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WELCOME TO THE
CHESNARA ANNUAL
REPORT & ACCOUNTS
FOR YEAR ENDED 31 DECEMBER 2020
1
SECTION AXXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED) CHESNARA ANNUAL REPORT & ACCOUNTS 2020 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 &
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.
2017
2019
2020
Building upon our entry to the
Dutch market we complete the
acquisition of Legal & General
Nederland, 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.
Completion 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
Solvency
Risk appetite
Cash generation
Compliance
Customers
£
Economic Value
Acquisitions
PR1 Principal risks
Economic
Value Earnings
Operational
performance
Commercial
new business
Dividend/Total
Shareholder Return
2
XXXXXXXXXXXXXXXXXXXCHESNARA ANNUAL REPORT & ACCOUNTS 2020
CONTENTS
SECTION A — OVERVIEW
SECTION D — IFRS FINANCIAL STATEMENTS
110 — Independent Auditor’s Report to
the members of Chesnara plc
118 — Consolidated Statement of
Comprehensive Income
119 — Consolidated Balance Sheet
120 — Company Balance Sheet
121 — Consolidated Statement of Cash Flows
122 — Company Statement of Cash Flows
123 — Consolidated Statement of Changes
in Equity
123 — Company Statement of Changes in Equity
124 — Notes to the Consolidated Financial
Statements
SECTION E — ADDITIONAL INFORMATION
204 — Financial calendar
204 — Key contacts
205 — Notice of the Annual
General Meeting
207 — Explanatory notes to the notice of
the Annual General Meeting
211 — Alternative performance measures
213 — Reconciliation of metrics
215 — Glossary
216 — Note on terminology
06 — An introduction to Chesnara
08 — Delivering our strategy
10 — 2020 highlights
12 — Measuring our performance
14 — Chairman’s Statement
SECTION B — STRATEGIC REPORT
20 — Overview of our business model,
strategy and culture & values
22 — Our strategy
24 — Our culture & values
26 — Section 172
34 — Business review
41 — Capital management
44 — Financial review
51 — Financial management
53 — Risk management
60 — Corporate and social responsibility
SECTION C — CORPORATE GOVERNANCE
68 — Board profile and Board of Directors
70 — Governance overview from the Chairman
72 — Corporate Governance Report
76 — Nomination & Governance
Committee Report
78 — Directors’ Remuneration Report
98 — Audit & Risk Committee Report
104 — Directors’ Report
107 — Directors’ Responsibilities Statement
3
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
The Shard, London
SECTION A:
OVERVIEW
0404
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 06 — An introduction to Chesnara
08 — Delivering our strategy
10 — 2020 highlights
12 — Measuring our performance
14 — Chairman’s Statement
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 05
05
XXXXXXXXXXXXXXXXXXXXXXXXXXX • XXXXXXX (CONTINUED) CHESNARA ANNUAL REPORT & ACCOUNTS 2020 OVERVIEW
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
OUR STR ATEGIC OBJECTIVES:
01
02
03
MAXIMISE
VALUE FROM
EXISTING
BUSINESS
ACQUIRE LIFE
AND
PENSIONS
BUSINESSES
ENHANCE VALUE
THROUGH
PROFITABLE
NEW BUSINESS
OUR CULTURE & VALUES –
RESPONSIBLE RISK BASED MANAGEMENT
06
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 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 Value1
of the business.
UK
SWEDEN
NETHERL ANDS
FUNDS UNDER MANAGEMENT1
£2.3bn
FUNDS UNDER MANAGEMENT
£3.7bn
FUNDS UNDER MANAGEMENT
£2.5bn
POLICIES
c240,000
POLICIES
c365,000
POLICIES
c325,000
1 Alternative performance measure (APM) used to enhance understanding of financial performance.
Further information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
07
SECTION ACHESNARA ANNUAL REPORT & ACCOUNTS 2020 OVERVIEW
DELIVERING OUR STRATEGY
Our company history has helped shape our business, which in
turn enables us to deliver against our objectives.
DIVIDEND HISTORY
£
ECONOMIC VALUE1 GROWTH
16 SUCCESSIVE YEARS OF DIVIDEND GROWTH
288% OF VALUE GROWTH SINCE 2004
We recognise the importance of providing stable and attractive
dividends to our shareholders. A full year 2020 dividend of
21.94p per share represents an increase of 3% on the prior year
and is Chesnara’s sixteenth successive year of dividend growth.
Economic Value (EcV)1 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 £363m 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
Economic Value history £m
21.9
2020
21.3
20.7
20.1
19.5
2019
2018
2017
2016
637
670
626
723
603
2020
2019
2018
2017
2016
08
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 SECTION A
What we’ve done
8 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 Economic 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 GENERATION1
CUSTOMERS
CUMULATIVE CASH GENERATION HAS EXCEEDED
OUR DIVIDENDS BY 152% OVER THE LAST 5 YEARS
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 152% 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
2020
2019
2018
2017
2016
27.7
32.9
31.9
36.7
30.4
30.1
47.8
27.6
36.5
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. The headline cash results in this chart are
analysed in more detail on pages 46 to 47.
1 Alternative performance measure (APM) used to enhance understanding of financial performance.
Further information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
09
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 2020 HIGHLIGHTS
FINANCIAL HIGHLIGHTS
IFRS
IFRS
£24.6m IFRS PRE-TAX PROFIT
2019 £96.1m
This includes profits arising from economic market
conditions1 of £21.2m and an intangible asset impairment
charge of £27.6m.
£43.3m TOTAL COMPREHENSIVE INCOME
2019 £60.6m
The 2020 result includes a foreign exchange gain of £22.6m
(2019: loss of £18.7m).
Financial review p50
SOLVENCY
IFRS
FuM
156% GROUP SOLVENCY
2019 155%
£8.5bn FUNDS UNDER MANAGEMENT 3
2019 £7.7bn
We are well capitalised at both group and subsidiary level
under Solvency II.
Capital management p42
Strong performance in volatile investment markets
during 2020.
Financial statements p119
£
ECONOMIC VALUE
ECONOMIC VALUE EARNINGS
£636.8m ECONOMIC VALUE4
2019 £670.0m
£(37.6)m ECONOMIC VALUE EARNINGS5
2019 £ 104.0m
Movement in the year is stated after dividend distributions of
£32.3m (2019: £31.3m) and includes a foreign exchange gain
of £36.7m (2019: loss of £28.8).
Financial review p49
The result includes £22.9m of earnings resulting from investment
market movements (2019: investment market gain of £121.1m)
and operating2 losses of £49.8m (2019: profit of £4.1m).
Financial review p48
COMMERCIAL NEW BUSINESS PROFIT
£10.5m COMMERCIAL NEW BUSINESS PROFIT6
2019 £14.4m
During 2020, Scildon has increased market share in both term and individual life markets, which has driven a record new
business result (£8.8m) and an uplift of 12.5% on 2019. Pricing pressures and changes to fee income and rebates have continued
to suppress Movestic’s new business value in 2020, with more modest returns of £1.6m (2019: £6.9m).
Business review p36 to 39
CASH GENERATION
£27.7m GROUP CASH GENERATION7
£23.6m DIVISIONAL CASH GENERATION8
2019 £36.7m
2019 £50.8m
Group and divisional cash generation of £27.7m and £23.6m respectively reflects a challenging year operationally and also
reflects significantly lower economic returns than the prior year. The reported cash generation includes a net release from the
with-profits funds of £9.2m (2019: £5.1m net growth in restricted surplus).
Financial review p46
10
OVERVIEWCHESNARA ANNUAL REPORT & ACCOUNTS 2020
OPERATIONAL & STRATEGIC HIGHLIGHTS
DIVIDEND
FULL YEAR DIVIDEND INCREASE
Total dividends for the year increased by 3% to 21.94p per share (7.65p interim and 14.29p proposed final). This compares with
21.30p in 2019 (7.43p interim and 13.87p final).
£
ECONOMIC BACKDROP
2020 HAS SEEN SIGNIFICANT VOLATILITY IN INVESTMENT MARKETS AS A RESULT OF COVID-19
EMERGING AS A GLOBAL PANDEMIC
2020 was a turbulent period for equity markets with the impact of the pandemic being felt early in the year as asset values
plummeted. At its lowest point the FTSE 100 value fell to c34% below that at the start of the year and, despite gradual recovery,
the index closed the year 14% lower than the opening value. Falling interest rates and continued downward pressure on bond
yields throughout 2020 also impacted the businesses to varying degrees. Sterling depreciation against the euro and Swedish
krona has led to foreign exchange translation gains.
DUTCH ACQUISITION
EXPANSION IN THE NETHERLANDS CONTINUES
Our presence in the Netherlands continued to grow following regulatory approval of a portfolio acquisition from Argenta Bank
(announced in 2019), at a discount to EcV of c22%, which completed on 31 August 2020.
OPERATIONALLY RESILIENT DURING PANDEMIC
THE GROUP HAS REMAINED OPERATIONALLY RESILIENT DURING THE COVID-19 PANDEMIC
Changes in working practices have been required in order to accommodate appropriate safety measures, such as staff working
from home. The group has remained operationally resilient throughout this transition, in particular focusing on ensuring key
business services relating to customers continue to be delivered. Where necessary we have introduced changes to processes
to help customers who may be in a vulnerable position due to COVID-19, and have ensured that any COVID-19 death claims
have been dealt with compassionately.
Notes: Items 1 to 8 below are Alternative Performance Measures (APMs) used by the group to supplement the required statutory disclosures under IFRS
and Solvency II, providing additional information to enhance the understanding of financial performance. Further information on these APMs can be
found on page 12, throughout the Financial Review and in the APM appendix on pages 211 to 212.
1 Economic profit is a measure of pre-tax profit earned from investment market conditions in the period and any economic assumption changes in the future.
2 Operating profit is 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.
3 Funds Under Management (FuM) represents the sum of all financial assets on the IFRS Balance Sheet.
4 Economic Value (EcV) is a financial metric derived from Solvency II. 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.
5 Economic Value earnings are a measure of the value generated in the period, recognising the longer-term nature of the group’s insurance and
investment contracts.
6 Commercial new business represents the best estimate of cash flows expected to emerge from new business written in the period. It is deemed to
be a more commercially relevant and market consistent measurement of the value generated through the writing of new business, in comparison to
the restrictions imposed under the Solvency II regime.
7 Group cash generation represents the surplus cash that the group has generated in the period. Cash generation is largely a function of the movement
in the solvency position, used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other
constraints are managed.
8 Divisional cash generation represents the cash generated by the three operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
11
SECTION ACHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
The IFRS results form the core of the Report & Accounts and hence retain
prominence as a key financial performance metric. However, this Report &
Accounts also adopts several Alternative Performance Measures (APMs).
These measures compliment the IFRS metrics and present additional
insight into the financial position and performance of the business,
from the perspective of all stakeholders.
The non-IFRS APMs have at their heart the Solvency II (SII) 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.
Further detail on APMs can be found in the appendix on pages 211 and 212.
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.
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 pages 41 to 43 & 213 to 214
Further details on pages 48 to 49 & 211 to 212
Further details on pages 46 to 47 & 212 to 214
12
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 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.
34-39
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.
36-39
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.
36-39
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.
34-39
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.
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
7
51
36-39
36-39
51
68-69
KEY
Primary interest
Secondary interest
*For the purposes of this key performance indicator assessment business partners refers to major suppliers and outsource partners.
13
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
OVERVIEW
CHAIRMAN’S STATEMENT
‘The group has remained
operationally and financially
resilient throughout the
COVID-19 pandemic. Ensuring
minimal impact on our
customers has been at the
centre of our response’.
2020 has been a unique and challenging
Despite the emerging new priorities, adverse
year. Whilst our core strategic priorities
operating conditions and continued
remain unchanged, the pandemic has
downward pressure on yields, it is reassuring
created a focus on additional short-term
to report a stable pre-dividend Economic
priorities, namely:
– The welfare of employees;
Value and cash generation levels that enable
the divisions to propose a further c£48m of
dividends to the parent company.
– Ensuring good business continuity with no
detrimental impact on customer outcomes
The financial stability during the year
or the regulatory framework;
combined with a clear expectation of future
– Maintaining the shareholder dividend
strategy without compromising financial
stability; and
– Protecting the business fundamentals to
maximise the potential for post COVID-19
recovery.
divisional dividends means I am pleased
to report continuation of our dividend
strategy with a 3% increase in the proposed
final dividend and hence total dividend.
I believe these areas of focus were important
to protect stakeholder interests under difficult
circumstances. I am pleased to report good
outcomes against each of these considerations
resulting in a good balance of positive
outcomes across all our key stakeholders.
Luke Savage
Chairman
14 CHESNARA ANNUAL REPORT & ACCOUNTS 2020
14
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
SECTION A
Before I report the headline results and expand upon how we have delivered
against our core strategic priorities, I would like to concentrate on how the
COVID-19 pandemic has impacted our short-term attention and how we have
worked hard to ensure our stakeholders have been well protected during such
difficult conditions. Our areas of enhanced short-term focus relate to staff
welfare, customers and regulators, shareholder dividends and maximising the
potential for post-COVID-19 recovery. Taking each in turn:
Employee welfare
From very early in the pandemic, our initial priority was to ensure staff could
work safely from home. At the same time, we have invested to make sure
our offices are as safe as possible so that on the occasions any staff do
need to work from the office and when government guidelines allowed, they
could do so with minimum risk. From an economic welfare perspective all
employees have been paid in full throughout, without the use of the
government furlough scheme.
Business continuity – customers and regulators
The emergence of COVID-19 gave raise to significant changes in the way we
work, largely as a result of the group having to respond to governmental rules
that were put in force in the jurisdictions within which we (and our outsourcers)
operate. It is pleasing to report that we undertook a smooth transition to these
remote working conditions, which have remained largely in force over the
course of the year, with no significant immediate or ongoing disruption to key
customer related business services.
Maintaining the shareholder dividend strategy
We have managed to maintain our dividend model and increase the
dividend payment in 2020 by 3%. Importantly, this has been done without
compromising the financial stability of group. The post dividend group
solvency ratio has increased slightly to 156% (31 December 2019: 155%)
and the closing Chesnara cash and instant access liquidity funds balance
remains healthy at £59.9m (31 December 2019: £75.5m).
Protecting the business
A balance has been struck between delivering good results in the year and
protecting the business so that we can maximise the potential for future
profits as the world recovers from the pandemic. As things stand, we believe
the business fundamentals remain solid and offer a good foundation for the
future. Total Funds Under Management1 closed higher than the opening
position, policy persistency in our closed operations was better than expected
and despite the challenges of COVID-19, Scildon goes into 2021 with over 7%
more policies in-force than was the case pre-COVID-19 at the end of 2019.
Despite smaller total new business markets in the year, our new business
market shares have held up relatively well in Sweden and we have made
notable market share gains in the Netherlands. In summary, the business in
terms of funds, policy counts and new business market shares remain strong
and offers a solid foundation for profit growth post COVID-19. In short, to date
we have weathered the pandemic storm well and emerge in good shape.
Moving onto the results during the year. Despite the aforementioned generally
positive assessment of the year, the reality is that in the short-term, adverse
conditions have had a detrimental impact on the results. In Scildon, cash
generation has been adversely impacted by the continued downward pressure
on yields, which contributes to an overall cash loss of £22.3m (2019: gain
£22.6m). Against this backdrop, with the exception of Scildon cash, I am
pleased that the consolidated results on all metrics demonstrate a level of
resilience synonymous with Chesnara’s financial track record and ability to
increase the dividend through difficult conditions.
From an IFRS perspective, we are reporting a reduction in pre-tax profits
compared with the 2019 result of £96.1m, to £24.6m in 2020. All divisional
results are generally lower than last year, with Scildon seeing the largest
reduction. In addition, the group results include the impact of a £27.6m
impairment to the AVIF (Acquired Value in Force) intangible assets, largely
relating to Scildon. From an IFRS balance sheet perspective it is pleasing
to report that Funds Under Management1 have grown c10% since the start
of the year.
Although we were able to protect the pre dividend Economic Value1
which closed the year at £669.1m, marginally lower than at the end of 2019,
the impact of the dividend payment resulted in an overall post dividend
reduction in EcV of 5% (2019: 7% increase in post dividend EcV). Our
long-term aim is to at least protect the post-dividend value. Clearly and
perhaps unsurprisingly, this has not been achieved during 2020. However in
light of the challenges faced the level of reduction has been well contained
and was significantly less than the gains in 2019. In addition, actions
regarding catastrophe risk reinsurance and lapse risk reduction, together
with the impact of post balance sheet yield recovery, will have reversed a
good proportion of the Scildon 2020 cash loss.
Despite a level of increased uncertainty at the point the 2019 accounts were
issued, as predicted we received the vast majority of the 2019 closing
proposed divisional dividends. Total divisional dividend receipts of £40.6m
have ensured we close the difficult year with £59.9m in cash and instant
access liquidity funds at the Chesnara company level. The cash generation
results for the year mean we expect further divisional dividend receipts
totalling £47.8m during 2021, comfortably funding the 2021 shareholder
dividends whilst maintaining a healthy residual cash balance. We do not expect
the Movestic dividend of c£10m to be received until the final quarter of 2021.
I will now report on how we have delivered against our three strategic
objectives in a little more detail:
01
MAXIMISE VALUE FROM EXISTING
BUSINESS
Robust levels of cash generation supplied by
all divisions except Scildon have resulted in
cash generation of £27.7m.
See pages 34 to 39 for further information.
The businesses have continued to generate sufficient cash1 to support
Chesnara’s dividend strategy. In addition, during the challenging conditions,
management have focused on capital management actions to optimise the
solvency and cash generation potential across the group. This has resulted in
material enhancements to the cash results in 2020. We have also progressed
further actions to the point they will be applied in the first half of 2021 and
will in turn enhance cash generation in 2021. Further information regarding
management actions is included on page 47.
Overall, we have been able to protect the pre-dividend value of the existing
businesses. There have however been specific areas where conditions, in
part driven by COVID-19, have resulted in value losses. Conditions during
the pandemic in Sweden have driven a notable increase in transfer activity.
This has led to a loss in value from an increase in policies transferring out.
Despite this increase in transfers, the overall Funds Under Management
have marginally increased and to the extent the current spike in outward
transfers is considered to be partially due to COVID-19 conditions including
temporary competitor pricing, we would expect the Swedish business to
stabilise in 2021.
In addition to the capital management actions, management have also
delivered notable value enhancing actions. In particular changes to asset
management providers have added c£14m of incremental EcV (£10m of this
value was recognised in the 2019 results).
1 Alternative performance measure (APM) used to enhance understanding of financial
performance. Further information on APMs can be found in the ‘Additional Information’
section of this Annual Report & Accounts.
15
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 OVERVIEW
CHAIRMAN’S STATEMENT (CONTINUED)
02
ACQUIRE LIFE AND PENSIONS
BUSINESSES
The acquisition of Argenta Insurance in the
Netherlands completed on 31 August with
an incremental value1 impact of c£9m.
See page 40 for further information.
COMPLETION OF OUR ACQUISITION OF ARGENTA
INSURANCE IN THE NETHERLANDS
Over the past two years, Waard has completed three acquisitions (including a
small deal of c9,000 policies agreed before the end of 2020 and is awaiting
regulatory approval), the largest being the Argenta portfolio. Whilst none are
large, we are developing a reputation as a natural acquirer of small portfolios
no longer seen as core by vendors. Whilst we remain optimistic that more
substantial opportunities exist, the merits of focusing on simple, well priced,
lower value transactions should not be underestimated. The recent deals
has delivered incremental value1 of c£9m and has contributed to growth in
excess of 40% in the Waard closed business policy count, leading to
associated cost efficiency gains.
Small deals will not transform Chesnara but they can, along with other
actions mean we can deliver gradual EcV1 growth whilst continuing the
dividend payment strategy. Similarly, in the UK we remain optimistic about
more significant opportunities but likewise are mindful of the cumulative
merits of smaller, well priced transactions.
Our balance sheet and existing debt arrangements which create a 7.4%
leverage1 ratio, provide sufficient funding capacity for numerous small deals
or a larger deal of up to approximately £120m without the need for additional
funding sources such as Tier 2 debt or equity.
03
ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
Commercial new business profit1 of £10.5m:
Record new business profits in Scildon of
£8.81m but COVID-19 conditions in Sweden
have resulted in a reduction in Movestic’s
new business profits to £1.64m
See pages 36 to 39 for further information.
COMMERCIAL NEW BUSINESS PROFITS1 OF £10.5M
REPLACE 33% 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
existing business, or through writing new business, to replace a significant
proportion of the Economic Value lost by way of dividend payments.
Despite a degree of COVID-19 related pressure on Dutch new business
markets, especially during the second half of the year, new business
volumes have held up well, largely due to a welcome improvement in market
shares. This has resulted in a further improvement in new business profits
with an increase of 12.5% to £8.8m (2019: £7.8m – restated at 2020
exchange rates).
By contrast, pension new business broker markets in Sweden were hit more
heavily by pandemic restrictions. In addition, we experienced a modest
reduction in market shares. This tends to be the case during periods of
heightened equity market volatility when unit-linked companies such as
Movestic are deemed less attractive than traditional investments with
guarantees or performance smoothing. This has resulted in a reduction in
Movestic’s new business profitability with a total profit in the year of £1.6m
(2019: £6.9m). Historically, as equity markets stabilise or increase in value
then the Movestic market shares have tended to recover. We would
16
therefore expect a degree of recovery in 2021 with steady state post
COVID-19 profit levels ultimately recovering to pre-pandemic levels.
COVID-19 has undoubtedly accelerated the move towards people transacting
remotely using digital solutions. Therefore, whilst we do not believe the
pandemic will have any permanent impact on the demand for the core
products we sell and administer we do recognise that the impact of sales
and service methods and preferences will be permanent. We have
continued to deliver solutions to remain competitive in the digital world.
In Movestic we are nearing completion of our digitalisation programme and
in Scildon we are coming to the final stages of modernising our pensions
processes. This is expected to have a positive impact on both costs and
pension new business levels in Scildon, with the business well positioned to
take advantage of the anticipated growth in the defined contribution market.
The programme will then move to the term product migration through 2021
and into 2022, delivering expected efficiencies and strengthening the
business’s market and operating position. The expected costs and benefits
are included within the 2020 year end position.
Solvency
The group continues to show a robust solvency ratio of 156% at 31 December
2020 (31 December 2019: 155%). The closing solvency position is stated
after recognising the £21.4m cost of the proposed final dividend, which is
expected to be paid in May 2021.
To further improve capital efficiency we have also chosen to apply the
volatility adjustment in the UK in 2021, which will be implemented alongside
plans to refine the mix of assets that back certain non-linked policies in the
UK, following approval from the PRA.
Regulation and governance
IFRS 17
Our programme has progressed well during the year. Notably we selected
Willis Towers Watson to provide a group-wide tool to calculate the contractual
service margin and store the associated data and implementation of the tool
commenced during the second half of 2020. As part of our continual
assessment of our plans, we have increased our budget to reflect the
complexity and scale of the programme and have fully provided for the costs
in our solvency position. Looking forward, 2021 will be focused on the
operational implementation of the CSM tool and associated processes, and
as such is a key priority for management and the group board.
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 relationships with
regulatory bodies across the group.
Governance framework
We continue to maintain a strong risk and governance culture across the
group. Our focus this year has been on ensuring that we continue to adhere to
these core principles whilst dealing with the challenges of the global pandemic,
and it is extremely pleasing to report that investment in operational resilience
across the group over recent years has made operating in these conditions
significantly easier, with all important business services having been delivered.
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 find an optimal long-term balance for stakeholder outcomes. The
Report & Accounts include a 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.
1 Alternative performance measure (APM) used to enhance understanding of financial
performance. Further information on APMs can be found in the ‘Additional Information’
section of this Annual Report & Accounts.
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 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’.
The 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 the markets
we operate in. Our consolidation model therefore offers a genuine solution
to the challenges certain insurance markets face.
The products and services we provide
– We help protect people and their dependants through the provision of life,
health and disability cover or by providing savings and pensions which help
customers with their financial needs in the future. We seek to provide
customers and their advisers with helpful and reliable support.
Sustainability
– We continued in 2020 to build on our sustainability/ESG activities, looking at
both our own operational impacts and also investments, whether they are
under our own control or by offering sustainable fund offerings for client
chosen investments.
– Movestic became a signatory to the UN’s Principles of Responsible
Investment and targeted five of the UN’s Sustainable Development Goals
to focus on. This was replicated in the UK through completion of our fund
manager rationalisation project and selection of Schroders, with availability
of ESG data, reporting and focus being at the core of our decision to place
our funds with them for management.
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. Across the
group staff have been able to work from home during COVID-19 restrictions.
Suppliers and partners
– We seek mutually respectful and sustainable relationships with our
suppliers. We believe that supplier relationships only work in the long term if
the terms and conditions are mutually beneficial. Our instinct and natural
preference is to maintain established long-term supplier relationships where
they remain commercially competitive and operationally viable.
Local community
– 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.
– All divisions support local community initiatives to the extent deemed
appropriate given our financial responsibilities as a PLC.
Outlook
Sustainability of the business model
Our assessment is that the impacts of the pandemic have had minimal
permanent adverse impact on the business model. In fact, three out of our
four businesses have actually grown in terms of scale through the year and
hence the risk that loss of scale compromises the business model is not
apparent. The UK division has experienced continued reduction in policy
volumes however, Funds Under Management remain relatively stable and
even in the absence of acquisitions the cost base is deemed sufficiently
variable to absorb the impact of run off for many years.
Brexit
We have consistently reported that we expected minimal impact from
Brexit. Having now exited the EU we have indeed experienced very limited
disruption. The only area where we have seen an impact is with regards to a
modest divergence of the Solvency II regulatory rules from the PRA
compared to those from EIOPA. The changes have had no financial impact
at this stage. We continue to expect a high level of equivalence between
regulatory reporting regimes but are mindful of the possibility of an
increased level of divergence as the PRA are enabled to move to UK specific
terms. We see no specific reason to expect the PRA to use their enhanced
freedoms to take a route that systemically makes it harder to do business in
the UK. That said, we continue to monitor the potential impact of Brexit
closely and it continues to be identified within our Principal Risks and
Uncertainties (see pages 55 to 59 for more information).
Sustainability of the dividend
We do not provide specific forward-looking financial projections or guidance
however there are several financial metrics and factors that provide a level of
comfort regarding dividend sustainability:
– Ongoing cash generation1 expectations from the existing portfolios
The cash generation model continues to show a good level of resilience to
difficult conditions. Longer term the EcV offers a useful proxy to the total
level of future cash. The closing EcV (which conservatively assumes risk free
asset returns) represents over 19 years coverage of the current full
year dividend.
– New business has minimal positive impact on short term cash due to the
associated acquisition costs and capital strain. New business does however
create future positive cash flows. Incremental future cash flows at the end
of 2020 as a result of new business in the year are £22.4m (2019: £27.0m).
– Strong and stable solvency
– Management actions and acquisitions – there remains the potential for
capital management actions and acquisitions to create material future cash
generation and capital releases. Actions are scheduled for 2021 including
catastrophe risk reinsurance in Scildon and cross group lapse capital
optimisation. These actions in particular have a material positive impact on
the prospects of future dividends from Scildon.
– Chesnara plc cash reserves – in the medium term the existence of
£59.9m of cash and instant access liquidity funds on the parent company
balance sheet combined with a low 7.4% gearing ratio1 provide comfort over
the ability to support future dividend payments.
Sustainability in ESG terms
We continue to increase our focus on ESG matters and environmental
sustainability in particular. We have again ensured our operations are carbon
neutral and commit to this as a permanent objective. The focus moving
forward will shift towards improving the sustainability characteristics of the
investment portfolio.
In light of the above, I am confident 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, Chesnara is well
positioned to continue to provide value to policyholders and shareholders.
We believe one consequence of the pandemic will be an acceleration
towards remote, digital customer engagement. In light of this I am pleased
to report that Movestic’s digitalisation programme is nearing completion and
Scildon is shortly due to migrate to a new pension platform with enhanced
end to end processes. Both these successful developments leave us well
positioned to react to shifting customer service demands.
Luke Savage
Chairman
29 March 2020
17
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
Lighthouse, Oland, Sweden
SECTION B:
STRATEGIC
REPORT
18
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 20 — Overview of our
business model, strategy
and culture & values
22 — Our strategy
24 — Our culture & values
26 — Section 172
34 — Business review
41 — Capital management
44 — Financial review
51 — Financial management
53 — Risk management
60 — Corporate and social
responsibility
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 19
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 OVERVIEW OF OUR BUSINESS MODEL, STRATEGY AND
CULTURE & VALUES
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
STAKEHOLDERS
REGUL ATORS
CUSTOMERS
SHAREHOLDERS
S TAKEHOLDER
OB JEC TIVES
Financial stability and
regulatory compliance
Fair outcomes
KPIs
Fair outcomes
Solvency
Fair outcomes
Investment return
Competitive returns
through attractive dividends
and share growth
Fair outcomes
EcV growth1
Cash generation1
HOW WE ORGANISE OURSELVES
CASH GENER ATION AND ECONOMIC VALUE GROW TH
Read more
on p23
DIVISION
UK
NETHERLANDS
SWEDEN
OPER ATING
COMPANY
S TR ATEGIC
OB JEC TIVES
KE Y
PRODUC TS
NUMBER
OF POLICIES
COUNTRYWIDE ASSURED
WAARD GROUP SCILDON
MOVESTIC
01
02
01
02
01
03
01
03
Read more on p34
Read more on p38
Read more on p36
Underwriting linked pension
business; life insurance, covering
both index-linked and unit linked;
endowments; whole of life; annuities
and some with profit business.
Underwriting
mainly term life
policies, with
some unit linked
and non-life
policies.
Underwriting of
protection,
individual savings
and group
pensions
contracts.
Predominantly the underwriting of
unit-linked pensions and savings.
Also provides some life and health
product offerings.
c24 0,0 0 0
c12 5 ,0 0 0
c205 ,0 0 0
c 36 5 ,0 0 0
DIS TRIBUTION
ME THOD
N/A
N/A
Sold through a
broker network.
Largely through a network of
brokers, although some is directly
to customers.
CHESNAR A CULTURE & VALUES – RESPONSIBLE RISK BASED MANAGEMENT
20
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT Chesnara is a European life and pensions consolidator, is listed on the London Stock Exchange, and has
subsidiaries in the UK, Sweden and the Netherlands. It is closed to new business in the UK but continues to
write new policies in Sweden and the Netherlands.
How we organise ourselves, along with our key stakeholders, and products, is shown in the diagram below.
The business model supports the successful delivery of our key strategic objectives, whilst maintaining our
strong culture & values. These are outlined further on pages 22 to 25.
OUR STRATEGY
STR ATEGIC OBJECTIVES
01
02
03
MAXIMISE THE VALUE
FROM EXISTING BUSINESS
ACQUIRE LIFE AND
PENSIONS BUSINESSES
ENHANCE VALUE THROUGH
PROFITABLE NEW BUSINESS
Managing our existing customers
fairly and efficiently is core to
delivering our overall strategic aims.
Acquiring and integrating companies
into our business model is key
to continuing our growth journey.
Writing profitable new business
supports the growth of
our group and helps mitigate the
natural run-off of our book.
KPIs
Cash generation
EcV earnings
Customer outcomes
KPIs
Cash generation
EcV growth
Customer outcomes
Risk appetite
KPIs
EcV growth
Read more on p23
Read more on p23
Read more on p23
OUR CULTURE & VALUES –
RESPONSIBLE RISK BASED MANAGEMENT
FAIR TRE ATMENT
OF CUS TOMERS
MAINTAIN
ADEQUATE FINANCIAL
RESOURCES
PROVIDE A
COMPE TITIVE RE TURN
TO OUR
SHAREHOLDERS
ROBUS T REGUL ATORY
COMPLIANCE
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional
Information’ section of this Annual Report & Accounts.
21
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
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 generation1
and are hence at the heart of the
investment case for our shareholder.
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
benefit 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 Value1
under best estimate and stressed scenarios.
– We work cooperatively with regulators.
– The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group’s risk profile.
– Transaction risk is minimised through stringent risk-based due
diligence procedures and the senior management team’s
acquisition experience and positive track record.
– We fund deals with debt, equity or cash depending on the size
and cash flows of each opportunity.
– Our acquisition strategy includes both UK and non-UK markets.
The primary focus of our operations is
to ensure we manage the existing
policy base in an efficient and
compliant manner. That said, the
Chesnara financial model supports
modest incremental value generation
through writing new business. New
business profits are an important and
welcome source of regular value
growth which supplements the
growth delivered from our existing
policy base and periodic acquisitions.
Our two operating subsidiaries that are open to new business are
Movestic in Sweden and Scildon in the Netherlands. Movestic
primarily focuses on unit-linked pensions and savings business,
distributed largely through IFAs, and has a profitability 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 profitable.
02
ENHANCE
VALUE THROUGH
PROFITABLE
NEW BUSINESS
03
22
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT HOW WE MEASURE DELIVERY
PRINCIPAL RISKS: FOR FURTHER INFORMATION SEE PAGES 55 TO 59
RISKS:
WHAT CAN STOP US
MEETING THIS OBJECTIVE
RISKS:
WHAT CAN WE DO
ABOUT THIS
Cash generation1
Cash generated by the existing business is an
important measure for how the business is performing.
It is defined as the movement in the surplus of capital
resources over capital requirements set by the board.
As such cash can be generated by either profits arising
in the period or a reduction in capital requirements.
EcV growth
Value generation is measured by reference to the
movement in Economic Value1 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.
– PR1 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 fulfilling the guarantees.
– PR4 Increased lapses on cash
generative/value enhancing products.
– PR4 PR6 Loss of key brokers can
result in increases in the level of
customers moving to competitors.
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 influence.
– PR2 Regulatory change can
– Close monitoring of persistency
potentially impact the cash flows
arising from the existing business.
– PR5 Expenditure levels could
exceed those assumed.
– PR1 Foreign currency fluctuations
can impact the sterling value
emerging from overseas operations.
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.
UPDATE
UK
Pages 34-35
Sweden
Pages 36-37
Netherlands
Pages 38-39
Cash generation
Collectively our future acquisitions must be suitably
cash generative to continue to fund the Chesnara
dividend strategy.
EcV enhancement
Acquisitions are required to have a positive impact on the
Economic Value per share.
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.
EcV 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 profit
represents true incremental value.
– PR3 There is the risk that if a lack
– Operating in three territories
Page 40
of suitable acquisition opportunities
come to market at a realistic
valuation, the investment case for
Chesnara diminishes over time.
– PR3 There is the risk that we make
an inappropriate acquisition that
adversely impacts the financial
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.
– 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.
– PR8 The attractiveness of products
can be influenced by economic
conditions, politics and the media.
– PR6 PR8 New business volumes
are sensitive to the quality of
service to intermediaries and the
end customer.
– PR8 In Sweden, new business
remains relatively concentrated
towards several large IFAs.
– PR8 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 36-37
Netherlands
Pages 38-39
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
23
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B 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 41 to 43.
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 an
investment that offers clarity and
consistency of performance.
Working constructively with our
regulators and complying with regulatory
requirements and guidance 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 board.
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT WHAT WE HAVE DONE
THE OUTCOMES
– Generally low level of complaints across the group has continued.
– Transparent customer communications, supporting better customer
outcomes.
– No deterioration in service levels and any claims, including COVID-19
claims, have been paid in business as usual expectations.
– Our primary focus during 2020 was to ensure that we dealt with the
challenges of COVID-19 in a robust way throughout the group. From a
customer perspective this primarily involved ensuring that our key
business services affecting customers continued largely unaffected
whilst we transitioned to, and maintained, a largely remote working
model. It is pleasing to say that this process took place with minimal
business disruption.
– Across the group, we have continued to deliver a good standard of
customer service.
– The UK division completed the implementation of its customer
strategy in support of regulatory guidelines, embedding revised
processes into business as usual operations.
– The UK’s administrative outsource service partners have delivered
within stringent service level requirements.
– Where complaints do arise, 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.
– The ORSA process has been fully utilised in the context of providing
– Robust solvency despite the significant market volatility in the year as
risk oversight over the impact of the COVID-19 pandemic.
a result of COVID-19.
– Delivered our continuous improvement regime regarding how we
– Ongoing constructive dialogue with regulators across the different
manage risk across the group, supported by our annual systems of
governance review.
– We have continued the journey to optimise the capital efficiency of
the assets held by Scildon, having sold corporate bonds during 2019
which have been replaced by mortgage assets during 2020.
– We have agreed with the Dutch regulator, the DNB, to reduce the
internal capital management buffer for the Dutch entities from 85%
to 75%.
– In the UK business we have applied for the Volatility Adjustment during
this year, which will be implemented following approval from the PRA.
– 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.
– Expanded operations in the Netherlands by completing the
acquisition of a portfolio of term life and savings products from
Argenta Bank. A further portfolio acquisition was agreed in the
territory, due to be announced complete in 2021.
territories in which the group operates.
– Dividend track record continues, with 3% dividend growth in 2020.
– Over the past five years, £152.9m of dividends have been paid.
– Further strengthening our position in the Netherlands with value
adding portfolio acquisitions, enhancing cash generation potential.
– 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
open dialogue with our regulators.
– Progressed our ESG strategy and laid the foundations for further
progress in 2021.
– Progressed the IFRS 17 project including the selection of a group-wide
calculation engine supplier.
– Demonstrated our operational resilience through how we have
responded to the challenges of COVID-19.
– Continued adherence to internal governance policies and principles.
– Achieved UN Principles of Responsible Investment (UNPRI)
signatory status for Movestic and, via our outsourced investment
management supplier Schroders, for Countrywide Assured, along
with a group-wide commitment to identified goals within the UN’s
Sustainability Development Goals (UNSDG).
25
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B SECTION 172 • THE BOARD’S APPROACH
Our Section 172 reporting seeks to communicate the board’s approach to decision-making, who our key stakeholders
are and how they are considered by the board when making decisions.
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 2020. 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 72 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 is 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 2020STRATEGIC 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 2020 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 30.
As referred to above, business plans are supported by associated financial budgets and
projections. This helps to ensure the both the shorter terms 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 are 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 VALUE1
CASH GENERATION1
SOLVENCY
IFRS
IFRS PROFITS
DIVISIONAL AND GROUP DIVIDENDS
£
EXPENSES
NEW BUSINESS PROFIT EXPECTATIONS1
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 group board level and with business unit equivalents in place to reflect territory considerations. 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.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
27
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B S
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SECTION 172 • KEY STAKEHOLDERS
The following table identifies 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. Matters arising in relation
to each stakeholder group are communicated by management to the board in MI pack at each board meeting. 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 conflict. 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 financially strong
company that treats them fairly
and meets their expectations
and needs. Our financial
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
significant interest to our
shareholders. If either of those
elements are put under
pressure, it is likely to reduce
confidence 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 financial reporting, which we produce every
six months.
– Public and private presentations to shareholders immediately
after issuing our financial 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.
KPIs monitored
relating to
stakeholder
Policy lapses
Complaints
Customer survey
scores
Significant
shareholder
purchases / sales
Overall
shareholder mix
Shareholder
feedback
Share price
The banks earn a return on
the facilities that are provided
to the group. Chesnara’s role
is to ensure that we manage
our finances 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.
Gearing ratio1
EcV1 position
Solvency
Maintaining a strong
relationship with our
banks is key. This helps to
ensure that day-to-day
banking remains efficient
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 finances in such a
way that complies with
the covenants attached
to our debt facilities.
28
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
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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.
Outsourcers play a
significant 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 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.
DEPENDENCIES OF
BUSINESS ON
STAKEHOLDER
IMPACT OF
BUSINESS ON
STAKEHOLDER
HOW WE
ENGAGE WITH
STAKEHOLDER
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 us
in a timely manner.
We strive to work closely with our intermediaries, engaging
in a number of ways. In both Movestic and Scildon, all
intermediaries have access to a partner website, where they
can administer customer processes and obtain information as
required. 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. All stakeholder
engagement was undertaken in a COVID-19 appropriate manner.
KPIs monitored
relating to
stakeholder
Sales volumes by
intermediary
Profitability
by intermediary
in Movestic
Customer
complaints by
intermediary
Service levels
Financial strength
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 financial stability of
the group in order to ensure
that the services provided
under any existing
arrangements continue to be
paid for by Chesnara.
The group has a significant
impact on its employees, be
it through its short-term and
long-term financial 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
benefits package also has a
significant effect on
employees.
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 specific 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.
Chesnara, and its subsidiaries have various mechanisms in
Staff surveys
Feedback from
employee forums
Feedback from
appointed NED
Staff turnover
place to ensure appropriate levels of engagement exist with
employees. This involves:
– Completing staff feedback surveys.
– Holding regular update briefings 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 in place.
Our corporate and social responsibility statement on pages
60 to 65 provides further information.
1 Alternative performance measure (APM) used to enhance understanding of financial performance.
Further information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
29
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
SECTION 172 • KEY STAKEHOLDERS (CONTINUED)
DEPENDENCIES OF
BUSINESS ON
STAKEHOLDER
IMPACT OF
BUSINESS ON
STAKEHOLDER
HOW WE
ENGAGE WITH
STAKEHOLDER
KPIs monitored
relating to
stakeholder
Relationship with
supervisory team
Formal feedback
from regulators
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 financial 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.
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 fit 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.
Adherence to
timescales
Level of overruns
Quality of service
Chesnara’s aim is to take reasonable steps to minimise the
impact that our day-to-day operations have on the environment,
as documented on pages 60-65.
CO2 emissions
Energy usage
Climate change is recognised as a risk and is monitored/
reported as part of the risk management function.
For policyholders who choose where they invest, we provide
access to a range of ethical and environmentally sustainable
funds and have made progress both in what is offered and
improvements in our customers’ abilities to gain information to
make an informed decision, more of which can be found in our
corporate and social responsibility statement on pages 60 to 65.
For our own investments we have made progress in 2020 at
promoting sustainability and ESG considerations in our
investment management decisions and have plans to develop
this further in 2021 in line with our commitments to UNPRI
and UNSDG.
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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 group has a relatively
small but stable set of
suppliers, who provide
quality and efficiency,
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.
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.
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 financially stable
will be of significant interest to
our suppliers.
Changes to the
environment, and
specifically climate change
and global warming,
affects the way in which
we operate our businesses
at Chesnara and, through
investments, the returns
made by our customers
and our shareholders.
Our operations’ impact is broadly
split into energy use from our
offices and emissions from
business travel and commuting.
The impact made by our
investment choices or those of
our customers, are more
wide-ranging and will be a key
focus of our attention in 2021.
30
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
SECTION 172 • SIGNIFICANT DECISIONS
The principal process that the board uses to make shorter 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 emergence of the global COVID-19 pandemic is one such example. The table below
lists the key decisions made by the board during the 2020 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
RESPONSE TO
COVID-19
PANDEMIC
– Overview: During 2020 COVID-19 emerged as a global pandemic. The group and board had to respond appropriately to the
economic, operational and staff impact of COVID-19.
– Key considerations and decision: The board’s role was to oversee the group’s response to COVID-19 as a global pandemic.
The board’s focus fits into three key areas:
• Financial impact: The board’s role was to closely monitor the impact of the investment market volatility on the group from a
solvency perspective. The board was also involved in the decision making process regarding divisional dividend remittances,
and assessed that, from a liquidity perspective, it was acceptable to defer payment of the year end 2019 dividends from
subsidiaries to later in 2020 than usual to enable further monitoring of the COVID-19 situation.
• Operational impact: From an operational perspective the group and its subsidiaries have been required to move to a largely
remote-working environment. The initial response involved the invoking of Crisis Management Teams across the group. The
Group Executive Committee met regularly at the start of the pandemic and provided weekly updates to the board in order to
enable it to oversee and challenge the group’s response. In particular, the initial focus was on ensuring that we continue to
treat customers fairly. In light of the initial uncertainty surrounding COVID-19, the board decided that it would be appropriate
to defer the issue of the 2019 results and Annual Report & Accounts from 31 March to 15 April. This enabled more thorough
and considered dialogue between the group and its auditors in order to ensure appropriate disclosures were made in the 2019
accounts regarding its impact.
• Staff impact: Staff health and wellbeing from continued remote working has been a primary concern of management and the
board. The board has been overseeing the potential inefficiency from prolonged remote working and a lack of available
childcare for families of employees, and permitted flexibility in the timing of certain planned activities over the course of 2020
to accommodate this. As part of the transition to a remote working environment the board supported the decision to invest
modest amounts to support staff in setting themselves up to work from home.
Overall the group and board’s response to COVID-19 has been multi-faceted, seeking to consider the impact on various
stakeholder groups. No decisions arising from the COVID-19 situation have been deemed to have been made by the board that
fundamentally affect the long-term outlook for the group.
– Stakeholder impact:
• Investors: Investors are interested in how the group has responded to, and been affected by, the pandemic in the context
of how it has affected the group’s financial position and outlook.
• Regulators: Conduct regulators across the group are interested in ensuring that the group continues to meet the needs and
expectations of its customers. Prudential regulators paid close attention to the financial impact of COVID-19 on the group.
• Staff: Staff across the group are affected by the decisions of management and the board, as the group has transitioned to a
largely remote working environment over the course of the year. Employees were paid in full throughout without the company
taking advantage of government support schemes such as furlough.
• Customers: Customers are a key stakeholder in the group’s response to COVID-19 and any associated board decisions.
In particular they are keen to ensure that their policies remain safe and secure and customers also expect to continue be
treated fairly.
– Overview: Every year the board is required to consider what level of dividends are appropriate for shareholders, whilst also
ensuring that it continues to adhere to its own capital management policy. Dividend proposals are subject to board approval, with
proposed final dividends being included in a resolution voted for at the Annual General Meeting.
– Key considerations and decision: The Directors Report on page 104 provides information on the key considerations made by
the board when approving dividends. The aim is to satisfy investor expectations by delivering an attractive yield, with steady
growth where possible. That said, this yield cannot and will not be delivered at the expense of financial security, be it through
solvency or liquidity. The board’s capital management policy does not permit a dividend to be paid such that, after the payment
of that dividend, the group solvency ratio falls below 110%. In approving a dividend the board is presented with a paper by
management which considers the various aspects of the dividend decision, including cash generation, solvency, the group’s
acquisition strategy and investor expectations. The dividend decisions made by the board in the year gave full consideration
to the impact of COVID-19 on the group, including the potential for further investment market disruption. During 2020 the board
approved the year end 2019 final dividend, amounting to 13.87p per share, and the interim 2020 dividend of 7.65p per share.
– Primary beneficiary: Dividend decisions are made primarily for the benefit of our shareholders.
– Other stakeholder considerations:
• Banks: Our bankers are considered in terms of the impact of distributions on our liquidity and solvency position.
• Regulators and customers: These stakeholders are considered in the context of ensuring that the solvency position of the group
post dividend remains robust.
1 Alternative performance measure (APM) used to enhance understanding of financial performance.
Further information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
31
APPLICATION
OF CAPITAL
MANAGEMENT
AND DIVIDEND
POLICIES
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B SECTION 172 • SIGNIFICANT DECISIONS (CONTINUED)
SIGNIFICANT DECISION DESCRIPTION OF DECISION AND IMPACT ON DIFFERENT STAKEHOLDER GROUPS
ACQUISITIONS IN
THE YEAR
– Overview: The board is required to approve any acquisitions that the group enters into. In addition to this, the board reviews
and approves any material acquisition offers.
REVISED
INVESTMENT MIX
AND VOL ATILIT Y
ADJUSTMENT
APPLICATION IN
THE UK
– Key considerations and decision: During December 2020 the board approved entry into an agreement with Brand New Day
Houdstermaatschappij N.V. in the Netherlands to acquire c9,000 policies, the vast majority of which are term life products.
The acquisition, which is likely to complete during the first half of 2021 will be delivered through the group’s Dutch subsidiary,
Waard Leven N.V. Whilst the transaction is not particularly large in the context of some historical transactions, it furthers the
group’s acquisition and consolidation strategy in the Netherlands.
– Primary beneficiary: The transaction is expected to deliver a small EcV1 gain on completion, which will accrue to the benefit
of the shareholders.
– Other stakeholder considerations:
• Regulators: This transaction required approval by the Dutch regulator, De Nederlandsche Bank (DNB), who needs to ensure
that the policies being transferred will be prudently managed, and that the transaction itself does not cause any prudential
or conduct issues for Waard Leven.
• Customers: The customers of the policies being transferred will be interested in ensuring that their policies continue to be
administered in line with expectations, and that they continue to be prudently managed.
– Overview: During the year the board approved the decision for Countrywide Assured to apply for the Volatility Adjustment in
conjunction with a proposal to refine the mix of investments that are used to back certain non-linked liabilities.
– Key considerations and decision: The business plan for the UK division included an initiative to further develop the strategy
for assets backing certain non-linked liabilities, with a view to optimising the risk/reward relationship and achieving higher returns
than the current portfolio. By design this introduces a little more spread risk into the portfolio. At the point of implementing the
new portfolio, the UK division intends to apply the Volatility Adjustment. This is a solvency calculation method, which requires
PRA approval, and will help reduce the artificial volatility in the balance sheet caused by movements in the value of assets
when bond spreads change that could otherwise encourage pro-cyclical behaviour. The board considered the business case for
the intended asset portfolio and associated application for the Volatility Adjustment and approved an application to the PRA in
December 2020. This followed a pre-application process that took place with the PRA earlier in the year. We plan to implement
this change to our investment mix at the same time as applying the Volatility Adjustment following approval from the PRA.
– Primary beneficiaries: The main stakeholder group to benefit from this initiative will be the shareholder, with higher asset
returns enabling stronger emergence of surplus, and the Volatility Adjustment resulting in less volatile surplus emergence.
– Other stakeholder considerations:
• Regulators and customers: As part of this process it was important that the board considered other stakeholders, primarily
the PRA in its role as our prudential supervisor and customers in their interests in ensuring their policies are held with a
financially secure organisation. The board concluded that the refined investment approach, coupled with the application of the
Volatility Adjustment would have no material impact on the PRA’s supervision of the UK business or any customer detriment.
SCILDON’S
INVESTMENT IN
A NEW POLICY
ADMINISTRATION
SYSTEM
– Overview: As noted in the 2019 group annual report and accounts, the group continues to invest in its IT infrastructure across the
group. This includes replacing the current policyholder administration system in Scildon and work has continued on this during 2020.
– Key considerations and decision: The board continued to consider the pros and cons of this IT development at key milestones
and project stage gates, including the associated risks, the financial impact and viable alternatives. Based on this assessment, the
board decided to continue to progress with the implementation.
– Primary beneficiary: There are three primary beneficiaries:
• Shareholders: The ongoing investment in IT is designed to provide value enhancements to the business and hence to our
shareholders. The target IT infrastructure is designed to be more robust and more efficient to run.
• Customers and brokers: Of equal importance is the benefit to customers and the interactions with brokers. The new system
will support a more digitised service, increasing speed, optionality and efficiency to the brokers and end 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 operating model.
• Suppliers: Having reliable suppliers to support the implementation and, where relevant, the ongoing maintenance of the new
system is an important consideration when making this decision.
32
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT SIGNIFICANT DECISION DESCRIPTION OF DECISION AND IMPACT ON DIFFERENT STAKEHOLDER GROUPS
APPROVAL OF
HIGH LEVEL ESG
STRATEGY
– Overview: In 2020, the board reviewed progress made across the group on our sustainability and ESG credentials and also
reviewed upcoming regulatory requirements and guidance likely to arise from the Task-force on Climate Financial Disclosure
(TCFD) and Sustainable Financial Disclosure Regulation (SFDR).
– Key considerations and decision: The review highlighted progress made across the group but also that more was required to
fully embed sustainability and ESG considerations into our operating model, the investment offering to our customers and our
own investment decisions. The board approved work to formulate a Group-wide ESG strategy to capture our intentions and
progression of further work to embed our commitments to UNPRI and UNSDG.
– Primary beneficiaries: The primary beneficiaries of this decision are:
• Shareholders: As it improves the sustainability of investment returns.
• Regulators: Regulatory guidance and legal requirements will be a key development for us to take account of in the coming years.
• Employees: Many of the aspects of ESG directly impact the role and working conditions of our current and future staff.
• Customers: Developing our ESG product offerings directly impacts our new business generation for those looking for ESG
investment opportunities and improves the sustainability of investment returns for those where we are responsible for
investment decisions.
– Other stakeholder considerations:
• Suppliers and outsourcers: As we roll out our ESG Policy in 2021 we will engage with our suppliers and outsourcers to ensure
alignment with their service offering.
33
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B BUSINESS REVIEW UK
The UK division principally consists of the insurance company Countrywide Assured plc. The company manages
c240,000 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 2020
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.
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.
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– The division has completed its fund management rationalisation programme during the
year, which has involved consolidating the vast majority of unit-linked fund management
with one investment management company. This programme’s purpose was to deliver a
combination of cost efficiencies, whilst also continuing to provide customers with strong
fund performance.
– The division has been investigating revising its investment approach for assets backing
some of its non-linked policies, and in conjunction has been assessing the benefits of
applying for the Volatility Adjustment (VA) when calculating its solvency position.
An application to the PRA was made during December 2020 to apply the VA. We plan to
implement this change to our investment mix at the same time as applying the Volatility
Adjustment following approval from the PRA.
– The Economic Value1 of the division, excluding the impact of dividend distributions, has
increased over the course of the year, despite the investment market volatility arising
from COVID-19.
– A key focus during the year has been ensuring that we continue to meet the needs of
our customers during the ongoing COVID-19 pandemic. This has resulted in a need for a
large proportion of the organisation, and its key outsource partners, to work from home.
Despite the necessary changes, all important business services have continued to
operate effectively, having adapted our processes accordingly.
– During the year we have implemented changes that enable customers to contact us in
new ways.
– The multi-year customer strategy implementation program was successfully completed,
with any revised processes having been transferred into business as usual operations.
– The division’s operational resilience programme has continued. This is a multi-year
programme which was set up to ensure that we comply with expectations of our
regulators and customers. Whilst the regulators’ requirements are still at a consultation
stage, we recognise the business and customer benefits of ensuring resilience in our
business services.
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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.
– The division has continued to deliver on its business as usual governance responsibilities
despite the COVID-19 situation. The organisation has transitioned to a predominantly
working from home environment, both in terms of our outsourcers and the oversight
governance team itself. This process was successfully implemented with no material
issues.
– Throughout the year, especially at the start of the pandemic, the business implemented
enhanced monitoring of key measures, such as claims and customer service, ensuring
performance levels were maintained despite the impact of the pandemic.
– The IFRS 17 programme has continued to progress in line with plans. We have been
working with Willis Towers Watson as the group’s provider of the contractual service
margin (CSM) tool.
34
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
KPIs
Economic Value1
£m
2020
187.4
2019
204.6
2018
214.7
2017
255.5
2016
239.6
Cash generation1
Reported value
Cumulative dividends
£m
150.0 337.4
2020
29.5
121.0 325.6
2019
33.6
62.0 276.7
2018
55.8
30.0 285.5
2017
34.5
239.6
2016
21.3
Policyholder fund performance
CA pension managed
CWA balanced managed pension
S&P managed pension
Benchmark - ABI mixed inv 40%-85% shares
17.9%
16.4%
17.8%
15.5%
3.0%
2.9%
1.6%
4.7%
12 months ended 31 December 2020
12 months ended 31 December 2019
During a very volatile year, our three main managed funds under-performed the reported ABI sector
benchmark, due to the portfolio asset positioning being higher in equities during the earlier stages of
the year, which saw significant equity falls driven by COVID-19. Whilst in the second half of the year
the funds outperformed the sector benchmark, this did not quite result in the overall full year position
exceeding sector index.
SOLVENCY RATIO: 163%
£m
131%
32.9
31.5
163%
64.4
(33.5)
130%
30.9
Surplus generated in
the year increases
solvency ratio from
131% to 163%. After the
dividend, due to be paid
in 2021, the ratio is 130%.
31 Dec 19
surplus
Surplus
generation
31 Dec 20
surplus
(pre-div)
2020
dividend
31 Dec 20
surplus
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further
information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
FUTURE PRIORITIES
– Implement planned changes to investments
backing certain non-linked liabilities and apply the
VA when calculating its solvency position.
– Manage the transition from using a risk-free curve
based on LIBOR (London Interbank Offering
Rate) for discounting insurance liabilities under
Solvency II to using SONIA (Sterling Overnight
Index Average) as required by the PRA.
– Continue to focus on maintaining an efficient and
cost-effective operating model.
– Continue to support Chesnara in identifying and
delivering UK acquisitions.
– Continue to deliver the division’s operational
resilience programme, focusing primarily on
business services affecting our customers. This
will include reviewing and responding to any new
rules that are introduced by the regulators.
– Key business as usual activities include:
• Continuing to complete product reviews which
are designed to support our ongoing
assessment of providing fair outcomes to our
customers. Deliver any resultant remediation
activity as required.
• Continuing to work at getting back in touch
with customers who have not provided us with
their most recent contact details.
– From an IFRS 17 perspective, 2021 is a year that
will see some of the operational changes that are
required being tested and implemented.
35
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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 2020
01
CAPITAL & VALUE MANAGEMENT
Movestic creates value predominantly by generating
growth in the unit-linked Funds Under Management
(FuM), whilst assuring a high-quality customer proposition
and maintaining an efficient operating model. FuM 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.
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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.
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.
– COVID-19 resulted in significant volatility in financial markets during the year, though
Swedish equities recovered well delivering 10.8% growth in 2020.
– The division has completed the liquidation of Modernac as part of its corporate
restructuring initiatives. This has released £1m of surplus capital.
– Policyholder transfers continues to be a feature of the business due to the competitive
Swedish market. High transfer activity has resulted in an adverse transfer ratio, with
slightly negative net client cash flows. That said, Movestic has strengthened its transfer
out assumptions in light of this dynamic, resulting in an increase in reserves of £18.7m,
which includes short-term cover for temporary COVID-19 related pressures. The
company has also increased its focus on business retention activity.
– New industry-wide regulations have been introduced in order to make it easier for
customers to transfer their pension funds. As part of this, further rules are expected
during 2021 that limit the amount that can be charged when transferring policies, with an
adverse EcV1 impact of £3.1m.
– Despite turbulent financial markets FuM increased by 1.8% over the year.
– Continuation of dividend policy with a proposed record payment of £10.2m.
– As part of streamlining its fund management proposition the division closed its
Luxembourg based operation and set-up 5 new funds in Sweden.
– Policyholder average investment return of 2.7% in the year (2019:18.9%), despite
COVID-19 the Swedish equity index rose 10.8%, however other equities and non-equity
investments were less positive resulting in lower total investment returns.
– Broker and customer servicing have been a key focus during the pandemic. The division
has adjusted its processes accordingly in order to ensure that such servicing continues
to an acceptable level.
– Development of customer and broker offerings remained a focus with new transparent
and personalised unit-linked pension and savings solutions as well as insurance products,
delivering enhanced digital service and functionality.
– The division received a rating from UNPRI (UN initiative for responsible investment) that
is better than, or in accordance with its peers, while the sustainable customer fund
offerings have remained a focus.
– Dealing with the impact of COVID-19 has been a key management focus in 2020.
– The company has ensured that it is operating in line with local government guidelines,
which essentially recommend that employees should work from home unless they cannot.
– In setting up these arrangements, management has focused on ensuring that the IT
infrastructure, both in terms of employee usability and security resilience, can
accommodate the revised working practices.
– Movestic has also focused on staff well-being throughout the lockdown given its
significant change for many staff members.
– The division’s digitisation programme has progressed well and was completed during
the fourth quarter. The business now has a more robust platform and the ongoing
enhancement to this, and our customer experience, continues as part of our core mission.
– The division has continued its strategic focus on strengthening relations with new and
existing brokers and partners, building direct distribution capacity.
– IFRS 17 continues to progress with Willis Towers Watson selected as provider of the
contractual service margin (CSM) tool and implementation initiated.
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.
– Movestic reported commercial new business profit1 of £1.6m (2019: £7.0m). The
decrease compared with 2019 is largely due to reduced sales volumes and increased
transfer activity with strengthened transfer out assumptions, driven by COVID-19
dynamics and the effects of price pressure on the Swedish market.
– Sales volumes were affected by lower activity across the market during 2020, due to the
pandemic, particularly during the second half of the year, as we sign-posted in our Half
Year Report. As the Swedish market also experienced continued price pressure, the
division developed its offering to increase competitiveness and build customer loyalty for
the future.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
KPIs (ALL COMPARATIVES HAVE BEEN RESTATED USING 2020 EXCHANGE RATES)
FUTURE PRIORITIES
Economic Value1
Reported value
Cumulative dividends
£m
2020
246.5
2019
277.6
2018
233.1
2017
246.4
2016
226.0
15.3
261.8
8.5
286.1
5.5
238.6
2.7
249.1
226.0
– 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 propositions and
experience.
– Strengthen distribution capacity with the direct
business area, as a complement to the broker
channel.
– Provide a predictable and sustainable dividend
to Chesnara.
– Increased focus on retention.
Broker assessment rating
2020
3.3
2019
3.5
2018
3.8
2017
3.7
2016
3.8
Policyholder average investment
return: 2.7%
Following the broker assessment review
we have conducted our own satisfaction
surveys. These surveys gave a more
positive result, and the feedback, both
positive and negative helped identify
further actions as we continue to work on
improving broker satisfaction.
– Continue to develop new solutions and
tools to support the brokers’ value enhancing
customer proposition.
– Strengthen the relationship with brokers further
and continue to develop improved functionality
and digital administration self-services for brokers.
– Continue to build distribution capacity in the
direct business area.
– Broaden product and service offering for other
customer segments.
SOLVENCY RATIO 165%
£m
155%
2.2
165%
(10.2)
90.1
92.3
158%
82.1
Solvency remains strong.
After the dividend,
due to paid in 2021, the
ratio is 158%.
– The COVID-19 situation will continue to be
monitored closely, with returning to the office
options under continuous review.
– A focus on the application decisions and
operational impact of the IFRS 17 programme,
including implementation of the contractual
service margin (CSM) tool.
31 Dec 19
surplus
Surplus
generation
31 Dec 20
surplus
(pre-div)
2020
dividend
31 Dec 20
surplus
Occupational pension market share %
New business profit1
£m
2020
4.5
2019
6.5
2018
6.6
2017
7.6
2016
8.3
2020
1.6
2019
7.0
2018
11.2
2017
11.0
2016
11.5
– Continued focus on sales activities and
competitive offerings in the broker channel as
well as increasing distribution capacity in the
direct business area.
– Ongoing development of the customer
offering and delivery of new functionality on
web platforms to improve customer and
broker experience.
New business figures from 2018 onwards represent
commercial new business, as detailed on page 211.
Values prior to this are retained at that which they were
previously reported.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further
information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
37
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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 2020
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.
– Waard completed the acquisition of a portfolio of term life and savings products from
Argenta Bank and has migrated the policies onto our systems. Towards the end of
the year, a further portfolio acquisition was agreed (subject to regulatory approval),
further strengthening Waard’s position as an acquirer of small portfolios that are not
core to vendors.
– Despite the market turmoil caused by the COVID-19 pandemic, both businesses
continue to have strong solvency positions, inclusive of the use of the Volatility
Adjustment. Scildon remains strong at 178%, above the internal capital management
policy of 175%. Waard continued to maintain significant solvency levels, the ratio
ending the year at 438%.
– Scildon has continued to optimise its risk-based return through de-risking its asset
portfolio and investing into mortgage funds with c£170m held as at 31 December 2020.
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.
– A key focus during the year has been ensuring that we continue to meet the needs of
our customers during the ongoing COVID-19 pandemic. This has resulted in a need for a
large proportion of the organisation to work remotely. Our processes have been adapted
accordingly and we have continued to effectively operate all key business services.
– Scildon continues work on the migration and digitalisation of its policy administration
system. Work has focussed on development of the pension proposition with key portals
going live in 2021, positioning the business well to take advantage of expected growth in
the defined contribution market. The project will then move to the term product
migration through 2021 and into 2022, delivering expected efficiencies and
strengthening the business’s market and operating position. The expected costs and
benefits are included within the 2020 year end position.
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 have engaged with the regulator throughout 2020 and the business implemented
enhanced monitoring of key measures, such as claims and customer service, ensuring
performance levels were maintained despite the impact of the pandemic.
– The division has continued to deliver on its business as usual governance responsibilities
despite the COVID-19 situation. The organisation successfully and rapidly transitioned to
a predominantly remote working environment.
– The IFRS 17 programme has continued to progress in line with plans. We began
working with Willis Towers Watson as the group’s provider of the contractual service
margin (CSM) tool.
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Scildon brings a ‘New business’ dimension to the Dutch
division. 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.
– Despite a tough and uncertain market, we continue to see increasing new business
profits, with £8.8m earned in the year on our commercially realistic metric. As noted
previously, we will face headwinds to maintain this progress, but we have a solid base to
take advantage.
– Underpinning this, Scildon policy count continues to increase, now with in excess of
200,000 policies. Also, the term market share for Scildon term lifestyle product for the
month of December 2020 has risen to 16.3%, although the market size has decreased,
partly as a result of COVID-19.
– We have established a white labelling relationship with Dazure (a distribution partner) as
a route to market to enable us to service more of the market.
38
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
KPIs (ALL COMPARATIVES HAVE BEEN RESTATED USING 2020 EXCHANGE RATES)
FUTURE PRIORITIES
Economic Value1 - Scildon
Reported value
Cumulative dividends
27.7
192.7
27.7
206.3
22.5
194.0
224.2
227.2
£m
2020
165.1
2019
178.7
2018
171.5
2017
224.2
2016
227.2
Client satisfaction rating
2020
8.1
2019
7.8
2018
7.7
2017
7.6
2016
7.4
SOLVENCY RATIO SCILDON: 178%
SOLVENCY RATIO WAARD: 438%
£m
210%
83.6
(16.8)
178%
66.7
31 Dec 19
surplus
Surplus
generation
31 Dec 20
surplus
£m
501%
2.2
475%
(4.0)
38.6
40.8
438%
36.7
31 Dec 19
surplus
Surplus
generation
31 Dec 20
surplus
(pre-div)
2020
dividend
31 Dec 20
surplus
Solvency is robust in both businesses, with post-dividend solvency ratios of
178% and 438% for Scildon and Waard respectively. The Scildon reduction includes
the impact of an increase in lapse capital which reverses out at group level.
Term assurance market share %
New business profit1
£m*
2020
14.2
2019
11.6
2018
7.6
2017
7.3
2016
5.9
2020
8.8
2019
7.9
2018
4.8
2017
1.9
2016
2.0
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further
information on APMs can be found in the ‘Additional Information’ section of this Annual Report & Accounts.
– Integrate the new acquisition into the Waard
business and continue to support Chesnara in
identifying and delivering Dutch acquisitions.
– Progress capital management and cash
generation initiatives across the group,
particularly in Scildon, with the aim of creating
future dividend potential.
– Effective management of the closed book run-off
in Waard to enable ongoing divided payments
to Chesnara.
– 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.
– During 2021 we plan to implement changes that
mean Scildon will directly benefit from the lapse
capital reversal currently at group.
– From an IFRS 17 perspective, 2021 is a year that
will see some of the required operational changes
being tested and implemented.
– Continue to deliver product innovation and cost
management actions to ensure we meet our full
potential in terms of new business value.
– Consider alternative routes to market that do
not compromise our existing broker relationships,
such as further product white labelling.
*New business figures from 2018 onwards represent
commercial new business, as detailed on p211. Values
prior to this are retained at that which they were
previously reported.
39
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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 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.
– We primarily focus on acquisitions in the UK and the Netherlands, although
– Transaction risk is minimised through stringent risk-based due diligence
will consider other territories should the opportunity arise.
– We assess deals applying well established criteria which consider the
procedures and the senior management team’s acquisition experience and
positive track record.
impact on cash generation and Economic Value under best estimate and
stressed scenarios.
– We fund deals with a combination of debt, equity or cash depending on the
size and cash flows of each opportunity and commercial considerations.
HOW WE ASSESS DEALS
Cash generation1
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 Value1 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 2020
ACQUISITION OUTLOOK
During 2020 the group completed one transaction:
Argenta transaction
On 1 September 2020, Chesnara announced the
completion of an acquisition of a portfolio of life insurance
business in run-off from the Dutch branch of Belgian-
owned Argenta Bank-en Verzekeringsgroep N.V. The
transaction was 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 involved the transfer of a portfolio of in excess
of 40,000 term and savings policies, for a consideration of
€29.2m (approximately £25m), 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 delivered c£9m of incremental value1. The acquired
portfolio had IFRS gross assets of c.£368m
(at 31 December 2020 exchange rates) and contributed
growth of over 40% to the Waard Group policy count.
A further small portfolio acquisition, with approximately
9,000 policies has been agreed before the year end.
This will complete upon regulatory approval in 2021.
– Despite the COVID-19 restrictions, we have continued to see a healthy flow of acquisition
activity in the year. We have also continued to see the continuation of, what we perceive
to be, high 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
become more challenging. The long-term economic implications resulting from
COVID-19, in particular the further reduction in both short and long-term interest rates
is likely to increase the challenges of businesses who own non-core back-books. We
believe this will potentially drive further consolidation as institutions seek to remove
operational complexity, refocus on core business lines and potentially release capital or
generate funds from capital intensive life and pension businesses.
– Historically we have had 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.
– 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.
40
CHESNARA ANNUAL REPORT & ACCOUNTS 2020XXXXXXXXXXXXXXXXXXXXXXXXXXX • 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 2020
31 Dec 2019
156%
155%
£204.0m
£210.8m
£568m
31 Dec 2020
£591m
31 Dec 2019
£364m
31 Dec 2020
£380m
31 Dec 2019
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)1 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, however we do
apply the Volatility Adjustment within our Dutch division and have applied to
do so in the UK.
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 OF 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:
KEY
Total market risk
Counterparty default risk
Total life underwriting risk
Total health underwriting risk
Operational risk
Capital requirement for other subsidiary
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.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
41
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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 and applied to do so in the UK 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
£m
28.5
2.1
2.2
(24.0)
16.0
(32.9)
156%
155%
168
36
173
38
568
364
591
380
31 Dec 2020
31 Dec 2019
Surplus: The group has £167.6m of surplus over and above the internal
capital management policy, compared to £172.8m at the end of 2019. The
group solvency ratio has increased from 155% to 156%. Solvency surplus
has fallen as a result of own funds falling slightly more than the capital
requirements, after the proposed dividend is taken into account.
Dividends: The closing solvency position is stated after deducting the
£21.4m proposed dividend (31 December 2019: £20.8m), and reflects the
payment of an interim dividend of £11.5m.
210.8
1.3
204.0
Divisional movement - £8.8m
Group
surplus
31 Dec 2019
CA
Movestic Waard
Scildon Chesnara/
consol adj
Exchange
rates
Dividends
Group
surplus
31 Dec 2020
Own Funds: Own Funds have risen by £9.7m (pre-dividends). Drivers of
growth include a UK with-profit net transfer of £9.2m and completion of the
Argenta acquisition. These factors were partly offset by the impact of the
fall in yields and operating strains.
SCR: The SCR has fallen by £16.4m, mainly due to a material reduction in
equity risk, currency and lapse risk; partially offset by an increase in expense
and catastrophe risk.
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 2019 figures have been restated using 31 December 2020 exchange rates in order to aid comparison at a divisional level.
UK £m
SWEDEN £m
130%
10
20
131%
11
22
133
102
140
108
Surplus: £10.5m above board’s capital
management policy.
Dividends: Solvency position stated after
£33.5m proposed dividend (2019: £29.0m).
Own Funds: Increased by £26.2m
(pre-dividend) due to a net with-profit capital
transfer and modest economic growth, offset
by a strengthening of operating assumptions.
SCR: Fallen by £5.3m, driven by fall in
equity risk capital. Currency risk and lapse
risk have also contributed to SCR reduction.
158%
54
28
57
33
225
142
255
165
Dividends: Solvency position stated after
£10.2m proposed dividend (2019: £6.8m).
Own Funds: Fallen by £20.4m
(pre-dividend) mainly driven by operating
losses due to changes in transfer legislation
and modelling, and fund management fees.
SCR: Fallen by £22.6m, driven by material
fall in equity risk, spread risk and lapse risk
reductions.
155%
Surplus: £53.6m above board’s capital
management policy.
31 Dec 2020
31 Dec 2019
31 Dec 2020
31 Dec 2019
NETHERLANDS – WAARD £m
NETHERLANDS – SCILDON £m
438%
501%
47
28
8
11
48
30
8
9
31 Dec 2020
31 Dec 2019
Surplus: £28.6m above board’s capital
management policy (£1.0m rise due to
buffer reduction: 85% to 75%).
Dividends: Solvency position stated after
£4.0m proposed dividend (2019: £5.2m).
Own Funds: Increased by £3.5m,
mainly due to completion of the Argenta
acquisition.
SCR: Risen by £1.3m, as business run-off
reductions were more than offset by
additional Argenta SCR, mainly due to an
increase in lapse, expense and catastrophe
risk from the new portfolio.
210%
178%
3
63
150
158
84
19
64
75
31 Dec 2020
31 Dec 2019
Surplus: £2.6m above board’s capital
management policy (£8.6m rise due to
buffer reduction: 85% to 75%).
Dividends: No foreseeable dividend is
proposed. The 2019 foreseeable dividend
of £7.4m was not paid.
Own Funds: Fallen by £7.3m due to
operating losses, partially offset by modest
economic profits.
SCR: Increased by £9.5m, largely due to
increases in underwriting risks due to the
fall in yields, which mainly reverses at
group level.
KEY
Own Funds (Post Div)
SCR
Buffer
Surplus
42
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC 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 EcV1 and
cash generation1, both of which are derived from the group’s solvency calculations, are also sensitive to these factors.
The diagram below provides some insight into the immediate and longer-term impact of certain sensitivities that the group is exposed to, covering solvency
surplus and Economic Value. As can be seen, EcV tends to take the ‘full force’ of adverse conditions whereas solvency is often protected in the short term
and, to a certain extent, the longer term due to compensating impacts on required capital. Whilst cash generation has not been shown in the diagrams below,
the impact of these sensitivities on the group’s solvency surplus has a direct read across to the immediate impact on cash generation.
Each individual bar in the diagram illustrates the estimated impact range (£m) of the respective sensitivities and whether that impact is positive (green) or
negative (red).
Impact range £m
(100) (80) (60) (40) (20) - 20 40 60 80 100
(100) (80) (60) (40) (20) - 20 40 60 80 100
SOLVENCY SURPLUS
EcV
20% sterling appreciation
20% sterling depreciation
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
INSIGHT *
20% sterling appreciation
A material sterling appreciation reduces the value of surplus in our overseas
divisions and hence has an immediate impact on group solvency surplus and
EcV. It also reduces the value of overseas investments in CA.
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 can be larger
than Own Funds, resulting in an immediate reduction in surplus, depending
on the starting point of the symmetric adjustment. Conversely, in an equity
fall, Own Funds and SCR both fall, to the extent to which the SCR reduction
offsets the Own Funds depends on the stress applied. The impacts are not
fully symmetrical due to management actions and tax. The change in
symmetric adjustment has a significant impact (25% equity fall: -£21m to the
SCR, 25% equity rise: +£30m 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, much
of which is invested in equities.
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 solvency surplus 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. The impact on the other divisions is less severe.
1 Alternative performance measure (APM) used to enhance understanding of financial
performance. Further information on APMs can be found in the ‘Additional Information’
section of this Annual Report & Accounts.
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.
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 mass lapse hits Own
Funds by more than the SCR reduction.
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.
43
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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
results for 2020. Further analysis can be found on pages 46 to 50.
IFRS
IFRS PRE-TAX PROFIT £24.6M
2019: £96.1m
TOTAL COMPREHENSIVE INCOME £43.3M
2019: £60.6m
Further detail on p50
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?
The IFRS results form the core of reporting and hence retain
prominence as a key financial performance metric. There is
however a general acceptance that the IFRS results in isolation do
not recognise the wider financial performance of a typical life
and pensions business, hence the use of supplementary alternative
performance measures (pages 211 to 212) to enhance
understanding of financial performance.
Risks
The IFRS profit/(loss)can be affected by a number of our principal
risks and uncertainties as set out on pages 55 to 59. Volatility in
equity markets and bond yields can result in volatility in the IFRS
pre-tax profit/(loss), 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
21.2
(27.6)
30.6
0.4
24.6
(3.4)
22.6
(0.5)
43.3
Operating
profit
Economic
profit
AVIF
impairment
Profit on
portfolio
acquisition
Profit
before tax
Tax
FX
Other
Total
comprehensive
income
– Solid profits were delivered in each of the operating divisions, despite the
challenging year and impact of COVID-19 on investment markets.
– Operating profits, excluding AVIF impairment1 were down on last year’s £46.2m,
in part due to a strengthening of reserves (c£10m) in Scildon.
– Economic earnings, excluding AVIF impairment1 were also more muted than in
2019 (£49.1m) and reflect the pandemic-related low equity growth environment
compared with the previous year.
– The AVIF impairment charge has arisen from reassessing the future profits from
Scildon, which has been hit in part by falling yields in the year.
– Total comprehensive income includes foreign exchange gains on translation of the
Dutch and Swedish divisional results, owing to sterling depreciation against the
euro and Swedish krona.
GROUP CASH GENERATION1 £27.7M
2019: £36.7m
DIVISIONAL CASH GENERATION1 £23.6M
2019: £50.8m
Further detail on p46
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 55 to 59. 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.
44
Highlights £m
29.5
12.4
4.1
(22.3)
23.6
4.1
27.7
UK
Sweden
Netherlands-
Waard
Netherlands-
Scildon
Divisional
cash
generation
Other group
activities
Total group
cash
generation
Divisional cash generation
– Cash generation in the UK is the largest component of the divisional result.
– The UK contribution was delivered through solid value growth, while a reduction in
capital requirements, in excess of the reduction in Own Funds, underpinned the
Swedish result. Cash returns in Waard benefit from the completion of the Argenta
policy portfolio acquisition.
– Scildon reported cash utilisation of £22.3m following a reduction in Own Funds and
an increase in capital requirements. Modest economic positives were insufficient to
offset operational losses, which were themselves partially due to reducing yields.
The rise in SCR included a strain from reinvesting low risk cash into mortgages
(mortgage balance £170m at 31 December 2020) and falling yields caused a lapse
SCR increase that reverses at group.
– The 2020 result includes the benefit of a net £9.2m capital transfer from restricted
with-profit funds in the UK (2019: £5.1m net increase in restriction).
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 and as consequence of a
management action to reduce SCR.
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT £
ECONOMIC VALUE (EcV)1 £636.8M
2019: £670.0m
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. EcV reflects a market-consistent
assessment of the value of the existing insurance business, plus the adjusted net asset value of
the non-insurance businesses 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-£100m, based on the composition of the group’s EcV at 31 December 2020.
EcV EARNINGS1 £(37.6)M
2019: £104.0m
Further detail on p49
Highlights £m
670.0
(37.6)
36.7
669.1
(32.3)
636.8
EcV
31 Dec 2019
EcV
earnings
Forex
Dividends
Pre-
dividend
EcV
EcV
31 Dec
2020
– Prior to any dividend payment impact, the total
Economic Value remains largely unchanged from the
prior year.
– The closing position includes an EcV earnings loss of
£37.6m, heavily impacted by the pandemic’s impact
on both business conditions and the economic
environment, with operating losses in Scildon and
Movestic and modest investment market returns
compared to prior years.
– The change in EcV over the year includes the impact
of the payment of the final 2019 and interim 2020
dividends.
– Foreign exchange gains arose on translation of the
Dutch and Swedish divisional results, representing
the weakening of sterling against both the euro and
Swedish krona.
Further detail on p48
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
(49.8)
Material other operating items
(16.2)
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?
A different perspective is provided in the performance of the group and on the valuation of the
business. Economic Value earnings are an important KPI as they provide a longer-term measure
of the value generated during a period. The Economic Value earnings of the group can be a
strong indicator of how we have delivered against all three of our core strategic objectives. This
includes new business profits generated from writing profitable new business, Economic Value
profit emergence from our existing businesses, and the Economic Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors, including those
highlighted within our principal risks and uncertainties and sensitivities analysis as set out on
pages 55 to 59. 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
Other
Total EcV earnings
(37.6)
22.9
5.7
– An EcV loss of £37.6m was incurred in 2020.
– The underlying operating earnings1 loss in the year is
largely driven by losses in Scildon and Movestic.
Movestic’s are a function of fund rebate pressures
across the industry, whilst Scildon’s are largely driven
by the impact of the current low yield environment.
CA and Waard delivered positive operating earnings.
– Material other operating items largely relates
to Movestic, and reflects changes in transfer out
assumptions. Off-setting this is a £7.2m gain
on completion of a portfolio acquisition in the
Waard Group.
– Economic earnings were more modest than in 2019,
owing to muted equity market returns, falling bond
yields and widening bond spreads, largely due to the
effect of COVID-19.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
45
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
FINANCIAL REVIEW • CASH GENERATION
The UK and Swedish businesses delivered solid cash contributions, supporting a total cash generation of £27.7m in
2020. 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 £27.7M
2019: £36.7m
DIVISIONAL CASH GENERATION £23.6M
2019: £50.8m
Definition: Defining cash generation in a life and pensions business is complex and there is no reporting framework defined by
the regulators. This can lead to inconsistency across the sector. We define cash generation as being the movement in Solvency II
surplus own funds over and above the group’s internally required capital, which is based on Solvency II rules.
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.
2020 £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)
2019 £m
Cash generated/
(utilised)
23.2
(19.3)
3.5
(14.6)
(7.1)
(18.0)
(25.1)
6.3
25.6
(1.3)
(8.9)
21.8
17.0
38.7
–
6.0
1.9
1.2
9.0
5.1
14.1
29.5
12.4
4.1
(22.3)
23.6
4.1
27.7
33.6
(6.2)
0.8
22.6
50.8
(14.1)
36.7
– Group cash generation of £27.7m reflects a challenging year operationally and significantly lower economic returns than the prior year.
– Cash utilisation in Scildon is the largest component of the year on year reduction.
– Further analysis of the key drivers of cash generation across the group is provided below and on the following page.
UK
SWEDEN
– The division continued to deliver sound value growth, supported by a smaller
– The division has reported positive cash generation compared to cash
reduction in capital requirements, resulting in solid cash generation that
supports the Chesnara dividend. The result includes the benefit of a £20.0m
capital transfer from the with-profit funds, off-set by a further restricted
surplus build up of £10.8m.
utilisation during 2019. Detailed analysis is provided on the following page,
with the movement year on year including exchange rate impacts
(2020: +£6.0m; 2019: -£4.4m) coupled with equity-market driven impacts,
including the symmetric adjustment (2020: £+11.7m; 2019: +£6.0m).
The equity-market driven cash generation in the current year is in part due
to customers moving out of equity exposures due to volatility during the
year, which reduces the level of capital Movestic is required to hold.
NETHERLANDS – WAARD
NETHERLANDS – SCILDON
– Waard has again reported growth in Own Funds, outweighing an increase in
the capital requirement, resulting in yet another year with positive cash
generation contributing to the overall group result. Much of the growth is due
to the Argenta policy portfolio acquisition, while the result also benefits from
foreign exchange gains due to sterling’s depreciation against the euro.
– The Scildon cash generation was disappointing, moving from positive in
2019 to cash utilisation during the current year. The result does however
include a £6.0m loss as a direct consequence of yield reductions, coupled
with the reinvestment from cash to higher returning mortgage investments,
which also had a negative impact of c£6m. This change of investments was
a continuation of a wider programme to improve capital efficiency, which
resulted in £24.1m of cash generation during 2019.
46
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
FINANCIAL REVIEW • CASH GENERATION – ENHANCED ANALYSIS
The format of the analysis draws out components of the cash generation results relating to technical complexities, modelling issues or
exceptional corporate activity (e.g. acquisitions). The results excluding such items are deemed to better reflect the underlying commercial
outcome (commercial cash generation). This commercial result is then analysed to show the key drivers of that result. In particular, the
analysis draws out the extent by which cash generation 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.
COMMERCIAL CASH £27.7M
2019: £75.3m
ECONOMIC CASH £24.7M
2019: £37.5m
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 generation
Analysed as:
Economic cash generation
Equities
Spreads
Forex
Yields
Other economics
Core operating cash generation
New business strain
Material other operating items
Management actions & other exceptional
Strategic asset allocation implementation
Buffer reduction
Scildon cash to mortgages
Currency SCR methodology
a
b
c
d
29.5
0.5
(9.2)
–
–
(2.1)
18.7
1.1
3.5
(0.6)
–
(5.8)
3.9
7.9
–
3.0
6.7
6.7
–
–
–
12.4
0.8
–
–
–
–
13.1
23.6
12.5
(1.5)
6.0
(2.1)
8.7
2.0
–
(12.5)
–
–
–
–
–
4.1
–
–
(1.4)
–
–
2.7
3.6
–
1.4
1.9
(0.1)
0.5
(2.5)
–
-
1.6
–
1.6
–
–
(22.3)
(0.1)
–
–
15.4
10.5
3.5
(2.7)
(0.8)
3.6
1.2
(6.0)
(0.7)
18.8
(13.0)
(2.2)
2.5
–
8.4
(5.9)
–
4.1
–
–
1.0
(15.4)
-
(10.3)
(0.9)
–
0.1
5.1
(2.4)
(3.7)
(18.1)
–
(10.1)
18.8
–
–
–
18.8
27.7
1.2
(9.2)
(0.4)
-
8.4
27.7
24.7
15.2
3.1
14.1
(16.4)
8.7
8.0
(13.0)
(21.8)
29.7
6.7
10.0
(5.9)
18.8
At a total group level commercial cash generation is the same as base case generation. At a divisional level there are however some significant differences. The
underlying commercial result for Scildon is significantly better than the base result when adjustments are made to give credit for components that reverse on
consolidation and one-off model enhancement impacts. Conversely whilst the commercial cash generation for the UK remains significant, it is lower than the base
result which includes the benefit of transfers from previously built up surpluses in the with-profit funds.
Impacts from economic conditions: At a total level the commercial cash result includes £24.7m of economic benefits with notable losses from reducing yields being
more than offset by foreign exchange and equity market related gains. Despite volatility, equity markets in Sweden actually increased by 10% over the year and this
together with the impact of fund reallocations from equity to fixed interest investments, has contributed to a total economic cash gain of £23.6m. Scildon is more
exposed to the impact of reducing yields. Yield related losses were greater than spread and foreign exchange gains, resulting is a small net economic loss.
Core operating cash generation: In total the divisions have delivered a core operating cash gain of £26.1m. The closed book operations in the UK and the
Netherlands benefit from the impact of book run-off resulting in £5.3m of core operating cash generation. There is also a book run-off benefit in Scildon but this is
broadly offset by new business strain, drawn out as a separate item. The central group cash item of £(18.1)m is the total value of numerous items including uncovered
central expenses incurred, changes in central provisions for future expenses, interest payments, an increases in counterparty capital and capital requirement
consolidation adjustments.
New business strain: As an open operation selling relatively capital-intensive term contracts, the Scildon result is impacted by new business strain and this has been
drawn out from the core result. The strain in Movestic is less material so not drawn out as a separate item.
Material other operating items: This includes operating items that were individually material and have therefore been separately analysed to aid the understanding
of the operating cash generation in the year. The Movestic loss includes the impact of regulatory changes on transfer rates plus the temporary impact due to both
COVID-19 conditions and competitor pricing. In Scildon we have experienced cash utilisation as a result of adopting revised standard mortality tables which suggest
higher mortality than our specific portfolio experiences. Finally, the group figure relates to IFRS 17 expense reserves. This is mainly due to a policy to centralise the
programme and hence there are corresponding releases in the UK and Scildon results of £3.0m and £3.4m respectively.
Management actions: Management actions have had a notable positive impact during the year:
a) The UK implemented a change in its asset mix backing its with profit policies, which benefitted the level of risk capital required to be held.
b) During the year we have delivered our pre-agreed flight path of reducing our capital management buffers in our Dutch businesses.
c) We have switched a significant proportion of Dutch assets from BBB corporate investments to mortgage based investments. This was implemented in two stages.
Stage 1 involved the switch from BBB to cash which created £24.1m of cash generation and this was completed in 2019 and was hence recognised in the 2019
results. The second stage involved moving from cash to mortgage-based investments which resulted in cash utilisation of £5.9m in 2020. Therefore, despite the
end to end process creating a large capital efficiency gain, the 2020 result includes a notable negative impact.
d) As part of the group’s capital management programme we have reassessed the modelling of our currency risk capital requirement resulting in a large reduction.
47
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
FINANCIAL REVIEW • EcV EARNINGS
EcV loss in the year is driven by some large operating losses reflecting difficult trading conditions in Sweden and a
challenging low yield environment affecting Scildon, offset by modest economic profits over the course of the year.
ECV EARNINGS £(37.6)M
2019: £104.0m
Analysis of the EcV result by earnings source:
Expected movement in period
New business
Operating experience variances
Operating assumption changes
Other operating variances
Total EcV underlying
operating earnings1
Material other operating items
Total EcV operating earnings1
Economic experience variances
Economic assumption changes
Total EcV economic earnings1
Other non-operating variances
Risk margin movement
Tax
EcV earnings
2020
£m
0.3
3.7
(22.0)
(35.8)
3.9
(49.8)
(16.2)
(66.1)
45.7
(22.8)
22.9
(2.8)
4.7
3.7
(37.6)
Analysis of the EcV result by business segment:
UK
Sweden
Netherlands
Group and group adjustments
EcV earnings
2020
£m
11.8
(22.9)
(8.5)
(18.0)
(37.6)
2019
£m
Note
(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
2019
£m
48.9
43.8
16.7
(5.3)
104.0
2
3
1
1
1
Note
4
5
6
7
Notes
1. Economic conditions: The EcV result is sensitive to investment market
conditions, as reflected by the change in economic earnings year on
year. Key movements in investment market conditions during the year are
as follows:
– FTSE All World index increased by 24% (year ended 31 December 2019:
increased by 24%);
– Swedish OMX all share index increased by 13% (year ended 31 December
2019: increased by 30%);
– The Netherlands AEX all share index increased by 4% (year ended 31
December 2019: increased by 20%); and
– 10-year UK gilt yields have decreased from 0.84% to 0.24%.
The consequence of the above is that economic earnings in 2020 are much
more muted compared to 2019, with modest equity market related gains
being off-set by downward pressure arising from falling yields.
2. Underlying operating earnings: The loss of £49.8m is largely made up
of losses in Scildon and Movestic, coupled with some group expense strain
(see Note 7) being reported. The competitive environment in Sweden has
continued over the course of the year, with fund rebate pressure being the
main driver of experience losses. Turning to Scildon, there has been positive
lapse experience in the year, but in the current low yield economic
environment this results in EcV losses due to guarantees within certain
policies biting. In addition Scildon has also reported some mortality losses
largely due to applying the most recently published mortality tables. The UK
business and the Waard Group have reported positive operating results.
3. Material other operating items: This includes operating items that are
individually material and have therefore been analysed separately. This largely
relates to Movestic, whereby assumption strengthening has been made in
the year, amounting to £21.8m. This is mainly down to: the general competitive
environment and amount of churn in the market; changes to transfer
regulations and associated charges; and a general move from customers to
more traditional products with guarantees as a result of COVID-19 related
market volatility concerns. Also included in this category is a £7.2m gain on the
completion of Waard’s acquisition of the Argenta portfolio during the year.
4. UK: The UK reported value growth of £11.8m in 2020, with economic
earnings being the largest component of the result, despite the COVID-19
impact on investment markets early in the year. Economic gains were
primarily the positive impact of modest equity market growth, noting that
our policyholder funds are invested in a combination of UK and global
equities, although this this was partially offset by the negative impact of
falling yields. Operational earnings included gains arising from positive
lapse experience (resulting in future fee income higher than assumed at the
start of the year) and favourable mortality experience, offset by a
strengthening of future expense assumptions.
5. Sweden: Movestic recorded a large loss (£22.9m) over the year. As
described in Note 3 the majority of this was as a result of assumption changes
in relation to dynamics around policy transfers. New business profits of £1.0m
were reported, representing a reduction compared to last year’s reported
profits of £4.3m. Volumes have been hit by COVID-19 and we believe these
will return as Swedish society starts to open back up. Operating losses were
also recorded in relation to fund management fees, which have come under
pressure over the course of the year. Economic earnings of £9.2m were
reported, substantially lower than 2019 (£55.3m), largely as a result of the
significant equity market growth in 2019 not being repeated during 2020.
6. Netherlands: The Dutch businesses posted a loss of £8.5m for 2020.
Waard delivered solid profits of £4.9m while Scildon incurred a loss of
£13.4m. New business performance in Scildon of £2.7m (2019: £3.5m) was
largely in line with the prior year. As referred to Note 2, Scildon has reported
operating losses amounting to £23.0m, largely as a result of incurring
guarantee related costs as a result of better than expected policy retention,
and also the impact of adjusting mortality assumptions to an updated
mortality table. Economic gains were modest in Scildon (£5.3m).
Waard has reported positive EcV earnings of £5.3m. The majority of this arose
from the Argenta portfolio acquisition, offset by small economic losses.
7. Group: This component includes various group-related costs, and
includes: non-maintenance related costs (such as acquisition costs); the
costs of the group’s IFRS 17 programme (the budget of which was
increased during the year); and some economic-related costs such as a
foreign exchange loss on our euro debt, the negative impact of reduced
interest rates and interest on our bank debt.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
48
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC 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) 636.8M
2019: £670.0m
Value movement: 1 Jan 2020 to 31 Dec 2020 £m
EcV to Solvency II £m
670.0
(37.6)
36.7
669.1
(32.3)
636.8
636.8
(45.8)
(0.3)
(1.5)
(21.4)
567.7
EcV
31 Dec 2019
EcV
earnings
Forex
Pre-dividend
EcV
Dividends
EcV
31 Dec 2020
EcV
31 Dec 2020
Risk
margin
Contract
boundaries
Own Funds
restrictions
Dividends
SII Own
Funds
31 Dec 2020
EcV earnings: A loss of £37.6m has been reported in 2020. The impact of
the COVID-19 pandemic felt in all divisions, with operating losses and
more modest investment markets returns in the year. Further detail can
be found on page 48.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £32.3m were paid during the period, being the final
dividend from 2019 and the 2020 interim dividend.
Foreign exchange: The EcV of the group benefitted from a foreign
exchange gain in the period, a consequence of the sterling depreciation
against the euro and Swedish krona.
EcV by segment at 31 Dec 2020 £m
UK
187.4
Sweden
246.5
Netherlands
219.1
Other group activities
(16.3)
The above chart shows that the EcV of the group remains 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 £21.4m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
49
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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 24.6M
2019: £96.1m
IFRS TOTAL COMPREHENSIVE INCOME £43.3M
2019: £60.6m
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.
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:
CA
Movestic
Waard Group
Scildon
Chesnara
Consolidation adjustments
Profit before tax, AVIF impairment
and profit on acquisition
AVIF impairment
Post completion gain on portfolio acquisition
Profit before tax
Tax
Profit after tax
Foreign exchange
Other comprehensive income
Total comprehensive income
Operating profit, excluding AVIF impairment1
Economic profit, excluding AVIF impairment1
Profit before tax, AVIF impairment
and profit on acquisition
AVIF impairment
Post completion gain on portfolio acquisition
Profit before tax
Tax
Profit after tax
Foreign exchange
Other comprehensive income
Total comprehensive income
2020
£m
35.7
12.9
4.1
14.6
(9.4)
(6.1)
51.8
(27.6)
0.4
24.6
(3.4)
21.2
22.6
(0.5)
43.3
30.6
21.2
51.8
(27.6)
0.4
24.6
(3.4)
21.2
22.6
(0.5)
43.3
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
1
2
3
4
5
6
7
3
8
9
10
7
3
8
Notes.
1. The CA segment has posted a strong result, albeit down on the prior year, which
saw strong investment related returns late in 2019. In addition to positive economic
returns, the current year result also benefited from positive operational impacts arising
from mortality assumption changes, expense modelling impacts and favourable
policyholder tax deductions.
2. Movestic continues to contribute positively to the overall group IFRS result, with
profits broadly in line with the prior year. Positive investment returns, strong claims
development and reduced operational expenses produced a favourable result year to date.
3. The Waard Group result reflects weaker investment performance due to investment
market volatility. It has also incurred slightly higher than expected acquisition
related expenditure, which includes costs in relation to the purchase of a portfolio of
life insurance business in run-off from the Dutch branch of Belgian-owned Argenta
Bank-en Verzekeringsgroep N.V., which completed on 31 August 2020.
50
Note
31 Dec 2020 - £43.3m
31 Dec 2019 - £60.6m
30.6
21.2
46.2
49.1
(27.6)
0.4
(3.4)
(0.5)
22.6
_
0.8
0.2
(17.0)
(18.7)
Forex
KEY
Operating
Profit recognised on portfolio acquisition
Economic
AVIF Impairment
Tax
Other
4. Scildon has delivered a relatively strong IFRS result, despite the need for a
strengthening of reserves of circa £10m in the year arising from the liability adequacy
test biting. Positive investment value growth has arisen from favourable spread and
interest rate movements, coupled with a positive insurance result due to favourable
mortality experience.
5. The Chesnara result largely represents holding company expenses. The current
year loss is higher than last year largely due to 2020 including larger one-off items
such as project related expenditure and a foreign exchange loss in respect of the euro
denominated loan that it holds.
6. Consolidation adjustments relate to items such as the amortisation and impairment
of intangible assets.
7. During the year a write down of the Scildon AVIF intangible asset was performed
amounting to £26.6m (£11.6m of this was recognised in the first half of the year).
The impairment was as a result of a reduction in the assessed value of the future cash
flows of policies that were in force at the point of acquisition. The AVIF held in respect
of the Protection Life book within CA was also impaired by £1.0m, following a year end
assessment. The impairments are driven by a combination of economic and operating
factors, with the exact allocation between the two being impracticable to determine.
As a result this has been reported outside of both operating and economic profits.
8. Sterling weakened against both the euro and Swedish krona in the period, having
a material impact on the 2020 result, creating a sizeable exchange gain at the end of
the year.
9. The operating profit, excluding AVIF impairment, includes the negative impact of the
liability adequacy test biting in Scildon, amounting to £10.0m, which is driven by a
combination of economic and operating assumption changes. In the absence of this
operating profits have remained broadly in line year on year, demonstrating the stability
of the core business.
10. Economic profit, excluding AVIF impairment, represents the components of the
earnings that are directly driven by movements in economic variables. Despite being
lower than last year, economic profits have held up well in what has been a turbulent
year for global investment markets, which have largely recovered from the steep falls
seen at the start of the COVID-19 pandemic.
IFRS net assets remained relatively stable during the year, whilst cash generated from
operating activities increased period on period, as positive investment returns
outweighed corresponding movements in insurance and investment contract liabilities.
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
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: 156%
2018-2020 TSR
(14.07)%
Gearing1 ratio
of 7.4%
2020 dividend yield
7.5%
This does not include the
financial reinsurance within
the Swedish business.
Based on average 2020 share
price and full year 2020
dividend of 21.94p
Group remains a
going concern
(see page 52)
Policyholders’
reasonable
expectations
maintained.
Asset liability
matching
framework
operated effectively
in the year.
Sufficient liquidity
in the Chesnara
holding company.
Further detail on 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 7.4% at 31 December 2020 (11.0% at 31 December 2019). 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 the funding requirements for future acquisitions and the 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 the size of the acquisition; current cash resources of the group;
the current gearing ratio and the board’s risk tolerance limits for additional
debt; the 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.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
51
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
STRATEGIC REPORT
FINANCIAL MANAGEMENT (CONTINUED)
OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES
1. Maintain the group as a going concern
After making appropriate enquiries, including 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.
In performing this work, the board has considered the current solvency and cash
position of the group and company, coupled with the group’s and company’s
projected solvency and cash position as highlighted in its most recent business
plan and Own Risk and Solvency Assessment (ORSA) process. These processes
consider the financial projections of the group and its subsidiaries on both a base
case and a range of stressed scenarios, covering projected solvency, liquidity,
EcV and IFRS positions. In particular these projections assess the cash
generation of the life insurance divisions and how these flow up into the
Chesnara parent company balance sheet, with these cash flows being used to
fund debt repayments, shareholder dividends and the head office function of the
parent company. Further insight into the immediate and longer-term impact of
certain scenarios, covering solvency, cash generation and Economic Value, can
be found on page 43 under the section headed ‘Capital Management
Sensitivities’. The directors believe these scenarios will encompass any potential
future impact of COVID-19 on the group as Chesnara’s most material ongoing
exposure to COVID-19 is any associated future investment market impacts.
Underpinning the projections 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.
– The projections apply the most recent actuarial assumptions, such as mortality
and morbidity, lapses and expenses.
Due to the group’s strong capital position and the group’s business model, although
the Covid-19 outbreak caused significant global economic disruption, the group and
the company remain well capitalised and has sufficient liquidity. No significant
strengthening of mortality assumptions has been required as a result of Covid-19 at
this stage. As such we can continue to remain confident that the group will continue
to be in existence in the foreseeable future. The information set out on pages 41 to
42 indicates a strong Solvency II position as at 31 December 2020 as measured at
both the individual regulated life company levels and at the group level. As well as
being well-capitalised the group also has a healthy level of cash reserves to be able
to meet its debt obligations as they fall due and does not rely on the renewal or
extension of bank facilities to continue trading. The group’s subsidiaries rely on cash
flows from the maturity or sale of fixed interest securities which match certain
obligations to policyholders, which brings with it the risk of bond default. In order to
manage this risk, we ensure that our bond portfolio is actively monitored and well
diversified. Other significant counterparty default risk relates to our principal
reinsurers. We monitor their financial position and are satisfied that any associated
credit default risk is low.
Whilst there was 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 adapted to these restrictions and do not cause any issues as to our
going concern.
2. Assessment of viability
The board assesses 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 over the three-year business
planning time horizon. The board’s assessment of the viability of the group is
performed in conjunction with its going concern assessment and considers both
the time horizons required for going concern, and the slightly longer term
timelines for assessing viability. The assessment for viability also considers the
same key financial metrics as for assessing going concern, being solvency, cash,
EcV and IFRS, both on base case and stressed scenarios.
As reported in the going concern section, the group has remained well
capitalised throughout the COVID-19 pandemic, and any operational disruption in
moving to a largely remote working model in the short term, was minimal. In light
of this, should the COVID-19 situation be with us in society over the whole
viability period, we do not believe that this factor would cause any concern as to
our overall viability.
3. 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.
4. Assessment of prospects
Our longer-term prospects are primarily considered through the conclusions
drawn from our annual business planning process, updated for key events that
may occur in-between business plans.
The business plans include underlying operational deliverables, an assessment of
the business model and the financial consequences of following those plans. As
part of this process we also consider the principal risks and uncertainties that the
group faces (see pages 55 to 59) and how these might affect our prospects.
An 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
strategic objectives:
Value from in-force book: The group has c930,000 policies in force at
31 December 2020. These are generally long-term policies, and the associated
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, whilst equity markets have somewhat recovered
from the initial falls at the start of the pandemic, sustained depressed market
values do adversely impact fee income streams and therefore if markets fall
again then profitability prospects reduce. Similarly further reductions in yields
would adversely impact our 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 40. We see no reason to expect that
COVID-19 will have a long term impact on the availability of acquisition
opportunities. Despite a competitive landscape, where deals have completed
over the past year, the acquiring companies have still tended to report value
gains. Indeed we completed a small Dutch acquisition which has resulted in a
€7.2m EcV gain. Waard are building a useful market position as a company who
are able and willing to acquire books that are sub-scale for the vendors business
model. Whilst we maintain our ambition to complete larger deals, the prospects
from a steady flow of well priced smaller acquisitions should not be underestimated.
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. New business levels have held up well in Scildon despite overall
market size reductions during the year. An increase in market share stands us in
a good position to take advantage should market volumes increase post
COVID-19 as we would expect them to do. Movestic’s new business results
have been more adversely impact by COVID-19 primarily due to an overall
reduction in wider market activity. That said, we were still able to post a new
business profit and our market share would mean a notable recovery in future
profits when the wider market volume recovers.
Our business fundamentals such as assets under management, policy volumes,
new business market shares and expenses have all proven resilient to the impact
of the pandemic. This, together with the positive assessment of our core
strategic objectives and a line of sight to positive management actions over the
planning period, leaves use well positioned to deliver ongoing positive outcomes
for all stakeholders.
52
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
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.
How we manage risk
The risk management system supports the identification, assessment, and reporting of risks along with coordinated and economical application of resources to
monitor and control the probability and/or impact of adverse outcomes within the board’s risk appetite or to maximise realisation of opportunities.
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 identified, 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 significance of risks, the likelihood of their occurrence
and take account of the controls in place to manage them. The processes are designed to manage the
risk profile within the board’s approved risk appetite.
Group and divisional risk management processes are enhanced by stress and scenario testing, which
evaluates the impact on the group of certain adverse events occurring separately or in combination.
The results, conclusions and any recommended actions are included within divisional and group ORSA
Reports to the relevant boards. There is a strong correlation between these adverse events and the
risks identified in ’Principal risks and uncertainties’ (pages 55 to 59). 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.
53
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B 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).
INVESTMENT AND LIQUIDITY RISK
REGULATORY CHANGE RISK (INCLUDING BREXIT)
ACQUISITION RISK
DEMOGRAPHIC EXPERIENCE RISK
EXPENSE RISK
OPERATIONAL RISK
IT / DATA SECURITY & CYBER RISK
PR1
PR2
PR3
PR4
PR5
PR6
PR7
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.
COVID-19
During 2020 the COVID-19 pandemic had a global impact
on demographic, social and economic factors.
Recognising that, as we move into 2021, there is potential
risk of related operational disruption and economic
volatility, the information in the following pages has been
updated to reflect the ongoing COVID-19 pandemic.
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.
54
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC 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 43).
INVESTMENT AND LIQUIDITY RISK
PR1
DESCRIPTION
Exposure to financial losses or value reduction arising from adverse movements in currency, investment markets, counterparty
defaults, or through inadequate asset liability matching.
RISK APPETITE
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.
Worldwide developments in Environmental, Social, and Governance (ESG) responsibilities and reporting have the potential to
influence market risk in particular, for example the risks arising from transition to a carbon neutral industry, with corresponding
changes in consumer preferences and behaviour.
KEY CONTROLS
RECENT CHANGES / OUTLOOK
– 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 regular consideration (and discussing appropriate strategies with fund
managers) to longer term global changes that may affect investment markets,
such as climate changes.
Influenced mainly by the COVID-19 pandemic, 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.
Chesnara has ESG as a regular agenda item on the appropriate
committee agendas across the group including the board,
with a group-wide ESG strategy and underlying principles
established in 2020 to provide top down guidance and consistency
where appropriate.
REGULATORY CHANGE RISK (INCLUDING BREXIT)
PR2
DESCRIPTION
The risk of adverse changes in industry practice/regulation, or inconsistent application of regulation across territories.
RISK APPETITE
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.
POTENTIAL
IMPACT
Chesnara currently operates in three regulatory domains 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.
Regulatory developments continue to drive a high level of change activity across the group, with items such as operational
resilience, climate change and IFRS17 being particularly high profile. Such regulatory initiatives carry the risk of expense
overruns should it not be possible to adhere to them in a manner that is proportionate to the nature and scale of Chesnara’s
businesses. 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.
55
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B RISK MANAGEMENT • PRINCIPAL RISKS AND UNCERTAINTIES (CONTINUED)
REGULATORY CHANGE RISK (INCLUDING BREXIT) (CONTINUED)
PR2
KEY CONTROLS
RECENT CHANGES / OUTLOOK
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, and proactively
discussing their initiatives to encourage a proportional approach
– Being a member of the ABI and equivalent overseas organisations 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 has not been directly impacted by the effects of the end
of the Brexit transition period given its existing group Structure,
though the main unknown is regarding group Regulatory
Supervision. 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. In addition,
there are a number of potential secondary impacts such as economic
implications, and the effect of any regulatory divergence as the
PRA progresses SII-equivalent regulation for the UK businesses.
Chesnara will monitor the consultation and discussions arising
under EIOPA’s Solvency II Review, and in the context of Brexit and
the UK’s ultimate position regarding SII equivalence.
PR3
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 losses 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 CHANGES / OUTLOOK
Chesnara has completed a portfolio acquisition in the Netherlands
during 2020 and has agreed to complete another during the
first half of 2021, also in the Netherlands, whilst maintaining the
established disciplines within the Acquisition Policy.
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.
.
56
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
DEMOGRAPHIC EXPERIENCE RISK
PR4
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 CHANGES / OUTLOOK
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:
– 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.
New legislation introduced at the start of 2020, and enhanced at
the start of 2021, made it easier for customers to transfer insurance
policies in Sweden. Even before the legislation passed, this
resulted in higher transfer activity in the market, particularly driven
by brokers. Movestic adjusted its future transfer assumptions to
reflect an expectation of increased transfers out.
COVID-19 increased the number of deaths arising in 2020 and this
will continue into 2021 and potential beyond. 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. Chesnara
does not expect a material impact on its mortality experience in the
long-term, and has not revised any 2020-year end valuation
assumptions to reflect any material increase in mortality costs.
Any negative impacts regarding term claims would be partially
offset by an opposite impact on annuities.
EXPENSE RISK
PR5
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. Similarly, 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.
57
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B RISK MANAGEMENT • PRINCIPAL RISKS AND UNCERTAINTIES (CONTINUED)
EXPENSE RISK (CONTINUED)
PR5
KEY CONTROLS
RECENT CHANGES / OUTLOOK
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
Chesnara has an ongoing expense management programme and
various strategic projects aimed at controlling expenses. Recent
examples include the Fund Manager Rationalisation project in the UK
and the IT transformation project within Scildon.
company. The cost base is supported by service income from third party
customers;
Completion of two recent portfolio acquisitions within the Waard
Group provides support towards ongoing fixed costs.
– 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.
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 recovers.
Higher inflation would increase Chesnara’s expected longer-term
cost base.
OPERATIONAL RISK
PR6
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 CHANGES / OUTLOOK
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:
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;
– Monitoring of key performance indicators and comprehensive management
– Crisis Management Team Terms of Reference; and
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;
– Regular staff training and development;
– Employee performance management frameworks;
– Promoting the sharing of knowledge and expertise; and
– Complementing internal expertise with established relationships with external
specialist partners.
– 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 and implementation
of additional controls. There is potential for COVID-19 to influence
the operating environment on a long term basis and drive changes in
competitor, regulator or counterparty (e.g. broker) behaviours.
Scildon is part way through an IT transformation project in order to
deliver improved functionality and operational efficiencies. With the
scale of the transformation, this potentially increases Scildon’s
operational risk during and immediately after delivery of the project.
It also has potential to result in project cost overruns, should the
delivery take longer than planned. Suitable controls are in place to
monitor and manage these risks, as appropriate.
58
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT
IT / DATA SECURITY & CYBER RISK
PR7
DESCRIPTION
RISK APPETITE
POTENTIAL
IMPACT
Risk of IT/ data security failures or impacts of malicious cyber-crime (including ransomware) 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
Chesnara seeks to limit the exposure and potential impacts from IT/ data security
failures or cyber-crime by:
– Embedding the Information Security Policy in all key operations and development
processes;
– Seeking ongoing specialist external advice, modifications to IT infrastructure and
updates as appropriate;
– Delivering regular staff training and attestation to the information security policy;
– Regular employee phishing tests and awareness sessions;
– Ensuring the board encompasses directors with information technology and
security knowledge;
– Conducting penetration and vulnerability testing, including third party service
providers;
– Executive committee and board level responsibility for the risk, included dedicated
IT security committees with exec membership;
– Having established Chesnara and supplier business continuity plans which are
regularly monitored and tested;
– Ensuring Chesnara’s outsourced IT service provider maintains relevant information
security standard accreditation (ISO27001); and
– Monitoring network and system security including; firewall protection, antivirus
and software updates. In addition, a designated steering group provides oversight
of the IT estate and information security environment including:
- Changes and developments to the IT estate;
- Performance and security monitoring;
- Oversight of information security incident management;
- Information security awareness and training;
- Development of business continuity plans and testing; and
- Overseeing compliance with the Information Security Policy.
RECENT CHANGES / OUTLOOK
Chesnara continues to invest in the incremental strengthening of its
operational resilience and has introduced additional automated
controls to protect our data and infrastructure with regular monitoring
to detect and prevent counter cyber-attacks.
No reports of material data breaches.
The move to remote working, as a result of COVID-19, has the
potential to increase cyber risk for businesses and therefore various
steps have been taken to enhance security, processes and controls
to protect against this.
NEW BUSINESS RISK
PR8
DESCRIPTION
Adverse new business performance compared with projected value.
Chesnara does not wish to write new business that does not generate positive new business value (on a commercial basis) over the
business planning horizon.
If new business performance is significantly lower than the projected value, this will typically lead to reduced value growth in the
medium to long-term. A sustained low level performance may lead to insufficient new business profits to justify remaining open to
new business.
RISK APPETITE
POTENTIAL
IMPACT
KEY CONTROLS
Chesnara seeks to limit any potential unexpected adverse impacts of acquisitions by:
– Monitoring quarterly new business profit performance;
– Investing in brand and marketing;
– Maintaining good relationships with brokers;
– Offering attractive products that suit customer needs;
– Monitoring market position and competitor pricing, adjusting as appropriate;
– Maintaining appropriate customer service levels and experience; and
– Monitoring market and pricing movements.
RECENT CHANGE / OUTLOOK
COVID-19 caused some volatility in new business volumes across
markets as well as in individual business’ volumes during
2020 as a result of restrictions on face to face sales meetings and
customer demand.
Competition has increased in the Swedish market resulting in lower
transfers in and higher transfers out. This activity has been further
enabled to a degree by new legislation in Sweden.
There is potential for the economic impacts of COVID-19, such as
lower interest rates, to adversely affect new business profitability
too and this is being closely monitored.
59
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B CORPORATE & 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.
During 2020 a key initiative, led by the board, was further progression of our corporate and social
responsibility credentials through development of a more detailed and measurable Environmental, Social
and Governance (ESG) strategy. This strategy sought to build upon action already taken in previous
years and also lay the foundations for further progress to be made in future years as ESG considerations
and reporting requirements develop.
PROGRESSION OF OUR ESG STRATEGY
2020 saw us make further progress in building on our sustainability
and ESG activities for:
– Our own operations in the UK, Sweden and the Netherlands;
– Our product offerings for new business in Sweden and the Netherlands;
– Our client chosen investments; and
– Our own investment decisions.
In Sweden, Movestic became a signatory of the UN’s Principles of Responsible Investment (UNPRI) and in the UK we completed our fund rationalisation
programme during 2020 by moving all of our UK fund management to Schroder Investment Management Ltd with a key part of this decision being their
commitment to UNPRI and sustainability/ESG investment management and reporting. Development of our ESG strategy is being based on the UN’s
Sustainable Development Goals (UNSDG) and we have chosen to focus on five of the seventeen goals initially:
In 2015, world leaders agreed to 17 Global Goals (officially known as the Sustainable
Development Goals or SDGs). These goals have the power to create a better world by
2030, by ending poverty, fighting inequality and addressing the urgency of climate
change. Guided by the goals, it is now up to all of us, governments, businesses, civil
society and general public to work together and build a better future for everyone.
Find out more at
globalgoals.org
Our opening assessment is that the above 5 Global Goals are the most appropriate initial focus areas for Chesnara.
We continued to make progress in 2020 in minimising ESG
risks and negative impacts from our own operations and also
initiated a project to embed our sustainability/ESG aspirations
within our investment management, which will progress
further through 2021.
A key driver of change throughout the coming year will be
on-going regulatory initiatives, at the forefront of which is
the FCA’s Policy Statement on climate-related disclosure
and the Sustainable Finance Disclosure Regulation (SFDR),
implemented in March 2021, which aims to improve
the quantity and quality of information about sustainable
investments, promoting responsible and sustainable
investment activity.
60
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT FAIR TREATMENT
FOR OUR
WORKFORCE
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):
Training and development
We continue to invest in the development of our employees through
individual and group training and development plans.
Fair pay
In 2020 our UK operations became an accredited Living Wage Foundation
Employer and took appropriate steps to ensure that all of our directly
employed staff and service contractors either met the Real Living Wage
pay level or we have an agreed plan in place for them so to do. The Real
Living Wage, as set by the Living Wage Foundation, is higher than the
Government’s National Living Wage, and is based on a calculation of the
cost of living and what employees and their families need to live.
2020
2019
Male
Female Male
Female
Details of our staff pay and benefits, and in relation to executive pay, are
set out in Section C as part of our Remuneration Report.
Directors of Chesnara plc
Senior management of the group
Heads of business units & group functions
5
7
14
2
2
10
5
6
18
2
2
7
Employees of the group
148
152
141
149
Total Note1
174
166
170
160
Gender split %
51.2% 48.8% 51.5% 48.5%
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.
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 2020 was c71%
male and c29% female. Chesnara are committed to diversity: our group Audit
and Risk Committee and group Remuneration Committee both have female
chairs and Movestic is headed up by a female CEO (also senior independent
director). Chesnara plc board appointments in 2020 were Luke Savage,
as the new Chair (appointed in 2019 with effective date in early 2020), and
Eamonn Flanagan. Peter Mason stepped down, as did David Brand (though
he remained on the CA board).
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.
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.
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.
Our business units each ensure that the health and welfare of our staff
is supported by employment contract provisions and these include access
to health insurance for all employees and encouragement and support for
flexible working. Our Swedish operation has a stated sick leave target of
<2% and such metrics are also closely monitored across the group to
highlight any issues and so that corrective actions can be taken as appropriate.
61
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
CORPORATE AND SOCIAL RESPONSIBILITY (CONTINUED)
FAIR TREATMENT FOR OUR WORKFORCE (CONTINUED)
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. In 2020 a review
of our group wide Whistleblowing policies and their effectiveness was
conducted and reported to the board. As a result, the board is satisfied that it
has established reasonable assurance that both the Whistleblowing policies
and related control systems have operated effectively.
During 2020, a key focus has been how to ensure staff are supported in
home working. A survey in June on the effectiveness of the Employee Forum
and work/support measures taken, which had an 82% response rate, led to
improvements being progressed, including provision of IT equipment, office
chairs and broadband upgrades. This survey also highlighted the importance
of weekly team calls led by the UK CEO and also ‘virtual social events’ as part
of maintaining social (non-work) communication between staff members.
The Employee Forum has also launched a Mind Mental Health at Work
programme to raise awareness of mental health issues in the workplace and
help identify, support and respond to employee issues.
Our operations in Sweden and the Netherlands make similar use of Employee
Forums, staff surveys, formal and informal employee engagement both at
the individual, team and whole company level. In the Netherlands (Scildon)
this is formalised through the operation of a Works Council.
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.
During the year, revisions to Whistleblowing polices were progressed in the
UK, Sweden and the Netherlands (Waard) and these were communicated to
all workforce members, whilst for Netherlands (Scildon) a review was
completed in late 2019 and no change in local regulations occurred in 2020 to
require an update. Registers have been maintained to check that the new
policies have been read and understood and 100% of workforce members
have complied. A review was also conducted as to whether the policies
remain appropriate under COVID and it was determined that they do, without
any revisions required.
Each business unit ensures that the current Whistleblowing policy is available
to all staff.
Employee engagement
In 2019 the board appointed Veronica Oak as our designated Workforce
Engagement NED. Despite the obvious complications arising during 2020 as
a result of COVID-19, Veronica has embedded her role during the year and
has formally reported to the board on issues/matters arising, covering both
engagement with staff and also an assessment of our culture across our UK,
Swedish and Dutch business units and how this fits in with corporate
objectives. This reporting highlighted a strong adoption of Chesnara’s core
values across the group and a multi-channel approach to ensuring effective
employee engagement through such mechanisms as: regular use of
Employee Forums; monthly team or whole company briefings for staff and
senior management, often also involving one or more of the Group
Executives; departmental meetings; and use of employee surveys to
highlight issues and drive change.
Going forward, Veronica will be meeting formally with the UK’s CEO and
members of the Employee Forum and with the CEO’s and Heads of HR in
Sweden and the Netherlands, in addition to the ad hoc lines of communication
that have been established in 2020.
In the UK, the Employee Forum has continued to operate for our UK workforce,
meeting remotely monthly. This Forum comprises staff members who
represent each functional area, rotated from time to time, who consult with
their colleagues and bring any matters of concern or interest to the Forum.
‘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’.
62
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT RESPONSIBLE
OPERATIONS &
INVESTMENTS
HUMAN RIGHTS
CLIMATE CHANGE
Modern Slavery Act 2015
The Modern Slavery Act (2015) 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 and
our full Modern Slavery Policy is made available to our entire workforce.
Chesnara plc welcomes the act and, with its subsidiaries, 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.
A review was conducted in 2020, on behalf of the board, of both our UK
operation and outsourced service providers. This review was reported to the
board and concluded that there had been no instances or concerns raised
and that we have complied with the Modern Slavery Act (2015) through
operation of our Modern Slavery Policy and assurance that its related control
systems operated effectively.
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.
With the publication of the FCA’s Policy Statement (PS20/17) and final rule
and guidance promoting climate-related financial disclosures, and specifically
disclosure consistent with the recommendations of the Task-force on Climate-
related Financial Disclosure (TCFD), we are already actively working with our
outsourced fund management supplier, Schroders, to ensure full compliance
ahead of publication of the 2021 Report and Accounts in 2022.
Climate change and related scenario testing is included 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. It is also
reported as an emerging risk within the routine risk reporting process as set
out on pages 73 to 76.
‘THE GROUP HAS FULLY OFFSET ITS CARBON
EMISSIONS FOR 2020 AND SO IS CARBON NEUTRAL’.
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. All staff are
required to attest that they have read and understood our Anti-Bribery and
Corruption Policy and its importance is highlighted at team training sessions.
The policy itself is available to all staff.
There were no instances of bribery or corruption in the period.
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 again
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. In
the UK we were delighted in 2020 to pay for a new book-keeping system and
staff training at the Foxton Centre in Preston. Starting out as a youth club in
1969, the Foxton Centre now helps and improves the lives of rough sleepers
and street sex workers and also runs youth community projects and facilities,
all in the Preston area.
63
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B CORPORATE AND SOCIAL RESPONSIBILITY (CONTINUED)
RESPONSIBLE OPERATIONS & INVESTMENTS (CONTINUED)
SUSTAINABILITY & ESG ISSUES
Disclosure of emissions
Global GHG emissions data for the year to 31 December 2020:
Our own operations
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 our
workforce is encouraged to conserve energy, minimise waste and recycle
work materials. Some examples include:
– The redesign of our Scildon offices in the Netherlands has taken full
account of carbon emissions and energy usage and has been supported
by a move at Scildon for all new company cars to be electric.
– Prior to the COVID lockdown in March, we continued to make progress
with a reduction in COVID-19 car usage for business travel and a shift
towards more travel by rail, which is significantly more efficient. This
proactive approach, across the group, to not only limit the amount of
travel but also give consideration to the method will be followed through
as current COVID restrictions are lifted.
– In 2019 we posted more than 600 fewer Report & Accounts, down 56%
on 2018. This number has reduced still further in 2021 with 450 copies
being issued.
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)
Remote working* (scope 3)
Commuting (scope 3)
Total gross emissions
Carbon offsetting
Total net emissions
Energy consumption in the group is reported on an actual basis where the
records are kept in the business (scope 2 – office use and scope 3 – business
travel) and converted to emissions measures using standard conversion factors
from the government website. For commuting and home-working, where
detailed records are not kept, estimates have been agreed for each division
regarding the average daily mileage and average proportion of home-working
during 2020. These estimates have then had the standard conversion factors
applied. Energy consumption data (in KwH) for the year to 1 December 2020
was as follows:
Company’s chosen intensity measurement
= tonnes of CO2e per square metre of office space
occupied (excluding commuting and remote working)
Company’s chosen intensity measurement
= tonnes of CO2e per square metre of office space
occupied (including commuting)
Emissions reported above normalised to per tonne of product output
Tonnes of CO2e
2020
2019
–
–
147.2
192.8
45.8
183.6
420.3
330.7
1042.6
944.0
1,419.0
(944.0)
(1,419.0)
–
–
0.031
0.056
0.152
0.212
Energy Consumption (KwH ‘000)
UK
780
Offshore
Total
7,757
8,536
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, as in 2019, fully neutralized the remaining
emissions for 2020.
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 financial
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. Until last year, 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. From
2019 onward 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. Furthermore, in
2020, given the increase in remote-working (and reduction in travel) due to
the COVID-19 pandemic, we have included increased domestic emissions
from staff working at home in order to fully recognise Chesnara’s impact.
64
*2020 includes an estimate of the carbon emissions that arise from the increased working
from home for all staff and outsourcers across the whole group.
The overall measure for tonnes of CO2e per square metre of office space (excluding
commuting) has reduced when compared to the prior year, this is mainly due to lower
emissions with the reduction in travel due to the pandemic, and also to lower
conversion rates (Defra 2020 v 2019). With the commuting mileage included, the
intensity measurement increases from 0.031 to 0.152.
There are 11 (2019:14) 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 offices. 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 2020. 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 efficient manner than the UK.
CHESNARA ANNUAL REPORT & ACCOUNTS 2020STRATEGIC REPORT – Scope 3 – comprises of the emissions incurred through direct business
travel and commuting, alongside an estimate of the remote-working
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).
SECURIT Y
FOR OUR
CUSTOMERS
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 offices. 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
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 2020 by:
– Paying for the planting of 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, in
December 2019 the company submitted and was externally assessed for
the energy usage, in the UK, for the 2019 year. 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.
Investments
We invest responsibly, with ESG considerations having an increasingly
important role in our investment process, whether that be product
offerings and client led investment decisions or our own asset
management.
Products/client chosen investment
– We offer investment alternatives with a pure focus on green investments
aimed at solving climate issues.
– We offer funds focusing on companies that invest in improved health.
– We provide services to enable our customers to make conscious and
active choices.
Own investment
We have strengthened further our Investment Committee focus on ESG and
it is a regular agenda item at our Investment Committee meetings. In the
UK, through our fund management supplier Schroders, we ensure that:
– Our 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.
– We maintain an ongoing dialogue with our fund manager to ensure that,
for the fund companies whose funds we have in our offering, we are able to
influence them in their sustainability work.
– We take responsibility for having a long-term sustainable business mode
focused on long-term profitability, not short-term maximisation.
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.
Customer/supplier engagement
During 2019 the board completed a review of our customer/supplier
engagement across all areas of our group, which set out a robust level of
engagement and a plan for future development. In 2020 this plan was
progressed further and the board has not identified that any additional
actions are required at this stage. The board remains vigilant to ensure the
importance of such engagement remains high on agendas.
The Strategic Report was approved by the board on 29 March 2021 and
signed on its behalf by:
Luke Savage
Chairman
John Deane
Chief Executive Officer
65
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION B
Windmills in Kinderdijk, Netherlands
SECTION C:
CORPORATE
GOVERNANCE
66
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
68 — Board profile and Board
of Directors
70 — Governance overview from
the Chairman
72 — Corporate Governance
Report
76 — Nomination & Governance
Committee Report
78 — Directors’ Remuneration
Report
98 — Audit & Risk Committee
Report
104 — Directors’ Report
107 — Directors’ Responsibilities
Statement
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 67
.
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 replaced Peter Mason who
stepped down as Chairman effective 13 February 2020)
JOHN DEANE
GROUP CHIEF EXECUTIVE
Non-executive Chairman of the board, Luke is responsible for
Appointment to the board: Appointed to the board in December
2014 and as Chief Executive in January 2015.
Career, skills and experience: John is a qualified Actuary and has
over 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 L
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).
Attends the Audit & Risk Committee by invitation.
Current directorships/business interests:
– Chesnara Holdings BV (from 01 May 2020)
– 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:
A
B
C
D
E
F
G
H
I
J
L
JANE DALE
SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR AND
CHAIRMAN OF THE AUDIT & RISK COMMITTEE
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
– Wealthtime Limited, Chairman of the Audit & Risk Committee
– Amber Financial Investments Limited, Chairman
– Global Risk Partners Limited, Chairman of the Governance & Audit
Committee and Chairman of the Remuneration Committee
Skills and experience:
A
B
C D E
F
G H I
J
K
68 CHESNARA ANNUAL REPORT & ACCOUNTS 2020
.
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
L
Commercial management
Operational change management
Customer operational / management
Information technology
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
EAMONN FLANAGAN
NON-EXECUTIVE DIRECTOR
Appointment to the board: Appointed to the Chesnara plc board
Appointment to the board: Appointed to the Chesnara plc board
in January 2013.
in July 2020.
Committee membership: Nomination & Governance, Audit & Risk
Committee membership: Nomination & Governance, Audit & Risk
and Remuneration (as Chairman from May 2013).
H
Current directorships/business interests:
– Countrywide Assured plc, NED
– Sanlam Investment Holdings Limited, NED
Skills and experience:
A
B H I
J
K
and Remuneration.
Current directorships/business interests:
– Countrywide Assured plc, NED
– AJ Bell, Chair of the Audit Committee and Disclosure Committee
– Randall & Quilter Investment Holdings Ltd, NED
Skills and experience:
A B
C
D
E
F
G
H
I
J K L
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
– Stonebridge International Insurance Limited, NED
– Bethany Christian Trust, Treasurer and NED
– Powza Limited, NED
– Zurich Finance (UK), NED
Skills and experience:
A
B C D E
F
G H
I
J
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
69
XXXXXXXXXXXXXXXXXXX.XXXXXXXX • XXXXXXX (CONTINUED)SECTION C
CORPORATE GOVERNANCE
GOVERNANCE OVERVIEW FROM THE CHAIRMAN
‘The practical application of
good governance is the
foundation of how we operate’.
Dear Shareholder,
On behalf of the board, I am very pleased to
I firmly believe that a robust, and effective,
present our Corporate Governance Report for
governance framework is essential to support
the year ended 31 December 2020.
management in delivering the company’s
strategy, as well as being fundamental to
The board is accountable to our shareholders
the effective management of the business
and wider stakeholders for generating and
and its sustainability in both the short and the
delivering sustainable value through good
long-term.
management of the group’s business. The
board plays a critical role in ensuring that the
This section of the Annual Report & Accounts
tone for the group’s culture and values is set
sets out our governance policies and practices,
from the top.
and includes details of how the company has
materially, during 2020, applied the UK
Corporate Governance Code 2018 (the Code).
70
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 2020, the board continued to engage
with its shareholders to promote effective governance through open and constructive two-way
dialogue, and we place great value on this engagement.
Significant progress has been made by managers and employees during the year. 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.
This report demonstrates how the board and its committees have fulfilled their governance
responsibilities.
Luke Savage
Chairman
29 March 2021
Current balance of executive and
non-executive directors
Current gender diversity of
the board
Board tenure of NEDs
1
2
2
2
4
5
Chairman
Non-executive
Executive
Male
Female
0-2 years
2-6 years
Over 6 years
1
2
71
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION C 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 Provision 40/41 regarding engaging with the
workforce on executive pay, for reasons of COVID-19, and Provision 23 on
diversity; both noted in the respective sections that follow. The UK
Corporate Governance Code is available at www.frc.org.uk
The board
At 31 December 2020, 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 68 and 69 and a
board profile, which assesses the core competencies required to meet the
group’s strategic objectives, is provided on page 69. 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) with the exception of Mr Savage, the directors of the company during the
year were also directors of Countrywide Assured plc;
ii) three directors of the company, being Messrs Deane and Hesketh
(throughout the year) and Savage, (from 01 May 2020), were also directors
of Chesnara Holdings BV;
iii) two directors of the company, being Messrs Deane and Rimmington, were
also directors of Movestic Livförsäkring AB; and
iv) David Brand was a director of the company until 30 June 2020 and of
Movestic Livförsäkring AB and Countrywide Assured plc for the full year.
Under local legislation or regulation for all divisions of the group, the directors
have responsibility for maintenance and projections of solvency and for
assessment of capital requirements, based on risk assessments, and for
establishing the level of long-term business provisions, including the adoption
of appropriate assumptions. The Prudential 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.
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 early 2020, Jane also concluded the search
for the new Chairman.
Directors and directors’ independence
During 2020 a review was conducted to assess the 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
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?
Provision-17
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 than the chair of the board when it is dealing with the
appointment of their successor?
Y
Y
Y
Y
Y
Y
72
CHESNARA ANNUAL REPORT & ACCOUNTS 2020CORPORATE GOVERNANCE
The following statement, together with the Directors’ Remuneration Report on pages 78 to 97, the Nomination &
Governance Committee Report on pages 76 to 77, and the Audit & Risk Committee Report on pages 98 to 103 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 2020.
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?
LS
JD EF 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?
N
N
N
N
N
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
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?
N
N
N
N
N
5. A member of the company’s pension scheme?
N
N
N
N
N
6. Close family ties with any of the company’s
advisers, directors or senior employees?
N
N
N
N
N
7. Held cross-directorships or had significant links with
other directors through involvement in other
companies or bodies?
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?
N
N
N
N
N
As a result of this review the board considers that all non-executive directors
were independent during the year under review.
The board has no familial relationship with any other member of the board or
senior management team.
Other than their fees, and reimbursement of taxable expenses, which are
disclosed on page 81, 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, of their
responsibilities and duties as contained within the group’s Governance &
Responsibilities 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 including
directors’ duties, the regulatory framework for UK listed companies,
operational resilience, Section 172 statements, FRC hot-topics and audit
market reform. Members of the CA plc board, who served during the period
under review, have considerable knowledge and experience of the UK-based
businesses of the group. Similarly, Messrs Savage, Deane, 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,
information technology and security, 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’.
73
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION C CORPORATE GOVERNANCE REPORT (CONTINUED)
Customer/supplier engagement
Following the board’s review in 2019 of our customer/supplier engagement
across all areas of our group, the board do not feel that any additional
actions are required at this stage. The board remains vigilant to ensure the
importance of such engagement remains high on agendas.
Company Secretary
Alastair 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.
Board effectiveness and performance evaluation
As part of the annual performance, an internal effectiveness evaluation of the
board and each of 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, contributed to a
formal performance evaluation of the Chairman.
The outcome of the reviews 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. They were presented back to each
committee and formally approved on that basis before each then confirmed
to the board that it continued to operate effectively and irrespective the
transfer to remote working due to COVID-19 in that regard.
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 2020.
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.
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 2020.
Employee engagement
With the onset of COVID-19 restrictions from March 2020, we took early
action to ensure that our employees not only remained safe but also
maintained productivity and focus.
The board has a standard agenda item at each of its meetings to cover
culture and stakeholder engagement, including workforce engagement. This
has helped highlight workforce and other stakeholder matters as part of
board discussion and decision-making.
A full description of our employee engagement and well-being is provided in
our Corporate and Social Responsibility section on pages 60 to 65.
74
CHESNARA ANNUAL REPORT & ACCOUNTS 2020CORPORATE GOVERNANCE
Remuneration Committee
Full details of the composition and work of the Remuneration Committee are provided on pages 78 to 79.
Audit & Risk Committee
Full details of the composition and work of the Audit & Risk Committee are provided on pages 98 to 103.
Nomination & Governance Committee
Full details of the composition and work of the Nomination & Governance Committee are provided on pages 76 to 77.
The attendance record of each of the directors at scheduled board and committee meetings for the period under review is:
Luke Savage2 - Non-Executive Chairman
Peter Mason3
John Deane - Executive director
Veronica Oak 6 - Non-executive director
David Brand4 - Non-executive director
David Rimmington - Executive director
Jane Dale - Non-executive director
Mark Hesketh6 – Non-executive director
Eamonn Flanagan5
Scheduled
board1
Nomination &
Governance
Committee
Remuneration
Committee
Audit & Risk
Committee
11 (11 )
1 (1 )
12 (12 )
11 (12 )
5 (5 )
12 (12 )
12 (12 )
10 (12 )
7 (7 )
3 (3 )
1 (1 )
n/a
3 (3 )
1 (1 )
n/a
3 (3 )
2 (3 )
2 (2 )
3 (3 )
1 (1 )
n/a
4 (4 )
2 (2 )
n/a
n/a
n/a
2 (2 )
n/a
n/a
n/a
8 (9 )
4 (4 )
n/a
9 (9 )
8 (9 )
5 (5 )
The figures in brackets indicate the maximum number of scheduled meetings
in the period during which the individual was a board or committee member.
Notes.
1: The number of scheduled board meetings includes 2 meetings that were
called at short notice to discuss ad hoc/subject specific matters.
2. Luke Savage was appointed to the board effective 14 February 2020.
3. Peter Mason resigned from the board effective 13 February 2020.
4. David Brand resigned from the board effective 30 June 2020.
5. Eamonn Flanagan was appointed to the board effective 1 July 2020.
6. Absence was due to illness or family bereavement.
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. This programme continued during 2020 with enhanced use made
of audio and video facilities due to the COVID-19 restrictions.
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
In normal circumstances 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. For
our 2020 AGM this was not possible due to the COVID-19 restrictions.
Instead the AGM was conducted in Preston as a closed meeting to all but
the Group Chief Executive who had been asked to chair it and in his capacity
as a shareholder, as well as the Group Company Secretary in both his
capacity as an officer of the company and shareholder in it. Shareholders
were encouraged to vote electronically in advance on the resolutions to be
passed and to submit their questions in advance if they had any.
At our AGM on 26 May 2020 all resolutions were passed, with votes for
ranging from 100% to 94.49% (votes against ranging from 0% to 5.51%).
Our next AGM is on 18 May 2021 and details of the resolutions to be proposed
can be found in the notice of the meeting on pages 205 to 206. The meeting
will be closed to shareholders on account of COVID-19 restrictions anticipated
to be prevailing at that time and shareholders are therefore encouraged to
submit in advance any questions that they may have in order that the Chairmen
of the board committees can answer them.
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, local regulators 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 55 to 59.
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:
75
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION C
CORPORATE GOVERNANCE
REPORT (CONTINUED)
NOMINATION & GOVERNANCE
COMMITTEE REPORT
– 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
– 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 2020, all Chesnara directors, apart from Luke Savage, 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 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 2020, 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 98 to 103. 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.
In relation to the preparation of the group financial statements, the controls in
place include:
– the finance governance team review new developments in reporting
requirements and standards to ensure that these are reflected in group
accounting policies; and
– the finance governance team develop the group’s financial control processes
and procedures which are implemented across the group.
The reporting process is supported by transactional and consolidation finance
systems. Reviews of the applications of controls for external reporting
purposes are carried out by senior finance management. The results of these
reviews are considered by the board as part of its monitoring of the
performance of controls around financial reporting. The Audit & Risk
Committee reviews the application of financial reporting standards and any
significant accounting judgements made by management.
Going Concern and Viability Statement
The Directors’ Statement on going concern is included in the Directors’ Report
on page 106 and the Long-Term Viability Statement is set out on page 52.
76
Nomination & Governance Committee
During the period under review, the Committee comprised Luke Savage,
who also served as Chairman of the Committee, Veronica Oak, Jane Dale,
Mark Hesketh and Eamonn Flanagan (from July 2020). Peter Mason, as
Chairman, and David Brand, as Committee member, attended the first
meeting of the year prior to their departure from the board in February and
June respectively. 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.
This includes consideration of recommendations made by the Group
Chief Executive for changes to the executive membership of the board.
During the period, the Committee met three times and attendance at
those meetings is shown on page 75. 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
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.
During 2020 the Committee managed the process that led to the
appointment to the board of me as chairman in February 2020, as previously
reported in our 2019 Report & Accounts, and also that of Eamonn Flanagan
in July 2020. Eamonn has extensive operational experience in financial
services in roles with Royal Insurance and Charterhouse/ING Barings. He
also brings executive and markets experience from Shore Capital Markets
where he was a Director and co-founder, as well as Non-executive
experience from AJ Bell, Randall & Quilter and previously at JLT. Eamonn is
a Fellow of the Institute of Actuaries.
CHESNARA ANNUAL REPORT & ACCOUNTS 2020CORPORATE 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.
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.
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 2020, 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 Eamonn Flanagan for election, at the company’s AGM on
18 May 2021. Following the annual board effectiveness reviews of individual
directors, as applicable and subject to re-election/election, the Chairman
considers that each director:
– continues to operate as an effective member of the board;
– has the necessary skills, knowledge and experience to enable them to
discharge their duties and contribute to the continued effectiveness of the
board; and
– has sufficient time available to fulfil their duties.
The board, on the advice of the Committee, recommends the re-election/
election of each director so proposed at the 2021 AGM. The full 2021 AGM
Notice can be found on page 205.
Luke Savage
Chairman of the Nomination & Governance Committee
29 March 2021
The development of talent below board level is extremely important and an
area of focus for the board. The company continues to both build an internal
leadership pipeline for senior roles and ensure that it remains up to date with
external talent.
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 profile, 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 the criteria and put forward for interview by the board and the
executive management team suitably qualified candidates. Any candidate
deemed suitable for appointment will, if necessary, first have to go through
the fit and proper process as outlined in the Senior Managers & Certification
Regime (SMCR).
The board process set out above was followed 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
for the Chairman role but utilised directors’ own knowledge of appropriate
candidates for the appointment of Eamonn Flanagan given the impact of
COVID-19 and Eamonn’s clear fit for the role. No directors have any link with
Odgers Berndtson and they were not used for any other work in 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 2021.
The board recognises the benefits of having diversity across all areas of the
group – please see the equal opportunities section on page 61 for further
detail. When considering the make-up of the board, the benefits of diversity
are appropriately reviewed and balanced where possible and appropriate,
including in terms of difference in skills, sector experience, gender, race,
disability, age, nationality and other contributions that individuals may make.
In identifying suitable candidates, the Committee will seek candidates from
a range of backgrounds, with the final decision being based on merit against
the role criteria set. Through its board Diversity Policy, 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
five men and two women (28.5%). In consideration of the longer term,
the board has discussed increasing its range of knowledge and experience
from outside financial services whilst balancing this with the requirements
of the financial services group. It appreciates that it may not be considered
to be fully compliant with the code by not setting other explicit diversity
targets. The business operates to principles for other roles and is mindful
that it has a small workforce and needs to take associated staff turnover
expectations into account.
Review of effectiveness
The board and its committees undertook annual effectiveness reviews and
the respective Chairmen discussed the findings in each forum. Other
standard processes were also undertaken, including Fit & Proper
assessments, Board Diversity Policy review, NED succession planning and
the review of the effectiveness of the Chairman. The evaluations did not
identify any immediate changes needed to board composition.
Any areas where increased focus and/or action was considered to be of
potential value has either been taken in 2020 or will be taken into account as
appropriate during 2021.
77
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION C
CORPORATE GOVERNANCE
DIRECTORS’ REMUNERATION REPORT
REMUNERATION COMMITTEE CHAIRMAN’S ANNUAL STATEMENT
Dear Shareholder,
I am pleased to present the 2020 Directors’ Remuneration Report, for which we seek your
support at our forthcoming Annual General Meeting, in May 2021.
2020 – 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 2020
In light of the performance of the executive team in 2020 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 2020 under the STI can be
This clear strategic focus is underpinned by the culture, values and risk
found on page 82.
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 2018 under the 2014 LTI are due to vest in April 2021
and apply to John Deane (GCEO) and David Rimmington (GFD). The targets and
performance outcome can be found in the table on page 84. As in 2020,
disclosure of the Economic Value1 outcome now enables comparison with
opening values.
Despite the COVID-19 pandemic having made 2020 a challenging year, we
Changes to the directors’ salary
have seen significant delivery on our key metrics:
1. Cash generation1 of £27.7m contributing to the funding requirements of
the dividend.
2. Movestic has delivered modest new business profits1 of £1.6m, which is
reflective of the challenging market. Movestic has provided to Chesnara a
SEK76.0m (£6.5m) dividend payment.
3. Scildon has delivered increased new business profits of £8.8m. This has been
delivered through cost saving initiatives and product innovation.
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, however, against the current economic background no inflationary
rise has been awarded to staff or executives.
UK employees received an average salary increase of 2% in 2020 but in 2021
there has been no general increase, with individual awards only being made as
a result of staff progression. The salaries of John Deane and David Rimmington
were increased by 2% in 2020 and 0% in 2021. The executive directors’
remuneration for 2021 can be found on page 97.
The board made no increase to the base fee and Committee chairmanship fees
for non-executive directors in 2020 or 2021, the only change to non-executive
director remuneration related to an increase in responsibility for myself arising
from the introduction of the new Workforce NED role.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
78 CHESNARA ANNUAL REPORT & ACCOUNTS 2020
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CHESNARA ANNUAL REPORT & ACCOUNTS 2020XXXXXXXXXXXXXXXXXXX.
SECTION C
Review of Incentive Scheme performance measures
As noted in my report last year, we have considered the performance targets
used within the Short-Term and Long-Term Incentive Schemes to ensure
that they remain effective and appropriate.
Short-Term Incentive Scheme – under this Scheme, the Committee has
discretion to determine with each award the performance criteria in
accordance with the Remuneration Policy. These were last changed in 2019
and this year, the Committee concluded that the metrics and weightings
remain appropriate – see full details on page 89.
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, again the Committee has concluded that these remain appropriate.
Directors’ Remuneration Policy (the Policy)
We reviewed the composition of the executive’s remuneration and our
Policy and our revised Policy was approved by shareholders at our AGM in
May 2020. We 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. In
summary, remuneration for our executives will continue to comprise basic
salary, benefits, including pension contributions on a par with all UK
employees, an annual Short-Term Incentive Scheme (STI) and a Long-Term
Incentive Scheme (LTI). We have continued in 2020 to monitor developments
in the area of remuneration, whether that is via enhancements to accepted
best practice, regulatory guidance or legal requirements, and have concluded
that no further changes are necessary to our Policy at this time. The Policy
approved in May 2020 can be found on pages 91 to 97 and in the Governance
Reports section of the company’s website: www.chesnara.co.uk
During the year under report we have responded to questions/queries raised
by shareholders.
The voting outcome at the 2020 AGM in respect of the Directors’ Remuneration
Report for the year ended 31 December 2019 and the remuneration policy is
set out on page 90 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.
Employee engagement
The Committee did not consult directly with employees on the alignment of
directors’ pay with UK employees. This was because the salary increase
was zero for all on account of COVID-19 considerations and pension
contributions as a percentage of salary are fully aligned between the
executive directors and employees. This may be considered to be in breach
of provisions 40/41 of the Code in its strictest definition but two-way
dialogue with the workforce was felt to be unnecessary in light of this
alignment and outcome under COVID-19 economic circumstances and there
not being anything on which to engage. It will engage in 2021.
I hope my annual statement, together with our Remuneration Report, provides
a clear account of the operation of the Remuneration Committee during 2020
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.
Shareholder engagement
The Directors’ Remuneration Report for the year ended 31 December
Veronica Oak
Chairman of the Remuneration Committee
2020 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 2021.
29 March 2021
79
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION C
DIRECTORS’ REMUNERATION REPORT
ANNUAL REMUNERATION REPORT
This section sets out how the Remuneration Committee has implemented its Remuneration Policy for executive
directors during 2020. Other than the single total figure of remuneration for each director tables on page 81, statement
of directors’ shareholding and share interests on pages 85 and 86, 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 2020. Members of the Remuneration Committee during the course of the year were:
Committee members1
Veronica Oak2
Luke Savage3
Eamonn Flanagan4
Peter Mason5
David Brand6
Notes.
Role on the
Committee
Committee chairman
Committee member
Committee member
Committee member
Committee
member since
January 2013
February 2020
July 2020
March 2004
Committee member
September 2018
Attendance
in 2020
Maximum possible
meetings in 2020
4
3
2
1
2
4
3
2
1
2
1. By invitation, the GCEO attends the Remuneration Committee, but was not present when matters relating to his own remuneration were discussed.
2. Veronica Oak joined the Committee in January 2013 and became the chairman in May 2013.
3. Luke Savage was appointed to the board effective 14 February 2020. Luke was not present when the Chairman’s fees were discussed.
4. Eamonn Flanagan was appointed to the board effective 1 July 2020.
5. Peter Mason resigned from the board effective 13 February 2020.
6. David Brand resigned from the board effective 30 June 2020.
During 2020 the Committee incurred external adviser fees of £1,440, including VAT, for advice in relation to the introduction of a post-employment minimum shareholding requirement.
Highlights 2020
In 2020, the Committee met four 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 2019 under the STI Scheme and in 2018
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 awards to executives in 2020 under the 2014 STI Scheme and the 2014 LTI Scheme and
undertook a half-year evaluation. Also considered whether the share price at the time of making the LTI award required any
adjustment to avoid a ‘windfall’ in terms of the number of shares to be awarded and concluded that no adjustment was necessary
given that the share price at the time of making the award (end April) had recovered from the lows reached during March to be
above that at the start of 2020.
All employee and
executive remuneration
A review of remuneration trends across the group revealed that pay remains at appropriate levels and is not adversely
affecting staff turnover or the ability to recruit new members of staff with the required skills and experience.
Terms of Reference
The Committee’s Terms of Reference were reviewed. No material revisions were made as they were felt to continue to be
appropriate for the activities of the Committee and provide adequate scope to cater for the expectations set by the Code.
Review of the
remuneration policy
A revised Remuneration Policy was presented to shareholders at the AGM in May 2020, and approved by them. No further
changes were felt necessary in 2020.
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 and economic conditions generally.
Directors’ remuneration
reporting
The Committee reviewed the draft Directors’ Remuneration Report for the 2020 Report & Accounts and recommended its
approval by the Chesnara board.
Performance against
strategic objectives
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
The Committee chairman responded to questions/queries raised by shareholders and engaged with major shareholders on
proposed changes to Remuneration Policy in Q1 2020, ahead of the shareholder vote at our AGM in May 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.
80
CHESNARA ANNUAL REPORT & ACCOUNTS 2020CORPORATE GOVERNANCE
Single total figure of remuneration for each director (audited information)
The remuneration of the executive directors for the years ended 31 December 2020 and 31 December 2019 is made up as follows:
Executive directors’ remuneration as a single figure - year ended 31 December 2020
Name of director
John Deane
David Rimmington
Total
Salary
and fees
£000
All taxable
benefits
£000
Non-taxable
benefits
£000
Annual
bonuses
£000
458
289
747
28
15
43
9
7
16
244
148
392
LTI
£000
Pension3
£000
–
–
–
43
27
70
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
449
283
732
46
12
58
6
5
11
443
251
694
LTI2&4
£000
144
76
220
Pension3
£000
43
27
70
Total for
2020
£000
782
486
1,268
Total for
2019
£000
1,131
654
1,785
Fixed
£000
Variable
£000
538
338
876
244
148
392
Fixed
£000
Variable
£000
526
327
853
605
327
932
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 320.0 pence.
The remuneration of the non-executive directors for the years ended 31 December 2020 and 31 December 2019 is made up as follows, with the fee
element being fixed and the benefits being variable in nature:
Non-executive directors’ remuneration as a single figure - year ended 31 December 2019 and 2018
Name of director
Luke Savage6
Peter Mason7
Veronica Oak
David Brand8
Eamonn Flanagan9
Jane Dale
Mark Hesketh
Total
Fees
£000
123
61
62
33
35
66
61
441
2020
Benefits5
£000
–
–
–
–
–
–
–
–
Total
£000
123
61
62
33
35
66
61
441
Fees
£000
na
123
61
66
na
67
61
378
2019
Benefits5
£000
na
1
1
1
na
1
1
5
Total
£000
na
124
62
67
na
68
62
383
Notes.
5. 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.
6. Luke Savage was appointed to the board effective 14 February 2020.
7. Peter Mason resigned from the board effective 13 February 2020.
8. David Brand resigned from the board effective 30 June 2020.
9. Eamonn Flanagan was appointed to the board effective 1 July 2020 but joined Chesnara on 1 June 2020 to undertake his on-boarding process.
81
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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.
The Committee did not consult directly with employees on the alignment of directors’ pay with UK employees because the salary increase and pension
contributions as a percentage of salary are fully aligned between the executive directors and employees.
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 2020 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 generation1, total EcV earnings1 and group strategic objectives, with the
latter for the first time including a specific ESG related performance objective. 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
Percentage
award for
on target
performance
Minimum
threshold for
maximum
performance
Percentage
award for
maximum
performance
On target
performance
Actual
result
Actual
percentage
total award
Actual
percentage
award, as
percentage
of salary
Total
award (£)
John Deane
Cash
generation1
Total EcV
earnings2
Group strategic
objectives
Total
David
Rimmington
Cash
generation1
Total EcV
earnings2
Group strategic
objectives
Total
£27.43m
0%
£34.29m1
12.0%
£43.85m
40.0%
£44.20m1
39.0%
39.0%
178,360
£24.08m
0%
£34.40m
16.0%
£51.60m
40.0%
£(44.59)m
0.0%
0.0%
–
75%
0%
100%
10.0%
125%
20.0%
72.0% of
max
14.4%
14.4%
65,721
38.0%
100.0%
53.4%
53.4%
244,081
£27.43m
0%
£34.29m1
12.0%
£43.85m
40.0%
£44.20m1
39.0%
35.1%
101,262
£24.08m
0%
£34.40m
16.0%
£51.60m
40.0%
£(44.59)m
0.0%
0.0%
–
75%
0%
100%
10.0%
125%
20.0%
89.5% of
max
17.9%
16.1%
46,477
38.0%
100.0%
56.9%
51.2%
147,739
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 total EcV earnings before exceptional items on page 48 has been adjusted in line with the basis of the target.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
82
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
The following table details the requirements for delivery of the strategic objectives for 2020 and actual outcomes:
Objectives area
Objectives and performance
Outcome
John Deane
Scildon organisation
and IT (30%)
Phase 1 design and development delivered in line with
plan, including achievement of cost savings set out for 2020.
Organisational design completed and implemented with support of
the works council.
Phase 2 plans to be in place.
IT strategy design completed and outsourcing option selected.
Balance sheet
optimisation (20%)
Ensure clarity of SII balance sheet optimisation
opportunities, and risks, and associated prioritisation and
delivery of agreed actions.
Currency SCR modelling review undertaken and an alternative, more
accurate process implemented resulting in a significant reduction in
capital requirement.
Acquisitions (30%)
Lead the investigation and delivery of acquisitions within risk
appetite processes.
People development
(10%)
Ensure that people development and succession
plans are progressed and monitored including COVID-19
contingency plans.
Reassurance review undertaken and opportunities delivered in 2020
and identified for 2021.
One acquisition completed and another signed; both in the
Netherlands which continues to evidence our ability to accept
portfolios into Waard.
Strategy and risk appetite for acquisitions having been reviewed
and pricing brought into line.
While impacted by the restrictions on travelling, the development
of individuals has remained a focus with improvements in
diversity and experience made. Comprehensive succession plans
in place, approved by the board and which can be mobilised at
short notice should the need arise.
ESG (10%)
Development of appropriate environmental/climate, people
and sustainability policies and practices.
ESG policies, principles and practices, to reflect the businesses’
requirements and developing regulatory aims have been
progressed with further delivery of actions identified for 2021.
David Rimmington
Statutory
reporting (20%)
Ensure timely and appropriate production of IFRS Report &
Accounts and group SII reports (QRTs and narratives) taking
into account the impact of COVID-19.
Processes were further developed to ensure delivery to the shorter
deadlines with no impact on the quality of outputs.
IFRS 17 (15%)
Planning and delivery of IFRS 17 across group and divisions.
Business
support (35%)
Constructive role on group and divisional boards and effective
working relationships with teams across the group.
Project has moved from planning to the development phase including
the selection of key partners. Technical papers and design
specification document production along with the build of a more
detailed delivery plan. A comprehensive review and replan has been
undertaken. An increase to the budget has been deemed necessary
to ensure that delivery is to the standard and timescales required.
Delivered all objectives.
Reviewed new business cash consumption and value in the context
of the strategic plan.
Provided support and challenge on the financial reporting of key
projects across the group.
Management
reporting and financial
analysis (20%)
Timely, appropriate and quality MI available to support capital
and balance sheet management and decision-making, taking
into account the impact of COVID-19.
COVID-19 impacts have been monitored and reporting processes
remain robust. Remote working continues to present some
efficiency challenges but quality of outputs remained high.
ESG (10%)
Continued development of appropriate reporting in ARA and
website of environmental/climate, people and sustainability
policies and practices.
ESG policies and practices to reflect the businesses requirements and
developing regulatory requirements have been progressed with
further delivery of actions identified for 2021.
83
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020 DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT (CONTINUED)
Annual bonuses (continued)
In converting performance against the measures assessed for 2020 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 is
based
£
457,745
288,756
Maximum
potential
award as
% age
of salary
Actual
award as
% age of
salary
100%
90%
53.38%
51.21%
Total
value of
award
£
244,081
147,739
391,820
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 2021 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
John Deane
David Rimmington
TSR
EcV
TSR
EcV
50%
50%
50%
50%
=Median
(7.02)%
18.22%
(14.07)%
=95.7%
£773.0m
£805.0m
£723.1m
£730.7m
94.5%
=Median
(7.02)%
18.22%
(14.07)%
=95.7%
£773.0m
£805.0m
£723.1m
£730.7m
94.5%
% of
award
vesting
Value of
award £
0%
0%
0%
0%
nil
nil
nil
nil
Note 1. The closing value for EcV1 is based on that shown on page 49 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 £730.7m.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
84
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 2020
143,045
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 2020
81,213
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
£457,744
based on share price (320.00p)
£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)
£259,882
based on share price (320.00p)
£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%
10.0%
12.5%
12.5%
10.0%
10.0%
10.0%
12.5%
12.5%
28 April 20233
28 April 20223
28 April 2021
28 April 2020
28 April 2019
28 April 20233
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 to 2020. David Rimmington; 75% in 2014 and 2015, 90% in 2016 to 2020. 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 is 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 2020 will be
made on a sliding scale with nil being paid out if the outcome is less than or equal to 94.3% of target, up to a maximum pay-out if the outcome is greater than or equal to
103.0% 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
2020 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.
85
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 2020 or the date of resignation.
No changes took place in the interests of the directors between 31 December 2020 and 28 March 2021.
Shares held:
1 January 2020
Shares held:
31 December
2020
Options:
With
performance
measures
Options:
Without
performance
measures1
Options:
Vested but
unexercised
Options:
Exercised
during
the year
Options:
Percentage of
shareholding
target held2
131,066
72,281
–
25,743
–
3,000
5,500
3,333
5,000
245,923
131,066
72,281
20,000
25,743
30,000
3,000
5,500
3,333
5,362
296,285
375,325
213,088
–
–
–
–
–
–
–
588,413
255,860
111,163
–
–
–
–
–
–
–
367,023
154,1873
50,1763
–
–
–
–
–
–
–
204,363
–
–
–
–
–
–
–
–
–
–
246.7%
180.9%
–
–
–
–
–
–
–
–
Name of director
John Deane
David Rimmington
Luke Savage4
Peter Mason5
Eamonn Flanagan6
Veronica Oak
David Brand7
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 2020 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 2021 Annual Report & Accounts.
2. Calculated using the share price of 298.00p at 31 December 2020.
3. Awarded under the 2014 LTI Scheme and vested on 28 April 2020.
4. Luke Savage was appointed as Chairman in February 2020.
5. Peter Mason ceased to be a non-executive director in February 2020.
6. Eamonn Flanagan was appointed a non-executive director in July 2020.
7. David Brand ceased to be a non-executive director in June 2020.
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
2020
Number
granted
during
year
Number
exercised
during
year
Number
lapsed
during
year
Number of
shares under
option and
unexercised at
31 December
2020
End of
performance
period Vesting date
Performance
period
Date of
expiry of
option
24/09/19
223.40
8,057
2014 LTI
(2020 award)
2014 LTI
(2019 award)
2014 LTI
(2018 award)
2014 LTI
(2017 award)
2014 LTI
(2016 award)
2014 STI
(2020 award)
2014 STI
(2019 award)
2014 STI
(2018 award)
2014 STI
(2017 award)
Share save
2014 LTI
(2020 award)
2014 LTI
(2019 award)
2014 LTI
(2018 award)
2014 LTI
(2017 award)
2014 STI
(2020 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
I
D
V
A
D
N
O
T
G
N
M
M
R
I
I
28/04/20
28/04/19
28/04/18
28/04/17
28/04/16
28/04/20
28/04/19
28/04/18
28/04/17
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
28/04/20
28/04/19
28/04/18
28/04/17
28/04/20
28/04/19
28/04/18
28/04/17
28/04/16
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
–
143,045
125,180
107,100
111,781
90,439
–
–
–
–
–
48,491
13,323
31,802
37,696
525,378
191,536
–
81,213
71,070
60,805
61,996
–
–
–
–
27,418
7,760
17,620
20,293
15,434
–
–
–
–
–
–
–
–
–
24/09/19
223.40
8,057
Share save
30/10/20
219.80
–
8,189
263,035
116,820
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(85,729)
–
–
–
–
–
–
143,045
31/12/22
28/04/23
3 years
28/04/30
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
26,052
90,439
48,491
13,323
31,802
37,696
8,057
31/12/19
28/04/20
3 years
28/04/27
31/12/18
28/04/19
3 years
28/04/26
n/a
n/a
n/a
n/a
n/a
28/04/23
28/04/22
28/04/21
28/04/20
01/11/22
n/a
n/a
n/a
n/a
n/a
28/04/30
28/04/29
28/04/28
28/04/27
01/05/23
(85,729)
631,185
–
–
–
(47,547)
–
–
–
–
–
(8,057)
–
81,213
71,070
60,805
14,449
27,418
7,760
17,620
20,293
15,434
–
8,189
31/12/22
28/04/23
3 years
28/04/30
31/12/21
28/04/22
3 years
28/04/29
31/12/20
28/04/21
3 years
28/04/28
31/12/19
28/04/20
3 years
28/04/27
n/a
n/a
n/a
n/a
n/a
n/a
n/a
28/04/23
28/04/22
28/04/21
28/04/20
28/04/19
01/11/22
01/12/23
n/a
n/a
n/a
n/a
n/a
n/a
n/a
28/04/30
28/04/29
28/04/28
28/04/27
28/04/26
01/05/23
01/06/24
(55,604)
324,251
There has been one change made to share options granted or offered and the main conditions for the exercise of these rights compared to the previous year,
which is the introduction of two-year holding period, to follow the three-year performance period associated with the LTI Scheme awards. This was outlined in the
Remuneration Policy, as adopted at the AGM in May 2020.
86
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 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.
400
350
300
250
200
150
100
50
0
x
e
d
n
I
R
S
T
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan19
Jan20
Jan21
The table below sets out the details for the director undertaking the role of GCEO:
Year
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
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
John Deane
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
Graham Kettleborough
782
1,111
965
1,142
902
596
712
702
612
384
53.38%
98.79%
31.08%
86.96%
98.33%
81.96%
91.30%
100.00%
65.48%
17.39%
–
19.93%
67.99%
80.95%
–
–
34.52%
n/a
100.00%
n/a
Note
1
1
1
1
1
1
2
3
4
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
2020 and 2019.
Percentage change in remuneration in 2020
compared with 2019
Group Chief Executive
%
Group Finance Director
%
Group employees
%
Salary and fees
All taxable benefits
Annual bonuses
2.00
(39.13)1
(44.89)
2.00
20.331
(41.01)
2.00
13.28
(38.46)
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.
87
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020
DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT (CONTINUED)
Rolling 5 year percentage change in remuneration for the executive and non-executive directors and group employees
The table below shows the percentage change in remuneration for the executive and non-executive directors and the company’s employees as a whole
between the years 2020 and 2019. In future years, this analysis will be repeated until a rolling 5 year comparison is ultimately reported.
Percentage change
in remuneration in 2020
compared with 2019
Group Chief
Executive
%
Group Finance
Director
%
Peter
Mason
%
Luke
Savage
%
Veronica
Oak
%
David
Brand
%
Jane
Dale
%
Eamonn
Flanagan
%
Mark
Hesketh
%
Group
employees
%
Salary and fees
All taxable benefits
Annual bonuses
2.00
(39.13)1
(44.89)
2.00
–
20.331
(39.13)
(41.01)
(44.89)
n/a
n/a
n/a
2.47
–
–
(100.00)
(100.00)
(100.00)
n/a
n/a
n/a
n/a
n/a
n/a
–
(100.00)
n/a
2.00
13.28
n/a
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.
Comparison of total remuneration for the GCEO and 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 2020 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 2020 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
2020
2019
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)
11.3 : 1
15.7 : 1
8.2 : 1
11.8 : 1
4.8 : 1
6.6 : 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 (which consists of administration expenses
and costs associated with the acquisition of new business). This has been
chosen as a comparator to give an indication of the employee pay relative to
the overall cost base. As can be seen, the total employee pay is a relatively
small component.
£m
100
80
60
40
20
0
2020 2019
+6%
94.6
89.6
+1%
28.2
28.0
Total employee
pay
Business
acquisition and
maintenance
expenditure
+3%
32.9
31.9
Dividends
Statement of Implementation of Remuneration Policy in the following financial year
The current Policy took effect following approval at the 2020 AGM and the following states how the Policy will be implemented during 2021.
Salaries and fees
Will be set in accordance with the company’s Policy.
Executive directors
No increase in salary has been applied for either John Deane (GCEO) or David Rimmington (GFD) in line with all UK staff.
Non-executive directors
No increase has been applied.
88
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020 The table below sets out the anticipated payments to non-executive directors for 2021:
Luke Savage
Eamonn Flanagan
Veronica Oak
Jane Dale
Mark Hesketh
Total
Fees
£000
122.6
60.8
62.3
66.0
60.8
372.5
Benefits1
£000
1.0
1.0
1.0
1.0
1.0
5.0
Total
£000
123.6
61.8
63.3
67.0
61.8
377.5
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.
2021 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 2022 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 earnings
Group strategic objectives
David
Rimmington
Cash generation
EcV earnings
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 onwards to remove the IFRS component used in prior years and
base performance assessment on cash generation and EcV earnings 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 Policy can be found on the company website
(www.chesnara.co.uk). Whilst the Policy makes several specific references
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 profit1, cash generation1, group strategic objectives,
including consideration of Environmental, Social and Governance risks
and performance, 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 earnings is deemed to be in accordance with
our approved Policy.
The Scheme includes Change of Control provisions covering takeover,
reconstruction, amalgamation or winding-up of the company and it is
a precondition that the executive accepts such provisions at the time of
the award.
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 earnings 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 and it is a precondition that the executive accepts
such provisions at the time of the award.
89
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020 DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT (CONTINUED)
2021 award made under the 2014 Long-Term Incentive Scheme
In 2021 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 2024 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 2021 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 2021 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 2023.
The Scheme includes Change of Control provisions covering takeover,
reconstruction, amalgamation or winding-up of the company and it is
a precondition that the executive accepts such provisions at the time of
the award.
Weightings
For the 2021 award the two measures have been assigned equal weighting.
Holding period
A two-year holding period was introduced to the LTI Scheme for awards made
from 2019, 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.
EcV1: 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 and it is a precondition that the executive accepts
such provisions at the time of the award.
The following table sets out the voting in respect of the Directors’ Remuneration Report at the 2020 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
93,082,557
97.49%
2,397,183
2.51%
95,479,740
11,573
The following table sets out the voting in respect of the Directors’ remuneration policy at the 2020 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
90,213,551
94.49%
5,260,276
5.51%
95,473,827
17,487
Approval
This report was approved by the board of directors on 29 March 2021 and signed on its behalf by:
Veronica Oak
Chairman of the Remuneration Committee
90
CHESNARA ANNUAL REPORT & ACCOUNTS 2020CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • REMUNERATION POLICY
SECTION C
The current Remuneration Policy was approved by our shareholders at the
Annual General Meeting held in May 2020 and can be found on our website:
www.chesnara.co.uk/corporate-responsibility/governance-reports
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.
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-term 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 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.
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.
Overall Policy aims are:
– to maintain a consistent and stable remuneration strategy based on clear
principles and objectives;
– to ensure remuneration structures do not encourage or reward excessive
risk-taking which is outside the boundaries of our stated risk appetite;
The company has three core strategic objectives:
1. Maximise value from existing business;
2. Acquire life and pensions 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.
– 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 & values
C
a
s
h
G
e
n
e
r
a
t
i
o
n
£
E
c
o
n
o
m
i
c
V
a
l
u
e
-
e
a
r
n
n
g
s
i
E
c
o
n
o
m
i
c
V
a
l
u
e
-
g
r
o
w
t
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T
o
t
a
l
s
h
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r
e
h
o
d
e
r
l
r
e
t
u
r
n
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
91
CHESNARA ANNUAL REPORT & ACCOUNTS 2020SECTION 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 2 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).
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.
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.
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.
92
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 3 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, EcV1 operating profit, cash
generation1, 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,
weighting of which 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.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
93
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 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 objectives;
targets are set
STI Scheme - The performance measures for the STI Scheme reflect the
main financial contributors to sustaining returns for shareholders and the
group strategic objectives. 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, EcV1 operating profit, cash generation1, 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.
1 Alternative performance measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the ‘Additional Information’ section of
this Annual Report & Accounts.
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CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 5 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.
For the avoidance of doubt, any reduction may be applied on an individual
basis as determined by the Committee.
(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 shareholding 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 final 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 final 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.
95
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 twelve-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.
No grants following service of notice.
Right to cash payment and unvested
deferred share awards cease on date
employment ends.
Outstanding options must be exercised
within 6 months of date employment ends.
No grants following service
of notice.
Unvested awards lapse on
date employment ends.
Outstanding options must be
exercised within 6 months of
date employment ends.
By company
summarily
(Bad Leaver).
None
Cease on date
employment ends.
None
prescribed
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.
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 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.
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.
Unvested awards lapse on
date employment ends.
Outstanding options must be
exercised within 6 months of
date employment ends.
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.
96
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020 Non-executive directors
Executives’ other directorships
– 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.
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.
– Non-executive directors are typically expected to serve two three-year
terms but may be invited by the board to serve for an additional period.
Any renewal is subject to board review and AGM re-election.
– The terms of an appointment are set out in a letter of appointment which
can be terminated by either party with three months’ notice or
immediately if termination is as a result of not being elected at the AGM.
– There are no compensation terms regardless of the circumstances that
may lead to a contract being terminated.
Illustration of 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
895
20%
20%
538
1,683
41%
1,454
32%
32%
27%
Group Finance Director
£000’s
Long-term incentive
Annual variable
Fixed
541
19%
19%
338
988
40%
858
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 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 2021.
Director
Group Chief Executive Officer
Group Finance Director
Salary and fees
£000
457.8
288.8
Benefits
£000
36.9
21.3
Pension
£000
Total fixed pay
£000
43.5
27.4
538.2
337.5
The pension figure above is based on 9.5% of gross basic salary.
Statement of shareholder views
Given there is very little change in Policy between this and our last Remuneration Policy the Committee has not considered it necessary to consult with
shareholders.
97
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020 AUDIT & RISK COMMITTEE REPORT
‘It is pleasing to report that
the group has remained
financially and operationally
resilient throughout
the COVID-19 pandemic’.
NUMBER OF MEETINGS
DURING YEAR: 9
MEMBERS:
Jane Dale
David Brand
Veronica Oak
Mark Hesketh
Eamonn Flanagan
- Chairman
- Member (until 30 June)
- Member
- Member
- Member (from 1 July)
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 68 to 69.
Chairman’s introduction
Welcome to the 2020 Audit & Risk Committee Report. I am writing this report
from my home, reflecting on a very challenging year. COVID-19 understandably
dominated what was already a busy looking agenda. I’m very grateful to
my colleagues and the staff at Chesnara for their hard work which enabled
the Committee to meet all its usual obligations as well as dealing with the
impact of the pandemic. As an introduction to my report I have highlighted
some of the key activities of the Committee over the year, starting, of course,
with COVID-19.
Financial reporting matters: The Committee has considered a number of
financial reporting matters as part of its role in overseeing the production of
the 2020 Annual Report & Accounts. Notably this has included ensuring that
COVID-19 is appropriately covered, not least in our going concern and viability
statements. In addition, we have completed a small acquisition in the
Netherlands during the year, and the Committee has spent time reviewing the
accounting and disclosure on this. Further information on significant issues that
the Committee has considered are included on page 101.
COVID-19: The pandemic emerged as we were finalising the group’s 2019
Annual Report & Accounts. We reported our initial view of the impact of the
emerging pandemic on the group in those accounts. Since then the
Committee has continued its close monitoring of both the financial and
operational impact of COVID-19 on the Chesnara group, and it is pleasing to
report that our business has remained operationally and financial resilient.
From an operational perspective we have focused on ensuring that our
customers continue to be treated fairly, that our critical processes continue to
operate effectively, and that our staff welfare is maintained whilst working
remotely. From a financial perspective, the Committee’s primary focus has
been on monitoring solvency and liquidity in light of the impact of the
significant equity market falls and drops in yields that were witnessed at the
outbreak of the pandemic. We have also been monitoring the insurance risk
associated with COVID-19 and have not noted any need for material
assumption changes. Further information on the Committee’s involvement
in overseeing the response to COVID-19 can be found later in my report.
Looking forward
Change remains firmly on the agenda as we look forward. The impact of
audit reform and changes to UK corporate governance will likely be far
reaching. From a financial reporting and governance perspective, proposals
include directors being held personally responsible for the accuracy of financial
statements; the introduction of new rules similar to the US Sarbanes-Oxley
regulations; and new requirements to report on environmental, social
and governance (ESG) obligations. There are also proposals in relation to the
external audit profession, which includes consideration of operational
separation between external audit and non-audit work within audit firms.
Most of these proposed changes have arisen from independent reviews that
have taken place over the last few years, including those performed by Sir
Donald Brydon, Sir John Kingman and the Competitions and Markets
Authority (CMA). The Financial Reporting Council will also be replaced by the
newly formed Audit Reporting and Governance Authority (ARGA). We will be
monitoring these changes closely.
IFRS 17: The Committee has continued its close oversight of the group’s
IFRS 17 implementation programme during the year. Most notably was its
involvement in the selection of a single supplier for a group-wide solution for
calculating the contractual service margin (CSM). Willis Towers Watson were
selected from a shortlist of three different solutions. Since the selection back
in the summer Management has been working hard with WTW developing
the technical specifications that the system requires, with the wider
operational implementation expected to be largely delivered over the course
of 2021. We have made excellent headway with our technical application of
the standard across the group. As well as its direct involvement in the CSM
suppler selection process, the Committee has also been involved in some
IFRS 17 ‘deep dive’ sessions; this helps to ensure that its members are
appropriately aware of all different components of the programme, ranging
from technical decisions through to our plans and associated budgets.
Looking forward we have lots to deliver in 2021, which will be a key year for
this multi-year implementation programme.
We have reported in the risk management section on page 55 that Brexit has
not, and is not expected to, significantly impact the group. That said, it has
the potential to introduce new solvency and reporting matters, or result in
regulatory divergence in terms of the application of Solvency II rules between
the UK and EU. The Committee will watch this space closely.
Finally, the impact of COVID-19 on our business will also remain firmly on the
Committee’s agenda. We will continue to pay very close attention to the impact
on our operations in order to ensure we remain resilient, with our customers
and staff at the centre of these considerations. In addition, COVID-19
continues to have the potential to cause ongoing market uncertainty such
is the scale of its impact on the global economy and operating environment,
and as such, the Committee will continue to ensure that we monitor
the potential impact of these on our solvency and hence financial resilience.
98
Jane Dale
Chairman of the Audit & Risk Committee
29 March 2021
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
THE CHESNARA AUDIT & RISK COMMITTEE HAS RESPONSIBILITIES OVER A COMBINATION OF BOTH RISK AND
AUDIT MATTERS. AN UPDATE AGAINST EACH OF THESE TWO KEY OBLIGATIONS HAS BEEN PROVIDED BELOW.
Audit responsibilities
This section of the report includes the following:
1. Activities during 2020: 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 2020
The Committee’s activity during the calendar year is driven by a combination of business as usual (BAU) items and non-standard areas that have required attention
during the year. Over and above the more standard areas of focus, the Committee has focused on: The group’s IFRS 17 implementation programme; the impact
of COVID-19; and keeping abreast of corporate governance developments and audit reform. 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:
– 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
page 101 for further details on certain aspects of this year’s accounts.
– Half Year Report: Reviewed and challenged the Chesnara Half Year Report for the six months ended 30 June 2020.
– 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 page 101 for further detail.
– Solvency II narrative reporting: Reviewed the Chesnara group Solvency and Financial Condition Report, which is published annually on the Chesnara website
and also sent to the Prudential Regulation Authority.
– Financial performance: Monitored and scrutinised the financial performance of the group during the year, covering IFRS, Solvency, EcV, Cash Generation and expenses.
– IFRS 17: Continued its oversight of the group’s ongoing IFRS 17 programme. Key highlights for the year have included; overseeing the decision-making process for
appointing a single group-wide supplier for the core IFRS 17 calculation engine; monitoring progress against plans and budget, including consideration of key
implementation risks; and ensuring relevant deep-dive sessions have taken place during the year in order to ensure the Committee’s own IFRS 17 education
continues at an appropriate pace.
– COVID-19: The Committee added the impact of COVID-19 to its watchlist of key items early on in 2020 as the pandemic emerged. From a financial reporting perspective
the immediate priority was ensuring that the 2019 Annual Report & Accounts (issued on 23 April 2020) had appropriate information included in relation to the
pandemic, which was classified as a post balance sheet event. For the purpose of the 2020 Annual Report & Accounts, the key focus of the Committee has been on
ensuring that the impact of COVID-19 is appropriately reported. This has included a particular focus on the group’s going concern, viability and prospects statements;
our disclosures within our Section 172 reporting on key decisions as a result of the pandemic; and the reporting of the group’s principal risks and uncertainties.
– FRC updates: Actively monitored any key publications issued by the Financial Reporting Council regarding financial reporting matters during the year. This has
included, but is not limited to, guidance issued in relation to financial reporting over COVID-19, including its impact on going concern, risk and viability; guidance on
Section 172 Reporting; and the 2020 Annual Review of Corporate Reporting.
– External audit plans: Reviewed the group-wide plans of the external auditor, including consideration of the key audit risks.
– External audit quality: Assessed the quality of the external auditor during the year. This has included, amongst other things, consideration of feedback from
management, coupled with reviewing the report issued by the Audit Quality Inspection Unit on Deloitte LLP, which was issued by the Financial Reporting Council
in July 2020.
– 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 100
for more information.
– Evaluation of internal audit effectiveness: The Committee evaluates its effectiveness on an annual basis and considers through this process, amongst other
things, the effectiveness of internal audit. It determined in 2020 that the papers that it receives, opportunity to engage with contributors, the atmosphere in
meetings and throughout this engagement as well as the way in which it is kept informed had all been effective, including as part of that the performance of the
internal audit function.
– Oversight of internal audit function developments during the year: During 2020 the Committee focused on ensuring that Internal Audit was still able to
operate despite the disruption to the organisation and the move to home working. See further detail in the ‘internal audit’ section overleaf.
– Review of internal audit findings: Received regular updates from business unit Audit & Risk Committees regarding key findings from 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.
– Feedback from divisional Audit & Risk Committees: Reviewed and challenged regular feedback provided by the group’s divisional Audit & Risk Committees.
– Committee Terms of Reference: Reviewed its Terms of Reference during the year and also completed its annual assessment of compliance with its terms of reference.
– Performance evaluation: Conducted an evaluation of the Committee’s performance during the year, which was completed by members of the Committee.
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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
99
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 lead audit engagement partner, Stephen Williams, was appointed during 2016 and this will be his fifth and final year
leading the Chesnara audit;
– The Committee has been working with Deloitte on appointing a lead audit partner to replace Stephen Williams and are in the process of considering a short list
of candidates. All candidates are suitably qualified and experienced and as such this change in partner does not change the Committee’s views on the
effectiveness of Deloitte as our external auditor;
– 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 2020 entitled ‘Deloitte LLP Audit Quality Inspection’. The report was discussed with the
auditor although the Chesnara plc audit was not in the population of those inspected; and
– The audit fees charged and the change in fees from the previous year. Changes in annual fees do, of course, need to reflect change in the nature of the
company’s business which has expanded over time.
It was concluded that the audit process was effective. The company is committed to putting its audit out to tender at least every ten years, 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.
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
%
proportion
80%
18%
2%
2020
£000
937
216
20
1,173
%
proportion
79%
21%
–
2019
£000
814
239
–
1,053
Audit services
The fees charged for audit services have increased slightly when compared with 2019, largely driven by an annual inflationary uplift, coupled with some
additional work arising from a combination of revised auditing standards that became effective during the year and additional work that is required in order for the
auditor to assess the risk of COVID-19 on the group, and how this is disclosed in the Annual Report & Accounts.
Assurance services
The cost of assurance services performed by the external auditor is largely in line with the prior year. These fees largely related to Deloitte’s review work over
the Chesnara Half Year Report, coupled with assurance services that are required over certain regulatory returns in the Netherlands.
Non-audit services
The non-audit services provided in 2020 are in relation to work performed in connection with the winding-up of Modernac, a former associated company
based in Luxemburg.
3. Internal audit
Chesnara has a local decentralised model for delivering its internal audit, with each of its business unit Audit & Risk Committees being responsible for the
oversight and supervision of its own internal audit work. The Chesnara Audit & Risk Committee oversees this by reviewing plans and receiving regular reports
from each territory. The group has utilised a mix of outsourced and in-house capabilities throughout the year, adapted to meet the specific needs of each
local market. Each of the local teams had to react to the impact of COVID-19 and in particular the change to a remote working model. This resulted in some
changes being required to local plans and also in terms of the way certain audits were delivered, with more reliance on remote desk-based reviews utilising
video conferencing. That said, it is pleasing to report that despite these challenges, the plans across the group were broadly maintained, with the respective
teams looking at a mixture of processes and areas including compliance; data quality; remuneration; outsourcing; information security; service level
agreements; operational resilience; customer strategy project; roll out of remote working arrangements and subsequent delivery of customer service and
associated data security; underwriting processes and operations; ORSA reporting processes and Insurance Distribution Directive (IDD) compliance. No
significant issues have been identified through the delivery of the internal audit programme during the year.
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CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020
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. This includes consideration of matters communicated by the auditors.
Area of focus
Reporting issue
Role of the Committee
Conclusion/action taken
COVID-19 and its
impact on going
concern, viability
and prospects,
and associated
disclosures
The emergence of COVID-19 as a global pandemic during 2020 has
resulted in a need for companies to clearly articulate in its Annual
Report & Accounts the impact that it has had on its operations,
financial position and outlook. Guidance has been issued by the
Financial Report Council on where COVID-19 might be expected to
be covered in the Annual Report & Accounts, including:
– Going concern and long-term viability statements
– Principal risks and uncertainties
– Section 172 disclosures regarding key decisions made in
the year
– Business performance updates
– Reporting of sensitivities
Accounting and
reporting for the
Argenta
acquisition
During the year the group completed the acquisition of a
small book of policies from Argenta Assuranties N.V. As a
one-off transaction it is important to ensure that the
accounting and disclosure is appropriately reflected in the
Annual Report & Accounts.
Scildon
adequacy of
reserves
IFRS 4 ‘Insurance contracts’ requires an assessment of the
adequacy of the reserves held for insurance liabilities, referred to
as the Liability Adequacy Test (LAT). Historically the LAT outcome
has shown that the IFRS reserves in Scildon are sufficient and in
excess of the company’s best estimate liability (BEL) calculations,
but given further yield falls during the year, to which Scildon is
sensitive, the LAT results have been a key focus of management
and the Audit & Risk Committee.
Scildon acquired
value in-force
intangible asset
The group IFRS balance sheet includes an intangible asset,
representing the acquired value of the in-force policies at the point
of the acquisition of Scildon (the AVIF asset), which is being
amortised over the estimated profit profile of the associated
polices. An impairment test of this intangible asset is required on
an annual basis.
The Committee has been closely
monitoring the impact of
COVID-19 on the group’s
operations and financial position
over the course of the year. From
a Report & Accounts perspective
the Committee’s role has been to
review the summary paper
prepared by management
sign-posting the key areas where
COVID-19 should be referred to,
and to ensure that the Annual
Report & Accounts present a fair
reflection of the impact of
COVID-19 on the Chesnara group.
The role of the Committee has
been to ensure that the
accounting for the acquisition is
reflective of the transaction,
across all financial metrics that
are used by the group, and that
appropriate disclosures have
been made in the Annual Report
& Accounts.
The Committee has paid close
attention to the liability
adequacy test that has been
performed as at year end 2020
and has reviewed the results
from this assessment, as
documented in management’s
paper to the Committee.
Particular attention was given
to the assumptions
underpinning the BEL, and any
key management judgments
such as the best estimate of
the benefits and costs
associated with the current
in-flight IT system upgrade.
The Committee has reviewed the
work performed by management
in assessing the carrying
value of the AVIF intangible
asset, including scrutinising the
assumptions made and
conclusions drawn.
The Committee is satisfied that the
Annual Report & Accounts presents
a complete and accurate picture
of the impact of COVID-19 on the
Chesnara group.
The Committee has reviewed the
acquisition accounting paper for the
Argenta purchase and is comfortable that
it reflects the underlying arrangements.
The Committee has also reviewed the
disclosures within the Annual Report &
Accounts.
The outcome from the liability
adequacy test was that the IFRS reserves
required strengthening by £10.0m. The
Committee is satisfied that this has been
appropriately reflected
in the closing reserves, and that adequate
disclosure in the financial statements has
been made.
The review concluded that the gross AVIF
asset was required to be written down by
£26.6m during the year. £11.6m of this
was recognised in the 2020 half year
report.
Movestic DAC
Actuarial
assumptions
The group balance sheet includes an intangible asset representing
the component of acquisition costs that have been deferred to be
recognised over the expected life of the policies to which the
acquisition costs relate. The asset is made up of different cohorts
of policies and is subjected to an annual impairment test. The
expected life of the policies is a key judgment for management
and is influenced by recent experience.
The Committee is required to
satisfy itself that the judgments
underpinning the accounting
assumptions are appropriate
and reflect the relevant facts
and observations.
In light of recent experience in Movestic,
in particular the dynamic that there is
generally more switching between
different product providers in this
market, it was deemed appropriate to
impair certain components, resulting in a
charge to the income statement of £1.0m.
– 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.
A particular focus of the Committee this year has been to
ensure that the impact of COVID-19 has been given
appropriate attention.
The Committee reviewed and
approved the actuarial basis
of assumptions report
underpinning the valuation of
insurance liabilities. This
specifically included reviewing
the impact of COVID-19 on the
assumptions.
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.
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SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020
AUDIT & RISK COMMITTEE REPORT (CONTINUED)
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.
Focused activities performed during the year
The table below and on the following page provides some information regarding the more focused activities that the Committee has performed during the
year in discharging its risk oversight responsibilities. In particular this includes how it has focused on the impact of COVID-19.
COVID-19: The Committee has paid very close attention to the impact of COVID-19 on the group. This has largely been managed through deep dive
updates provided by the chief risk officer in the quarterly risk reports, coupled with capturing and tracking the impact of COVID-19 in a ‘live’ non-regular
ORSA document. The Committee has focused on the following areas in relation to the pandemic:
– Financial resilience: The emergence of COVID-19 as a global pandemic resulted in some significant investment market movements during March
2020, notably equity market falls and yield falls. At one point the FTSE 100 was down c34% on the start of the year, and 10 year gilts had fallen by 62
basis points. Solvency has remained resilient across the business, which is consistent with the sensitivities of the business as reported in the annual
group’s Own Risk and Solvency Assessment (ORSA) as required by Solvency II rules. No significant mortality strengthening has been required, and our
assessment of sensitivities subsequent to the emergence of the pandemic continue to show that, should further economic volatility emerge, we expect
to continue to remain solvent.
– Operational resilience: COVID-19 resulted in a need for the vast majority of staff within the Chesnara group to work from home for significant periods
of time. The Committee monitored the impact of this closely, focusing on ensuring that the group was able to continue to deliver its important business
services with minimal disruption in order to continue to treat customers fairly. The Chesnara group was able to transition to a largely remote-working
environment with minimal disruption and benefitted from investment in operational resilience and communication technology across the group in recent
years. The Committee also paid close attention to its core outsourcers, particularly in the UK, where they have customer servicing responsibilities.
Full operational impact reports were produced by each subsidiary within the group as they transitioned to a remote working environment, and this
demonstrated that all important business services could continue to be delivered.
– Staff health and well-being: As the remote-working environment has continued to be required over extended periods of the year, greater focus has
been necessary on staff health and well-being. The Committee has sought to identify and understand the risk in this area and what measures
management can put in place to mitigate the impact of extended periods without ‘in-person’ interactions. This has resulted in a collective effort in
ensuring staff in the business remain engaged, through a particular focus on more frequent interactions both within teams and from senior management
to staff. The group has utilised video technology where feasible in order to ‘humanize’ staff interactions as much as possible.
– Systems of governance conclusions: The business has focused on ensuring it can continue to deliver its core governance routines despite the
challenges of the pandemic. It is pleasing to report that these have continued largely unaffected; and this is backed up by the results of our annual
systems of governance survey, which continued to give very positive results consistent with pre-pandemic surveys.
Key projects across the group:
– IFRS 17: As a multi-year group-wide programme, the Committee has been paying close attention to the IFRS 17 programme. Not only does the
Committee need to ensure that it understands IFRS 17 from a technical perspective in order to be able to discharge its audit responsibilities, the
Committee is also charged with ensuring that it understands and challenges the project delivery and risks. The Committee has obtained regular project
updates throughout the year and has continued to review, and challenge progress made to date and the future plans of the project.
– Scildon IT systems: The division has been embarking on an upgrade to its policyholder administration system. The Committee has remained abreast of
the programme, how it is being managed, and ensuring that any emerging risks are being appropriately dealt with by management. In particular the
Committee has stayed abreast of any impact of COVID-19 on the project’s delivery timescales and associated budget.
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CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020 Regular activities performed during the year
The table below provides some further information regarding the ‘business as usual’ 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. The quarterly risk reporting included ‘in focus’ topics as required,
including, amongst other things;
• COVID-19: This was a key focus area throughout the year. See update in previous section for further detail.
• IT, data security and cyber risk: Each business unit carried out gap analysis against the group principles for IT and data security. This work
demonstrated that all business units are materially aligned to the group principles, acknowledging that these may be documented and embedded in a
variety of ways. All actions identified to close any non-material gaps have now been completed.
• Brexit: In particular, the potential impact on the solvency regime in which the group operates.
– 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 2021 plans, with suitable priorities attached.
– ORSA review: The Committee reviewed the 2020 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 and included specific consideration of the impact of COVID-19. 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 the group’s risk appetite framework, including reviewing and challenging the key risk indicators / tolerance limits
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.
Assurance
Taken together, the group’s risk function and Internal Audit function ensure that the committee is provided with appropriate assurance throughout each year. The second-line
Risk function ensures independent review and challenge of business performance and activities with the opportunity to influence areas of review to be undertaken by the
independent third-line Internal Audit function. The committee can direct the activity of either function as circumstances require, amending work plans to accommodate deep dives
if felt appropriate to do so. The incremental ORSA work in 2020 as a result of COVID-19 is one such example. The committee leverages these functions within the group’s
proportionate three-lines of defence model in addition to engaging with and having board representation on the business unit audit & risk committees which themselves have
local risk and Internal Audit functions. In this way, and through receiving assurance reports from each business unit on a quarterly basis as introduced in 2020, the committee
satisfies itself with regard the assurance it obtains on the group’s activities and performance.
Jane Dale
Chairman of the Audit & Risk Committee
29 March 2021
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SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020 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 2020. The Corporate Governance Report on pages 72 to 76 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 2020, the company had
150,065,457 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 2020, shareholders approved resolutions to
allot shares up to an aggregate nominal value of £5,002,052 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 51 to 52 and the ‘Risk
management’ section on pages 53 to 59.
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 34 to 40.
Greenhouse gas reporting
The ‘Corporate and social responsibility’ section on pages 60 to 65.
Environmental, employee and social community matters
The ‘Corporate and social responsibility’ section on pages 60 to 65.
Directors
Full information of the directors who served in 2020 is detailed in the
Corporate Governance Report on pages 72 to 76.
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 72 to 76. 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 80 to 90,
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 2019 and 31 December 2020 and the
period to 29 March 2021.
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 July 2020,
Eamonn Flanagan was appointed to the board.
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.
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CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020 Results and dividends
The consolidated statement of comprehensive income for the year ended 31 December 2020, prepared in accordance with International
Financial Reporting Standards adopted by the EU and set out on page 118 shows:
Profit for year attributable to shareholders
2020
£000
2019
£000
21,191
79,142
An interim dividend of 7.65p per ordinary share was paid by Chesnara on 13 November 2020. The board recommends payment of a final
dividend of 14.29p per ordinary share on 24 May 2021 to shareholders on the register at the close of business on 9 April 2021.
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
£32.9m
£30.1m
£27.6m
76%
2016
36%
2017
64%
2018
87%
119%
2019
2020
Over the past 5 years £154m of dividends have
been paid at an average annual yield of 6.1% (based
on average annual share prices) representing 66%
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 2020 and 16 March 2021:
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SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020 DIRECTORS’ REPORT (CONTINUED)
Name of substantial shareholder
Total number of ordinary shares held
Percentage of the issued share capital
as at 31 December 2020
Aberdeen Standard Investments
Columbia Threadneedle Investments
M&G Investments
Canaccord Genuity Wealth Management
Hargreaves Lansdown Asset Management
Interactive Investor
Janus Henderson Investors
Royal London Asset Management
24,624,574
18,207,841
9,190,725
8,520,159
7,840,848
5,302,858
5,216,939
5,137,519
16.41%
12.13%
6.12%
5.68%
5.23%
3.53%
3.48%
3.42%
Subsequent to 31 December 2020 there have been changes to this position and the holdings as at 16 March 2021 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 16 March 2021
Aberdeen Standard Investments
Columbia Threadneedle Investments
M&G Investments
Canaccord Genuity Wealth Management
Hargreaves Lansdown Asset Management
Interactive Investor
Royal London Asset Management
Janus Henderson Investors
23,441,666
18,229,478
9,190,725
8,550,000
8,350,890
6,783,230
5,117,519
4,966,939
15.62%
12.15%
6.12%
5.70%
5.56%
4.52%
3.41%
3.31%
Chesnara plc has no multiple voting rights or voting certificates relative to total voting rights and no issued share capital is composed of non-voting shares.
Depositary receipts represent 0% of voting rights and our free float percentage of voting rights exceeds 98%.
Related party transactions and significant contracts
During the year ended 31 December 2020, 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
There have been no post balance sheet events that either require
adjustment to the financial statements or are important in the understanding
of the company’s current position, financial performance or results.
Charitable donations
Charitable donations made by group companies during the year ended
31 December 2020 were £22,000 (2019: £5,000) and included supporting
The Foxton Centre, a Preston based charity with a long history and
strong commitment to working in the local community with both adults
and young people. Further details of this charity can be found
at www.thefoxtoncentre.co.uk
No political contributions were made during the year ended 31 December
2020 (2019: £nil).
Employees
The average number of employees during 2020 was 306 (2019: 316)
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 33.
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 53 to 59, within the
Financial Management section on pages 51 to 52 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 29 March 2021 and signed on its behalf by:
106
David Rimmington
Group Finance Director
CORPORATE GOVERNANCECHESNARA ANNUAL REPORT & ACCOUNTS 2020 DIRECTORS’ RESPONSIBILITIES STATEMENT
The directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each
financial year. Under that law the directors are required to prepare the group
financial statements in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006 and
International Financial Reporting Standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union:
– properly select and apply accounting policies;
– present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information;
– provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the entity’s
financial position and financial performance; and
– make an assessment of the company’s ability to continue as a going concern.
The directors are responsible for keeping adequate accounting records that
are sufficient to show and explain the company’s transactions and disclose
with reasonable accuracy at any time the financial position of the company
and enable them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the assets
of the company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company’s website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
– the financial statements, prepared in accordance with International Financial
Reporting Standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the company and the undertakings
included in the consolidation taken as a whole;
– the strategic report includes a fair review of the development and
performance of the business and the position of the company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face; and
– the annual report and financial statements, taken as a whole, are fair, balanced
and understandable and provide the information necessary for shareholders
to assess the company’s performance, business model and strategy.
Luke Savage
Chairman
John Deane
Chief Executive Officer
29 March 2021
29 March 2021
107
SECTION CCHESNARA ANNUAL REPORT & ACCOUNTS 2020
Near Morecambe, United Kingdom
SECTION D:
IFRS FINANCIAL
STATEMENTS
108 CHESNARA ANNUAL REPORT & ACCOUNTS 2020
108
110 — Independent Auditor’s
Report to the members
of Chesnara plc
118 — Consolidated Statement of
Comprehensive Income
119 — Consolidated Balance Sheet
120 — Company Balance Sheet
121 — Consolidated Statement of
Cash Flows
122 — Company Statement of
Cash Flows
123 — Consolidated Statement
of Changes in Equity
123 — Company Statement of
Changes in Equity
124 — Notes to the Consolidated
Financial Statements
CHESNARA ANNUAL REPORT & ACCOUNTS 2020 109
109
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 2020 and of the group’s profit for the year then ended;
– the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act
2006, and International Financial Reporting Standards (IFRSs) as adopted by the European Union;
– the parent company financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the
Companies Act 2006; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
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 Changes in Equity;
– the Consolidated and Parent Company Cash Flow Statements; and
– the related Notes 1 to 51, excluding the capital adequacy disclosures calculated in accordance with the Solvency II regime in Note 29 which are marked as unaudited.
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law, and international accounting standards in conformity with
the requirements of the Companies Act 2006, and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent
company financial statements is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006.
Basis of 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:
– Valuation of insurance liabilities, pinpointed to the valuation of the Save & Prosper (S&P) Cost of Guarantees (CoG),
and the adequacy of Scildon reserves;
– Valuation of the Scildon Acquired Value In-Force (AVIF) intangible asset;
– Valuation of the Movestic Deferred Acquisition Costs (DAC) intangible asset; and
– Implementation of CA plc Fund Manager Rationalisation (FMR).
Within this report, key audit matters are identified as follows:
Newly identified
Similar level of risk
Materiality
The materiality that we used for the group financial statements was £14.7m which was determined on the basis of 3% of net assets at
31 December 2020.
Scoping
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
In comparison to the prior year, we have not identified a separate key audit matter for the current year relating to the appropriateness of the
COVID-19 post balance sheet event disclosures, as these are no longer relevant.
However, for relevant key audit matters outlined in Section 5, we have assessed and evaluated how management has taken account of the lower
asset returns due to the significant resultant deterioration in economic conditions as a result of COVID-19.
We have identified one new key audit matter relating to the FMR project that was undertaken within the Countrywide Assured plc subsidiary.
Countrywide Assured plc had historically used various fund managers to manage its day-to-day fund management requirements and the FMR
project sought to rationalise these into a single fund manager.
This has been identified as a key audit matter due to the changes to processes and controls over the preparation of accounting entries to the general
ledger in response to the changes in fund structure and reporting received from the single fund manager.
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CHESNARA ANNUAL REPORT & ACCOUNTS 2020
SECTION D
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis of accounting included:
– 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;
– assessed the actions that came out of the various governance committee meetings which considered COVID-19 in advance of reporting;
– 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, in anticipation of any further deterioration of the wider UK and Global economy
as a result of COVID-19 or Brexit; and
– assessed the going concern disclosures made by management in the financial statements, based on our knowledge gained throughout the audit.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on
the group’s and parent company’s ability to continue as a going concern for a period of at least 12 months from when the financial statements are authorised for issue.
In relation to the reporting on how the group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement
in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
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.
Valuation of insurance liabilities
Key audit matter description
Across the group, there are two matters relating to insurance liabilities which we have identified as key audit matters:
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. These reserves are
calculated using a stochastic model based on a variety of possible economic scenarios, which are 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. The value of the CoG was £18.8m at
31 December 2020 (31 December 2019: £17.3m). This increase was primarily due to lower than expected asset returns over 2020, which decreased policyholder asset shares,
and therefore increased the residual cost to shareholders. The value is determined by management’s third party actuarial expert, and management compare this valuation against
an in-house derived estimate using an approximation model to validate its reasonableness.
See Note 3(a) for management’s consideration of this critical accounting judgement and key sources of estimation and uncertainty, Note 30 for disclosure of the calculation
methodology and the charge to income for the current and prior year.
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 reserves under IFRS 4 are
not adequate.
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.
During the year a fall in interest rates due to the impact of COVID-19 on the global economy, has been a significant driver in the increase of the Best Estimate Liabilities (BEL) used
within the LAT. The test performed over the adequacy of the Scildon reserves, by management, identified a deficit of £10.0m between the BEL and the IFRS reserves, thus
resulting in an additional reserve being created. The BEL are also impacted by expected cost savings and new business levels included within the expense assumptions, relating to
a new IT system implementation project within the Scildon component.
At such a point that such assumptions are not considered to be achievable, to the extent that the LAT assessment continues to bite there be a direct impact on the level of required
IFRS reserves. This is due to the IFRS reserves now being aligned to the BEL. The relevant assumptions, and the impact on Scildon reserving is documented within Note 30.
We have also deemed there to be a risk of fraud, due to the inherent risk of management overriding internal controls around the setting of the parameters used to calculate the
reserves at inception.
The accounting policy adopted by the group is documented within Note 2(h) to the financial statements.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 Valuation of insurance liabilities (continued)
How the scope of our audit responded to the key audit matter
In respect of the valuation of Save & Prosper Cost of Guarantees:
– we gained an understanding of the internal controls around the reserving process, with specific reference to the S&P CoG;
– we performed procedures to assess the objectivity, competence, capabilities 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 2019 and 31 December 2020;
– 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;
– we tested management’s estimation model at each quarter-end since the 31 December 2019 audited position. We independently sourced and reconciled inputs to the model for
each of the periods and assessed whether the result produced by management using the estimation model was within an acceptable tolerance; and
– where manual adjustments have been made by management we have challenged the derivation and purpose of such adjustments with involvement from our actuarial specialists
by evaluating supporting documents and calculations.
In respect of the adequacy of Scildon reserves:
– we gained an understanding of the key controls around the setting of the assumptions feeding into 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;
– with involvement of actuarial specialists, we challenged the mortality, lapse and expense assumptions which feed into the test, by evaluating experience, supporting documents
and calculations. We have also challenged the interest rate assumptions, given they are a significant driver of the LAT deficit in the current period, by evaluating relevant supporting
documents and calculations; and
– assessed the expected cost savings and new business levels included within the expense assumptions, relating to a new IT system implementation project. This included
evaluating information provided by group and Scildon management including the associated business plans, and through direct challenge of managements actuarial expert and the
appointed actuary.
Key observations
Based on the audit procedures performed, we consider that the S&P Cost of Guarantees reserve is 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.
Valuation of Scildon AVIF
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 £21.6m (2019: £56.0m).
Management is required to assess the impairment of the Scildon AVIF intangible balance at least annually, in line with the relevant requirements of IAS 36 Impairment of assets and
IFRS 4 Insurance Contracts and this process involves significant judgement.
In response to the performance of Scildon, impacted by the impact of COVID-19 on investment returns, management performed an additional impairment test at 30 June 2020,
resulting in an £11.6m impairment. A further impairment of £15.0m has been recorded in the remaining period to 31 December 2020, see Note 3(a) for management’s
considerations of the AVIF impairment assessment.
The AVIF is assessed for impairment against the discounted value in force (VIF) arising on the underlying portfolio. 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 3(a) for management’s consideration of significant accounting judgements. The accounting policy adopted by the group is documented within Note 2(o) to the financial
statements and the acquired in-force business intangible is disclosed in Note 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 the internal controls in place to monitor and mitigate the risk of inappropriate management adjustments to the key assumptions;
– we have constructed a range of independent discount rates based on alternative industry data in order to challenge the rate applied by management;
– with the involvement of actuarial specialists we have challenged the Scildon cash flows as used within management’s impairment assessment, assessing whether the parameters
and judgements used are consistent with those used within the modelling of the Scildon BEL. In particular our challenge focussed around the investment return assumptions
driving the reduction in expected future cash flows; and
– we have assessed the disclosure of the aforementioned impairment within Note 3(a).
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.
112
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED) Valuation of Movestic Deferred Acquisition Costs (DAC) intangible asset
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 key judgement areas within this balance, both in terms of the amortisation period selected for the DAC and also in management’s assessment of the asset
for impairment. The impairment assessment is most sensitive to mortality, transfers, surrenders, and expenses.
As at year end 2020, the DAC balance held on the group balance sheet totalled £69.1m (2019; £63.9m), of which £58.5m (2019; £53.5m) relate to the Movestic component. Due to
the significance of the balance and the uncertainty brought about by regulatory changes in Sweden driving an increase in transfers out, we identified a key audit matter related to
the Movestic DAC. Through the annual impairment test of the DAC, management identified and reported an impairment of £1.0m relating specifically to single premium occupational
pension policies written between 2012 and 2017. See Note 3(b) for further details.
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. The accounting policy relating to deferred acquisition costs has been presented through Note 2(h) 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 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;
– with the involvement of actuarial specialists we have challenged the amortisation profile adopted by management, by constructing a range of independent amortisation profiles
based on alternative data; and
– with the involvement of actuarial specialists we have challenged the reasonableness of managements assumptions within the impairment test, including; mortality, transfers,
surrenders, and expenses. We have challenged such assumptions by evaluating experience, supporting documents and calculations.
Key observations
Through the procedures performed, we consider the assumptions in determining the DAC valuation to be appropriate.
Implementation of Countrywide Assured plc Fund Manager Rationalisation (FMR)
Key audit matter description
Countrywide Assured plc used various fund managers to manage its day-to-day fund management requirements. During 2019 the company decided to rationalise to a single fund
manager. The changes in fund manager and certain aspects of investment administration services completed in September 2020 with processes and controls embedding over the
course of Q4 2020/Q1 2021. As part of the change in fund manager, certain aspects of the fund structure were also simplified.
In addition to the operational changes required as a result of changing fund manager and investment administration services, changes to the financial reporting processes and controls
over investment accounting were also required. These included changes to processes and controls over the preparation of accounting entries to the general ledger in response
to the changes in fund structure and reporting received from the single fund manager.
The impacted balances within Countrywide Assured plc, as at 31 December 2020 were as follows:
– Equity securities – £4.0m
– Holding in collective investment schemes – £2,073.3m
– Debt securities – £208.3m
These are included within the consolidated balances and disclosed further in Note 24 and the operational changes are discussed further within the Strategic Report on page 34.
How the scope of our audit responded to the key audit matter
We obtained an understanding of the relevant controls over the valuation and existence of financial assets impacted by the FMR related changes to processes.
In respect of the FMR:
– we revisited our risk assessment considerations in response to the changes;
– we independently obtained custodian confirmations for 100% of the equity securities, holdings in collective investment schemes and debt securities;
– we assessed whether the investment records agree with the holdings of the custodian by inspecting the reconciliations;
– we performed detailed testing on a sample of valuations to independent pricing sources;
– we performed detailed testing on a sample of realised gains and losses impacting on net investment return;
– we assessed whether the trial balances agree to the underlying investment records held by the company by inspecting the reconciliations; and
– we assessed the competence of the fund manager as a service organisation, including evaluating the service auditor report that provides details of the control environment for
the services provided to Countrywide Assured plc.
Key observations
Based on the audit procedures performed, we consider that the investment related balances are appropriate.
113
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 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
£14.7m (2019: £12.8m)
£12.4m (2019: £10.5m)
Basis for determining
materiality
3% of net assets at 31 December 2020. In the case of the parent company, materiality has been capped at 85% of group materiality.
In the prior period, materiality was 3% of adjusted net assets as at 30 June 2019 to factor in the inherent volatility in asset prices in net assets between
30 June 2019 and 31 December 2019. In the current period, we have determined of materiality using the 31 December 2020 net assets balance,
thus rendering the aforementioned adjustment redundant.
Rationale for the
benchmark applied
A net assets measure is closely aligned to the objectives of capital solvency and efficiency, dividend payments and ultimately cash generation
that is relevant for Chesnara’s 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 £490.0m
Group materiality £14.7m
Component materiality range
£7.3m to £12.5m
Audit committee reporting
threshold £0.73m
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 financial statements
Parent company financial statements
Performance materiality
60% (2019: 70%) of group materiality
60% (2019: 70%) of parent company materiality
Basis and rationale
for determining
performance materiality
In determining performance materiality, we considered the quality of the control environment and whether we were able to rely on controls, the
nature of the balances, the high level of audit adjustments identified the previous audit and the further pressures on the control as a result of the
current COVID-19. Considering these factors, performance materiality was reduced to 60% for the current year.
Error reporting threshold
We agreed with the Audit & Risk Committee that we would report to the Committee all audit differences in excess of £730,000 (2019: £640,000), 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.
114
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED) 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. These components account for all the operations of the group and were all subject to a full scope audit.
Excluding the parent company, the component materiality levels set by the group auditor range from £7.3m to £8.8m (2019: £6.4m to £7.0m). The movement in range in the year arises
due to the increase in group materiality, and foreign exchange movements impacting the re-translated balance sheets.
Working with other auditors
The audit at each location involved the use of component audit teams. The group audit team have utilised virtual meetings throughout the period, to monitor and challenge each of the
component audit teams, including 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 other information comprises the information included in the Annual Report, other than the financial statements and our auditor’s report
thereon. The directors are responsible for the other information contained within the Annual Report.
We have nothing to report
in this regard.
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.
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 course of 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 this gives rise to a
material misstatement in the financial statements themselves. 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.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give
a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations,
or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities This description
forms part of our auditor’s report.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material
misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
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;
– the group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was approved by the board;
– results of our enquiries of management, internal audit, and the Audit & 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 relevant internal specialists, including tax, valuations, actuarial, and IT,
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 (CoG), 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, Tax and Pensions 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.
In addition to the above, 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, FRC, DNB and FSA; and
– 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.
116
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED) 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.
Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the
group’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the
financial statements and our knowledge obtained during the audit:
– The directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 107;
– The directors’ explanation as to its assessment of the group’s prospects, the period this assessment covers and why the period is appropriate set out on page 52;
– The directors’ statement on fair, balanced and understandable set out on page 107;
– The board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 54;
– The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems set out on pages 72 and 74; and
– The section describing the work of the Audit & Risk Committee set out on pages 98 to 103.
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
We have nothing to report in
respect of these matters.
– 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.
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 which we are required to address
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 12 years, covering
the years ending 31 December 2009 to 31 December 2020.
Consistency of the audit report with the additional report to the Audit & Risk Committee
Our audit opinion is consistent with the additional report to the Audit & Risk Committee we are required to provide in accordance with ISAs (UK).
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
29 March 2021
117
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 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
Other operating income
Total revenue net of investment return
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders
Net decrease/(increase) 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 impairment of acquired value of in-force business
Charge for amortisation of acquired value of in-force business
Charge for amortisation of acquired value of customer relationships
Other
Note
2020
£000
2019
£000
7
7
8
9
10
1 1
1 1
1 1
12
12
13
14
15
15
15
15
293,365
(42,907 )
268,331
(44,215 )
250,458
92,698
254,568
40,181
224,116
92,895
1,090,640
37,838
637,905
1,445,489
(420,031 )
6,869
48,178
(364,984 )
(1 10,878 )
1,340
(109,538 )
(23,625 )
(70,952 )
(27,623 )
(9,562 )
(63 )
(5,062 )
(445,265 )
(176,541 )
38,064
(583,742 )
(664,463 )
5,424
(659,039 )
(21,750 )
(67,811 )
–
(10,445 )
(70 )
(5,635 )
Total expenses net of change in insurance contract provisions and investment contract liabilities
(61 1,409 )
(1,348,492 )
Total income less expenses
Share of profit of associate
Post completion gain 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 land and buildings
Other comprehensive income for the year, net of tax
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 124 to 201 form part of these financial statements.
23
51
16
7
17
7
4
1
46
46
26,496
–
388
(2,299 )
24,585
(3,394 )
96,997
1,072
788
(2,751 )
96,106
(16,964 )
21,191
79,142
22,618
(464 )
(18,684 )
144
22,154
(18,540 )
43,345
60,602
14.12p
52.77p
14.03p
52.47p
118
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Derivative financial instruments
Total financial assets
Insurance and other receivables
Prepayments
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 financial instruments
Total financial liabilities
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance and investment contracts
Deferred income
Income taxes
Other payables
Bank overdrafts
Total liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Other reserves
Retained earnings
Total shareholders’ equity
SECTION D
Note
2020
£000
2019
£000
1 8
19
20
2 1
22
23
30
31
24
24
24
24
24/25
24/27
1
26
26
38
28
30
31
32
33
34
27
36
37
38
39
40
28
69,051
61,655
409
–
8,508
8,718
–
1,124
197,068
37,026
10,180
6,714,303
1,098,559
332,117
344,918
830
8,500,907
45,048
13,349
12,716
4,566
105,351
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
2,076
7,749,704
53,936
8,353
14,132
5,394
107,956
9,065,496
8,340,971
3,958,037
613
3,610,415
521
4,035,040
332,117
2,844
66,955
3
4,436,959
19,086
2,863
96,337
3,355
9,427
50,107
1,645
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
8,578,429
7,865,480
7
487,067
475,491
41
41
42
43
43,768
142,085
30,772
270,442
43,767
142,053
8,618
281,053
487,067
475,491
The Notes and information on pages 124 to 201 form part of these financial statements.
Approved by the board of directors and authorised for issue on 29 March 2021 and signed on its behalf by:
Luke Savage
Chairman
John Deane
Chief Executive Officer
Company number: 04947166
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
119
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
2020
£000
2019
£000
24
354,720
620
354,720
521
355,340
355,241
24
28
34
40
224
263
57,945
123
3,819
1,915
74,758
855
2,440
769
64,026
79,085
419,366
434,326
216
15,402
1,859
253
14,849
4,190
17,477
19,292
34
23,608
37,676
23,608
37,676
41,085
56,968
378,281
377,358
41
41
42
43
7,496
142,085
50
228,650
7,495
142,053
50
227,760
378,281
377,358
The Notes and information on pages 124 to 201 form part of these financial statements.
The profit for the financial year of the parent company was £32.7m (2019: £64.9m).
The financial statements of Chesnara plc (registered number 4947166) were approved by the board of directors and authorised for issue on 29 March 2021 and
signed on its behalf by:
Luke Savage
Chairman
John Deane
Chief Executive Officer
120
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Impairment of acquired value of in-force business
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
Impairment losses
Fair value gains on financial assets
Share of profit of associate
Increase in intangible assets related to insurance and investment contracts
Interest received
Dividends received
Changes in operating assets and liabilities:
Increase in financial assets
(Increase)/decrease in reinsurers’ share of insurance contract provisions
Decrease/(increase) in amounts deposited with reinsurers
Decrease in insurance and other receivables
Increase in prepayments
Increase in insurance contract provisions
Increase in investment contract liabilities
Increase/(decrease) in provisions
Decrease in reinsurance payables
Increase/(decrease) in payables related to direct insurance and investment contracts
Increase/(decrease) in other payables
Net cash generated/(utilised by) from operations
Income tax paid
Net cash generated/(utilised by) from operating activities
Cash flows from investing activities
Development of software
Purchases of property and equipment
Net cash generated/(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
Dividends paid
Interest paid
Net cash utilised by financing activities
Net decrease in net cash and cash equivalents
Net cash and cash equivalents at beginning of year
Effect of exchange rate changes on net cash and cash equivalents
Net cash and cash equivalents at end of the year
Note. Net cash and cash equivalents includes overdrafts.
The Notes and information on pages 124 to 201 form part of these financial statements.
Note
2020
£000
2019
£000
21,191
79,142
22
18
19
19
21
22
16
16
23
637
12,845
27,623
9,562
63
1,292
757
55
492
3,128
(2,987 )
(1,929 )
2,244
1,019
(138,1 19 )
–
(15,316 )
5,335
3,241
(150,789 )
(6,981 )
304
6,763
(4,227 )
233,055
36,539
39
(523 )
7,451
6,188
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 )
58,952
(6,456 )
(46,415 )
(878 )
52,496
(47,293 )
2,734
(857 )
(3,097 )
(98 )
1,877
(3,195 )
1
32
(26,094 )
(695 )
(32,294 )
(2,295 )
–
–
(18,465 )
(646 )
(31,316 )
(2,570 )
(61,345 )
(52,997 )
28
(6,972 )
106,782
3,896
(103,485 )
214,254
(3,987 )
28
103,706
106,782
121
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Decrease/(increase) in financial assets
Changes in operating assets and liabilities:
Decrease in loans and receivables
(Increase)/decrease in prepayments
Increase in provisions
Decrease/(increase) in other payables
Net cash generated/(utilised by) operating activities
Income tax received
Net cash generated/(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
Repayment of borrowings
Repayment of lease liabilities
Dividends paid
Interest paid
Net cash utilised by financing activities
Net increase/(decrease) in net cash and cash equivalents
Net cash and cash equivalents at beginning of year
Note
2020
£000
2019
£000
32,692
64,939
(1,504 )
1,087
492
(40,553 )
60
16,813
729
(100 )
25
(341 )
(1,704 )
1,362
593
(69,772 )
9
(27,470 )
1,426
76
266
1,508
9,400
–
(28,767 )
1,796
9,400
(26,971 )
40,553
(21 )
69,772
(266 )
40,532
69,506
1
32
(15,376 )
(62 )
(32,294 )
(1,087 )
–
–
(17,055 )
(19 )
(31,320 )
(1,362 )
(48,786 )
(49,756 )
1,146
769
(7,221 )
7,990
Net cash and cash equivalents at end of the year
28
1,915
769
Note. Net cash and cash equivalents includes overdrafts.
The Notes and information on pages 124 to 201 form part of these financial statements.
122
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC (CONTINUED)
SECTION D
Total
£000
475,491
21,191
1
32
(32,294 )
22,618
(464 )
492
281,053
21,191
–
–
(32,294 )
–
–
492
232,638
79,142
(31,320 )
–
–
593
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
281,053
475,491
STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2020
Equity shareholders’ funds at 1 January 2020
Profit for the year
Issue of share capital
Issue of share premium
Dividends paid
Foreign exchange translation differences
Revaluation of land and buildings
Share based payment
Note
4
Share
capital
£000
43,767
–
1
–
–
–
–
–
142,053
–
–
32
–
–
–
–
8,618
–
–
–
–
22,618
(464 )
–
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Equity shareholders’ funds at 31 December 2020
43,768
142,085
30,772
270,442
487,067
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Year ended 31 December 2019
Equity shareholders’ funds at 1 January 2019
Profit for the year
Dividends paid
Foreign exchange translation differences
Revaluation of land and buildings
Share based payment
Note
4
Share
capital
£000
43,767
–
–
–
–
–
142,053
–
–
–
–
–
27,158
–
–
(18,684 )
144
–
Equity shareholders’ funds at 31 December 2019
43,767
142,053
8,618
COMPANY STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2020
Share
capital
£000
Share
premium
£000
Other
reserves
£000
Treasury
shares
£000
Retained
earnings
£000
Equity shareholders’ funds at 1 January 2020
Profit for the year
Issue of share capital
Issue of share premium
Dividends paid
Share based payment
7,495
–
1
–
–
–
142,053
–
–
32
–
–
Equity shareholders’ funds at 31 December 2020
7,496
142,085
50
–
–
–
–
–
50
–
–
–
–
–
–
–
227,760
32,692
–
–
(32,294 )
492
228,650
378,281
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
–
–
–
–
–
The Notes and information on pages 124 to 201 form part of these financial statements.
Total
£000
445,616
79,142
(31,320 )
(18,684 )
144
593
Total
£000
377,358
32,692
1
32
(32,294 )
492
Total
£000
343,146
64,939
(31,320 )
593
193,548
64,939
(31,320 )
593
227,760
377,358
123
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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.
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 29 March 2021.
Representation of prior year amounts
In order to better reflect the nature of the balances, we have excluded prepayments and insurance receivables from financial assets on the face of the statement
of financial position. The prior year comparative has been represented accordingly. On the Statement of Comprehensive Income, we have added in a line item to
show other comprehensive income and the prior year figure has been represented accordingly.
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 accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. 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 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
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020 SECTION D
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
IFRS 17
Subject
Insurance contracts
IFRS 10 and IAS 28 (amendments)
Sale or contribution of assets between an investor and its associate or joint venture
Amendments to IAS 1
Amendments to IFRS 3
Amendments to IAS 16
Amendments to IAS 37
Classification of liabilities as current or non-current
Reference to the conceptual framework
Property, plant and equipment – proceeds before intended use
Onerous contracts – cost of fulfilling a contract
Annual improvements to IFRS Standards 2018 - 2020 cycle
Amendments to IFRS 1 first-time adoption of International Financial Reporting Standards,
IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture
Interest Rate Benchmark Reform (IBOR) – Phase 2
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (effective date: 1 January 2021)
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 June 2020, amendments to the original draft
were issued, which are still subject to endorsement within the EU and UK. These amendments defer the effective date of IFRS 17 by 2 years to 1 January 2023.
The new standard will significantly change how the group measures and reports its insurance contracts. Implementation activities were progressed during 2020,
following an initial assessment of the technical and operational implications of the standard performed in 2019. These implementation activities are ongoing and
will continue throughout 2021 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 120.
(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 2020 2 Significant accounting policies (continued)
(c) Basis of preparation
The consolidated and parent company financial statements have been prepared on a going concern basis. The directors believe that they have a reasonable
expectation that the group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the directors have
taken into consideration the points as set out in the Financial Management section under the heading ‘Going Concern’.
The financial statements are presented in pounds sterling, rounded to the nearest thousand, and are prepared on the historical cost basis except that the following
assets and liabilities are stated at their fair value: derivative financial instruments; financial instruments at fair value through income; assets and liabilities held for
sale; investment property; and investment contract liabilities at fair value through income.
Assets and liabilities are presented on a current and non-current basis in the Notes to the financial statements. If assets are expected to be recovered or liabilities
expected to be settled within a year, they are classified as current. If they are expected to be recovered or settled in more than one year, they are classified as
non-current. The company balance sheet is also presented in this manner.
The preparation of financial statements in conformity with IFRSs requires management to make 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.
(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.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (f) Foreign currencies
The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates, being its
functional currency. For the purpose of these consolidated financial statements, the results and financial position of each group company are expressed in pounds
sterling, which is the functional currency of the parent company and the presentation currency of the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency, being foreign currencies,
are recorded at the rates of exchange prevailing on the dates of the transactions. 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. 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 and
exchange differences are recognised in profit or loss. 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.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the group’s foreign operations are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year, unless exchange rates fluctuate
significantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classified as equity and
are recognised in the group’s foreign currency translation reserve. Such translation differences are recognised as income or as expense in the year in which the
operation is disposed of.
Transactions relating to business combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date.
(g) Product classification
The group’s products are classified at inception as either insurance or investment contracts for accounting purposes. Insurance contracts are contracts which
transfer significant insurance risk and remain as insurance contracts until all rights and obligations are extinguished or expire (see below for how we classify
different products). 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, for certain Movestic products, 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.
For the purpose of assessing whether significant insurance risk exists, the following general framework is applied:
– Unit-linked contract with death benefit greater than 105% of unit fund: A threshold has been set to determine significant insurance risk, and for these group of
products the assessment is made with reference to the policyholder’s unit fund. In the event that the death benefit on a product is deemed to exceed 105% of
the value of the unit fund, it is classified as an insurance product.
– Unit-linked product with death benefit based on premiums received: Products that have a death benefit based on premiums received are deemed to carry
significant insurance risk, as there are plausible scenarios where the additional amounts may be significant.
– Unit-linked product with death benefit of a fixed sum assured: A death benefit that is a fixed sum assured is classed as having significant insurance risk as there
are plausible scenarios where additional amounts may be significant.
– With-profits – guaranteed minimum pensions: Guaranteed minimum pension products have significant insurance risk as the cost to the provider is contingent
on the policyholder, their survival to maturity and the annuity market.
– With-profits – guaranteed minimum fund value: These products have a death benefit equal to the present value of the guarantee which may be onerous depending
on the timing of the death.
– Protection: Protection products, such as term assurance or whole of life products, carry clear insurance risk, as the potential benefit can far exceed the premiums
for the product.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
2 Significant accounting policies (continued)
(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, both regular and up-front single payment premiums are accounted for when they fall 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.
For the annually renewed risk contracts in Sweden, 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.
(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.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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, the impact of deferred tax on unrealised capital gains is passed to the policyholder and for the Swedish business a policyholder yield
tax in respect of an estimate of the investment return on the underlying investments in the unitised funds are also reflected in the measurement of the
respective unit-linked liabilities.
Investment contract liabilities are managed together with related investment assets on a fair value basis as part of the documented risk management strategy.
The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts.
(j) Reinsurance
The group cedes reinsurance in the normal course of business for the purpose of avoiding the retention of undue concentration of risk on any one life, policyholder
or loss event (for example multiple losses under a group Life contract). Assets, liabilities and income and expense arising from ceded reinsurance contracts are
presented separately from the related assets, liabilities, income and expenses from the related insurance contracts because the reinsurance arrangements do not
relieve the group from its direct obligations to its policyholders.
Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets, which comprise amounts due from
insurance companies for paid and unpaid losses and ceded life policy benefits. Rights under contracts that do not transfer significant insurance risk are accounted
for as financial instruments and are presented as amounts deposited with reinsurers.
The net premiums payable to a reinsurer may be more or less than the reinsurance assets recognised by the group in respect of the reinsurance cover purchased.
Any gain or loss is recognised in the income statement in the period in which the reinsurance premiums are payable.
Rights under reinsurance contracts comprising the reinsurers’ share of insurance contract provisions and accrued policyholder claims are estimated in a manner
that is consistent with the measurement of the provisions held in respect of the related insurance contracts and in accordance with the terms of the reinsurance
contract. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the group may
not recover all amounts due and the event has a reliably measurable impact on the amounts that the group will receive from the reinsurer. Impairment losses
reduce the carrying value of the related reinsurance assets to their recoverable amount and are recognised as an expense in the income statement.
The group enters into certain financing arrangements, which are established in the form of a reinsurance contract, but which are substantively in the form of a
financial instrument. Such arrangements are classified and presented as borrowings within financial liabilities.
(k) Fee and commission income and other operating income
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 at the
point at which the commission becomes due. 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.
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SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 2 Significant accounting policies (continued)
(k) Fee and commission income and other operating income (continued)
Other operating income:
Fee income from investment managers is recognised in accordance with IFRS 15 and are in relation to Movestic, and are received from the fund companies,
based on the value of the managed assets. The fee income is recognised and adjusted on an ongoing basis, as Movestic meets its commitments.
(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.
(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.
Within each tax jurisdiction that the group operates, there exists the ability to offset individual deferred tax assets and deferred tax liabilities.
(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 recognised under IAS 38 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.
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IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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.
(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.
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.
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) Insurance and other receivables, prepayments
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.
Prepayments are held at cost and are amortised over the relevant time period.
131
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 2 Significant accounting policies (continued)
(v) 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.
(w) 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.
(x) 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.
Operating activities cash flows includes loans and financial investments. The purchases are funded from cash flows associated with the origination of insurance
and investment contracts, net of payments of related benefits and claims. This is due to the cash receipts and payments made on behalf of the customers for
which their funds are held by the entity. Dividends and interest received from the financial investments are captured within the operating activities.
Investing activities cash flows cash includes payments to acquire property, plant and equipment, intangibles, and other long-term assets. These payments include
those relating to capitalised development costs.
Financing activities cash flows include cash proceeds from issuing shares capital, cash payments to owners to acquire or redeem the entity’s shares, cash
repayments of amounts borrowed, cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease, dividends paid out to
shareholders, and interest paid on the borrowings.
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 129) 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.
132
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (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.
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 expense 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.
The groups’ weighted average incremental borrowing rate applied to lease liabilities as at 1 January 2020 is 2.1% for the UK and Swedish division and 2.0% for
the Netherlands division.
133
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
2 Significant accounting policies (continued)
(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. The company paid a contribution to the Scheme and subsequently had no further financial obligations with respect to this part of the
Scheme. During 2019, a new defined contribution pension scheme was established for the benefit of Scildon employees.
Further disclosure can be found in Note 35.
(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.
(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.
134
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (hh) Investment in subsidiaries
Investments in subsidiaries are carried in the statement of financial position at cost less impairment. The company assesses at each reporting date whether an
investment is impaired by assessing whether any indicators of impairment exist. If objective evidence of impairment exists, the company calculates the amount
of impairment as the difference between the recoverable amount of the group entity and its carrying value and recognises the amount as an expense in the
income statement. The recoverable amount is determined based on the cash flow projections of the underlying entities.
(ii) Acquisitions and portfolio transfers
Acquisitions are accounted for under IFRS 3 ‘Business combinations’. This requires management to perform an assessment of the fair value of the assets
and liabilities acquired and consideration paid at the point of acquisition. In the event that the fair value of the assets and liabilities exceeds the fair value of the
consideration, this is recognised as a day 1 gain. Where the fair value of the consideration exceeds the fair value of the assets and liabilities acquired it is
recognised as a goodwill intangible asset on the group balance sheet. Where a transaction is not deemed to be a business combination it is accounted for as an
asset and liability purchase. In this scenario the group identifies and recognise the individual identifiable assets acquired (including those assets that meet the
definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the
individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase.
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 UK had exited the EU, which has had very limited disruption to business. 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 127.
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 130 and Note 19 on page 162.
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
range from 4% to 12%.
As at 31 December 2020, material carrying values of acquired in-force business, net of amortisation, are £23.5m in respect of Movestic (31 December 2019:
£23.9m) and £21.6m in respect of Scildon (31 December 2019: £56.0m). During the year, the Scildon AVIF was written-down by £26.6m.
A 100bps increase in the effective discount rate would reduce the underlying value of in-force business by £1.0m for Movestic and £1.0m for Scildon. A 10% fall
in projected future profits would reduce the underlying value of in-force business by £2.3m for Movestic and £3.4m for Scildon.
135
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 3 Critical accounting judgements and key sources of estimation and uncertainty (continued)
Key sources of estimation and uncertainty (continued)
(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 129 and Note 18 on page 161.
As at 31 December 2020, the carrying values of deferred acquisition costs, net of amortisation, and of deferred income, in respect of CA, were £1.4m and £2.7m
respectively (as at 31 December 2019: £1.7m and £3.3m respectively). The impact on the above numbers of a 1 year movement in the estimated lifetime of the
management services contract or amortisation period is not material.
As at 31 December 2020, the carrying values of deferred acquisition costs, net of amortisation, in respect of Movestic, was £58.5m (as at 31 December 2019:
£53.3m). During the year, Movestic DAC was written down by £1.0m. An increase in the length of the amortisation period by 5 year would have increased profit
before tax for the year ended 31 December 2020 by £11.1m and shareholders’ equity as at 31 December 2020 by £11.1m.
As at 31 December 2020, the carrying values of deferred acquisition costs, net of amortisation, in respect of Scildon, was £9.2m (as at 31 December 2019:
£8.9m). An increase in the length of the amortisation period by 1 year would have increased profit before tax for the year ended 31 December 2020 by £1.6m
and shareholders’ equity as at 31 December 2020 by £1.3m.
(c) Estimates of future payments arising on insurance contracts
Longer term business: The group has to make a number of estimates in order to calculate the liabilities for long-term insurance business. Such estimates are
also used when performing liability adequacy tests to verify the adequacy of IFRS technical provisions. These estimates include areas such as future mortality
and morbidity rates, the level of contract persistency, investment returns, administration expenses and the costs of guarantees. Future expenses are based on
management’s best estimate at the balance sheet date, and includes the costs and benefits of in-flight projects to the extent there is reasonable certainty as to
their outcome. At 31 December 2020 this included a net of costs benefit of £6m in relation to changes to IT systems and processes in Scildon which were in
progress at the end of the year. The technical provisions for such contracts arise in CA, Waard Group and Scildon, and are summarised on Note 30 on page 174.
The total carrying value at 31 December 2020 was £3,888.9m (31 December 2019: £3,539.7m). Further information on how these estimates are derived, along
with the sensitivity of the balance sheet to these assumptions on a gross and net of reinsurance basis, is included in Note 30 on page 179.
Products with guarantees: 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.
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 2020, the carrying value of insurance contract liabilities which contain S&P discretionary participation features was £273.3m (31 December
2019: £265.0m). This amount is part of the technical provisions for CA in Note 30(a) on page 174. Key sensitivities for this balance are included within the
sensitivities disclosure for CA in Note 30 on page 179.
(d) Brexit
We have consistently reported that we expected minimal impact from Brexit. Having now exited the EU we have indeed experienced very limited disruption.
The only area where we have seen an impact is with regards to a modest divergence of the Solvency II regulatory rules from the PRA compared to those from
EIOPA. The changes have had no financial impact at this stage. We continue to expect a high level of equivalence between regulatory reporting regimes but are
mindful of the possibility of an increased level of divergence as the PRA are enabled to move to UK specific terms. We see no specific reason to expect the PRA
to use their enhanced freedoms take a route that systemically makes it harder to do business in the UK.
(e) Climate change
In our principal risks and uncertainties on pages 55 to 59 we identify that climate change related risks have the potential to manifest as an ‘investment and
liquidity risk’ (principal risk 1) or a ‘regulatory change risk’ (principal risk 2). Whilst climate change risk is one of the most significant challenges facing the world, with
Chesnara having its part to play in shaping policies and practices that contribute to managing climate risk challenges, the year end balance sheet does not include
any significant judgments that are underpinned by a particular climate change scenario. As a consequence, we do not believe that climate change risk is currently
a key source of estimate uncertainty.
136
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 Exchange rates
The group’s principal overseas operations during the year were located within Sweden and the Netherlands.
The results and cash flows of these operations have been translated into sterling at an average rate for the year of £1 = SEK 11.80 (2019: £1 = SEK 12.07) for the
Swedish business and £1 = EUR 1.13 (2019: £1 = EUR 1.14) for the Dutch business.
Assets and liabilities have been translated at the year-end rate of £1 = SEK 11.15 (31 December 2019: £1 = SEK 12.29) for the Swedish business and £1 = EUR 1.11
(31 December 2019: £1 = EUR 1.18 ) for the Dutch business.
Total foreign currency exchange rate movements for the year ended 31 December 2020 resulted in gain recognised in the Consolidated Statement of Comprehensive
Income of £22.6m (year ended 31 December 2019: loss of £18.8m).
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)
2020
2019
Gross
£000
Net
£000
Gross
£000
Net
£000
1,682,545
8,795,071
5,256
1,828
281,441
1,508,592
1,093,115
5,220
1,828
274,240
1,879,757
8,801,168
5,428
1,846
295,031
1,684,485
1,098,518
5,392
1,846
286,888
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 (such as COVID-19, SARS or a flu pandemic) 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.
137
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
5 Management of insurance risk (continued)
(a) UK business (continued)
Non-linked business contains three distinct groups of products:
(i)
A number of products representing approximately 71% (2019: 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.
Reinsurance is used extensively on the business described above to mitigate concentrations of insurance risk. The insurance risk is further managed through
pricing, product design and, for non-linked and quasi-linked contracts, appropriate investment strategy.
Concentration of insurance risk
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 (such as COVID-19, SARS or a flu pandemic) 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.
138
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES 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:
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
2020
2019
Gross
£000
Net
£000
Gross
£000
7,581
1 1
3,768
1,948
3,032
6,702
2
2,344
(107 )
1,019
5,953
1 1
2,568
2,385
6,003
Net
£000
1,353
2
1,301
697
5,086
16,340
9,960
16,920
8,439
2020
2019
Gross
£000
Net
£000
Gross
£000
Net
£000
32,798
223
25,206
48
38,850
840
29,588
182
531
7,551
20,112
274
2,622
9,072
565
8,574
20,945
309
3,101
10,903
61,215
37,222
69,774
44,083
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 2020: SEK 47,300, being
approximately £4,244) although most policies are between 5 to 25 times the base amount.
The Norwegian product provides a maximum coverage of insured benefits up to 80 times a base amount (31 December 2020 NOK: 99,858, being approximately
£8,959) although most policies are between 6 to 15 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.
139
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 20% 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 £0.5m) and SEK 150m (approximately £13.5m).
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 98.6% 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 283m (approximately £25.4m) 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
2020
2019
Gross
£000
Net
£000
Gross
£000
Net
£000
Long-term unit-linked without DPF (sums assured)
Long-term non-linked without DPF (sums assured)
1,716,595
4,011,292
995,170
2,299,855
10,930
1,453,159
10,930
1,391,754
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 and Argenta 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.
140
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
2020
2019
Gross
£000
Net
£000
Gross
£000
Net
£000
1,658,661
39,470,854
46,645
5
1,435,164
17,349,438
32,334
5
3,278,940
33,800,425
38,319
4
1,992,386
17,691,985
26,119
4
Protection
Product feature
The division mainly wrote term life, sold as a regular premium policy. Older policy profit sharing conditions (before 2011) allow for a surrender value at lapse or
profit sharing at maturity. The current mass market product has no surrender value or profit sharing. The most significant factors that could increase risk are
epidemics and changes in lifestyle leading to higher mortality.
Management of risks
Term assurances are the main new business product type and significant underwriting occurs. Quota share reinsurance agreements are in place with a maximum
retention per policy, to mitigate the risk in excess of risk appetite for mortality at the moment of underwriting. 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
maturity. Early surrender triggers smaller charges for policyholders. Index linked policies contain either explicit or implicit guarantees, which triggers smaller
charges for policyholders. The group pension contracts are also unit-linked in nature.
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 and due to the guarantees given for some policies there is a prevailing risk of
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.
141
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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.
142
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 2020
*Insurance
Unit-linked
contracts
£000
contracts Annuities in
payment
with DPF
£000
£000
Assets
Property and equipment
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
Derivative financial instruments
Total financial assets
Insurance and other receivables
Prepayments
Reinsurers’ share of accrued policyholder claims
Income taxes
Cash and cash equivalents
–
–
9,190
37,026
6,180
6,067,413
11,402
319,246
–
6,404,241
1,546
237
6,143
–
8,101
–
–
37,771
–
–
304,096
7,426
–
679
312,201
546
116
–
–
3,819
–
–
–
–
–
–
106,680
–
–
106,680
–
–
–
–
826
Other
non-linked
contracts
and other
shareholder
£000
8,718
1,124
150,107
–
4,000
342,794
973,051
25,672
151
1,345,668
42,956
12,996
6,573
4,566
92,605
Total
£000
8,718
1,124
197,068
37,026
10,180
6,714,303
1,098,559
344,918
830
8,168,790
45,048
13,349
12,716
4,566
105,351
Total assets
6,466,484
354,453
107,506
1,665,313
8,593,756
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
2,823,651
–
319,544
–
103,383
–
711,459
613
3,958,037
613
4,031,023
–
–
–
4,031,023
–
326
30,312
–
4,026
198
–
–
–
3
3
–
7
6,202
–
1,354
473
–
–
–
–
–
–
–
1,524
–
–
–
4,017
2,844
66,955
–
73,816
19,086
2,530
58,299
9,427
44,727
974
4,035,040
2,844
66,955
3
4,104,842
19,086
2,863
96,337
9,427
50,107
1,645
Total liabilities
6,889,536
327,583
104,907
920,931
8,242,957
*Insurance contracts with DPF include shareholder funds within the CA (S&P) with-profits funds.
143
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
6 Management of financial risk (continued)
(i) General (continued)
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
Derivative financial instruments
Total financial assets
Insurance and other receivables
Prepayments
Reinsurers’ share of accrued policyholder claims
Income taxes
Cash and cash equivalents
–
–
–
9,085
37,330
432,645
5,077,043
132,095
–
123
5,641,906
19,390
260
6,112
–
44,580
–
–
–
40,267
–
–
190,696
133,047
–
1,953
325,696
2,036
36
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
–
1,373,536
32,510
8,057
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
2,076
7,450,329
53,936
8,353
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.
144
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
145
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 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. The time bands have been updated and as a result the prior year has been represented.
31 December 2020
Carrying values and cash
flows arising from:
Carrying value
£000
<1 yr
£000
1-2 yrs
£000
2-5 yrs
£000
5-10 yrs
£000
10-15 yrs
£000
15-20 yrs
£000
>20 yrs
£000
Total
£000
Contractual cash flows (undiscounted)
Insurance contract liabilities
Unit-linked
With DPF
Annuities in payment
Other non-linked
2,823,651
319,544
103,383
711,459
2,823,651
42,461
5,180
114,686
–
26,629
5,000
92,418
–
85,703
13,898
241,019
–
69,953
19,373
283,024
–
41,353
14,547
165,262
–
9,766
9,911
78,962
–
5,145
9,873
51,855
2,823,651
281,010
77,782
1,027,226
Total insurance contract liabilities
3,958,037
2,985,978
124,047
340,620
372,350
221,162
98,639
66,873 4,209,669
Investment contract liabilities
Unit-linked
Other
Total investment contract liabilities
Liabilities relating policyholder’s fund
held by the Group
Lease liabilities
Borrowings
Derivatives
4,031,023
4,017
4,031,023
4,017
4,035,040 4,035,040
–
–
–
332,1 17
2,844
66,955
3
332,1 17
669
44,699
3
–
1,355
23,862
–
–
–
–
–
1,262
–
–
Total financial liabilities
4,436,959
4,412,528
25,217
1,262
Other liabilities
Other provisions
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance
and investment contracts
Deferred income
Income taxes
Other payables
Bank overdrafts
613
19,086
2,863
96,337
3,355
9,427
50,107
1,645
613
19,086
2,863
96,337
3,355
9,427
50,107
1,645
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
89
–
–
89
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,031,023
4,017
– 4,035,040
–
–
–
–
332,117
3,375
68,561
3
– 4,439,096
–
–
–
–
–
–
–
–
613
19,086
2,863
96,337
3,355
9,427
50,107
1,645
Total
8,578,429 7,581,939
149,264
341,882
372,439
221,162
98,639
66,873 8,832,198
146
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
31 December 2019
Carrying values and cash
flows arising from:
Carrying value
£000
<1 yr
£000
1-2 yrs
£000
2-5 yrs
£000
5-10 yrs
£000
10-15 yrs
£000
15-20 yrs
£000
>20 yrs
£000
Total
£000
Contractual cash flows (undiscounted)
Insurance contract liabilities
Unit-linked
With DPF
Annuities in payment
Other non-linked
2,498,328
321,183
107,024
683,880
2,498,328
41,982
5,359
101,733
–
24,545
5,200
90,858
–
81,764
14,600
218,570
–
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
Total insurance contract liabilities
3,610,415
2,647,402
120,603
314,934
368,541
225,945
101,562
64,216
3,843,203
Investment contract liabilities
Unit-linked
Other
Total investment contract liabilities
Liabilities relating policyholder’s fund
held by the group
Lease liabilities
Borrowings
Derivatives
3,690,272
4,044
3,690,272
4,044
3,694,316
3,694,316
–
–
–
–
–
–
299,375
2,527
88,163
547
299,375
654
52,602
547
–
1,128
16,192
–
–
806
23,050
–
Total financial liabilities
4,084,928 4,047,494
17,320
23,856
Other liabilities
Other provisions
Deferred tax liabilities
Reinsurance payables
Payables related to direct insurance
and investment contracts
Deferred income
Income taxes
Other payables
Bank overdrafts
521
22,500
3,207
87,136
3,907
9,964
41,728
1,174
521
22,500
3,207
87,136
3,907
9,964
41,728
1,174
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
93
–
–
93
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,690,272
4,044
–
3,694,316
–
–
–
–
299,375
2,681
91,844
547
– 4,088,763
–
–
–
–
–
–
–
–
521
22,500
3,207
87,136
3,907
9,964
41,728
1,174
Total
7,865,480 6,865,033
137,923
338,790
368,634
225,945
101,562
64,216 8,102,103
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. Note 6(i) on page 143 provides more information on the assets held to match these liabilities.
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 150. 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.
147
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
6 Management of financial risk (continued)
(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
2020
£000
2019
£000
3,858,099
(3,764,667 )
3,451,070
(3,372,372 )
93,432
78,698
2,653,919
(2,338,853 )
2,183,080
(1,889,425 )
315,066
293,655
694
(226 )
468
2,839
(739 )
2,100
1,340
(825 )
515
1,051
(616 )
435
(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.
148
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net of reinsurance
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
2020
2019
Profit before
tax
£m
Shareholders ’
equity
£m
Profit before
tax
£m
Shareholders ’
equity
£m
(51.0 )
7.1
13.9
(14.5 )
1.4
(1.2 )
2.1
(1.7 )
(38.6 )
5.4
11.0
(11.5 )
10.4
(8.5 )
35.0
(28.6 )
(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 )
The sensitivity to a 100 bp decrease in market rates of interest is notably different in 2020 compared against 2019. This difference comes from the impact of the
liability adequacy test, which has caused Scildon’s reserves to increase under this sensitivity at 2020 where this was not the case at 2019.
Gross of reinsurance
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
2020
2019
Profit before
tax
£m
Shareholders ’
equity
£m
Profit before
tax
£m
Shareholders ’
equity
£m
(44.8 )
0.1
9.9
(10.4 )
1.4
(1.2 )
2.1
(1.7 )
(33.5 )
(0.3 )
7.7
(8.2 )
10.4
(8.5 )
35.0
(28.6 )
(51.7 )
51.3
8.3
(9.3 )
1.5
(1.2 )
5.6
(4.6 )
(38.0 )
37.4
6.7
(7.5 )
8.7
(7.2 )
32.6
(26.7 )
(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;
– The mortgage loan portfolio held by Waard with respect to the interest and capital repayments due from the borrowers;
– 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.
The creditworthiness of major reinsurers is considered on an annual basis by reviewing their financial strength.
149
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
6 Management of financial risk (continued)
(v) Credit risk management (continued)
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
2020
Amount
subject to
credit risk
£000
84,303
1,087,157
–
95,411
830
197,068
37,026
344,918
21,708
12,715
3,822
Balance
sheet
carrying Policyholder
linked
£000
value
£000
6,714,303
1,098,559
332,117
105,351
830
197,068
37,026
344,918
45,048
12,716
4,566
5,427,225
132,095
299,375
49,655
123
–
–
–
35,891
62
–
2019
Amount
subject to
credit risk
£000
97,279
1,326,822
–
58,301
1,953
188,452
37,330
32,187
18,045
14,070
5,394
Balance
sheet
carrying
value
£000
5,524,504
1,458,917
299,375
107,956
2,076
188,452
37,330
32,187
53,936
14,132
5,394
Policyholder
linked
£000
6,630,000
11,402
332,117
9,940
–
–
–
–
23,340
1
744
Holdings in collective investment schemes
Debt securities
Policyholders’ funds held by the group
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
Total
7,007,544
1,884,958
8,892,502
5,944,426
1,779,833
7,724,259
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.
The acquisition of the Argenta portfolio included a substantial number of saving plans designed to save the capital amount due to a bank to pay off personal
mortgages. Common in The Netherlands is a structure whereby the insurance company providing the savings vehicle invests in the policyholder’s mortgage,
which are held by the bank that provides the mortgage. The arrangement with the bank is structured such that any impact as a result of default of the mortgage
by the policyholder is incurred by the bank only, with no impact to Chesnara. These assets earn the same interest as the mortgage, thereby providing a perfect
investment match against the insurance liability. The above table reflects the material increase in mortgage loan portfolio as the acquired Argenta portfolio uses
such a structure.
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 2020
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
–
–
–
290,715
–
742
–
–
–
–
AA
£000
147,552
–
–
402,929
–
9,368
6,310
–
–
–
A
£000
42,299
79,406
37,026
262,779
–
1,190
5,750
679
–
84,361
BBB
£000
Unrated
£000
4,469
–
–
130,342
–
1,053
419
–
–
1,908
2,748
4,897
–
392
344,918
9,355
236
151
3,822
9,142
Total
£000
197,068
84,303
37,026
1,087,157
344,918
21,708
12,715
830
3,822
95,411
Total
291,457
566,159
513,490
138,191
375,661
1,884,958
150
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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 2020.
There were no holdings of assets that were below BBB in 2020 and 2019. Included within reinsurers’ share of insurance contract provisions and amounts deposited
with reinsurers, in respect of investment contracts is a total significant exposure of £74.0m as at 31 December 2020 (31 December 2019: £78.0m) to ReAssure.
Of this amount £49.0m (31 December 2019: £50.0m) 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 2020 and 31 December 2019.
Debt securities
As at 31 December 2020
Austria
Belgium
France
Germany
Italy
Ireland
Netherlands
Poland
Portugal
Spain
UK
Other
Europe
USA
Other
North America
Australia
Other
Asia Pacific
Total
Policyholder Policyholder Non-linked/
shareholder
£000
linked with-profit
£000
£000
–
–
630
–
–
–
582
–
–
–
6,008
2,997
–
–
–
–
–
–
–
–
–
–
7,426
–
36,951
33,047
228,917
188,064
35,710
26,397
81,533
718
1,914
24,319
166,232
145,140
Total
£000
36,951
33,047
229,547
188,064
35,710
26,397
82,115
718
1,914
24,319
179,666
148,137
10,217
7,426
968,942
986,585
1,185
–
1,185
–
–
–
–
–
–
–
–
–
81,060
3,311
82,245
3,311
84,371
85,556
7,285
19,133
7,285
19,133
26,418
26,418
1 1,402
7,426
1,079,731
1,098,559
151
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
6 Management of financial risk (continued)
(v) Credit risk management (continued)
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
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
133,047
1,193,775
1,458,917
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 2020, further interim distributions totalling £3,261 (2019: £3,805) 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 2020 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 (CA),
the group’s principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business
of which was transferred to Countrywide Assured plc during 2006. This segment also contains Save & Prosper Insurance Limited which was acquired on
20 December 2010 and its then subsidiary Save & Prosper Pensions Limited. The S&P business was transferred to CA during 2011. This segment also contains
the business of Protection Life, which was purchased on 28 November 2013 and the business of which was transferred to CA effective from 1 January 2015.
CA is responsible for conducting unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk, as described
in Note 6 ‘Management of Financial Risk’.
Movestic: This segment comprises the group’s Swedish life and pensions business, Movestic Livförsäkring AB (Movestic) and its subsidiary and associated
companies, which are open to new business and which are responsible for conducting both unit-linked and pensions and savings business and providing some
life and health product offerings.
Waard Group: This segment represents the group’s 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 2019, the Waard Group acquired a small
portfolio of policies from Monuta insurance, which consists of term and savings policies. On 21 November 2019, the Waard Group completed a deal to acquire a
portfolio of term life insurance policies and saving mortgages insurance policies. The completion took place on the 31 August 2020, at which stage Waard
Group obtained control.
152
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 of the reporting segments and the group as a whole. There were no changes to the measurement basis for segment profit during the year ended
31 December 2020.
(i) Segmental income statement for the year ended 31 December 2020
Insurance premium revenue
Insurance premium ceded to reinsurers
Net insurance premium revenue
Fee and commission income
Net investment return
Other operating income
CA
(UK )
£000
40,653
(16,650 )
24,003
23,336
85,717
11,703
Waard
Group
Scildon
Movestic
(Sweden ) (Netherlands ) (Netherlands )
£000
£000
£000
Other group
activities
(UK )
£000
16,296
(6,674 )
9,622
20,229
89,539
28,037
12,768
(577 )
12,191
88
5,735
441
223,648
(19,006 )
204,642
49,045
73,367
–
–
–
–
–
210
–
Total
£000
293,365
(42,907 )
250,458
92,698
254,568
40,181
Segmental revenue, net of investment return
144,759
147,427
18,455
327,054
210
637,905
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
(72,311 )
(18,515 )
(350 )
–
–
(17,388 )
(500 )
(1 )
(952 )
(91,023 )
(22,918 )
(1,438 )
(124 )
(12,258 )
(4,565 )
(1,209 )
(10,362 )
–
(684 )
–
(53 )
(3,131 )
–
(2 )
(281,359 )
–
(2,974 )
(209 )
(470 )
(27,390 )
–
–
–
–
–
(364,984 )
(109,538 )
(26,926 )
–
–
(8,491 )
3
(1,087 )
(1,647 )
(647 )
(68,658 )
(5,062 )
(2,299 )
Profit/(loss) before tax and consolidation adjustments
35,694
12,940
4,223
14,652
(9,365 )
58,144
Other operating expenses:
Charge for impairment of acquired value of in-force business
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
(1,000 )
(2,423 )
–
–
–
(2,640 )
(63 )
2,126
–
(720 )
–
–
(26,623 )
(3,779 )
–
1,175
–
–
–
–
(27,623 )
(9,562 )
(63 )
3,301
Segmental income less expenses
32,271
12,363
3,503
(14,575 )
(9,365 )
24,197
Post completion gain on portfolio acquisition
–
–
388
–
–
388
Profit/(loss) before tax
Income tax (expense)/credit
32,271
(6,081 )
12,363
(235 )
3,891
(883 )
(14,575 )
2,301
(9,365 )
1,504
24,585
(3,394 )
Profit/(loss) after tax
26,190
12,128
3,008
(12,274 )
(7,861 )
21,191
Further analysis of the segmental profit before tax and consolidation adjustments can be found on page 50 of the Financial Review section.
153
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
7 Operating segments (continued)
(ii) Segmental balance sheet as at 31 December 2020
CA
(UK )
£000
Waard
Group
Scildon
Movestic
(Sweden ) (Netherlands ) (Netherlands )
£000
£000
£000
Other group
activities
(UK )
£000
Total
£000
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
2,564,764
(2,429,712 )
3,874,967
(3,764,907 )
437,099
(391,590 )
2,127,539
(1,954,287 )
64,646
(41,452 )
9,069,015
(8,581,948 )
135,052
1 10,060
45,509
173,252
23,194
487,067
–
–
–
–
–
13,028
2,396
3,929
–
–
–
19,353
An explanation of the nature of valuation differences between the measurements in reportable segments’ assets and liabilities can be found in accounting policy
Note 2(h).
(iii) Segmental income statement for the year ended 31 December 2019
Insurance premium revenue
Insurance premium ceded to reinsurers
Net insurance premium revenue
Fee and commission income
Net investment return
Other operating income
CA
(UK )
£000
46,913
(17,972 )
28,941
25,376
310,711
11,690
Waard
Group
Scildon
Movestic
(Sweden ) (Netherlands ) (Netherlands )
£000
£000
£000
Other group
activities
(UK )
£000
18,336
(9,007 )
9,329
21,291
563,534
26,148
2,071
(128 )
1,943
16
6,838
–
201,011
(17,108 )
183,903
46,212
209,037
–
–
–
–
–
520
–
Total
£000
268,331
(44,215 )
224,116
92,895
1,090,640
37,838
Segmental revenue, net of investment return
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
Post completion gain 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
154
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(iv) Segmental balance sheet as at 31 December 2019
CA
(UK )
£000
Waard
Group
Movestic
Scildon
(Sweden ) (Netherlands ) (Netherlands )
£000
£000
£000
Other group
activities
(UK )
£000
Total
£000
Total assets
Total liabilities
Net assets
Investment in associates
Additions to non-current assets
8 Fees and commission income
Year ended 31 December
Fee income
Policy-based fees
Fund management-based fees recognised under IFRS 15
Fund management-based fees recognised under IFRS 4
Benefit-based fees
Change in deferred income – gross
Change in deferred income – reinsurers’ share
Total fee income
Commission income
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
2020
£000
44,277
29,230
2,450
11,493
589
(34 )
88,005
4,693
2019
£000
41,477
30,995
2,876
12,516
687
(140 )
88,411
4,484
Total fee and commission income
92,698
92,895
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
Net investment return
2020
£000
23,557
27,658
–
124,125
82,670
(3,486 )
44
2019
£000
38,057
31,933
5
944,598
82,280
(6,269 )
36
254,568
1,090,640
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 2019: £nil).
155
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
10 Other operating income
Year ended 31 December
Fee income from investment managers
Charges to policyholder funds for yield tax
Other
Total other operating income
11 Insurance contract claims and benefits
Year ended 31 December
Claims and benefits paid to insurance contract holders
(Decrease)/increase in insurance contract provisions
Total insurance contract claims and benefits
Reinsurer’s share of claims and benefits
Net insurance contract claims and benefits incurred
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
Total increase in investment contract liabilities
Reinsurers’ share of investment contract liabilities
Net increase in investment contract liabilities
Investment contract benefits comprise benefits accruing to holders of investment contracts issued by the group.
2020
£000
35,487
4,165
529
2019
£000
34,045
3,728
65
40,181
37,838
2020
£000
2019
£000
420,031
(6,869 )
445,265
176,541
413,162
(48,178 )
621,806
(38,064 )
364,984
583,742
2020
£000
96,424
14,454
2019
£000
626,432
38,031
110,878
(1,340 )
664,463
(5,424 )
109,538
659,039
156
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Impairment losses
Total
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
2020
£000
2019
£000
6,151
(3,929 )
9,576
(4,393 )
2,222
5,183
16,705
(9,144 )
15,409
(10,362 )
7,561
5,047
4,226
8,619
(22 )
1,019
3,333
8,214
(27 )
–
23,625
21,750
Note
44
2020
£000
32,976
3,479
1,292
637
11,248
757
20,563
2019
£000
33,418
5,099
1,442
538
11,336
704
15,274
70,952
67,811
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
*Includes £111k (2019: £169k) audit fees in respect of the Movestic audit in the year performed by EY.
2020
£000
244
804
216
2019
£000
211
709
302
1,264
1,222
157
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
15 Other operating expenses
Year ended 31 December
Charge for impairment of acquired value of in-force business
Charge for amortisation of acquired value of in-force business
Charge for amortisation of acquired value of customer relationships (AVCR)
Other
Payment of yield tax relating to policyholder funds
Other
Total
The review of the Scildon AVIF concluded that the gross AVIF asset was required to be written down by £26.6m during the year.
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
2020
£000
2019
£000
27,623
–
9,562
10,445
63
70
4,165
897
3,728
1,907
5,062
5,635
2020
£000
1,083
1,161
55
–
2,299
2019
£000
1,363
1,300
63
25
2,751
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.
2020
£000
(4,577 )
(235 )
(883 )
2,301
2019
£000
(5,851 )
(438 )
(1,428 )
(9,247 )
(3,394 )
(16,964 )
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 credit/(expense)
Total net expense
158
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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% (2019: 19.0%)
Other permanent differences
Effect of UK tax bases on insurance profits
Offset of franked investment income
Variation in rate of tax on amortisation of acquired in-force value
Foreign tax
Effect of change in tax rate
Other
Over provided in previous years
2020
£000
2019
£000
(5,093 )
(280 )
–
(6,101 )
(605 )
(28 )
(5,373 )
(6,734 )
796
883
(4,577 )
(5,851 )
2020
£000
2019
£000
22,906
38,107
(4,352 )
(276 )
286
(123 )
(255 )
97
46
–
(7,240 )
342
1,509
(26 )
(529 )
98
23
(28 )
Total income tax expense
(4,577 )
(5,851 )
There has been no change in tax rate during the year (tax rate 19%).
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
2020
£000
2019
£000
(241 )
(19 )
(260 )
25
(498 )
13
(485 )
47
(235 )
(438 )
159
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
17 Income tax (continued)
Movestic (continued)
Reconciliation of effective tax rate on profit before tax
Year ended 31 December
Profit before tax
Income tax using the domestic corporation tax rate of 21.4%
Non-taxable income in relation to unit-linked business
Impact of different tax rate for subsidiaries
Non-taxable fair value adjustment
Permanent differences
Non-deductible expenses
(Under)/over provided in prior years
Total income tax expense
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
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 provided in prior years
Total income tax expense
160
2020
£000
2019
£000
12,358
12,685
(2,645 )
2,736
–
(96 )
(7 )
(204 )
(19 )
(2,715 )
2,497
(2 )
(73 )
14
(173 )
14
(235 )
(438 )
2020
£000
2019
£000
(505 )
–
(2,308 )
(12 )
(505 )
(2,320 )
(378 )
892
(883 )
(1,428 )
2020
£000
2019
£000
3,897
5,028
(975 )
92
–
(1,257 )
(159 )
(12 )
(883 )
(1,428 )
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 credit/(expense)
Reconciliation of effective tax rate on profit before tax
Year ended 31 December
(Loss)/profit before tax
Income tax using the domestic corporation tax rate of 25%
Permanent differences
Non-deductible expenses
Total income tax credit/(expense)
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
The amortisation charged to income is recognised in fees, commission and other acquisition costs (see Note 13).
2020
£000
(1,899 )
–
2019
£000
(2,034 )
(1,310 )
(1,899 )
(3,344 )
5,534
(1,334 )
(6,720 )
817
2,301
(9,247 )
2020
£000
2019
£000
(14,574 )
40,287
3,644
(8 )
(1,335 )
(10,072 )
8
817
2,301
(9,247 )
2020
£000
63,885
13,073
(12,845 )
(1,019 )
5,957
2019
£000
65,039
15,131
(11,547 )
(19 )
(4,719 )
69,051
63,885
11,802
57,249
10,803
53,082
69,051
63,885
161
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
19 Acquired value of in-force business (AVIF)
Year ended 31 December
Cost:
Balance at 1 January
Addition
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Amortisation for the year
Impairment charge
Foreign exchange translation difference
Balance at 31 December
Carrying amounts:
At 1 January
At 31 December
Current
Non-current
Total
2020
£000
2019
£000
21 1,364
2,287
8,235
219,956
–
(8,592 )
221,886
211,364
120,541
9,562
27,623
2,505
113,347
10,445
–
(3,251 )
160,231
120,541
90,823
106,609
61,655
90,823
48,924
12,731
17,006
73,817
61,655
90,823
The amortisation charged to the Consolidated Statement of Comprehensive Income is recognised in other operating expenses (see Note 15).
20 Goodwill
Goodwill arose 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. During 2020, the Sparplatsen was liquidated.
21 Software assets
31 December
Cost:
Balance at 1 January
Additions
Disposals
Foreign exchange translation difference
Balance at 31 December
Amortisation and impairment losses:
Balance at 1 January
Amortisation charge for the year
Disposal
Impairment charge
Foreign exchange translation difference
Balance at 31 December
Carrying amounts at 31 December
Current
Non-current
Total
162
2020
£000
2019
£000
25,774
3,112
(2,714 )
2,618
25,069
3,097
–
(2,392 )
28,790
25,774
19,786
1,292
(2,714 )
–
1,918
19,358
1,442
–
982
(1,996 )
20,282
19,786
8,508
5,988
2,382
6,126
2,042
3,946
8,508
5,988
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
2020
£000
2019
£000
13,547
3,109
(3,546 )
(630 )
1,634
12,348
3,579
(1,854 )
520
(1,046 )
14,1 14
13,547
6,504
1,394
(3,513 )
1,011
8,055
1,242
(2,362 )
(431 )
5,396
6,504
8,718
7,043
1,536
7,182
685
6,358
8,718
7,043
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
2,214
2,475
(1,703 )
(619 )
209
2,576
91
41
(67 )
(19 )
5
51
152
48
(41 )
(64 )
14
109
48
85
–
(47 )
6
92
–
–
–
–
–
–
10
–
–
(8 )
–
2
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
46
609
–
–
–
655
1
19
–
–
–
20
2
64
–
–
–
66
2
46
–
–
–
48
–
–
–
–
–
–
–
9
–
–
–
9
2020
Total
£000
2,515
2,649
(1,81 1 )
(757 )
234
2,830
791
2,039
2,830
2020
Total
£000
51
747
–
–
–
798
163
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
22 Property and equipment (continued)
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 entered into a new agreement in regards to its office floor space, which will impacted the right-of-use asset and lease liability value.
23 Investment in associate
31 December
Balance at 1 January
Share of profit
Disposal
Foreign exchange translation difference
Balance at 31 December
During the year Modernac SA (in which Movestic Livförsäkring AB has a 49% investment) was liquidated.
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
Policyholders’ funds held by the group
Derivative financial instruments
Total assets measured at fair value through income
Mortgage loan portfolio
Total
164
2020
£000
6,481
–
(6,481 )
–
2019
£000
5,840
1,072
–
(431 )
–
6,481
2020
£000
2019
£000
7,823,042
332,117
830
7,416,066
299,375
2,076
8,155,989
344,918
7,717,517
32,187
8,500,907
7,749,704
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial assets that are not held at fair value or managed on a fair value basis consist of the ‘Mortgage loan portfolio’. 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 2020 was £345.0m (31 December 2019. £34.0m)
and the change in fair value in the year was an increase of £310.9m due to the addition of a mortgage fund in respect of the acquisition of Argenta Assuranties
N.V. (31 December 2019: £8.8m decrease). All other financial assets are held on a fair value basis and have a value of £8,156.0m as at 31 December 2020
(31 December 2019: £7,717.5m) with a change in fair value in the year of an increase of £438.5m (31 December 2019: £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 below show the
determination of fair value according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1). However,
where such information is not available, the group applies valuation techniques to measure such instruments. These valuation techniques make use of market-
observable data for all significant inputs where possible (Level 2), but, in some cases it may be necessary to estimate other than market-observable data within
a valuation model for significant inputs (Level 3).
Fair value measurement at 31 December 2020
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
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
10,180
6,521,054
627,464
466,822
3,880
1,098,166
332,117
–
–
7,825
–
185,424
10,180
6,714,303
–
393
–
393
–
830
–
–
–
–
–
–
627,464
467,215
3,880
1,098,559
332,117
830
7,961,517
9,048
185,424
8,155,989
2,320,635
5,835,354
8,155,989
4,035,040
332,117
3
4,367,160
Financial liabilities
Investment contracts at fair value through income
Liabilities related to policyholders’ funds held by the group
Derivative financial instruments
Total
–
332,117
–
4,035,040
–
3
332,117
4,035,043
–
–
–
–
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
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
165
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
24 Financial instruments (continued)
Holdings in collective investment schemes
The fair value of holdings in collective investment schemes classified as Level 2 are related to our Scildon operation and do not meet the classification as Level 1,
as their fair value is determined using valuation techniques with observable market inputs. The holdings classified as Level 3 also relate to our Scildon operation,
and represent investments held in a mortgage fund. These are classified as Level 3 as the fair value is derived from valuation techniques that include inputs
that are not based on observable market data.
Debt securities
The debt securities classified as Level 2 at 2019 and 2020 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.
Derivative financial instruments
Within derivative financial instruments is a financial reinsurance embedded derivative related to our Movestic operation. The group has entered into a reinsurance
contract with a third party that has a section that is deemed to transfer significant insurance risk and a section that is deemed not to transfer significant
insurance risk. The element of the contract that does not transfer significant insurance risk has two components and has been accounted for as a financial
liability at amortised cost and an embedded derivative asset at fair value.
The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being
determined by reference to market interest rate at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination
hierarchy set out above. Further detail can be found in Note 27.
Investment contract liabilities
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.
Significant unobservable inputs in Level 3 instrument valuations
The Level 3 instruments held in the group are in relation to investments held in a fund that contains mortgage backed assets in the Netherlands. The fair value of
the mortgage fund is determined by the fund manager on a monthly basis. The fair value of mortgage receivables in the fund is model-based, with a number of
variables in the valuation model, such as the discount rate and the assumed constant prepayment rate.
Sensitivity of Level 3 instruments measured at fair value on the statement of financial position to changes in key assumptions. There is a risk that the value of
the fund decreases or increases over time. This can be as a consequence of a periodic reassessment of the constant prepayment rate and the discount rate
used in the valuation model.
Reconciliation of Level 3 fair value measurements of financial instruments. 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
At start of period
Transfers into Level 3
Total gains and losses recognised in the income statement
Purchases
Settlements
Exchange rate adjustment
At the end of period
31 December
Financial liabilities
Borrowings
2020
£000
–
32,463
3,249
143,589
–
6,123
185,424
Carrying amount
Fair value
2020
£000
2019
£000
2020
£000
2019
£000
66,955
88,163
68,371
90,124
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. These are calculated using floating rates with the amortised cost being determined net of unamortised arrangement fees which form
part of the effective interest rate calculation. The amount due in relation to financial reinsurance is fair valued with reference to market interest rates at the balance
sheet date. During the year, there was a transfer between Level 2 to Level 3 in relation to mortgage backed assets. There were no other transfers between
Levels 1, 2 and 3 during the year. The group holds no Level 3 liabilities as at the balance sheet date.
166
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company
Fair value measurement at 31 December
Holdings in collective investment schemes
Total
Current
Non-current
Total
2020
£000
2019
£000
57,945
74,758
57,945
74,758
57,945
–
74,758
–
57,945
74,758
There were no Level 2 and Level 3 assets. The amounts held in collective investment schemes at a Chesnara plc company level are purely in relation to instant
access liquidity funds.
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
2020
£000
2019
£000
354,720
354,720
354,720
354,720
–
354,720
–
354,720
354,720
354,720
2020
£000
2019
£000
344,918
32,187
2,357
342,561
2,151
30,036
344,918
32,187
The mortgage loan portfolio is stated at amortised cost. During the year, the material increase in the mortgage fund was in respect of the acquisition of Argenta
Assuranties N.V.
167
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
The carrying amount is a reasonable approximation of fair value.
Prepayments
31 December
Prepayments
Current
Non-current
Total
2020
£000
766
495
2019
£000
746
2,033
17,776
17,459
–
8,554
7,341
–
10,116
665
1 1,527
8,068
3,958
9,480
45,048
53,936
44,277
771
53,129
807
45,048
53,936
2020
£000
2019
£000
13,349
8,353
13,099
250
8,003
350
13,349
8,353
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
168
2020
2019
Asset
£000
Liability
£000
Asset
£000
Liability
£000
–
830
–
830
724
106
830
–
(3 )
–
(3 )
(3 )
–
(3 )
–
2,076
–
2,076
2,076
–
2,076
–
(483 )
(64 )
(547 )
(500 )
(47 )
(547 )
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Exchange-traded futures (by geographical investment market)
31 December
Australia
Switzerland
Europe
UK
Hong Kong
Japan
USA
Sweden
Total
2020
2019
Asset
£000
Liability
£000
Asset
£000
Liability
£000
–
–
2
–
–
627
50
151
830
–
–
(2 )
–
–
(1 )
–
–
(3 )
35
21
107
86
58
183
1,585
1
(29 )
(18 )
(13 )
(37 )
(6 )
(36 )
(344 )
–
2,076
(483 )
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.
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
2020
£000
104,965
97
289
2019
£000
54,307
23,650
29,999
105,351
107,956
(1,645 )
(1,174 )
103,706
106,782
The effective interest rate on short-term bank deposits was 0.00% (2019: 0.36%), with an average maturity of 1 day (2019: 34 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 £8.1m (2019: £44.6m) held in unit-linked policyholders’ funds.
169
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
28 Cash and cash equivalents (continued)
Group (continued)
31 December
Bank loan (i)
Financial reinsurance
Lease liabilities
Total
1 January
2020
£000
Financing
cash flows
£000
Foreign
exchange
translation
differences
£000
New
leases
£000
Other 31 December
2020
£000
changes (ii )
£000
52,525
35,638
2,527
(15,376 )
(10,718 )
(695 )
1,861
3,025
937
90,690
(26,789 )
5,823
–
–
16
16
–
–
59
59
39,010
27,945
2,844
69,799
(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.
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
Bank loan (i)
Lease liabilities
Total
2020
£000
1,818
97
–
1,915
2019
£000
672
97
–
769
1 January
2020
£000
Financing
cash flows
£000
Foreign
exchange
translation
differences
£000
New
leases
£000
Other 31 December
2020
£000
changes (ii )
£000
52,525
253
(15,376 )
(62 )
1,861
–
52,778
(15,438 )
1,861
–
16
16
–
9
9
39,010
216
39,226
(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.
170
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(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
175%
175%
Scildon
Group
175%
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 considered 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.
171
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
29 Capital management (continued)
(b) Objectives, policies and processes for managing capital (continued)
(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 2020 and at 31 December 2019, 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.
Other
group and
consolidation
Scildon adjustments
£m
£m
CA
£m
Movestic
£m
166.7
(33.5 )
234.8
(10.2 )
133.2
224.6
102.3
142.5
30.9
82.1
Waard
Group
£m
51.7
(4.0 )
47.7
10.9
36.8
152.2
–
152.2
85.5
66.7
130%
158%
438%
178%
120%
122.8
10.4
120%
171.0
53.6
175%
19.1
28.6
175%
149.6
2.6
Group
£m
589.1
(21.4)
567.7
363.7
204.1
156%
110%
400.1
167.7
(16.3 )
26.3
10.0
22.5
n/a
n/a
n/a
n/a
n/a
31 December 2020 (unaudited)
Region
Own Funds (pre dividends)
Proposed dividend
Own Funds (post dividends)
SCR
Solvency surplus
Solvency ratio
Dividend paying limit (% of SCR)
Dividend paying limit (£)
Surplus over dividend paying limit
172
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
149.7
9.1
71.8
32.9
81.7
36.4
79.0
131%
155%
500%
210%
120%
129.1
1 1.4
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
(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 2020 (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
133.2
1.5
1.4
33.5
(43.9 )
9.0
0.4
224.6
–
91.0
10.2
(216.5 )
0.5
0.4
Other
group and
consolidation
Scildon adjustments
£m
£m
152.2
–
37.8
–
(9.8 )
(6.9 )
–
10.0
–
–
(26.4 )
49.0
(9.3 )
(0.2 )
Waard
Group
£m
47.7
–
6.1
4.0
(14.6 )
3.8
(1.6 )
Group
£m
567.7
1.5
136.3
21.3
(235.8 )
(2.9 )
(1.0 )
IFRS Net Assets
135.1
110.2
45.4
173.3
23.1
487.1
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
Further information how the group uses Solvency II, and metrics derived from Solvency II, as alternative performance measures can be found in Section E on
pages 211 to 214.
173
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
30 Insurance contract provisions
(a) Analysis of insurance contract provisions by operating segment
31 December
CA
Movestic
Waard Group
Scildon
2020
Gross Reinsurance
£000
£000
1,627,983
69,702
385,633
1,874,719
171,853
26,234
2,501
(3,520 )
Net
£000
1,456,130
43,468
383,132
1,878,239
2019
Gross Reinsurance
£000
£000
1,71 1,548
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
Total insurance contract provisions
3,958,037
197,068
3,760,969
3,610,415
188,452
3,421,963
Current
Non-current
Total
215,558
3,742,479
15,849
181,219
199,709
3,561,260
205,587
3,404,828
15,492
172,960
190,095
3,231,868
3,958,037
197,068
3,760,969
3,610,415
188,452
3,421,963
(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
2020
Gross Reinsurance
£000
£000
3,610,415
298,361
261,710
(65,838 )
(375,715 )
14,526
(16,238 )
80,921
149,895
188,452
–
14,413
(1,222 )
(34,446 )
5,338
(5,239 )
1,798
27,974
Net
£000
3,421,963
298,361
247,297
(64,616 )
(341,269 )
9,188
(10,999 )
79,123
121,921
2019
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 )
Net
£000
3,355,645
25,492
209,732
(63,467 )
(365,132 )
7,885
9,878
332,567
(90,637 )
Balance at 31 December
3,958,037
197,068
3,760,969
3,610,415
188,452
3,421,963
(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.
174
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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*
2020
2019
SPI **
SPP **
SPI
SPP
2.063%
2.813%
3.000%
3.938%
2.063%
2.813%
2.625%
3.750%
–
5.000%
–
5.000%
*Trustee Investment Contract (TIC), a unit-linked contract.
**SPI (CA S&P Insurance business)/SPP (S&P Pension business).
Discount rates
CA uses appropriate rates of interest, for different product types, in discounting projected liabilities. As at 31 December 2020 for the material product types,
these lay between -0.05% and 1.45% (31 December 2019: between 0.55% and 2.15%).
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.
175
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Charge/(credit) to income
At the end of year
2020
£000
17,322
1,490
2019
£000
23,097
(5,775 )
18,812
17,322
The cost of guarantees are sensitive to changes in the value of investments. A 1% decrease in investment yields would decrease net profit and net equity by
£4.1m. A 10% fall in equities would decrease net profit and net equity by £3.9m.
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 £1,653,000 as at 31 December 2020 (31 December 2019: £904,000).
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 2.50% per annum.
The Timed Investment Fund reserve is sensitive to changes in the value of equities. A 10% fall in equities would decrease net profit and net equity by £0.3m.
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 2020 was £3.7m (31 December 2019: £3.8m). 426 policies invested in the fund (31 December 2019: 436), of which 25
(31 December 2019: 27) were paying premiums (for a total of approximately £8,000 per annum (31 December 2019: £8,000)).
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
2.46% pa
0.03% pa
0.20% 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 2020 was £0.1m (31 December 2019: £0.1m).
176
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2020 was £4.3m
(31 December 2019: £3.6m).
Increase of premiums on Personal Retirement Account
Policyholders with a Personal Retirement Account may increase their regular premium contribution on terms that can be beneficial to the policyholder. The
cost of policyholders exercising this benefit is assessed using a prudent assumption as to the level of take-up of the option. The reserve for this option as at
31 December 2020 was £0.03m (31 December 2019: £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 2020 was £0.3m (31 December 2019: £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 2020 is £0.1m (31 December 2019: £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.
(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.
177
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020 30 Insurance contract provisions (continued)
(c) Basis and assumptions for calculating insurance contract provisions (continued)
Sweden (continued)
(iii) Analysis of claims development – gross
2015
£000
2016
£000
2017
£000
2018
£000
2019
£000
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
28,753
21,916
19,499
16,744
16,314
15,289
15,289
(10,752 )
34,504
25,190
22,040
21,326
18,591
32,110
23,826
23,180
20,548
29,398
19,252
18,840
19,574
14,061
18,591
(12,943 )
20,548
(12,469 )
18,840
(9,552 )
14,061
(7,884 )
16,485
(3,596 )
In balance sheet
4,537
5,648
8,079
9,288
6,177
12,889
2020
£000
16,485
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
20,596
67,214
2020
£000
10,653
2017
£000
11,337
2,052
11,135
9,695
2018
£000
9,661
10,497
10,071
2019
£000
9,632
5,403
2015
£000
2016
£000
11,061
6,920
5,839
10,322
8,115
11,012
5,957
5,150
4,432
7,488
6,639
6,639
(3,621 )
8,115
(4,657 )
9,695
(4,476 )
10,071
(3,892 )
5,403
(2,991 )
10,653
(2,569 )
In balance sheet
3,018
3,458
5,219
6,179
2,412
8,084
Provision for prior years
Liability in balance sheet
Netherlands (Waard Group)
(i) Basis
13,457
41,827
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.
178
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 non-linked contracts the insurance contract provisions are calculated as the discounted value of future claims and expenses less any expected premium
income. For any given policy if the net present value of future discounted cash flows is positive then no asset is recognised.
Additionally, a liability adequacy test is performed to verify the adequacy of the IFRS technical provisions. The test is carried out by comparing the carrying amount
of IFRS provisions with the best-estimate provisions calculated under Solvency II regulations. If the value of best-estimate provisions is higher, then the difference
is added to the total value of IFRS provisions as a LAT deficit. As at 31 December 2020 there is a LAT deficit of £10.0m (31 December 2019: £0.0m).
(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:
Gross of reinsurance:
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
5% decrease in loss ratio
Net of reinsurance:
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
5% decrease in loss ratio
CA
Change in net of tax
profits and equity
Scildon
Change in net of tax
profits and equity
2020
£m
2019
£m
2020
£m
(1.9 )
1.0
(4.5 )
(18.9 )
(15.3 )
(3.6 )
(5.2 )
n/a
n/a
(1.1 )
3.1
(6.6 )
(19.8 )
(15.7 )
(4.1 )
(3.8 )
n/a
n/a
(20.8 )
(32.9 )
4.7
(16.7 )
(16.7 )
–
(9.1 )
n/a
n/a
2019
£m
(32.5 )
(38.1 )
42.8
(0.6 )
(0.6 )
–
(0.1 )
n/a
n/a
CA
Change in net of tax
profits and equity
Scildon
Change in net of tax
profits and equity
2020
£m
2019
£m
2020
£m
(2.3 )
(4.3 )
1.8
2.3
2.8
(0.6 )
(4.7 )
n/a
n/a
(1.6 )
(3.2 )
0.7
2.3
2.9
(0.6 )
(3.5 )
n/a
n/a
(20.6 )
(32.2 )
3.6
(16.6 )
(16.6 )
–
(9.5 )
n/a
n/a
2019
£m
(32.4 )
(37.7 )
42.2
(0.9 )
(0.9 )
–
(0.3 )
n/a
n/a
Movestic
Change in net of tax
profits and equity
2019
£m
2020
£m
n/a
0.3
(0.5 )
n/a
n/a
n/a
n/a
(2.6 )
2.6
n/a
0.4
(0.6 )
n/a
n/a
n/a
n/a
(2.7 )
2.7
Movestic
Change in net of tax
profits and equity
2019
£m
2020
£m
n/a
(0.1 )
(0.0 )
n/a
n/a
n/a
n/a
(1.6 )
1.6
n/a
(0.1 )
(0.0 )
n/a
n/a
n/a
n/a
(1.7 )
1.7
179
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
30 Insurance contract provisions (continued)
(d) Sensitivity to changes in assumptions (continued)
Impact on reported profits and equity to changes in key variables (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 2020 is negative £1.9m.
Dutch business (Scildon)
Similar to Waard, Scildon measures the majority of its insurance contract liabilities using historical assumptions, which usually means that the value of IFRS
provisions is fairly stable under many sensitivities. This is not the case at year-end 2020 as the liability adequacy test bites and so the IFRS provision includes a
LAT deficit reflecting the excess of best-estimate Solvency II provisions above the IFRS provision. Under certain sensitivities, namely the 100 basis point decrease in
investment return and the 10% increase in mortality, morbidity and maintenance expenses, the best-estimate provisions increase. This in turn causes the LAT
deficit to increase further and thus results in some impacts that are comparably different from those presented at year-end 2019 where there was no LAT deficit.
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
2020
Amount
deposited
with
reinsurer
£000
Investment
contract
liability
£000
Net
£000
2019
Amount
deposited
with
reinsurer
£000
Net
£000
715,276
3,319,764
37,026
–
678,250
3,319,764
739,819
2,954,497
37,330
–
702,489
2,954,497
4,035,040
37,026
3,998,014
3,694,316
37,330
3,656,986
146,352
3,888,688
37,026
–
109,326
3,888,688
96,191
3,598,125
37,330
–
58,861
3,598,125
4,035,040
37,026
3,998,014
3,694,316
37,330
3,656,986
The fair values of the group’s investment contract liabilities have been disclosed according to a three-level valuation hierarchy in Note 24.
180
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
2020
£000
2019
£000
299,375
41,214
(2,858 )
29,925
30,795
(66,334 )
259,836
62,092
(2,672 )
38,031
(19,204 )
(38,708 )
332,117
299,375
7,120
324,997
3,193
296,182
332,117
299,375
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 2020
Non-investment property
Property and equipment
Motor vehicles
Hardware
Other
Total
Current
Non-current
Total
Maturity analysis
31 December 2019
Non-investment property
Property and equipment
Motor vehicles
Hardware
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
2,597
50
102
93
2
559
18
51
41
–
1,169
40
56
88
2
1,241
6
15
–
–
2,844
669
1,355
1,262
89
–
–
–
–
89
–
–
–
–
–
–
776
2,068
2,844
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
–
–
–
–
–
–
1,118
1,409
2,527
Total
£000
3,058
64
122
129
2
3,375
Total
£000
2,361
94
166
50
10
2,681
181
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
2020
£000
39,010
27,945
2019
£000
52,525
35,638
66,955
88,163
43,347
23,608
24,024
64,139
66,955
88,163
2020
£000
2019
£000
39,010
52,525
15,402
23,608
14,849
37,676
39,010
52,525
The bank loan as at 31 December 2020 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 2020 was £15.0m (31 December 2019: £21.0m).
The fair value of the euro denominated bank loan at 31 December 2020 was £24.1m (31 December 2019: £31.7m).
The fair value of amounts due in relation to financial reinsurance was £27.5m (31 December 2019: £37.5m).
Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.
182
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
were transferred to another administrator during 2020. Until that point, Scildon continued 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
2020
£000
2019
£000
–
–
–
–
–
–
75
75
–
75
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:
2020
£000
2019
£000
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
Total profit for the year not recognised in income
–
–
–
–
–
2020
£000
–
–
–
–
–
–
–
1,422
–
(21 )
117
1,518
2019
£000
6,796
(936 )
(577 )
103
(5,385 )
(1 )
–
183
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Expected defined benefit obligation end of period
Past service pension costs
Transfer out of the defined benefit scheme
Foreign exchange translation
Balance at 31 December
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
Settlement
Interest income
Other costs
The return on plan assets (excluding amounts included in net interest expense)
Foreign exchange translation
Balance at 31 December
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
184
2020
£000
–
–
–
–
–
–
–
–
–
–
–
–
2020
£000
–
–
–
–
–
–
–
–
–
–
2020
£000
–
–
–
–
–
–
–
2019
£000
50,781
1,434
267
673
936
577
(397 )
(9 )
5,271
(58,395 )
(1,138 )
–
2019
£000
50,886
(397 )
1,221
267
(58,395 )
694
(9 )
6,796
(1,138 )
(75 )
2019
£000
1,422
1,422
673
(694 )
(21 )
117
1,518
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal actuarial assumptions applied to the Scheme valuation are as follows:
Discount rate
Interest income on assets
General salary increases
Deferred pension increases
Inflation
Distribution of plan assets:
Other
Total
Period ended 31 December
Other
Total
31 December 31 December
2019
2020
–
–
–
–
–
1.25%
2.00%
2.00%
0.00%
2.00%
31 December 31 December
2019
£000
2020
£000
–
–
(75 )
(75 )
2020
2019
Quoted
market
price in an
active
market
£000
Total
£000
Not
quoted
Quoted
market
price in an
active
market
£000
Total
£000
Not
quoted
–
–
–
–
–
–
(75 )
(75 )
–
–
(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
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
2020
£000
2019
£000
–
7,261
2020
£000
2019
£000
(339 )
(206 )
357
(18,898 )
(1,113 )
(195 )
700
(21,892 )
(19,086 )
(22,500 )
(1,489 )
(17,597 )
(706 )
(21,794 )
(19,086 )
(22,500 )
185
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
36 Deferred tax assets and liabilities (continued)
CA and other group activities
(a) Recognised deferred tax assets and liabilities
31 December
Profit arising on transition to new tax regime
Deferred acquisition costs
Deferred income
Acquired value in-force
Unrealised and deferred investment gains
Excess expenses of management
Share-based payments
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
Right of use-assets/lease liabilities
Total
Comprising:
Net deferred tax liabilities
Total
2019
Assets/
(liabilities )
£000
Credit/
(charge )
in year
£000
2020
Assets/
(liabilities )
£000
(598 )
(260 )
514
(1,290 )
(731 )
731
517
4
162
30
(44 )
527
(3,363 )
3,363
103
(4 )
(436 )
(230 )
470
(763 )
(4,094 )
4,094
620
–
(1,113 )
774
(339 )
(1,113 )
(1,113 )
774
774
(339 )
(339 )
2018
Assets/
(liabilities )
£000
Credit/
(charge )
in year
£000
2019
Assets/
(liabilities )
£000
(806 )
(322 )
616
(1,872 )
(1 1,477 )
1 1,477
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 )
On 3 March 2021, the Chancellor announced plans to increase the corporation tax rate from 19% to 25% with effect from 1 April 2023. The main corporation tax
rate has not yet been substantively enacted. The effect of the rate change on the recognised balance is not expected to be material.
186
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
(b) Items for which no deferred tax asset is recognised
31 December
BLAGAB transitional amounts
Unrelieved expenses
Total
2020
£000
2019
£000
774
883
2020
£000
955
78,318
2019
£000
1,430
82,197
79,273
83,627
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.
There are no aggregate temporary differences arising on the acquisition of subsidiaries or associated undertakings, for which deferred tax has not been recognised.
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 2019: £0.2m), in respect of fair value adjustments arising
upon acquisition. Unrecognised deferred tax assets were nil at the balance sheet date in respect of corporation tax recoverable (31 December 2019: 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
2019
Assets/
(liabilities )
£000
Credit/
(charge )
in year
£000
Foreign
exchange
translation
difference
£000
2020
Assets/
(liabilities )
£000
(788 )
1,488
68
(446 )
700
(378 )
700
700
(378 )
(378 )
(45 )
80
35
35
35
(765 )
1,122
357
357
357
187
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
36 Deferred tax assets and liabilities (continued)
Scildon
(e) Recognised deferred tax assets and liabilities
31 December
Fair value adjustment on acquisition
Deferred acquisition costs
LAT reserve
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
37 Reinsurance payables
Payable to reinsurers
31 December
2019
Assets/
(liabilities )
£000
Credit/ Recognised
through
(charge )
equity
in year
£000
£000
Foreign
exchange
translation
difference
£000
2020
Assets/
(liabilities )
£000
(13,549 )
4,016
–
–
(568 )
(7,900 )
(3,891 )
7,229
27
2,474
(11 )
99
(774 )
(4,844 )
(21,892 )
4,200
(21,892 )
4,200
(21,892 )
4,200
–
–
–
–
–
–
–
–
–
–
(703 )
234
29
–
(31 )
(469 )
(266 )
(7,023 )
4,277
2,503
(11 )
(500 )
(9,143 )
(9,001 )
(1,206 )
(18,898 )
(1,206 )
(18,898 )
(1,206 )
(18,898 )
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
2020
£000
2,676
13
174
2019
£000
2,998
13
196
2,863
3,207
2,863
–
3,207
–
2,863
3,207
31 December
Accrued claims
Intermediaries’ liabilities
Policyholder liabilities
Other
Total
Current
Non-current
Total
2020
Gross Reinsurance
£000
£000
72,593
1,309
20,129
2,306
12,716
–
–
–
Net
£000
59,877
1,309
20,129
2,306
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
96,337
12,716
83,621
87,136
14,132
73,004
96,337
–
12,716
–
83,621
–
87,136
–
14,132
–
73,004
–
96,337
12,716
83,621
87,136
14,132
73,004
The carrying value of payables related to the direct insurance and investment contracts is a reasonable approximation of fair value.
188
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
39 Deferred income
31 December
Balance at 1 January
Additions
Release to income
Foreign exchange translation difference
Balance at 31 December
Current
Non-current
Total
The release to income is included in fees and commission income (see Note 8).
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
The carrying value of other payables is a reasonable approximation of fair value.
2020
£000
3,907
–
(589 )
37
2019
£000
3,948
646
(687 )
–
3,355
3,907
390
2,965
376
3,531
3,355
3,907
2020
£000
10,041
42
3,455
36,569
2019
£000
9,768
64
2,813
29,083
50,107
41,728
50,107
–
41,728
–
50,107
41,728
2020
£000
1,501
358
2019
£000
3,347
843
1,859
4,190
1,859
–
4,190
–
1,859
4,190
189
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
41 Share capital and share premium
Group
31 December
Share capital
150,065,457
43,768
150,061,567
43,767
2020
2019
Number
of shares
issued
Share
capital
£000
Number
of shares
issued
Share
capital
£000
Share
premium
£000
142,085
Share
premium
£000
142,053
The number of shares in issue at the balance sheet date included nil shares held in treasury (31 December 2019: nil).
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.
Company
31 December
Authorised:
Ordinary shares of 5p each
Issued:
Ordinary shares of 5p each
2020
2019
Number
of shares
Share
capital
£000
Number
of shares
Share
capital
£000
201,000,000
10,050
201,000,000
10,050
150,065,457
7,496
150,061,567
7,495
Share
premium
£000
142,085
Share
premium
£000
142,053
The number of shares in issue at the balance sheet date included nil shares held in treasury (31 December 2019: nil).
42 Other reserves
Group
31 December
Capital redemption reserve
Foreign exchange translation reserve
Balance at 31 December
Company
31 December
Capital redemption reserve
190
2020
£000
50
30,722
2019
£000
50
8,568
30,772
8,618
2020
£000
2019
£000
50
50
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES 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
Share based payment
Dividends
Final approved and paid for 2018
Interim approved and paid for 2019
Final approved and paid for 2019
Interim approved and paid for 2020
Balance at 31 December
2020
£000
2019
£000
281,053
21,191
492
–
–
(20,814 )
(11,480 )
232,638
79,142
593
(20,178 )
(1 1,142 )
–
–
270,442
281,053
The interim dividend in respect of 2019, approved and paid in 2019 was paid at the rate of 7.43p per share. The final dividend in respect of 2019, approved and
paid in 2020, was paid at the rate of 13.87p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year
ended 31 December 2019 was made at the rate of 21.30p per share.
The interim dividend in respect of 2020, approved and paid in 2020, was paid at the rate of 7.65p per share to equity shareholders of the parent company
registered at the close of business on 9 October 2020, the dividend record date.
A final dividend of 14.29p per share in respect of the year ended 31 December 2020 payable on 24 May 2021 to equity shareholders of the parent company
registered at the close of business on 9 April 2021, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final
dividend of £21.4m 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 2019 and 31 December 2020:
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 2018
Interim approved and paid for 2019
Final approved and paid for 2019
Interim approved and paid for 2020
Balance at 31 December
Details of dividends, approved and paid, are set out in the ‘group’ section above.
2020
P
7.65
14.29
2019
P
7.43
13.87
21.94
21.30
2020
£000
227,760
32,692
492
–
–
(20,814 )
(11,480 )
2019
£000
193,548
64,939
593
(20,178 )
(1 1,142 )
–
–
228,650
227,760
191
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
2,408
291
176
–
Movestic
£000
7,177
2,774
1,513
–
Waard
Group
£000
1,204
147
133
–
Other group
activities
£000
Scildon
£000
11,072
1,189
1,228
–
3,068
371
225
–
2020
£000
24,929
4,772
3,275
–
2019
£000
24,461
5,430
2,012
1,515
Total
2,875
11,464
1,484
13,489
3,664
32,976
33,418
Monthly average number of employees
Company
Subsidiaries
Total
35
270
305
36
280
316
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 193.
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.
192
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Movestic
The Swedish business participates in a combined defined benefit and defined contribution scheme operated by Försäkringsbranschens Pensionskassa, ‘FPK’.
(the Scheme). The Scheme is a multi-employer scheme with participants including other Swedish insurance companies not related to the group. The Scheme
provides, for those born in 1971 or earlier, benefits to employees which are linked to their final salary and to the amount of time working for companies which
are members of the Scheme. For those employees born in 1972 or later, the Scheme operates on a defined contribution basis.
Assets and liabilities are held on a pooled basis and are not allocated by the Trustee to any individual company. Consequently, reliable information is not available
to account for the Scheme as a defined benefit scheme and therefore, in accordance with IAS 19 Employee Benefits, the Scheme is accounted for as a defined
contribution scheme.
Contributions to the Scheme are based on the funding recommendations of the independent qualified actuary: the contributions paid to the Scheme subsequent
to the acquisition of the Swedish business on 23 July 2009 and up to 31 December 2018, totalled £4.9m.
During 2020 further contributions of £0.3m 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 2019.
The Annual Report states that the Scheme’s surplus is £201.5m as at 31 December 2019 (£143.6m as at 31 December 2018).
As at 31 December 2019, the fund had assets under management of £1.5bn (£1.4bn as at 31 December 2018). During 2019 there have been 108 (31 December
2018: 116) 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.
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 (STI) Scheme
(b) Long-Term Incentive (LTI) Scheme
The STI Scheme is based upon a 1 year performance period measured against cash generation, EcV earnings and strategic group objectives. In relation to 2020,
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 100% 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) 2020 award under the Short-Term Incentive (STI) Scheme
Details of the short-term incentive awards made in the year are as follows:
2020 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
2020
£000
2019
£000
255
137
392
59
451
242
693
57
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.
193
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
45 Share-based payments (continued)
(b) 2020 award made under the Long-Term Incentive (LTI) Scheme
In April 2020, the group granted 224,000 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 economic value and total shareholder return (TSR).
The fair value of the non-market base condition was determined to be 323.50p, which was the share price as at 28 April 2020, the grant date of the options.
Details of the share options outstanding during the year are as follows:
2020 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
2020
Weighted
average
exercise
price
£
Options
number
000
–
224
224
–
–
–
Monte Carlo
323.50
Nil
184.04
28.51
3 years
0.42%
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 £119,000 related to equity-settled share-based payments transactions in 2020
(c) 2019 award made under the Short-Term Incentive (STI) Scheme
The group has recorded an expense of £57,000 with regards to the 35% element that has been deferred over the vesting period.
(d) 2019 award made under the Long-Term Incentive (LTI) Scheme
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 economic 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
2020
2019
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
196
–
196
–
–
–
–
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.
194
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The inputs into the Monte Carlo model are as follows:
Valuation method
Weighted average share price (pence)
Weighted average exercise price (pence)
Weighted average fair value of options granted (pence)
Expected volatility
Expected life
Risk free rate
Expected dividend yield
Monte Carlo
358.50
Nil
202.74
25.35
3 years
1.110%
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 £66,000 related to equity-settled share-based payments transactions in 2020.
(e) 2018 award under the Short-Term Incentive (STI) Scheme
The group has recorded an expense of £18,000 with regards to the 35% element that has been deferred over the vesting period.
(f) 2018 award made under the Long-Term Incentive (LTI) Scheme
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
2020
2019
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
168
–
168
–
–
–
168
–
168
–
–
–
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
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 £64,000 related to equity-settled share-based payments transactions in 2020.
Monte Carlo
410.00
Nil
229.78
25.77
3 years
1.190%
0%
195
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
45 Share-based payments (continued)
(g) 2017 award under the Short-Term Incentive (STI) Scheme
The group has recorded an expense of £48,000 with regards to the 35% element that has been deferred over the vesting period.
(h) 2017 award made under the Long-Term Incentive (LTI) Scheme
In April 2017, the group granted 174,000 nil priced share options with a vesting period of 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
Lapsed 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
2020
2019
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
174
(133 )
41
–
–
–
174
–
174
–
–
–
Monte Carlo
382.75
Nil
211.73
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 £37,000 related to equity-settled share-based payments transactions in 2020.
(i) 2016 award under the Short-Term Incentive (STI) Scheme
The group has recorded an expense of £17,000 with regards to the 35% element that has been deferred over the vesting period.
196
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) 2016 award made under the Long-Term Incentive (LTI) Scheme
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
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.
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
2020
2019
Weighted
average
exercise
price
£
Options
number
000
Weighted
average
exercise
price
£
Options
number
000
90
–
–
90
–
–
–
–
–
–
204
(48 )
(65 )
90
–
–
3.715
–
–
–
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 £nil related to equity-settled share-based payments transactions in 2020.
(k) 2015 award made under the Long-Term Incentive (LTI) Scheme
In April 2015, the group granted 181,000 nil priced share options with a vesting period of 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.
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 2019 and 2020.
197
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
2020
2019
21,191
150,062,807
14.12p
14.03p
79,142
149,972,471
52.77p
52.47p
The weighted average number of ordinary shares in respect of the year ended 31 December 2020 is based upon 150,065,457 shares. No shares were held
in treasury.
There were 1,026,664 share options outstanding at 31 December 2020 (2019: 859,641). Accordingly, there is dilution of the average number of ordinary shares in
issue in respect of 2019 and 2020.
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 2020 or as at 31 December 2019.
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. This is on the basis that the group’s governance map requires all strategically significant
decisions to be approved by the group board. As such, they have the authority and responsibility for planning, directing and controlling the activities of the group.
Key management compensation is as follows:
Short-term employee benefits
Post-employment benefits
Share-based payments
Total
2020
£000
1,198
70
492
2019
£000
1,495
70
598
1,760
2,163
The share-based payments charge comprises £0.2m (2019: £0.2m) of Short-Term Incentive (STI) Scheme, and £0.3m (2019: £0.4m) related to Long-Term Incentive
(LTI) Scheme, which is determined in accordance with IFRS 2 ‘Share-based Payment’. Further details on the share-based payment are disclosed in Note 45.
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.
198
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following amounts were payable to directors in respect of bonuses and incentives:
Annual bonus scheme (included in the short-term employee benefits above)
2020
£000
2019
£000
392
694
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. The terms and conditions attached to the annual bonus scheme can be found in the remuneration section of these accounts on page 92.
(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:
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
Movestic Livförsäkring AB had the no amounts outstanding at the balance sheet date following the liquidation of Modernac.
(iv) Transactions with persons related to key management personnel
During the year, there were no transactions with persons related to key management personnel.
2020
£000
2019
£000
3,684
3,533
2020
£000
–
–
–
–
–
2019
£000
(68 )
2,071
(42 )
1,961
–
199
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Country of
incorporation
Ownership interest
31 December 2020
Ownership interest
31 December 2019
Functional
Currency
Countrywide Assured plc
United Kingdom
100% of all share capital (1)
100% of all share capital (1)
Sterling
Countrywide Assured Life Holdings Limited
United Kingdom
100% of all share capital
100% of all share capital
Sterling
Countrywide Assured Services Limited
United Kingdom
100% of all share capital
100% of all share capital
Sterling
Countrywide Assured Trustee Company Limited
United Kingdom
100% of all share capital
100% of all share capital
Sterling
Registered address
2nd Floor, Building 4, West Strand Business Park,
West Strand Road, Preston, Lancashire PR1 8UY
Movestic Livförsäkring AB
Movestic Balanserad
Movestic Försiktig
Movestic Global ESG
Movestic Offensiv
Movestic Global
Movestic Kapitalforvältning AB
Registered address
Box 7853, S -103 99 Stockholm, Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
Sweden
100% of all share capital
100% of all share capital
Swedish krona
100% of all share capital (7)
100% of all share capital (7)
100% of all share capital (7)
100% of all share capital (7)
100% of all share capital (7)
–
–
–
–
–
Swedish krona
Swedish krona
Swedish krona
Swedish krona
Swedish krona
100% of all share capital (2)
100% of all share capital (2)
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.
Luxembourg
49% of all share capital (8)
49% of all share capital (8)
Swedish krona
Registered address
BP 593 L-2015 Luxemburg, Luxembourg
Chesnara Holdings B.V.
Netherlands
100% of all share capital (3)
100% of all share capital (3)
Euro
Waard Leven N.V.
Waard Schade N.V.
Waard Verzekering
Registered address
Geert Scholtenslaan II 1687 CL Wognum,
Netherlands
Netherlands
100% of all share capital (4)
100% of all share capital (4)
Euro
Netherlands
100% of all share capital (4)
100% of all share capital (4)
Euro
Netherlands
100% of all share capital (4)
100% of all share capital (4)
Euro
Scildon N.V
Netherlands
100% of all share capital (4)
100% of all share capital (4)
Euro
Registered address
Laapersveld 68 Hilversum, Netherlands
(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. It has been put into liquidation during the year.
(7) Investment funds held indirectly by Movestic Livförsäkring AB.
(8) Held indirectly through Movestic Livförsäkring AB. Liquidated on 2 April 2020.
200
IFRS FINANCIAL STATEMENTSCHESNARA ANNUAL REPORT & ACCOUNTS 2020NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
51 Portfolio acquisition
On 21 November 2019, Waard completed a deal to acquire a portfolio of term life insurance policies (TLI) and saving mortgages insurance policies (SMI) from
Belgian insurance provider Argenta Assuranties N.V. (Aras). The SMI portfolio was accompanied by supporting financial assets via unit-linked investments in a
client mortgage fund. Waard obtained control at the date of completion, which was 31 August 2020. The portfolios were successfully migrated on 5 September
2020 (27,664 TLI and 12,551 SMI in total policies 40,185).
The transaction has given rise to a post completion gain on acquisition of £0.4m calculated as follows:
Fair value
Assets
Client mortgage fund
Acquired value in-force
Deferred tax asset
Total assets
Liabilities
Insurance contract provisions
Deferred tax liabilities
Total liabilities
Net assets
Net assets acquired
Total consideration, paid in cash
Post completion gain on portfolio acquisition
£000
319,641
2,296
5,815
327,752
300,697
5,819
306,516
21,236
21,236
20,848
388
Gain on acquisition: A post-completion gain of £0.4m was recognised in relation to this acquisition and has been reported on the face of the statement of
comprehensive income.
Acquisition-related costs: The portfolio was acquired for base a purchase price £25.4m as of 1 July 2019. For the period between cut-off date until the completion
date of 31 August 2020, a roll-forward period was agreed. The purchase price as at 31 August 2020 was £20.8m. No advisory expenses directly related to the deal
were accounted for by Waard. These expenses were borne by affiliated companies Chesnara plc and Chesnara Holdings B.V. As a result, no addition to the
consideration was paid.
The assets and liabilities acquired are included within changes in insurance provisions and financial assets within operating cash flows on the face of the cash
flow statement.
201
SECTION DCHESNARA ANNUAL REPORT & ACCOUNTS 2020
Pythonbrug, Amsterdam, Netherlands
SECTION E:
ADDITIONAL
INFORMATION
202 CHESNARA ANNUAL REPORT & ACCOUNTS 2020
204 — Financial calendar
204 — Key contacts
205 — Notice of the Annual
General Meeting
207 — Explanatory notes to
the notice of the Annual
General Meeting
211 — Alternative performance
measures
213 — Reconciliation of metrics
215 — Glossary
216 — Note on terminology
CHESNARA ANNUAL REPORT & ACCOUNTS 2020
203
FINANCIAL CALENDAR
KEY CONTACTS
Registered and Head Office
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
T +44 (0)1772 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
The Hanover Building
Corporation Street
Manchester
M4 4AH
Registrars
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
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
30 March 2021
Results for the year ended
31 December 2020 announced
08 April 2021
Ex-dividend date
09 April 2021
Dividend record date
23 April 2021
Last date for dividend reinvestment
plan elections
18 May 2021
Annual General Meeting
24 May 2021
Dividend payment date
26 August 2021
Half year results for the 6 months
ending 30 June 2021 announced
204
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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 2021 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 18 May 2021 at 11am, for the
business set out below. In light of the continuing Coronavirus (COVID-19)
pandemic and resultant social distancing measures in place at the time
of writing, 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 14 inclusive will be proposed as ordinary resolutions and
resolutions 15 to 18 inclusive will be proposed as special resolutions.
1. To receive and adopt the audited accounts for the financial year ended
31 December 2020, together with the reports of the directors and
auditor thereon.
2. To approve the Directors’ Remuneration Report for the year ended
31 December 2020.
3. To declare a final dividend of 14.29 pence per ordinary share for the
financial year ended 31 December 2020.
4. To re-elect John Deane as a director.
5. To re-elect David Rimmington as a director.
6. To re-elect Jane Dale as a director.
7. To re-elect Luke Savage as a director.
8. To re-elect Veronica Oak as a director.
9. To re-elect Mark Hesketh as a director.
10. To elect Eamonn Flanagan as a director.
11. To reappoint Deloitte LLP as auditor of the company to hold office until
the conclusion of the next general meeting of the company at which
accounts are laid before shareholders.
12. To authorise the directors to determine the auditor’s remuneration.
13. That, from the passing of this resolution 13 until the earlier of the close of
business on 30 June 2022 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.
14. That the directors be and they are hereby generally and unconditionally
authorised in accordance with Section 551 of the Companies Act 2006 (the
Act), to exercise all the powers of the company, to allot shares in the
company and/or to grant rights to subscribe for or to convert any security into
shares in the company (Allotment Rights):
(a) up to an aggregate nominal amount of £2,501,249 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 £2,501,249;
and
(b) up to an aggregate nominal amount of £5,002,499 (such amount to be
reduced by the nominal aggregate amount of any shares allotted or rights
granted pursuant to the authority in paragraph (a) above) in connection
with an offer by way of a rights issue:
i) to holders of ordinary shares in proportion (as nearly as may be
practicable) to their respective holdings; and
ii) to holders of other equity securities as required by the rights of those
securities or as the directors otherwise consider necessary,
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 2022) 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.
205
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2020
NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
15. 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
(b) the allotment of equity securities (other than pursuant to paragraph
(a) above) with an aggregate nominal value of £375,187
and shall expire on the revocation or expiry (unless renewed) of the
authority conferred on the directors by resolution 14 of this notice, save
that, before the expiry of this power, the 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.
16. That, subject to the passing of resolution 14 of this notice and, in addition
to the power contained in resolution 15 of this notice, the directors be
and are hereby empowered pursuant to Section 570 of the Companies Act
2006 (the Act) to allot equity securities (as defined in Section 560 of the
Act) for cash, pursuant to the authority conferred on them by resolution 14
of this notice or by way of sale of treasury shares as if Section 561 of
the Act did not apply to any such allotment, provided that this power is:
(a) limited to the allotment of equity securities up to an aggregate nominal
value of £375,187; and
(b) used only for the purposes of financing (or refinancing, if the power is
to 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 14 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.
17. That the company be and is hereby generally and unconditionally authorised
for the purposes of Section 701 of the Companies Act 2006 (the Act) to
make one or more market purchases (as defined in Section 693(4) of the Act)
of ordinary shares in the capital of the company, provided that:
(a) the maximum aggregate number of ordinary shares hereby authorised
to be purchased is 15,007,496;
(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 2022); and
(e) the company may enter into contracts or contracts to purchase ordinary
shares under the authority hereby conferred prior to the expiry of such
authority which will or may be completed wholly or partly after the expiry
of such authority, and may make a purchase of ordinary shares in
pursuance of any such contract or contracts.
18. That a general meeting of the company (other than an Annual General Meeting)
may be called on not less than 14 clear days’ notice.
By order of the board
Alastair Lonie
Company Secretary
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
29 March 2021
206
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2020
EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING
Impact of the Coronavirus pandemic on the AGM
The company has continued to closely monitor the situation in respect of the Coronavirus pandemic and the restrictions and precautionary measures still
being taken across the country. As a result of these restrictions as they stand at the time of writing, the AGM will be held as a closed meeting with only
a limited number of directors (in their capacity as shareholders or proxies appointed by shareholders), who will abide by social distancing recommendations,
being present in person in order to form the quorum for a valid meeting. Physical attendance at the AGM by shareholders (other than the small number
of directors required to form a quorum) will, regrettably, not be possible this year. The company will continue to update shareholders in the usual way, via
the Regulatory News System (RNS), should the arrangements for the AGM change at short notice. There will as a result 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
4. CREST members who wish to appoint one or more proxies through the
Meeting is entitled to appoint another person, or two or more persons in
respect of different shares held by the shareholder, as their proxy to
exercise all or any of their 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 the AGM is being
held as a closed meeting due to the Coronavirus pandemic, no other
person appointed as a proxy will be permitted to attend the meeting in
person (and any member who purports to appoint any person other
than the Chairman as their proxy will be treated as having appointed the
Chairman, who will vote in accordance with their instructions, in order
to ensure that their vote is counted). Members are strongly 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 Group, 10th Floor, Central Square, 29 Wellington Street,
Leeds, LS1 4DL (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 Group, 10th Floor, Central Square, 29 Wellington Street,
Leeds, LS1 4DL so as to be received by 11am on Friday 14 May 2021.
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 at the time
of writing 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 Friday 14 May 2021. Members who hold
their shares in uncertificated form may also use the ‘CREST’ voting
service to appoint a proxy electronically, as explained right.
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 Group (ID RA10), by 11am on Friday 14 May 2021,
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.
207
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2020 EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
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 06 April 2021, 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:
5. Copies of directors’ service contracts and letters of appointment are
available for inspection at the registered office of the company during
normal business hours each business day subject to prevailing public
health measures. 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 Friday 14 May 2021. Changes to entries on
the register of members after that time will be disregarded in determining
the right of any person to attend or vote at the Annual General Meeting.
7. The right to appoint proxies does not apply to persons nominated to
receive information rights under Section 146 of the Companies Act 2006;
as such rights can only be exercised by the member concerned. Any
person nominated to enjoy information rights under Section 146 of the
Companies Act 2006 who has been sent a copy of this notice of Annual
General Meeting is hereby informed, in accordance with Section 149(2) of
the Companies Act 2006, that they may have a right under an agreement
with the registered member by whom they were nominated to be appointed,
or to have someone else appointed, as a proxy for this Annual General
Meeting. If they have no such right, or do not wish to exercise it, they may
have a right under such an agreement to give instructions to the member
as to the exercise of voting rights. Nominated persons should contact the
registered member by whom they were nominated in respect of these
arrangements.
8. As at 23 March 2021 (being the last practicable date prior to the publication
of this document), the company’s issued share capital consisted of
150,074,957 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 23 March 2021 (being the last practicable date prior to the
publication of this document) were 150,074,957.
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 restrictions and 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
208
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2020 Resolution 1
Resolutions 11 and 12
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 11, therefore, proposes Deloitte’s reappointment as auditor to hold
office until the next general meeting at which the company’s accounts are
laid before shareholders. Resolution 12 authorises the directors to determine
the auditor’s remuneration.
Resolution 13
Political donations
It has always been the company’s policy that it does not make political
donations. This remains the company’s policy.
Part 14 of the Companies Act 2006 (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.
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.
Resolutions 2
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 2020. The Directors’ Remuneration Report can be
found on pages 80 to 97 of the 2020 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 91
to 97. The vote on this resolution is advisory only and the directors’ entitlement
to remuneration is not conditional on it being passed. The Companies Act
2006 requires the Directors’ Remuneration Policy to be put to shareholders for
approval annually unless the approved policy remains unchanged, in which
case it need only be put to shareholders for approval at least every 3 years. The
company is not proposing any changes to the Directors’ Remuneration Policy
approved at the Annual General Meeting in 2020.
Resolution 3
Final dividend
The declaration of the final dividend requires the approval of shareholders in
general meeting. If the 2021 Annual General Meeting approves resolution 3,
the final dividend of 14.29 pence per share will be paid on 24 May 2021 to
ordinary shareholders who are on the register of members at the close of
business on 09 April 2021 in respect of each ordinary share.
Resolutions 4 – 10 inclusive
Election and Re-election of directors
The company’s Articles of Association provide that any director who has not
been elected or re-elected by the shareholders at either of the two preceding
Annual General Meetings is required to retire at the next Annual General
Meeting. Additionally, the Articles of Association require such further directors
to retire at the Annual General Meeting as would bring the total number of
directors retiring up to one-third of their number.
Notwithstanding the provisions of the company’s Articles of Association,
the board of directors has determined that all the directors shall retire from
office at this year’s Annual General Meeting in line with 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.
Eamonn Flanagan was appointed to act as a director by the Board in July 2020
and, in line with the company’s Articles of Association, Eamonn is retiring
and seeking election by the shareholders. Biographical details of each director
can be found on pages 68 and 69 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.
209
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2020 EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING (CONTINUED)
Resolution 14
Resolution 17
Authority to purchase own shares
This resolution, which will be proposed as a special resolution, seeks to renew
the company’s authority to purchase its own shares. It specifies the maximum
number of shares which may be acquired as 10% of the company’s issued
ordinary share capital (excluding treasury shares) as at 23 March 2021, 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 2022.
The company has options and awards outstanding under existing share schemes
over an aggregate of 1,026,664 ordinary 5p shares, representing 0.68% of
the company’s issued ordinary share capital (excluding treasury shares) as at
23 March 2021 (the latest practicable date prior to the publication of this
document). This would represent approximately 0.76% of the company’s issued
share capital (excluding treasury shares) if the proposed authority being sought
at the Annual General Meeting to buy back 15,007,496 ordinary shares
was exercised in full (and all the repurchased ordinary shares were cancelled).
Resolution 18
Notice of general meetings
The Companies Act 2006 requires the notice period for general meetings of the
company to be at least 21 days, but, as a result of a resolution which was
passed by the company’s shareholders at last year’s Annual General Meeting,
the company is currently able to call general meetings (other than an Annual
General Meeting) on not less than 14 clear days’ notice. In order to preserve
this ability, shareholders must once again approve the calling of meetings
on not less than 14 clear days’ notice. Resolution 18 seeks such approval. The
approval will be effective until the company’s next Annual General Meeting,
when it is intended that a similar resolution will be proposed. The company will
also need to meet the 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 2021 Annual General Meeting. The board is, therefore,
seeking to renew its authority over shares having an aggregate nominal amount
of £2,501,249, representing approximately one-third of the issued ordinary
share capital of the company (excluding treasury shares) as at 23 March 2021
(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 £5,002,499, representing approximately two-thirds of the issued
share capital of the company (excluding treasury shares) as at 23 March 2021
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 £5,002,499.
As at 23 March 2021, 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 2022.
Passing resolution 14 will ensure that the directors have flexibility to take
advantage of any appropriate opportunities that may arise. At present the
directors have no intention of exercising this authority.
Resolutions 15 and 16
Disapplication of statutory pre-emption rights
The directors are currently authorised, subject to certain limitations, to issue
shares for cash without first offering them to existing shareholders in proportion
to their existing shareholdings. That authority will expire at the conclusion of
the 2021 Annual General Meeting and, in accordance with the Statement of
Principles issued by the Pre-Emption Group, resolutions 15 and 16 (which
will be proposed as special resolutions) seek to renew the directors’ authority
to disapply pre-emption rights as referenced below.
Resolution 15, if passed, will allow the directors to (a) allot shares in the company
for cash in connection with a rights issue or other pre-emptive offer; and
(b) otherwise allot shares in the company for cash up to a maximum aggregate
nominal value of £375,187, in each case as if the pre-emption rights of Section
561 of the Companies Act 2006 did not apply. This aggregate nominal amount
equates to approximately 5% of the issued ordinary share capital of the company
(excluding treasury shares) as at 23 March 2021 (being the latest practicable
date prior to the publication of this notice of Annual General Meeting).
Resolution 16 is proposed as a separate special resolution. In line with the
Pre-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.
210
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2020 ALTERNATIVE PERFORMANCE MEASURES
Throughout our Report & Accounts we use alternative performance measures (APMs) to supplement the assessment
and reporting of the performance of the group. These measures are those that are not defined by statutory reporting
frameworks, such as IFRS or Solvency II.
The APMs aim to assess performance from the perspective of all stakeholders, providing additional insight into the
financial position and performance of the group and should be considered in conjunction with the statutory reporting
measures such as IFRS and Solvency II.
The following table identifies the key APMs used in this report, how each is defined and why we use them. Further
information can be found throughout the Overview (Section A), with detailed reference within the Financial Review
(pages 44 to 49).
APM
WHAT IS IT?
WHY DO WE USE IT?
REF
Economic Value
(EcV)
£
Economic Value
(EcV) earnings
EcV operating
earnings
EcV underlying
operating
earnings
EcV economic
earnings
Commercial
new business
profit
EcV is a financial metric that is derived from
Solvency II Own Funds. 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.
We define EcV as being the Own Funds
adjusted for contract boundaries, risk margin
and restricted with-profit surpluses. As such,
EcV and Own Funds have many common
characteristics and tend to be impacted by the
same factors.
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.
This is the element of EcV earnings (see above)
that are generated from the 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.
EcV operating earnings (see above) exclusive of
any individually material (positive or negative)
items of an exceptional or non-recurring nature,
that would not fall under normal business as
usual operations.
This is the element of EcV earnings (see above)
that are derived from investment market
conditions in the period and any economic
assumption changes in the future.
A more commercially relevant measure of
new business profit than that recognised directly
under the Solvency II regime, allowing for a
modest level of return, over and above risk-free,
and exclusion of the incremental risk margin
Solvency II assigns to new business.
See EcV analysis on
page 49
See EcV earnings
analysis on page 48
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.
By recognising the market-related value of
in-force business (in-force value), a different
perspective is provided in the performance of
the group and on the valuation of the business.
Economic Value earnings are an important
KPI as they provide a longer-term measure of the
value generated during a period. The Economic
Value earnings of the group can be a strong
indicator of how we have delivered against all
three of our core strategic objectives.
EcV operating earnings are important as they
provide an indication of the underlying value
generated by the business. It can help identify
profitable activities and also inefficient
processes and potential management actions.
See EcV earnings
analysis on page 48
This helps management and investors identify
the underlying performance of the business
as usual operations of the company.
See EcV earnings
analysis on page 48
EcV economic earnings are important in order
to measure the additional value generated from
investment market factors.
See EcV earnings
analysis on page 48
This provides a fair commercial reflection
of the value added by new business operations
and is more comparable with how new
business is reported by our peers, improving
market consistency.
See Business Review
section on pages 36
to 39
211
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2020
ALTERNATIVE PERFORMANCE MEASURES (CONTINUED)
APM
Group cash
generation
WHAT IS IT?
WHY DO WE USE IT?
REF
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.
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’.
See cash generation
on page 46 and
reconciliation on
page 214
Divisional 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.
It is an important indicator of the underlying
operating performance of the business
before the impact of group level operations and
consolidation adjustments.
See cash generation
on page 46
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.
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.
Commercial cash generation excludes the
impact of technical adjustments, modelling
changes and exceptional corporate activity;
representing the underlying commercial cash
generated by the business.
FuM reflects the value of the financial assets
that the business manages, as reported in the
IFRS Consolidated Balance Sheet.
A measure of the pre-tax profit earned from the
company’s ongoing business operations,
excluding any profit earned from investment
market conditions in the period and any
economic assumption changes in the future.
This also excludes any intangible asset
adjustments that are not practicable to ascribe
to either operating or economic conditions.
A measure of pre-tax profit earned from
investment market conditions in the period and
any economic assumption changes. This also
excludes any intangible asset adjustments that
are not practicable to ascribe to either
operating or economic conditions.
Commercial
cash generation
Funds under
management
(FuM)
Operating profit,
excluding AVIF
impairment
IFRS
IFRS
Economic profit,
excluding AVIF
impairment
IFRS
Commercial cash generation aims to provide
stakeholders with enhanced insight into
cash generation, drawing out components of
the result relating to technical complexities
or exceptional items. The result is deemed to
better reflect the underlying commercial
performance, show key drivers within that.
See cash generation
on page 47
FuM are important as it provides an indication
of the scale of the business, and the potential
future returns that can be generated from the
assets that are being managed.
See Consolidated
Balance Sheet on
page 119
Operating earnings are important as they
provide an indication of the underlying
profitability of the business. It can help identify
profitable activities and also inefficient
processes and potential management actions.
Reconciliation to
pre-tax profit can be
found on page 50
Economic earnings are important in order to
measure the surplus generated from investment
market factors.
Reconciliation to
pre-tax profit can be
found on page 50
£
Acquisition value gains reflect the incremental
Economic Value added by a transaction, exclusive
of any additional risk margin associated with
absorbing the additional business.
The EcV gain from acquisition will be net of any
associated increase in risk margin. The risk
margin is a temporary Solvency II dynamic which
will run off over time.
See acquire life &
pensions businesses
on page 40
A financial measure that demonstrates the
degree to which the company is funded by debt
financing versus equity capital, presented as
a ratio. It is defined as bank debt divided by bank
debt plus equity, as measured under IFRS.
It is an important measure as it indicates the
overall level of indebtedness of Chesnara and it is
also a key component of the bank covenant
arrangements held by Chesnara.
See Financial
Management on
page 51
Acquisition
value gain
(incremental
value)
Leverage/
gearing
212
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2020
RECONCILIATION OF METRICS
The diagram below shows the interaction between the IFRS metrics and the alternative performance
measures used by the group.
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
2020
31 Dec
2019
Rationale
Group IFRS net assets
487.1
478.2
Removal of intangible assets; AVIF, DAC and DIL
(137.7)
(157.5)
Intangible assets that cannot be sold separately have no intrinsic value under
Solvency II rules.
Removal of IFRS reserves, net of reinsurance
8,082.0
7,375.9
Inclusion of SII technical provisions, net of reinsurance
(7,856.1)
(7,076.1)
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
10.9
4.4
2.0
Other immaterial valuation differences.
–
These are the deferred tax impacts as a result of the adjustments above.
(21.4)
(20.8)
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
(1.5)
(10.8)
Group SII Own Funds
567.7
590.9
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.
213
SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2020 RECONCILIATION OF METRICS (CONTINUED)
Solvency II position
Solvency II is the solvency regime that applies to the group. Over and above IFRS, Solvency II imposes a capital requirement on the group.
A summary of the solvency position of the group at 31 December 2020 and 31 December 2019 is as follows:
£m
Group SII Own Funds (OF)
Solvency Capital Requirement (SCR)
Solvency surplus
Solvency ratio
31 Dec 2020
31 Dec 2019
567.7
363.7
204.0
156%
590.9
380.1
210.8
155%
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. For further information on cash generation please refer to page 212
and the Financial Review section.
Cash generation can be derived from the opening and closing solvency positions as follows:
Opening Solvency II surplus, including management buffer of 10%:
Own Funds – 31 Dec 2019
SCR – 31 Dec 2019
Management buffer (10% of SCR)
Surplus available for distribution – 31 Dec 2019
Closing Solvency II surplus, including management buffer of 10%:
Own Funds – 31 Dec 2020
SCR – 31 Dec 2020
Management buffer (10% of SCR)
Surplus available for distribution – 31 Dec 2020
£m
590.9
380.1
38.0
172.8
567.7
363.7
36.4
167.6
The closing Solvency II position at 31 December 2020 reflects the payment of an interim dividend of £11.5m paid during the year and reflects a foreseeable
dividend of £21.4m due to be paid in 2021. As these are distributions to shareholders, akin to IFRS profit reporting, these do not form part of the cash generation
metric and should be excluded. Consequently, group cash generation can be derived as follows:
Closing surplus available for distribution less opening available surplus for distribution
Add back: Interim dividend paid
Add back: Foreseeable year end dividend
Group cash generation
£m
(5.2 )
11.5
21.4
27.7
214
ADDITIONAL INFORMATIONCHESNARA ANNUAL REPORT & ACCOUNTS 2020
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
Leverage
(gearing)
London Stock
Exchange
LTI
Independent Financial Adviser.
Key Performance Indicator.
A financial measure that demonstrates the degree to which the
company is funded by debt financing versus equity capital,
usually presented as a ratio.
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, a previously associated company 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 N.V.
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.
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
IFRS
HCL Insurance BPO Services Limited.
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.
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.
International Financial Reporting Standards.
Waard
The Waard Group.
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SECTION ECHESNARA ANNUAL REPORT & ACCOUNTS 2020
ADDITIONAL INFORMATION
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, Waard Verzekeringen; 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.
Registered and Head Office
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
T +44 (0)1772 972050
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.
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