REG - Chesnara PLC - Final Results
31/03/2022 07:00
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RNS Number : 6786G Chesnara PLC 31 March 2022
CHESNARA plc
("Chesnara" or "the Company")
31 March 2022
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc
STRONG CASH GENERATION, ROBUST SOLVENCY AND GROWTH
Chesnara plc today reports its full year 2021 results. Key highlights are:
· Strong commercial cash generation of £53.0m
· Robust solvency of 152%
· Growth in EcV of £57.8m (before impact of FX and dividend), an
increase of 9%
· Proposed 3% increase to the full year dividend
· IFRS pre-tax profit of £28.8m
Commenting on the results, Steve Murray, Group CEO said:
"It has been a year of good delivery across Chesnara in 2021. We've seen
material cash generation, allowing us to increase our dividend by a further 3%
- the 17th successive year of progressive growth. The business has grown,
including through the profitable writing of new business; and we announced two
acquisitions, Sanlam Life and Pensions and Robein Leven, which we expect to
complete in the first half of 2022. Looking forward, we have clear line of
sight to multiple sources of cash generation and have a variety of growth
value levers at our disposal. We remain optimistic about our ability to
participate in future M&A, particularly following our inaugural £200m
Tier 2 debt raise."
A FY results presentation is being held at 9:30am on 31 March 2022 -
participants can register here
(https://stream.brrmedia.co.uk/broadcast/623207321c349d634ccb0cd4) .
Further details on the financial results are as follows:
2021 FINANCIAL HIGHLIGHTS
GROUP CASH GENERATION
· Commercial cash((1)) generation of £53.0m in 2021 (2020:
£27.7m) represents 156% dividend coverage.
· 2021 cash generation includes c£23m as a direct result of
management actions.
· The results during the year, combined with balance sheet
strength and the financial outlook, support a further year of dividend growth.
The Board is recommending a 2021 final dividend of 14.7p per share (2021
total dividend of 22.6p), which is a 3% increase compared to 2020 and extends
the period of uninterrupted dividend growth to 17 years.
· Enhanced detail in our Report & Accounts and Investor
Presentation shows a clear line of sight of future cash emergence in the form
of: real world returns, solvency capital requirement run off and management
actions, which is more than sufficient to fund the continuation of the
dividend model and Tier 2 coupon payments.
FINANCIAL STABILITY
· A closing Solvency II ratio of 152% (31 December 2020: 156%)
remains comfortably within our normal operating range of between 140-160%.
The ratio does not benefit from any transitional adjustments. Conversely the
ratio is impacted by a high closing symmetric adjustment((2)) which is
expected to reverse over time. Looking through this temporary impact, the
Solvency II ratio would be 160%.
· Since the year end, we have raised £200m of Tier 2 debt.
Post this debt raise and including the estimated impact of completing the
acquisitions announced in the year, we estimate a Solvency II ratio of 182%.
This is not expected to be a new long term sustained level, but it does
create solvency capacity to undertake further acquisitions.
· Estimated Fitch leverage ratio((3)) of 6.4% as at 31 December
2021 is estimated to have increased to c30.4% as a result of the Tier 2 debt
and acquisitions.
DELIVERING GROWTH
· Economic value earnings before FX of £57.8m (2020: £(37.6)m)
more than covers the annual dividend.
· Economic value of £624m has marginally reduced over the year
due to foreign exchange losses which reversed similar sized gains in 2020.
Including the expected gains on completion of the acquisitions announced in
the year, the results show modest post dividend Economic Value growth.
· Two notable acquisitions were announced during the year: one in
the UK and one in the Netherlands. Post completion of these deals, pro forma
results deliver growth in both Funds Under Management (41% increase((4)) to
£12.3bn) and policies in force (8% increase to 967,000) compared to the end
of 2020. Increased scale will enhance operational efficiency and increase
the longevity of the business model.
· Multiple sources of growth create a long-term commercial value
which is significantly in excess of the reported Economic Value.
· IFRS net assets remained stable, closing at £0.5bn (2020:
£0.5bn)
IFRS PRE-TAX PROFITS
· IFRS pre-tax profit increased to £28.8m in 2021 (2020:
£24.6m).
DIVIDEND DETAILS
· The recommended final dividend of 14.7p per share is expected
to be paid on 24 May 2022. The ordinary shares will be quoted ex-dividend on
the London Stock Exchange as of 7 April 2022. The record date for
eligibility for payment will be 8 May 2022.
STRATEGIC OUTLOOK
Upon completion of the acquisitions announced in 2021, the Chesnara group will
have grown significantly in terms of both Funds under Management and policies
in force, compared to the position at the start of the year.
Sources of future cash and growth also remain strong. In particular, the
outlook for acquisitions is positive. We expect the market to be active and
we have taken actions to enhance our opportunity to participate in that
market.
Since the year end, we have completed our inaugural Tier 2 debt raise, raising
£200m with a 10.5-year term at a competitive coupon of 4.75%. The
strengthening of the team from an M&A perspective, alongside the increased
funding capacity creates an increased level of confidence that we can enhance
the growth potential from our existing businesses with additional growth
through acquisitions.
Notes:
Note 1 Commercial cash generation removes components of the cash
generation in the group's divisions relating to technical complexities,
modelling issues or exceptional corporate activity (e.g. acquisitions). The
result excluding such items is deemed to better reflect the underlying
commercial outcome (commercial cash generation).
Note 2 The symmetric adjustment is a factor that requires standard
formula firms to hold proportionally extra capital following periods of equity
growth and proportionally less capital in falling equity markets.
Note 3 The leverage ratio is a financial measure that demonstrates the
degree to which the company is funded by debt financing versus equity capital,
presented as a ratio. It is defined as debt divided by debt plus equity, as
measured under IFRS.
Note 4 Increases quoted as compared to the 31 December 2020 year end
position.
The Board approved this statement on 30 March 2022.
Enquiries
Steve Murray, Chief Executive, Chesnara plc - 01772 972079
David Rimmington, Group Finance Director, Chesnara plc - 01772 972079
Roddy Watt, FWD Consulting - 0207 623 2368 / 07714 770493
Notes to Editors
Chesnara is a life and pensions company listed on the London Stock Exchange.
It administers approximately one million policies with the assets under
management spread broadly equally across businesses in the UK, the Netherlands
and Sweden. Chesnara operates as Countrywide Assured in the UK, as The Waard
Group and Scildon in the Netherlands, and as Movestic in Sweden.
Following a three pillar strategy, Chesnara's primary responsibility is the
efficient administration of its customers' life and savings policies, ensuring
good customer outcomes and providing a secure and compliant environment to
protect policyholder interests. It also adds value by writing profitable new
business in Sweden and the Netherlands and by undertaking value-adding
acquisitions of either companies or portfolios.
Consistent delivery of the Company strategy has enabled Chesnara to increase
its dividend for 16 years in succession.
Further details are available on the Company's website (www.chesnara.co.uk
(http://www.chesnara.co.uk) ).
CAUTIONARY STATEMENT
This document may contain forward-looking statements with respect to certain
of the plans and current expectations relating to the 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, Swedish domestic,
Dutch domestic and global economic and business conditions, market-related
risks such as fluctuations in interest rates, currency exchange 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 jurisdictions 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.
2021 HIGHLIGHTS
GROUP CASH GENERATION £20.3M 2020 £27.7M
COMMERCIAL CASH GENERATION £53.0M 2020 £27.7M
Group cash generation of £20.3m (2020: £27.7m) has been suppressed by a
number of technical items including a temporary increase in capital
requirements as a direct consequence of the symmetric adjustment (which
requires more capital following periods of good equity growth). Looking
through such technical matters we report a strong Commercial cash generation
of £53.0m (2020: £27.7m)
GROUP SOLVENCY 152% 2020 156%
We are well capitalised at both group and subsidiary level under Solvency II.
Our group solvency has remained robust and stable through a wide range of
market conditions over the last few years.
FUNDS UNDER MANAGEMENT £9.1BN 2020 £8.5BN
2021 saw strong equity market growth, which supported an increase in our Funds
Under Management.
ECONOMIC VALUE £624.2M 2020 £636.8M
EcV earnings of £57.8m were offset by the impact of dividend distributions of
£33.3m (2020: £32.3m) and a foreign exchange loss of £37.1m (2020: gain of
£36.7m).
ECONOMIC VALUE EARNINGS £57.8M 2020 £(37.6)M
The year-on-year swing is predominantly due to changing economic conditions.
COMMERCIAL NEW BUSINESS PROFIT £9.6M 2020 £10.5M
Profits of £9.6m provide c30% coverage of the dividend payments in the year,
as a result of new business written during 2021. The results remain somewhat
impacted by COVID-19 conditions and we retain an expectation of post COVID-19
recovery. Despite market challenges new business has created £21.9m of
incremental future cash flow expectations (2020: £21.9m).
IFRS PRE-TAX PROFIT £28.8M 2020 £24.6M
This includes profits arising from operating activities of £40.7m (2020:
£30.6m). The 2020 results included an intangible asset impairment charge of
£27.6m.
IFRS TOTAL COMPREHENSIVE INCOME £3.8M 2020 £43.3M
The 2021 result includes a foreign exchange loss of £23.9m (2020: gain of
£22.6m).
FULL YEAR DIVIDEND INCREASED FOR THE 17TH CONSECUTIVE YEAR
Total dividends for the year increased by 3% to 22.60p per share (7.88p
interim and 14.72p proposed final). This compares with 21.94p in 2020 (7.65p
interim and 14.29p final).
EQUITY MARKET GROWTH DELIVERS ECONOMIC RETURNS, OFFSETTING THE NEGATIVE IMPACT
OF STERLING STRENGTHENING
The 'post-pandemic' market recovery continued with further growth across most
indices throughout 2021, resulting in a solid year of investment returns.
Equity market growth, alongside rising interest rates and bond yields, have
supported strong economic returns in each of the operating divisions.
Sterling appreciation against the euro and Swedish krona over the year has led
to material foreign exchange translation losses, reversing similar scale gains
in 2020. The results fully reflect the impact of inflationary pressure up to
the end of 2021. Since the year end, we have seen downward pressure on
equities, yield increases and further increases to inflation. In line with our
sensitivities, we would expect a continued stable solvency position, albeit
the Economic Value will have reduced.
THE GROUP CONTINUES TO EXPAND THROUGH M&A
During 2021 we announced two further acquisitions. The acquisition of Sanlam
Life & Pensions UK, which is expected to complete in the first half of
2022 and will add c£3bn of FuM. Growth in the Netherlands also continued
within the Waard Group, with the completion of the Brand New Day portfolio
acquisition. The announcement of the acquisition of Robein Leven NV, also due
to complete in 2022, will bring Waard's total policy count to c133,000,
representing a 142% increase compared to the policies in force on entry to the
Dutch market. We remain optimistic about the outlook for future deals.
OPERATIONAL GROWTH DELIVERED IN POLICIES AND FUM
Despite two of our divisions being closed to new business, at a consolidated
level the group has delivered operational growth with increases in both
policies and Funds Under Management (FuM). Pro-forma the impact of the
announced acquisitions, three-year policy growth will be 9%, while FuM have
increased 59% over the same period, a rise of £4.5bn.
These financial highlights include the use of Alternative Performance Measures
(APMs) that are not required to be reported under International Financial
Reporting Standards.
1 - Economic profit is a measure of pre-tax profit earned from investment
market conditions in the period and any economic assumption changes in the
future.
2 - Operating profit is a measure of the pre-tax profit earned from a
company's ongoing core business operations, excluding any profit earned from
investment market conditions in the period and any economic assumption changes
in the future.
3 - Funds Under Management (FuM) represents the sum of all financial assets on
the IFRS balance sheet.
4 - Economic Value (EcV) is a financial metric derived from Solvency II. It
provides a market consistent assessment of the value of existing insurance
businesses, plus adjusted net asset value of the non-insurance business within
the group.
5 - Economic Value earnings are a measure of the value generated in the
period, recognising the longer-term nature of the group's insurance and
investment contracts.
6 - Commercial new business represents the best estimate of cash flows
expected to emerge from new business written in the period. It is deemed to be
a more commercially relevant and market consistent measurement of the value
generated through the writing of new business, in comparison to the
restrictions imposed under the Solvency II regime.
7 - Group cash generation represents the surplus cash that the group has
generated in the period. Cash generation is largely a function of the
movement in the solvency position, used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring other
constraints are managed.
8 - Divisional cash generation represents the cash generated by the three
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
9 - Commercial cash generation is used as a measure of assessing how much
dividend potential has been generated, subject to ensuring other constraints
are managed. It excludes the impact of technical adjustments, modelling
changes and corporate acquisition activity; representing the group's view of
the Commercial cash generated by the business.
MEASURING OUR PERFORMANCE
Throughout our Report & Accounts we use measures to assess and report how
well we have performed. The range of measures is broad and includes many
measures that are not based on IFRS. The financial analysis of a life and
pensions business also needs to recognise the importance of Solvency II
figures, the basis of regulatory solvency. In addition, the measures aim to
assess performance from the perspective of all stakeholders.
FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS
The IFRS results form the core of the Report & Accounts and hence retain
prominence as a key financial performance metric. However, this Preliminary
Announcement also adopts several Alternative Performance Measures (APMs).
These measures compliment the IFRS metrics and present additional insight into
the financial position and performance of the business, from the perspective
of all stakeholders.
The non-IFRS APMs have at their heart the Solvency II valuation known as Own
Funds and, as such, all major financial APMs are derived from a defined
rules-based regime. The list below shows the core financial metrics that sit
alongside the IFRS results, together with their associated KPIs and interested
parties.
FINANCIAL STATEMENT KPIS:
· IFRS net assets
· IFRS profits
ADDITIONAL METRICS:
· Solvency
o Own Funds
o Solvency Capital Requirement (SCR)
o SCR plus management buffer
o Solvency position (absolute value)
o Solvency position ratio
· Cash generation
o Group cash generation
o Divisional cash generation
· Economic Value
o Balance sheet
o Earnings
· New business
o EcV
o Commercial
SOLVENCY
Solvency is a fundamental financial measure which is of paramount importance
to investors and policyholders. It represents the relationship between the
value of the business as measured on a Solvency II basis and the capital the
business is required to hold - the Solvency Capital Requirement (SCR).
Solvency can be reported as an absolute surplus value or as a ratio.
Solvency gives policyholders comfort regarding the security of their
provider. This is also the case for investors together with giving them a
sense of the level of potential surplus available to invest in the business or
distribute as dividends (subject to other considerations and approvals).
ECONOMIC VALUE
Economic Value (EcV) is deemed to be a more meaningful measure of the
long-term value of the group than Own Funds. In essence, the IFRS balance
sheet is not generally deemed to represent a fair commercial value of our
business as it does not fully recognise the impact of future profit
expectations of long-term policies.
EcV is derived from Solvency II Own Funds and recognises the impact of future
profit expectations from existing business.
An element of the EcV earnings each period is the Economic Value of new
business. By factoring in real world investment returns and removing the
impact of risk margins, the group determines the value of new business on a
commercial basis.
CASH GENERATION
Cash generation is used by the group as a measure of assessing how much
dividend potential has been generated, subject to ensuring other constraints
are managed.
Group cash generation is calculated as the movement in the group's surplus Own
Funds above the group's internally required capital, as determined by applying
the group's capital management policy, which has Solvency II rules at its
heart.
Divisional cash generation represents the movement in surplus own funds above
local capital management policies within the three operating divisions of
Chesnara. Divisional cash generation is used as a measure of how much
dividend potential a division has generated, subject to ensuring other
constraints are managed.
Commercial cash generation excludes the impact of technical adjustments,
modelling changes and corporate acquisition activity; representing the group's
view of cash generated by the business.
OPERATIONAL AND OTHER PERFORMANCE MEASURES
In addition to the financial performance measures, this Report & Accounts
includes measures that consider and assess the performance of all our key
stakeholder groups. The table below summarises the performance measures
adopted throughout the Report & Accounts.
MEASURE WHAT IS IT AND WHY IS IT IMPORTANT?
Customer service levels How well we service our customers is of paramount importance and so through
various means we aim to assess customer service levels. The business reviews
within the Report & Accounts refer to a number of indicators of customer
service levels.
Broker satisfaction Broker satisfaction is important because they sell our new policies, provide
ongoing service to their customers and influence book persistency. We include
several measures within the Report & Accounts, including direct broker
assessment ratings for Movestic and general assessment of how our brands fare
in industry performance awards in the Netherlands.
Policy investment performance This is a measure of how the assets are performing that underpin policyholder
returns. It is important as it indicates to the customer the returns that
their contributions are generating, and options available to invest in funds
that focus on environmental, social and governance factors.
Industry performance assessments This is a comparative measure of how well our investments are performing
against the rest of the industry, which provides valuable context to our
performance.
Funds under management This shows the value of the investments that the business manages. This is
important because scale influences operational sustainability in run-off books
and operational efficiency in growing books. Funds under management are also a
strong indicator of fee income.
Policy count Policy count is the number of policies that the group manages on behalf of
customers. This is important to show the scale of the business, particularly
to provide context to the rate at which the closed book business is maturing.
In our open businesses, the policy count shows the net impact of new business
versus policy attrition.
Total shareholder returns This includes dividend growth and yield and shows the return that an investor
is generating on the shares that they hold. It is highly important as it
shows the success of the business in translating its operations into a return
for shareholders.
New business profitability This shows our ability to write profitable new business which increases the
value of the group. This is an important indicator given one of our core
objectives is to "enhance value through profitable new business".
New business market share This shows our success at writing new business relative to the rest of the
market and is important context for considering our success at writing new
business against our target market shares.
Gearing ratio The gearing is a ratio of debt to IFRS net assets and shows the extent to
which the business is funded by external debt versus internal resources
(defined as debt divided by debt plus equity). The appropriate use of debt is
an efficient source of funding.
Knowledge, skills and experience of the Board of Directors This is a key measure given our view that the quality, balance and
effectiveness of the board of directors has a direct bearing on delivering
positive outcomes to all stakeholders. This includes holding the management
teams accountable for the delivery of set objectives and the proper assessment
of known and emerging risks and opportunities, e.g., those arising from
climate change.
* For the purposes of this key performance indicator assessment business
partners refers to major suppliers and outsource partners.
CHAIR'S STATEMENT
Despite the general level of uncertainty and challenges that have prevailed
over much of 2021, we have achieved a huge amount during the year. This,
coupled with the successful debt raise at the start of 2022, leaves me
confident about the continued success of the Chesnara group.
LUKE SAVAGE, CHAIR
CASH EMERGENCE, DIVIDEND AND FINANCIAL STABILITY
Chesnara has a strong track record over its history of delivering cash
generation across a variety of market conditions. 2021 has been no different
and this delivery has supported 17 years of continued dividend growth for our
shareholders.
Financial stability is at the heart of the Chesnara business and its financial
model. First and foremost, it is fundamental to providing financial security
to our customers. Strong and stable solvency is also critical to the
investment case for both equity and debt investors. In light of this, I am
pleased to report the continuation of our stable solvency track record.
The closing Solvency II ratio of 152% (which does not adopt any of the
temporary benefits available from Solvency II transitional arrangements) is
well within our target operating range. The ratio is underpinned by a well-
diversified business model, a focus on responsible risk-based management and
resilient and reliable cash flows from businesses. These factors have again
enabled our divisions to propose dividends to the group sufficient to support
a continuation of our attractive shareholder dividend.
PEOPLE
Operating conditions remained difficult in 2021 with continued COVID-19
related restrictions. The fact that we have continued to operate so
effectively is testament to the professionalism, flexibility and diligence of
staff across all of our territories. I would like to take this opportunity
to again thank every member of our team for their remarkable level of
resilience. We intend to continue our hybrid working model in 2022 and this
will provide staff with the undoubted benefits of face-to-face team
interaction and will also provide an increased level of flexibility which will
help with work/life balance.
During the year, John Deane announced his retirement as CEO. During John's
time at Chesnara, we continued the uninterrupted dividend growth track record
and the post dividend Economic Value1 increased by 50%. Perhaps just as
importantly, John navigated the group through a challenging period of
regulatory change and review and of course the huge challenges brought by the
COVID-19 pandemic. John leaves the group with solid foundations for Steve
Murray, our new CEO, to lead Chesnara through the next stage of its
development. Steve's background and track record in delivering successful
M&A activity gives me confidence that there is a promising future ahead
for Chesnara.
We have also had changes in our non-executive team with Veronica Oak retiring
in January 2022. Veronica, who was also Chair of the Remuneration Committee,
served nine years as a director of the group and has been a fundamental part
of the Chesnara success story over that period.
My fellow directors and I sincerely thank John and Veronica for their
dedication and contribution to the group. We wish them both a long,
enjoyable and happy retirement.
Replacing Veronica, we have appointed two new independent non-executive
directors, Carol Hagh and Karin Bergstein, bringing a wealth of experience to
the group. We are delighted to have attracted two highly talented
individuals with such diverse expertise and experience. Their insight and
skills, particularly from an international perspective, will be of significant
benefit to the group as we continue to execute our ambitious strategy and
deliver value to our policyholders and shareholders.
PURPOSE
At Chesnara, we help protect customers and their dependents through the
provision of life, health, and disability cover or by providing savings and
pensions to meet future financial needs. These are very often customers that
have come to us through acquisition, and we are committed to ensuring they are
positively supported by us.
We have always managed our business in a responsible way and have a strong
sense of acting in a fair manner, giving full regard to the relative interests
of all stakeholders.
Our equity investors are a key stakeholder, and I am pleased that we have been
able propose a 3% increase in total dividend.
We have always been fully respectful of Environmental, Social and Governance
('ESG') matters. In particular, we have positioned governance as being a
core foundation to the business model and have a well-established governance
framework.
Over recent years we have increased our focus on environmental matters. We
have reduced our operational carbon footprint to net neutral and continue to
identify areas to reduce this further. All residual direct carbon usage is
fully offset. We have started the journey regarding transitioning assets to
support a net zero outcome. In particular, in Sweden, which has the largest
proportion of our assets, we have commenced a shift to a more sustainable
investment profile. We are however hugely aware of the need to do more and
it is increasingly recognised that the financial services industry has an
incredibly important role to play in the fight against climate change. At
Chesnara, not only do we commit to increasing the formality and visibility of
ESG matters. We aim to ensure we deliver the necessary real-world change in
the way we operate and the assets we manage.
OUTLOOK
Like many others around the world, we have watched the unfolding events in
Ukraine with shock and horror. We hope the conflict can be ended quickly but
recognise that however quickly the immediate situation is resolved it will
take years for those impacted to rebuild their lives. To help those impacted
by the troubles, the group has made donations totalling £50,000 predominantly
to the Disaster Emergency Committee's Ukraine Appeal.
We have no shareholder assets invested in Russia and have confirmed that our
major partners and suppliers also have no material exposure to Russia. None of
our customers are subject to sanctions imposed on the back of the invasion of
Ukraine.
For as long as the conflict and associated sanctions persist, we expect
markets to be more volatile. Our 2021 results yet again demonstrate the
continued ability of the business to generate cash across a variety of market
conditions to fund shareholder dividends and interest payments. The line of
sight for future cash generation is strong.
Upon completion of the acquisitions announced in 2021, the Chesnara group will
have grown significantly in terms of both Funds under Management and policies
in force compared to the position at the start of the year.
Sources of future growth also remain strong. In particular, the outlook for
acquisitions is positive. We expect the market to be active and we have
taken actions to enhance our opportunity to participate in that market. Our
new CEO, Steve Murray has strong M&A credentials and the appointment of
Sam Perowne into a new Head of Strategic Development role brings further
experience, with his previous role being Head of Corporate Strategy and
M&A at Phoenix.
Since the year end, we have completed our inaugural Tier 2 debt raise, raising
£200m with a 10.5-year term at a competitive coupon of 4.75%. The
strengthening of the team from an M&A perspective, alongside the increased
funding capacity creates an increased level of confidence that we can enhance
the growth potential from our existing businesses with additional growth
through acquisitions.
Luke Savage,
Chair
30 March 2022
CHIEF EXECUTIVE OFFICER'S REPORT
It's been another good year of performance at Chesnara with strong Commercial
cash generation supported by strong and stable solvency. Looking forward, we
have clear line of sight to future sources of cash generation and remain
positive about the outlook for acquisitions.
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
I am delighted to introduce my first CEO report since joining last year. I
wanted to start with what we focus on strategically every day here at Chesnara
through our teams and partners across the UK and Europe.
We do three things:
1. We run in force insurance and pensions books efficiently and
effectively. We look after c876,000 policyholders and customers who have
c£9.1bn of their assets with us;
2. We seek out and deliver value enhancing M&A opportunities. 9
acquisitions over our history so far with two further deals announced in the
second half of 2021. These deals once completed will add a further £3.2bn
of Funds Under Management in the UK, increasing total group assets by 35%, and
90,000 policyholders (c10% increase) to the group. Our Tier 2 debt raise of
£200m (in February 2022) provides further financial flexibility to support
further acquisitions: and
3. We write focused, profitable new business where we are satisfied an
appropriate return can be made. Our medium-term aim is to cover c50% of the
total dividend from new business profits.
Remaining focussed on these areas in 2021 has resulted in another good year of
delivery at Chesnara, with IFRS pre-tax profits of £28.8m (2020: £24.6m) and
presents us with positive growth opportunities as we look further forward.
Looking at our key performance metrics in turn:
CONTINUED DELIVERY OF RESILIENT CASH GENERATION AND STABLE SOLVENCY
At the heart of the Chesnara financial model and investment case is resilient
cash generation and stable solvency.
RESILIENT CASH GENERATION
We yet again delivered positive group cash generation in 2021 of £20.3m
(2020: £27.7m). As a reminder, we define cash as the movement in the
group's surplus Own Funds above the group's internally required capital.
This surplus can be impacted by equity markets and currency movements in the
near term. In 2021, group cash generation was adversely impacted by £26.1m
by factors such as the symmetric adjustment (SA) a feature of the Solvency II
Standard Formula whereby additional capital needs to be held following periods
of strong equity growth which we have seen this year. And we also
experienced a £14.3m negative impact from foreign exchange (FX) movements
(2020: £14.1m gain) primarily as a result of sterling strengthening against
both the Swedish krona and the euro.
To get a better sense of the inherent cash generation in Chesnara, our
alternative Commercial cash metric looks through the SA and FX translation
impacts, along with other less material technical impacts, (see Financial
Review section for more detailed cash generation analysis). All divisions
have delivered material levels of Commercial cash with total Commercial cash
generation of £53.0m (2020: £27.7m) well above the dividend and interest
funding cash cost in 2021 of £34.3m. This continues to illustrate the
ongoing inherent cash generative nature of the businesses, a key feature of
Chesnara over the last 17 years.
Commercial cash generation by division:
£m 2021
CA 47.7
Movestic 1.9
Scildon 6.0
Waard 3.0
£m Cumulative 2019-2021
CA 118.6
Movestic 22.1
Scildon 47.1
Waard 8.0
Based on this cash generation and despite the symmetric adjustment strain, the
divisions have proposed aggregate dividends of £38.6m against a dividend
payment to shareholders of £33.9m.
COMMERCIAL CASH GENERATION IN 2021 REPRESENTS 156% COVERAGE OF THE TOTAL
DIVIDEND
The Chesnara parent company cash and instant access liquidity fund balance at
31 December remains healthy at £46.1m, and further supports the
sustainability of the funding of the group dividend. Cash reserves have
increased further as a result of the post year end Tier 2 debt raise.
Looking forward, we have a strong line of sight to future cash generation from
the unwind of risk margin and SCR, investment returns above risk free rates,
wider synergies, management actions and potential acquisition activity.
STABLE AND ROBUST SOLVENCY
The strong and stable track record for solvency has continued through 2021.
Solvency ratio %* Solvency surplus £m
2017 146 193.4
2018 158 202.4
2019 155 210.8
2020 156 204.0
2021 152 190.7
*Preferred operating solvency range = 140% to 160%
The closing headline solvency ratio of 152% remains comfortably within our
target operating range of between 140% and 160%. This solvency ratio does
not adopt any of the temporary benefits available from Solvency II
transitional arrangements. Conversely, the ratio is impacted by the
symmetric adjustment; a feature of the Solvency II Standard Formula whereby
additional capital needs to be held following periods of strong equity
growth. The adjusted solvency, looking through the symmetric adjustment
(which is expected to reverse over time) is 160%.
Looking forward, during the second quarter of 2022, we expect to complete the
acquisitions of Sanlam Life & Pensions and Robein Leven. In addition, in
February we raised £200m of Tier 2 debt at a coupon of 4.75%. The estimated
solvency ratio including the impact of these post balance sheet events is
estimated to be in excess of 180%. This will not be the new long-term position
as we expect to utilise this additional capital surplus when we take value
adding actions, which should result in the ratio reverting back within the
robust and stable 140% to 160% historical range.
THE OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTCULARLY THROUGH M&A
Over the medium term, we expect all components of the growth model to be
positive, although there can be a level of shorter-term volatility in each
element.
A key element of the growth model is real world investment returns. The
reported EcV of the group assumes risk free returns on shareholder and
policyholder assets. Over time, as we have seen historically, we expect
average returns in excess of risk free. In 2021 this represented growth of
c£110m. Valuing the group assuming relatively conservative returns above
risk free, for example an average 5% equity returns per annum, would add
significantly upwards of £150m of incremental EcV.
FOCUSSED WRITING OF NEW BUSINESS
Writing new business is the third area of focus in the Chesnara strategy.
Not only is new business value adding in its own right, importantly it adds
scale which in turn enhances operational effectiveness and improves the
sustainability of the financial model. Even under the current difficult
conditions, we have seen Commercial new business profits of c£10m. New
business has also been a key component in the overall 19% increase in
Movestic's FuM and new business volumes have driven a 7% growth in policy
numbers in Scildon.
Over time, we expect improvements to operational effectiveness to be a source
of value creation, be that through M&A synergies, scale or other positive
management actions. Over recent years, including 2021, we have suffered some
operational losses particularly relating to investments made in systems
(especially in Scildon), some regulatory changes, and higher than expected
pension transfer outflows in Sweden.
The outflows in Sweden are fully recognised in the closing figures; and
further changes in transfer regulations are anticipated to come into force in
July 2022. These are expected to have a positive impact on the Movestic
transfer ratio with books that were not previously open to transfers becoming
open. All of Movestic's existing unit linked books are already open to
transfers. Along with COVID-19 impacts on broker behaviour, we know a large
driver of the higher recent outflows was more aggressive pricing from a
competitor. The competitor has retracted their special offer pricing from 1
January 2022, and early indications support our confidence of a material
rebalance to the transfer ratio in 2022.
EACH DIVISION HAS DELIVERED EcV GROWTH
All divisions delivered positive growth during the year, with a total growth
in divisional EcV (before dividends and FX movements) of £62.3m (2020:
£19.6m loss) and a total growth in group EcV before dividend and FX movements
of £57.8m (2020: £37.6 loss). The acquisitions that were announced during
2021, which are expected to complete in the first half of 2022, are expected
to add approximately £15m of EcV on completion and importantly will also
enhance longer term cash and value creation prospects from the sources of
growth detailed above.
We have also grown our Funds Under Management (FuM) in 2021 with positive
equity markets providing positive support here. We expect FuM post
completion of Sanlam and Robein Leven to be over £12bn for the first time in
Chesnara's history.
OVER £203m OF EcV GROWTH, EXCLUDING DIVIDEND PAYMENTS AND FOREX MOVEMENTS,
SINCE 2016
Growth in FuM
Funds Under Management £bn
2017 7.7
2018 7.1
2019 7.7
2020 8.5
2021 9.1
2021 pro forma acquisitions 12.3
Growth in policies in force
Policies 000's
2019 891
2020 894
2021 877
2021 pro forma acquisitions 967
Note: acquisitions included in the charts above were announced in 2021 and
expected to complete in 2022.
AN INCREASED FOCUS ON ACQUISITION ACTIVITY
The primary purpose of Chesnara when it was formed back in 2004 was to acquire
other closed book businesses. Acquisition activity has been a core component
of our historical EcV growth. They create growth through any price to EcV
discount and also improve the future growth outlook by enhancing the potential
from the other elements for the 'value growth source fan'.
Successful acquisitions have been key to Chesnara's development and will
remain so in the future. During 2021, we announced two acquisitions, Robein
Leven in the Netherlands and Sanlam Life and Pensions in the UK. Robein
Leven will add further scale to the Dutch closed book operations and Sanlam
will increase the UK Funds Under Management1 by £2.9bn (128% increase).
Together they are expected to add Economic Value1 of c£15m on completion and
additional steady cash generation potential of c£6m per annum.
Looking back at historic deals and the value we have created from them
provides us with further confidence in our ability to add value through
acquisitions in current and new territories.
CASE STUDY 1 -
ENTERING THE DUTCH CLOSED BOOK MARKET
We entered the Dutch closed book market with the purchase of Waard in 2015 for
£50.1m. We have subsequently acquired and successfully consolidated three
further closed books which have been self-funded by capital residing in
Waard. Despite the natural run-off of a closed book, we expect to have over
133k policies in force on completion of Robein Leven acquisition compared to
56k policies in force in 2015. If we add back the total dividend payments
made by Waard since acquisition, we have a closing EcV of £110m which
represents an 220% return on the initial investment.
CASE STUDY 2 -
ENTERING THE SWEDISH MARKET
Chesnara paid £22.1m(1) in 2009 for Movestic when it had £962m(2) of Funds
Under Management and an Embedded Value of £91m(3). When adjusted for
capital injections and dividends paid, as at the end of 2021, Movestic has an
adjusted EcV of £255m and £4.4bn of Funds Under Management. This
demonstrates a 10-fold return on the initial investment.
1 - the purchase prices includes the purchase of Moderna and Aspis
2 - the Embedded Value and assets under management of Movestic is taken as the
31 December 2009 position)
CONFIDENCE IN OUR ABILITY TO EXECUTE M&A IN THE FUTURE
We remain optimistic about the prospect of future acquisitions and believe
that we can deliver more transformational deals looking forward. Equally
smaller deals, especially if well-priced, can and do have a material positive
cumulative impact, as the case studies above show.
2021 saw an active M&A market across European insurance with sources of
capital (particularly through private equity firms) readily available to
support transactions, large international insurance groups refocusing their
strategies away from legacy businesses and management teams that actively
managed their business portfolios getting rewarded by shareholders.
Whilst events in Ukraine may dampen the M&A market in the short term, we
expect the high activity levels we have seen in insurance M&A to
continue. A market with plenty of activity provides lots of opportunity for
Chesnara as a consolidator. We continue to believe there is also likely to
be a little less competition in the sub £500m valuation deal end of the
market that we currently participate in.
We have taken further steps to enhance our ability to execute M&A
further. The recent appointment of a new Head of Strategic Development &
Investor Relations, Sam Perowne, who starts with us in April will provide us
with further experience in this area. We have also raised £200m of Tier 2
debt which, which after paying down existing debt and funding the Sanlam Life
& Pensions UK deal, gives us capacity in terms of liquidity and solvency
to fund deals of c£100m directly from our own balance sheet. Our revolving
credit facility that sits alongside the longer-term debt creates an additional
level of working capital flexibility. For more transformational deals, we
retain the ability to raise equity and are mindful of the potential benefits
from other funding arrangements such as joint ventures or vendor
part-ownership.
Our assessment of the market potential, our track record of delivery and the
actions we have taken to enhance our ability to execute M&A means we are
confident that acquisitions will continue to contribute to Chesnara's success
in the future.
MORE TO DO ON ESG
We believe that positive outcomes for any particular stakeholder at the cost
of inappropriate outcomes for other stakeholders is not acceptable. Our
Section 172 reporting demonstrates how we actively consider a broad range of
stakeholder outcomes when making key decisions.
Looking at our current position on ESG, we believe we start from a relatively
positive position with regards to our carbon footprint (direct and
indirect). And we can point to positive progress in a number of areas of our
business on environmental matter, for example, further development of our
'green' funds in Movestic and enhanced reporting on ESG matters through our UK
fund management partner Schroders. Equally we are increasingly aware that we
need to drive further change to support the just transition we all need to
make and that the change has to be meaningful in relatively short order.
More formality is required around some of our processes and disclosures to
make sure we inform and educate our stakeholders about what we are doing well
and to validate our opinion that, at least for now, our environmental
credentials are sound. We also need to enhance our disclosures and more
importantly, we need to better define meaningful and transparent action plans
with clear targets and to demonstrate how we are delivering those plans and
the impacts they are having. In 2022, we have established a group wider
programme of work to accelerate our efforts in this area.
We recognise that the financial services sector has to play a significant role
in addressing climate change and are fully committed to playing our part (see
our TCFD report within the CSR section).
OUTLOOK
Chesnara has a fantastic track record of sustainable long term cash generation
over its history through recessions, pandemics, global financial crisis and
other variable market conditions. 2021 has seen us continue this impressive
record of cash generation.
It is impossible to look forward and not reflect on what is happening in
Ukraine. Trying to explain to my three young children with any logic or
sense how a war of this nature is being raged in this modern age is a futile
exercise. Our thoughts and prayers are with the people of Ukraine at this
difficult time. As Luke highlighted in his report, we have made a donation
to the DEC for the people of Ukraine and assured ourselves that our assets,
operations and partners are not exposed directly to Russia. We will continue
to actively manage and monitor this position and have offered further support
for our people with family in Ukraine.
The war in Ukraine has played a large role in the volatile start to the year
we have seen across global markets. The Chesnara business model has
delivered cash generation in uncertain markets before, and we have confidence
it will do so going forward. The strong line of sight we have to future cash
generation is even more important in the current environment as do the variety
of value levers we continue to have at our disposal.
We have ambitious plans to grow the business and I have been delighted to hear
that our people across the group share an ambition to grow further,
particularly through acquisitions, and continue our impressive record of cash
generation.
I want to thank them for all their remarkable efforts during what has been
another tough and troubling period. And with their continued drive and
determination, I have every confidence that the future remains bright for
Chesnara.
Steve Murray,
Chief Executive Officer
30 March 2022
STRATEGIC REPORT
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to customers and shareholders through
our three strategic pillars, executed across our three territories.
STRATEGIC OBJECTIVES
1. 2. 3.
MAXIMISE THE VALUE FROM EXISTING BUSINESS ACQUIRE LIFE AND PENSIONS BUSINESSES ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
Managing our existing customers fairly and efficiently is core to delivering Acquiring and integrating companies into our business model is key to Writing profitable new business supports the growth of our group and helps
our overall strategic aims. continuing our growth journey. mitigate the natural run-off of our book.
KPIs KPIs KPIs
Cash generation Cash generation EcV growth
EcV earnings EcV growth Customer outcomes
Customer outcomes Customer outcomes
Risk appetite
OUR CULTURE AND VALUES -
RESPONSIBLE RISK BASED MANAGEMENT
RESPONSIBLE RISK BASED MANAGEMENT FOR THE BENEFIT OF ALL OUR STAKEHOLDERS FAIR TREATMENT OF CUSTOMERS MAINTAIN ADEQUATE FINANCIAL RESOURCES PROVIDE A COMPETITIVE RETURN TO OUR SHAREHOLDERS ROBUST REGULATORY COMPLIANCE
BUSINESS REVIEW | UK
The UK division principally consists of the insurance company Countrywide
Assured plc. The company manages c219,000 policies and is in run-off.
Countrywide Assured follows an outsourcer-based operating model, with
functions such as customer services, investment management and accounting and
actuarial services being outsourced. A central governance team is
responsible for managing all outsourced operations.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
As a closed book, the division creates value through managing the following
key value drivers: costs; policy attrition; investment return; and reinsurance
strategy.
In general, surplus regulatory capital emerges as the book runs off. The
level of required capital is closely linked to the level of risk to which the
division is exposed. Management's risk-based decision-making process seeks
to continually manage and monitor the balance of making value enhancing
decisions whilst maintaining a risk profile in line with the board's risk
appetite.
At the heart of maintaining value is ensuring that the division is governed
well from a regulatory and customer perspective.
INITIATIVES AND PROGRESS IN 2021
- Entered into a new arrangement during year to reinsure the vast
majority of its annuity liabilities, which has reduced the division's exposure
to longevity risk. The immediate impact of this arrangement was to increase
the solvency surplus of the division by £3.5m.
- Implemented a refinement to its investment approach for assets
backing some of its non-linked policies. This has sought to improve the
return on investments whilst maintaining an appropriate level of risk. In
conjunction with this the division has implemented the Volatility Adjustment
("VA") when calculating its solvency position, following approval by the PRA
that was granted during the year. Implementing both at the same time reduces
short term solvency volatility that can arise from movements in credit
spreads.
- Applied the new industry rules of using the Sterling Overnight
Interbank Average Rate ('SONIA') to discount its regulatory liabilities rather
than the London Interbank Offered Rate ('LIBOR'). This impact was a decrease
in solvency surplus by £5.4m.
- Approved the plan to transfer actuarial services currently
provided by Capita to Willis Towers Watson, who currently service the rest of
the UK book. This is planned to be delivered in time for half year 2022
reporting.
- The Economic Value of the division, excluding the impact of
dividend distributions, has increased by £28.0m since the start of the year.
- Supported our shareholder in the acquisition process for Sanlam
Life & Pensions, whilst also ensuring that the existing division continues
to be appropriately governed.
FUTURE PRIORITIES
- Once the acquisition has completed, bring the Sanlam business
into the wider UK division in an efficient manner, and continue the planning
for delivering the longer-term operating model.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Continue to support Chesnara in identifying and delivering UK
acquisitions.
KPIs
Economic Value
£m 2017 2018 2019 2020 2021
EEV / EcV 255.5 214.7 204.6 187.4 181.9
Cumulative dividends 32.0 91.0 120.0 153.5
Total 255.5 246.7 295.6 307.4 335.4
Cash generation
£m 2017 2018 2019 2020 2021
Cash generation 34.5 55.8 33.6 29.5 27.4
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Treating customers fairly is one of our primary responsibilities. We seek to
do this by having effective customer service operations together with
competitive fund performance whilst giving full regard to all regulatory
matters. This supports our aim to ensure policyholders receive good returns,
appropriate communication, and service in line with customer expectations.
INITIATIVES AND PROGRESS IN 2021
- A key priority for the year has been to continue to ensure we
meet the needs of our customers during the ongoing pandemic.
- The operational resilience programme continued to be progressed
throughout 2021. This has enabled us to meet the first regulatory deadline
of 31 March 2022.
- Work to ensure we do what is reasonably expected of us to stay
in contact with customers continues, together with activity to reunite
customers with unclaimed assets. Focus will remain on these activities
during 2022.
FUTURE PRIORITIES
- The operational resilience programme is a multi-year project and
will continue to be a key priority to ensure we meet the final regulatory
deadline of 31 March 2025.
- Following the acquisition of Sanlam Life & Pensions, work
will commence on transition of the business to CA and our standard operating
model.
- In February 2022, the FCA published its second consultation
paper on Consumer Duty, with the final policy statement expected in July
2022. A gap analysis is being performed and we will complete any actions
required to ensure we meet the FCA's expectations.
KPIs
Policyholder fund performance
2021 2020
CA Pension Managed 10.8% 3.0%
CWA Balanced Managed Pension 10.8% 2.9%
S&P Managed Pension 10.4% 1.6%
Benchmark - ABI Mixed Inv 40%-85% shares 10.8% 4.7%
Throughout the year our main managed funds performed well and in line with
industry benchmarks.
GOVERNANCE
BACKGROUND INFORMATION
Maintaining effective governance and a constructive relationship with
regulators underpins the delivery of the division's strategic plans.
Having robust governance processes provides management with a platform to
deliver the other aspects of the business strategy. As a result, a
significant proportion of management's time and attention continues to be
focused on ensuring that both the existing governance processes, coupled with
future developments, are delivered.
INITIATIVES AND PROGRESS IN 2021
- The governance oversight team and a large portion of the
outsourced staff have needed to continue to work remotely over the majority of
2021.
- Successfully delivered against 2021 plans regarding the group's
multi-year IFRS 17 programme. The calculation engine went live for user
acceptance testing and the division completed a dry run during the second half
of the year. We have continued to work with our auditors on the technical
decisions underpinning the implementation.
FUTURE PRIORITIES
- Oversee the completion of the Sanlam acquisition and its
integration into the division. Whilst initially the operating models will be
relatively independent, initial focus will be on ensuring appropriate
oversight over the business and aligning our systems of governance and
corporate responsibilities map.
- From an IFRS 17 point of view, 2022 is a critical year.
Activity will focus on calculating the opening balance sheet position at 1
January 2022 as well as continuing with the operational implementation at both
head office and within our outsourcers.
KPIs
SOLVENCY RATIO: 158%
Surplus generated in the year increases solvency ratio from 130% to 158%.
After the dividend, due to be paid in 2022, the ratio is 130%.
£m Solvency Ratio
31 Dec 2020 surplus 30.9 130%
Surplus generation 27.0
31 Dec 2021 surplus (pre-dividend) 58.0 158%
2021 dividend (27.5)
31 Dec 2021 surplus 30.5 130%
BUSINESS REVIEW | SWEDEN
Movestic is a life and pensions business based in Sweden and is open to new
business. From its Stockholm base, Movestic operates as an innovative brand
in the Swedish life insurance market. It offers personalised unit-linked
pension and savings solutions through brokers and is well-rated within the
broker community.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Movestic creates value predominantly by generating growth in the unit-linked
Funds Under Management (FuM), whilst assuring a high-quality customer
proposition and maintaining an efficient operating model. FuM growth is
dependent upon positive client cash flows and positive investment
performance. Capital surplus is a factor of both the value and capital
requirements and hence surplus can also be optimised by effective management
of capital.
INITIATIVES AND PROGRESS IN 2021
- Investment markets were characterised by a strong upward trend
on global stock exchanges, while interest rates remained historically low
during 2021.
- The favourable developments on the stock market were reflected
in the returns on the policyholders' investment assets.
- During 2021, Movestic has continued to diversify its
distribution channels and business model through strengthening its offer and
distribution within the custodian business and extended cooperation has been
entered into with custody institutions in the Swedish market. The business
volume has grown significantly, with FuM having increased by 22% to a total of
£ 4.4bn.
- Policyholder transfers continue to be a feature of the business
due to new regulations that limit the amount that can be charged when
transferring policies and the competitive Swedish market. The negative trend
for the transfer ratio has continued, with an impact on EcV, but the net
client cashflows remain positive. The company has continued its focus on
business retention activity.
- 2021 has continued to be marked by the COVID-19 pandemic and the
business has reserved for the uncertainties of future development and the
effect on employee absence and longer or more severe sickness claims due to
postponed operations.
FUTURE PRIORITIES
- Continue the journey of digitalising and automating processes,
with a view to improving both efficiency and control.
- Continue to develop more digitalised and customised customer
propositions and experience.
- Strengthen capabilities and distribution capacity within
custodian and direct business, as a complement to the broker channel.
- Increased focus on retention and to reverse the transfer ratio
seen in 2021.
KPIs (all comparatives have been presented using 2021 exchange rates)
Economic Value
£m 2017 2018 2019 2020 2021
Reported value 224.9 212.8 253.4 225.0 244.9
Cumulative dividends 2.5 5.3 11.5 20.8
Total 224.9 215.3 258.6 236.5 265.7
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Movestic provides personalised long-term savings, insurance policies and
occupational pensions for individuals and business owners. We believe that
recurring independent financial advice increases the likelihood of a solid and
well-planned financial status, hence we are offering our products and services
through advisors and licenced brokers.
INITIATIVES AND PROGRESS IN 2021
- Policyholder average investment return were 23.3% (2020: 2.7%)
arising from investments in equity, interest bearing securities and hedge
funds.
- Broker and customer servicing have been a key focus during the
pandemic. The company has continued the efforts to ensure effective servicing
during the remote working environment.
- Increased demands on digital processes and availability have
also led to the division increasing efforts to create services, such as
customised advice, for both customers and brokers.
- The allocation of funds away from equity seen in 2020 was
reversed during the year showing a renewed confidence in equity markets.
- During the year, the company's unit-linked products were
classified as 'Article 8' products under the EU regulation on Sustainability
disclosure, i.e., they promote environmental or social characteristics by
customers choosing to invest their capital in funds with such focus.
FUTURE PRIORITIES
- Continue to develop new solutions and tools to support the
brokers' value enhancing customer proposition.
- Strengthen the relationship with brokers further and continue to
develop improved functionality and digital administration self-services for
brokers.
- Pursue a broader distribution with brokers within risk product
and custodian business.
- Broaden product and service offering to match relevant customer
segments.
KPIs (all comparatives have been presented using 2021 exchange rates)
Broker assessment rating (out of 5)
2017 2018 2019 2020 2021
Rating 3.7 3.8 3.5 3.3 3.6
Following the broker assessment review we have conducted our own satisfaction
surveys. These surveys gave a more positive result in 2021 than in 2020, and
constructive feedback helped identify further actions as we continue to work
on improving broker satisfaction.
POLICYHOLDER AVERAGE INVESTMENT RETURN:
23.3%
GOVERNANCE
BACKGROUND INFORMATION
Movestic operates to exacting regulatory standards and adopts a robust
approach to risk management.
Maintaining strong governance is a critical platform to delivering the various
value-enhancing initiatives planned by the division.
INITIATIVES AND PROGRESS IN 2021
- Dealing with the impact of COVID-19 has continued to be a key
management focus.
- The company has ensured that it is operating in line with local
government guidelines, which has been working from home, if possible, for part
2021. However, restrictions have eased during parts of the year and the
company has established a more permanent way of working and considered the new
experience and insights gained because of the pandemic.
- Sustainability Reporting has been a major focus area and the
Disclosure Regulation was applied in March 2021. The company has made all
relevant actions to be compliant and to improve the communication and value
proposition to customers and brokers.
- The implementation of IFRS17 for group purposes has continued
during 2021 and the company has analysed the scope and impact of IFRS17 on its
product portfolio, actuarial models, systems, and overall financial
statements.
FUTURE PRIORITIES
- The COVID-19 situation will continue to be monitored closely,
with a return to the office working in 2022, though arrangements will remain
under continuous review.
- Continue delivering the IFRS17 implementation program.
KPIs (all comparatives have been presented using 2021 exchange rates)
SOLVENCY RATIO: 148%
Solvency remains strong.
£m Solvency Ratio
31 Dec 2020 surplus 74.9 158%
Surplus generation 0.9
31 Dec 2021 surplus 75.8 148%
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
As an "open" business, Movestic not only adds value from sales but as it gains
scale, it will become increasingly cash generative which will fund further
growth or contribute towards the group's attractive dividend. Movestic has a
clear sales focus and targets a market share of 6% -10% of the advised
occupational pension market. This focus ensures we are able to adopt a
profitable pricing strategy.
INITIATIVES AND PROGRESS IN 2021
- Movestic reported commercial new business profit of £4.3m
(2020: £1.6m) which consists largely of sales volumes within custodian
business but also from increased sales, and increased increments and
spontaneous premiums due to inter alia salary and bonus processes being
postponed from 2020 to 2021.
- Sales activities were higher across the market during 2021 and
Movestic sales volumes were more than 100% above 2020. The high growth was
mainly generated through the new partnership with Carnegie within the
custodian business, as opposed to our more traditional broker led occupational
pension products. Movestic will continue to develop its offering to increase
competitiveness and build customer loyalty for the future.
FUTURE PRIORITIES
- Continued focus on sales activities and competitive offerings in
the broker channel.
- Strengthen capabilities and distribution capacity within
custodian and direct business.
- Ongoing development of the products and digital services for
relevant customer segments and delivery of new functionality on web platforms
to improve customer and broker experience.
- Capitalise on the opportunities expected when transfer back
barriers are removed during the year.
KPIs (all comparatives have been presented using 2021 exchange rates)
Occupational pension market share %
% 2017 2018 2019 2020 2021
Market share 7.6 6.6 6.5 4.5 3.6
New business profit*
£m 2017 2018 2019 2020 2021
New business profit 11.0 11.2 7.0 1.6 4.3
*New business figures from 2018 onwards represent commercial new business.
Values prior to this are retained at that which they were previously reported.
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through their dual
closed and open book approach and through the group acquisition strategy will
integrate portfolios and businesses into their operations.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Both Waard and Scildon have a common aim to make capital available to the
Chesnara group to fund further acquisitions or to contribute to the dividend
funding. Whilst their aims are common, the dynamics by which the businesses
add value differ:
- Waard is in run-off and has the benefit that the capital
requirements reduce in-line with the attrition of the book.
- As an "open business", Scildon's capital position does not
benefit from book run-off. It therefore adds value and creates surplus
capital through writing new business and by efficient operational management
and capital optimisation.
INITIATIVES AND PROGRESS IN 2021
- Waard completed the acquisition of a portfolio of policies from
Brand New Day and has migrated them onto its systems.
- Waard has also entered into an agreement, subject to regulatory
approval, to acquire Robein Leven, a specialist provider of traditional and
linked savings products, mortgages and annuities.
- Both businesses continue to report strong solvency positions.
Scildon remains strong at 192%. Waard continued to maintain significant
solvency levels, the ratio ending the year at 399%.
- Scildon entered into a new catastrophe risk reinsurance contract
and renegotiated its reinsurance for the term assurance business, with the
benefit of improving the capital efficiency of the division.
- Following agreement from the DNB and reflective of the strong
solvency position of the company, we have reduced the solvency buffer in Waard
to 150% for dividend eligibility purposes.
FUTURE PRIORITIES
- Integrate the new acquisition into the Waard business and
continue to support Chesnara in identifying and delivering Dutch acquisitions.
- Effective management of the closed book run-off in Waard to
enable ongoing dividend payments to Chesnara.
- Continue to deliver the ongoing IT development programme in
Scildon.
KPIs (all comparatives have been presented using 2021 exchange rates)
Economic Value - The Netherlands
£m 2017 2018 2019 2020 2021
EcV 256.4 209.4 217.5 204.6 212.7
Cumulative dividends 33.3 41.2 46.0 46.0
Total 256.4 242.8 258.7 250.6 258.7
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Great importance is placed on providing customers with high quality service
and positive outcomes.
Whilst the ultimate priority is the end customer, in Scildon we also see the
brokers who distribute our products as being customers and hence developing
processes to best support their needs is a key focus.
INITIATIVES AND PROGRESS IN 2021
- A key focus during the year has been ensuring that we provide
flexible solutions and offerings to our clients and our people to ensure we
continue to meet the needs of our customers during the ongoing COVID-19
pandemic.
- Scildon has launched its group pensions portal during 2021
following the migration and digitalisation of its policy administration
system. This work will continue during 2022 for which the expected costs are
included within the 2021 year end position. The remaining products will
remain on existing platforms with further digitalisation and improvements to
the customer offering being assessed.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality and
to enhance and develop existing processes, infrastructure and customer
experiences in Scildon.
KPIs (all comparatives have been presented using 2021 exchange rates)
Scildon client satisfaction rating (out of 10)
2017 2018 2019 2020 2021
Rating 7.6 7.7 7.8 8.1 8.1
GOVERNANCE
BACKGROUND INFORMATION
Waard and Scildon operate in a regulated environment and comply with rules and
regulations both from a prudential and from a financial conduct point of view.
INITIATIVES AND PROGRESS IN 2021
- We have engaged with the regulator throughout the year and the
business continued its enhanced monitoring of key measures, such as claims and
customer service, to ensure performance levels were maintained during the
pandemic.
- In line with auditor rotation requirements, Waard and Scildon
have completed an audit tender process and have appointed EY to replace
Deloitte for the 2022 audit.
- The IFRS 17 and IFRS 9 programme has continued to progress in
line with plans.
FUTURE PRIORITIES
- For IFRS 17, 2022 is a year that will see us finalising
technical and operational changes and perform dry runs of the group's numbers.
KPIs (all comparatives have been presented using 2021 exchange rates)
SOLVENCY RATIO: SCILDON 192%; WAARD 399%
Solvency is robust in both businesses, with post-dividend solvency ratios of
192% and 399% for Scildon and Waard respectively.
Scildon
£m Solvency Ratio
31 Dec 2020 surplus 62.3 178%
Surplus generation 12.8
31 Dec 2021 surplus (pre-dividend) 75.1
2021 dividend (5.0)
31 Dec 2021 surplus 70.1 192%
Waard
£m Solvency Ratio
31 Dec 2020 surplus 34.3 438%
Surplus generation 5.1
31 Dec 2021 surplus (pre-dividend) 39.4 454%
2021 dividend (6.1)
31 Dec 2021 surplus 33.3 399%
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
Scildon brings a "New business" dimension to the Dutch division. Scildon sell
protection, individual savings and group pensions contracts via a broker-led
distribution model. The aim is to deliver meaningful value growth from
realistic market share. Having realistic aspirations regarding volumes means
we are able to adopt a profitable pricing strategy. New business also helps
the business maintain scale and hence contributes to unit cost management.
INITIATIVES AND PROGRESS IN 2021
- Despite a tough and uncertain market, we continue to generate
commercial new business profits, with £5.2m earned in the year. The market
remains challenging but we have a solid base to take advantage.
- Underpinning this, Scildon APE and policy count continue to
increase, now with in excess of 218,00 policies. Also, whilst in a reduced
market size, the term market share for Scildon has increased to 16.1% (2020:
14.2%).
- We continue to grow our portfolio through our white labelling
relationship with Dazure (a distribution partner), demonstrating a positive
additional route to market to enable us to service more policyholders.
FUTURE PRIORITIES
- Continue to deliver product innovation and cost management
actions to ensure we meet our full potential in terms of new business value.
- Consider alternative routes to market that do not compromise our
existing broker relationships, such as further product white labelling.
KPIs (all comparatives have been presented using 2021 exchange rates)
Scildon - term assurance market share %
% 2017 2018 2019 2020 2021
Market share 7.3 7.6 11.6 14.2 16.1
Scildon - new business profit*
£m 2017 2018 2019 2020 2021
New business profit 2.0 1.9 4.8 7.9 5.2
*New business figures from 2018 onwards represent commercial new business.
Values prior to this are retained at that which they were previously reported.
BUSINESS REVIEW | acquire life and pension businesses
Well considered and appropriately priced acquisitions maintain the
effectiveness of the operating model, create a source of value enhancement and
sustain the cash generation potential of the group.
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of
advisers and industry associates, utilising both group and divisional
management expertise as appropriate.
- We primarily focus on acquisitions in the UK and Netherlands,
although will consider other territories should the opportunity arise and this
is supportive of our strategic objectives.
- We assess deals applying well established criteria which
consider the impact on cash generation and Economic Value under best estimate
and stressed scenarios.
- We work cooperatively with regulators.
- The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group's risk profile.
- Transaction risk is reduced through stringent risk-based due
diligence procedures and the senior management team's acquisition experience
and positive track record.
- We fund deals with a combination of debt, equity or cash
depending on the size and cash flows of each opportunity and commercial
considerations.
HOW WE ASSESS DEALS
Cash generation
- Collectively our future acquisitions must be suitably cash
generative to continue to support Chesnara delivering attractive dividends.
Value enhancement
- Acquisitions are required to have a positive impact on the
Economic Value per share in the medium term under best estimate and certain
more adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance,
customer interests.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite the
financial returns must be suitably compelling.
INITIATIVES AND PROGRESS IN 2021
During 2021, Chesnara has been successful in its two key markets. With two
deals in the Netherlands (Brand New Day completed on 15 April 2021 and Robein
Leven announced on 25 November 2021) and a further transaction in UK (Sanlam
Life & Pensions announced on 13 September 2021).
In total these three transactions were reported to increase Chesnara EcV by
c£17m, with further value that is not captured within EcV expected, and our
expectation is an increase of cash generation of c£7m p.a. under steady state
conditions. These demonstrate that Chesnara is able to source transactions, is
seen within the market as an attractive buyer of life and pension businesses
and is able to acquire on terms that provide financially beneficial outcomes
to Chesnara.
We continue to see an attractive pipeline within our key territories. To
support our ability to continue to acquire businesses, we announced on 2
February 2022 the successful inaugural Tier 2 subordinated debt raise of
£200m. This improves Chesnara's position in three ways:
i) Chesnara, post repayment of existing debt and consideration of the
Sanlam transaction, has capital available to deploy quickly for transactions;
ii) Chesnara strengthens its solvency position, which creates capacity for
further transactions; and
iii) Allows Chesnara to develop a relationship with debt investors and
create optionality for future financing of transactions.
ACQUISITION OUTLOOK
- Despite the COVID-19 restrictions, we have continued to see a
healthy flow of acquisition activity in the year across European insurance
including UK and the Netherlands. Sources of capital particularly from
private equity have remained high.
- We recognise that the consolidation markets in these countries
are mature but the key general drivers for the owners of portfolios to offload
business continue to remain relevant and create a strong pipeline. These
includes better uses of capital (e.g. return to investors or supporting other
business lines), operational challenges (e.g. end of life systems), management
distraction, regulatory challenges, business change (e.g. IFRS 17) and wider
business and strategic needs.
- Our expectation is that portfolio transactions become more
likely; a number came to market in 2021. Our strong expertise and knowledge in
the markets, good regulatory relationships and the flexibility of our
operating model means that Chesnara is very well placed to manage the
additional complexity associated with these portfolio transfers and provide
beneficial outcomes for all stakeholders. These transactions may not be
suitable for all potential consolidators, in particular those who do not have
existing licenses in these territories.
- Chesnara will continue its robust acquisition assessment model
which takes into account; (a) the price compared to the EcV; (b) the cash
generation capability; (c) the strategic fit; and (d) the risks within the
target. We will also continue to assess the long-term commercial value of
acquisitions as part of our objective to maximise the value from in-force
business.
- The subordinated debt raise in February 2022 as well as the
£100m Revolving Credit Facility arrangement, with a £50m accordion option
entered into in July 2021 provide funding capability on commercially
attractive terms and enable us to provide strong returns to investors. We will
continue to explore how we can increase our funding capability further,
including consideration of partnerships
- Our good network of contacts in the adviser community, who
understand the Chesnara acquisition model, supported by our engagement
activity with potential targets, ensures that we are aware of most viable
opportunities in the UK and Western Europe. With this in mind, we are
confident that we are well positioned to continue the successful acquisition
track record in the future.
CAPITAL MANAGEMENT | Solvency II
Subject to ensuring other constraints are managed, surplus capital is a useful
proxy measure for liquid resources available to fund items such as dividends,
acquisitions or business investment. As such, Chesnara defines cash
generation as the movement in surplus, above management buffers, during the
period.
What is solvency and capital surplus?
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds" (OF)
and this is measured in accordance with the rules of the newly adopted
Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital Requirement
(SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an
absolute surplus OF less SCR
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and includes a value
for future profits expected to arise from in-force policies.
The Own Fund valuation is deemed to represent a commercially meaningful figure
with the exception of:
- Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain policies despite a high
probability of receipt.
- Risk margin: The Solvency II rules require a "risk margin"
liability which is deemed to be above the realistic cost.
- Restricted with profit surpluses: Surpluses in the group's
with-profit funds are not recognised in Solvency II Own Funds despite their
commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted for the items
above. As such our Own Funds and EcV have many common characteristics and
tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term guarantee package
when Solvency II was introduced, are available to temporarily increase Own
Funds. Chesnara does not take advantage of such measures, however we do
apply the volatility adjustment within our Dutch and UK divisions.
How do Own Funds change?
Own Funds (and Economic Value) are sensitive to economic conditions. In
general, positive equity markets and increasing yields lead to OF growth and
vice versa. Other factors that improve OF include writing profitable new
business, reducing the expense base and improvements to lapse rates.
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a "Standard formula"
or "internal model". Chesnara adopts the "Standard formula".
The standard formula requires capital to be held against a range of risk
categories. The following table shows the categories and their relative
weighting for Chesnara:
£m 2021
Total market risk 292.6
Counterparty default risk 11.9
Total life underwriting risk 184.4
Total health underwriting risk 12.7
Diversification risk (108.2 )
Capital requirement for other sub 0.3
Operational risk 12.5
ALAC DT (39.3)
SCR 366.8
There are three levels of capital requirement:
Minimum dividend paying requirement/risk appetite requirement
The board sets a minimum solvency level above the SCR which means a more
prudent level is applied when making dividend decisions.
Solvency Capital Requirement
Amount of capital required to withstand a 1 in 200 event. The SCR acts as an
intervention point for supervisory action including cancellation or the
deferral of distributions to investors.
Minimum Capital Requirement
The MCR is between 45% and 25% of the SCR. At this point Chesnara would need
to submit a recovery plan which if not effective within three months may
result in authorisation being withdrawn.
How does the SCR change?
Given the largest component of Chesnara's SCR is market risk, changes in
investment mix or changes in the overall value of our assets has the greatest
impact on the SCR. For example, equity assets require more capital than low
risk bonds. Also, positive investment growth in general creates an increase
in SCR. Book run-off will tend to reduce SCR, but this will be partially
offset by an increase as a result of new business.
CHESNARA GROUP SOLVENCY METRICS
£m 2021 2020
Own funds 558 568
SCR 367 364
Solvency surplus 191 204
Solvency ratio % 152% 156%
A review of the UK's application of Solvency II is currently underway, led by
HM Treasury. To support this the PRA oversaw a Quantitative Impact Study
(QIS) in 2021, which will inform a potential "comprehensive package of
reforms", expected to be issued for consultation during 2022. Consequently,
the Solvency II regime as applied in the UK may diverge from the EU's approach
going forward. We are monitoring this closely and future financial
statements will report on the UK specific application of Solvency II. We see
no specific reason to expect the PRA to use their enhanced freedoms take a
route that systemically makes it harder to do business in the UK.
We are well capitalised at both a group and subsidiary level. We have
applied the volatility adjustment in our Dutch businesses and the UK but have
not used any other elements of the long-term guarantee package within the
group. The volatility adjustment is an optional measure that can be used in
solvency calculations to reduce volatility arising from large movements in
bond spreads.
CHESNARA GROUP
SOLVENCY SURPLUS
£m
Group solvency surplus at 31 Dec 2020 204.0
CA 27.0
Movestic (3.2)
Waard 1.3
Scildon 13.1
Chesnara / consol adj (1.5)
Exchange rates (16.1)
Dividends (33.9)
Group solvency surplus at 31 Dec 2021 190.7
Surplus: The group has £191m of solvency surplus (2020: £204m). The
group solvency ratio has reduced from 156% to 152% but remains comfortably
within our target range. Solvency surplus has fallen due to a reduction in
own funds (after the proposed dividend is taken into account) and a small rise
in SCR.
Dividends: The closing solvency position is stated after deducting the
£22.1m proposed dividend (31 December 2020: £21.4m) and reflects the payment
of an interim dividend of £11.8m.
Own Funds: Own Funds have risen by £20.7m (pre-dividends). Drivers of
growth include rising yields, strong equity growth, a UK with-profit transfer
of £8.3m and completion of the Brand New Day acquisition. These factors
were partly offset by the impact of operating losses on transfers out and
expenses.
SCR: The SCR has risen by £3.1m, mainly due to a material rise in equity,
interest and spread risk as a result of the strong economic growth. This is
partially offset by a material fall in catastrophe and longevity risk, and an
increase in the LACDT benefit.
The numbers that follow present the divisional view of the solvency position
which may differ to the position of the individual insurance company(ies)
within the consolidated numbers. Note that year end 2019 figures have been
restated using 31 December 2021 exchange rates in order to aid comparison at a
divisional level.
UK
£m 2021 2020
Own funds (post dividend) 131 133
SCR 100 102
Buffer 20 20
Surplus 10 10
Solvency ratio % 130% 130%
Surplus: £10.4m above board's capital management policy.
Dividends: Solvency position stated after £27.5m proposed dividend (2020:
£33.5m)
Own Funds: Risen by £25.1m (pre-dividend), including the benefits of rising
yields, equity growth, VA implementation, annuity reinsurance and improvements
to modelling of guarantees.
SCR: Fallen by £1.9m, driven by fall in longevity and counterparty default
risk capital, offset by a rise in market risk.
SWEDEN
£m 2021 2020
Own funds (post dividend) 234 205
SCR 159 130
Buffer 32 26
Surplus 44 49
Solvency ratio % 148% 158%
Surplus: £44.1m above board's capital management policy.
Dividends: No foreseeable dividend is proposed for 2021 (2020: £5.3m).
Own Funds: Risen by £29.1m (pre-dividend) mainly due to strong economic
growth, offset by an increase in assumed transfers out and a small operating
loss on transfers out in 2021.
SCR: Risen by £28.6m, driven by material rise in equity, spread and
currency risk capital.
NETHERLANDS - WAARD
£m 2021 2020
Own funds (post dividend) 44 44
SCR 11 10
Buffer 4 8
Surplus 29 27
Solvency ratio % 399% 438%
Surplus: £29.4m above board's capital management policy (£4.5m due to
buffer reduction: 75% to 35%).
Dividends: Solvency position stated after £6.1m proposed dividend.
Own Funds: Risen, pre-dividend, by £2.3m, mainly due to completion of the
Brand New Day acquisition and moderate investment surplus, offset by an
increase in costs.
SCR: Increased by £1.0m, with an increase in market and lapse risks, offset
by a fall in catastrophe risk.
NETHERLANDS - SCILDON
£m 2021 2020
Own funds (post dividend) 147 142
SCR 76 80
Buffer 57 60
Surplus 13 2
Solvency ratio % 192% 178%
Surplus: £12.8m above board's capital management policy.
Dividends: Solvency position stated after £5.0m proposed dividend (2020: no
dividend was paid).
Own Funds: Risen by £9.4m (pre-dividend) due to rising interest rates and a
fall in mortgage spreads, offset by an increase in expenses and cost of new
catastrophe risk cover.
SCR: Fallen by £3.4m, driven by a material reduction in catastrophe risk
capital, offset by increases in market and lapse risk capital.
CAPITAL MANAGEMENT | Sensitivities
The group's solvency position can be affected by a number of factors over
time. As a consequence, the group's EcV and cash generation, both of which
are derived from the group's solvency calculations, are also sensitive to
these factors.
The table below provides some insight into the immediate impact of certain
sensitivities that the group is exposed to, covering solvency surplus and
Economic Value. As can be seen, EcV tends to take the 'full force' of
adverse conditions whereas solvency is often protected in the short term and,
to a certain extent, the longer term due to compensating impacts on required
capital. Whilst cash generation has not been shown in the diagrams below,
the impact of these sensitivities on the group's solvency surplus has a direct
read across to the immediate impact on cash generation.
Solvency ratio Solvency surplus EcV
Impact % Impact range £m Impact range £m
20% sterling appreciation 4.1% (30.0) to (20.0) (108.0) to (98.0)
20% sterling depreciation (4.1)% 20.0 to 30.0 98.0 to 108.0
25% equity fall 16.2% (13.8) to 16.2 (103.2) to (83.2)
25% equity rise (9.3)% (9.3) to 20.7 72.1 to 92.1
10% equity fall 6.9% (1.0) to 9.0 (40.0) to (30.0)
10% equity rise (4.4)% (4.4) to 5.6 28.6 to 38.6
1% interest rate rise 7.7% 17.5 to 22.5 1.0 to 7.0
1% interest rate fall (8.9)% (37.0) to (17.0) (18.5) to (3.5)
50bps credit spread rise (2.0)% (11.5) to (6.5) (15.5) to (10.5)
25 bps swap rate fall (4.8)% (21.0) to (11.0) (22.0) to (12.0)
10% mass lapse 1.4% (13.5) to (8.5) (55.5) to (40.5)
5% expense increase plus 0.5% inflation rise (9.7)% (36.8) to (29.3) (29.0) to (24.0)
10% mortality increase (5.2)% (22.5) to (17.5) (23.5) to (18.5)
INSIGHT*
20% sterling appreciation/depreciation: A material sterling appreciation
reduces the value of surplus in our overseas divisions and hence has an
immediate adverse impact on the solvency surplus and EcV. Conversely, a
sterling depreciation has the opposite effect.
Equity sensitivities: The equity rise sensitivities cause both Own Funds and
SCR to rise, as the value of the funds exposed to risk is higher. The
increase in SCR can be larger than Own Funds, resulting in an immediate
reduction in the solvency ratio, depending on the starting point of the
symmetric adjustment. Conversely, in an equity fall, Own Funds and SCR both
fall, to the extent to which the SCR reduction offsets the Own Funds depends
on the stress applied. The impacts are not fully symmetrical due to
management actions and tax. The change in symmetric adjustment has a
significant impact (25% equity fall: -£29m to the SCR, 25% equity rise:
+£10m to SCR). The EcV impacts are more intuitive as they are more directly
linked to Own Funds impact. CA and Movestic contribute the most due to their
large amounts of unit-linked business, much of which is invested in equities.
Interest rate sensitivities: An interest rate rise is generally positive
across the group. An interest rate fall results in a larger impact on Own
Funds than an interest rate rise, given the current low interest rate
environment. CA, Movestic and Scildon all contribute towards the total group
impact.
50bps credit spread rise: A credit spread rise has an adverse impact on
solvency, particularly in Scildon due to corporate and non-local government
bond holdings that form part of the asset portfolios backing non-linked
insurance liabilities. The impact on the other divisions is less severe.
25bps swap rate fall: This sensitivity measures the impact of a fall in the
swap discount curve with no change in the value of assets. The result is
that liability values increase in isolation. The most material impacts are
on CA and Scildon due to the size of the non-linked book.
10% mass lapse: This sensitivity has a small impact on solvency as the
reduction in Own Funds is largely offset by a reduction in SCR. However,
with fewer policies on the books there is less potential for future profits.
The division most affected is Movestic; the loss in future fee income
following mass lapse hits Own Funds by more than the SCR reduction.
5% expense rise + 0.5% inflation rise: The expense sensitivity hits the
solvency ratio immediately as the increase in future expenses and inflation is
capitalised into the balance sheet.
10% mortality increase: This sensitivity has an adverse impact on solvency and
EcV, particularly for Scildon due to their term products.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that the
sensitivities modelled are deemed to be broadly similar (with the exception
that the 10% equity movements are naturally more likely to arise) in terms of
likelihood. Whilst sensitivities provide a useful guide, in practice, how
our results react to changing conditions is complex and the exact level of
impact can vary due to the interactions of events and starting position.
FINANCIAL REVIEW
The key performance indicators are a reflection of how the business has
performed in delivering its three strategic objectives.
Summary of each KPI:
IFRS
PRE-TAX PROFIT: £28.8M (2020: £24.6M)
TOTAL COMPREHENSIVE INCOME: £3.8M (2020: £43.3M)
What is it?
Presentation of the results in accordance with International Financial
Reporting Standards (IFRS) aims to recognise the profit arising from the
longer-term insurance and investment contracts over the life of the policy.
Why is it important?
The IFRS results form the core of reporting and hence retain prominence as a
key financial performance metric. There is however a general acceptance that
the IFRS results in isolation do not recognise the wider financial performance
of a typical life and pensions business, hence the use of supplementary
alternative performance measures to enhance understanding of financial
performance.
Risks
The IFRS profit/(loss) can be affected by a number of our principal risks and
uncertainties. Volatility in equity markets and bond yields can result in
volatility in the IFRS pre-tax profit/(loss), and foreign currency
fluctuations can affect total comprehensive income. The IFRS results of
Scildon are potentially relatively volatile, in part, due to the different
approach used by the division for valuing assets and liabilities, as permitted
under IFRS 4.
£m 2021
Operating profit 40.7
Economic profit (11.8)
Profit/(loss) on portfolio acquisition (0.1)
Profit before tax 28.8
Tax (1.5)
Forex impact & other comprehensive income (23.5)
Total comprehensive income 3.8
- Divisional pre-tax profits were ahead of expectations for the
period, with a particularly strong contribution from the UK business,
offsetting marginal losses in the Dutch businesses.
- Operating profits of £40.7m underpin the result and reflect an
uplift on the prior year, though a component of this was a release of reserves
(c£10m) in Scildon as a result of the LAT no longer biting. Excluding this
element, the year-on-year result is broadly similar, demonstrating the
stability of the core business.
- The loss on economic activities arises largely from the adverse
impact of interest rate increases on Scildon's results (which have an asset
and liability mismatch on current IFRS measurement rules).
- Total comprehensive income includes significant foreign exchange
losses on translation of the Dutch and Swedish divisional results, owing to
sterling appreciation against the euro and Swedish krona.
CASH GENERATION
GROUP CASH GENERATION £20.3M (2020: £27.7M)
DIVISIONAL CASH GENERATION £31.1M (2020: £23.6M)
What is it?
Cash generation is calculated as being the movement in Solvency II Own Funds
over the internally required capital. The internally required capital is
determined with reference to the group's capital management policies, which
have Solvency II rules at their heart. Cash generation is used by the group
as a measure of assessing how much dividend potential has been generated,
subject to ensuring other constraints are managed.
Why is it important?
Cash generation is a key measure, because it is the net cash flows to Chesnara
from its life and pensions businesses which support Chesnara's dividend-paying
capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
from existing business'. However, our cash generation is always managed in the
context of our stated value of maintaining strong solvency positions within
the regulated entities of the group.
Risks
The ability of the underlying regulated subsidiaries within the group to
generate cash is affected by a number of our principal risks and
uncertainties. Whilst cash generation is a function of the regulatory
surplus, as opposed to the IFRS surplus, it is impacted by similar drivers,
and therefore factors such as yields on fixed interest securities and equity
and property performance contribute significantly to the level of cash
generation within the group.
£m 2021
UK 27.4
Sweden (14.4)
Netherlands - Waard 2.9
Netherlands - Scildon 15.2
Divisional cash generation 31.1
Other group activities (10.8)
Group cash generation 20.3
Divisional cash generation
- Each operating division delivered a strong cash result for the
period with the exception of Movestic, which reported material cash
utilisation.
- The UK contribution was delivered through significant value
growth, supported by a smaller reduction in capital requirements, while cash
returns in Waard benefit from a rise Own Funds and fall in required capital,
each of a similar magnitude.
- Scildon reported healthy cash generation in 2021 after
delivering both value growth and a reduction in required capital. Economic
earnings supported growth in Own Funds, while new reinsurance drove a material
decrease in SCR due to lower catastrophe risk exposure.
- Own Funds growth in Movestic includes the benefit of equity
market growth, off-set by operating losses relating to strengthening future
transfer assumptions. The division also reported a corresponding increase in
SCR, primarily due to the aforementioned equity market growth and an
associated symmetric adjustment strain.
Group cash generation
- Total group cash generation includes the impact of other group
activities, primarily the impacts of group expenses on Own Funds and that of
foreign exchange movements upon consolidation of the group capital
requirements.
ECONOMIC VALUE (EcV)
£624.2M (2020: £636.8M)
What is it?
Economic value (EcV) was introduced following the introduction of Solvency II
at the start of 2016, with EcV being derived from Solvency II Own Funds. EcV
reflects a market-consistent assessment of the value of the existing insurance
business, plus the adjusted net asset value of the non-insurance businesses
within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force business and net
assets of the non-insurance business and hence is an important reference point
by which to assess Chesnara's value. A life and pensions group may typically
be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
business over time.
The EcV development of the Chesnara group over time can be a strong indicator
of how we have delivered to our strategic objectives, in particular the value
created from acquiring life and pensions businesses and enhancing our value
through writing profitable new business. It ignores the potential of new
business to be written in the future (the franchise value of our Swedish and
Dutch businesses) and the value of the company's ability to acquire further
businesses.
Risks
The Economic Value of the group is affected by economic factors such as equity
and property markets, yields on fixed interest securities and bond spreads.
In addition, the EcV position of the group can be materially affected by
exchange rate fluctuations. For example, a 20.0% weakening of the Swedish
krona and euro against sterling would reduce the EcV of the group within a
range of £90m-£110m, based on the composition of the group's EcV at 31
December 2021.
£m
2020 Group EcV 636.8
EcV earnings 57.8
Forex loss (37.1)
Pre-dividend EcV 657.5
Dividends (33.3)
2021 Group EcV 624.2
- Prior to any dividend payments, the total Economic Value
increased by £20.7m in the year.
- The closing position reflects earnings of £57.8m, driven by
positive investment market conditions, off-set by some operating losses in
both Scildon and Movestic.
- The result also incorporates material forex losses arising on
translation of the Dutch and Swedish divisional results, representing the
weakening of both the euro and Swedish krona against sterling.
- The change in EcV over the year includes the impact of the
payment of the final 2020 and interim 2021 dividends.
ECV EARNINGS
£57.8M 2020: £(37.6)M
What is it?
In recognition of the longer-term nature of the group's insurance and
investment contracts, supplementary information is presented that provides
information on the Economic Value of our business.
The principal underlying components of the Economic Value result are:
- The expected return from existing business (being the effect of
the unwind of the rates used to discount the value in-force);
- Value added by the writing of new business;
- Variations in actual experience from that assumed in the opening
valuation;
- The impact of restating assumptions underlying the determination
of expected cash flows; and
- The impact of acquisitions.
Why is it important?
A different perspective is provided in the performance of the group and on the
valuation of the business. Economic Value earnings are an important KPI as
they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
have delivered against all three of our core strategic objectives. This
includes new business profits generated from writing profitable new business,
Economic Value profit emergence from our existing businesses, and the Economic
Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors,
including those highlighted within our principal risks and uncertainties and
sensitivities analysis. In addition to the factors that affect the IFRS
pre-tax profit and cash generation of the group, the EcV earnings can be more
sensitive to other factors such as the expense base and persistency
assumptions. This is primarily due to the fact that assumption changes in
EcV affect our long-term view of the future cash flows arising from our books
of business.
£m 2021
Total operating earnings (58.8)
Economic earnings 109.6
Other 7.1
Total EcV earnings 57.8
- Total group EcV earnings of £57.8m were reported in the year.
- The total operating earnings loss includes material operating
assumption changes and other items, amounting to £26.2m. This primarily
relates to adverse changes in transfer out assumptions in Movestic.
- Other operating components include losses in Scildon and a group
level expense strain, offsetting the positive results in other divisions.
- Economic conditions during the period, with rising equity
markets coupled with increases in yields resulted in substantial economic
gains of £109.6m (2020: £9.2m).
CASH GENERATION
GROUP CASH GENERATION
£20.3M (2020: £27.7M)
DIVISIONAL CASH GENERATION
£31.1M (2020: £23.6M)
The UK and Dutch divisions delivered solid cash contributions, supporting
divisional cash generation of £31.1m in 2021. Cash is generated from
increases in the group's solvency surplus, which is represented by the excess
of own funds held over management's internal capital needs. These are based
on regulatory capital requirements, with the inclusion of additional
'management buffers'.
Definition: Defining cash generation in a Life and Pensions business is
complex and there is no reporting framework defined by the regulators. This
can lead to inconsistency across the sector. We define cash generation as
being the movement in Solvency II surplus own funds over and above the group's
internally required capital, which is based on Solvency II rules.
Implications of our cash definition:
Positives
- Creates a strong and transparent alignment to a regulated
framework.
- Positive cash results can be approximated to increased dividend
potential.
- Cash is a factor of both value and capital and hence management
are focused on capital efficiency in addition to value growth and indeed the
interplay between the two.
Challenges and limitations
- In certain circumstances the cash reported may not be
immediately distributable by a division to group or from group to
shareholders.
- Brings the technical complexities of the SII framework into the
cash results e.g. symmetric adjustment, with-profit fund restrictions, model
changes etc, and hence the headline results do not always reflect the
underlying commercial or operational performance.
2021 £m 2020 £m
Movement in Movement in management's capital requirement Forex Cash Cash generated / (utilised)
Own Funds impact generated / (utilised)
UK 25.1 2.3 - 27.4 29.5
Sweden 26.3 (35.5) (5.2) (14.4) 12.4
Netherlands - Waard Group 2.3 2.8 (2.3) 2.9 4.1
Netherlands - Scildon 9.6 6.1 (0.5) 15.2 (22.3)
Divisional cash generation / (utilisation) 63.4 (24.3) (8.1) 31.1 23.6
Other group activities (4.5) (0.1) (6.1) (10.8) 4.1
Group cash generation / (utilisation) 58.9 (24.4) (14.2) 20.3 27.7
GROUP
- Group cash generation of £20.3m is lower than the 2020 total,
although it is supported by improved divisional results over the prior year.
The result includes the adverse impact of a £14.2m foreign exchange loss on
consolidation (2020: £14.1m gain).
- Divisional cash generation of £31.1m reflects an improvement on
the prior year (2020: £23.6m), despite the cash utilisation reported in
Movestic.
- Further analysis of the key drivers of cash generation across
the group is provided below and on the following page.
UK
- The division has delivered another year of robust cash
generation. Substantial value growth, supported by a smaller reduction in
capital requirements, resulted in cash generation of £27.4m for 2021. The
growth in Own Funds was assisted by economic conditions (particularly the
positive impact of rising yield curves) and supported by solid operating
profits. The result includes the benefit of an £8.3m capital transfer from
the with-profit funds, off-set by a restricted surplus build up of £14.6m
during the year. The new annuity reinsurance arrangement that was entered into
during the year contributed to the reduction in SCR.
SWEDEN
- Movestic reported cash utilisation of £14.4m in the year, with
Own Funds growth being exceeded by a larger increase in capital
requirements. On the own funds side of the equation, growth was driven by
economic conditions and strong investment returns, particularly in equity
markets, offset by operating losses relating to strengthening future transfer
assumptions. From a capital requirements perspective, equity market-driven
growth in Own Funds has resulted in an increase in market-risk related capital
requirements, including the impact of the symmetric adjustment, which
increased significantly in the year.
NETHERLANDS - WAARD
- Waard has reported growth in Own Funds, alongside a similar
reduction in capital requirements, resulting in another year of stable cash
generation, contributing to the divisional cash total. The result includes the
positive impact of the Brand New Day policy portfolio acquisition, as well as
a foreign exchange loss due to sterling appreciation against the euro.
NETHERLANDS - SCILDON
- The Scildon result was pleasing, with a rise in Own Funds and
reduction in capital requirements yielding healthy cash returns. Value
growth was delivered predominantly via economic returns (narrowing of bond
spread and positive interest rate movements) offsetting operational strains,
largely driven by changes in assumptions relating to one-off expenses. The
reduction in required capital was driven by the new reinsurance arrangements
entered into during the year, driving a fall in catastrophe risk exposure,
while economic conditions saw favourable spread risk movements on the mortgage
portfolio.
CASH GENERATION - ENHANCED ANALYSIS
The format of the analysis draws out components of the cash generation results
relating to technical complexities, modelling issues or exceptional corporate
activity (e.g. acquisitions). The results excluding such items are deemed to
better reflect the inherent commercial outcome (Commercial cash generation).
COMMERCIAL CASH GENERATION
£53.0M (2020: £27.7M)
UK Sweden Netherlands Netherlands scildon Group adj Total
Waard
Base cash generation 27.4 (14.4) 2.9 15.2 (10.8) 20.3
Symmetric adjustment 9.8 16.2 - - - 26.1
WP restriction look through 6.3 - - - - 6.3
Acquisition activity impact - - 0.1 - 1.3 1.4
Reallocate lapse risk reversal - - - (4.0) 4.0 -
Model changes (3.6) - - (5.2) - (8.8)
LIBOR to SONIA 7.7 - - - - 7.7
Commercial cash generation 47.7 1.9 3.0 6.0 (5.5) 53.0
Whilst CA remains the dominant source of cash it is pleasing to note that all
divisions have made positive contributions. Economic conditions have been
favourable and we have also created cash from a series of management actions.
Operating cash is suppressed by the adverse impact of system investments in
Scildon and transfer outflows in Movestic. Writing new business creates long
term value and enhances business longevity but it does create short term cash
strain which is therefore a natural and expected feature of the Scildon and
Movestic results. On balance the overall Commercial cash generation outcome
benefits from a good level of diversification including the mix between open
to new business and closed book businesses.
UK
A strong commercial cash outcome which illustrates that UK remains at the
heart of the cash generation model. The acquisition of Sanlam will positively
contribute to the longevity of this core source of cash.
CA has delivered strong economic and operating results in line with
sensitivities base expectations. Management have enhanced the outcome through
management actions including annuity reinsurance and application of the
volatility adjustment.
SWEDEN
As an open business with a natural level of new business strain the total
outcome is broadly in line with expectations. Economic conditions
(predominantly equity growth) have resulted in more cash generation (looking
through the symmetric adjustment) than we would expect under more steady state
conditions, but this has been largely offset by losses due to higher
transfers. An action to reinsure some of our mass lapse exposure has enhanced
the outcome in the year.
WAARD
Waard is the only division to report economic losses within the total
commercial cash result, predominantly due to foreign exchange impacts. The
operating and management action component net results is c£6m which continues
to demonstrate the ability of the Dutch closed book division to make
meaningful cash contributions. Completion of the Robein Leven acquisition in
2022 is expected to further enhance the cash potential from Waard.
SCILDON
As is the case with Movestic, the results include the short-term adverse
impact from writing new business in line with expectations. Similarly economic
conditions (predominantly increasing yields and an increase to the value of
mortgage based investments) have resulted in more cash generation than we
would expect under steady state conditions but this has been largely offset by
losses due to IT investment expenses. We have taken out catastrophe risk
reinsurance during the year which has had a material positive capital
efficiency impact.
GROUP ADJ
The group cash loss relates primarily to foreign exchange impacts.
EcV EARNINGS
£57.8M (2020: £(37.6)M)
Economic conditions, particularly the positive impact of rising yields and
interest rates, coupled with equity market growth, underpin healthy EcV
earnings of £57.8m, offsetting some large operating losses reflective of
difficult trading conditions in Sweden and one-off items in Scildon.
Analysis of the EcV result in the period by earnings source:
£m 2021 2020
Expected movement in period (1.7) 0.3
New business 2.4 3.7
Operating experience variances (19.2) (22.0)
Other operating assumption changes (13.9) (35.8)
Other operating variances (0.2) 3.9
Material operating assumption changes and other items (26.2) (16.2)
Total operating earnings (58.8) (66.1)
Economic experience variances 79.5 45.7
Economic assumption changes 30.1 (22.8)
Total economic earnings 109.6 22.9
Other non-operating variances 4.5 (2.8)
Risk margin movement 10.8 4.7
Tax (8.2) 3.7
EcV earnings 57.8 (37.6)
Analysis of the EcV result in the year by business segment:
£m 2021 2020
UK 28.0 11.8
Sweden 26.1 (22.9)
Netherlands 8.3 (8.5)
Group and group adjustments (4.6) (18.0)
EcV earnings 57.8 (37.6)
Economic conditions: The EcV result is sensitive to investment market
conditions, and reflects material economic earnings in the year. The result
includes positive movements in interest rates and spreads, alongside equity
market returns, offset by the negative impact of rising inflation. Key
movements in investment market conditions during the year that have
contributed to the reported economic profits are:
- CPI (UK consumer price index) increased by 4.7% (year ended 31
December 2020: reduced 1%)
- FTSE All Share index increased by 15% (year ended 31 December 2020:
decreased by 12%);
- Swedish OMX all share index increased by 35% (year ended 31 December
2020: increased by 13%);
- The Netherlands AEX all share index increased by 23% (year ended 31
December 2020: increased by 4%); and
- 10-year UK gilt yields have increased from 0.24% to 0.98%.
Total operating earnings: In addition to the material operating assumption
changes, the result consists of losses in Scildon, coupled with some group
expense strain, offsetting positive earnings in both the UK and Waard. The
loss in Scildon includes adverse mortality and lapse results. While the
division reported positive lapse experience, in the current economic
environment this results in EcV losses due to guarantees within certain
policies. Scildon also reported an expense assumption strain arising from
its digitalisation programme.
A key component of the positive operating result in the UK was fee income,
arising from a higher than expected persistency throughout the year. Growth
in Waard was largely due to favourable mortality experience and resultant
changes in mortality assumptions.
Material operating assumption changes and other items: This includes
operating items that are individually material and have therefore been
analysed separately. This main component of this relates to Movestic, where
assumption strengthening had a significantly negative impact (£28.7m) on
earnings in the opening half of the year. Following changes surrounding
transfer regulations in the Swedish market during the prior year, transfer
experience in 2021, in part due to further aggressive pricing by a competitor,
has led to a need for a further strengthening of future transfer
assumptions. The other element within this category is a £2.5m gain on the
completion of Waard's acquisition of the Brand New Day portfolio during the
second quarter.
UK: The UK delivered significant value growth in 2021 with earnings more
than double the prior year total, aided by positive investment market
conditions, but also supported by solid operational growth. Economic profits
of £24.3m arose from the positive impact of rising yields and equity market
growth, overshadowing the adverse effect of rising interest rates. Operational
performance contributed earnings of £7.2m, with key items including positive
outcomes on fee income (due to higher retained policy counts) and changes in
assumptions relating to future guarantees and expenses. This offset a
strengthening of mortality assumptions and an expense strain (also owing to
higher policy counts).
Sweden: Movestic recorded earnings of £26.1m for the period, with strong
economic gains off-set by a material non-recurring operational strain. As
described above, the operational strain was mainly the consequence of
assumption changes in relation to dynamics around policy transfers. The
operational loss, excluding these assumption changes, was £3.3m, with adverse
experience on transfers and fee income overshadowing other operational
gains. New business profits of £2.9m were delivered, representing an
improvement compared to the £1.0m reported in 2020. Volume and margin
pressures remain in a challenging Swedish market, though good progress was
made in 2021, particularly on single premium and custodian business.
Improvements in fund rebate arrangements and corresponding future income, also
delivered operational gains for the division. Economic earnings of £56.3m
underpin the result (2020: £9.2m) and were primarily the result of strong
equity markets during 2021, reflected by an average policyholder investment
return of 23.3%.
Netherlands: The Dutch businesses posted combined value growth of £8.3m for
the period, with Scildon delivering gains of £6.1m and Waard contributing a
further £2.2m. Economic profits support the Scildon result, reflective of
positive interest rate movements and narrowing spreads. As indicated earlier,
Scildon has reported operating losses, largely the result of incurring
guarantee related costs as a consequence of better than expected policy
retention, and the impact of higher mortality driven outgoings than
anticipated. A strengthening of expense assumptions attributable to its
digitalisation programme was another key component of the operating result.
Waard has reported EcV earnings of £2.2m, with modest operating earnings
supported by economic profits, arising from investment market conditions.
Operationally, positive mortality experience (and subsequent changes to
assumptions) was offset by an expense strain a revision of future provisions.
The result also includes the benefit delivered by the Brand New Day portfolio
acquisition.
Group: This component comprises various group-related costs and includes:
non-maintenance related costs (such as acquisition costs); the costs of the
group's IFRS 17 programme (the budget of which was increased during the year);
and some economic-related costs such as a foreign exchange gain on our euro
debt, and the impact of rising interest rates and interest on our bank debt.
EcV
£624.2M (31 DEC 2020: £636.8M)
The Economic Value of Chesnara represents the present value of future profits
of the existing insurance business, plus the adjusted net asset value of the
non-insurance business within the group. EcV is an important reference point
by which to assess Chesnara's intrinsic value.
Value movement: 1 Jan 2021 to 31 Dec 2021:
£m
2020 Group EcV 636.8
EcV earnings 57.8
Forex loss (37.1)
Pre-dividend EcV 657.5
Dividends (33.3)
2021 Group EcV 624.2
EcV earnings: Earnings of £57.8m have been delivered in 2021. Economic
profits arising from favourable market conditions, with equity growth, rising
yields and narrowing spreads, drive the result.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £33.3m were paid during the period, being the final
dividend from 2020 and the 2021 interim dividend.
Foreign exchange: The EcV of the group includes the adverse impact of a
foreign exchange loss on consolidation, being a consequence of sterling
appreciation against the euro and Swedish krona during the year.
EcV by segment at 31 Dec 2021:
£m
UK 181.9
Sweden 244.8
Netherlands 212.7
Other group activities (15.2)
2021 Group EcV 624.2
The above table shows that the EcV of the group is diversified across its
different markets.
EcV to Solvency II:
£m
2021 Group EcV 624.2
Risk margin (38.2)
Contract boundaries 1.4
Own funds restrictions (7.8)
Dividends (22.1)
2021 SII own funds 557.5
Our reported EcV is based on a Solvency II assessment of the value of the
business but adjusted for certain items where it is deemed that Solvency II
does not reflect the commercial value of the business. The above waterfall
shows the key difference between EcV and SII, with explanations for each item
below.
Risk margin: Solvency II rules require a significant 'risk margin' which is
held on the Solvency II balance sheet as a liability, and this is considered
to be materially above a realistic cost. We therefore reduce this margin for
risk for EcV valuation purposes from being based on a 6% cost of capital to a
3.25% cost of capital.
Contract boundaries: Solvency II rules do not allow for the recognition of
future cash flows on certain in-force contracts, despite the high probability
of receipt. We therefore make an adjustment to reflect the realistic value
of the cash flows under EcV.
Ring-fenced fund restrictions: Solvency II rules require a restriction to be
placed on the value of surpluses that exist within certain ring-fenced
funds. These restrictions are reversed for EcV valuation purposes as they
are deemed to be temporary in nature.
Dividends: The proposed final dividend of £22.1m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
IFRS
IFRS PRE-TAX PROFIT
£28.8M (2020: £24.6M)
IFRS TOTAL COMPREHENSIVE INCOME
£3.8M (2020: £43.3M)
The group IFRS results reflect the natural dynamics of the segments of the
group, which can be characterised in three major components: stable core,
variable element and growth operation.
Executive summary
Stable core: At the heart of surplus, and hence cash generation, are the core
CA (excluding the S&P book) and Waard
Group segments. The requirements of these books are to provide a predictable
and stable platform for the financial model and dividend funding. As closed
books, the key is to sustain this income source as effectively as possible.
Variable element: Included within the CA segment is the S&P book. This
can bring an element of short-term earnings volatility to the group, with the
results being particularly sensitive to investment market movements due to
product guarantees. The IFRS results of Scildon are potentially relatively
volatile although this is, in part, due to reserving methodology rather than
'real world' value movements.
Growth operation: The long-term financial models of Movestic and Scildon are
based on growth, with levels of new business and premiums from existing
business being targeted to more than offset the impact of policy attrition,
leading to a general increase in assets under management and, hence,
management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the
following IFRS results:
2021 2020
£m £m Note
CA 35.6 35.7 1
Movestic 12.1 12.9 2
Waard Group 0.1 4.1 3
Scildon (0.5) 14.6 4
Chesnara (12.6) (9.4) 5
Consolidation adjustments (5.8) (6.1) 6
Profit before tax, AVIF impairment and profit on acquisition 28.9 51.8
AVIF impairment - (27.6) 7
Post completion (loss) / gain on portfolio acquisition (0.1) 0.4 3
Profit before tax 28.8 24.6
Tax (1.5) (3.4)
Profit after tax 27.4 21.2
Foreign exchange (23.9) 22.6 8
Other comprehensive income 0.4 (0.5)
Total comprehensive income 3.8 43.3
Operating profit, excluding AVIF impairment 40.7 30.6 9
Economic profit, excluding AVIF impairment (11.8) 21.2 10
Profit before tax, AVIF impairment and (loss)/gain on acquisition 28.9 51.8
AVIF impairment - (27.6) 7
Post completion (loss) / gain on portfolio acquisition (0.1) 0.4 3
Profit before tax 28.8 24.6
Tax (1.5) (3.4)
Profit after tax 27.3 21.2
Foreign exchange (23.9) 22.6 8
Other comprehensive income 0.4 (0.5)
Total comprehensive income 3.8 43.3
Note 1: The CA segment has continued to post a strong result, which saw a
strong emergence of operating profits in the year. This included a one-off
gain arising from the inception of a new annuity reinsurance agreement,
favourable policyholder tax deductions, positive with-profit modelling impacts
and favourable expense assumption impacts. Economic returns were also
positive in the year, with favourable valuation interest rate impacts being
offset slightly by adverse market and inflation rate related factors.
Note 2: Movestic continues to contribute positively to the overall group
IFRS result, with profits broadly in line with the prior year. Higher fund
rebates arising from higher assets under management, together with favourable
claims experience were the main drivers.
Note 3: The Waard Group result reflects weaker investment performance due to
investment market volatility. The result also reflects an adverse expense
assumption change in the year and slightly higher than expected acquisition
and other project related expenditure.
Note 4: The loss generated by Scildon reflects adverse investment return
movements in the year, as rising interest rates have had a negative impact on
investment values. Higher than expected expenses have also impacted the
results, with higher than anticipated project spend being incurred.
Note 5: The Chesnara result largely represents holding company expenses.
The current year loss is higher than last year largely due to 2021 including
larger one-off items such as project related expenditure, such as IFRS 17. The
result also reflects a foreign exchange gain of £1.5m in respect of the euro
denominated loan that it holds.
Note 6: Consolidation adjustments relate to items such as the amortisation
and impairment of intangible assets.
Note 7: During 2020 a write down of the Scildon AVIF intangible asset was
performed amounting to £26.6m. The impairment was as a result of a
reduction in the assessed value of the future cash flows of policies that were
in force at the point of acquisition. The AVIF held in respect of the
Protection Life book within CA was also impaired by £1.0m, following a year
end assessment. The impairments were driven by a combination of economic and
operating factors, with the exact allocation between the two being
impracticable to determine. As a result, this has been reported outside of
both operating and economic profits. No further write-downs have been
performed in 2021.
Note 8: Sterling strengthened against both the euro and Swedish krona in the
period, having a material impact on the 2021 result, creating a sizeable
exchange loss at the end of the year.
Note 9: The operating profit, excluding AVIF impairment, includes the
positive impact of fully releasing the additional reserve created in 2020 due
to the liability adequacy test biting in Scildon, amounting to £10.0m. In
the absence of this, operating profits, albeit lower than in 2020, have
remained strong, demonstrating the stability of the core business.
Note 10: Economic profit, excluding AVIF impairment, represents the components
of the earnings that are directly driven by movements in economic variables.
The economic loss in the year, largely reflects adverse investment market
factors, particularly the adverse impact of interest rate rises upon the value
of investments in the Netherlands.
IFRS net assets reduced slightly during the year, as did cash generated from
operating activities, which also decreased period on period, as positive
investment returns were outweighed by corresponding movements in insurance and
investment contract liabilities.
FINANCIAL management
The group's financial management framework is designed to provide security for
all stakeholders, while meeting the expectations of policyholders,
shareholders and regulators.
Summary:
OBJECTIVES
The group's financial management framework is designed to provide security for
all stakeholders, while meeting the expectations of policyholders,
shareholders and regulators. Accordingly we aim to:
- Maintain solvency targets
- Meet the dividend expectations of shareholders
- Optimise the gearing ratio to ensure an efficient capital base
- Ensure there is sufficient liquidity to meet obligations to
policyholders, debt financiers and creditors
- Maintain the group as a going concern
HOW WE DELIVER OUR OBJECTIVES
In order to meet our obligations we employ and undertake a number of
methods. These are centred on:
1. Monitor and control risk & solvency
2. Longer-term projections
3. Responsible investment management
4. Management actions
OUTCOMES
Key outcomes from our financial management process, in terms of meeting our
objectives, are set out below:
1. SOLVENCY:
Group Solvency Ratio: 152%
2. SHAREHOLDER RETURNS
2019-2021 TSR (0.08)%
2021 dividend yield 8.1%
Based on average 2021 share price and full year 2021 dividend of 22.60p.
3. CAPITAL STRUCTURE
Gearing ratio of 6.4%
Pro-forma gearing ratio of 30.4%*
This does not include the financial reinsurance within the Swedish business.
* Unaudited pro-forma figure is based on the 31 December 2021 actual,
adjusted for the expected impacts of the pro-forma acquisitions and tier 2
debt.
4. LIQUIDITY AND POLICYHOLDER RETURNS
Policyholders' reasonable expectations
maintained.
Asset liability matching framework operated effectively in the year.
Sufficient liquidity in the Chesnara holding company.
5. MAINTAIN THE GROUP AS A GOING CONCERN
Group remains a going concern
Further detail on capital structure
The group is funded by a combination of share capital, retained earnings and
debt finance. The debt gearing (excluding financial reinsurance in Sweden)
was 6.4% at 31 December 2021 (7.4% at 31 December 2020). The level of debt
that the board is prepared to take on is driven by the group's "Debt and
leverage policy" which incorporates the board's risk appetite in this area.
Over time, the level of gearing within the group will change, and is a
function of the funding requirements for future acquisitions and the repayment
of existing debt. Subsequent to the balance sheet date, the company
announced the successful pricing of its inaugural debt capital markets
issuance of £200m Tier 2 Subordinated Notes. This is expected to increase
group solvency from 152% to 202%.
The net proceeds of the Notes will be used for corporate purposes, including
investments and acquisitions.
Acquisitions are funded through a combination of debt, equity and internal
cash resources. The ratios of these three funding methods vary on a
deal-by-deal basis and are driven by a number of factors including, but not
limited to the size of the acquisition; current cash resources of the group;
the current gearing ratio and the board's risk tolerance limits for additional
debt; the expected cash generation profile and funding requirements of the
existing subsidiaries and potential acquisition; future financial commitments;
and regulatory rules. In addition to the above, Movestic uses a financial
reinsurance arrangement to fund its new business operation.
OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES
Maintain the group as a going concern
After making appropriate enquiries, including consideration of the emerging
potential impact of the invasion of Ukraine and the associated sanctions that
have been imposed upon Russia as a consequence and to a lesser extent, the
reducing impact of COVID-19 on the group's operations and financial position
and prospects, the directors confirm that they are satisfied that the company
and the group have adequate resources to continue in business for the
foreseeable future. Accordingly, they continue to adopt the going concern
basis in the preparation of the financial statements.
In performing this work, the board has considered the current solvency and
cash position of the group and company, coupled with the group's and company's
projected solvency and cash position as highlighted in its most recent
business plan and Own Risk and Solvency Assessment (ORSA) process. These
processes consider the financial projections of the group and its subsidiaries
on both a base case and a range of stressed scenarios, covering projected
solvency, liquidity, EcV and IFRS positions. In particular these projections
assess the cash generation of the life insurance divisions and how these flow
up into the Chesnara parent company balance sheet, with these cash flows being
used to fund debt repayments, shareholder dividends and the head office
function of the parent company. Further insight into the immediate and
longer-term impact of certain scenarios, covering solvency, cash generation
and Economic Value, can be found under the section headed 'Capital Management
Sensitivities'. The directors believe these scenarios will encompass any
potential future impact of the Ukraine crisis and COVID-19 on the group, as
Chesnara's most material ongoing exposure to both potential threats are any
associated future investment market impacts. Underpinning the projections
process outlined above are a number of assumptions. The key ones include:
- We do not assume that a future acquisition needs to take place to make
this assessment.
- We make long term investment return assumptions on equities and fixed
income securities.
- The base case scenario assumes exchange rates remain stable, and the
impact of adverse rate changes are assessed through scenario analysis.
- Levels of new business volumes and margins are assumed.
- The projections apply the most recent actuarial assumptions, such as
mortality and morbidity, lapses and expenses.
The group's strong capital position and business model, provides a degree of
comfort that although the Ukraine crisis and COVID-19 both have the potential
to cause further significant global economic disruption, the group and the
company remain well capitalised and has sufficient liquidity. As such we can
continue to remain confident that the group will continue to be in existence
in the foreseeable future. The information set out in the Capital Management
section indicates a strong Solvency II position as at 31 December 2021 as
measured at both the individual regulated life company levels and at the group
level. As well as being well-capitalised the group also has a healthy level
of cash reserves to be able to meet its debt obligations as they fall due and
does not rely on the renewal or extension of bank facilities to continue
trading. This position has been further enhanced in early 2022, when the
company announced the successful pricing of its inaugural debt capital markets
issuance of £200m Tier 2 Subordinated Notes, the net proceeds of which will
be used for corporate purposes, including investments and acquisitions. The
group's subsidiaries rely on cash flows from the maturity or sale of fixed
interest securities which match certain obligations to policyholders, which
brings with it the risk of bond default. In order to manage this risk, we
ensure that our bond portfolio is actively monitored and well diversified.
Other significant counterparty default risk relates to our principal
reinsurers. We monitor their financial position and are satisfied that any
associated credit default risk is low.
Whilst there was some short-term operational disruption from dealing with the
restricted operating environment in light of COVID-19, our assessment has
shown that both our internal functions and those operated by our key
outsourcers and suppliers adapted to these restrictions and do not cause any
issues as to our going concern.
Assessment of viability
The board assesses that being financially viable includes continuing to pay an
attractive and sustainable level of dividends to investors and meeting all
other financial obligations, including debt repayments over the three-year
business planning time horizon. The board's assessment of the viability of
the group is performed in conjunction with its going concern assessment and
considers both the time horizons required for going concern, and the slightly
longer term timelines for assessing viability. The assessment for viability
also considers the same key financial metrics as for assessing going concern,
being solvency, cash, EcV and IFRS, both on base case and stressed scenarios.
As reported in the going concern section, the group has remained well
capitalised throughout the COVID-19 pandemic, and any operational disruption
in moving to a largely remote working model in the short term, was minimal.
In light of this, should the COVID-19 situation be with us in society over the
whole viability period, we do not believe that this factor would cause any
concern as to our overall viability.
Viability statement
Based on the results of the analysis above, the directors have a reasonable
expectation that the company will be able to continue in operation and meet
its liabilities as they fall due over the three-year period of their
assessment.
Assessment of prospects
Our longer-term prospects are primarily considered through the conclusions
drawn from our annual business planning process, updated for key events that
may occur in-between business plans.
The business plans include underlying operational deliverables, an assessment
of the business model and the financial consequences of following those
plans. As part of this process we also consider the principal risks and
uncertainties that the group faces and how these might affect our prospects.
An assessment of our prospects has been shown below, updated for our
consideration of the impact of the Ukraine crisis and to a lesser extent
COVID-19. This has been structured around our three strategic objectives:
Value from in-force book: The group has c876,000 policies in force at 31
December 2021. These are generally long-term policies, and the associated
cash flows can, at an overall portfolio level, be reasonably well predicted on
base case and stressed scenarios. The group is well capitalised at both a
group and divisional level and we have high quality assets backing our
insurance liabilities. Just as equity markets had recovered from the impact
of COVID-19, the worsening situation in the Ukraine has caused equity prices
to fall. Whilst this may turn out to be a temporary situation, sustained
depressed market values do adversely impact fee income streams and therefore
if markets fall further then profitability prospects reduce. Similarly,
further reductions in yields would adversely impact our prospects. Temporary
market volatility is however a natural feature of investment markets and our
financial model is well positioned to withstand difficult conditions without
creating any permanent harm to the longer-term profitability prospects.
Acquisition Strategy: The outlook and prospects of continuing to deliver
against this strategic objective is covered in the Business Review section.
We see no reason to expect that the Ukraine crisis or COVID-19 will have a
long term impact on the availability of acquisition opportunities. Indeed,
during the year we announced two acquisitions in the year, one in the UK and
one in the Netherlands. We also completed another small Dutch acquisition in
2021 which has resulted in a £2.5m EcV gain. Waard continue to build a
useful market position as a company who are able and willing to acquire books
that are sub-scale for the vendors business model. Whilst we maintain our
ambition to complete larger deals, the prospects from a steady flow of
well-priced smaller acquisitions should not be underestimated. The financial
position of the group continues to support financing deals through the use of
our own resources or by raising debt, however in the short-term equity funding
would likely be less attractive.
Value from new business: Chesnara is in a fortunate position in that its
prospects do not fundamentally rely on the ability to sustain new business
volumes. New business levels have contributed a small amount of extra value
during the year despite the ongoing challenges as a result of COVID-19 and we
believe there remains realistic upside potential as we move into 2022.
Our business fundamentals such as assets under management, policy volumes, new
business market shares and expenses have all proven resilient to the impact of
the Ukraine crisis and pandemic. This, together with the positive assessment
of our core strategic objectives and a line of sight to positive management
actions over the planning period, leaves use well positioned to deliver
ongoing positive outcomes for all stakeholders.
RISK MANAGEMENT
Managing risk is a key part of our business model. We achieve this by
understanding the current and emerging risks to the business, mitigating them
where appropriate and ensuring they are appropriately monitored and managed.
HOW WE MANAGE RISK
RISK MANAGEMENT SYSTEM
The risk management system supports the identification, assessment, and
reporting of risks to monitor and control the probability and/or impact of
adverse outcomes within the board's risk appetite or to maximise realisation
of opportunities.
Strategy: The risk management strategy contains the objectives and principles
of risk management, the risk appetite, risk preferences and risk tolerance
limits.
Policies: The risk management policies implement the risk management strategy
and provide a set of principles (and mandated activities) for control
mechanisms that take into account the materiality of risks.
Processes: The risk management processes ensure that risks are identified,
measured/ assessed, monitored and reported to support decision making.
Reporting: The risk management reports deliver information on the material
risks faced by the business and evidence that principal risks are actively
monitored and analysed and managed against risk appetite.
Chesnara adopts the "three lines of defence" model with a single set of risk
and governance principles applied consistently across the business.
In all divisions we maintain processes for identifying, evaluating and
managing all material risks faced by the group, which are regularly reviewed
by the divisional and group Audit & Risk Committees. Our risk assessment
processes have regard to the significance of risks, the likelihood of their
occurrence and take account of the controls in place to manage them. The
processes are designed to manage the risk profile within the board's approved
risk appetite.
Group and divisional risk management processes are enhanced by stress and
scenario testing, which evaluates the impact on the group of certain adverse
events occurring separately or in combination. The results, conclusions and
any recommended actions are included within divisional and group ORSA Reports
to the relevant boards. There is a strong correlation between these adverse
events and the risks identified in 'Principal risks and uncertainties'. The
outcome of this testing provides context against which the group can assess
whether any changes to its risk appetite or to its management processes are
required.
ROLE OF THE BOARD
The Chesnara board is responsible for the adequacy of the design and
implementation of the group's risk management and internal control system and
its consistent application across divisions. All significant decisions for the
development of the group's risk management system are the group board's
responsibility.
Strategy and Risk Appetite
Chesnara group and its divisions have a defined risk strategy and supporting
risk appetite framework to embed an effective risk management framework,
culture and processes at its heart and to create a holistic, transparent and
focused approach to risk identification, assessment, management, monitoring
and reporting.
The Chesnara board approves a set of risk preferences which articulate, in
simple terms, the desire to increase, maintain, or reduce the level of risk
taking for each main category of risk. The risk position of the business is
monitored against these preferences using risk tolerance limits, where
appropriate, and they are taken into account by the management teams across
the group when taking strategic or operational decisions that affect the risk
profile.
Risk and Control Policies
Chesnara has a set of Risk and Control Policies that set out the key policies,
processes and controls to be applied. The Chesnara board approves the
review, updates and attestation of these policies at least annually.
Risk Identification
The group maintains a register of risks which are specific to its activity and
scans the horizon to identify potential risk events (e.g. political; economic;
technological; environmental, legislative & social).
On an annual basis the board approves the materiality criteria to be applied
in the risk scoring and in the determination of what is considered to be a
principal risk. At least quarterly the principal and emerging risks are
reported to the board, assessing their proximity, probability and potential
impact.
Own Risk and Solvency Assessment (ORSA)
On an annual basis, or more frequently if required, the group produces a group
ORSA Report which aggregates the divisional ORSA findings and supplements
these with an assessment specific to group activities. The group and
divisional ORSA policies outline the key processes and contents of these
reports.
The Chesnara board is responsible for approving the ORSA, including steering
in advance how the assessment is performed and challenging the results.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of and
attestation to the effectiveness of the risk management system. The assessment
considers the extent to which the risk management system is embedded.
The Chesnara board is responsible for monitoring the Risk Management System
and its effectiveness across the group. The outcome of the annual review is
reported to the group board which make decisions regarding its further
development.
COVID-19
Although COVID-19 has been a material event, it is not documented here as a
principal risk in its own right, as the impacts from COVID-19 are already
covered by other principal risks, for example, market risks, mortality risk
and other risks associated with operational failure and business continuity.
The Chesnara group has continued to remain operationally and financially
stable throughout the COVID-19 pandemic, providing a high level of assurance
regarding operational resilience processes and the suitability of the approach
taken.
CLIMATE CHANGE RISK WITHIN CHESNARA'S RISK FRAMEWORK
Climate change is not considered as a standalone principal risk. Instead,
the risks arising from climate change are integrated through existing
considerations and events within the framework. The information in the
following pages has been updated to reflect Chesnara's latest views on the
potential implications of climate change risk and wider developments and
activity in relation to Environmental, Social and Governance (ESG).
Chesnara has embedded climate change risk within the group's risk framework
during 2021 and included a detailed assessment alongside the group's ORSA,
concluding that the group is not materially exposed to climate change risk.
UKRAINE CONFLICT
The invasion of Ukraine by Russia is considered to be an emerging risk for
Chesnara Group in the sense that it is a rapidly evolving situation and has
potential implications for Chesnara's Principal risks. The risk information on
the following pages includes specific commentary where appropriate.
principal risks and uncertainties
The following tables outline the principal risks and uncertainties of the
group and the controls in place to mitigate or manage their impact. It has
been drawn together following regular assessment, performed by the Audit &
Risk Committee, of the principal risks facing the group, including those that
would threaten its business model, future performance, solvency or liquidity.
The impacts are not quantified in the tables. However, by virtue of the
risks being defined as principal, the impacts are potentially significant.
Those risks with potential for a material financial impact are covered within
the sensitivities
PR1 - INVESTMENT AND LIQUIDITY RISK
DESCRIPTION Exposure to financial losses or value reduction arising from adverse movements
in currency, investment markets, counterparty defaults, or through inadequate
asset liability matching.
RISK APPETITE The group accepts this risk but has controls in place to prevent any increase
or decrease in the risk exposure beyond set levels. These controls will result
in early intervention if the amount of risk approaches those limits.
POTENTIAL IMPACT Market risk results from fluctuations in asset values, foreign exchange rates
and interest rates and has the potential to affect the group's ability to fund
its commitments to customers and other creditors, as well as pay a return to
shareholders.
Chesnara and each of its subsidiaries have obligations to make future
payments, which are not always known with certainty in terms of timing or
amounts, prior to the payment date. This includes primarily the payment of
policyholder claims, reinsurance premiums, debt repayments and dividends.
The uncertainty of timing and amounts to be paid gives rise to potential
liquidity risk, should the funds not be available to make payment.
Other liquidity issues could arise from counterparty failures/credit defaults,
a large spike in the level of claims or other significant unexpected expenses.
Worldwide developments in Environmental, Social, and Governance (ESG)
responsibilities and reporting have the potential to influence market risk in
particular, for example the risks arising from transition to a carbon neutral
industry, with corresponding changes in consumer preferences and behaviour.
KEY CONTROLS RECENT CHANGE / OUTLOOK
- Regular monitoring of exposures and performance; COVID-19 has arguably introduced greater uncertainty into investment markets,
given that the longer-term effects of government enforced social and economic
- Asset liability matching; restrictions remains unclear, as does the extent to which those restrictions
may need to continue or be repeated in future as the virus, and any subsequent
- Maintaining a well-diversified asset portfolio; mutations, continues to affect different parts of the world. 2021 was a year
of high equity growth, but also with an appreciation in sterling and inflation
- Holding a significant amount of surplus in highly liquid "Tier 1" assets increasing. Chesnara continues to monitor these closely given the heightened
such as cash and gilts; level of uncertainty and volatility but remains within risk appetite in terms
of its exposures.
- Utilising a range of investment funds and managers to avoid significant
concentrations of risk; With greater global emphasis being placed on environmental and social factors
when selecting investment strategies, the group has an emerging exposure to
- Having an established investment governance framework to provide review "transition risk" arising from changing preference and influence of, in
and oversight of external fund managers; particular, institutional investors. This has the potential to result in
adverse investment returns on any assets that perform poorly as a result of
- Regular liquidity forecasts; "ESG transition". Chesnara's 2021 risk analysis of transition risk
demonstrates that this is well within its risk appetite and within its
- Considering the cost/benefit of hedging when appropriate; standard economic sensitivities.
- Actively optimising the risk / return trade-off between yield on fixed The conflict in Ukraine / Russia brings additional economic uncertainty and
interest assets compared with the associated balance sheet volatility and volatility to financial markets, including the potential for higher
potential for defaults or downgrades; and inflationary pressures in the short term. The group has no direct exposure in
terms of investments in Russian funds or companies via customer unit linked
- Giving due regular consideration (and discussing appropriate strategies funds, and we are working with customers that are exposed to help them.
with fund managers) to longer term global changes that may affect investment
markets, such as climate changes.
PR2 - REGULATORY CHANGE RISK (INCLUDING BREXIT)
DESCRIPTION The risk of adverse changes in industry practice/regulation, or inconsistent
application of regulation across territories.
RISK APPETITE The group aims to minimise any exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Chesnara currently operates in three regulatory domains and is therefore
exposed to potential for inconsistent application of regulatory standards
across divisions, such as the imposition of higher capital buffers over and
above regulatory minimum requirements. Potential consequences of this risk for
Chesnara are the constraining of efficient and fluid use of capital within the
group or creating a non-level playing field with respect to future new
business/acquisitions.
Regulatory developments continue to drive a high level of change activity
across the group, with items such as operational resilience, climate change
and IFRS17 being particularly high profile. Such regulatory initiatives
carry the risk of expense overruns should it not be possible to adhere to them
in a manner that is proportionate to the nature and scale of Chesnara's
businesses. The group is therefore exposed to the risk of:
- incurring one-off costs of addressing regulatory change as well as any
permanent increases in the cost base in order to meet enhanced standards;
- erosion in value arising from pressure or enforcement to reduce future
policy charges;
- erosion in value arising from pressure or enforcement to financially
compensate for past practice; and
- regulatory fines or censure in the event that it is considered to have
breached standards or fails to deliver changes to the required regulatory
standards on a timely basis.
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara seeks to limit any potential impacts of regulatory change on the The jurisdictions which Chesnara operates in are currently subject to
business by: significant change arising from political, regulatory and legal change. These
may either be localised or may apply more widely, following from EU-based
- Having processes in place for monitoring changes, to enable timely actions regulation and law, or the potential unwinding of this following the UK's
to be taken, as appropriate; departure from the EU.
- Maintaining strong open relationships with all regulators, and proactively The PRA's post Brexit transition period ends on 31 March 2022. In addition,
discussing their initiatives to encourage a proportional approach the UK Treasury and EIOPA are both undertaking a review of SII rules
implementation. There is potential for divergence of regulatory approaches
- Being a member of the ABI and equivalent overseas organisations and amongst European regulators with potential implications for Chesnara's
utilising other means of joint industry representation; capital, regulatory supervision and structure.
- Performing internal reviews of compliance with regulations; and The group has considered any restructuring which could be required to align to
changes in the requirements of cross border regulatory supervision. In
- Utilising external specialist advice and assurance, when appropriate. extremis, Chesnara could consider the re-domiciling of subsidiaries or legal
restructure of the business, should this result in a more commercially
Regulatory risk is monitored and scenario tests are performed to understand acceptable business model in a changed operating environment. In addition,
the potential impacts of adverse political, regulatory or legal changes, along there are a number of potential secondary impacts such as economic
with consideration of actions that may be taken to minimise the impact, should implications, and the effect of any regulatory divergence as the PRA
they arise. progresses SII-equivalent regulation for the UK businesses. Chesnara will
monitor the consultation and discussions arising under EIOPA's Solvency II
Review, and in the context of Brexit and the UK's ultimate position regarding
SII equivalence.
The group is subject to evolving regimes governing the recovery, resolution or
restructuring of insurance companies. As part of the global regulatory
response to the risk that systemically important financial institutions could
fail, banks, and more recently insurance companies, have been the focus of new
recovery and resolution planning requirements developed by regulators and
policy makers nationally and internationally. It remains unclear to what
extent any future recovery and resolution regime could apply to the group in
the future and, consequently, what the implications of such a development
would be for the group and its creditors.
PR3 - ACQUISITION RISK
DESCRIPTION The risk of failure to source acquisitions that meet Chesnara's criteria or
the execution of acquisitions with subsequent unexpected financial losses or
value reduction.
RISK APPETITE Chesnara has a patient approach to acquisition and generally expects
acquisitions to enhance EcV and expected cash generation in the medium term
(net of external financing), though each opportunity will be assessed on its
own merits.
POTENTIAL IMPACT The acquisition element of Chesnara's growth strategy is dependent on the
availability of attractive future acquisition opportunities. Hence, the
business is exposed to the risk of a reduction in the availability of suitable
acquisition opportunities within Chesnara's current target markets, for
example arising as a result of a change in competition in the consolidation
market or from regulatory change influencing the extent of life company
strategic restructuring.
Through the execution of acquisitions, Chesnara is also exposed to the risk of
erosion of value or financial losses arising from risks inherent within
businesses or funds acquired which are not adequately priced for or mitigated
as part of the transaction.
We have assessed that COVID-19 does not materially increase the level by which
Chesnara is exposed to this risk.
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara's financial strength, strong relationships and reputation as a "safe Chesnara has completed a portfolio acquisition in the Netherlands during 2021
hands acquirer" via regular contact with regulators, banks and target and has agreed to complete further acquisitions the first half of 2022, one in
companies enables the company to adopt a patient and risk-based approach to the UK and another in the Netherlands, whilst maintaining the established
assessing acquisition opportunities. Operating in multi-territories provides disciplines within the Acquisition Policy.
some diversification against the risk of changing market circumstances in one
of the territories. Consideration of additional territories within The successful Tier 2 debt raise, in addition to diversifying the group's
Western-Europe remains on the agenda, if the circumstances of entry meet capital structure, has provided additional flexibility in terms of funding
Chesnara's stated criteria. Chesnara's future growth strategy.
Chesnara seeks to limit any potential unexpected adverse impacts of
acquisitions by:
- Applying a structured board approved risk-based Acquisition Policy
including CRO involvement in the due diligence process and deal refinement
processes;
- Having a management team with significant and proven experience in mergers
and acquisitions; and
- Adopting a cautious risk appetite and pricing approach.
PR4 - DEMOGRAPHIC EXPERIENCE RISK
DESCRIPTION Risk of adverse demographic experience compared with assumptions (such as
rates of mortality, morbidity, persistency etc.)
RISK APPETITE The group accepts this risk but restricts its exposure, to the extent
possible, through the use of reinsurance and other controls. Early warning
trigger monitoring is in place to track any increase or decrease in the risk
exposure beyond a set level, with action taken to address any impact as
necessary.
POTENTIAL IMPACT In the event that demographic experience (rates of mortality, morbidity,
persistency etc.) varies from the assumptions underlying product pricing and
subsequent reserving, more or less profit will accrue to the group.
The effect of recognising any changes in future demographic assumptions at a
point in time would be to crystallise any expected future gain or loss on the
balance sheet.
If mortality or morbidity experience is higher than that assumed in pricing
contracts (i.e. more death and sickness claims are made than expected), this
will typically result in less profit accruing to the group.
If persistency is significantly lower than that assumed in product pricing and
subsequent reserving, this will typically lead to reduced group profitability
in the medium to long-term, as a result of a reduction in future income
arising from charges on those products. The effects of this could be more
severe in the case of a one-off event resulting in multiple withdrawals over a
short period of time (a "mass lapse" event).
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara performs close monitoring of persistency levels across all groups of Legislation introduced at the start of 2020, and enhanced at the start of
business to support best estimate assumptions and identify trends. There is 2021, made it easier for customers to transfer insurance policies in Sweden.
also partial risk diversification in that the group has a portfolio of annuity Even before the legislation passed, this resulted in higher transfer activity
contracts where the benefits cease on death. in the market, particularly driven by brokers. The higher rates of transfers
have persisted through 2021 as a result of the legislation and compounded by a
Chesnara seeks to limit the impacts of adverse demographic experience by: competitive market, resulting in further changes to the transfer
assumptions.
- Aiming to deliver good customer service and fair customer outcomes;
COVID-19 increased the number of deaths arising in 2020 and 2021. The effect
- Having effective underwriting techniques and reinsurance programmes, of this is expected to be more pronounced in older lives rather than in the
including the application of "Mass Lapse reinsurance", where appropriate; typical ages of the assured lives in the Chesnara books. Chesnara does not
expect the pandemic to have a material impact on mortality experience and
- Carrying out regular investigations, and industry analysis, to support costs in the long-term.
best estimate assumptions and identify trends;
- Active investment management to ensure competitive policyholder investment
funds; and
- Maintaining good relationships with brokers, which is independently
measured via yearly external surveys that considers brokers attitude towards
different insurers.
PR5 - EXPENSE RISK
DESCRIPTION Risk of expense overruns and unsustainable unit cost growth.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group is exposed to expenses being higher than expected as a result of
one-off increases in the underlying cost of performing key functions, or
through higher inflation of variable expenses.
A key underlying source of potential increases in regular expense is the
additional regulatory expectations on the sector.
For the closed funds, the group is exposed to the impact on profitability of
fixed and semi-fixed expenses, in conjunction with a diminishing policy
base.
For the companies open to new businesses, the group is exposed to the impact
of expense levels varying adversely from those assumed in product pricing.
Similar, for acquisitions, there is a risk that the assumed costs of running
the acquired business allowed for in pricing are not achieved in practice, or
any assumed cost synergies with existing businesses are not achieved.
KEY CONTROLS RECENT CHANGE / OUTLOOK
For all subsidiaries, the group maintains a regime of budgetary control. Chesnara has an ongoing expense management programme and various strategic
projects aimed at controlling expenses.
- Movestic and Scildon assume growth through new business such that the
general unit cost trend is positive; Inflation has materially increased during 2021 in all territories including
both long term measures and short-term distortions in wage inflation due to
- The Waard Group pursues a low cost-base strategy using a designated the economic impacts of COVID-19 e.g., the operation of the furlough scheme.
service company. The cost base is supported by service income from third Higher inflation would increase Chesnara's expected longer-term cost base.
party customers;
Through its exposures to investments in real asset classes, both direct and
- Countrywide Assured pursues a strategy of outsourcing functions with indirect, Chesnara has an indirect hedge against the effects of inflation and
charging structures such that the policy administration cost is more aligned will consider more direct inflation hedging options should circumstances
to the book' s run off profile; and determine that to be appropriate.
- With an increased current level of operational and strategic change within
the business, a policy of strict Project Budget Accounting discipline is being
upheld by the group for all material projects.
PR6 - OPERATIONAL RISK
DESCRIPTION Significant operational failure/business continuity event.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group and its subsidiaries are exposed to operational risks which arise
through daily activities and running of the business. Operational risks may,
for example, arise due to technical or human errors, failed internal
processes, insufficient personnel resources or fraud caused by internal or
external persons. As a result, the group may suffer financial losses, poor
customer outcomes, reputational damage, regulatory intervention or business
plan failure.
Part of the group's operating model is to outsource support activities to
specialist service providers. Consequently, a significant element of the
operational risk arises within its outsourced providers.
KEY CONTROLS RECENT CHANGE / OUTLOOK
The group perceives operational risk as an inherent part of the day-to-day Operational resilience remains a key focus for the business and high on the
running of the business and understands that it can't be completely regulatory agenda following the regulatory changes published by the BoE, PRA
eliminated. However, the Company's objective is to always control or mitigate and FCA. Chesnara Plc is progressing activity as part of a UK Operational
operational risks, and to minimise the exposure when it's possible to do so in Resilience project to identify important business services, carry out scenario
a convenient and cost-effective way. testing and establish respective impact tolerances. Each Business Unit
continues to carry out assurance activities through local business continuity
Chesnara seeks to reduce the impact and likelihood of operational risk by: programmes to ensure robust plans are in place to limit business disruption in
a range of severe but plausible events. In response to COVID-19, Chesnara, its
- Monitoring of key performance indicators and comprehensive management subsidiaries and outsourced service providers all adapted to remote working
information flows; conditions, utilising communication technology as required and implementation
of additional controls.
- Effective governance of outsourced service providers including a regular
financial assessment. Under the terms of the contractual arrangements the
group may impose penalties and/or exercise step-in rights in the event of
specified adverse circumstances;
- Regular testing of business continuity plans;
- Regular staff training and development;
- Employee performance management frameworks;
- Promoting the sharing of knowledge and expertise; and
- Complementing internal expertise with established relationships with
external specialist partners.
PR7 - IT / DATA SECURITY & CYBER RISK
DESCRIPTION Risk of IT/ data security failures or impacts of malicious cyber-crime
(including ransomware) on continued operational stability.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Cyber risk is a growing risk affecting all companies, particularly those who
are custodians of customer data. The most pertinent risk exposure relates to
information security (i.e. protecting business sensitive and personal data)
and can arise from failure of internal processes and standards, but
increasingly companies are becoming exposed to potential malicious
cyber-attacks, organisation specific malware designed to exploit
vulnerabilities, phishing attacks etc. The extent of Chesnara's exposure to
such threats also includes third party service providers.
The potential impact of this risk includes financial losses, inability to
perform critical functions, disruption to policyholder services, loss of
sensitive data and corresponding reputational damage or fines.
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara seeks to limit the exposure and potential impacts from IT/data Chesnara continues to invest in the incremental strengthening of its cyber
security failures or cyber-crime by: risk resilience and response options.
- Embedding the Information Security Policy in all key operations and No reports of material data breaches.
development processes;
The move to remote working, as a result of COVID-19, had the potential to
- Seeking ongoing specialist external advice, modifications to IT increase cyber risk for businesses and therefore various steps were taken to
infrastructure and updates as appropriate; enhance security, processes and controls to protect against this.
- Delivering regular staff training and attestation to the information It is anticipated that cyber crime campaigns originating from Russia will
security policy; increase, with some suppliers already reporting an increase in information
security threats which some are saying is state sponsored. Although Chesnara
- Regular employee phishing tests and awareness sessions; is not considered to be a direct target of any such campaigns, all business
units have confirmed that they have increased monitoring and detection/
- Ensuring the board encompasses directors with information technology and protection controls in relation to the increased threat.
security knowledge;
- Conducting penetration and vulnerability testing, including third party
service providers;
- Executive committee and board level responsibility for the risk, included
dedicated IT security committees with executive membership;
- Having established Chesnara and supplier business continuity plans which
are regularly monitored and tested;
- Ensuring Chesnara's outsourced IT service provider maintains relevant
information security standard accreditation (ISO27001); and
- Monitoring network and system security including firewall protection,
antivirus and software updates.
In addition, a designated Steering Group provides oversight of the IT estate
and Information Security environment including:
- Changes and developments to the IT estate;
- Performance and security monitoring;
- Oversight of Information Security incident management;
- Information Security awareness and training;
- Development of Business Continuity plans and testing; and
- Overseeing compliance with the Information Security Policy.
PR8 - NEW BUSINESS RISK
DESCRIPTION Adverse new business performance compared with projected value.
RISK APPETITE Chesnara does not wish to write new business that does not generate positive
new business value (on a commercial basis) over the business planning horizon.
POTENTIAL IMPACT If new business performance is significantly lower than the projected value,
this will typically lead to reduced value growth in the medium to long-term. A
sustained low level performance may lead to insufficient new business profits
to justify remaining open to new business.
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara seeks to limit any potential unexpected adverse impacts of COVID-19 caused some volatility in new business volumes across markets as well
acquisitions by: as in individual business' volumes during 2021.
- Monitoring quarterly new business profit performance; Overall volumes during the pandemic have been lower than historic levels,
largely as a result of restrictions on face-to-face sales meetings and
- Investing in brand and marketing; customer demand.
- Maintaining good relationships with brokers; Competition has increased in the Swedish market resulting in lower transfers
in and higher transfers out. This activity has been further enabled to a
- Offering attractive products that suit customer needs; degree by new legislation in Sweden. As a result of recent changes in
competitor offerings, making them less attractive, 'transfers out' have begun
- Monitoring market position and competitor pricing, adjusting as to trend back down towards more normal levels.
appropriate;
Scildon has increased market share in protection business within the
- Maintaining appropriate customer service levels and experience; and Netherlands.
- Monitoring market and pricing movements. There is potential for COVID-19 to influence the operating environment on a
long-term basis and drive changes in competitor, regulator or counterparty
(e.g. broker) behaviours. For example, any restrictions on Brokers meeting
new customers face to face could result in increased focus on the existing
customers and risk of churn.
PR9 - REPUTATIONAL RISK
DESCRIPTION Poor or inconsistent reputation with customers, regulators, investors, staff
or other key stakeholders/counterparties.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group is exposed to the risk that litigation, employee misconduct,
operational failures, the outcome of regulatory investigations, press
speculation and negative publicity, disclosure of confidential client
information (including the loss or theft of customer data), IT failures or
disruption, cyber security breaches and/or inadequate services, amongst
others, whether true or not, could impact its brand or reputation. The group's
brand and reputation could also be affected if products or services
recommended by it (or any of its intermediaries) do not perform as expected
(whether or not the expectations are realistic) or in line with the customers'
expectations for the product range.
Any damage to the group's brand or reputation could cause existing customers
or partners to withdraw their business from the group, and potential customers
or partners to elect not to do business with the Group and could make it more
difficult for the group to attract and retain qualified employees.
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara seeks to limit any potential reputational damage by: Given the global focus on climate change as well as the significant momentum
in the finance industry, the group is exposed to strategic and reputational
- Regulatory publication reviews and analysis risks arising from its action or inaction in response to climate change as
well the regulatory and reputational risks arising from its public disclosures
- Timely response to regulatory requests on the matter.
- Open and honest communications In relation to the Ukraine / Russia conflict, no material exposure has been
identified in terms of the group's key counterparty connections. There are
- HR policies and procedures limited indirect connections through third parties who have a presence in
Russia and Chesnara has confirmed that there are no obvious links with Russia
- Fit & Proper procedures through it's shareholders or stockbrokers.
- Operational and IT Data Security Frameworks
- Product governance and remediation frameworks
- Appropriate due diligence and oversight of outsourcers and third parties
DIRECTORS' REsponsibilities STATEMENT
With regards to this preliminary announcement, the Directors confirm to the
best of their knowledge that:
- The financial statements have been prepared in accordance with
United Kingdom adopted international accounting standards and give a true and
fair view of the assets, liabilities, financial position and profit for the
Company and the undertakings included in the consolidation as a whole;
- Pursuant to Disclosure and Transparency Rules Chapter 4, the
Chairman's Statement and Management Report include a fair review of the
development and performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties faced by the
business.
On behalf of the Board
Luke Savage Steve Murray
Chairman Chief
Executive Officer
30 March 2022 30 March 2022
INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON THE
PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC
As the independent auditor of Chesnara plc we are required by UK Listing Rule
LR 9.7A.1(2)R to agree to the publication of Chesnara plc's preliminary
announcement statement of annual results for the year ended 31 December 2021.
The preliminary statement of annual results for the year ended 31 December
2021 includes disclosures required by the Listing Rules and any additional
content such as highlights, Chairman's Statement, component business review, a
consolidated statement of comprehensive income, balance sheet and statement of
cash flows. We are not required to agree to the publication of presentations
to analysts.
The directors of Chesnara plc are responsible for the preparation,
presentation and publication of the preliminary statement of annual results in
accordance with the UK Listing Rules.
We are responsible for agreeing to the publication of the preliminary
statement of annual results, having regard to the Financial Reporting
Council's Bulletin "The Auditor's Association with Preliminary Announcements
made in accordance with UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Chesnara plc is complete and
we signed our auditor's report on 30 March 2022. Our auditor's report is not
modified and contains no emphasis of matter paragraph.
Our audit report on the full financial statements sets out the following key
audit matters which had the greatest effect on our overall audit strategy; the
allocation of resources in our audit; and directing the efforts of the
engagement team, together with how our audit responded to those key audit
matters and the key observations arising from our work:
Valuation of Scildon insurance liabilities
Key audit matter description Scildon measures the majority of its insurance contract liabilities using
historical market rates of interest along with a number of other parameters
and assumptions. At 31 December 2021, the Scildon insurance liabilities
contributed £1.9bn of the group total of £3.8bn.
IFRS 4 requires an insurer, at the end of each reporting period, to assess
whether its recognised insurance liabilities are adequate, using current
estimates of future cash flows (the "Liability adequacy test", or "LAT").
Given Scildon's accounting policy makes use of historical market interest
rates, there is a heightened risk that its reserves under IFRS 4 are not
adequate.
We therefore consider the initial parameter setting process and LAT as key
audit matters, specifically in relation to the mortality, lapse and expense
assumptions which feed into the test, given that the insurance liabilities are
most sensitive to these factors.
We have also deemed there to be a risk of fraud, due to the inherent risk of
management overriding internal controls around the setting of the parameters
used to calculate the reserves at inception.
The accounting policy adopted by the group is documented within note 2(g) to
the financial statements, with the assumptions and sensitivities set out
within note 28 therewith.
How the scope of our audit responded to the key audit matter In respect of the adequacy of Scildon reserves:
· we gained an understanding of the relevant controls around the
setting of the assumptions feeding into the LAT;
· with the involvement of actuarial specialists, we challenged the
mortality, lapse and expense assumptions which feed into the test, by
evaluating experience, supporting documents and calculations;
· we assessed the results of the experience investigations carried out
by management to determine whether they provide support for the assumptions;
· we performed analytics on policy cash flows, and carried out further
investigation on outliers and movements compared to the prior period; and
· for a sample of policies, we recalculated the reserve at a policy
level, using our independent replication model, and compared the results to
those produced by management.
Key observations Based on the procedures performed, we concluded that the initial parameter
setting process were reasonable, and LAT performed by management was
reasonable, supporting the valuation of Scildon's insurance contract
liabilities.
Valuation of Movestic Deferred Acquisition Costs intangible asset
Key audit matter description Acquisition costs relating to investment contracts comprise directly
attributable incremental acquisition costs, which vary with, and are related
to, securing new business, are recognised as an asset to the extent that they
represent the contractual right to future benefits from the provision of
investment management service. The asset is presented as a deferred
acquisition cost asset, and is amortised over the expected term of the
contract, as the fees relating to the provision of the services are
recognised.
There are a number of key judgement areas within this balance, both in terms
of the amortisation period selected for the DAC and also in management's
assessment of the asset for impairment. The impairment assessment is most
sensitive to mortality, transfer, surrender, and expense assumptions.
As at year end 2021, the DAC balance held on the group balance sheet totalled
£63.3m (2020; £69.1m), of which £53.6m (2020; £58.5m) related to the
Movestic component. Due to the significance of the balance and the uncertainty
brought about by regulatory changes and competition in the Swedish market,
driving an increase in transfers out, we identified a key audit matter related
to the valuation of the Movestic DAC.
Due to the potential for management to introduce inappropriate bias to
judgements made in the impairment assessment, we have determined that there
was a risk of misstatement due to fraud.
The accounting policy relating to deferred acquisition costs has been
presented through note 2(g)iii to the financial statements, and details of the
balance and movement are set out in note 18 therewith.
How the scope of our audit responded to the key audit matter In respect of the Movestic DAC:
· we gained an understanding of the relevant controls in place around
the setting of the amortisation profile, and the impairment test;
· we have assessed the rationale for the expense ledger balances
capitalised, and performed tests of detail around contracts to assess the
valuation of the DAC;
· we have created an expectation of the DAC balance using the amounts
capitalised through the period, offset with the amortisation charge. We have
also performed investigation into any differences;
· with the involvement of actuarial specialists, we challenged the
amortisation profile adopted by management, by constructing a range of
independent amortisation profiles based on alternative data; and
· with the involvement of actuarial specialists we challenged the
reasonableness of management's assumptions within the impairment test by
evaluating experience, supporting documents and calculations.
Key observations Based on the procedures performed, we consider the DAC valuation to be
appropriate.
Valuation of Chesnara plc's investment in CA plc
Key audit matter description Chesnara plc, the group's parent entity, holds a total investment of £354.7m
(2020: £354.7m) on the company balance sheet relating to its investment in
group subsidiaries, of which £167.9m (2020: £167.9m) related to the UK
entity, CA plc. The balance is held at cost less impairment.
In line with IAS 36 Impairment of Assets, management are required to carry
out an impairment assessment annually to ensure that the investment in CA plc
is not carried at more than the recoverable amount, which is the higher of
fair value less costs of disposal and value in use. Management have
historically deemed EcV to be an appropriate proxy for the IAS 36 "value in
use" within their impairment assessment. Management's definition of EcV has
been set out on page 218 of the financial statements.
The reduction of the CA plc EcV by £19.6m between 31 December 2020 (£187.2m)
and 30 June 2021 (£167.6m) was an indicator that the investment could be
impaired at 31 December 2021. We therefore identified a key audit matter
relating to the balance.
The impairment assessment performed by management as at the balance sheet date
highlighted c.£14.0m (2020: £19.3m) of headroom over the carrying value of
the investment, and hence no impairment was deemed necessary.
Due to the potential for management to introduce inappropriate bias to
judgements made in the impairment assessment, we have determined that there
was a risk of misstatement due to fraud.
The accounting policy relating to the valuation of Chesnara plc's investment
in CA plc has been presented through note 2(hh) to the financial statements,
with details of the balance and movement within note 22 therewith.
How the scope of our audit responded to the key audit matter In respect of the investment in Countrywide Assured plc:
· we gained an understanding of the relevant controls in place around
the impairment assessment;
· we evaluated management's methodology and the appropriateness of
using EcV as a proxy for the "value in use" with reference to the requirements
of IAS 36;
· we challenged management's assessment by performing benchmarking
against other recent industry transactions to gain corroborative and
contradictory evidence; and
· with the support of our actuarial specialists, we have challenged the
adjustments made to the IFRS balance sheet to arrive at EcV.
Key observations Based on the procedures performed, we consider the carrying value of Chesnara
plc's investment in CA plc on the company balance sheet to be appropriate.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we did not
provide a separate opinion on these matters.
Procedures performed to agree to the preliminary announcement of annual results
In order to agree to the publication of the preliminary announcement of annual
results of Chesnara plc we carried out the following procedures:
(a) checked that the figures in the preliminary announcement covering the
full year have been accurately extracted from the audited or draft financial
statements and reflect the presentation to be adopted in the audited financial
statements;
(b) considered whether the information (including the management commentary)
is consistent with other expected contents of the annual report;
(c) considered whether the financial information in the preliminary
announcement is misstated;
(d) considered whether the preliminary announcement includes a statement by
directors as required by section 435 of CA 2006 and whether the preliminary
announcement includes the minimum information required by UKLA Listing Rule
9.7A.1;
(e) where the preliminary announcement includes alternative performance
measures ("APMs"), considered whether appropriate prominence is given to
statutory financial information and whether:
· the use, relevance and reliability of APMs has been explained;
· the APMs used have been clearly defined, and have been given
meaningful labels reflecting their content and basis of calculation;
· the APMs have been reconciled to the most directly reconcilable line
item, subtotal or total presented in the financial statements of the
corresponding period; and
· comparatives have been included, and where the basis of calculation
has changed over time this is explained.
(f) read the management commentary, any other narrative disclosures and
any final interim period figures and considered whether they are fair,
balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on the financial
statements is to the company's members as a body, in accordance with Chapter 3
of Part 16 of the Companies Act 2006. Our audit work has been undertaken so
that we might state to the company's members those matters we are required to
state to them in an auditor's report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company's members as a body, for our audit
work, for our audit report or this report, or for the opinions we have formed.
Andrew Holland, FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Bristol, United Kingdom
30 March 2022
IFRS FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2021 2020
£000 £000
Insurance premium revenue 312,046 293,365
Insurance premium ceded to reinsurers (115,881) (42,907)
Net insurance premium revenue 196,165 250,458
Fee and commission income 89,975 92,698
Net investment return 1,172,988 254,568
Other operating income 46,568 40,181
Total income net of investment return 1,505,696 637,905
Insurance contract claims and benefits incurred:
Claims and benefits paid to insurance contract holders (506,490) (420,031)
Net (increase)/decrease in insurance contract provisions (23,577) 6,869
Reinsurers' share of claims and benefits 60,168 48,178
Net insurance contract claims and benefits (469,899) (364,984)
Change in investment contract liabilities (902,579) (110,878)
Reinsurers' share of investment contract liabilities 4,110 1,340
Net change in investment contract liabilities (898,469) (109,538)
Fees, commission and other acquisition costs (24,023) (23,625)
Administrative expenses (67,925) (70,952)
Other operating expenses:
Charge for impairment of acquired value of in-force business - (27,623)
Charge for amortisation of acquired value of in-force business (8,184) (9,562)
Charge for amortisation of acquired value of customer relationships (55) (63)
Other (5,964) (5,062)
Total (expenses)/income net of change in insurance contract provisions and (1,474,519) (611,409)
investment contract liabilities
Total income less expenses 31,177 26,496
Post completion (loss)/gain on portfolio acquisition (93) 388
Financing costs (2,272) (2,299)
Profit before income taxes 28,812 24,585
Income tax expense (1,518) (3,394)
Profit for the year 27,294 21,191
Items that may be reclassified to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign (23,879) 22,618
operations
Revaluation of land and building 369 (464)
Other comprehensive income for the year, net of tax (23,510) 22,154
Total comprehensive income for the year 3,784 43,345
Basic earnings per share (based on profit for the year) 18.18p 14.12p
Diluted earnings per share (based on profit for the year) 18.00p 14.03p
CONSOLIDATED BALANCE SHEET
31 December 2021 2019
£000 £000
Assets
Intangible assets:
Deferred acquisition costs 63,327 69,051
Acquired value of in-force business 49,629 61,655
Acquired value of customer relationships 320 409
Software assets 8,885 8,508
Property and equipment 7,830 8,718
Investment properties 1,071 1,124
Reinsurers' share of insurance contract provisions 247,750 197,068
Amounts deposited with reinsurers 38,295 37,026
Financial assets:
Equity securities at fair value through income 6,352 10,180
Holdings in collective investment schemes at fair value through income 6,858,054 6,714,303
Debt securities at fair value through income 978,199 1,098,559
Policyholders' funds held by the group 990,700 332,117
Financial assets held at amortised cost 293,811 344,918
Derivative financial instruments 264 830
Total financial assets 9,127,380 8,500,907
Insurance and other receivables 35,613 45,048
Prepayments 13,245 13,349
Reinsurers' share of accrued policyholder claims 16,340 12,716
Income taxes 7,233 4,566
Cash and cash equivalents 70,087 105,351
Total assets 9,687,005 9,065,496
Liabilities
Insurance contract provisions 3,818,412 3,958,037
Other provisions 992 613
Financial liabilities:
Investment contracts at fair value through income 4,120,572 4,035,040
Liabilities relating to policyholders' funds held by the group 990,700 332,117
Lease contract liabilities 2,019 2,844
Borrowings 47,185 66,955
Derivative financial instruments - 3
Total financial liabilities 5,160,476 4,436,959
Deferred tax liabilities 15,699 19,086
Reinsurance payables 70,414 2,863
Payables related to direct insurance and investment contracts 129,262 96,337
Deferred income 2,809 3,355
Income taxes 6,527 9,427
Other payables 23,991 50,107
Bank overdrafts 256 1,645
Total liabilities 9,228,838 8,578,429
Net assets 458,167 487,067
Shareholders' equity
Share capital 7,496 43,768
Merger reserve 36,272 -
Share premium 142,085 142,085
Other reserves 7,262 30,772
Retained earnings 265,052 270,442
Total shareholders' equity 458,167 487,067
Approved by the board of directors and authorised for issue on 30 March 2022
and signed on its behalf by:
Luke Savage Steve Murray
Chairman Chief
Executive Officer
Company Number: 04947166
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2021 2020
£000 £000
Profit for the year 27,294 21,191
Adjustments for:
Depreciation of property and equipment 749 637
Amortisation of deferred acquisition costs 13,370 12,845
Impairment of acquired value of in-force business - 27,623
Amortisation of acquired value of in-force business 8,184 9,562
Amortisation of acquired value of customer relationships 55 63
Amortisation of software assets 1,382 1,292
Depreciation on right of use assets 739 757
Interest on lease liabilities 95 55
Share based payment 593 492
Tax paid 1,518 3,128
Interest receivable (2,269) (2,987)
Dividends receivable (614) (1,929)
Interest expense 2,177 2,244
Impairment losses - 1,019
Fair value gains on financial assets (990,914) (138,119)
Increase in intangible assets related to insurance and investment contracts (8,938) (15,316)
Interest received 2,493 5,335
Dividends received 1,930 3,241
Changes in operating assets and liabilities:
Increase in financial assets (187,975) (150,789)
Increase in reinsurers' share of insurance contract provisions (37,747) (6,981)
Decrease in amounts deposited with reinsurers 5,858 304
Decrease in insurance and other receivables 5,980 6,763
Increase in prepayments (873) (4,227)
Increase in insurance contract provisions 15,534 233,055
Increase in investment contract liabilities 1,098,809 36,539
Increase in provisions 445 39
Increase/(decrease) in reinsurance payables 67,766 (523)
Increase in payables related to direct insurance and investment contracts 35,701 7,451
(Decrease)/increase in other payables (24,950) 6,188
Net cash generated from operations 36,392 58,952
Income tax paid (9,796) (6,456)
Net cash generated from operating activities 26,596 52,496
Cash flows from investing activities
Development of software - 2,734
Purchases of property and equipment (3,636) (857)
Net cash (utilised)/generated by investing activities (3,636) 1,877
Cash flows from financing activities
Proceeds from issue of share capital - 1
Share premium arising on issue of share capital - 32
Repayments of borrowings (16,102) (26,094)
Repayment of lease liabilities (598) (695)
Dividends paid (33,276) (32,294)
Interest paid (2,271) (2,295)
Net cash utilised by from financing activities (52,247) (61,345)
Net decrease in net cash and cash equivalents (29,287) (6,972)
Net cash and cash equivalents at beginning of year 103,706 106,782
Effect of exchange rate changes on net cash and cash equivalents (4,588) 3,896
Net cash and cash equivalents at end of the year 69,831 103,706
Note: Net cash and cash equivalents includes overdrafts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share capital Share premium Merger reserve Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2021 (as previously restated) 43,768 142,085 - 30,772 - 270,442 487,067
Transfer to merger reserve (36,272) - 36,272 - - - -
Equity shareholders' funds at 1 January 2021 (restated) 7,496 142,085 36,272 30,772 - 270,442 487,067
Profit for the year - - - - 27,294 27,294
Dividends paid - - - - (33,277) (33,277)
Foreign exchange translation differences - - (23,879) - - (23,879)
Revaluation of land and buildings - - - 369 - - 369
Share based payment - - - - - 593 593
Equity shareholders' funds at 31 December 2021 7,496 142,085 36,272 7,262 - 265,052 458,167
Year ended 31 December 2020
Share capital Share premium Merger reserves Other reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2020 43,767 142,053 - 8,618 - 281,053 475,491
Profit for the year - - - - - 21,191 21,191
Issue of share capital 1 - - - - - 1
Issue of share premium - 32 - - - - 32
Dividends paid - - - - - (32,294) (32,294)
Foreign exchange translation differences - - - 22,618 - - 22,618
Revaluation of land and buildings - - - (464) - - (464)
Share based payment - - - - - 492 492
Equity shareholders' funds at 31 December 2020 43,768 142,085 - 30,772 - 270,442 487,067
NOTES TO THE CONSOLIDATED IFRS FINANCIAL STATEMENTS
1. Basis of presentation
The preliminary announcement is based on the group's financial statements for
the year ended 31 December 2021, which are prepared in accordance with United
Kingdom adopted international accounting standards in conformity with the
requirements of the Companies Act 2006.
2. Significant accounting policies
The accounting policies applied by the group in determining the IFRS basis
results in this report are the same as those previously applied in the group's
consolidated financial statements.
3. Operating segments
The group considers that it has no product or distribution-based business
segments. It reports segmental information on the same basis as reported
internally to the chief operating decision maker, which is the board of
directors of Chesnara plc.
The segments of the group as at 31 December 2021 comprise:
- CA: This segment represents the group's UK life insurance and
pensions run-off portfolio and comprises the original business of Countrywide
Assured plc, the group's principal UK operating subsidiary, and of City of
Westminster Assurance Company Limited which was acquired in 2005 and the
long-term business of which was transferred to Countrywide Assured plc (CA)
during 2006. This segment also contains Save & Prosper Insurance Limited
which was acquired on 20 December 2010 and its then subsidiary Save &
Prosper Pensions Limited. The S&P business was transferred to CA during
2011. This segment also contains the business of Protection Life, which was
purchased on 28 November 2013 and the business of which was transferred to CA
effective from 1 January 2015. CA is responsible for conducting unit-linked
and non-linked business, including a with-profits portfolio, which carries
significant additional market risk.
- Movestic: This segment comprises the group's Swedish life and
pensions business, Movestic Livförsäkring AB ('Movestic') and its subsidiary
and associated companies, which are open to new business and which are
responsible for conducting both unit-linked and pensions and savings business
and providing some life and health product offerings.
- Waard Group: This segment represents the group's closed Dutch life
and general insurance business, which was acquired on 19 May 2015 and
comprised the three insurance companies Waard Leven N.V., Hollands Welvaren
Leven N.V. and Waard Schade N.V., and a servicing company, Waard
Verzekering. During 2017, the book of policies held within Hollands Welvaren
Leven N.V. was successfully integrated into Waard Leven and consequently
Hollands Welvaren Leven N.V. was deregistered on 19 December 2018. The Waard
Group's policy base is predominantly made up of term life policies, although
also includes unit-linked policies and some non-life policies, covering risks
such as occupational disability and unemployment. On 1 October, the Waard
Group acquired a small portfolio of c6,000 policies from Monuta insurance,
which consists of term and savings policies. On 21 November 2019, the Waard
Group completed a deal to acquire a portfolio of term life insurance policies
and saving mortgages insurance policies. The completion took place on the 31
August 2020, at which stage Waard Group obtained control. On 31 December
2020, Waard entered into an agreement to acquire a portfolio of term life
insurance policies, Unit Linked policies and funeral insurance policies from
Dutch insurance provider Brand New Day Levensverzekeringen N.V. (BND). The
portfolio was successfully migrated on 10 April 2021.
- Scildon: This segment represents the Group's open Dutch life
insurance business, which was acquired on 5 April 2017. Scildon's policy
base is predominantly made up of individual protection and savings
contracts. It is open to new business and sells protection, individual
savings and group pension contracts via a broker-led distribution model.
- Other group activities: The functions performed by the parent
company, Chesnara plc, are defined under the operating segment analysis as
Other group activities. Also included therein are consolidation and
elimination adjustments.
The accounting policies of the segments are the same as those for the group as
a whole. Any transactions between the business segments are on normal
commercial terms in normal market conditions. The group evaluates
performance of operating segments on the basis of the profit before tax
attributable to shareholders of the reporting segments and the group as a
whole. There were no changes to the measurement basis for segment profit
during the year ended 31 December 2021.
(i) Segmental income statement for the year ended 31 December 2021
Other Group Activities
Waard Group Scildon (UK)
CA Movestic (Netherlands) (Netherlands) Total
(UK) (Sweden)
£000 £000 £000 £000 £000 £000
Insurance premium revenue 36,004 13,796 32,546 229,700 - 312,046
Insurance premium ceded to reinsurers (87,353) (5,374) (3,406) (19,748) - (115,881)
Net insurance premium revenue (51,349) 8,422 29,140 209,952 - 196,165
Fee and commission income 22,140 18,029 76 49,730 - 89,975
Net investment return 179,662 821,381 11,928 160,006 11 1,172,988
Other operating income 13,681 32,887 - - - 46,568
Segmental revenue, net of investment return 164,134 880,719 41,144 419,688 11 1,505,696
Net insurance contract claims and benefits incurred (34,545) (2,787) (35,849) (396,718) - (469,899)
Net change in investment contract liabilities (77,568) (820,901) - - - (898,469)
Fees, commission and other acquisition costs (316) (23,598) (713) (1,816) - (26,443)
Administrative expenses:
Amortisation charge on software assets - (1,306) - (36) - (1,342)
Depreciation charge on property and equipment - (115) (54) (577) - (746)
Other (16,090) (12,794) (4,407) (20,992) (11,554) (65,837)
Operating expenses 5 (5,972) - - 3 (5,964)
Financing costs - (1,179) (1) - (1,092) (2,272)
Profit before tax and consolidation adjustments 35,620 12,067 120 (451) (12,632) 34,724
Other operating expenses:
Charge for amortisation of acquired value of in-force business (1,443) (2,467) (838) (3,436) - (8,184)
Charge for amortisation of acquired value of customer relationships - (55) - - - (55)
Fees, commission and other acquisition costs - 1,878 - 542 - 2,420
Segmental income less expenses 34,177 11,423 (718) (3,345) (12,632) 28,905
Post completion gain on portfolio acquisition - - (93) - - (93)
Profit before tax 34,177 11,423 (811) (3,345) (12,632) 28,812
Income tax (expense)/credit (4,979) (1) 188 444 2,830 (1,518)
Profit/(loss) after tax 29,198 11,422 (623) (2,901) (9,802) 27,294
(ii) Segmental balance sheet as at 31 December 2021
Other Group Activities
Waard Group Scildon (UK)
CA Movestic (Netherlands) (Netherlands) Total
(UK) (Sweden)
£000 £000 £000 £000 £000 £000
Total assets 2,551,611 4,568,400 389,846 2,122,474 54,674 9,687,005
Total liabilities (2,420,861) (4,462,163) (347,961) (1,963,052) (34,801) (9,228,838)
Net assets 130,750 106,237 41,885 159,422 19,873 458,167
Investment in associates - - - - - -
Additions to non-current assets - 11,590 197 4,483 - 16,270
(iii) Segmental income statement for the year ended 31 December 2020
Other Group Activities
Waard Group Scildon (UK)
CA Movestic (Netherlands) (Netherlands) Total
(UK) (Sweden)
£000 £000 £000 £000 £000 £000
Insurance premium revenue 40,653 16,296 12,768 223,648 - 293,365
Insurance premium ceded to reinsurers (16,650) (6,674) (577) (19,006) - (42,907)
Net insurance premium revenue 24,003 9,622 12,191 204,642 - 250,458
Fee and commission income 23,336 20,229 88 49,045 - 92,698
Net investment return 85,717 89,539 5,735 73,367 210 254,568
Other operating income 11,703 28,037 441 - - 40,181
Segmental revenue, net of investment return 144,759 147,427 18,455 327,054 210 637,905
Net insurance contract claims and benefits incurred (72,311) (952) (10,362) (281,359) - (364,984)
Net change in investment contract liabilities (18,515) (91,023) - - - (109,538)
Fees, commission and other acquisition costs (350) (22,918) (684) (2,974) - (26,926)
Administrative expenses:
Amortisation charge on software assets - (1,438) - (209) - (1,647)
Depreciation charge on property and equipment - (124) (53) (470) - (647)
Other (17,388) (12,258) (3,131) (27,390) (8,491) (68,658)
Operating expenses (500) (4,565) - - 3 (5,062)
Financing costs (1) (1,209) (2) - (1,087) (2,299)
Profit before tax and consolidation adjustments 35,694 12,940 4,223 14,652 (9,365) 58,144
Other operating expenses:
Impairment charge for acquired value of in-force business (1,000) - - (26,623) - (27,623)
Charge for amortisation of acquired value of in-force business (2,423) (2,640) (720) (3,779) - (9,562)
Charge for amortisation of acquired value of customer relationships - (63) - - - (63)
Fees, commission and other acquisition costs - 2,126 - 1,175 - 3,301
Segmental income less expenses 32,271 12,363 3,503 (14,575) (9,365) 24,197
Profit arising on portfolio acquisition - - 388 - - 388
Profit before tax 32,271 12,363 3,891 (14,575) (9,365) 24,585
Income tax (expense)/credit (6,081) (235) (883) 2,301 1,504 (3,394)
Profit/(loss) after tax 26,190 12,128 3,008 (12,274) (7,861) 21,191
(iv) Segmental balance sheet as at 31 December 2020
Other Group Activities
Waard Group Scildon (UK)
CA Movestic (Netherlands) (Netherlands) Total
(UK) (Sweden)
£000 £000 £000 £000 £000 £000
Total assets 2,564,764 3,874,967 437,099 2,127,539 64,646 9,069,015
Total liabilities (2,429,712) (3,764,907) (391,590) (1,954,287) (41,452) (8,581,948)
Net assets 135,052 110,060 45,509 173,252 23,194 487,067
Investment in associates - - - - - -
Additions to non-current assets - 13,028 2,396 3,929 - 19,353
4. Borrowings
Group
31 December
2021 2020
£000
£000
Bank loan 31,273 39,010
Amount due in relation to financial reinsurance 15,912 27,945
Total 47,185 66,955
Current 36,907 43,347
Non-current 10,278 23,608
Total 47,185 66,955
Company
31 December
2021 2020
£000
£000
Bank loan 31,273 39,010
Current 31,237 15,402
Non-current - 23,608
Total 31,237 39,010
The bank loan as at 31 December 2021 comprises the following:
- on 3 April 2017 tranche one of a new facility was drawn down,
amounting to £40.0m. This facility is unsecured and is repayable in ten
six-monthly instalments on the anniversary of the draw down date. The
outstanding principal on the loan bears interest at a rate of 2.00 percentage
points above the London Inter-Bank Offer Rate and is repayable over a period
which varies between one and six months at the option of the borrower. During
the year, the London Inter-Bank Offer Rate changed to Sterling Overnight Index
Average (SONIA) as a reference point. The proceeds of this loan facility were
utilised, together with existing Group cash, to repay in full, the
pre-existing loan facilities totalling £52.8m.
- on 3 April 2017 tranche two of the new loan facility was drawn
down, amounting to €71.0m. As with tranche one, this facility is unsecured
and is repayable in ten six-monthly instalments on the anniversary of the draw
down date. The outstanding principal on the loan bears interest at a rate of
2.00 percentage points above the European Inter-Bank Offer Rate and is
repayable over a period which varies between one and six months at the option
of the borrower.
- In April 2018 we converted our existing debt arrangement with RBS
into a syndicated facility. This will provide access to higher levels of debt
financing from a wider panel of lenders, which in turn will enable us to
fulfil our appetite of financing future deals up to the maximum levels of
gearing set out in our debt and leverage policy, without being restricted by
the lending capacity of one individual institution. This facility enables
Chesnara to access an increased level of funds efficiently, which in turn
supports our acquisition strategy.
The fair value of the sterling denominated bank loan at 31 December 2021 was
£12.0m (31 December 2020: £15.0m).
The fair value of the euro denominated bank loan at 31 December 2021 was
£18.5m (31 December 2020: £24.1m).
The fair value of amounts due in relation to financial reinsurance was £16.4m
(31 December 2020: £27.5m).
Bank loans are presented net of unamortised arrangement fees. Arrangement fees
are recognised in profit or loss using the effective interest rate method.
In 2022, the bank loan was fully repaid and replaced by a Tier 2 Subordinated
Notes Debt.
5. Earnings per share
Earnings per share are based on the following:
Year ended 31 December 2021 2020
Profit for the year attributable to shareholders (£000) 27,294 21,191
Weighted average number of ordinary shares 150,118,548 150,062,807
Basic earnings per share 18.18p 14.12p
Diluted earnings per share 18.00p 14.03p
The weighted average number of ordinary shares in respect of the year ended 31
December 2021 is based upon 150,065,457 shares in issue at the beginning of
the period and 150,145,602 shares in issue at the end of the period. No shares
were held in treasury.
There were 1,501,566 share options outstanding at 31 December 2021 (2020:
1,026,664). Accordingly, there is dilution of the average number of ordinary
shares in issue in respect of 2020 and 2021.
6. Retained earnings
Group
Year ended 31 December
2021 2020
£000 £000
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January 270,442 281,053
Profit for the year 27,294 21,191
Share based payment 593 492
Dividends
Final approved and paid for 2018 (20,814)
Interim approved and paid for 2019 - (11,480)
Final approved and paid for 2019 (21,446) -
Interim approved and paid for 2020 (11,831) -
Balance at 31 December 265,052 270,442
The interim dividend in respect of 2020, approved and paid in 2020 was paid at
the rate of 7.65p per share. The final dividend in respect of 2020, approved
and paid in 2021, was paid at the rate of 14.29p per share so that the total
dividend paid to the equity shareholders of the parent company in respect of
the year ended 31 December 2020 was made at the rate of 21.94p per share.
The interim dividend in respect of 2021, approved and paid in 2021, was paid
at the rate of 7.88p per share to equity shareholders of the parent company
registered at the close of business on 22 October 2021, the dividend record
date.
A final dividend of 14.72p per share in respect of the year ended 31 December
2021 payable on 24 May 2022 to equity shareholders of the parent company
registered at the close of business on 8 April 2022, the dividend record date,
was approved by the directors after the balance sheet date. The resulting
total final dividend of £22.1m 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 2020 and 31 December 2021:
Year ended 31 December
2021 2020
P P
Interim - approved and paid 7.88 7.65
Final - proposed/paid 14.72 14.29
Total 22.60 21.94
7. Related parties
(a) Identity of related parties
The shares of the company were widely held and no single shareholder exercised
significant influence or control over the company.
The company has related party relationships with:
(i) key management personnel who comprise the directors (including
non-executive directors) of the company;
(ii) its subsidiary companies;
(iii) its associated company;
(iv) other companies over which the directors have significant influence; and
(v) transactions with persons related to key management personnel.
(b) Related party transactions
(i) Transactions with key management personnel.
Key management personnel comprise of the directors of the company. This is
on the basis that the group's governance map requires all strategically
significant decisions to be approved by the group board. As such, they have
the authority and responsibility for planning, directing and controlling the
activities of the group. Key management compensation is as follows:
2021 2020
£000 £000
Short-term employee benefits 2,342 1,614
Post-employment benefits 85 70
Share-based payments 593 492
Total 3,020 2,176
The share-based payments charge comprises £0.2m (2020: £0.2m) of Short-term
Incentive Scheme (STI), and £0.2m (2020: £0.3m) related to Long-term
Incentive Scheme (LTI), which is determined in accordance with IFRS 2 'Share
based Payment'
In addition, to their salaries the company also provides non-cash benefits to
directors, and contributes to a post-employment defined contribution pension
plan on their behalf, or where regulatory contribution limits are reached, pay
an equivalent amount as an addition to base salary.
The following amounts were payable to directors in respect of bonuses and
incentives:
2021 2020
£000 £000
Annual bonus scheme (included in the short-term employee benefits above) 934 392
These amounts have been included in Accrued Expenses. The amounts payable
under the annual bonus scheme were payable within one year.
(ii) Transactions with subsidiaries
The company undertakes centralised administration functions, the costs of
which it charges back to its operating subsidiaries. The following amounts
which effectively comprised a recovery of expenses at no mark up were credited
to the Statement of Comprehensive Income of the company for the respective
periods:
2021 2020
£000
£000
Recovery of expenses 4,771 4,553
(iii) Transactions with persons related to key management personnel
During the year, there were no transactions with persons related to key
management personnel.
8. Portfolio acquisition
On 31 December 2020, Waard entered into an agreement to acquire a portfolio of
term life insurance policies, Unit Linked policies and funeral insurance
policies from Dutch insurance provider Brand New Day Levensverzekeringen N.V.
(BND). The portfolio was accompanied by cash assets of EUR 10,059,503 and
the unit linked assets of EUR 3,488,343.42.
The transaction has given rise to a post completion loss on acquisition of
£0.1m calculated as follows:
Fair value
£000
Assets
Unit-linked asset 2,994
Cash 8,635
Total assets 11,629
Liabilities
Insurance contract provisions 11,722
Total liabilities 11,722
Net assets (93)
Net liabilities acquired (93)
Total consideration, paid in cash -
Post completion loss on portfolio acquisition (93)
Loss on acquisition: A loss of £0.1m has been recognised on acquisition. This
loss on acquisition has been recorded as a "post completion loss on portfolio
acquisition" on the face of the statement of comprehensive income.
Acquisition-related costs: Waard concluded the deal and obtained control as of
14 April 2021. The portfolio was acquired for a purchase price of EUR 1 as of
the effective cut-off date of 1 July 2020. For the period between cut-off
date until the completion date of 14 April 2021 a roll-forward period was
agreed. No advisory expenses directly related to the deal were accounted for
by Waard. These expenses were borne by affiliated companies Chesnara PLC and
Chesnara Holdings B.V. As a result, no addition to the consideration was
paid.
The assets and liabilities acquired are included within changes in insurance
provisions and financial assets within operating cash flows on the face of the
cash flow statement.
FINANCIAL CALENDAR
31 March 2022
Results for the year ended 31 December 2021 announced
07 April 2022
Ex-dividend date
08 April 2022
Dividend record date
26 April 2022
Last date for dividend reinvestment plan elections
17 May 2022
Annual General Meeting
24 May 2022
Dividend payment date
31 August 2022
Half year results for the 6 months ending 30 June 2022 announced
KEY CONTACTS
Registered and Head Office
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
Tel: 01772 972050
www.chesnara.co.uk
Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
One St Peter's Square
Manchester
M2 3DE
Auditor
Deloitte LLP
Statutory Auditor
3 Rivergate
Temple Quay
Bristol
BS1 6GD
Registrars
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint Stockbrokers and Corporate Advisors
Panmure Gordon
One New Change
London
EC4M 9AF
Investec Bank plc
30 Gresham Street
London
EC2V 7QP
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8th Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3rd Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
145 Leadenhall Street
London
EC3V 4QT
ALTERNATIVE PERFORMANCE MEASURES
Throughout this report we use alternative performance measures (APMs) to
supplement the assessment and reporting of the performance of the group.
These measures are those that are not defined by statutory reporting
frameworks, such as IFRS or Solvency II.
The APMs aim to assess performance from the perspective of all stakeholders,
providing additional insight into the financial position and performance of
the group and should be considered in conjunction with the statutory reporting
measures such as IFRS and Solvency II.
The following table identifies the key APMs used in this report, how each is
defined and why we use them.
APM What is it? Why do we use it?
Group cash generation Cash generation is used by the group as a measure of assessing how much Cash generation is a key measure, because it is the net cash flows to Chesnara
dividend potential has been generated, subject to ensuring other constraints from its life and pensions businesses which support Chesnara's dividend-paying
are managed. capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
Group cash generation is calculated as the movement in the group's surplus own from existing business'.
funds above the group's internally required capital, as determined by applying
the group's capital management policy, which has Solvency II rules at its
heart.
Divisional cash generation Cash generation is used by the group as a measure of assessing how much It is an important indicator of the underlying operating performance of the
dividend potential has been generated, subject to ensuring other constraints business before the impact of group level operations and consolidation
are managed. adjustments.
Divisional cash generation represents the movement in surplus own funds above
local capital management policies within the three operating divisions of
Chesnara. Divisional cash generation is used as a measure of how much
dividend potential a division has generated, subject to ensuring other
constraints are managed.
Commercial cash generation Cash generation is used by the group as a measure of assessing how much Commercial cash generation aims to provide stakeholders with enhanced insight
dividend potential has been generated, subject to ensuring other constraints into cash generation, drawing out components of the result relating to
are managed. technical complexities or exceptional items. The result is deemed to better
reflect the underlying commercial performance, show key drivers within that.
Commercial cash generation excludes the impact of technical adjustments,
modelling changes and corporate acquisition activity; representing the
underlying commercial cash generated by the business.
Economic Value (EcV) EcV is a financial metric that is derived from Solvency II Own Funds. It EcV aims to reflect the market-related value of in-force business and net
provides a market consistent assessment of the value of existing insurance assets of the non-insurance business and hence is an important reference point
businesses, plus adjusted net asset value of the non-insurance business within by which to assess Chesnara's value. A life and pensions group may typically
the group. be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
We define EcV as being the Own Funds adjusted for contract boundaries, risk business over time. The EcV development of the Chesnara group over time can be
margin and restricted with-profit surpluses. As such, EcV and Own Funds a strong indicator of how we have delivered to our strategic objectives.
have many common characteristics and tend to be impacted by the same factors.
Economic Value (EcV) earnings The principal underlying components of the Economic Value earnings are: By recognising the market-related value of in-force business (in-force value),
a different perspective is provided in the performance of the group and on the
- The expected return from existing business (being the effect of the unwind valuation of the business. Economic Value earnings are an important KPI as
of the rates used to discount the value in-force); they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
- Value added by the writing of new business; have delivered against all three of our core strategic objectives.
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the determination of expected
cash flows; and
- The impact of acquisitions.
EcV operating earnings This is the element of EcV earnings (see above) that are generated from the EcV operating earnings are important as they provide an indication of the
company's ongoing core business operations, excluding any profit earned from underlying value generated by the business. It can help identify profitable
investment market conditions in the period and any economic assumption changes activities and also inefficient processes and potential management actions.
in the future.
EcV economic earnings This is the element of EcV earnings (see above) that are derived from EcV economic earnings are important in order to measure the additional value
investment market conditions in the period and any economic assumption changes generated from investment market factors.
in the future.
Commercial new business profit A more commercially relevant measure of new business profit than that This provides a fair commercial reflection of the value added by new business
recognised directly under the Solvency II regime, allowing for a modest level operations and is more comparable with how new business is reported by our
of return, over and above risk-free, and exclusion of the incremental risk peers, improving market consistency.
margin Solvency II assigns to new business.
Funds under management (FuM) FuM reflects the value of the financial assets that the business manages, as FuM are important as it provides an indication of the scale of the business,
reported in the IFRS Consolidated Balance Sheet. and the potential future returns that can be generated from the assets that
are being managed.
Operating profit, excluding AVIF impairment A measure of the pre-tax profit earned from the company's ongoing business Operating earnings are important as they provide an indication of the
operations, excluding any profit earned from investment market conditions in underlying profitability of the business. It can help identify profitable
the period and any economic assumption changes in the future. This also activities and also inefficient processes and potential management actions.
excludes any intangible asset adjustments that are not practicable to ascribe
to either operating or economic conditions.
Economic profit, excluding AVIF impairment A measure of pre-tax profit earned from investment market conditions in the Economic earnings are important in order to measure the surplus generated from
period and any economic assumption changes. This also excludes any investment market factors.
intangible asset adjustments that are not practicable to ascribe to either
operating or economic conditions.
Acquisition value gain (incremental value) Acquisition value gains reflect the incremental Economic Value added by a The EcV gain from acquisition will be net of any associated increase in risk
transaction, exclusive of any additional risk margin associated with absorbing margin. The risk margin is a temporary Solvency II dynamic which will run off
the additional business. over time.
Leverage / gearing A financial measure that demonstrates the degree to which the company is It is an important measure as it indicates the overall level of indebtedness
funded by debt financing versus equity capital, presented as a ratio. It is of Chesnara, and it is also a key component of the bank covenant arrangements
defined as debt divided by debt plus equity, as measured under IFRS. held by Chesnara.
GLOSSARY
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches
between assets and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for
measuring the annual equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
BAU Cash Generation This represents divisional cash generation plus the impact of non-exceptional
group activity.
BLAGAB Basic life assurance and general annuity business
Cash Generation This represents the operational cash that has been generated in the period.
The cash generating capacity of the group is largely a function of the
movement in the solvency position of the insurance subsidiaries within the
group and takes account of the buffers that management has set to hold over
and above the solvency requirements imposed by our regulators. Cash generation
is reported at a group level and also at an underlying divisional level
reflective of the collective performance of each of the divisions prior to any
group level activity.
Commercial Cash Generation Cash generation excluding the impact of technical adjustments, modelling
changes and exceptional corporate activity; the underlying commercial cash
generated by the business.
Divisional Cash Generation This represents the cash generated by the three operating divisions of
Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the
regulator of our Dutch subsidiaries.
DPF Discretionary Participation Feature - A contractual right under an insurance
contract to receive, as a supplement to guaranteed benefits, additional
benefits whose amount or timing is contractually at the discretion of the
issuer.
Dutch Business Scildon and the Waard Group, consisting of Waard Leven N.V., Waard Schade N.V.
and Waard Verzekeringen B.V.
Economic Profit A measure of pre-tax profit earned from investment market conditions in the
period and any economic assumption changes in the future (alternative
performance measure - APM).
EcV Economic Value is a financial metric that is derived from Solvency II Own
Funds that is broadly similar in concept to European Embedded Value. It
provides a market consistent assessment of the value of existing insurance
businesses, plus adjusted net asset value of the non-insurance business within
the group.
FCA Financial Conduct Authority.
FI Finansinspektionen, being the Swedish Financial Supervisory Authority.
Form of Proxy The form of proxy relating to the General Meeting being sent to shareholders
with this document.
FSMA The Financial Services and Markets Act 2000 of England and Wales, as amended.
Group The company and its existing subsidiary undertakings.
Group Cash generation This represents the absolute cash generation for the period at total group
level, comprising divisional cash generation as well as both exceptional and
non-exceptional group activity.
Group Own Funds In accordance with the UK's regulatory regime for insurers it is the sum of
the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the group in those capital
resources.
Group SCR In accordance with the UK's regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Group Solvency Group solvency is a measure of how much the value of the company exceeds the
level of capital it is required to hold in accordance with Solvency II
regulations.
HCL HCL Insurance BPO Services Limited.
IFRS International Financial Reporting Standards.
IFA Independent Financial Adviser.
LACDT Loss Absorbing Capacity of Deferred Tax
KPI Key performance indicator.
Leverage (gearing) A financial measure that demonstrates the degree to which the company is
funded by debt financing versus equity capital, usually presented as a ratio,
defined as debt divided by debt plus equity, as measured under IFRS
London Stock Exchange London Stock Exchange plc.
LTI Long-Term Incentive Scheme - A reward system designed to incentivise executive
directors' long-term performance.
Movestic Movestic Livförsäkring AB.
Modernac Modernac SA, a previously associated company 49% owned by Movestic.
New business The present value of the expected future cash inflows arising from business
written in the reporting period.
Official List The Official List of the Financial Conduct Authority.
Operating Profit A measure of the pre-tax profit earned from a company's ongoing core business
operations, excluding any profit earned from investment market conditions in
the period and any economic assumption changes in the future (alternative
performance metric - APM).
Ordinary Shares Ordinary shares of five pence each in the capital of the company.
ORSA Own Risk and Solvency Assessment
Own Funds Own Funds - in accordance with the UK's regulatory regime for insurers it is
the sum of the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the company in those
capital resources.
PRA Prudential Regulation Authority.
QRT Quantitative Reporting Template.
ReAssure ReAssure Limited.
Resolution The resolution set out in the notice of General Meeting set out in this
document.
RMF Risk Management Framework.
Scildon Scildon NV.
Shareholder(s) Holder(s) of Ordinary Shares.
Solvency II A fundamental review of the capital adequacy regime for the European insurance
industry. Solvency II aims to establish a set of EU-wide capital requirements
and risk management standards and has replaced the Solvency I requirements.
Standard Formula The set of prescribed rules used to calculate the regulatory SCR where an
internal model is not being used.
STI Short-Term Incentive Scheme - A reward system designed to incentivise
executive directors' short-term performance.
SCR In accordance with the UKs regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Swedish Business Movestic and its subsidiaries and associated companies.
S&P Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
Transfer ratio The proportion of new policies transferred into the business in relation to
those transferred out.
TCF Treating Customers Fairly - a central PRA principle that aims to ensure an
efficient and effective market and thereby help policyholders achieve fair
outcomes.
TSR Total Shareholder Return, measured with reference to both dividends and
capital growth.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK Business CA and S&P.
UNSDG United Nations Sustainable Development Group
VA The volatility adjustment is a measure to ensure the appropriate treatment of
insurance products with long-term guarantees under Solvency II. It represents
an adjustment to the rate used to discount liabilities to mitigate the effect
of short-term volatility bond returns.
Waard The Waard Group
NOTE ON TERMINOLOGY
As explained in the IFRS financial statements, the principal reporting
segments of the group are:
CA which comprises the original business of Countrywide Assured plc, the group's
original UK operating subsidiary; City of Westminster Assurance Company
Limited, which was acquired by the group in 2005, the long-term business of
which was transferred to Countrywide Assured plc during 2006; S&P which
was acquired on 20 December 2010. This business was transferred from Save
& Prosper Insurance Limited and Save & Prosper Pensions Limited to
Countrywide Assured plc on 31 December; and Protection Life Company Limited
which was acquired by the group in 2013, the long-term business of which was
transferred into Countrywide Assured plc in 2014;
Movestic which was purchased on 23 July 2009 and comprises the group's Swedish
business, Movestic Livförsäkring AB and its subsidiary and associated
companies;
The Waard Group which was acquired on 19 May 2015 and comprises two insurance companies; Waard
Leven N.V. and Waard Schade N.V.; and a service company, Waard Verzekeringen;
and
Scildon which was acquired on 5 April 2017; and
Other group activities which represents the functions performed by the parent company, Chesnara
plc. Also included in this segment are consolidation adjustments.
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