Chesnara Plc Acquires Direct Line Life Insurance Company Limited
Chesnara Plc ("Chesnara") is pleased to announce that it has entered into an agreement to acquire the entire issued share capital of Direct Line Life Insurance Company Limited ("Direct Line Life"), from Direct Line Insurance Group Plc ("Direct Line Group"), for a total consideration of £39.3 million, payable in cash on completion (the "Acquisition"). The Acquisition will be financed from a combination of existing cash resources and a new bank facility.
Direct Line Life is a UK-based life insurance company and wholly-owned subsidiary of Direct Line Group. It became substantially closed to new business on 5 July 2011 and has been focused since then on managing the existing portfolio in line with the run-off plan agreed at the time with the then FSA. Prior to closure to new business, Direct Line Life predominantly offered non-linked products including mortgage life cover, fixed term life cover (both with and without critical illness cover) and over 50's life cover to UK customers distributed under both its own brand and also in recent years, but before the closure to new business, on a white label basis.
Direct Line Life is being acquired at an effective 74.7 per cent. of Chesnara Directors' estimate of the residual embedded value of £52.6 million as at 30 June 2013, adjusted to reflect a capital extraction of £23.0 million by the seller immediately at completion.
The effect of this capital extraction is that Chesnara will acquire the business with a lower solvency margin than its long term target of 150%, and will therefore immediately on completion inject capital, estimated at £10.4 million. This increased funding requirement is temporary and is expected to be released by way of a Part VII transfer of Direct Line Life into Chesnara's existing UK life book, Countrywide Assured Plc, by the end of 2014.
As part of the Acquisition, Chesnara has agreed a new loan facility with The Royal Bank of Scotland plc of £73.8 million. This is made up of two facilities. The first facility is divided into two tranches. Tranche A of the first facility will be used to refinance some £30 million of Chesnara's existing outstanding bank debt and Tranche B, which is in the amount of £31 million, will be used to finance part of the consideration for the Acquisition. The second facility will be used to provide short term funding of £12.8 million in relation to the capital extraction described above (the second facility will be repaid at the latest by 30 June 2015).
Chesnara has a clear objective to make strategic acquisitions in the life assurance sector and in particular in its core UK life operations. Chesnara is experienced in managing closed UK life books and Direct Line Life will be an attractive complementary addition. The Acquisition is expected to have a positive impact on the embedded value and cash generation ability of Chesnara in the medium term once integrated.
In the financial year ended 31 December 2012, Direct Line Life had an operating profit before tax of £9.4 million, reported a profit for the period after tax of £6.9 million and had gross assets of £177.6 million. Direct Line Life had approximately 150,000 policies in force as at 31 July 2013. The results of Direct Line Life will be presented using Chesnara's accounting policies in the circular to be sent to shareholders (as noted below).
Following completion, Chesnara intends to transfer the administration role to HCL (one of Chesnara's current outsourcing partners). Management intends to focus on realising potential synergies when they might be available, such as combining the underlying life companies of the enlarged group by means of a transfer pursuant to the provisions of Part VII of FSMA 2000.
The Acquisition is subject to approval from the Prudential Regulation Authority ("PRA"). The Acquisition is a Class 1 transaction for Chesnara under the Listing Rules and is conditional on the approval of Chesnara shareholders at a general meeting, notice of which will be included in a circular to be sent to shareholders shortly.
Commenting on the Acquisition, Graham Kettleborough, Chief Executive Officer of Chesnara Plc said:
"We are very pleased to have reached agreement to acquire a complementary UK business which we can integrate with our existing UK life book. Adding this portfolio to our existing book of business brings extra security, from increased size and concentrated governance, to both existing and the newly acquired policyholders. It is of benefit to our shareholders as it fits with our strategy, is accretive to our embedded value and will also help support our dividend paying capacity in the medium term."