Final Results
Chesnara plc - Preliminary Results for the year ended 31 December 2006
Strong emerging surplus supports 6.6% final dividend increase
29 March 2007
Chesnara today reported final results for the twelve months to 31 December
2006. The Group is committed to offering shareholders an attractive long-term
income stream arising from the profits of its substantially closed life
assurance business.
* Profit (on IFRS basis) before tax increased by 22% to £25.0m, 18.41p
earnings per share (2005 profit before tax: £20.5m, 19.26p earnings per
share)
* Transfer of City of Westminster Assurance (CWA) business to Countrywide
Assured delivers positive solvency effects, tax benefits and operational
efficiencies
* Disposal of Premium Life International and charge obtained on Guardian
Assurance-held assets improve solvency position
* Contract concluded with Capita to outsource former CWA business provides
greater certainty of future policy-related expenses
* Mortgage endowment misselling provision assumptions prove adequate
* Favourable persistency experience
* Shareholder equity on EEV basis, pre proposed final dividend payment, now
£189.1m (31 December 2005: £176.2m)
* Life Company solvency ratio improves to 205%, post dividend, (31 December
2005: 178%). Group solvency ratio, post dividend, increased to 225% (31
December 2005: 158%)
* 8.05p final dividend per share proposed (7.55p): increased by 6.6%
* Total dividend for year of 13.1p (12.45p): increased by 5.2%
* Board remains committed to progressive dividend policy
* Search for value adding acquisition opportunities broadens and continues
Graham Kettleborough, Chief Executive said:
'At the half year we saw a strong emergence of surplus and this has continued,
in line with our expectations, through the full year. The completion of the
transfer of the acquired CWA business into CA in the first half has enabled us
to begin to realise the financial and operational synergies we planned. This
has been complemented by three significant further transactions in the year -
the sale of PLI, the charge on Guardian assets and the Capita outsourcing deal
- which all bring greater financial certainty to the Group. This enables the
Board to deliver, once again, on its promise to shareholders of a reliable and
progressive dividend stream by proposing an increase to the final dividend of
6.6% to 8.05p'
The Board approved this preliminary statement on 28 March 2007.
Enquiries
Graham Kettleborough
Chief Executive, Chesnara plc 07799 407519
Michael Henman/John Beresford-Peirse
Cubitt Consulting 0207 367 5106
Notes to editors:
Chesnara plc, which listed on the London Stock Exchange in May 2004, is the
owner of Countrywide Assured plc ("CA"). CA is a life assurance company that is
substantially closed to new business. In June 2005, Chesnara confirmed its
strategic intentions when it acquired a further closed life insurance company -
City of Westminster Assurance ("CWA") - for £47.8m. With effect from 30 June
2006, CWA's policies and assets were transferred into CA plc. Chesnara's
operating model is to maintain a relatively small corporate governance team and
outsource the majority of its back office functions.
Financial Highlights
Year ended 31 December
2006 2005
IFRS basis
Operating profit 26.5 21.3
Financing costs (1.2) (0.8)
Loss on sale of subsidiary company (0.3) -
---------- ----------
Profit before income taxes £25.0m £20.5m
========== ==========
Basic earnings per share 18.41p 19.26p
Dividend per share 13.1p 12.45p
Shareholders' net equity £114.3m £108.3m
========== ==========
European Embedded Value basis (EEV)
Operating profit 15.0 10.7
Exceptional item
Profit on acquisition of subsidiary company - 30.3
Investment variances and economic assumption 15.6 10.9
changes
---------- ----------
Profit before tax £30.6m £51.9m
---------- ----------
Covered Business
Shareholder net worth 84.5 84.5
Value of in-force business 109.9 110.0
---------- ----------
Embedded value 194.4 194.5
Acquired embedded value financed by debt (16.8) (21.0)
Shareholders' equity in other Group companies 11.5 2.7
---------- ----------
Shareholders' equity on EEV basis £189.1m £176.2m
---------- ----------
Life annual premium income (AP) £113.4m £118.0m
Life single premium income (SP) £54.8m £60.1m
Life annualised premium income (AP + 1/10 SP) £118.9m £124.0m
In contrast with the IFRS basis of reporting, the EEV basis recognises the
discounted value of the expected future cash flows, arising from the long-term
business contracts in force at the year end, as a component of shareholder
equity. Accordingly, the EEV result recognises, within profit, the movement in
this component.
The Group presents supplementary financial information, prepared in accordance
with the EEV basis, with effect from 1 January 2006. This first-time adoption
of EEV principles and associated disclosures represents a change from the
Achieved Profit ("AP") basis of reporting, which was previously adopted by the
Group as the basis for presenting supplementary financial information.
Restatement of information for the comparative period from the AP basis to the
EEV basis, together with explanatory notes, was set out in the 2006 Interim
Financial Statements which are available on www.chesnara.co.uk
Under the EEV basis of reporting, the exceptional profit arising during the
year ended 31 December 2005 relates to the acquisition of CWA Life Holdings plc
and represents the excess of the embedded value of that company, at the
acquisition date, over the total purchase price. Investment variances and
economic assumption changes for the year ended 31 December 2006 are stated net
of a £0.3m loss arising on the sale of a subsidiary company.
CHAIRMANS STATEMENT
I am pleased to present the third annual financial statements of Chesnara plc
("Chesnara").
Background
Chesnara, owner of Countrywide Assured plc ("CA") since its listing in May
2004, seeks to participate actively in the consolidation of the closed life
business sector in the UK. In 2005 it acquired City of Westminster Assurance
Company Limited ("CWA"), another closed life assurance company, from Irish Life
and Permanent plc.
CA now manages a portfolio of some 228,000 life assurance and pension policies
and is substantially closed to new business. It writes Guaranteed Bonds, a
small amount of protection business and accepts top-ups to existing contracts.
As a substantially closed book it is expected that the embedded value of the
business will decline over time as the number of policies in force reduces and
as the surpluses emerging in the business are distributed by way of dividends.
As the portfolio runs off, the regulatory capital supporting it may also be
reduced and returned to shareholders.
In order to prolong the yield delivery, Chesnara seeks to acquire similar
businesses. We believe, however, that such potential acquisitions should not
detract from our key objective of delivering a steady and attractive dividend
yield.
Review
New acquisition opportunities in the closed life sector in the UK slowed
considerably in 2006, particularly within our £50m to £200m target value range.
Our main focus has, therefore, been on enhancing shareholder value in the
existing business and I am pleased to report a number of significant
developments, which prolong and secure the dividend yield from those
businesses.
* At the end of June 2006 the long-term business of CWA was transferred to CA
under the provisions of Part VII of the Financial Services and Markets Act
2000 (the "Part VII Transfer"). Besides realising significant financial
savings and synergies in resources required to manage the combined
businesses, the transfer has given rise to more efficient use of capital
required for regulatory purposes. In the second half of the year, following
a successful application to the High Court, £3m of CWA share capital was
released;
* In January 2007 we entered into a contract with Capita Life and Pensions
Regulated Services Limited for the provision of administration services to
the CWA business for an initial term of 15 years. This followed discussions
with the incumbent administration services provider, whose contract was due
to expire in February 2009, which indicated that terms for renewal beyond
this date were unlikely to be attractive to us. Although the terms of the
new contract have given rise to a reduction of some £5m in the value of the
in-force portfolio to reflect increased administration costs over the life
of the contract, they provide certainty of the administration expense base
for some time to come;
* During 2006 we have begun to witness a fall in the number of mortgage
endowment misselling complaints received. This follows less intense media
attention and a lower pitch of advertising by complaints handling firms, as
more policyholders have become time-barred from making successful
complaints. Approximately 70% of our in-force endowment policies are now
time-barred, this proportion being expected to increase to a maximum of 80%
over the course of 2007. These circumstances, together with the strength of
investment markets during 2006, have contributed to a position where
assumptions previously adopted to fix the level of associated provisions
have proved to be adequate. In addition, the 2006 results have benefited
from a Professional Indemnity ("PI") insurance recovery of £1.1m in respect
of administration costs incurred in the handling of misselling claims; and
* Policy lapse experience and, accordingly, the rate of policy retention
within the in-force portfolio were favourable over 2006, particularly with
respect to protection policies. While this experience to some extent
follows naturally as the closed books proceed along their run-off cycle,
the underlying persistency was reinforced by investment market experience
over 2006. The strength of the markets has both enhanced the short-term
surplus and improved the longer-term outlook, as it has the effect of
increasing deductions made from unit funds.
The positive effects of these developments have more than compensated for the
negative impact of revised expense assumptions in relation to third-party
administration contracts and have translated into a strong earnings performance
for 2006 on both of our principal bases of financial reporting.
On the IFRS basis, we have posted a pre-tax profit of £25.0m for the year ended
31 December 2006, compared with £20.4m for the corresponding period in 2005.
This improvement is underpinned by the continuing strong emergence of surpluses
in the life business, together with the absence of additional charges required
to strengthen misselling provisions.
This result allows the Board to recommend a final dividend of 8.05p per share
(2005: 7.55p per share), in respect of the year ended 31st December 2006,
representing an increase of 6.6% over the final dividend for 2005. The
resulting total dividend for the year of 13.1p (2005: 12.45p) represents a 5.2%
increase.
On the EEV basis of reporting, the Group recognises a pre-tax profit of £30.6m
for the year ended 31 December 2006, compared with £21.6m, before an
exceptional item, for the corresponding period in 2005, and compared with an
underlying return of £10.4m expected to arise from the unwind of the risk
discount rate within the embedded value. This significant improvement reflects:
* The positive impact of economic assumption changes, which have been driven
principally by strength in the investment markets and by a reduction of £
4.3m in projected policyholder tax arising as a result of the Part VII
Transfer;
* A positive variance of £6.3m in the longer-term investment return; to which
investment market strength also contributed;
* The release of a reinsurer default reserve, measured for EEV purposes at £
3.5m;
* Favourable lapse experience, across both the CA and CWA businesses,
amounting to some £2.9m; and
* The adequacy of the additional provisions in respect of misselling redress
exposure, together with the related PI insurance recovery of £1.1m.
offset by:
* A reduction of some £7.7m in respect of revised expense assumptions
relating to third-party administration contracts.
In addition to the reduction in projected policyholder tax of £4.3m, arising as
a result of the Part VII Transfer, there is also a reduction in projected
shareholder tax of £5.7m. These amounts, together with an associated release of
a deferred tax provision of £0.6m, give rise to total projected tax synergies
over the whole life of the in-force portfolio arising as a result of the Part
VII Transfer of £10.6m in EEV terms.
Total shareholder equity, as stated on the EEV basis, pre final dividend
appropriations has increased from £176.2m at 31 December 2005 to £189.1m at 31
December 2006 which reflects the strong net EEV earnings performance in the
period.
CA's capital solvency ratio at 205% post dividend is at a healthy premium to
the target set by the Board of 150%, having increased from the combined CA and
CWA post-dividend level of 178% at 31 December 2005. The Group's solvency ratio
has strengthened to 225% from the 31 December 2005 level of 158%, stated after
allowing for the respective final dividends.
Outlook
Experience during the year in the two key areas of mortgage endowment
complaints and persistency has proved favourable. This leads the Board to
continue to look to the future with optimism. We remain aware of the importance
of these issues and, in the light of some continuing uncertainty with regard to
the application and interpretation of regulatory rules, will continue to
manage them closely. The key outsourcing contracts for the CA and CWA
businesses now provide greater certainty regarding the overall expense base for
some time to come. During 2006 investment market performance has provided a
positive underpin and, although returns in the medium term have been
encouraging, the equity market performance during the first quarter of 2007
serves to remind us of the potential for future volatility. Following its
acquisition, CWA is providing a strong surplus flow and, following the Part VII
Transfer, the expected financial and operational synergies are being realised.
We believe we are well placed to fulfil our stated objective of continuing to
deliver a reliable and progressive dividend flow.
The flow of closed life book consolidation opportunities remains slow. Whilst
continuing to pursue our activity in this marketplace we will also consider
other opportunities which could leverage value from our existing capabilities.
If there is no clearly superior investment alternative the possibility of a
return of surplus capital remains.
The Board wishes to extend its thanks to all employees for their continued
contribution to the Group.
Christopher Sporborg
Chairman
28 March 2007
OPERATING AND FINANCIAL REVIEW
Basis of Accounting
The Group reports primarily in accordance with International Financial
Reporting Standards ("IFRS"). As IFRS essentially permits the "grandfathering"
of the principles and bases used to measure profit arising on long-term
insurance contracts under previously-adopted UK GAAP and, as the business of
the Group predominantly relates to life contracts in run off, so the earnings
profile of the Group will continue to be dominated by the underlying emergence
of surplus in these businesses as measured for UK regulatory reporting
purposes.
The Group continues to provide financial information supplementary to the IFRS
basis. With effect from reporting periods commencing on 1 January 2006, the
Group has adopted European Embedded Value ("EEV") principles as the basis for
providing this supplementary information in lieu of the Achieved Profit ("AP")
basis of reporting. AP and EEV methodologies are similar, insofar as both aim
to measure the underlying embedded value of the Group's life assurance,
pensions and annuity businesses. However, EEV principles provide a framework
which is intended to improve the comparability and transparency of embedded
value reporting across Europe.
IFRS Result
a. Analysis of results
The following summarises pre-tax earnings information reflected in the IFRS
Income Statement, showing, for the year ended 31 December 2006, the
contribution from the constituent businesses of the Group.
CA CWA Parent Amortisation
business business company of AVIF Total
£000 £000 £000 £000 £000
Year ended 31
December 2006
Operating profit 17,184 12,506 313 (3,502) 26,501
Finance costs - - (1,206) - (1,206)
Loss on sale of (248) - - - (248)
subsidiary
company
---------- ---------- ---------- ---------- ----------
Profit before 16,936 12,506 (893) (3,502) 25,047
income taxes
========== ========== ========== ========== ==========
Year ended 31
December 2005
Operating profit 8,591 14,607 105 (2,042) 21,261
Finance costs - - (805) - (805)
---------- ---------- ---------- ---------- ----------
Profit before 8,591 14,607 (700) (2,042) 20,456
income taxes
========== ========== ========== ========== ==========
Notes
(1) The CWA component of the 2005 pre-tax result is for the 7-month
post-acquisition period, whereas the component for 2006 is for a 12-month
period.
(2) Financing costs arise in respect of a bank loan raised to part finance
the acquisition of CWA.
(3) Amortisation of Acquired Value In-Force (AVIF) represents a post
acquisition charge to profits of the write down of the acquired value of
CWA in-force business, as measured at the acquisition date. The pattern of
amortisation is broadly intended to match the pattern of surplus arising
from the run off of the underlying CWA insurance and investment contract
portfolios.
b. Commentary on overall result
Overall, the result for the year ended 31 December 2006 reflects the continuing
strong emergence of surplus in both the CA and CWA life businesses, as the
underlying in-force insurance and investment contracts run off. The CA results
for the year ended 31 December 2005 were materially adversely affected by
increases in provisions for redress and administration costs in connection with
mortgage endowment misselling claims. We do not consider it necessary to make
further increases to these provisions as at 31 December 2006 and this, together
with a £1.1m recovery from PI insurers for misselling claims administration
costs, underpins the significant improvement in the results compared with the
preceding year.
Other significant factors which have impacted the result attributable to CA for
the year ended 31 December 2006 are:
(1) The recognition of £0.4m of costs incurred in connection with the Part VII
Transfer. While, under the IFRS basis of reporting, the synergistic benefits
arising from the transfer arise principally in future periods, the results for
the current year benefit from the release of some £0.6m of deferred tax
provisions, thus reducing income tax expense for the year ended 31 December
2006;
(2) The recognition of a pre-tax book loss of £0.3m arising on the disposal of
Premium Life International Limited ("PLI"). The related benefit arises from a
reduction in the cost of maintaining regulatory capital, as the disposal has
given rise to a reduction of £2.0m in the Long Term Insurance Requirement (see
"Solvency and Regulatory Capital" section below); and
(3) A charge of £1.1m in respect of the amortisation of deferred acquisition
costs relating to insurance contracts (compared with £4.0m for the year ended
31 December 2005). As these costs are now fully amortised there will, in
future, be a greater degree of correlation between distributable surplus
arising from the run off of the life businesses and the reported IFRS profits
attributable to them.
The CWA result continues to make a significant contribution to Group earnings.
Net of related parent company debt financing costs and of amortisation of
acquired in-force value, both of which are identified in the table above, the
pre-tax contribution was £7.8m for the year ended 31 December 2006 (£11.8m for
the 7-month post-acquisition period ended 31 December 2005). While the
prior-period post-acquisition result benefited from a change in statutory
valuation assumptions, resulting in part from favourable mortality experience
which we indicated would not necessarily replicate in future periods, the 2006
result has been impacted by:
1. A reduction of £1.4m in respect of the recapture of certain reinsurance
arrangements. This recapture, which became effective from 31 December 2006,
gives rise to future offsetting surpluses as the underlying policy
contracts run off; and
2. A net reduction of £2m in respect of statutory expense assumptions which
have been revised to reflect fully the anticipated impact of changed
outsourcer administration arrangements for the in-force policy portfolio.
This is explained more fully in the following section.
(c) Management of the policy portfolio expense base
A key aspect of the ongoing profitability of the Group's life businesses is the
extent to which they are able to secure appropriate third-party administration
arrangements. These arrangements seek to avoid fixed and semi-fixed expense
issues that would otherwise arise from a diminishing income stream as the
in-force policy base runs off. Accordingly, the expense assumptions underlying
the result give recognition to a projected expense stream which is more certain
and which effectively reflects a higher proportion of expenses which are
variable with policy volume.
Following from these arrangements:
(1) For the CA business, a 15% decline in policy-based surplus, driven
principally by the reduced size of the policy portfolio, comparing 2006 with
the previous year, has been sheltered by a reduction in the expense base, which
was largely anticipated by the expense assumptions established at the end of
2005; and
(2) For the CWA business, the expense assumptions adopted at the end of 2006
reflect the anticipated impact of the replacement of CSC by Capita as the
third-party administration partner with effect from 1 April 2007, leading to a
net reduction of some £2.0m in the CWA pre-tax result. Significantly, as the
CSC contract was due to expire in 2009, while the Capita contract expires in
2022, there is now a greater degree of certainty regarding the expense base
over a longer contractual term.
The expense assumptions relating to both the CA and CWA businesses also reflect
a revised view of anticipated costs, over the life of the contracts, relating
to core systems developments, which may be necessary for business and
operational purposes, but which are not otherwise provided for in the
contracts.
EEV Result
Supplementary information prepared in accordance with EEV principles and set
out on pages 20 to 24 is presented to provide alternative information to that
presented under IFRS. EEV principles recognise profits as they are earned over
the life of insurance and investment contracts and assist in identifying the
value being generated by the life businesses. The result determined under this
method represents principally the movement in the life businesses' embedded
value, before transfers made to the Parent Company and ignoring any capital
movements. As the Group's life assurance operations are now substantially
closed to new business, the principal underlying components of the EEV result
are the expected return from the business in force (being the yield at the risk
discount rate on the related policy cash flows as they fall into surplus)
together with (1) variances of actual experience from that assumed for each
component of the policy in force cash flows and (2) the impact of resetting
assumptions for each component of the prospective cash flows.
The following is a summarised statement of the EEV pre-tax result:
Year ended 31 December
2006 2005
£000 £000
Operating profit of covered business 15,684 11,353
Other operational loss (699) (700)
Exceptional item
Profit on acquisition of subsidiary company - 30,324
---------- ----------
Operating profit before tax 14,985 40,977
Variation from longer term investment return 6,307 14,525
Economic assumption changes 9,284 (3,598)
---------- ----------
Profit before tax 30,576 51,904
========== ==========
Operating profit of covered business before tax at £15.7m is significantly
greater than the underlying return of £10.4m expected to arise from the unwind
of the risk discount rate within the embedded value. The principal factors
which have contributed to the net excess are:
(1) Favourable lapse experience within both the CA and CWA businesses amounting
to some £2.9m;
(2) £3.5m arising on the release of the Guardian default reserve; this is
explained more fully on page 11; and
(3) £1.1m recovery from PI insurers for misselling claims administration costs,
as also referred to in the commentary under "IFRS Result" above.
The net excess has also been adversely affected by operating assumption changes
of £7.7m, which relates principally to the strengthening of expense assumptions
in connection with third-party administration arrangements. These arrangements
were changed significantly during the year.
The absence of the need for additional provisions in respect of redress for
mortgage endowment misselling claims has contributed to the improvement in the
operating profit of the covered business compared with 2005.
Profit before tax of £30.6m has also benefited from the impact in both the CA
and CWA businesses of a strong performance in investment markets during the
last quarter of 2006. Besides giving rise to a favourable effect on
current-year investment returns, this has also given rise to a resetting of
assumptions regarding future investment returns within the cashflows underlying
the in-force value. This is reflected in "Economic assumption changes" in the
table above, which also include the favourable impact of a £4.3m reduction in
notional policyholder tax as a consequence of the Part VII Transfer. Together
with concomitant projected future tax savings of £5.7m in shareholder tax and a
release of a deferred tax provision of £0.6m, this gives rise to a projected
total saving in future tax of £10.7m arising as a result of the Part VII
Transfer and the net of tax result for the year has benefited by this amount
The results for the year ended 31 December 2005 reflect an exceptional credit
of £30.3m (£20.3m net of tax) relating to the acquisition of CWA. This amount
represents the difference between the total purchase price and the embedded
value of CWA on acquisition, which has now been re-stated in accordance with
EEV principles. Under the AP basis the exceptional credit was reported as £
18.3m (£13.1m net of tax) for the year ended 31 December 2005. The upward
revaluation at the acquisition date arises principally from the application of
a lower risk discount rate to the projected cashflows from the acquired
in-force business.
Shareholders' Equity and Embedded Value of Covered Business - EEV Basis
The consolidated balance sheet prepared in accordance with EEV principles may
be summarised as:
31 December
2006 2005
£000 £000
Value of in-force business 109,941 109,961
Other net assets 79,167 66,212
---------- ----------
189,108 176,173
========== ==========
Represented by:
Embedded value ("EV") of covered business 194,405 194,437
Less: amount financed by borrowings (16,800) (21,000)
---------- ----------
EV of covered business attributable to
shareholders 177,605 173,437
Net equity of other Group companies 11,503 2,736
---------- ----------
Shareholders' equity 189,108 176,173
========== ==========
The tables below set out the components of the value of in-force business by
major product line at each period end:
31 December
2006 2005
Number of policies 000 000
Endowment 75 85
Protection 86 102
Annuities 4 4
Pensions 53 55
Other 10 10
---------- ----------
Total 228 256
=========== ==========
31 December
2006 2005
Value in-force £m £m
Endowment 70.3 76.7
Protection 73.1 80.7
Annuities 2.8 3.4
Pensions 41.7 39.6
Other 0.8 4.7
---------- ----------
Total at product level 188.7 205.1
Valuation adjustments
Holding company expenses (21.7) (25.5)
Other (16.9) (28.9)
Cost of capital (3.4) (3.1)
---------- ----------
Value in-force pre-tax 146.7 147.6
Taxation (36.8) (37.6)
---------- ----------
Value in-force post-tax 109.9 110.0
========== ==========
The value in force represents the discounted value of the future surpluses
arising from the insurance and investment contracts in force at each respective
period end. The future surpluses are calculated by using realistic assumptions
for each component of the cash flow.
The amount in respect of "other valuation adjustments" has reduced
significantly over the year following a refinement of the projection processes,
whereby certain elements previously contained within this category are now
identifiable at product level and have accordingly been allocated to the
product lines shown. The 2005 amounts have not been re-stated to reflect this.
Policyholder Funds Investment Return
The CA Managed Fund, which is managed by Schroder Investment Management Limited
and which represents a significant proportion of CA policyholder funds under
management, returned 9.82% over the year ended 31 December 2006. The CWA Global
Managed Fund, which is managed by Irish Life Investment Managers Limited and
which represents a significant proportion of CWA policyholder funds under
management, returned 9.34% over the same period. Both funds outperformed the
average of 9% achieved by the ABI Life Balanced Managed Fund sector.
The absolute level of growth has had a positive effect on policyholder values,
reduced the level of mortgage endowment misselling redress and led to an
increase in the value in-force, as projected future charges, based on fund
values, have increased.
Returns to Shareholders
Returns to shareholders are underpinned by the emergence of surplus in, and
transfer of surplus from, the life business' long-term insurance fund to
shareholder funds and by the return on shareholder net assets representing
shareholder net equity. These realisations are utilised in the first instance
for the repayment and servicing of the bank loan on the basis set out in Note
5. The surplus arises from the realisation of value in-force, which effectively
unwinds at the risk discount rate used to discount the underlying cash flows:
at 31 December 2006 this rate was reset to 6.1% (31 December 2005: 5.6%). The
return on shareholder net assets is determined by the Group's investment
policy. Shareholder funds bear central corporate governance costs which cannot
be fairly attributed to the long-term insurance funds and which arise largely
in connection with the status of Chesnara as a listed company.
Dividend distributions are currently set in the context of the Board's target
for a minimum level of regulatory capital resources. This target, together with
the excess over it at 31 December 2006 is set below.
The Board's continuing primary aim is to provide a reliable and progressive
dividend flow to shareholders within the context of the emergence of surplus in
the life business. The Company's share price strengthened progressively through
the second and third quarters of 2005, stabilising at a range between 155p and
170p per share. This growth was driven in part by (i) the well publicised
consolidation of that part of the life industry which focuses on the run off of
closed life and pensions policy portfolios and by a positive reaction to
Chesnara's participation in this marketplace through the acquisition of CWA in
2005 and by (ii) the recognition that, in accordance with its current strategy,
Chesnara is essentially a yield stock, which, in the absence of the acquisition
of further closed-book propositions, holds out the prospect of a return of
capital to shareholders. After some volatility in the early months of 2006 the
shares have generally traded within a range of 170p to 185p. With total
proposed dividends in respect of the year ended 31 December 2006 at 13.1p per
share, this implies a yield of between 7.1% and 7.7%. At a market price of 170p
per share, the shares may be characterised as trading at a discount of 6% to
the embedded value of the Group as now reported on the EEV basis as at 31
December 2006. Similarly, at a market price of 185p per share, they may be
characterised as trading at a premium of just over 2% to Group embedded value.
Solvency and Regulatory Capital
Regulatory Capital Resources and Requirements
The regulatory capital of life insurance companies in the UK is calculated by
reference to FSA prudential regulations. The rules are designed to ensure that
companies have sufficient assets to meet their liabilities in specified adverse
circumstances. As such, there is a restriction on the full transfer of surplus
from the long-term business fund to shareholder funds of the life company and
on the full distribution of reserves from the life company to Chesnara.
The following summarises the capital resources and requirements of the life
company for regulatory purposes, before and after making provision for dividend
payments from the life company to Chesnara, which were approved after the
respective period ends.
Subsequent to the Part VII Transfer on 30 June 2006, the capital requirements
and, accordingly, the regulatory solvency position of the life businesses,
subsist entirely within one regulated entity, Countrywide Assured plc ("CA").
Prior to that date the capital requirements and regulatory position were
determined separately for the two regulated life companies, being CA and City
of Westminster Assurance Company Limited ("CWA"). The prior period information
presented below shows the information in a pro-forma aggregated format, for the
sake of comparison with the current period. The Directors do not consider that
it is misleading to present the prior period information, which was previously
reported on a separate-entity basis, in this way.
31 December
2006 2005
£m £m
Pre-dividend
Available capital resources ("CR") 84.4 84.5
---------- ----------
Long-term insurance capital requirement
("LTICR") 28.8 34.1
Resilience capital requirement ("RCR") 2.6 2.8
---------- ----------
Total capital resources requirement ("CRR") 31.4 36.9
---------- ----------
Target capital requirement cover 45.8 54.7
---------- ----------
Excess of CR over target requirement 38.6 29.8
---------- ----------
Ratio of available CR to CRR 269% 229%
---------- ----------
Post dividend
Available capital resources ("CR") 64.4 65.7
---------- ----------
Long-term insurance capital requirement
("LTICR") 28.8 34.1
Resilience capital requirement ("RCR") 2.6 2.8
---------- ----------
Total capital resources requirement ("CRR") 31.4 36.9
---------- ----------
Target capital requirement cover 45.8 54.7
---------- ----------
Excess of CR over target requirement 18.6 11.0
---------- ----------
Ratio of available CR to CRR 205% 178%
---------- ----------
The CA Board, as a matter of policy, continues to target CR cover for total CRR
at a minimum level of 150% of the LTICR and 100% of the RCR. Up until 30 June
2006, the CWA target capital requirement cover was expressed as a £5m excess
over the regulatory CRR, as a consequence of a long-standing agreement with the
FSA. With effect from 30 June 2006 the CRR of the transferred business is
determined on the same basis as the existing CA business, so that, overall, the
Group benefits to the extent that the total CRR is lower than if the £5m excess
had continued to be applied to the transferred business.
£5.8m of the target capital requirement cover set out above (2005: £11.7m) is
represented by shareholder retained earnings: to the extent that the target
cover is maintained, this amount is not currently distributable from the life
business.
Available capital resources at 31 December 2006 and, therefore, the overall
solvency position have benefited from the full release of the £6m reserve held
against the possible default of Guardian Assurance plc ("Guardian"), a major
reinsurer (see below).
Further, CA's solvency position has benefited from the disposal of PLI,
referred to under IFRS Result in the Operating Review above, which has reduced
the LTICR by £2.0m, while capital resources reduced by £0.3m.
It can be seen from this information that Chesnara, which relies on dividend
distributions from its life company, is currently in a favourable position to
service its loan commitments and to continue to pursue a progressive dividend
policy.
Insurance Group Directive
In accordance with the EU Insurance Group Directive, the Group calculates the
excess of the aggregate of regulatory capital employed over the aggregate
minimum solvency requirement imposed by local regulators. The following sets
out these calculations pre and post the recognition of interim and final
dividends for the financial year, but approved by the Board and paid to Group
shareholders after the respective dates:
31 December
2006 2005
£m £m
Pre-dividend
Available group capital resources 79.2 66.2
Group regulatory capital requirement (31.4) (36.9)
---------- ----------
Excess 47.8 29.3
========== ==========
Cover 252% 179%
========== ==========
Post-dividend
Available group capital resources 70.8 58.3
Group regulatory capital requirements (31.4) (36.9)
---------- ----------
Excess 39.4 21.4
========== ==========
Cover 225% 158%
========== ==========
The regulatory requirement is that available group capital resources should be
at least 100% of capital requirements.
Individual Capital Assessments
The FSA Prudential Sourcebooks require an insurance company to make its own
assessment of its capital needs to a required standard (a 99.5% probability of
being able to meet its liabilities to policyholders after one year). In the
light of scrutiny of this assessment, the FSA may impose its own additional
individual capital guidance. The Individual Capital Assessment is based on a
realistic liability assessment, rather than the statutory mathematical
reserves, and involves stress testing the resultant realistic balance sheet for
the impact of adverse events.
Following the Part VII Transfer as at 30 June 2006, an Individual Capital
Assessment for the life businesses was established on a combined basis during
the second half of 2006. As a result, it has been concluded that the effective
current- and medium-term capital requirement constraints on distributions to
Chesnara will continue to be on the basis set out under "Regulatory capital
resources and requirements" above.
Guardian Default Reserve
Following the implementation of the Insurers (Reorganisation and Winding Up)
Regulations 2004, CA maintained a reserve of £6m at 31 December 2005 relating
to possible default by Guardian, with whom it had aggregate reinsured
liabilities at that time of £221.3m. During 2006 Guardian granted a legal
charge to CA over the related investment assets, as a result of which the CA
Board determined that the reserve is no longer required.
The reserve was established determining the regulatory capital source
position and, therefore, served to restrict the amount which may be transferred
from CA's long-term business fund to shareholder funds. It was also recognised
at £3.5m in establishing the Embedded Value of the covered business in
accordance with EEV principles, which employ a market-consistent embedded value
methodology (see below). Accordingly, the release of the reserve during 2006
has increased available capital resources, as determined for regulatory
solvency purposes by £6m and has also increased the profit of the covered
business, as reported in the EEV supplementary information on page 24, by £3.5m.
Neither the establishment nor the release of the reserve have been recognised
for IFRS reporting purposes, as the likelihood of default by Guardian under the
reinsurance arrangements was considered by the CA Board to be remote.
EEV Reporting
As explained in the Notes to the Supplementary Information on pages 23 to 24,
the Group has adopted European Embedded Value ("EEV") principles as the basis
for reporting supplementary financial information in lieu of the Achieved
Profit ("AP") basis. This first-time adoption of EEV principles involves the
restatement of supplementary financial information previously reported under
the AP basis. The impact of the adoption of EEV on shareholder net equity and
profit after tax as previously reported on the AP basis is set out and
explained in the 2006 Interim Financial Statements, which are available on our
website www.chesnara.co.uk.
Consolidated Income Statement for the year ended 31 December 2006
Year ended 31 December
2006 2005
Note £000 £000
Insurance premium revenue 112,800 115,673
Insurance premium ceded to reinsurers (22,194) (26,691)
---------- ----------
Net insurance premium revenue 90,606 88,982
Fee and commission income
Insurance contracts 43,519 49,405
Investment contracts 9,085 5,971
Investment income 151,470 214,691
---------- ----------
Total revenue (net of reinsurance payable) 294,680 359,049
Other operating income 1,195 1,226
---------- ----------
Net income 295,875 360,275
---------- ----------
Policyholder claims and benefits incurred (218,541) (291,921)
Reinsurers' share of claims and benefits
incurred 32,761 61,300
---------- ----------
Net policyholder claims and benefits incurred (185,780) (230,621)
---------- ----------
Change in investment contract liabilities (58,905) (85,130)
Reinsurers' share of investment contract
liabilities 1,304 3,742
---------- ----------
Net change in investment contract liabilities (57,601) (81,388)
---------- ----------
Fees, commission and other acquisition costs (2,881) (5,699)
Administrative expenses (17,184) (18,675)
Other operating expenses
Charge for amortisation of intangible assets (3,773) (2,364)
Reinsurance recapture premium (1,374) -
Other (781) (267)
---------- ----------
Total expenses (269,374) (339,014)
---------- ----------
Operating profit 26,501 21,261
Financing costs (1,206) (805)
Loss on sale of subsidiary company 3 (248) -
---------- ----------
Profit before income taxes 25,047 20,456
Income tax expense 4 (5,791) (1,841)
---------- ----------
Profit for the year 19,256 18,615
========== ==========
Basic earnings per share 8 18.41p 19.26p
---------- ----------
Diluted earnings per share 8 18.41p 19.26p
========== ==========
Consolidated Balance Sheet at 31 December 2006
31 December
2006 2005
Note £000 £000
Assets
Intangible assets
Deferred acquisition costs 10,687 13,000
Acquired value of in-force business
Insurance contracts 22,144 24,900
Investment contracts 13,644 14,661
Property and equipment - -
Reinsurers' share of insurance contract
provisions 207,279 199,563
Amounts deposited with reinsurers 63,721 62,697
Investment properties 27,750 25,422
Financial assets
Equity securities at fair value through income 738,487 688,478
Holdings in collective investment schemes at
fair value through income 342,352 340,379
Debt securities at fair value through income 350,524 383,817
Loans and receivables including insurance
receivables 17,130 19,810
Derivative financial instruments 30,642 16,108
---------- ----------
Total financial assets 1,479,315 1,448,592
---------- ----------
Reinsurers share of accrued policyholder
claims 4,191 4,810
Income taxes 260 199
Cash and cash equivalents 301,218 282,452
---------- ----------
Total assets 2,130,209 2,076,296
---------- ----------
Liabilities
Insurance contract provisions 1,115,197 1,072,064
Financial liabilities
Investment contracts at fair value through
income 812,979 803,146
Borrowings 5 16,574 20,638
Derivative financial instruments 1,421 416
---------- ----------
Total financial liabilities 830,974 824,200
---------- ----------
Provisions 597 1,433
Deferred tax liabilities 13,946 13,327
Reinsurance payables 3,059 2,049
Payables related to direct insurance and
investment contracts 24,927 23,866
Deferred income 18,231 20,195
Income taxes 2,023 3,345
Other payables 7,000 7,550
---------- ----------
Total liabilities 2,015,954 1,968,029
---------- ----------
Net assets 114,255 108,267
========== ==========
Shareholders' equity
Share capital 6 41,501 41,501
Share premium 6 20,458 20,458
Other reserves 50 50
Retained earnings 7 52,246 46,258
---------- ----------
Total shareholders' equity 114,255 108,267
========== ==========
Consolidated Statement of Cash Flows for the year ended 31 December 2006
Year ended 31 December
2006 2005
£000 £000
Profit for the year 19,256 18,615
Adjustments for:
Depreciation - 105
Amortisation of deferred acquisition costs. 2,312 4,998
Amortisation of acquired in-force value 3,772 2,363
Tax expense 5,791 1,841
Interest receivable (26,331) (7,929)
Dividends receivable (30,266) (17,901)
Interest expense 1,206 805
Change in fair value of investment properties (2,328) (1,344)
Fair value gains on financial assets (54,154) (75,786)
Loss on sale of property and equipment - 300
Loss on sale of subsidiary company 248 -
Interest received 28,981 9,545
Dividends received 27,099 18,473
Changes in operating assets and liabilities
(excluding the effect of acquisitions)
Increase in intangible assets related to
investment and insurance contracts - (8,936)
Decrease/(increase) in financial assets 20,039 (3,537)
Increase in reinsurers share of insurance
contract provisions (7,097) (37,818)
Increase in amounts deposited with reinsurers (1,024) (4,021)
Decrease in other loans and receivables 2,932 9,706
Increase in insurance contract provisions 44,056 122,572
Increase in investment contract liabilities 9,833 52,510
(Decrease)/Increase in provisions (836) 507
Increase/(decrease) in reinsurance payables 1,010 (1,284)
Increase in payables related to direct insurance
and investment contracts 1,061 9,515
Decrease in other payables (1,650) (5,199)
---------- ----------
Cash generated from operations 43,910 88,100
Income tax paid (6,470) (4,217)
---------- ----------
Net cash generated from operating 37,440 83,883
activities
========== ==========
Cash flows from investing activities
Acquisition of subsidiary, net of cash - 124,497
acquired
Disposal of subsidiary, net of cash (295) -
disposed of
Purchases of property and equipment - (2)
---------- ----------
Net cash (utilised by)/generated from (295) 124,495
investing activities
========== ==========
Cash flows from financing activities
Proceeds from the issue of share capital - 23,533
(Repayment of)/proceeds from borrowings (4,200) 21,000
Payment of transaction costs - (2,539)
Dividends paid (13,268) (11,249)
Interest paid (911) (604)
---------- ----------
Net cash (utilised by)/generated from (18,379) 30,141
financing activities
========== ==========
Net increase in cash and cash equivalents 18,766 238,519
Cash and cash equivalents at beginning of 282,452 43,933
period
---------- ----------
Cash and cash equivalents at end of period 301,218 282,452
========== ==========
In the cash flow statement proceeds from the
sale of property
and equipment comprise:
Net book amount - 300
Loss on sale - (300)
---------- ----------
Proceeds from sale - -
========== ==========
Consolidated Statement of Changes in Equity for the year ended 31 December 2006
Year ended 31 December 2006
Capital
Share Share redemption Retained
capital premium reserve earnings Total
£000 £000 £000 £000 £000
Equity shareholders' 41,501 20,458 50 46,258 108,267
fundsat 1 January 2006
Profit for the period
representing total
recognised income and
expenses - - - 19,256 19,256
Dividends paid - - - (13,268) (13,268)
---------- --------- ---------- ---------- ----------
Equity shareholders'
funds at 31 December 41,501 20,458 50 52,246 114,255
2006
========== ========= ========== ========== ==========
Year ended 31 December 2005
Capital
Share Share redemption Retained
capital premium reserve earnings Total
£000 £000 £000 £000 £000
Equity shareholders' 40,500 - 50 38,892 79,442
funds at 1 January 2005
Profit for the period
representing total
recognised income and
expenses - - - 18,615 18,615
Dividends paid - - - (11,249) (11,249)
Issue of ordinary shares
pursuant to exercise of
option 84 1,449 - - 1,533
Issue of ordinary shares
pursuant to placing and
open offer 917 21,083 - - 22,000
Expenses incurred in
connection with issue of
ordinary shares pursuant
to placing and open offer - (2,074) - - (2,074)
------- --------- ---------- --------- ---------
Equity shareholders'
funds at 31 December 41,501 20,458 50 46,258 108,267
2005
======= ========= ========== ========= =========
1. Basis of Preparation
These financial statements have been prepared in accordance with International
Financial Reporting Standards including International Accounting Standards and
Interpretations (collectively "IFRS") issued by the International Accounting
Standards Board ("IASB") and endorsed for use by companies in the EU, and with
those parts of the UK Companies Act 1985 applicable to companies reporting
under IFRS.
Full details of IFRS policies applied, which are unchanged from those applied
for the year ended 31 December 2005 are set out in the financial statements for
the year then ended, a copy of which is available from our website
www.chesnara.co.uk.
2. Status of financial information
The financial information contained in this preliminary announcement does not
constitute the Company's consolidated statutory financial statements for the
years ended 31 December 2006 or 2005, but is derived from those financial
statements. The financial statements for the year ended 31 December 2005, have
been delivered to the Registrar of Companies. The financial statements for the
year ended 31 December 2006 will be delivered following the Company's Annual
General Meeting. The auditors have reported on those financial statements;
their reports were unqualified and did not contain statements under section 237
(2) or (3) of the Companies Act 1985.
The financial statements will be posted to shareholders on 12 April 2007,
copies of which will also be available from the Company Secretary, Chesnara
plc, Harbour House, Portway, Preston, PR2 2PR.
3. Disposal of subsidiary
On 15 January 2006 the Group disposed of its interest in Premium Life
International Limited to LCL International Life Assurance Company Limited for a
consideration receivable in cash of £1, which, net of cash balances of £295,067
in the subsidiary at that date, gave rise to a net cash outflow of £295,066.
This amount is reflected as a cash outflow from investing activitiesin the
Consolidated Statement of Cash Flows.
The contribution of the subsidiary to the net profit for the year ended 31
December 2006 is not material and a loss of £248,000 arising on the disposal
has been recognised in the Consolidated Income Statement for that period.
Following the disposal there was a reduction of £2,030,000 in the regulatory
capital resource requirements of Countrywide Assured plc and there was a
reduction in available capital resources of £248,000.
4. Income tax expense
Year ended 31 December
2006 2005
£000 £000
Current tax expense
Current year 4,212 5,021
Adjustment to prior years 626 -
Overseas tax 334 253
---------- ----------
5,172 5,274
Deferred tax expense
Origination and reversal of temporary
differences 619 (3,433)
---------- ----------
Total income tax expense/(credit) 5,791 1,841
========== ==========
Reconciliation of effective tax rate on profit Year ended 31 December
before tax
2006 2005
£000 £000
Profit before tax 25,047 20,456
---------- ----------
Income tax using the domestic corporation tax 7,514 6,137
rate of 30% (2004: 30%)
Effect of tax rates in offshore jurisdictions - 4
Permanent differences 163 -
Effect of UK taxing bases on insurance profits
Offset of franked investment income (3,463) (3,790)
Other 951 (510)
Under provided in prior years 626 -
---------- ----------
Total income tax expense 5,791 1,841
========== ==========
5. Borrowings
Group and Company 31 December
2006 2005
£000 £000
Bank loan 16,574 20,638
========== ==========
The bank loan which was drawn down on 2 June 2005 under a facility made
available in 4 May 2005 is unsecured and is repayable in five equal annual
instalments on the anniversary of the draw down date. Accordingly the current
portion as at 31 December 2006, being that payable within one year, is £
4,102,176 and the non-current portion is £12,471,943. The outstanding principal
on the loan bears interest at a rate based on the London Inter-bank Offer Rate
and is payable in arrears over a period which varies between one and six months
at the option of the borrower.
6. Share capital and share premium
Group 31 December 2006 31 December 2005
Share Share
Number of capital Number of capital
shares £000 shares £000
Share
capital 104,588,785 41,501 104,588,785 41,501
---------- ---------- ---------- ----------
There have been no changes in Group share capital and share premium during the
year ended 31 December 2006.
Under the reverse acquisition basis of accounting, at the date of acquisition
of Chesnara plc (the legal parent) the amount of issued share capital in the
consolidated balance sheet represents the amount of issued share capital of
Countrywide Assured Life Holdings Limited (the legal subsidiary) immediately
before the acquisition and the deemed cost of acquisition, is taken as £nil.
The number of shares, representing the equity structure, reflects the equity
structure of Chesnara plc as set out below.
Company
The share capital of Chesnara plc comprises:
31 December 31 December
2006 2005
Authorised £ £
201,000,000 Ordinary
shares of 5p each 10,050,000 10,050,000
========== ==========
Number of Share
Shares Capital Share Capital
Issued £ £
Ordinary shares of 5p each 104,588,785 5,229,439 5,229,439
========== ========== ==========
There have been no changes in Company share capital and share premium during
the year ended 31 December 2006.
7. Retained earnings
Year ended 31 December
2006 2005
Retained earnings attributable
to equity holders of £000 £000
the parent company comprise:
Balance at 1 January 46,258 38,892
Profit for the year 19,256 18,615
Dividends
Final approved and paid for 2004 - (6,124)
Interim approved and paid for 2005 - (5,125)
Final approved and paid for 2005 (7,986) -
Interim approved and paid for 2006 (5,282) -
---------- ----------
Balance at 31 December 52,246 46,258
========== ===========
The retained earnings balance represents the amount available for dividend
distribution to the equity shareholders of the parent company except for £
2,504,000 (31 December 2005: £12,959,000) which is not distributable and which
must be retained in the regulated life subsidiary company in accordance with
the solvency capital requirements pertaining to that subsidiary.
The interim dividend in respect of 2005, approved and paid in 2005, was paid at
the rate of 4.9p per share. The final dividend in respect of 2005, approved and
paid in 2006, was paid at the rate of 7.55p per share so that the total
dividend paid to the equity shareholders of the Parent Company in respect of
the year ended 31 December 2005 was made at the rate of 12.45p per share.
The interim dividend in respect of 2006, approved and paid in 2006, was paid at
the rate of 5.05p per share to equity shareholders of the Parent Company
registered at the close of business on 15 September 2006, the dividend record
date.
A final dividend of 8.05p per share in respect of the year ended 31 December
2006 payable on 14 May 2007 to equity shareholders of the parent company
registered at the date of business 10 April 2007, the dividend record date, was
approved by the Directors after the balance sheet date. The resulting total
dividend of £8.4m 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 2005 and 31 December 2006:
2006 2005
p p
Interim - approved and paid 5.05 4.90
Final - proposed 8.05 7.55
---------- ----------
Total 13.10 12.45
========== ==========
8. Earnings per share
Earnings per share is based on the following:
Year ended 31 December
2006 2005
Profit for the year (£000) 19,256 18,615
Weighted average number of ordinary shares 104,588,785 96,637,227
---------- ----------
Basic earnings per share 18.41p 19.26p
---------- ----------
Diluted earnings per share 18.41p 19.26p
========== ==========
The weighted average number of shares in respect of the year ended 31 December
2005 is based on
i. 84,564,168 shares in issue at the beginning of the period
ii. 1,691,284 shares issued on 10 February 2005 pursuant to exercise of a share
option
iii. 18,333,333 shares issued on 2 June 2005 pursuant to a placing and open
offer
The weighted average number of ordinary shares in respect of the year ended 31
December 2006 is based on 104,588,785 shares in issue at the beginning and end
of the period.
The diluted weighted average number of shares in respect of the year ended 31
December 2005 was 96,673,130. The dilution reflects an adjustment for the
equivalent number of shares that would have been issued for no consideration
had the exercise of the share option, granted to Numis Securities limited for
broking services, provided in connection with the admission of the company to
the Official List of the UK Listing Authority, been exercised prior to its
actual exercise date of 10 February 2005.
There were no further share options outstanding during the year ended 31
December 2005 or during the year ended 31 December 2006.
9. Additional information
Additional information relating to the Company can be found on its website
www.chesnara.co.uk.
10. Forward looking statements
This document may contain forward-looking statements with respect to certain
of the plans and current expectations relating to 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 and global economic and business
conditions, market-related risks such as fluctuations in interest 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 jurisdiction 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.
Supplementary Information - European Embedded Value Basis
Summarised consolidated income statement
Year ended 31 December
2006 2005
Note £000 £000
Operating profit of covered 3
business 15,684 11,353
Other operational result (699) (700)
---------- ----------
Operating profit 14,985 10,653
Exceptional Item
Profit on acquisition of
subsidiary company - 30,324
Variation from longer-term
investment return 6,307 14525
Effect of economic assumption
changes 9,284 (3,589)
---------- ----------
Profit before tax 30,576 51,904
Tax (4,373) (11,970)
---------- ----------
Profit for the period 26,203 39,934
========= ==========
Earnings per share
Based on profit for the period
before exceptional item, net
of attributable tax 25.05p 20.34p
---------- ----------
Based on profit for the period 25.05p 41.32p
---------- ----------
Diluted earnings per share
Based on profit for the period
before exceptional item, net
of attributable tax 25.05p 8.42p
---------- ----------
Based on profit for the period 25.05p 33.20p
---------- ----------
Supplementary Information - European Embedded Value Basis
Summarised consolidated balance sheet
31 December
2006 2005
Note £000 £000
Assets
Value of in force business 2,4 109,941 109,961
Reinsurers' share of insurance
contract provisions 183,033 174,154
Amounts deposited with reinsurers 62,794 60,979
Investment properties 27,750 25,422
Deferred tax assets 121 120
Financial assets
Equity securities at fair value
through income 738,487 688,478
Holdings in collective investment
schemes at fair value through
income 342,352 340,379
Debt securities at fair value
through income 350,524 383,817
Loans and receivables including
insurance receivables 17,310 19,810
Derivative financial instruments 30,642 16,108
---------- ----------
Total financial assets 1,479,315 1,448,592
---------- ----------
Reinsurers' share of accrued policy
claims 4,191 4,810
Income taxes 260 199
Cash and cash equivalents 301,218 282,452
---------- ----------
Total assets 2,168,623 2,106,689
---------- ----------
Liabilities
Insurance contract provisions 1,091,889 1,051,913
Financial liabilities
Investment contracts at fair value
through income 832,025 819,306
Borrowings 16,574 20,638
Derivative financial instruments 1,421 416
---------- ----------
Total financial liabilities 850,020 840,360
---------- ----------
Provisions 597 1,433
Reinsurance payables 3,059 2,049
Payables related to direct
insurance and investment contracts 24,927 23,866
Income taxes 2,023 3,345
Other payables 7,000 7,550
---------- ----------
Total liabilities 1,079,515 1,930,516
---------- ----------
Net assets 189,108 176,173
========== ==========
Shareholders' equity
Share capital 41,501 41,501
Share premium 20,458 20,458
Other reserves 50 50
Retained earnings 127,099 114,164
---------- ----------
Total shareholders' equity 2,4 189,108 176,173
========== ==========
Supplementary Information - European Embedded Value Basis
Summarised consolidated statement of changes in equity
Year ended 31 December
2006 2005
£000 £000
Shareholders' equity at 1 January 176,173 126,029
Profit for the period
representing total recognised
income and expense 26,203 39,934
Dividends paid (13,268) (11,249)
Issue of ordinary shares pursuant
to exercise of option - 1,533
Issue of ordinary shares pursuant
to placing and open offer - 22,000
Expenses incurred in connection
with issue of ordinary shares
pursuant to placing and open
offer - (2,074)
---------- ----------
Shareholders' equity at
31 December 189,108 176,173
========== ==========
Supplementary Information - European Embedded Value Basis
Notes to the Supplementary Information
1. Basis of preparation
The Group presents financial statements which are supplementary to the Group's
primary financial statements which have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). This supplementary
information has been prepared in accordance with the European Embedded Value
("EEV") principles issued in May 2004 by the European CFO Forum and
supplemented by Additional Guidance on EEV Disclosures issued by the same body
in October 2005. The principles provide a framework intended to improve
comparability and transparency in embedded value reporting across Europe.
This first time adoption of EEV principles and associated disclosures
represents a change from the Achieved Profit (AP) basis of reporting, which has
previously been adopted by the Group as the basis for presenting supplementary
financial information. The adoption of EEV principles does not affect the basis
of reporting the statutory results, the regulatory capital position or the
dividend paying capacity of Chesnara plc.
The Directors consider that the EEV methodology is a refinement of the AP basis
previously adopted by the Group and represents a more meaningful basis of
reporting the underlying value of the business and the underlying drivers of
performance.
Information relating to the restatement of supplementary financial information,
from reporting in accordance with the AP basis to reporting in accordance with
EEV principles, is set out in 2006 Interim Financial statements, which are
available on our website www.chesnara.co.uk.
The description of covered business and the methodology and assumptions used in
applying EEV principles are also set out in the Interim Financial Statements.
2. Analysis of shareholders' equity
31 December
2006 2005
£000 £000
Covered business
Required capital 44,192 54,749
Free surplus 40,268 29,727
---------- ----------
Shareholder net worth 84,460 84,476
Value of in-force business 109,941 109,961
---------- ----------
Embedded value of covered 194,401 194,437
business
Less: amount financed by (16,800) (21,000)
borrowings
---------- ----------
Embedded value of covered
business attributable to
shareholders 177,601 173,437
Net equity of other Group 11,507 2,736
companies
---------- ----------
Total shareholders' equity 189,108 176,173
========== ==========
The movement in the value of
in-force business comprises:
Value at beginning of period 109,961 61,437
Acquired in-force value arising -
on the acquisition of CWA Life
Holdings plc 53,804
Amount charged to operating
profit (20) (5,280)
---------- ----------
Value at end of period 109,941 109,961
========== ==========
On 2 June 2005, the Group drew down £21m on a bank loan facility, in order to
part fund the acquisition of CWA Life Holdings plc. This effectively
represented a purchase of part of the underlying value in force of CWA by way
of debt finance and it follows that the embedded value of the covered business
is not attributable to equity shareholders of the Group to the extent of the
outstanding balance on the loan account at each balance sheet date. The loan is
repayable in five equal annual instalments on the anniversary of the draw down
date, the funds for the repayment effectively being provided by way of the
realisation of the underlying value of in-force business of the covered
business. In accordance with this, £4.2m of the loan was repaid on 2 June 2006,
leaving principal outstanding at that date of £16.8m.
3. Analysis of profit of covered business
Year Ended 31 December
2006 2005
£000 £000
New business contribution 1,599 1,147
Return from in-force business
Expected return 10,386 9,087
Experience variances 7,459 (563)
Operating assumption changes (5,072) 542
Return on shareholder net worth 1,312 1,140
---------- ----------
Operating profit 15,684 11,353
Variation from longer-term 6,307 14,525
investment return
Effect of economic assumption 9,284 (3,598)
changes
---------- ----------
Profit before tax 31,275 22,280
Tax (4,496) (2,068)
---------- ----------
Profit after tax 26,779 20,212
========== ==========
The profit of covered business varies from amounts presented in the summarised
consolidated income statement in respect of the pre-tax result of the holding
company presented as "other operational result", any tax pertaining thereto,
which is included in "other tax", and profit on acquisition of subsidiary
company and related tax, which are exceptional items. The variation from
longer-term investment return for the year ended 31 December 2006 is stated net
of a loss of £248,000 arising on the sale of a subsidiary company.
4. Reconciliation of shareholders' equity on the IFRS basis to shareholder
equity on the EEV basis
31 December
2006 2005
£000 £000
Shareholders' equity on the
IFRS basis 114,255 108,267
Adjustments
Deferred acquisition costs
Insurance contracts - (1,114)
Investment contracts (10,074) (11,239)
Deferred income 17,239 19,145
Adjustment to provisions on
investment contracts, net of
amounts deposited with
reinsurers (19,596) (16,700)
Adjustments to provisions on
insurance contracts, net of
reinsurers' share (936) (34)
Acquired in-force value (25,933) (28,703)
Deferred tax 4,212 2,590
Reinsurer default reserve - (6,000)
---------- ----------
Group shareholder net worth 79,167 66,212
Value of inforce business 109,941 109,961
---------- ----------
Shareholders' equity on the
EEV basis 189,108 176,173
========== ==========
Group shareholder net worth
comprises:
Shareholder net worth in
covered business 84,460 84,476
Shareholder's equity in other
Group companies 11,507 2,736
Debt finance (16,800) (21,000)
---------- ----------
Total 79,167 66,212
========== ==========
The reinsurer default reserve adjustment at 31 December 2005 related to a
reserve which was established for FSA prudential reporting and which was
recognised for reporting on the EEV basis, but not for reporting on the IFRS
basis. The reserve was not recognised for reporting in accordance with IFRS as
the events to which it relates were, in the opinion of the Directors,
considered to be remote or uncertain. However, the reserve was charged to the
shareholder net worth component of the embedded value of the covered business,
as this was held to be consistent with the market-consistent valuation approach
adopted in accordance with EEV principles. The reserve was maintained against
the effect of possible default by a major reinsurer, Guardian Assurance plc,
which is a subsidiary of Aegon NV. As a result of mitigating action that was
taken during 2006 the reserve is no longer required at 31 December 2006.
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