is included in fees and commission income (see Note 8).
2019
£000
3,948
646
(687 )
2018
£000
4,701
–
(753 )
3,907
3,948
376
3,531
476
3,472
3,907
3,948
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
183
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
2019
£000
9,768
64
2,813
29,083
2018
£000
14,374
48
3,115
27,219
41,728
44,756
41,728
–
44,756
–
41,728
44,756
2019
£000
3,347
843
2018
£000
2,156
655
4,190
2,811
4,190
–
2,811
–
4,190
2,811
The carrying value of other payables is a reasonable approximation of fair value.
41 Share capital and share premium
Group
31 December
Share capital
150,061,567
43,767
149,908,956
43,767
2019
2018
Number
of shares
issued
Share
capital
£000
Number
of shares
issued
Share
capital
£000
Share
premium
£000
142,053
Share
premium
£000
142,053
The number of shares in issue at the balance sheet date included nil shares held in treasury (31 December 2018: nil).
184
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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.
SECTION D
Company
31 December
Authorised:
Ordinary shares of 5p each
Issued:
Ordinary shares of 5p each
2019
2018
Number
of shares
Share
capital
£000
Number
of shares
Share
capital
£000
201,000,000
10,050
201,000,000
10,050
150,061,567
7,495
149,908,956
7,495
Share
premium
£000
142,053
Share
premium
£000
142,053
The number of shares in issue at the balance sheet date included nil shares held in treasury (31 December 2018: nil).
42 Other reserves
Group
31 December
Capital redemption reserve
Foreign exchange translation reserve
Balance at 31 December
Company
31 December
Capital redemption reserve
2019
£000
50
8,568
2018
£000
50
27,108
8,618
27,158
2019
£000
2018
£000
50
50
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
185
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
43 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 2017
Interim approved and paid for 2018
Final approved and paid for 2018
Interim approved and paid for 2019
Balance at 31 December
2019
£000
2018
£000
232,638
79,142
–
593
–
–
(20,178 )
(1 1,142 )
238,341
24,124
56
501
(19,578 )
(10,806 )
–
–
281,053
232,638
The interim dividend in respect of 2018, approved and paid in 2018 was paid at the rate of 7.21p per share. The final dividend in respect of 2018, approved and
paid in 2019, was paid at the rate of 13.46p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended
31 December 2018 was made at the rate of 20.67p per share.
The interim dividend in respect of 2019, approved and paid in 2019, was paid at the rate of 7.43p per share to equity shareholders of the parent company registered
at the close of business on 6 September 2019, the dividend record date.
A final dividend of 13.87p per share in respect of the year ended 31 December 2019 payable on 2 June 2020 to equity shareholders of the parent company
registered at the close of business on 24 April 2020, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final
dividend of £20.8m has not been provided for in these financial statements and there are no income tax consequences.
The following summarises dividends per share in respect of the year ended 31 December 2018 and 31 December 2019:
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 2017
Interim approved and paid for 2018
Final approved and paid for 2018
Interim approved and paid for 2019
Balance at 31 December
Details of dividends, approved and paid, are set out in the ‘group’ section above.
186
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
2019
P
7.43
13.87
2018
P
7.21
13.46
21.30
20.67
2019
£000
193,548
64,939
593
–
–
(20,178 )
(11,142 )
2018
£000
158,571
64,860
501
(19,578 )
(10,806 )
–
–
227,760
193,548
SECTION D
44 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
Movestic
£000
2,206
284
146
–
6,920
3,046
1,513
–
Waard
Group
£000
Other group
activities
£000
Scildon
£000
1,155
155
115
–
10,568
1,480
–
1,515
3,612
465
238
–
2019
£000
24,461
5,430
2,012
1,515
2018
£000
25,188
5,009
2,389
1,809
Total
2,636
11,479
1,425
13,563
4,315
33,418
34,395
Monthly average number of employees
Company
Subsidiaries
Total
36
280
316
37
326
363
Directors
The Directors’ Remuneration Report and Note 45 provides detail of compensation to directors of the company.
UK
UK-based employees are all employed by Chesnara plc.
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 45 – share based payments on page 188.
Waard
The Waard business participates in a defined contribution scheme.
Scildon
Scildon operated a defined Benefit Pension Scheme for the benefit of its present and past employees. This Scheme was closed during 2019 and transferred into
a defined contribution scheme. From 1 October 2019, Scildon no longer bears any risks relating to the funding of the plan and all pension assets will be transferred
to another administrator during 2020. Until that point, Scildon continues to bear only the fund administration costs. Further details are provided in Note 35.
Under the company’s new defined contribution scheme, Scildon 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.
Movestic
The Swedish business participates in a combined defined benefit and defined contribution scheme operated by Försäkringsbranschens Pensionskassa, ‘FPK’.
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 2018, totalled £4.2m.
During 2019 further contributions of £0.4m 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 2018.
The Annual Report states that the scheme’s surplus is £143.6m as at 31 December 2019 (£193.9m as at 31 December 2018).
As at 31 December 2019, the fund had assets under management of £1.2bn (£1.3bn as at 31 December 2018). During 2019 there have been 116 (31 December
2018: 121) employer insurance companies participating in the scheme and 26,000 (31 December 2018: 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.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
187
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
45 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 1 year performance period measured against cash generation, EcV operating profit and strategic group objectives. In relation to
2019, 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 3 years. Therefore the award was 65% settled in cash and 35% settled by a share option award, which cannot be exercised for 3 years.
Under the LTI Scheme, options are granted with a vesting period of 3 years. These awards are subject to performance conditions tied to the company’s financial
performance in respect of growth in EcV 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 EcV 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) 2019 award under the Short-Term Incentive Scheme (STI)
Details of the short-term incentive awards made in the year are as follows:
2019 Short-Term Incentive Scheme Awards made in year
Amount paid as cash bonus through the income statement (65%)
Amount deferred into shares for 3 years and subject to forfeiture (35%)
Total bonus award for the year
Amount of deferred expense recorded in the current year
2019
£000
2018
£000
451
242
693
57
140
76
216
18
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.
(b) 2019 award made under the Long-Term Incentive Scheme (LTI)
In April 2019, the group granted 196,000 nil priced share options with a vesting period of 3 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 358.50p, which was the share price as at 28 April 2019, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2019 Long-Term Incentive Scheme
2019
Weighted
average
exercise
price
£
Options
number
000
–
196
196
–
–
–
Outstanding at the beginning of the year
Granted during the year
Outstanding at the end of the year
The weighted average contractual life is 10 years.
188
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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
SECTION D
Monte Carlo
358.50
Nil
202.74
25.35
3 years
1.1 10%
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 £81,000 related to equity-settled share based payments transactions in 2019.
(c) 2018 award made under the Short-Term Incentive Scheme (STI)
The group has recorded an expense of £18,000 with regards to the 35% element that has been deferred over the vesting period.
(d) 2018 award made under the Long-Term Incentive Scheme (LTI)
In April 2018, the group granted 168,000 nil priced share options with a vesting period of 3 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 410.00p, which was the share price as at 28 April 2018, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2018 Long-Term Incentive Scheme
Outstanding at the beginning of the year
Granted during the year
Outstanding 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
2019
2018
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
168
–
168
–
–
–
–
168
168
–
–
–
Monte Carlo
410.00
Nil
229.78
25.77
3 years
1.190%
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 £153,000 related to equity-settled share based payments transactions in 2019.
(e) 2017 award under the Short-Term Incentive Scheme (STI)
The group has recorded an expense of £48,000 with regards to the 35% element that has been deferred over the vesting period.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
189
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
45 Share-based payments (continued)
(f) 2017 award made under the Long-Term Incentive Scheme (LTI)
In April 2017, the group granted 174,000 nil priced share options with a vesting period of 3 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
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
2019
2018
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
174
–
174
–
–
–
174
–
174
–
–
–
Monte Carlo
382.75
Nil
21 1.73
26.97
3 years
0.70%
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 £111,000 related to equity-settled share based payments transactions in 2019.
(g) 2016 award under the Short-Term Incentive Scheme (STI)
The group has recorded an expense of £66,000 with regards to the 35% element that has been deferred over the vesting period.
(h) 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 3 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
2019
2018
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
221
(48 )
(71 )
102
–
–
3.715
–
–
–
221
–
–
–
221
–
–
–
–
–
Outstanding at the beginning of the year
Exercised during the year
Lapsed during the year
Exercisable at the end of the year
Outstanding at the end of the year
The weighted average contractual life is 10 years.
190
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
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
SECTION D
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 £54,000 related to equity-settled share based payments transactions in 2019.
(i) 2015 award under the Short-Term Incentive Scheme (STI)
The group has recorded an expense of £10,000 with regards to the 35% element that has been deferred over the vesting period.
(j) 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 3 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
Exercised during the year
Lapsed during 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
2019
2018
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
89
(69 )
–
20
–
2.765
–
–
165
(45 )
(31 )
89
–
4.025
–
–
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 £nil related to equity-settled share based payments transactions in 2019.
(k) 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 3 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.
There were no share options outstanding during at either balance sheet date.
The group recognised no expense related to equity-settled share based payments transactions in 2018 and 2019.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
191
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
46 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
2019
2018
79,142
149,972,471
52.77p
52.47p
24,124
149,847,736
16.10p
16.01p
The weighted average number of ordinary shares in respect of the year ended 31 December 2019 is based upon 150,061,567 shares. No shares were held
in treasury.
There were 859,641 share options outstanding at 31 December 2019 (2018: 845,346) Accordingly, there is dilution of the average number of ordinary shares in
issue in respect of 2018 and 2019.
47 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.
48 Capital commitments
There were no capital commitments as at 31 December 2019 or as at 31 December 2018.
49 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.
(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
2019
£000
1,495
70
2018
£000
988
68
1,565
1,056
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)
2019
£000
2018
£000
694
216
These amounts have been included in accrued expenses as disclosed in Note 40. The amounts payable under the annual bonus scheme were payable within 1 year.
192
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
(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 Statement of Comprehensive Income of the company for the respective periods:
SECTION D
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
2019
£000
2018
£000
3,533
3,976
2019
£000
(68 )
2,071
(42 )
2018
£000
(8,253 )
5,460
(1,561 )
1,961
(4,354 )
–
(2,700 )
Movestic Livförsäkring AB had the following amounts outstanding at the balance sheet date:
2019
2018
Amounts
owed by
associate
£000
Amounts
owed to
associate
£000
Amounts
owed by
associate
£000
Amounts
owed to
associate
£000
Modernac S.A.
–
–
–
2,700
These amounts have been included in other payables as disclosed in Note 40 and other receivables as disclosed in Note 26.
(iv) Transactions with persons related to key management personnel
During the year, there were no transactions with persons related to key management personnel.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
193
IFRS FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
50 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
2019
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
2018
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
Movestic Fund Management S.A.
Luxembourg
100% of all share
capital (6)
100% of all share
capital (6)
Swedish krona
Registered address
12 Rue Gabriel Lippmann, L-5365 Munsbach, Luxembourg
Modernac S.A.
Registered address
BP 593 L-2015 Luxemburg, Luxembourg
Chesnara Holdings B.V.
Waard Leven N.V.
Waard Schade N.V.
Waard Verzekering
Registered address
Geert Scholtenslaan II 1687 CL Wognum, Netherlands
Scildon N.V
Registered address
Laapersveld 68 Hilversum, Netherlands
Luxembourg
49% of all share
capital (2)
49% of all share
capital (2)
Swedish krona
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 (3)
100% of all share
capital (4)
100% of all share
capital (4)
100% of all share
capital (4)
Euro
Euro
Euro
Euro
Netherlands
100% of all share
capital (4)
100% of all share
capital (4)
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.
(6) Company formed on 6 March 2017.
194
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
51 Portfolio acquisition
On 1 October 2019, Waard completed a deal to acquire circa 6,000 term and endowment policies, together with associated net assets from Monuta Verzekeringen N.V.,
a Netherlands based funeral insurance provider, for a total consideration of €1. The acquisition creates a natural fit for Waard, enabling it to increase its overall
policy base whilst being able to integrate the acquired book of policies into its systems and processes seamlessly.
The acquisition of this policy portfolio has given rise to a profit on acquisition of €0.9m (£0.8m) calculated as follows:
SECTION D
Fair value
Assets
Cash and cash equivalents
Total assets
Liabilities
Insurance contract provisions
Total liabilities
Net assets
Net assets acquired
Total consideration, paid in cash
Profit recognised on portfolio acquisition
£000
28,589
28,589
27,801
27,801
788
788
–
788
Gain on acquisition: A gain of £0.8m has been recognised on acquisition. At the point of price negotiation and subsequent deal completion, Monuta Verzekeringen
N.V. was following a strategic plan to dispose of non-core business, which included this book of policies. In the opinion of the Directors, this resulted in a disposal
pricing strategy that sought to offer an attractive investment opportunity for potential buyers. This gain on acquisition has been recorded as a ‘profit recognised on
portfolio acquisition’ on the face of the statement of comprehensive income.
Acquisition-related costs: The costs in respect of the transaction amounted to £0.3m and have been included in Administration Expenses within the Consolidated
Statement of Comprehensive Income in 2019.
52 Post balance sheet event
The directors consider the emergence of COVID-19 as a pandemic during 2020, and the associated government measures both in the UK and overseas in response,
as a non-adjusting post balance sheet event.
The overall financial impact of COVID-19 on the IFRS results cannot be reliably estimated at this time. However, COVID-19 has affected some key investment
market indicators that can have a material effect on the group IFRS results. These have been listed below, along with an unaudited estimate of their impact on
the group’s IFRS net assets:
– Equity prices: Equity prices have seen some significant falls since 31 December 2019, with some leading indices showing falls of up to 25%. An across the board
equity price reduction of 25% is estimated to reduce the IFRS net assets of the group by c£20m.
– Yield reductions: Yields on fixed income securities, such as government bonds, have generally fallen since the start of the year. For example, UK 10 year gilts
have fallen from 84bps at 31 December 2019 to 39bps as at 31 March 2020, representing a fall of 45bps. The EUR and SEK yield curves have seen slightly lower
falls of c.20bps. It is estimated that this reduction in yields would increase the group’s IFRS net assets by c£10m since the start of the year. This is largely driven
by the Dutch divisions’ use of historical IFRS discount rates which means that the fall in yields causes asset values to rise with only a small increase in liabilities.
– Corporate bond spreads: Corporate bond spreads have generally widened since 31 December 2019. It is estimated that the impact of this would be to reduce
the group’s IFRS net assets by c£25m since the start of the year.
– Exchange rates: Based on an assessment of how the SEK/GBP and EUR/GBP exchange rates have moved since 31 December 2019 up to 31 March 2020, it is
estimated that the IFRS net assets will have increased by c£8m.
In this environment, the board have recognised that the group will need to adjust its client service and operational capability as events unfold in the period ahead,
and are in response upscaling its ability to deliver core services from the home environment, and executing plans to minimise the risk of transmission from within
the group’s office spaces.
The strength of the capital position means that although the COVID-19 outbreak has resulted in significant global economic disruption, Chesnara remains well
capitalised, with the group’s solvency estimated as being 163% (unaudited) at 31 March 2020, after allowing for the payment of the proposed dividend. The
solvency position is being monitored frequently, with appropriate actions being taken to protect the long-term interest of policyholders.
Chesnara, and all of its regulated legal entities continue, to have a capital position in excess of the levels required by the regulations, which themselves are designed
to provide a strong level of protection for policyholders.
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
195
SECTION E:
ADDITIONAL
INFORMATION
196 CHESNARA ANNUAL REPORT & ACCOUNTS 2019
198 Financial calendar
198 Key contacts
199 Notice of the Annual General Meeting
201 Explanatory notes to the notice of the
Annual General Meeting
205 Reconciliation of metrics
206 Glossary
207 Note on terminology
Zaanse Schans Windmills, Netherlands
CHESNARA ANNUAL REPORT & ACCOUNTS 2019
197
FINANCIAL CALENDAR
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
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Joint Stockbrokers and
Corporate Advisors
Panmure Gordon
One New Change
London
EC4M 9AF
Investec Bank plc
30 Gresham Street
London
EC2V 7QP
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
15 April 2020
Results for the year ended
31 December 2019 announced
23 April 2020
Ex dividend date
23 April 2020
Published Report & Accounts issued
to shareholders
24 April 2020
Dividend record date
11 May 2020
Last date for dividend reinvestment
plan elections
26 May 2020
Annual General Meeting
02 June 2020
Dividend payment date
27 August 2020
Half year results for the 6 months
ending 30 June 2020 announced
198
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2019 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
Notice is given that the 2020 Annual General Meeting of Chesnara plc will be
held at the offices of Chesnara plc, West Strand Business Park, West Strand
Road, Preston, PR1 8UY on 26 May 2020 at 11am, for the business set out
below. In light of the Coronavirus (COVID-19) pandemic and the social distancing
measures in place, shareholders will not be able to attend the AGM in person.
Only the business of the AGM will be held at that time.
Resolutions 1 to 15 inclusive will be proposed as ordinary resolutions and
resolutions 16 to 19 inclusive will be proposed as special resolutions.
1. To receive and adopt the audited accounts for the financial year ended
31 December 2019, 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 2019.
3. To approve the Directors’ Remuneration Policy (as contained in the Directors’
Remuneration Report for the year ended 31 December 2019).
4. To declare a final dividend of 13.87 pence per ordinary share for the financial
year ended 31 December 2019.
5. To re-elect John Deane as a director.
6. To re-elect David Rimmington as a director.
7. To re-elect Jane Dale as a director.
8. To elect Luke Savage as a director.
9. To re-elect Veronica Oak as a director.
10. To re-elect David Brand as a director.
11. To re-elect Mark Hesketh as a director.
12. 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.
13. To authorise the directors to determine the auditor’s remuneration.
14. That, from the passing of this resolution 14 until the earlier of the close
of business on 30 June 2021 and the conclusion of the company’s
next Annual General Meeting, the company and all companies which
are its subsidiaries at any time during such period are authorised:
(a) to make donations to political parties or independent election
candidates;
(b) to make donations to political organisations other than political
parties; and
(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.
199
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2019
NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
15. 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) up to an aggregate nominal amount of £2,501,026 such amount to be
reduced by the aggregate nominal amount of any equity securities
allotted pursuant to the authority in paragraph (b) below in excess of
£2,501,026; and
17. That, subject to the passing of resolution 15 of this notice and, in addition
to the power contained in resolution 16 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 15
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 £375,154; and
(b) up to an aggregate nominal amount of £5,002,052 (such amount to be
(b) used only for the purposes of financing (or refinancing, if the power is to
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,
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 company’s next Annual General Meeting (or, if earlier,
at the close of business on 30 June 2021) save that the company may, before
such expiry, make offers or agreements which would or might require securities
to be allotted or Allotment Rights to be granted after such expiry and the
directors may allot securities or grant Allotment Rights in pursuance of such
offer or agreement notwithstanding the expiry of the authority conferred by
this resolution.
16. That, subject to the passing of resolution 15 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 15 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
be exercised within 6 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 15 of this notice save that,
before the expiry of this power, the company may make any offer or
agreement which would or might require equity securities to be allotted
after such expiry and the directors may allot equity securities under any
such offer or agreement as if the power had not expired.
18. 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 15,006,157;
(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 5 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 (or, if earlier, at the close
of business on 30 June 2021); 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.
19. That a general meeting of the company (other than an Annual General
Meeting) may be called on not less than 14 clear days’ notice.
(b) the allotment of equity securities (other than pursuant to paragraph (a)
above) with an aggregate nominal value of £375,154
By order of the board
and shall expire on the revocation or expiry (unless renewed) of the authority
conferred on the directors by resolution 15 of this notice, save that, before
the expiry of this power, the company may make any offer or agreement which
would or might require equity securities to be allotted after such expiry and
the directors may allot equity securities under any such offer or agreement as
if the power had not expired.
Alastair Lonie
Company Secretary
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
14 April 2020
200
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2019
EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING
Potential impact of the Coronavirus pandemic
The company has been closely monitoring the situation in respect of the Coronavirus pandemic and the restrictions and precautionary measures being
taken across the country. As a result of these restrictions, physical attendance at the AGM by shareholders will not be possible this year and arrangements
for the AGM may also need to change at short notice. The company will continue to update shareholders in the usual way, via the Regulatory News
System (RNS). Please do not attempt to attend the AGM in person as the company reserves the right to take such measures as it considers appropriate
to comply with Government guidance and to seek to ensure the health and security of those attending and/or take measures that are mandated or
recommended by the UK Government. There will be no presentation given on business progress at this year’s AGM and nor will refreshments be provided.
Given the current circumstances, the company strongly encourages shareholders to vote electronically. Instructions on voting are attached to the
Notice of AGM sent out to shareholders and can also be found on the company’s website. Shareholders may also wish to submit questions in advance
via e-mail to info@chesnara.co.uk We will endeavour to respond to questions raised directly, or by publishing responses on our website.
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. Members
who wish to appoint a proxy should appoint the Chairman of the meeting as
their proxy. As a result of the public health measures taken by the Government
to reduce the public health risks posed by the spread of Coronavirus, no
other person appointed as a proxy will be permitted to attend the meeting in
person. Members are therefore encouraged to vote electronically.
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 may request a physical copy proxy form directly from the registrars,
Link Asset Services, 34 Beckenham Road, Beckenham, BR3 4TU (telephone
number: 0371 664 0300). If you request a physical copy proxy form, it must be
completed in accordance with the instructions that accompany it and then
delivered (together with any power of attorney or other authority under which
it is signed, or a certified copy of such item) to Link Asset Services, PXS1,
34 Beckenham Road, Beckenham, Kent BR3 4TU so as to be received by
11am on Thursday 21 May 2020.
3. 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, which is unfortunately not permitted in the current circumstances
in line with Government measures to protect public health, must appoint a
proxy to do so. A proxy need not be a member of the company, but as noted
above members should appoint the Chairman of the meeting as their proxy as
no other person appointed as a proxy will be permitted to attend the meeting in
person. 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 Thursday 21 May 2020.
Members who hold their shares in uncertificated form may also use the ‘CREST’
voting service to appoint a proxy electronically, as explained in Note 4.
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 Link Asset
Services (ID RA10), by 11am on Thursday 21 May 2020, 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.
201
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2019 EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
5. Copies of directors’ service contracts and letters of appointment are
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 Companies Act 2006.
Where the company is required to place a statement on a website under
Section 527 of the Companies Act 2006, it must forward the statement to the
company’s auditor not later than the time when it makes the statement
available on the website. The business which may be dealt with at the Annual
General Meeting includes any statement that the company has been required
under Section 527 of the Companies Act 2006 to publish on a website.
12. Members meeting the threshold requirements in Sections 338 and 338A of
the Companies Act 2006 have the right to require the company (i) to give to
members entitled to receive notice of the meeting notice of a resolution which
may properly be moved and is intended to be moved at the meeting and/or
(ii) to include in the business to be dealt with at the meeting any matter (other
than a proposed resolution) which may be properly included in the business.
A resolution may properly be moved or a matter may properly be included in
the business unless (a) (in the case of a resolution only) it would, if passed,
be ineffective (whether by reason of inconsistency with any enactment or the
company’s constitution or otherwise), (b) it is defamatory of any person, or
(c) it is frivolous or vexatious. Such a request may be in hard copy form or in
electronic form, must identify the resolution of which notice is to be given or
(as applicable) the matter to be included in the business, must be authenticated
by the person or persons making it, must be received by the company not
later than 11am on Tuesday 15 April 2020, and (in the case of a matter to be
included in the business only) must be accompanied by a statement setting
out the grounds for the request.
The notes on the following pages give an explanation of the proposed
resolutions:
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.
6. The time by which a person must be entered on the register of members
in order to have the right to 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 Thursday 21 May 2020. 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 31 March 2020 (being the last practicable date prior to the publication
of this document), the company’s issued share capital consisted of
150,061,567 ordinary shares, carrying one vote each. No shares were held
by the company in treasury. Therefore, the total voting rights in the
company as at 31 March 2020 (being the last practicable date prior to
the publication of this document) were 150,061,567.
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. As shareholders will be unable
to attend this year’s AGM due to the public health measures introduced
by the Government in response to the Coronavirus pandemic, the
company encourages shareholders to submit their questions electronically
in advance of the meeting via info@chesnara.co.uk
202
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2019 Resolution 1
Resolutions 5 – 11 inclusive
Report & Accounts
The Companies Act 2006 requires the directors of a public company to lay
its Annual Report & Accounts before the company in general meeting, giving
shareholders the opportunity to ask questions on the contents. The Annual
Report & Accounts comprise the audited Financial Statements, the Auditor’s
Report, the Directors’ Report, the Directors’ Remuneration Report, and the
Directors’ Strategic Report.
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.
Resolutions 2 and 3
Approval of the Directors’ Remuneration Report
In accordance with the Companies Act 2006, the company proposes ordinary
resolution 2 to approve the Directors’ Remuneration Report for the financial
year ended 31 December 2019. The Directors’ Remuneration Report can be
found on pages 76 to 93 of the 2019 Report & Accounts and, for the purposes
of this resolution, does not include the parts of the Directors’ Remuneration
Report containing the Directors’ Remuneration Policy as set out on pages 87
to 93, which is the subject of a separate vote at resolution 3. The vote on
this resolution is advisory only and the directors’ entitlement to remuneration
is not conditional on it being passed.
Approval of the Directors’ Remuneration Policy
The Companies Act 2006 requires the Directors’ Remuneration Policy (the
‘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 3 years. Although the company is not proposing any
material changes to the Policy, it was last approved at the Annual General
Meeting in 2017 and is therefore presented for approval as resolution 3 at the
Annual General Meeting. The Policy can be found on pages 87 to 93 of the
Annual Report & Accounts. The vote on the new Policy is a binding vote,
meaning that payments to directors may only be made if they are within the
boundaries of the approved Policy. If approved, the Policy will replace the
policy approved in 2017, becoming effective following the AGM and it is currently
intended that it will continue to apply for 3 years until the Annual General
Meeting in 2023, when further shareholder approval will be sought. Any future
changes to the Policy will require shareholder approval. Once approved,
the company will only be able to make remuneration payments to current and
prospective directors and payments for loss of office to current or past
directors within the boundaries of the new Policy, unless an amendments to
the Policy authorising the company to make such payments has been
approved by a separate shareholder resolution.
Resolution 4
Final dividend
The declaration of the final dividend requires the approval of shareholders in
general meeting. If the 2020 Annual General Meeting approves resolution 4,
the final dividend of 13.87 pence per share will be paid on 02 June 2020
to ordinary shareholders who are on the register of members at the close of
business on 24 April 2020 in respect of each ordinary share.
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 the best practice
recommendations of the UK Corporate Governance Code 2018 (the ‘Code’).
Each of the directors intends to stand for re-election by the shareholders.
Biographical details of each director can be found on pages 64 and 65 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.
Resolutions 12 and 13
Re-appointment and remuneration of auditor
The company is required to appoint an auditor, at each general meeting
before which accounts are laid, to hold office until the end of the next such
meeting. The Audit & Risk Committee has recommended the re-appointment
of Deloitte LLP and has confirmed that such recommendation is free from
influence by a third party and that no restrictive contractual terms have been
imposed on the company. Deloitte LLP has indicated that it is willing to
continue to act as the company’s auditor.
Resolution 12, 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 13 authorises the directors to determine
the auditor’s remuneration.
Resolution 14
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.
203
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2019 EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
Resolution 15
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 31 March 2020,
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 company’s next Annual General Meeting
and the close of business on 30 June 2021.
The company has options and awards outstanding under existing share
schemes over an aggregate of 859,641 ordinary 5p shares, representing 0.57%
of the company’s issued ordinary share capital (excluding treasury shares)
as at 31 March 2020 (the latest practicable date prior to the publication of this
document). This would represent approximately 0.64% of the company’s
issued share capital (excluding treasury shares) if the proposed authority being
sought at the Annual General Meeting to buy back 15,006,157 ordinary shares
was exercised in full (and all the repurchased ordinary shares were cancelled).
Resolution 19
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 19 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.
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 2020 Annual General Meeting. The board is, therefore,
seeking to renew its authority over shares having an aggregate nominal amount
of £2,501,026, representing approximately one-third of the issued ordinary
share capital of the company (excluding treasury shares) as at 31 March 2020
(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 £5,002,052, representing approximately two-thirds of the issued
share capital of the company (excluding treasury shares) as at 31 March 2020
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 £5,002,052.
As at 31 March 2020, the company held no treasury shares.
The authority will expire at the earlier of the conclusion of the company’s next
Annual General Meeting and the close of business on 30 June 2021.
Passing resolution 15 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.
Resolutions 16 and 17
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 2020 Annual General Meeting and, in accordance with the Statement of
Principles issued by the Pre-Emption Group, resolutions 16 and 17 (which
will be proposed as special resolutions) seek to renew the directors’ authority
to disapply pre-emption rights as referenced below.
Resolution 16, 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 £375,154, 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 31 March 2020
(being the latest practicable date prior to the publication of this notice of Annual
General Meeting).
Resolution 17 is proposed as a separate special resolution. In line with the
Pre-Emption 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 6 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 3 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
3 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.
204
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2019 RECONCILIATION OF METRICS
Within these Report & Accounts and as described on page 12, 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 users of the Report & Accounts. The diagram below shows the interaction between the measures:
FINANCIAL STATEMENTS
ADDITIONAL METRICS
IFRS net assets
Solvency II valuation
(Own Funds)
(Own Funds)
I
R
Capital requirements
Solvency Capital
Requirement
SCR plus
management
buffer
IFRS profits
Economic Value
I
P
I
R
B
Solvency
Stakeholder focus:
P Policyholders
I
Investors
R Regulators
B Business partners
Key performance indicators
Balance sheet
Earnings
Percentage
Absolute
New business
I
B
Cash generation
EcV
Commercial
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
2019
31 Dec
2018
Rationale
Group IFRS net assets
478.2
445.6
Removal of intangible assets; AVIF, DAC and DIL
(157.5)
(173.5)
Intangible assets that cannot be sold separately have no intrinsic value under
Solvency II rules.
Removal of IFRS reserves, net of reinsurance
7,375.9
6,817.6
Inclusion of SII technical provisions, net of reinsurance
(7,076.1)
(6,510.7)
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
Deferred tax valuation differences
Foreseeable dividends
2.0
–
3.9
Other immaterial valuation differences.
(4.4)
These are the deferred tax impacts as a result of the adjustments above.
(20.8)
(20.2)
Under Solvency II rules, future ‘foreseeable dividends’ are required to be recognised
within Own Funds. Under IFRS rules, dividends are recognised when paid.
Ring-fenced surpluses
(10.8)
(5.7)
Group SII Own Funds
590.9
552.6
Solvency II 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-profits 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.
205
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2019 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.
IFA
KPI
LGN
London Stock
Exchange
LTI
Independent Financial Adviser.
Key performance indicator.
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 plc.
Long-Term Incentive Scheme – A reward system designed to
incentivise executive directors’ long-term performance.
BAU cash
generation
This represents divisional cash generation plus the impact of
non-exceptional group activity.
BLAGAB
Basic life assurance and general annuity business.
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.
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.
Operating profit
A measure of the pre-tax profit earned from a company’s ongoing
core business operations, excluding any profit earned from
investment market conditions in the period and any economic
assumption changes in the future (alternative performance
metric – APM).
Commercial
cash generation modelling changes and exceptional corporate activity; the
Cash generation excluding the impact of technical adjustments,
underlying commercial cash generated by the business.
Divisional cash This represents the cash generated by the three operating divisions
generation
of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
Ordinary shares Ordinary shares of 5 pence each in the capital of the company.
ORSA
Own Risk and Solvency Assessment.
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.
DNB
DPF
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.
Dutch business
Scildon and the Waard Group, consisting of Waard Leven N.V.,
Waard Schade N.V. and Waard Verzekeringen B.V.
Economic
Profit
A measure of pre-tax profit earned from investment market
conditions in the period and any economic assumption changes
in the future (alternative performance measure – APM).
EcV
FCA
FI
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.
STI
SCR
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 NV.
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.
Standard
Formula
The set of prescribed rules used to calculate the regulatory
SCR where an internal model is not being used.
Short-Term Incentive Scheme – A reward system designed to
incentivise executive directors’ short-term performance.
In accordance with the UKs regulatory regime for insurers it is
the sum of individual capital resource requirements for the
insurer and each of its regulated undertakings.
Movestic and its subsidiaries and associated companies.
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 Shareholder Return, measured with reference to both
dividends and capital growth.
The United Kingdom of Great Britain and Northern Ireland.
Form of proxy
The form of proxy relating to the General Meeting being sent
to shareholders with this document.
FSMA
The Financial Services and Markets Act 2000 of England and
Wales, as amended.
Swedish
business
Group
The company and its existing subsidiary undertakings.
Group cash
generation
Group
Own Funds
Group SCR
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.
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.
S&P
TCF
TSR
UK or
United Kingdom
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.
VA
HCL Insurance BPO Services Limited.
International Financial Reporting Standards.
Waard
The Waard Group.
UK Business
CA and S&P.
The volatility adjustment is a measure to ensure the appropriate
treatment of insurance products with long-term guarantees
under Solvency II. It represents an adjustment to the rate used to
discount liabilities to mitigate the effect of short-term volatility
bond returns.
HCL
IFRS
206
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2019
NOTE ON TERMINOLOGY
As explained in Note 7 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 two insurance companies; Waard Leven N.V. and Waard Schade N.V.;
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.
207
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2019
Registered and Head Office
Building Four, West Strand Business Park,
West Strand Road, Preston, Lancashire PR1 8UY
T +44 (0)1772 972050 F +44 (0)1772 482244
www.chesnara.co.uk
Registered Number: 4947166
Designed by The Chase
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.
208 CHESNARA ANNUAL REPORT & ACCOUNTS 2019