Chesnara churns out cash but Sweden is a concern

The legion of income investors with holdings in Chesnara will be pleased to see that the insurance company has once again upped its interim dividend, to 6.1p from 5.95p the year before.

It may be unusual to highlight a dividend payment in a company's interim results, but when a stock yields more than 9% that seems a sensible place to start, a view echoed by company Graham Kettleborough, who acknowledged the importance of the company's pay-out to its shareholders.

"We are a dividend stock, a favourite of self-invested personal pension plans," he said to Sharecast. "The increase is in line with what we normally do," he added.

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Although the company's policy is for steady rather than sensational dividend increases, the yield has somehow risen to a level which is normally only seen on companies regarded as certainties to cut or cancel dividend payments; that is not the case at Chesnara, where the board is confident about future dividend flows.

"Cash generation in the first half of this year compares very favourably with last year," Kettleborough said. Net cash generation this time round totalled £12.4m, versus £6.7m in the first half of last year.

The group said it continues to make progress on the Solvency II requirements set to be introduced to the insurance industry, with the group's solvency ratio at the end of June the same as it was at the end of 2011: 198%. The solvency ratio is a measure of a company's wherewithal to meet long-term obligations (liabilities).

"Profits on both an IFRS and EEV basis were both pretty healthy compared to last year," Kettleborough said. IFRS is the standard International Financial Reporting Standards methodology, while EEV - European Embedded Value - is a standard used in the insurance industry.

IFRS profit before tax, excluding exceptional items, for the six months ended 30th June increased by 145% to £9.3m from £3.8m the year before. On an EEV basis pre-tax profit for the half-year of £20.3m shot up from £0.4m the year before.

"The UK business is chugging away, while in Sweden we have had some operational difficulties which we have made some progress in addressing," Kettleborough said.

Pressed on what had gone wrong at Movestic, its Swedish life assurance company, Kettlebrough said there were two aspects to the Swedish situation.

"We have seen a decline in new business but we are not alone in Sweden in seeing new business fall away. Swedes are cautious and though they have cash they are sitting on their hands at the moment in view of the economic climate," Kettleborough explained.

More specifically to Chesnara, the group had some teething problems in Sweden switching to a new information technology system - "an operational hiccup" - which cheesed off many customers and caused some reputational damage, but with a new boss in place in Sweden the issue is getting sorted and the company is readying for a marketing push to lure customers old and new in to the fold, Kettleborough claimed.

Total EEV for the group increased from £294.5m at the end of 2011 to £296.3m at 30th June, after allowing for the payment of the 2011 final dividend of £12.5m during the period. The company's stock market valuation is around £217m.

Market reaction the figures was favourable, with the shares rising as high as 191.75p in the first three hours of trading before ebbing slightly; the day before the results the shares had closed at 185p.

Canaccord Genuity, which rates the shares a "buy", said that Sweden had detracted from a good UK performance.

"[Movestic's] AuM [assets under management] and market share have declined (albeit Q2 [second quarter] showed an improvement on Q1), and the new business value turned negative in H1 [first half]," the broker said.

"While there was no cash contribution to Sweden in H1, sustainable IFRS break-even has been pushed back a year to end-2013, with a full year profit contribution not expected until 2015. A new CEO is in place, who is said to be having an impact, but, until there is a strong recovery in savings demand, we think the division could continue to struggle," is Canaccord's view.

Nevertheless, the broker has raised its full year embedded value (EEV) forecast for the full-year, although the IFRS and EEV profit forecasts for the full year have been trimmed, to reflect the shortfall in Sweden. The broker's dividend forecasts have been left untouched.

"We note that the cash generation in H1 of £12.4m more than covered the final dividend paid in the period of £12.1m," the broker added.

Panmure Gordon is also a buyer, saying the company showed "remarkable reasilience" in the difficult investment markets, in which first quarter gains in equity markets were largely reversed in the second quarter, while UK bond yields continued to drift lower.

"The UK business appears well prepared for the introduction of Solvency II with no increased capital requirements anticipated. It is in Sweden where we believe management faces its toughest challenge with policy attrition at a high level," Panmure Gordon predicts.

Kettleborough told Sharecast that the company had looked at a number of acquisition opportunities, particularly in western Europe, "but none were of the size to make it worthwhile."

Panmure Gordon suggests that the introduction of Solvency II, whenever that finally happens, may result in more interesting opportunities.