The enduring attraction of shares in life assurer Chesnara (CSN) is their bumper dividend yield which is supported by a business model that throws off cash. What's more, the dividend has been steadily increased despite the tough trading climate and the 3 per cent five-year compound annual growth rate looks sustainable. So, given the low yields on offer from most financial instruments, Chesnara is a must for any serious income seeker.
- Very attractive yield
- Strong solvency position
- Low cost base
- Shares trade below embedded value
- Strong competition for closed books
- Swedish operation taking time to turn round
The group's core operation is based on managing the run down of life-insurance funds that are closed for new business. Its closed-book subsidaries boast strong solvency ratios and generate a lot of cash as requirements to hold capital diminish over their remaining lives. Indeed, last year net cash generation rose from £31.4m to £41m, which was enough to cover the £19.5m cost of the dividend payout and put aside £21.5m of surplus cash for a rainy day.
Chesnara used to be the life assurance arm of Countrywide, the estate agency chain, before it was demerged in 2004. Since then it has bought the City of Westminster Assurance business in 2006 and the closed life book of Save & Prosper at the end of 2010. As these are integrated, the group achieves a greater economy of scale, and to keep costs down even more it has outsourced its administrative and investment management operations to Capita. In fact, the Preston-based UK side of the operation employs just 20 full-time staff. Further acquisitions are likely, and are needed to sustain the business model in the long term, although the competition is pretty fierce.
| CHESNARA (CSN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 235p | MARKET VALUE: | £270m | |
| TOUCH: | 234-237p | 12-MONTH HIGH: | 251p | LOW: 155p |
| DIVIDEND YIELD: | 7.8% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 190p | EMBEDDED VALUE: | 271p | |
| Year to 31 Dec | Net premiums (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 79.3 | 34.2 | 29.1 | 16.4 |
| 2011 | 87.0 | 22.4 | 22.4 | 16.9 |
| 2012 | 80.2 | 19.7 | 24.3 | 17.4 |
| 2013* | na | 21.0 | 14.3 | 17.9 |
| 2014* | na | 23.0 | 15.9 | 18.4 |
| % change | - | +10 | +11 | +3 |
Normarl market size:1,000 Matched bargain trading Beta:0.55 *Canaccord Genuity estimates - EPS figures not directly comparable | ||||
However, in 2009 the group departed from the core closed-book operation with the purchase of Movestic, a predominantly unit-linked Swedish life and pensions business that still writes new business. This was supplemented in 2010 with the purchase of a small Swedish life and health insurer Aspis Forsakringar. However, problems arose partly as a result of the tough market but also as a result of poor internal systems and administration, which meant that the operation lost the support of local independent financial advisers (IFAs) that sold its products. But profits are now on the rise, albeit from a modest £400,000 in 2011 to £1.4m last year.
Trading in the UK has been strong, however, assisted by solid gains in equity markets and a slowdown in the decline in bond yields. This was enough to transform the previous year's so-called 'economic' loss of £49.4m into a profit of £21.5m, which lifted embedded value per share up from 256p to 271p. And while persistency rates rose last year from 6.5 per cent to 7.4 per cent - that's the percentage of policies that are closed out before maturity - this takes the rate back to nearer the long-term average and does not suggest there is a sustained worsening trend. This is important because policies closing early affect premium income.
