Monday 14 May 2012

Portfolio Review: Chesnara (LSE:CSN)

As part of my continuing effort to stay up-to-date with my portfolio, let's review Chesnara. I like the name 'Chesnara' - it sounds a bit like perfume (that might smell of chestnuts?). This anodyne name actually hides what is unkindly called a zombie fund.

I own it because of the yield, which is rapidly approaching 10%!

So, what is the story behind this huge yield?

Chesnara plc was formed in only 2004 and was built up by buying existing closed life assurance companies, including
  • Countrywide Assured plc
  • City of Westminster Assurance Company Ltd
  • Moderna Forsakringar Liv AB  (an open Swedish life assurance company specialising in savings and pension products) - now called Movestic Livforsakring AB
  • Save & Prosper Insurance Limited

Chesnara has made further investments in Sweden including the establishment of a fund management subsidiary of Movestic and the acquisition of the operations, systems, personnel and renewal rights of Aspis Liv, a Swedish life assurance company which specialised in risk and health products.

Chesnara continues to seek to acquire further life assurance and associated assets in the UK and Western Europe.

Chesnara's strategy is worth quoting for its clarity: "Chesnara's strategy centres on the delivery of a reliable dividend stream to its shareholders which will be funded from the underlying emergence of surplus from its life assurance subsidiaries. Chesnara will pursue a policy of opportunistically acquiring further life assurance assets in the UK and Western Europe. Key criteria for assessing such opportunities are that they:
  • do not dilute value
  • offer an acceptable level of risk; and
  • improve or have the potential to improve the quality and longevity of earnings.

In the absence of any suitable acquisition opportunities, the principal focus is to maximise the earnings and distribution potential of the subsidiaries without compromising regulatory capital requirements or introducing inappropriate risk."

The basic business model is therefore based on making money by buying up blocks of closed life funds and squeezing cost and capital savings out of them. The success of this depends on:
  • how long people with policies survive
  • whether any new policies issued are correctly priced
  • how successful they are at managing the portfolio of financial assets. 

The latest financial statement was published on 24th April 2012. It starts with a pretty comprehensive (and sobering) analysis of the risks that the business faces but then notes: "There were no significant changes in the nature and incidence of risks and uncertainties arising during the year ended 31 December 2011".

The Annual Accounts for 2011 are the first set of results since the transfer of the Save and Prosper business acquired in December 2010 and showed adjusted pre-tax profit for the year was up to £22.4m from £18.3m in 2010, excluding £15.9m of profit arising from the acquisition. However, the company’s valuation was down. Chesnara’s European Embedded Value (EEV), the standard calculation used to value insurance companies, fell to £294.5m in 2011 from £354.6m in 2010. The valuation makes certain assumptions about life expectancy, persistency (i.e. how long the policy is kept) and investment conditions and was mainly affected by investment conditions in 2011. As with most companies in the life insurance sector, business has been affected by falling equity markets and falling yields on Government securities.

Shares in Chesnara have slumped from a 12-month high of 264p in April 2011 and the company warned in November 2011 that the embedded value of its assets had been hit by 'risk aversion', but said this would not affect income.

So the share price has moved around a lot since I bought (and added to) CSN, meaning that I am now showing around a 25% loss on the purchase price. Not ideal, obviously, but the continued high yield is some recompense for this decline. On the current share price CSN seems to be a 'steal' (as some fund managers seem to have decided) and hopefully the price will recover when financial stability in Europe returns.

[Purchase price: 173p and 240p]

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

  1. Interesting investment. That is one juicy dividend yield....