REG - Chesnara PLC - Final Results
30/03/2023 07:00
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RNS Number : 6960U Chesnara PLC 30 March 2023
30 March 2023
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc (CSN.L)
("Chesnara" or "the Company")
INCREASED ACQUISITION MOMENTUM WITH STRONG CASH GENERATION, SUPPORTING A
PROPOSED 3% INCREASE IN FINAL DIVIDEND
Chesnara reports its 2022 full year results. Key highlights are:
· Completion of the Sanlam Life & Pensions and Robein Leven
transactions, with the acquisition of Conservatrix's insurance portfolio
completed on 1 January 2023
· Strong group commercial cash generation of £46.6m
· Robust solvency of 197%, above normal 140-160% operating range
· Economic value ("EcV") of £532.3m (354p per share), pro forma for
Conservatrix acquisition
· Proposed 3% increase to the full year dividend (total 2022 dividend
of 23.28p per share)
Commenting on the results, Steve Murray, Group CEO, said:
"The completion of three transactions over the past 12 months has shown that
we have real momentum behind our acquisition strategy. The wider business
has performed robustly despite the high level of market volatility reducing
the group's Economic Value. We retain a strong and resilient solvency position
with substantial cash balances at the holding company level, supporting our
continued track record of growing our dividend. We remain optimistic about our
ability to participate in future M&A and continue to be highly confident
in our ability to finance and execute such transactions on attractive terms
for both vendors and our shareholders."
A full year results presentation is being held at 9:30am on 30 March 2023 -
participants can register here (https://brrmedia.news/Chesnara_Prelims22) .
Further details on the financial results are as follows:
2022 FULL YEAR FINANCIAL AND STRATEGIC HIGHLIGHTS
CASH GENERATION AND DIVIDENDS - 18 YEARS OF DIVIDEND GROWTH
· Total divisional base cash generation((1)) for FY 2022 was
£61.9m (FY 2021: £31.1m) despite volatile market conditions. Divisional
commercial cash generation((1)) for FY 2022 was £25.9m (FY 2021: £58.5m)
· Group commercial cash((1)) generation of £46.6m in FY 2022 (FY
2021: £53.0m) represents 133% dividend coverage.
· The results during the year, combined with the group's balance
sheet strength, support a further year of dividend growth. The Board has
proposed a 2022 final dividend of 15.16p per share (2022 total dividend of
23.28p), which is a 3% increase compared to 2021 and extends the period of
uninterrupted dividend growth to 18 years.
FINANCIAL RESILIENCE - WELL POSITIONED FOR FUTURE M&A
· Solvency II ratio of 197% as at 31 December 2022 (31 December
2021: 152%), materially above our normal operating range of between
140-160%. The increase has been driven in part by the issue of £200m of
Tier 2 subordinated debt in February 2022 and provides significant headroom
for future M&A activity.
· Cash balances at group holding companies increased over the
period to £108.1m (31 December 2021: £46.1m), with resources of over £100m
available for future acquisitions and to support the dividend strategy.
· Management actions have remained a focus for the group during
the year, with the financial exposure to currency movements reduced through
the execution of an FX hedge.
· Leverage ratio((2)) of 37.6% as at 31 December 2022 (31
December 2021: 6.4%, 30.4% on a pro forma basis) has increased due to the
£200m Tier 2 debt issuance and IFRS losses during the year.
DELIVERING VALUE - EXECUTING OUR RENEWED STRATEGY
· The Sanlam Life & Pensions and Robein Leven transactions
completed in April 2022, adding further scale to the group's UK and Dutch
businesses respectively and increasing expected annual steady state cash
generation by £6m per annum.
· The group also completed the acquisition of the insurance
portfolio of Conservatrix in the Netherlands in January 2023, with the
transaction expected to double Waard's steady state cash generation to £8m
per annum.
· Total group capital deployed in the three acquisitions of
Sanlam Life & Pensions, Robein Leven and Conservatrix totalled over
£110m, of which £85m was funded from holding company cash reserves, with day
1 EcV accretion estimated at £42m and additional steady state cash generation
of £10m per annum for those completed.
· Commercial new business profit((3)) of £9.5m in FY 2022 (FY
2021: £9.6m).
· In line with our FY 2021 sensitivities, Economic Value (EcV) of
£511.7m as at 31 December 2022 (31 December 2021: £624.2m), has reduced over
the year due to economic conditions, including the fall in equity markets and
widening of credit spreads, partly offset by the positive impacts of the
acquisitions of Sanlam Life & Pensions and Robein Leven. Pro forma for the
Conservatrix acquisition, EcV is £532.3m (354p per share) as at 31 December
2022.
· Multiple sources of growth create a long-term commercial value
which is significantly in excess of the reported Economic Value.
COMMITMENT TO SUSTAINABILITY
· The group has set new long term sustainability targets, with
the aim to have net zero financed emissions by 2050 and net zero operational
emissions by 2028. More detail can be found in the group's inaugural Annual
Sustainability Report, which has been published today.
IFRS PRE-TAX PROFITS/LOSSES
· IFRS pre-tax losses were £147m in FY 2022 (FY 2021 IFRS
pre-tax profits: £28.8m). These were driven by adverse investment
conditions which resulted in a fall in asset values, which due to an inherent
accounting mismatch under IFRS means assets are fair valued through the
P&L and liabilities are largely not. This accounting mismatch means that
IFRS results do not reflect the commercial reality of how assets and movements
in their values are used to match liabilities. Insurers globally will be
adopting a new accounting standard from 2023 onwards - IFRS 17 - to overcome
some of these mismatches between the historical treatment of assets and
liabilities.
· The group has today provided a separate update on the
introduction of IFRS17.
DIVIDEND DETAILS
· The recommended final dividend of 15.16p per share is expected
to be paid on 26 May 2023. The ordinary shares will be quoted ex-dividend on
the London Stock Exchange as of 6 April 2023. The record date for
eligibility for payment will be 11 April 2023.
ANALYST PRESENTATION
· A presentation for analysts will be held at 9.30am on 30 March
2023 at the offices of Panmure Gordon & Co, 40 Gracechurch Street, London,
EC3V 0BT which will be available to join online. A replay will subsequently be
posted to the corporate website at www.chesnara.co.uk.
· To join the webcast, please register using the following link
here (https://brrmedia.news/Chesnara_Prelims22) .
Investor Enquiries
Sam Perowne
Head of Strategic Development & Investor Relations
Chesnara plc
E - sam.perowne@chesnara.co.uk
Media Enquiries
Roddy Watt
Director, Capital Markets
FWD
T - 020 7280 0651 / 07714 770 493
E - roddy.watt@fwdconsulting.co.uk
Notes to Editors
Chesnara (CSN.L) is a European life and pensions consolidator listed on the
London Stock Exchange. It administers approximately one million policies and
operates as Countrywide Assured and CASLP 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 18 years in succession. Further details are available on the
company's website (www.chesnara.co.uk).
Notes
Note 1 Divisional cash generation represents the cash generated by the
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
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.
Note 2 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. This is consistent with how Fitch would assess us from
a leverage perspective.
Note 3 Commercial new business profit is a more commercially relevant
measure of new business profit than that recognised directly under the
Solvency II regime, allowing for a modest level of return, over and above
risk-free, and exclusion of the incremental risk margin Solvency II assigns to
new business. This provides a fair commercial reflection of the value added
by new business operations and is more comparable with how new business is
reported by our peers, improving market consistency.
The Board approved this statement on 29 March 2023.
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.
2022 HIGHLIGHTS
GROUP CASH GENERATION £82.7M 2021 £20.3M
COMMERCIAL CASH GENERATION £46.6M 2021 £53.0M
A strong cash result was delivered in 2022 with group cash generation of
£82.7m (excluding the day 1 impact of the two acquisitions completed in the
year), which includes £61.9m of cash generation from our divisions. The
result has benefitted from the positive impact of the symmetric adjustment
(which has been beneficial as a result of falling equity prices in the
year). Commercial cash generation, which adjusts for items such as the
symmetric adjustment gives a view of the underlying cash generation in
Chesnara and is analysed in more detail in the financial review section.
Commercial cash generation of £46.6m more than covers the 2022 dividend. Both
cash metrics include the impact (£36.5m) of having hedged an element of our
FX exposure during the year.
GROUP SOLVENCY 197% 2021 152%
The group solvency improvement is largely due to the impact of the Tier 2 debt
raised, being significantly higher than the strains from the acquisitions
completed in the period. Looking through these transaction impacts, the
underlying solvency has increased by 10 percentage points.
FUNDS UNDER MANAGEMENT £10.6BN 2021 £9.1BN
FuM growth since the start of the year has been primarily delivered through
our two completed acquisitions. Volatile economic conditions impacted asset
values which has had an adverse impact on FuM.
ECONOMIC VALUE £511.7M 2021 £624.2M
The EcV result was particularly affected by falls in equity markets and bond
prices in the year, moving in line with our published sensitivities. Other
negative factors include the impact of dividend distributions (£34.3m).
Acquisitions completed in the year contributed £21.4m to EcV.
ECONOMIC VALUE EARNINGS £(106.1)M 2021 £57.8M
The year-on-year swing is predominantly due to volatile economic conditions in
the period.
COMMERCIAL NEW BUSINESS PROFIT £9.5M 2021 £9.6M
Profits from Scildon remain stable but challenging equity market conditions in
Sweden have had a negative impact on their new business result versus 2021.
IFRS PRE-TAX LOSS £146.9M 2021 £28.8M PROFIT
The result contains large losses arising from economic conditions of £151.7m
(2021: £11.8m), largely in our Dutch businesses. Our reserving approach in
Scildon means that the result bears the full impact of interest rate increases
on asset values but no credit is recognised for the associated reduction in
liabilities.
IFRS TOTAL COMPREHENSIVE INCOME £(91.9)M 2021 £3.8M
There was a relatively modest foreign exchange impact of £5.8m in 2022
compared to the prior year (loss of £23.9m). Total comprehensive income
benefits from a £48.6m tax credit (2021: £1.5m tax charge).
FULL YEAR DIVIDEND INCREASED FOR THE 18(th) CONSECUTIVE YEAR
Total dividends for the year increased by 3% to 23.28p per share (8.12p
interim and 15.16p proposed final). This compares with 22.60p in 2021 (7.88p
interim and 14.72p final). The two completed acquisitions and one recently
announced acquisition are expected to positively support future cash
generation.
2022 HAS SEEN VOLATILE ECONOMIC CONDITIONS WITH RISING INTEREST RATES, FALLING
EQUITY MARKETS AND INFLATIONARY PRESSURE
The financial results have been heavily impacted by the economic conditions in
2022, particularly in the first half of the year. The war in Ukraine and
uncertainty in financial markets have been reflected in falling equity values
and rising interest rates which, coupled with the impact of inflationary
pressures, have led to negative investment returns and economic losses across
the operating divisions. The impact of these economic factors has been felt,
to varying degrees, across all of our financial metrics.
THE GROUP CONTINUES TO EXPAND THROUGH M&A
In 2022, we completed the two acquisitions announced late in 2021 and
announced a further acquisition in the Netherlands. The acquisitions of
Sanlam Life & Pensions (UK) Limited (now renamed CASLP) and Robein Leven
in the Netherlands, both completed successfully during the second quarter of
2022, delivered a combined c9% uplift in policies within the group portfolio
and a total day 1 EcV gain of £21.4m.
Expansion in the Netherlands has continued under the Waard Group in 2022
following the announcement of the acquisition of the insurance portfolio of
Conservatrix NV, which subsequently completed early in 2023. This
transaction delivers a material increase in Waard's policies under
administration of c60%.
We remain optimistic about the outlook for future deals.
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 base and commercial cash generation
o Divisional base and commercial 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.
Emissions and water/energy usage Tracking our scope 1, 2 and 3 (non-financed) emissions is a core part of our
transition to be a net zero and sustainable group.
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
I am delighted to report that our divisions have continued to deliver a strong
level of cash generation despite significant economic volatility during the
year. This has supported an increase in our dividend for an 18th consecutive
year.
LUKE SAVAGE, CHAIR
CASH EMERGENCE, DIVIDEND AND FINANCIAL STABILITY
Chesnara has a strong track record of delivering cash generation across a
variety of market conditions. 2022 has been no different, with total
divisional cash generation of £61.9m leaving us well positioned to further
extend our 18 years of continued dividend growth. Our shareholders will
receive 23.28p per share, an increase of 3%.
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 our equity and debt investors.
In light of this, I am pleased to report our solvency position remains robust,
with a closing Solvency II ratio of 197%, significantly above our normal
operating range, providing us with considerable strategic optionality. Our
solvency position remains underpinned by a well-diversified business model, a
focus on responsible risk-based management and resilient and reliable cash
flows from our businesses. Our previously announced Tier 2 debt raise in
February 2022 was also a material contributor to our improved solvency ratio.
PEOPLE AND DELIVERY
Following the initial impact from the pandemic, operating conditions have
stabilised and across the group we have settled into effective and flexible
hybrid working conditions. However, while operating conditions have become
less challenging we are aware that our workforce is becoming increasingly
challenged by the wider cost of living crisis. With this in mind, we have
supported all UK staff whose salaries are below the higher rate tax threshold
with two one-off payments in August and December broadly in line with the
estimated increase in average household expenditure witnessed to date. We
have also offered pay increases which are sympathetic to inflationary
pressures our employees are exposed to. Beyond financial reward we have
rolled out a Wellness Support programme. This offers tailored one-to-one
lifestyle coaching designed to help staff manage the challenges associated
with increasingly stressful but often sedentary lifestyles. The programme
initially covers the UK head office but delivery of similar programmes will
become a core requirement across the wider group as a key objective of our
Sustainability Programme.
Across the group our people have continued to deliver. We have completed the
acquisitions of Sanlam Life & Pensions (UK) Limited in the UK and Robein
Leven in the Netherlands. On both deals our teams have been working hard
integrating those new businesses into the group. Positive progress has been
made on the Sanlam integration, including planning for the Part VII process.
The integration of Robein Leven is now largely complete. Furthermore, we
completed the acquisition of the insurance portfolio of Conservatrix in the
Netherlands on 1 January 2023. This transaction transforms our Dutch closed
life business, Waard, increasing its policies under administration by over 60%
and creating a second material closed book consolidation business alongside
Chesnara's existing UK platform.
In Sweden, there has been a strong focus on improving the transfer ratio with
a marked reduction in the rate at which business transfers out from our
portfolio. There are also positive early signs of improved new business as
local management focus on maximising the expected opportunity from recent
regulatory changes in Sweden.
Staff have also been working hard to ensure we can meet the requirements of
IFRS 17 which became effective from the start of 2023. Our programme is
progressing well and we are on track to produce the half year 2023 figures as
required. We retain our view that the transition to IFRS 17 will have
minimal commercial impact on how we manage the business, the risks it is
exposed to or the financial outcomes we expect. This, together with the
successful Tier 2 debt raise in February 2022, leaves us well placed to fund
future acquisition activity.
One final action I wanted to highlight is the implementation of a foreign
currency hedge during the second half of the year. This has materially
reduced our exposure to FX movements between sterling and both the euro and
Swedish krona. In addition to reducing the real world exposure, the hedge
has also materially reduced the level of currency risk capital we have to hold
thereby increasing the headline solvency ratio by c11 percentage points.
Of course, these major developments are in addition to continuing to deliver
all customer and regulatory business-as-usual responsibilities.
In short, it has been a period of significant operational delivery and I would
like to take this opportunity to thank staff for their continued commitment
and efforts.
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 that
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
announced a 3% increase in the 2022 dividend to 23.28 pence per share. Our
debt investors have also received their first full year's worth of debt coupon
payments since the Tier 2 raise in February 2022.
We have also 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 and we
have accelerated and deepened this focus during the year. As we take stock
of our environmental status, we continue to believe that our current position
is relatively strong across all divisions and there are many examples of
positive environmental actions. That said, we are also extremely conscious
that we need to more formally substantiate our environmental footprint and,
based on this assessment, agree and report targets for how we commit to reduce
to net zero.
A group wide sustainability programme has been initiated during the period
which is building on the excellent work done in the divisions thus far. The
programme has Executive and Non-Executive sponsorship, with David Rimmington
leading executive oversight of the programme and Jane Dale chairing our new
Group Sustainability Committee. This work will look to transform Chesnara into
a sustainable business. The scale of the task for us and the rest of the
industry is huge and an initial priority for the programme will be to formally
measure our scope 3 financed emissions, to go with our understanding of the
impact of our operating framework. This will allow us to establish a formal
road map to the ultimate net zero target and an action-based transition plan
to demonstrate how we will deliver the associated real world change. We have
produced our inaugural Annual Sustainability Report (available on the Chesnara
website) which provides details on our commitments and long term targets, as
well as key activities for the wider sustainability strategy.
OUTLOOK
Sources of future growth remain strong. The reduction in Economic Value
during the period has been driven largely by the impact of the war in Ukraine
and wider geopolitical factors have had on equity markets. However, we
retain our view that, despite such short-term market volatility, equities
continue to offer a source of long term value enhancement. Furthermore, with
the completion of the Conservatrix acquisition, we expect a level of value
recovery during the first quarter of 2023.
In addition, the outlook for acquisitions is positive. We continue to expect
the market to be active and we have taken actions to enhance our ability to
participate in that market, including the issuance of our inaugural Tier 2
bond in February 2022.
Luke Savage,
Chair
29 March 2023
CHIEF EXECUTIVE OFFICER'S REPORT
The acquisition of the Conservatrix insurance portfolio was the third
transaction Chesnara has announced over the past year, highlighting the
renewed growth momentum behind our M&A strategy
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
As I look back on 2022, it is hard to underestimate the extreme and volatile
economic and geopolitical backdrop we have all witnessed and operated in. As
part of my annual 2021 report, I highlighted Chesnara's track record of
delivering through a very wide range of market conditions over its history and
we have done so yet again in 2022, both in terms of cash generation and
acquisitions. We have generated £46.6m of Commercial cash, representing 133%
coverage of the 2022 total dividend. Commercial cash provides good insight
into the underlying cash generation dynamics of the group. The symmetric
adjustment (a feature of our capital model which means we hold more capital
when equity markets rise sharply and can then release capital if we see
corresponding falls) and the implementation of a FX hedge have generated
additional cash, resulting in total group cash generation of £82.7m
(excluding the impact of acquisitions). This level of cash generation against
such a negative external market backdrop clearly demonstrates the resilience
of our business model and is expected to enable our divisions to pay c£74m of
dividends to Chesnara plc in early 2023. Our solvency position remains
strong and well above our normal operating range of 140%-160%, leaving us well
positioned to fund our M&A strategy and withstand future financial
volatility.
In 2022, we have re-energised our strategy whilst remaining focused on doing
three things:
1. Running in-force insurance and pensions books efficiently and effectively.
- We now look after c1 million policyholders and customers who have
c£11.0bn of their assets with us, following the acquisition of Conservatrix's
insurance portfolio which completed on 1 January 2023.
- We have seen the benefits of positive retention activity. In Sweden,
we have seen a marked reduction in the rate at which policies have been
transferring out from the Movestic portfolio.
- Our business model has meant there has been a relatively immaterial
impact on our balance sheet from the high inflationary backdrop across the UK
and Europe.
2. Seeking out and delivering value enhancing M&A opportunities:
- This is an area where we have seen extensive activity across the group
compared to recent years. During 2022, we completed the acquisitions of
CASLP and Robein Leven and the integration of these businesses within the
group is well underway.
- In July 2022, we also announced the acquisition of the insurance
portfolio of Conservatrix in the Netherlands and the deal completed on 1
January 2023. A capital contribution of £35m has been provided by the group
to support the solvency position of the Conservatrix business, ensuring that
Conservatrix customers will benefit from becoming part of a well-capitalised
group after a significant period of uncertainty. Our updated expectation is
the transaction will add c£21m to Economic Value and deliver steady state
cash generation of c£4m each year, supporting our dividend strategy. As a
reminder, CASLP and Robein Leven combined added £21.4m in EcV and should
deliver additional steady state cash generation of c£6m each year.
- Our February Tier 2 debt raise of £200m proved to be very well timed to
support this activity, with capital resources required to support our three
announced transactions totalling over £110m, of which £85m was funded from
holding company cash reserves. And it provides financial flexibility to
support further acquisitions where we continue to have material resources of
over £100m.
3. Writing focused, profitable new business where we are satisfied an
appropriate return can be made.
- During the period we have delivered record market shares of term new
business in Scildon. Against a backdrop where the overall term market shrank
in 2022, we have seen a 3.5% period on period increase in total volumes. In
Movestic we have seen increments return to pre COVID-19 levels plus an
encouraging trend in new transfer business. The inflated levels of transfers
out we have seen over the last 24 months are also now back in line with our
longer term assumptions.
Remaining focussed on these three strategic aims has had a positive impact on
the results in the period and importantly enhanced the outlook for the
group. However, these positive impacts have been more than offset by the
adverse short term impacts of very volatile economic and market conditions on
the IFRS and Economic Value (EcV) results during the period, where we have
reported losses of £146.9m and £106.1m respectively.
CONTINUED DELIVERY OF RESILIENT CASH GENERATION AND ROBUST SOLVENCY
At the heart of the Chesnara financial model and investment case is resilient
cash generation and stable solvency.
RESILIENT CASH GENERATION
The total group cash generation (excluding the impact of acquisitions) during
the year was £82.7m (2021: £20.3m). As a reminder, we define cash as the
movement in the group's surplus Own Funds above the group's internally
required capital. The surplus can be impacted by equity markets and currency
movements in the near term and by consolidation adjustments. The divisional
results pre-consolidation give a good reflection of the dividend potential
rather than looking at the consolidated group figures in isolation.
The total divisional cash generation for the year was £61.9m (2021: £31.1m)
and creates significant future dividend paying capacity. The headline
divisional cash generation was positively impacted by £36.0m through
technical factors such as the symmetric adjustment*. As I mentioned above,
this is a feature of the Solvency II Standard Formula whereby reduced capital
levels need to be held following periods of sharp equity market falls, such as
we have seen this year.
To get a further sense of the inherent cash generation in Chesnara, our
alternative Commercial cash metric looks through the symmetric adjustment and
foreign exchange translation impacts, along with other less material technical
impacts (see Financial Review section for more detailed cash generation
analysis).
At a total divisional level, we have generated £25.9m of Commercial cash.
We have options to complement any base cash generation by taking capital
enhancing management actions. During the latter part of the year, we
triggered one such management action and took out a hedge to reduce our
exposure to foreign exchange rate movements which created c£26m of additional
solvency surplus. This, together with the divisional results, provides
coverage well in excess of the shareholder dividend.
*Symmetric adjustment: the Solvency II capital requirement calculation
includes an adjusting factor that reduces or increases the level of the equity
capital required depending on historical market conditions. Following periods
of market growth, the factor tends to increase the level of capital required
and conversely, in falling markets the capital requirement becomes less
onerous.
Cash generation by territory:
Divisional cash generation
£m 2022
UK 40.8
Sweden 16.1
Netherlands 5.0
Total 61.9
Commercial cash generation
£m
UK 22.0
Sweden (1.1)
Netherlands 5.0
25.9
Other group 20.8
Total 46.6
TOTAL COMMERCIAL CASH GENERATION REPRESENTS 133% COVERAGE OF THE 2022
SHAREHOLDER DIVIDEND
The Chesnara parent company cash and instant access liquidity fund balance at
31 December 2022 has increased to c£108m (31 December 2021: £46.1m), which
provides future acquisition funding capacity and further supports the
sustainable funding of the group dividend. Cash reserves have increased
largely as a result of the £200m Tier 2 debt raise in February 2022. This has
been offset by the repayment of the pre-existing RCF balances of £31.2m,
£62.9m funding for the Sanlam Life & Pensions (UK) Limited (now renamed
CASLP) acquisition and a £21.5m capital injection to Waard to support the
Conservatrix acquisition. Waard were able to fund the acquisition of Robein
Leven without additional capital support from the group. Excluding these
items, the underlying balance has remained largely constant as divisional
dividend receipts have broadly matched the shareholder dividend payment and
other working capital outflows.
Looking forward, we continue to have a strong line of sight to future cash
generation over the medium and longer term from the unwind of risk margin and
SCR, investment returns above risk free rates, wider synergies and management
actions. And that's before further potential benefits from new business and
further acquisitions.
STRONG SOLVENCY
During the year we have seen a sharp increase in the group solvency ratio to
197%. The table that follows illustrates that this increase is largely due
to the Tier 2 debt issuance, partly offset by the capital resources (mainly
the payment of consideration) required to complete the CASLP and Robein Leven
acquisitions, together with the impact of a swing in the scale and direction
of the symmetric adjustment. Excluding these individually material movements
the ratio has continued to remain stable.
Solvency ratio %* Solvency surplus £m
2018 158 202.4
2019 155 210.8
2020 156 204.0
2021 152 190.7
2022 197 298.4
*Normal operating solvency range = 140% to 160%
The closing headline solvency ratio of 197% is significantly above our normal
operating range of between 140% and 160%. The solvency ratio does not adopt
any of the temporary benefits available from Solvency II transitional
arrangements (though we do apply the volatility adjustment in our UK and Dutch
divisions). However, 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. At the end of 2021,
the symmetric adjustment was suppressing the solvency ratio by 8%. We noted
that this supressing impact was likely to reverse out over time. This is
indeed exactly what we have observed during 2022 when equity markets have
fallen, with the symmetric adjustment shifting to a position where it is now
enhancing the headline ratio by 10 percentage points.
Solvency ratio %
SII % 31 Dec 2021 152
Tier 2 impact 49
Robein impact (1)
SLP impact (13)
FX hedge 11
Symmetric adjustment impact 10
Annual dividend payments (10)
Normal business (1)
SII % 31 Dec 2022 197
We expect to utilise this additional capital surplus as we undertake
acquisitions, which should result in the ratio reverting back within the
robust and stable 140% to 160% historical range. The recently completed
Conservatrix acquisition is expected to reduce the solvency ratio by
approximately 15 percentage points to 182% on a pro forma basis as at 31
December 2022. Strategically, it is our intention to deploy further capital
in support of value enhancing acquisitions in the future.
THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTICULARLY THROUGH
M&A
In our 2021 full year accounts, we introduced the concept of the Chesnara
'fan' which illustrates the additional areas of growth potential the group may
benefit from that aren't reflected in our Economic Value metric.
We also stated that "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."
Although a one year time period is short, it is worth looking at how the
results for 2022 map against the value growth components of the Chesnara
'fan'.
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. Given the direct link to external market performance
this source of value is the most volatile of the growth sources. In 2021,
real world returns represented growth of c£110m. A large proportion of this
has reversed with a corresponding loss in 2022 of c£109m. Despite this
volatility in the short term, over the long term we expect average returns in
excess of risk free, as we have seen historically. Valuing the group
assuming relatively conservative returns above the risk free yield, for
example using an average of 5% total equity returns per annum, would add
significantly upwards of £150m of incremental EcV. In addition, we might
reasonably expect a significant proportion of the recent losses to be reversed
in the event that markets recovered.
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. During the first half of the year, Countrywide Assured
in particular has benefitted from synergies from the CASLP acquisition. Over
recent years, including 2021, we have suffered some operational losses
particularly relating to investments made in IT systems in Scildon, some
regulatory changes, and higher than expected pension transfer outflows in
Sweden. It is hugely encouraging to report that there has been a marked
reduction in the rate at which business has transferred from the Swedish
portfolio in 2022 and we start 2023 with outflow rates being back in line with
the long term assumption. The Countrywide Assured expense synergies together
with the positive transfer experience in Sweden mean the outlook for
operational value growth is much improved.
The other value growth components have all been a source of actual growth
during the period. The Own Funds of the group have increased by c£20m
directly as a result of risk margin reductions. Acquisitions completed in
the period have also added £21.4m of EcV on a marginal costing basis and the
Conservatrix deal completed on 1 January 2023 is expected to add a further
c£21m of 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. During 2022, we have seen steady
commercial new business profits of £9.5m.
EQUITY MARKET PERFORMANCE HAS DRIVEN A MARKED REDUCTION IN EcV
Despite a degree of recovery towards the end of the year, we have seen falls
in equity markets over the period, particularly in Sweden, and this has been
the primary reason why we are reporting a group EcV loss of £106.1m for the
year. The overall movement in the group's EcV over the period includes a
£21.4m positive impact of the two acquisitions that we completed in the year.
We have grown our Funds Under Management (FuM) in 2022, largely through the
completion of CASLP and Robein Leven. This growth was largely offset by the
negative effects of increasing yields and falling equity markets on the value
of funds.
Growth in FuM
Funds Under Management £bn £bn
2018 7.1
2019 7.7
2020 8.5
2021 9.1
2022 7.5
2022 acquisitions 3.1
2022 pro forma Conservatrix 0.4
2022 total 11.0
Growth in policies in force
Policies 000's 000's
2019 891
2020 894
2021 877
2022 853
2022 acquisitions 81
2022 pro forma Conservatrix 70
2022 total 1,004
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 and acquisition activity has been a core
component of our historical EcV growth. As well as the immediate benefit
from any price discount to EcV, acquisitions also improve the future growth
outlook by enhancing the potential from the other value elements of the
Chesnara 'fan'.
Successful acquisitions have been key to Chesnara's development historically
and will remain so in the future. During 2022, we completed two
acquisitions, Robein Leven in the Netherlands and CASLP in the UK. Robein
Leven added further scale to Waard, the group's Dutch closed book operations,
and CASLP increased the UK Funds Under Management by £2.9bn. Together they
added £21.4m of EcV on a marginal cost basis and are expected to create
additional steady cash generation potential of c£6m per annum.
In July 2022, we announced the acquisition of Conservatrix in the
Netherlands. This deal completed on 1 January 2023 and our updated
expectation is that this deal will deliver an immediate increase of c£21m of
EcV, with further value generated from future real world investment returns
and the run-off of the risk margin. The new portfolio is expected to
generate c£4m of steady state incremental cash per annum meaning the enlarged
Waard business will generate c£8m of cash per year, covering about one
quarter of the shareholder dividend. Taken together, accessing these value
enhancing acquisitions required us to deploy over £110m of capital resources
(of which £85m was funded from holding company cash reserves), primarily from
the £200m inaugural Tier 2 debt raise we executed in February 2022.
CONFIDENCE IN OUR ABILITY TO EXECUTE FUTURE M&A
We remain optimistic about the prospect of future acquisitions and believe
that we can deliver further value accretive deals. Even relatively small
transactions can have a material positive cumulative impact, as the group
delivers synergies from integrating businesses and portfolios into its
existing operations.
2022 has continued to see an active M&A market across European insurance
with sources of capital 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 being rewarded by shareholders.
Even with the current market volatility, we expect positive activity levels in
insurance M&A to continue. A market with plenty of activity provides
opportunities for Chesnara as a consolidator. We continue to believe there
is also likely to be a little less competition in the sub £250m deal
valuation end of the market that we currently participate in. The three
deals that we have announced in recent times should provide positive reference
points for sellers and their advisors about our renewed ability to execute
M&A.
We continue to have material cash resources to deploy following the £200m
Tier 2 debt issue and, after paying down existing debt, funding the CASLP deal
and Conservatrix capital injection, we hold cash balances of £108m at a group
level (of which a good proportion is readily available for deployment). Our
revolving credit facility 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 (including the
people changes highlighted below) mean we are confident that acquisitions will
continue to contribute to Chesnara's success in the future.
PEOPLE CHANGES
We announced that Sam Perowne was joining our executive team early in 2022.
Sam, along with two new Independent NED appointments in February, Karin
Bergstein and Carol Hagh, has extensive M&A experience. In August, we
announced two further changes to our senior leadership team, with Al Lonie
moving from Company Secretary to become my Chief of Staff and Amanda Wright
joining from abrdn to become General Counsel and Company Secretary.
These changes further enhance the capacity, capability and experience we have
available to pursue further strategic opportunities.
In February this year, we also announced that our Scildon CEO, Gert-Jan
Fritzsche will be leaving the business as we enter the next phase of Scildon's
strategic development. I want to thank him for all his efforts over the past
6 years as Scildon CEO. Our market search for his replacement is well under
way.
A SUSTAINABLE CHESNARA
We are committed to becoming a sustainable group. As a steward and a safe
harbour for our c1 million policyholders and c£11bn of policyholder and
shareholder assets, we have a real responsibility to help drive the change
needed to deliver decarbonisation and a sustainable society and economy. As
a business, we are still at the beginning of our journey and our principles
are: "Do no harm. Do good. Act now for later." We're determined to get there
and we know that speed is of the essence.
To drive our sustainability agenda, we have established our Group
Sustainability Committee chaired by our Senior Independent Director, Jane
Dale, which will help oversee our group sustainability programme that is being
led by Dave Rimmington. The committee consists of senior management from
across the group, including myself. Our inaugural Annual Sustainability
Report (ASR), which we've published alongside this annual report and accounts,
details our vision and commitments. This first ASR positions what we're
going to do and how we're going to do it, alongside why being sustainable is
so important to us. Simply put, we will make decisions based on all of our
stakeholders, including the planet and its natural resources. Positive
outcomes for any particular stakeholder at the cost of inappropriate outcomes
for other stakeholders is not acceptable. Based on this, we're committed to:
1. Supporting a sustainable future, including our net zero
transition plans
2. Making a positive impact, including our plans to invest in
positive solutions
3. Creating a fairer world, ensuring our group is an inclusive
environment for all employees, customers and stakeholders
These commitments will shape what we do and how we do it. We are working to
put sustainability at the heart of everything we do and 2023 will further
embed this. Our reporting will evolve as our plans and targets become more
established so please take a look at our first ASR and we look forward to
updating you on our progress.
OUTLOOK
Chesnara has an excellent track record of sustainable long term cash
generation over its history through recessions, pandemics, global financial
crisis and other variable market conditions. 2022 has seen us continue this
impressive record of cash generation in difficult markets.
The war in Ukraine played a large role in the volatile start to 2022 that we
saw across global markets. The Chesnara business model has delivered
positive cash generation in uncertain markets before, and we have confidence
it will continue to do so in future. We are not dismissive of the material
reduction in Economic Value that equity market falls and interest rate rises
have created during 2022 but equally, we do not see the value loss in the
period as being a factor that at all compromises the medium to longer term
outlook. In fact, we start 2023 with even greater optimism about the prospects
we see in relation to potential acquisitions.
We have ambitious plans to grow the business and the achievements during 2022
leave us well positioned to do so.
Finally, I want to thank our people across the UK, Sweden and the Netherlands
for all their remarkable efforts during an exceptionally busy period. Their
efforts, the robustness of our business model and positive outlook for M&A
give me every confidence that the future remains bright for Chesnara.
Steve Murray,
Chief Executive Officer
29 March 2023
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 A JUST TRANSITION TO A SUSTAINABLE GROUP
BUSINESS REVIEW | UK
The UK division is made up of Countrywide Assured plc and Sanlam Life &
Pensions (UK) Limited (now renamed CASLP). CASLP was acquired by Chesnara on
28 April 2022 following the announcement to purchase the company in September
2021. The combined businesses manage c272,000 policies covering linked
pension business, life insurance, endowments, annuities and some with-profit
business. Countrywide Assured follows an outsourcer-based operating model,
whereas CASLP's is currently largely delivered through internal resources.
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 2022
- The acquisition of Sanlam Life & Pensions (UK) Limited (now
renamed CASLP) was completed on 28 April 2022. This increased the number of
policies by over 68,000 and added EcV of £54.5m to the division.
- Combined UK division delivered cash generation of £40.8m in the
year, and combined foreseeable dividends of £56.0m.
- As a result of the acquisition, central overheads can now be
shared across a wider policy base, which has resulted in a benefit to CA Own
Funds of £8.1m.
- Work is progressing well on integrating CASLP into the division
which includes preparing the business for moving to the division's target
operating model for CASLP. The planned activity of transferring the policies
of CASLP into CA is progressing in line with plans.
- CA completed net transfers of capital out of its with-profit
funds which increased solvency surplus by £7.8m
- Investment markets have influenced the results of the division
over the year. Falls in equity prices and rises in yields have generally
been positive to solvency, but less favourable to the division's EcV.
- CA solvency has increased during the period, largely driven by
the aforementioned group cost sharing exercise, the with-profit capital
extraction and the positive benefits from increasing yields and the fall in
the equity symmetric adjustment
FUTURE PRIORITIES
- Move to the planned longer-term target operating model for CASLP.
- Continue with the work that is required to deliver the planned
transfer of the insurance business of CASLP into the UK's principal operating
company, Countrywide Assured plc.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Identify potential management actions with a focus on those that
have the potential to accelerate cash generation.
- Support Chesnara in identifying and delivering UK acquisitions.
KPIs
Economic Value - UK
£m 2018 2019 2020 2021 2022
EcV 214.7 204.6 187.4 181.9 209.3
Cumulative dividends 59.0 88.0 121.5 149.0
Total 214.7 263.6 275.4 303.4 358.3
Note: The 2022 closing value includes the additional EcV from the acquisition
of CASLP, which includes the value of the acquired business plus a capital
injection from Chesnara plc. There is a corresponding value outflows of
£62.9m at the parent company.
Cash generation
£m 2018 2019 2020 2021 2022
Cash generation 55.8 33.6 29.5 27.4 40.8
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Delivering good customer outcomes 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 2022
- Following the acquisition of CASLP, their customer-facing website
was developed and we have ensured customers continue to receive the same high
quality standard of service. The process of aligning, where appropriate,
CASLP's and CA's customer governance framework is progressing in line with
plans.
- The UK's operational resilience programme has remained a key focus.
All regulatory deadlines have been met and work is now in progress on the next
phase of the work, which includes identifying and remediating any weaknesses
identified through the journey mapping phase of work.
- Throughout the year, the activity of seeking to stay in contact with
customers and to reunite customers with unclaimed assets has continued, as has
the activity on product reviews with remediation undertaken where required.
- The FCA published their final paper on Consumer Duty in July 2022.
An assessment of actions needed to meet the requirements of the paper has been
undertaken for the division, and a plan is being implemented.
FUTURE PRIORITIES
- Continued focus on the operational resilience programme to ensure
the regulatory deadline of March 2025 is achieved.
- Execute the board agreed plans and progress any actions needed to
meet the requirements of the Consumer Duty for CA and CASLP.
KPIs
Policyholder fund performance
2022 2021
CA Pension Managed (7.9)% 10.8%
CWA Balanced Managed Pension (7.9)% 10.8%
S&P Managed Pension (8.4)% 10.4%
Benchmark - ABI Mixed Inv 40%-85% shares (9.8)% 10.8%
Throughout the year our main managed funds performed ahead of 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 2022
- The integration of CASLP into the existing UK governance framework
has been a focus and is largely complete.
- The division's IFRS 17 project has remained a priority over 2022.
The project has progressed well for both the existing CA business as well as
integrating CASLP's programme. The division is well placed to apply IFRS 17
which went live on 1 January 2023.
FUTURE PRIORITIES
- Finalise the transition of CASLP to align with the UK division's
governance framework.
- Deliver IFRS 17 reporting for the division, which became effective
from 1 January 2023.
- Deliver the UK aspect of the group-wide sustainability programme.
KPIs
SOLVENCY RATIO: CA 205%
SOLVENCY RATIO: CASLP 167%
Solvency is strong in both businesses with surplus generated in the year
increasing the pre-dividend solvency ratio from 130% to 205% and from 112% to
167% in CA and CASLP respectively.
CA £m Solvency Ratio
31 Dec 2021 surplus 30.5 130%
Surplus generation 37.5
31 Dec 2022 surplus (pre-dividend) 67.9 205%
2022 dividend (46.0)
31 Dec 2022 surplus 21.9 134%
CASLP £m Solvency Ratio
31 Mar 2022 surplus 4.6 112%
Surplus generation 19.2
31 Dec 2022 surplus (pre-dividend) 23.8 167%
2022 dividend (10.0)
31 Dec 2022 surplus 13.8 139%
BUSINESS REVIEW | SWEDEN
Our Swedish division consists of Movestic, a life and pensions business which
is open to new business. It offers personalised unit-linked pension and
savings solutions through brokers and is well-rated within the broker
community.
Sӧderberg & Partners have, in their recent annual report, named Movestic
as insurance company of the year for unit linked insurance, ahead of
competition from 12 other insurance providers in the Swedish market.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Movestic creates value predominantly by generating growth in 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 2022
- 2022 has seen uncertainty in the Swedish and global financial
markets, resulting in rising Swedish interest rates and inflation and falling
equity markets.
- These events were reflected in the lower returns on the
policyholders' investment assets as well as Movestic's own investments.
- Movestic's solvency ratio has strengthened over the year and it has
an expected year end 2022 dividend of £12.0m.
- The division has continued to strengthen its offering and
distribution within its relatively new custodian business.
- Over 2022, incoming volumes have been in line with the prior year
despite the financial markets' dampening effect.
- Pension transfers continue to be a feature of the market through new
regulations, particularly those introduced in July 2022, along with
digitalisation, transparency, lower fees, and new working processes. The net
transfer outflow has improved significantly due to the removal of competitors'
aggressive pricing activities, coupled with the impact of Movestic's retention
initiatives.
- Favourable claims development in the risk insurance segment has also
been seen.
FUTURE PRIORITIES
- Continue to build solid and long-term sustainable value creation for
customers and owners through a diversified business model with continued
profitable growth of volumes and market shares in selected segments.
- Focus on building digital leadership in the industry through the
development of digitalised and tailored customer propositions and
experience. Movestic will also continue the journey to digital and automated
processes to further improve efficiency and control.
- Remain focused on customer loyalty and providing attractive
offerings to both retain customers and reach more volumes on the transfer
market.
- Provide a predictable and sustainable dividend to Chesnara.
KPIs (all comparatives have been presented using 2022 exchange rates)
Economic Value
£m 2018 2019 2020 2021 2022
Reported value 208.0 247.7 220.0 239.4 199.3
Cumulative dividends 2.7 8.7 14.0 17.0
Total 208.0 250.4 228.7 253.3 216.3
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 2022
- A third party survey completed during 2022 demonstrated the
importance of occupational pension as the most important benefit when choosing
a new employer, hence an important tool for employers to stay attractive.
- A new concept "Movestic Frihet", which includes personal advice on
savings and insurance for customers approaching retirement, was launched
during the year with positive response from the market.
- A new partnership with Lexly was also entered into, which gives
Movestic customers access to online legal advisory services.
- A new concept for onboarding of individuals within the direct market
segment was launched during the first half year.
- The processing of policy transfers was further digitalised during
the year, both from the perspective of brokers and individual customers.
- Launch of an opportunity for both existing and new individual
customers to engage in new savings by subscribing to an endowment policy on
the Movestic website.
FUTURE PRIORITIES
- Continued development of new digital self-service solutions and
tools to support the brokers' value enhancing customer proposition, and to
facilitate smooth administrative processes making Movestic a partner that is
easy to do business with.
- Further strengthen the relationship with brokers through increased
presence, both physical and digital.
- Seek to capitalise on the new rules that came into effect in July
2022 that enhances our ability to transfer policies onto our platform where it
is in the interest of customers to do so.
KPIs (all comparatives have been presented using 2022 exchange rates)
Broker assessment rating (out of 5)
2018 2019 2020 2021 2022
Rating 3.8 3.5 3.3 3.6 3.8
POLICYHOLDER AVERAGE INVESTMENT RETURN:
-14.6%
The total average fund performance needs to be assessed in light of the
reduction in value of wider equity markets, especially the main Swedish OMX
index that fell by 25%. Against this backdrop, the performance is seen as a
positive outcome. This is supported by the fact Sӧderberg and Partners, a
major Swedish distributer, cited improved fund payout rates as a key factor in
selecting Movestic as 'Insurance Company of the Year'.
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 2022
- The IFRS 17 programme has continued during the year and Movestic
remains on track with its implementation.
- Sustainability has remained a focus area. Efforts have been made
to integrate sustainability risk in various internal processes in order to be
compliant with changes in the Solvency II delegated regulation which entered
into force in August 2022. Movestic has also been playing a strong role in the
group's wider sustainability programme.
- Further implementation on the EU sustainability regulation (the SFDR
and the EU Taxonomy) was carried out during the year, including integrating
sustainability as a parameter in the advisory process.
- During the year, a new Swedish NED, Marita Odélius Engström,
joined the Movestic board and A&RC, with Karin Bergstein, a plc NED, also
joining the Movestic board.
FUTURE PRIORITIES
- Deliver the remaining aspects of the division's IFRS 17 programme.
- Continue implementation of sustainability regulations.
KPIs (all comparatives have been presented using 2022 exchange rates)
SOLVENCY RATIO: 162%
Solvency remains strong post a foreseeable dividend of £12m
£m Solvency Ratio
31 Dec 2021 surplus 74.1 148%
Surplus generation 4.4
31 Dec 2022 surplus (pre-dividend) 78.5 173%
2022 dividend (12.0)
31 Dec 2022 surplus 66.5 162%
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 2022
- Sales volumes developed positively in 2022 and are 14% above 2021
for the unit-linked segment. The custodian sales volumes were on par with
the previous year despite the unfavourable financial market conditions. Sales
volumes in early 2023 also appear positive.
- The division delivered new business profit of £3.4m (2021: £4.2m).
The prior year included higher pension increments profit, largely due to
salary and bonus processes being postponed in 2020 to 2021, which is not the
case in 2022.
- Movestic will continue to develop its offering to increase
competitiveness and build customer loyalty. A special focus was also put on
new volumes that became available on the Swedish transfer market from the
second half of 2022.
- The intense competition in the unit-linked market continues,
resulting in Movestic's market share of new business currently being below the
long-term target. Movestic saw some positive sales development in the broker
channel during the year. In the custodian market, Movestic is well within
the target range for custodian market share achieving 9.5% on a rolling 12
month basis.
FUTURE PRIORITIES
- Launch new risk product offerings in the broker channel, including a
new technical solution for administration.
- Strengthen distribution capacity within the direct business area, as
a complement to the broker channel and partner distributed custodian business.
KPIs (all comparatives have been presented using 2022 exchange rates)
Occupational pension market share %
% 2018 2019 2020 2021 2022
Market share 6.6 7.0 4.7 3.6 4.1
New business profit
£m 2018 2019 2020 2021 2021
New business profit 10.6 6.6 1.5 4.1 3.4
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through our closed
book business Waard, which seeks to acquire and integrate portfolios and our
open book business Scildon, which seeks to write profitable term, investments
and savings business.
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 2022
- Waard completed the acquisition of Robein Leven in April 2022 with
the integration largely complete by the end of the year.
- Waard also entered into an agreement to acquire the insurance
portfolio of Conservatrix, a specialist provider of life insurance products in
the Netherlands that was declared bankrupt on 8 December 2020. The transaction
completed on 1 January 2023 adding 70,000 policies and £0.4bn of assets under
management. These acquisitions further strengthen Waard's position as an
acquirer of business and portfolios in the Netherlands.
- Despite market pressures during 2022, both businesses continue to
have strong solvency positions, inclusive of the use of the volatility
adjustment: Scildon at 188% at 31 December 2022; and Waard at 591%.
- Scildon launched an IT system improvement project for individual
products that is expected to run until 2024 and generate cost efficiencies.
FUTURE PRIORITIES
- Integrate the Conservatrix 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 divided payments to Chesnara.
- Continue to progress the ongoing IT projects to generate capital
efficiencies.
KPIs (all comparatives have been presented using 2022 exchange rates)
Economic Value - The Netherlands
£m 2018 2019 2020 2021 2022
EcV 221.1 229.7 216.0 224.6 223.4
Cumulative dividends 8.3 13.4 13.4 18.7
Total 221.1 237.9 229.4 238.0 242.1
Note: The 2022 closing value includes the additional EcV in Waard relating to
the capital injection from Chesnara plc in respect of the Conservatrix
acquisition. There is a corresponding value outflows of £21.5m at the parent
company.
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 2022
- Scildon's focus has been on providing flexible solutions and
offerings to our clients, including sustainable options, and continuing to
meet the needs of our customers during the impacts of the war in Ukraine and
the cost of living crisis.
- Work has continued on the Scildon pension portal and work also
started to improve the existing system that services all other products
providing improved functionality for customers.
- Waard has provided certainty to the policyholders and staff of both
Robein Leven and Conservatrix through its acquisition activity.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality and to
enhance and develop existing processes, infrastructure and customer
experiences.
- Continue to progress the IT development programme in Scildon to
enhance functionality for customers.
- Maintain stability to customers of Conservatrix during the
integration process.
KPIs (all comparatives have been presented using 2022 exchange rates)
Scildon client satisfaction rating (out of 10)
2018 2019 2020 2021 2022
Rating 7.6 7.7 7.8 8.1 8.3
(Source MWM(2) market research agency, Netherlands)
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 2022
- The IFRS 17 and IFRS 9 work has continued to progress, with
significant strides being made during the year. Work has continued with our
auditors on the technical decisions and the operational processes underpinning
the implementation. Both businesses remain on track to deliver IFRS 17
reporting for half year 2023.
- Further implementation on the EU sustainability regulation (the SFDR
and the EU Taxonomy) was carried out during the year.
- Waard has implemented a new actuarial tool during the year to
strengthen its systems and controls.
- The 2022 results have been audited by the newly appointed local
auditor, EY, following a tender process for both Waard and Scildon during
2021.
FUTURE PRIORITIES
- Finalising the preparation for IFRS 17 and IFRS 9 financial
reporting, which are live as of 1 January 2023.
- Continue implementation of sustainability regulations.
KPIs (all comparatives have been presented using 2022 exchange rates)
SOLVENCY RATIO: SCILDON 188%; WAARD 591%
Solvency is robust in both businesses, with post-dividend solvency ratios
(inclusive of the volatility adjustment) of 188% and 591% for Scildon and
Waard respectively. Note, the increase in Waard solvency includes the benefit
of the £21.5m capital injection from group in respect of the Conservatrix
acquisition, completed 1 January 2023.
Scildon
£m Solvency Ratio
31 Dec 2021 surplus 74.0 192%
Surplus generation (11.9)
31 Dec 2022 surplus 62.1 188%
Waard
£m Solvency Ratio
31 Dec 2021 surplus 35.2 399%
Surplus generation 36.3
31 Dec 2022 surplus (pre-dividend) 71.5 630%
2022 dividend (5.3)
31 Dec 2022 surplus 66.2 591%
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 2022
- Despite significant market turmoil over the course of 2022, Scildon
continue to generate commercial new business profits, with £6.1m earned in
the year. The overall volume of business increased by c3% versus 2021
against a term market that materially shrank during the year.
- Underpinning this, Scildon APE and policy count continue to
increase, now with more than 230,000 policies. The market share for the
Scildon term lifestyle product is 18.2% (YTD to December 2022).
- Scildon were awarded a 5 star rating for its lifestyle product by
independent trade body, Moneyview.
FUTURE PRIORITIES
- Continue to deliver product innovation and cost management actions.
- 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 2022 exchange rates)
Scildon - term assurance market share %
% 2018 2019 2020 2021 2022
Market share 7.6 11.6 14.2 16.1 18.2
Scildon - new business profit
£m 2018 2019 2020 2021 2022
New business profit 4.6 7.5 8.4 5.2 6.1
BUSINESS REVIEW | acquire life and pension businesses
During 2022 we completed the acquisitions of Sanlam Life & Pensions (UK)
Limited (now renamed CASLP) and Robein Leven and announced the purchase of the
insurance portfolio of Conservatrix. Well considered acquisitions 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 own
contacts and advisers and industry associates, utilising both group and
divisional management expertise as appropriate.
- We primarily focus on acquisitions in our existing territories,
although we will consider other territories should the opportunity arise and
this is supportive of our strategic objectives.
- We assess deals by 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 own resources, debt or equity
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 2022
In July 2022, Chesnara announced the acquisition of the insurance portfolio of
Conservatrix, a specialist provider of life insurance products in the
Netherlands that was declared bankrupt on 8 December 2020. The transaction
completed on 1 January 2023.
The insurance portfolio has increased Waard's number of policies under
administration by over 50%, transforming Waard into a second material closed
book consolidation business alongside Chesnara's existing UK platform.
This is the seventh transaction undertaken in the Dutch market. Conservatrix's
savings, annuity and funeral plan products are well aligned with Chesnara's
existing life and pension liability mix in the Netherlands, and adds
approximately 70,000 additional policies and £0.4bn of assets to the group.
A capital contribution of £35m was provided by the group (£21.5m from the
parent and the remaining £13.5m funded by Waard) to support the solvency
position of the Conservatrix business and Conservatrix customers will benefit
from becoming part of a well capitalised group, after a significant period of
uncertainty.
Future cash generation from the acquisition under steady state conditions is
expected to be c£4 million per annum, supporting Chesnara's progressive
dividend strategy. Waard will become a material contributor to the group's
dividends, with expected total annual cash generation of £8 million.
The Conservatrix transaction is expected to increase the group's EcV by c£21m
on a pro forma basis and provides further EcV accretion potential from future
real world investment returns and the run-off of the risk margin.
In addition, we also completed two transactions during April 2022 that were
originally announced in 2021: Robein Leven in the Netherlands (announced in
November 2021) and CASLP in the UK (announced in September 2021). These
acquisitions added £21.4m day 1 EcV and are expected to add c£6m of steady
state cash generation.
Total group capital deployed in the three acquisitions of CASLP, Robein Leven
and Conservatrix totalled over £110m, of which £85m was funded from holding
company cash reserves. Including Conservatrix this is expected to add c£42m
of EcV to the group and £10m of steady state cash generation.
ACQUISITION OUTLOOK
- We continue to see a healthy flow of acquisition activity across
European insurance including UK and the Netherlands.
- We recognise that the consolidation markets in these countries are
mature but the key drivers for owners to divest portfolios continue to remain
relevant and create a strong pipeline. These include 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 sales of portfolios will continue and 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 licences in these territories.
- Chesnara will continue its robust acquisition assessment model which
takes into account; (a) the strategic fit; (b) the cash generation capability;
(c) the medium term impact on EcV per share; 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 £200m Tier 2 subordinated debt issue in February 2022, together
with the existing £100m Revolving Credit Facility arrangement (with an
additional £50m accordion option), provides funding capability on
commercially attractive terms. Whilst we deployed c£85m of capital in support
of M&A (£110m including capital from Waard), we continue to have
immediately available acquisition firepower of over £100m. We will continue
to explore how we can increase our funding capability further, including
consideration of partnerships.
- Our strong network of contacts including the corporate finance
adviser community, who understand the Chesnara acquisition model, supported by
our engagement activity with potential targets, ensures that we are aware of
viable opportunities in the UK and Western Europe. With this in mind, we are
confident that we are well positioned to continue our 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.
GROUP SOLVENCY
SOLVENCY POSITION
£m 31 Dec 2022 31 Dec 2021
Own funds 605 558
SCR 307 367
Surplus 298 191
Solvency ratio % 197% 152%
SOLVENCY SURPLUS
£m
Group solvency surplus at 31 Dec 2021 190.7
CA 37.4
SLP (5.1)
Movestic 7.5
Waard 3.6
Scildon (11.4)
Chesnara / consol adj (10.6)
Tier 2 153.3
Acquisition (37.4)
Exchange rates 4.7
Dividends (34.3)
Group solvency surplus at 31 Dec 2022 298.4
Surplus:
The group has £268m of surplus over and above the group's internal capital
management policy requirements, compared to £154m at the end of 2021. The
group solvency ratio has increased from 152% to 197%.
Dividend:
The closing solvency position is stated after deducting the £22.8m proposed
dividend (31 December 2021: £22.1m) and reflects the payment of an interim
dividend of £12.2m.
Own Funds:
Own Funds have risen by £82m (pre-dividends). The most material driver is
the introduction of £200m Tier 2 debt of which £153m is recognised as
eligible Own Funds. This is offset by a reduction in divisional Own Funds,
largely due to the fall in equity markets.
SCR:
The SCR has fallen by £60m, owing mainly to a material falls in equity risk
(caused by the fall in equity markets) and in currency risk (following the
introduction of the group currency hedge).
What is solvency and capital surplus?
- Solvency surplus is a measure of how much the value of the company
(Own Funds) 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".
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.
A review of the UK's application of Solvency II is currently underway, led by
HM Treasury. In April 2022, the PRA published a statement indicating its
agreement with the view that the risk margin and matching adjustment can be
reformed so as to reduce overall capital levels for life insurers by around
10% to 15% in current economic conditions. In November 2022, the UK
government announced plans to legislate the reforms to Solvency II. We
continue to monitor this closely and future financial statements will report
on the UK specific application of Solvency II as it diverges from the EU's
regime. 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 Scildon, Waard Leven, CA and CASLP, 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.
UK - CA
£m 2022 2021
Own funds (post dividend) 87 131
SCR 65 100
Buffer 13 20
Surplus 9 11
Solvency ratio % 134% 130%
Surplus: £9m above board's capital management policy.
Dividends: Solvency position stated after £46m foreseeable dividend (2021:
£28m).
Own Funds: Risen by £2m (pre-dividend) due to an extraction of restricted
with-profit capital, reduced expense assumptions, offset by the fall in equity
markets.
SCR: Decreased by £35m due to sharp fall in equity risk and moderate fall
in spread and expense risks.
UK - CASLP
£m 2022 Mar 2022
Own funds (post dividend) 49 59
SCR 36 43
Buffer 7 9
Surplus 6 7
Solvency ratio % 139% 137%
Surplus: £4m above board's capital management policy.
Dividends: Solvency position stated after £10m foreseeable dividend.
Own Funds: Since acquisition, Own Funds fell by £10m, largely due to an
increase in expense assumptions and fall in equity markets.
SCR: Fallen by £7m in the post-acquisition period, due to reductions in
equity, spread, counterparty, longevity and lapse risks.
SWEDEN
£m 2022 2021
Own funds (post dividend) 173 229
SCR 107 155
Buffer 21 31
Surplus 45 43
Solvency ratio % 162% 148%
Surplus: £45m above board's capital management policy.
Dividends: Solvency position stated after £12m foreseeable dividend (2021:
£3m).
Own Funds: Decreased by £44m (pre-dividend) largely due to fall in equity
markets, although slightly offset by the rise in yields.
SCR: Decreased by £48m due to sharp fall in equity risk and moderate falls
in currency, lapse and expense risks, due to the market movements.
NETHERLANDS - WAARD
£m 2022 2021
Own funds (post dividend) 80 47
SCR 14 12
Buffer 5 4
Surplus 61 31
Solvency ratio % 591% 399%
Surplus: £61m above board's capital management policy.
Dividends: Solvency position stated after £5m foreseeable dividend (2021:
£6m).
Own Funds: Increased by £33m, due to receipt of £22m from Chesnara and
£5m from Scildon to support acquisition activity. There is also a gain on
revaluation of Robein Leven.
SCR: Risen by £1m, mainly due to acquisition of Robein Leven, which has
mostly impacted equity, expense and concentration risk.
NETHERLANDS - SCILDON
£m 2022 2021
Own funds (post dividend) 132 155
SCR 70 81
Buffer 53 61
Surplus 9 13
Solvency ratio % 188% 192%
Surplus: £9m above board's capital management policy.
Dividends: No foreseeable dividend is expected (2021: £5m).
Own Funds: Decreased by £23m due to the rise in interest rates and adverse
mortality and lapse experience.
SCR: Decreased by £11m, largely due to falls in equity and lapse risk, due
to the fall in equities and rising yields, respectively. Other insurance
risks have fallen moderately.
The tables above 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 2021 figures have been restated
using 31 December 2022 exchange rates in order to aid comparison at a
divisional level.
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.
The Tier 2 debt raise in February 2022 has had a material impact on the
reported sensitivities because, as capital requirements move, the amount of
the Tier 2 debt able to be recognised in the Own Funds also moves. For
example, where FX movements reduce the SCR, we now also experience a
corresponding reduction in base Own Funds and also Own Funds relating to Tier
2 capital. The total surplus is now more exposed to downside risks but,
importantly, the Tier 2 itself has created more than sufficient additional
headroom to accommodate this. The group also implemented a currency hedge in
December 2022 which materially reduces the impact of currency movements on
surplus.
Whilst cash generation has not been shown in the table below, the impact of
these sensitivities on the group's solvency surplus has a direct read across
to the immediate impact on cash generation. For illustrative purposes, several
sensitivities are reported solely showing the downside exposure. For all of
these, there is a corresponding upside sensitivity.
Solvency ratio Solvency surplus EcV
Impact % Impact range £m Impact range £m
20% sterling appreciation 11.8% (31.9) to (21.9) (68.6) to (58.6)
20% sterling depreciation (7.8)% 35.0 to 45.0 78.6 to 88.6
25% equity fall 0.9% (56.7) to (26.7) (81.3) to (61.3)
25% equity rise (10.2)% 26.6 to 56.6 72.8 to 92.8
10% equity fall 0.4% (22.9) to (12.9) (33.6) to (23.6)
10% equity rise (3.9)% 10.1 to 20.1 25.5 to 35.5
1% interest rate rise 3.2% (5.8) to 4.2 (15.7) to (5.7)
1% interest rate fall (4.2)% (12.7) to 7.3 2.9 to 17.9
50bps credit spread rise (4.2)% (20.9) to (10.9) (20.1) to (15.1)
25bps swap rate fall (4.7)% (16.2) to (6.2) (16.8) to (6.8)
10% mass lapse (2.0)% (31.5) to (21.5) (46.2) to (36.2)
1% inflation (7.4)% (26.8) to (16.8) (26.5) to (16.5)
10% mortality increase (5.2)% (20.7) to (15.7) (21.9) to (16.9)
INSIGHT*
Currency sensitivities: A sterling appreciation reduces the value of surplus
in our overseas divisions and any overseas investments in our UK entities,
however this is mitigated by the group currency hedge. so the overall impact
on solvency surplus is small. The impact of a sterling depreciation is not
symmetrical because the currency hedge only removes a limited amount of upside
potential.
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 surplus, depending on the starting point of the symmetric
adjustment. The converse applies to an equity fall sensitivity, although the
impacts are not fully symmetrical due to management actions and tax. The
Tier 2 debt value also changes materially in these sensitivities. The change
in symmetric adjustment can have a significant impact (25% equity fall: -£12m
to the SCR, 25% equity rise: +£39m 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 currently has a more
adverse effect on group economic value than an interest rate fall. This is a
change in exposure following the rise in interest rates over 2022. However,
group solvency is still less exposed to rising interest rates as a rise in
rates causes capital requirements to fall, increasing solvency.
50bps credit spread rise: A credit spread rise has an adverse impact on
surplus and future cash generation, 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: In this sensitivity Own Funds fall as there are fewer
policies on the books, thus less potential for future profits. This is
largely offset by a fall in SCR, although the amount of eligible Tier 2
capital also falls. The division most affected is Movestic as it has the
largest concentration of unit-linked business.
1% inflation rise: This sensitivity measures a permanent increase in
inflation in every future year over and above our modelled assumptions. Such
a rise in inflation increases the amount of expected future expenses. This
is capitalised into the balance sheet and hits the solvency position
immediately.
10% mortality increase: This sensitivity has an adverse impact on surplus and
cash generation, 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:
CASH GENERATION
GROUP CASH GENERATION £82.7M (2021: £20.3M)
DIVISIONAL CASH GENERATION £61.9M (2021: £31.1M)
excluding the day 1 impact of acquisitions
What is it?
Cash generation is calculated as being the movement in Solvency II Own Funds
over the internally required capital, excluding the impact of tier 2 debt.
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 2022
UK 40.8
Sweden 16.1
Netherlands - Waard 8.4
Netherlands - Scildon (3.4)
Divisional cash generation 61.9
Other group activities 20.8
Group cash generation 82.7
- Strong total cash generation of £82.7m is the combined impact of
good divisional performance and a positive contribution at the central plc
level.
- The divisional result of £61.9m is dominated by the positive impact
of investment market driven reductions in capital requirements including
c£28m from the symmetric adjustment. The good surplus emergence at a
divisional level has enabled total expected divisional dividends of £74m.
- The central contribution of £20.8m benefits from the impact of a FX
currency hedge taken out toward the end of the year which reduced our currency
capital requirement (including buffer) by £36m. The balancing central loss of
c£15m relates to consolidation adjustments, central develop expenditure and
central recurring overheads.
IFRS
PRE-TAX LOSS: £146.9M (2021: £28.8M PROFIT)
TOTAL COMPREHENSIVE LOSS: £91.9M (2021: £3.8M PROFIT)
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 can be relatively volatile from interest rate and spread changes, in
part, due to the different approach used by the division for valuing assets
and liabilities, as permitted under IFRS 4. The dynamics of our IFRS results
will change once IFRS 17 comes in force, which will be effective from 1
January 2023
£m 2022
Operating profit (10.5)
Economic profit (151.8)
Profit on portfolio acquisition 15.4
Profit before tax (146.9)
Tax 48.6
Forex impact 5.8
Other 0.7
Total comprehensive income (91.9)
- The loss in the year is dominated by the Scildon result, which
reported a pre-tax loss of £103.7m. This has arisen as a result of an
accounting mismatch between assets and liabilities, with yield increases in
the year being the key factor causing this.
- The loss on economic activities was £151.8m for the year, with all
adversely impacted by factors such as rising yields, coupled with falling
equity markets.
- The result includes profit on acquisitions of £15.4m, comprising
gains arising on the CASLP and Robein Leven deals in the UK and Netherlands.
- Total comprehensive income includes a positive movement in tax
liability (owing to the operating losses) and a small foreign exchange gain on
translation of the Dutch and Swedish divisional results.
ECONOMIC VALUE (EcV)
£511.7M (2021: £624.2M)
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 £59m-£69m, based on the composition of the group's EcV at 31
December 2022.
£m
2021 EcV 624.2
EcV earnings (106.1)
Forex 6.5
Acquisitions 21.4
Pre-dividend EcV 546.0
Dividends (34.3)
2022 EcV 511.7
- The 12.5% fall in Economic Value pre-dividend is broadly in line
with expectations given the backdrop of widening credit spreads and sharp
equity value reductions, particularly in Sweden where the primary OMX index
fell by 25%. Equity impacts and spread impacts of c£65m and c£20m
respectively account for the vast majority of the fall.
- Despite the overall reduction, new business profits and acquisitions
did manage to cover 88% of the total dividend payment. This gives confidence
that under more beneficial economic conditions the prospect of post dividend
Economic Value growth is a realistic expectation.
ECV EARNINGS
£(106.1)M 2021: £57.8M
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
business.
£m 2022
Total operating earnings (26.8)
Economic earnings (109.1)
Other 29.9
Total EcV earnings (106.1)
- The majority of the earnings loss is due to economic conditions.
Equity market falls have materially impacted unit linked policyholder funds
and future fee related positive cashflows are rebased from the closing fund
value. There have also been notable losses resulting from credit spreads
widening and more modest yield related losses.
- Whilst operating losses are a real source of value deterioration
they do include items more positive in nature. For example, overheads and
one-off costs associated with the M&A strategy are within this total as
are certain non-recurring costs associated with the Tier 2 raise and IFRS 17.
The loss includes a much reduced impact from Movestic outward transfers which
is a significant positive development with closing transfer levels being back
in line with our long term assumption. We have strengthened mortality and
expense assumption in Scildon
- The "Other" category includes reduction in risk margin, positive tax
impacts and the cost of the Tier 2 coupon payments.
CASH GENERATION
GROUP CASH GENERATION
£82.7M (2021: £20.3M)
DIVISIONAL CASH GENERATION
£61.9M (2021: £31.1M)
With positive contributions in each territory the divisional cash generation
exceeds £60m and, looking through the impact of acquisitions, total cash
generation for 2022 was £82.7m . 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.
2022 £m 2021 £m
Movement in Movement in management's capital requirement Forex Cash generated / (utilised) Cash generated / (utilised)
Own Funds impact
UK (10.0) 50.8 - 40.8 27.4
Sweden (40.8) 57.9 (1.0) 16.1 (14.4)
Netherlands - Waard Group (2.0) 7.6 2.9 8.4 2.9
Netherlands - Scildon (21.4) 17.4 0.5 (3.4) 15.2
Divisional cash generation / (utilisation) (74.2) 133.7 2.4 61.9 31.1
Other group activities (15.0) 33.2 2.6 20.8 (10.8)
Group cash generation / (utilisation) (89.2) 166.9 5.0 82.7 20.3
GROUP
- Other group activities includes consolidation adjustments as well as
central costs and central SCR movements.
- Central costs of approximately £15m include a large proportion of
exceptional non-recurring expenditure and Tier 2 interest costs.
- Central SCR movements have minimal real cash flow implications, but
they do have meaningful solvency impacts. The movement in the year largely
relates to a £36.5m reduction as a result of a currency hedge taken out in
the final quarter of 2022.
UK
- The UK again delivered strong cash generation, driven by capital
requirement reductions (and symmetric adjustment impact) following a
significant decline in equity values and increase in yields, which offset the
negative impact of investment conditions on Own Funds. Economic conditions and
their associated impact, primarily markets risks, drove the positive movement
in capital requirements. Conversely, Own Funds suffered the effect of a
corresponding reduction in asset values. Own Funds also include a £7.8m gain
as a result of a capital transfer from the with-profit funds.
SWEDEN
- Movestic has reported a solid cash result for 2022, with a
substantial reduction in capital requirements offsetting a large fall in the
value of Own Funds. The division is particularly sensitive to investment
market movements and economic conditions during the period underpin the cash
result. Own Funds bear the impact of economic conditions and negative
investment returns (particularly equity driven).
NETHERLANDS - WAARD
- Waard delivered improved cash generation, following a reduction in
capital requirements that exceeded a fall in Own Funds. Economic losses,
largely due to the negative effect of rising interest rates on yields and bond
values and mortgage portfolio, were the main component of the value reduction.
This also had a positive impact on capital requirements, driving a material
decrease in market risks.
NETHERLANDS - SCILDON
- The Scildon result was dominated by economic factors that were key
to the decline in both Own Funds and required capital. Rising interest rates,
falling bond values and widening spreads had a negative impact on Own Funds,
resulting in significant economic losses. Operational losses also contributed
to the value reduction. The reduction in SCR was driven by economic factors,
particularly market risks, as well as lapse risk with lower exposure to the
cost of guarantees. Overall, Scildon posted a loss for 2022.
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
£46.6M (2021: £53.0M)
UK SWEDEN NETHERLANDS NETHERLANDS SCILDON DIVISIONAL GROUP ADJ TOTAL
WAARD TOTAL
Base cash generation 40.8 16.1 8.4 (3.4) 61.9 20.8 82.7
Symmetric adjustment (10.9) (17.2) - - (28.2) - (28.2)
WP restriction look through (7.8) - - - (7.8) - (7.8)
Commercial cash generation 22.0 (1.1) 8.4 (3.4) 25.9 20.8 46.6
The group's closed book businesses (UK and Waard) continue to be the dominant
source of commercial cash generation with a total commercial result of
c£30.4m which in itself represents 87% coverage of the full year dividend.
The open to new business divisions (Movestic and Scildon) have reported modest
commercial cash losses, resulting in a total divisional result of £25.9m.
This result has been further enhanced by the implementation of an FX hedge to
reduce the group balance sheet exposure to FX movements. This delivered
£36.5m of commercial cash which in turn contributes to a total commercial
cash generation of £46.6m, representing 133% coverage of the full year
dividend. We have consistently reported the existence of potential management
actions to enhance cash emergence. We deemed the time was right and the
financial case was suitably compelling to implement one of these in the shape
of an FX hedge.
UK
The UK result, which includes the post-acquisition results for CASLP,
relates to a combination of operating and economic gains. The economic result
includes the benefits from the increased yield environment in part offset by
losses from equity falls and widening credit spreads.
The commercial cash outcome illustrates that UK remains at the heart of the
cash generation model. The acquisition of CASLP will positively contribute to
the longevity of this core source of cash.
SWEDEN
The Swedish result, which excludes the large benefits from the symmetric
adjustment, is largely a direct consequence of the sharp decline in equity
values and a widening of credit spreads during the period, which are partially
offset by benefits from yield increases. The underlying operating result is
broadly in line with expectation.
WAARD
The Waard commercial cash gain includes both operating and economic profits.
The operating gains are largely due to post acquisition synergies from the
Robein Leven acquisition which completed in Q2. Economic gains have arisen as
a result of FX movements and rising yields.
SCILDON
The Scildon result includes modest benefits from the increasing interest rates
during the period. Operating losses, largely due to strengthening operating
assumptions, together with new business strains have more than offset any
economic profits.
GROUP ADJ
The central group cash generation includes a £36.5m gain from a FX hedge
taken out in the year . This is partially offset by central expenses and
consolidation adjustments. The central expenses include coupon payments of the
Tier 2 debt raised in the year, central overheads and centrally incurred
business development investments e.g. M&A activity, IFRS 17, Tier 2 debt
raise process.
EcV EARNINGS
£(106.1)M (2021: £57.8M)
The EcV earnings of the group reflect the economic conditions over the course
of the year, with negative equity returns, rising interest rates and falling
bond values, delivering economic losses across the operating divisions.
Analysis of the EcV result in the period by earnings source:
£m 31 Dec 31 Dec
2022 2021
Expected movement in period (1.3) (1.7)
New business 8.0 2.4
Operating experience variances (20.7) (19.2)
Operating assumption changes (14.5) (13.9)
Other operating variances 1.7 (26.4)
Total operating earnings (26.8) (58.8)
Total economic earnings (109.1) 109.6
Other non-operating variances (2.6) 4.5
Risk margin movement 20.4 10.8
Tax 12.0 (8.2)
EcV earnings (106.1) 57.8
Analysis of the EcV result in the year by business segment:
£m 31 Dec 31 Dec
2022 2021
UK (24.6) 28.0
Sweden (37.1) 26.1
Netherlands (29.4) 8.3
Group and group adjustments (15.0) (4.6)
EcV earnings (106.1) 57.8
Total economic earnings: The large economic loss of £109.1m dominates the EcV
result in the year. The result is in line with our reported sensitivities and
is driven by the following market movements:
Reduction in equity indices:
- CPI (UK consumer price index) increased by 5.1% to 10.5% (year ended
31 December 2021: increased by 4.7% to 5.4%);
- FTSE All Share index decreased by 3% (year ended 31 December 2021:
increased by 15%);
- Swedish OMX all share index decreased by 25% (year ended 31 December
2021: increased by 35%); and
- The Netherlands AEX all share index decreased by 15% (year ended 31
December 2021: increased by 23%).
Widening credit spreads:
- UK AA corporate bond yields increased to 1.04% (31 December 2021:
0.69%).
- European AA credit spreads increased to 0.29% (31 December 2021:
0.16%).
Increased yields:
- 10-year UK gilt yields have increased from 0.98% to 3.78%.
The following table illustrates the approximate relative impacts of these
market factor on the EcV economic loss:
Split of economics
Equities 67%
Spreads 18%
Yields 5%
Other 10%
The EcV results over the past two years illustrate how sensitive the results
are to economic factors. The fact that the loss in 2022 is the same as an
equally large gain in 2021 demonstrates that, to an extent, there is a lack of
permanence to such market driven value movements. Short term volatility has
limited commercial impact on the business and of more importance is the fact
that steady state, over the longer term, we expect EcV growth in the form of
real world investment returns.
Total operating earnings: Although we report an operating loss, it is
encouraging to see the marked reduction compared to 2021. The result includes
many different components including items that represent positive investment
in the future and items that are non-recurring in nature. The most significant
items in 2022 are:
- Recurring central development overheads including those associated
with the M&A strategy. Whilst the cost of this development investment is
recognised, EcV does not recognise the potential returns we expect from it.
- Non-recurring development expenditure such as IFRS 17.
- Operating losses in Movestic mainly relating to transfers. Over
previous years, aggressive pricing from a competitor resulted in a period of
high transfer-out losses. The position has stabilised in 2022 and transfer
rates have returned to our long terms assumed level by the end of the year.
The resultant transfer related operating loss is greatly reduced and not
expected to be a feature in 2023 based on current transfer levels.
- We have strengthened mortality and expense assumptions in Scildon. An
element of the expense related loss covers process enhancement work for which
the expected cost reduction benefits are not yet recognised in the closing
valuation.
Risk Margin: the risk margin has reduced as in force books have run off.
Increasing interest rates have also been a key driver of risk margin
reduction.
Looking at the results by division:
UK: the UK division reported a small operating loss, primarily as a result
of some expenses pressure. This was overshadowed by economic factors, with
the division reporting a combined economic loss of £28.7m. The widening of
bond spreads, alongside equity market falls, resulted in material economic
losses being reported, although this was off-set somewhat by the net positive
impact of the large yield rises that were witnessed during 2022.
Sweden: Movestic recorded a large loss, with the division being heavily
impacted by external economic factors. Investment market conditions,
particularly falling equity values (the Swedish OMX decreased 25% in 2022),
resulted in negative economic returns (£43.0m). Operating earnings were
suppressed by a reduction in fund rebate income and some adverse experience in
transfers, although it is pleasing to report that the latter was to a much
lesser extent than in the prior year. Modest new business profits (on an EcV
basis) of £1.8m were reported (20221: £2.9m), reflecting difficult market
conditions and margin pressures, with lower rebate income and equity falls
having a negative impact.
Netherlands: The Dutch division has reported a combined loss of £29.4m in
2022, with economic losses of £34.3m dominating the result. In Scildon,
economic losses of £29.7m were primarily the consequence of rising interest
rates and widening bond spreads adversely impacting bond and property
values. As outlined earlier, Scildon also reported an operational loss,
which includes the impact of guarantee related costs and higher mortality
driven outgoings than anticipated, alongside an element of one-off expense
assumption strengthening. Waard has reported an EcV loss of £3.1m, with
economic experience being the main component. The impact of rising yields
has resulted in falls in the value of our bond and mortgage portfolio,
outweighing the positive impact of discounting the division's liabilities at a
higher rate.
Group: This component includes various group-related costs and includes:
non-maintenance related costs (such as acquisition costs); the costs of the
group's IFRS 17 programme; and some material economic-related items such as
financing costs, primarily in relation to the Tier 2 debt interest costs, and
negative investment returns.
EcV
£511.7M (2021: £624.2M)
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 2022 to 31 Dec 2022:
£m
2021 EcV 624.2
EcV earnings (106.1)
Forex 6.5
Acquisitions 21.4
Pre-dividend EcV 546.0
Dividends (34.3)
2022 EcV 511.7
EcV earnings: A loss of £106.1m has been reported in 2022. Significant
economic losses arising from the adverse economic investment market conditions
witnessed in the first half of year, drive the result.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £34.3m were paid during the year, being the final
dividend from 2021 and the 2022 interim dividend.
Foreign exchange: The closing EcV of the group reflects a foreign exchange
gain in the period, a consequence of the sterling appreciation against Swedish
krona being offset by depreciation versus the euro.
EcV by segment at 31 Dec 2022:
£m
UK 209.3
Sweden 199.3
Netherlands 223.4
Other group activities (120.3)
2022 EcV 511.7
The above table shows that the EcV of the group is diversified across its
different markets.
EcV to Solvency II:
£m
2022 EcV 511.7
Risk margin (33.4)
Contract boundaries (3.8)
Tier 2 200.0
Tier 2 restrictions (46.7)
Dividends (22.8)
2022 SII Own Funds 605.1
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 £22.8m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
Tier 2: The tier 2 debt is treated as "quasi equity" for Solvency II
purposes. For EcV, consistent with IFRS, we continue to report this is debt.
IFRS
IFRS PRE-TAX LOSS
£146.9M (2021: £28.8M PROFIT)
IFRS TOTAL COMPREHENSIVE INCOME
£(91.9)M (2021: £3.8M)
The group's IFRS results reflect the differing dynamics of the reserving
methods adopted across the group under IFRS 4. We will be applying IFRS 17
for the first time in 2023.
Analysis of IFRS result by segment:
2022 2021
£m £m
UK (11.7) 35.6
Movestic 2.3 12.1
Waard Group (10.0) 0.1
Scildon (103.7) (0.5)
Chesnara (27.3) (12.6)
Consolidation adjustments (11.9) (5.8)
(Loss)/profit before tax and acquisitions (162.3) 28.9
Gain/(loss) on acquisitions 15.4 (0.1)
(Loss)/profit before tax (146.9) 28.8
Tax 48.6 (1.5)
(Loss)/profit after tax (98.3) 27.3
Foreign exchange 5.8 (23.9)
Other comprehensive income 0.6 0.4
Total comprehensive income (91.9) 3.8
Analysis of IFRS result between operating and economic factors:
Operating (loss)/profit (10.5) 40.7
Economic loss (151.8) (11.8)
(Loss)/profit before tax and acquisitions (162.3) 28.9
Post completion gain/(loss) on acquisitions 15.4 (0.1)
(Loss)/profit before tax (146.9) 28.8
Tax 48.6 (1.5)
(Loss)/profit after tax (98.3) 27.3
Foreign exchange 5.8 (23.9)
Other comprehensive income 0.6 0.4
Total comprehensive income (91.9) 3.8
The group has reported a large pre-tax IFRS loss for the year, which is
dominated by the result reported by Scildon. Scildon's IFRS results are
particularly sensitive to yield changes, which increased significantly over
2022, largely as a result of the accounting mismatch between its insurance
contract liabilities and the assets that back them. Scildon's insurance
contract liabilities are largely valued using the observed yield curve at the
point of sale of the underlying contract. As yields move over time, the
liability value does not change, but the fair values of the assets that back
the liabilities do. Consequently, with significant rises in yields having
been observed over the course of 2022, Scildon has seen large fair value falls
in its fixed interest assets, which has not been offset by a decrease in the
associated liabilities. This dynamic will be different under IFRS 17, where
insurance contract liabilities will be valued more consistently across the
group. Whilst other segments of the group also display a level of results
exposure to yields, they are not of the same magnitude as for Scildon.
A divisional summary has been provided below, along with drawing out some
other key features of the IFRS results.
UK: Reported a loss for the year driven by adverse economic returns; namely
falling equity markets, rising interest rates and the impact of rising
inflation, in contrast with the prior year which saw economic profits. A
positive operating result was reported in the year, driven by favourable
operating assumption change impacts and experience gains. The UK segment
result includes the post-acquisition results of CASLP.
Movestic: The division has reported a small IFRS profit, although this is
significantly down on the prior year. This is largely driven by economic
factors, which has resulted in lower fund rebates arising from lower Funds
Under Management and adverse investment returns on shareholder assets.
Waard Group: The division's results reflect the impact of investment market
movements in the year, particularly the adverse value impact on bond holdings
as a result of interest rate rises in the year. The division's results
include the post-acquisition performance of Robein Leven, which was acquired
during the year. The division also completed the acquisition of another
small policy portfolio in the year.
Scildon: Scildon's result is dominated by the impact of increases in yields
over the year. In addition the division has reported some strain arising
from higher than expected mortality over the year.
Chesnara: The result largely represents holding company expenses and debt
financing costs. The current year loss is higher than last year, largely due
to additional interest costs on the new Tier 2 debt which was issued in
February 2022. The result also includes some investment losses as a
consequence of adverse market movements on directly held investments.
Consolidation adjustments: These relate to items such as the amortisation
and impairment of intangible assets. The increase in the year is
predominantly due to the extra charge arising from the AVIF asset recognised
in relation to the acquisition of CASLP.
Gain / (loss) on acquisition: The group completed the acquisitions of Sanlam
Life and Pensions and Robein Leven during the year. Gains of £9.6m and
£5.8m respectively were recognised, representing the difference between the
purchase consideration and the net assets acquired.
Exchange gains: Movements in sterling against both the euro and Swedish
krona in the period created a favourable exchange profit, compared with a
large exchange rate loss incurred in the prior year.
Operating profits: The group reported an operating loss in the year. This
includes the adverse impact of increased debt financing costs within Chesnara,
arising from the Tier 2 debt issuance in the year and reduced operating
profits within the UK division, where experience variances and policyholder
tax impacts were lower than the prior year. The prior year result included
the positive impact of releasing an additional reserve created in 2020 due to
the liability adequacy test biting in Scildon, amounting to £10.0m.
Economic losses: This represents the components of the earnings that are
directly driven by movements in economic variables. The economic losses
reported in the year are dominated by Scildon's results.
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: 197%
(2021: 152%)
2. SHAREHOLDER RETURNS
2020-2022 TSR 9.6%
(2019-2021 TSR (0.08)%)
2022 dividend yield 8.1%
(2021: 8.1%)
Based on average 2022 share price and full year 2022 dividend of 23.28p
3. CAPITAL STRUCTURE
Gearing ratio of 37.6%
(2021: 6.4%)
This does not include the financial reinsurance within the Swedish business.
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 37.6% at 31 December 2022 (6.4% at 31 December 2021). 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. During the year, the company announced the successful
pricing of its inaugural debt capital markets issuance of £200m Tier 2
Subordinated Notes.
The net proceeds of the notes has been partially used for corporate purposes,
including the funding of the CASLP acquisition in the year. The balance is
held as investments.
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, in the past Movestic used 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 prevailing
high-inflation environment and the ongoing potential impacts of the war in
Ukraine on the group's operations, 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 prevailing high inflation environment and the
war in Ukraine 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 ongoing war in Ukraine and the prevailing high
inflation environment 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 2022 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
was 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 have been 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 and subsequent changes
to working practices in light of COVID-19, our experience has shown that both
our internal functions and those operated by our key outsourcers and suppliers
have adapted well 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.
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. Although we produce business plans and other financial projections
over longer time horizons, the selection of three-year viability assessment
recognises that the level of operating, regulatory and market certainty
reduces towards the later years of the projection time frames. The three-year
period also aligns with executive director LTIP performance time frames.
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 War in Ukraine crisis and the prevailing
high inflation environment. This has been structured around our three
strategic objectives:
Value from in-force book: The group has c933k policies in force at 31
December 2022 (over 1 million on a pro forma basis including Conservatrix).
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 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, adverse
movements 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 earlier in the business review
section. We see no reason to expect that the war in Ukraine or the high
inflation environment will have a long term impact on the availability of
acquisition opportunities. Indeed, during the year we completed two
acquisitions in the year, one in the UK and one in the Netherlands. We also
completed another Dutch acquisition on 1 January 2023. Waard continues 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 the war in
Ukraine and the subsequent cost of living crisis and we believe there remains
realistic upside potential as we move into 2023.
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 war in Ukraine and cost of living crisis. 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
During 2022, the risks from the global pandemic have materially reduced, with
nearly all restrictions being lifted globally, however there remains a risk of
further outbreaks/variants. 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. COVID-19 is not documented here as
a principal risk in its own right, as the impacts are already covered by other
principal risks, for example, market risks morality risk and other risks
associated with operational failure and business continuity.
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
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 ongoing invasion of Ukraine by Russia is considered to be an emerging risk
for Chesnara Group in the sense that it is an evolving situation and has
potential implications for Chesnara's Principal risks. The risk information on
the following pages includes specific commentary where appropriate.
MACROECONOMIC VOLATILITY
Significant economic volatility globally and particularly in the UK is being
driven by supply chain pressures and soaring energy prices. The UK narrowly
staved off a recession at the end of 2022, though it is still possible that
the UK will enter recession in 2023 albeit the BoE expects any recession to be
shorter and less severe than previously thought. The information in the
following pages has been updated to reflect Chesnara's latest views on the
potential implications.
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; With greater global emphasis being placed on environmental and social factors
when selecting investment strategies, the group has an emerging exposure to
- Asset liability matching; "transition risk" arising from changing preference and influence of, in
particular, institutional investors. This has the potential to result in
- Maintaining a well-diversified asset portfolio; adverse investment returns on any assets that perform poorly as a result of
"ESG transition". Chesnara has established a Sustainability Programme to
- Holding a significant amount of surplus in highly liquid "Tier 1" assets embed Chesnara's Sustainability strategy.
such as cash and gilts;
- Utilising a range of investment funds and managers to avoid significant
concentrations of risk; The conflict in Ukraine / Russia brings additional economic uncertainty and
volatility to financial markets, including the potential for higher
- Having an established investment governance framework to provide review inflationary pressures in the short term. The group has no direct exposure in
and oversight of external fund managers; terms of investments in Russian funds or companies via customer unit linked
funds, and we are working with customers that are exposed to help them.
- Regular liquidity forecasts;
- Considering the cost/benefit of hedging when appropriate;
The cost of living and energy crisis is driving significant economic
- Actively optimising the risk / return trade-off between yield on fixed volatility globally and particularly in the UK and there is a risk of poor
interest assets compared with the associated balance sheet volatility and mid-term performance on shareholder and policyholder assets.
potential for defaults or downgrades; and
- Giving due regular consideration (and discussing appropriate strategies
with fund managers) to longer term global changes that may affect investment An interim risk report was produced in October 2022 for the Audit & Risk
markets, such as climate changes. Committee summarising some of the emerging risks from the current
geo-political and domestic volatility, documenting known risks and mitigants
providing assurance that the risks are being adequately managed.
PR2 - REGULATORY CHANGE RISK
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 main 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 UK Treasury and EIOPA are both undertaking a review of SII rules
discussing their initiatives to encourage a proportional approach; implementation. There is potential for divergence of regulatory approaches
amongst European regulators with potential implications for Chesnara's
- Being a member of the ABI and equivalent overseas organisations and capital, regulatory supervision and structure.
utilising other means of joint industry representation;
The group has considered any restructuring which could be required to align to
- Performing internal reviews of compliance with regulations; and changes in the requirements of cross border regulatory supervision. In
extremis, Chesnara could consider the re-domiciling of subsidiaries or legal
- Utilising external specialist advice and assurance, when appropriate. restructure of the business, should this result in a more commercially
acceptable business model in a changed operating environment. In addition,
Regulatory risk is monitored and scenario tests are performed to understand there are a number of potential secondary impacts such as economic
the potential impacts of adverse political, regulatory or legal changes, along implications, and the effect of any regulatory divergence as the PRA
with consideration of actions that may be taken to minimise the impact, should progresses SII-equivalent regulation for the UK businesses. Chesnara will
they arise. 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.
In July 2022, the FCA published final rules for a new Consumer Duty and
response to feedback to CP21/36 - A New Consumer Duty. The Consumer Duty, with
an implementation date of 31 July 2023, will set higher and clearer standards
of consumer protection across financial services and require firms to act to
deliver good outcomes for customers. Operations in the UK are reviewing
existing product governance frameworks in relation to delivering the new
Consumer Duty requirements.
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.
KEY CONTROLS RECENT CHANGE / OUTLOOK
Chesnara's financial strength, strong relationships and reputation as a "safe Chesnara completed acquisitions in the Netherlands and the UK during 2022
hands acquirer" via regular contact with regulators, banks and target and has recently completed a further acquisition in the Netherlands in early
companies enables the company to adopt a patient and risk-based approach to 2023, whilst maintaining the established disciplines within the Acquisition
assessing acquisition opportunities. Operating in multi-territories provides 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. Following higher rates of
transfers through 2021, transfers have trended downwards during 2022. However
Chesnara seeks to limit the impacts of adverse demographic experience by: the market remains sensitive to any changes and so this risk continues to be
actively monitored.
- Aiming to deliver good customer service and fair customer outcomes;
COVID-19 increased the number of deaths arising in 2020, 2021 and to a lesser
- Having effective underwriting techniques and reinsurance programmes, extent in 2022. The effect of this is expected to be more pronounced in
including the application of "Mass Lapse reinsurance", where appropriate; older lives rather than in the typical ages of the assured lives in the
Chesnara books. Chesnara does not expect the pandemic to have a material
- Carrying out regular investigations, and industry analysis, to support impact on mortality experience and costs in the long-term.
best estimate assumptions and identify trends;
Cost of living pressures could give rise to higher surrenders and lapses
- Active investment management to ensure competitive policyholder investment should customers face personal finance pressures and not be able to afford
funds; and premiums or need to access savings. Any downturn in the property market could
reduce protection business sales particularly in the Netherlands. Currently
- Maintaining good relationships with brokers, which is independently there has been no evidence of changes in behaviours. Chesnara continues to
measured via yearly external surveys that considers brokers attitude towards monitor closely and respond appropriately.
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. Acquisitions also present
- Movestic and Scildon assume growth through new business such that the opportunities for expense systems and unit cost reduction.
general unit cost trend is positive;
Through its exposures to investments in real asset classes, both direct and
- The Waard Group pursues a low cost-base strategy using a designated indirect, Chesnara has an indirect hedge against the effects of inflation and
service company. The cost base is supported by service income from third will consider more direct inflation hedging options should circumstances
party customers; determine that to be appropriate.
- Countrywide Assured pursues a strategy of outsourcing functions with The cost of living and energy crisis is driving increases in supplier costs,
charging structures such that the policy administration cost is more aligned particularly in the UK with its outsourcing model. Wage inflation is generally
to the book's run off profile; and lower than headline inflation but is currently much higher than the long term
valuation assumptions, with consideration needed regarding the balancing of
- With an increased current level of operational and strategic change within employee remuneration versus turnover /retention / motivation risks / tight
the business, a policy of strict Project Budget Accounting discipline is being labour markets.
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 continues to progress activity under the UK operational
operational risks, and to minimise the exposure when it's possible to do so in resilience project. In line with the regulatory deadlines, the first
a convenient and cost-effective way. self-assessment was presented to the A&RC/Board in March 2022. The next
key regulatory deadline is 31 March 2025; the deadline by which all firms
Chesnara seeks to reduce the impact and likelihood of operational risk by: should have sound, effective, and comprehensive strategies, processes, and
systems that enable them to address risks to their ability to remain within
- Monitoring of key performance indicators and comprehensive management their impact tolerance for each important business service (IBS) in the event
information flows; of a severe but plausible disruption. To support this the project is currently
in the process of running a schedule of real life severe but plausible
- Effective governance of outsourced service providers including a regular scenario testing. Each Business Unit continues to carry out assurance
financial assessment. Under the terms of the contractual arrangements the activities through local business continuity programmes to ensure robust plans
group may impose penalties and/or exercise step-in rights in the event of are in place to limit business disruption in a range of severe but plausible
specified adverse circumstances; events.
- Regular testing of business continuity plans; In response to the ongoing energy crisis analysis has been carried out on
operational continuity with the threat of planned blackouts. Based on the
- Regular staff training and development; expected nature and/or probability of the risk crystallising there were no
material concerns arising.
- 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 and ransomware 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 ongoing invasion of Ukraine by Russia heightens the risk of cyber crime
- Seeking ongoing specialist external advice, modifications to IT campaigns originating from Russia, with some suppliers reporting an increase
infrastructure and updates as appropriate; in information security threats which some are saying is state sponsored.
Although Chesnara is not considered to be a direct target of any such
- Delivering regular staff training and attestation to the information campaigns, all business units have confirmed that they have increased
security policy; monitoring and detection/ protection controls in relation to the increased
threat.
- Regular employee phishing tests and awareness sessions;
During 2022 the group has continued to test and seek assurance of the
- Ensuring the board encompasses directors with information technology and resilience to cyber risks, this has included:
security knowledge;
- End-to-end simulated cyber attack;
- Conducting penetration and vulnerability testing, including third party
service providers; - Regular phishing campaigns;
- Executive committee and board level responsibility for the risk, included - Board training and awareness;
dedicated IT security committees with executive membership;
- Group wide cyber risk reviews; and
- Having established Chesnara and supplier business continuity plans which
are regularly monitored and tested; - Ongoing penetration testing and vulnerability management
- Ensuring Chesnara's outsourced IT service provider maintains relevant Chesnara is also implementing a new group-wide cyber response framework which
information security standard accreditation (ISO27001); and includes updated group policy regarding ransomware.
- 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 The Swedish transfer market remains active following regulatory changes over
acquisitions by: the past two years. Further regulatory changes affecting transfers are
expected in April 2023 that could also impact transfer experience.
- Monitoring quarterly new business profit performance;
- Investing in brand and marketing;
As a result of recent changes in competitor offerings, making them less
- Maintaining good relationships with brokers; attractive, 'transfers out' have begun to trend back down towards more normal
levels.
- Offering attractive products that suit customer needs;
- Monitoring market position and competitor pricing, adjusting as
appropriate;
- Maintaining appropriate customer service levels and experience; and
- Monitoring market and pricing movements.
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. Chesnara supports the UN Sustainable Development Goals (SDGs),
including Climate Action. We have set our long term net zero targets and
- Open and honest communications during 2023, we will produce our transition plan and the all-important shorter
term 2025 and 2030 targets.
- HR policies and procedures
In relation to the Ukraine / Russia conflict, no material exposure has been
- Fit & Proper procedures identified in terms of the group's key counterparty connections. There are
limited indirect connections through third parties who have a presence in
- Operational and IT Data Security Frameworks Russia and Chesnara has confirmed that there are no obvious links with Russia
through its shareholders or stockbrokers.
- 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
29 March 2023 29 March 2023
INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON THE
PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC
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 period ended 31 December
2022.
The preliminary statement of annual results for the period ended 31 December
2022 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, consolidated balance sheet and
consolidated statement of cash flows. We are not required to agree to the
publication of presentation 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 29 March 2023. 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 the CASLP AVIF intangible asset
Key audit matter description On 28 April 2022, Chesnara plc completed the acquisitions of Sanlam Life &
Pensions UK Limited (subsequently renamed "CASLP Limited"). The acquisition
has resulted in the recognition of an AVIF intangible asset amounting to
£59.6m, which represents the present value of the future post-tax cash flows
expected to arise from policies that were in force at the point of
acquisition. The asset has been valued using a discounted cash flow model that
projects the future surpluses that are expected to arise from the business.
We have identified a new key audit matter relating to the discount rate used
by management to discount the future cash flows underpinning the fair value of
the CASLP AVIF intangible at acquisition date. Due to the highly judgemental
nature of this balance, we identified manipulation of this assessment as an
area of potential fraud.
The accounting policy adopted by the group is documented within note 2(n) to
the financial statements, with details of the balance sheet movement in note20
therewith.
How the scope of our audit responded to the key audit matter In respect of the CASLP AVIF:
· we gained an understanding of the relevant controls in place over
the accuracy and completeness of key assumptions;
· with involvement of valuation specialists, we constructed a range
of independent discount rates based on alternative industry data in order to
challenge the discount rate applied by management;
· with the involvement of actuarial specialist, we assessed the
reasonableness of management's cash flow assumptions and amortisation rate
used in deriving the AVIF balance;
· we have assessed the disclosure of the AVIF recognised at
acquisition within note 20 to the financial statements.
Key observations Based on the audit procedures performed, we consider the discount rate used in
the AVIF recognised at the date of acquisition to be appropriate.
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 2022, the Scildon insurance liabilities
represented £1.7bn (2021: £1.9bn) of the group total of £3.8bn (2021:
£3.8bn).
IFRS 4 Insurance Contracts requires an insurer, at the end of each reporting
period, to assess whether its recognised insurance contract 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) in
the financial statements. The assumptions and the sensitivity of Scildon
insurance contract liabilities to such assumptions are set out in note 30 of
the financial statements. Actuarial assumptions, specifically the liability
adequacy test, are referred to within the Audit and Risk Committee report on
page 120 of the annual report.
How the scope of our audit responded to the key audit matter In respect of the Scildon insurance contract liabilities, we performed the
following procedures:
· gained an understanding of the relevant controls around the
setting of the assumptions feeding into the LAT;
· with the involvement of actuarial specialists, challenged the
mortality, lapse and expense assumptions which feed into the test, by
evaluating experience, supporting documents and calculations;
· assessed the results of the experience investigations carried out
by management to determine whether they provide support for the assumptions;
· 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, recalculated the reserve at a policy
level, using an 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 and the LAT performed by management were 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 of directly
attributable incremental acquisition costs, which vary with, and are related
to, securing new business. Acquisition costs are recognised as a deferred
acquisition cost asset to the extent that they represent the contractual right
to future benefits from the provision of investment management service. The
asset 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 2022, the DAC balance held on the group balance sheet totalled
£62.8m (2021: £63.3m), of which £51.9m (2021: £53.6m) related to the
Movestic component. Due to the significance of the balance and the uncertainty
brought about by macroeconomic factors and regulatory changes in the Swedish
market, we identified a key audit matter related to the valuation of the
Movestic DAC.
We have also deemed there to be a risk of fraud, due to the inherent risk of
management overriding internal controls around the assumptions used in the
impairment assessment and determination of the amortisation period applied.
The accounting policy adopted by the group is set out in note 2(h) to the
financial statements, with details of the balance sheet movement in note 19
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;
· assessed the rationale for the expense ledger balances
capitalised, and performed tests of detail in respect of valuation which
involved agreeing acquisition costs back to contracts;
· 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, challenged the
amortisation profile adopted by management, by constructing a range of
independent amortisation profiles based on alternative data; and
· with the involvement of internal actuarial specialists,
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
reasonable.
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 £414.1m
(2021: £354.7m) on the company balance sheet relating to its investment in
group subsidiaries, of which £142.9m (2021: £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 if there is indication of impairment loss at the
balance sheet date. Through the assessment management challenge whether the
investment in CA plc is carried at more or less than the recoverable amount,
which is the higher of fair value less costs of disposal and value in use, and
therefore whether an impairment is required. Management have historically
deemed economic value ("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 245 of the annual report.
In recent periods, the CA plc EcV has been on a downwards trend due to the
entity being closed to new business, poor investment returns, and increasing
pressures from macroeconomic factors. The impairment assessment performed by
management at the balance sheet date highlighted £25.0m (2021: £14m of
headroom) of impairment over the carrying value of the investment. We
therefore identified a key audit matter relating to the valuation of Chesnara
plc's investment in CA plc.
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 in note 2 (gg) of the financial statements, with
details of the balance and movement in note 18 therewith. The investment in CA
plc is also referred to in the Audit and Risk Committee report on page 119 of
the annual report.
How the scope of our audit responded to the key audit matter In respect of the investment in CA plc:
· we gained an understanding of the relevant controls in place
around the impairment assessment and EcV valuation;
· 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 tested 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.
Matthew Perkins (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Birmingham, United Kingdom
29 March 2023
IFRS FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2022 2021
£000 £000
Insurance premium revenue 317,457 312,046
Insurance premium ceded to reinsurers (44,821) (115,881)
Net insurance premium revenue 272,636 196,165
Fee and commission income 93,380 89,975
Net investment return (1,487,013) 1,172,988
Other operating income 48,371 46,568
Total revenue net of investment return (1,072,626) 1,505,696
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (458,530) (506,490)
Net decrease/(increase) in insurance contract provisions 510,572 (23,577)
Reinsurers' share of claims and benefits 18,101 60,168
Net insurance contract claims and benefits 70,143 (469,899)
Change in investment contract liabilities 1,003,957 (902,579)
Reinsurers' share of investment contract liabilities (2,653) 4,110
Net change in investment contract liabilities 1,001,304 (898,469)
Fees, commission and other acquisition costs (43,432) (24,023)
Administrative expenses (85,097) (67,925)
Other operating expenses
Charge for amortisation of acquired value of in-force business (13,259) (8,184)
Charge for amortisation of acquired value of customer relationships (45) (55)
Other (8,700) (5,964)
Total expenses net of change in insurance contract provisions and investment 920,914 (1,474,519)
contract liabilities
Total (expenses)/income less expenses (151,712) 31,177
Post completion gain/(loss) on acquisition 15,361 (93)
Financing costs (10,549) (2,272)
(Loss)/profit before income taxes (146,900) 28,812
Income tax credit/(expense) 48,567 (1,518)
(Loss)/profit for the year (98,333) 27,294
Items that may be reclassified subsequently to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign 5, 785 (23,879)
operations
Revaluation of land and buildings 674 369
Other comprehensive income/(expenses) for the year, net of tax 6,459 (23,510)
Total (expenses)/comprehensive income for the year (91,874) 3,784
Basic earnings per share (based on (loss)/earnings for the year) (65.45)p 18.18p
Diluted earnings per share (based on (loss)/earnings for the year) (64.67)p 18.00p
In accordance with the exemption allowed by section 408 of the Companies Act
2006, the Company has not presented its own income statement or statement of
other comprehensive income. The Company reported a loss of £16.4m (2021:
profit £29.0m) during the year. The retained profit for the financial year
reported in the financial statements of the Company was £175.2m (2021:
£225.0m).
CONSOLIDATED BALANCE SHEET
31 December 2022 2021
£000 £000
Assets
Intangible assets
Deferred acquisition costs 62,805 63,327
Acquired value of in-force business 96,922 49,629
Acquired value of customer relationships 268 320
Software assets 9,300 8,885
Property and equipment 7,894 7,830
Investment properties 94,481 1,071
Reinsurers' share of insurance contract provisions 196,315 247,750
Amounts deposited with reinsurers 32,803 38,295
Financial assets
Equity securities at fair value through income 79,233 6,352
Holdings in collective investment schemes at fair value through income 8,157,208 6,858,054
Debt securities at fair value through income 932,711 978,199
Policyholders' funds held by the group 1,130,476 990,700
Financial assets held at amortised cost 305,228 293,811
Derivative financial instruments 141 264
Total financial assets 10,604,997 9,127,380
Insurance and other receivables 36,672 35,613
Prepayments 15,630 13,245
Reinsurers' share of accrued policyholder claims 14,125 16,340
Income taxes 5,846 7,233
Cash and cash equivalents 175,294 70,087
Total assets 11,353,352 9,687,005
Liabilities
Insurance contract provisions 3,611,261 3,818,412
Other provisions 7,953 992
Financial liabilities
Investment contracts at fair value through income 5,804,869 4,120,572
Liabilities relating to policyholders' funds held by the group 1,130,476 990,700
Lease contract liabilities 1,233 2,019
Borrowings 211,976 47,185
Derivative financial instruments 3,850 -
Total financial liabilities 7,152,404 5,160,476
Deferred tax liabilities 8,095 15,699
Reinsurance payables 48,821 70,414
Payables related to direct insurance and investment contracts 149,723 129,262
Deferred income 2,383 2,809
Income taxes 4,426 6,527
Other payables 35,150 23,991
Bank overdrafts 19 256
Total liabilities 11,020,235 9,228,838
Net assets 333,117 458,167
Shareholders' equity
Share capital 7,502 7,496
Merger reserve 36,272 36,272
Share premium 142,332 142,085
Other reserves 13,721 7,262
Retained earnings 133,290 265,052
Total shareholders' equity 333,117 458,167
Approved by the board of directors and authorised for issue on 29 March 2023
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 2022 2021
£000 £000
Profit for the year (98,333) 27,294
Adjustments for:
Depreciation of property and equipment 732 749
Amortisation of deferred acquisition costs 13,571 13,370
Impairment of acquired value of in-force business - -
Amortisation of acquired value of in-force business 13,259 8,184
Amortisation of acquired value of customer relationships 45 55
Amortisation of software assets 1,785 1,382
Depreciation on right of use assets 659 739
Interest on lease liabilities 28 95
Share based payment 867 593
Tax paid (32,268) 1,518
Interest receivable (9,530) (2,269)
Dividends receivable (1,519) (614)
Interest expense 10,521 2,177
Fair value gains on financial assets 1,219,377 (990,914)
Profit arising on acquisition (15,361) -
Increase in intangible assets related to insurance and investment contracts (13,704) (8,938)
Interest received 9,626 2,493
Dividends received 1,458 1,930
Changes in operating assets and liabilities:
Increase in financial assets (31,148) (187,975)
Decrease/(increase) in reinsurers' share of insurance contract provisions 54,013 (37,747)
Decrease in amounts deposited with reinsurers 5,492 5,858
Decrease in insurance and other receivables 11,690 5,980
Increase in prepayments (2,149) (873)
(Decrease)/increase in insurance contract provisions (422,279) 15,534
(Decrease)/increase in investment contract liabilities (755,826) 1,098,809
(Decrease)/increase in provisions (2,827) 445
(Decrease)/increase in reinsurance payables (21,564) 67,766
Increase in payables related to direct insurance and investment contracts 17,141 35,701
Decrease in other payables (12,755) (24,950)
Net cash (utilised by)/generated from operations (58,999) 36,392
Income tax paid (12,121) (9,796)
Net cash (utilised by)/generated from operating activities (71,120) 26,596
Cash flows from investing activities
Development of software (2,400) -
Acquisition of subsidiary, net of cash acquired 55,557 -
Purchases of property and equipment (1,106) (3,636)
Net cash generated from/(utilised by) investing activities 52,051 (3,636)
Cash flows from financing activities
Net proceeds from the issue of share capital 253 -
Net proceeds of Tier 2 debt raise 196,542 -
Proceeds from borrowings 2,013 -
Repayments of borrowings (37,135) (16,102)
Repayment of lease liabilities (342) (598)
Dividends paid (34,296) (33,276)
Interest paid (5,801) (2,271)
Net cash generated from/(utilised by) financing activities 121,234 (52,247)
Net decrease in net cash and cash equivalents 102,165 (29,287)
Net cash and cash equivalents at beginning of year 69,831 103,706
Effect of exchange rate changes on net cash and cash equivalents 3,279 (4,588)
Net cash and cash equivalents at end of the year 175,275 69,831
Note: Net cash and cash equivalents includes overdrafts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2022 Share capital Share premium Merger reserve Other reserves Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2022 7,496 142,085 36,272 7,262 265,052 458,167
Profit for the year - - - - (98,333) (98,333)
Dividends paid - - - - (34,296) (34,296)
Foreign exchange translation differences - - - 5,785 - 5,785
Revaluation of land and buildings - - - 674 - 674
Issue of share capital 6 - - - - 6
Issue of share premium - 247 - - - 247
Share based payment - - - - 867 867
Equity shareholders' funds at 31 December 2022 7,502 142,332 36,272 13,721 133,290 333,117
Year ended 31 December 2021 Share capital Share premium Merger reserve Other reserves Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2021 (as previously stated) 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
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 2022, which are prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
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 2022 comprise:
UK: 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. This also includes the acquisition of Sanlam Life and
Pensions (UK) Limited (SLP) on 28 April 2022, subsequently the legal name
changed to CASLP. CA & CASLP are responsible for conducting unit-linked
and non-linked business, including a with-profits portfolio, which carries
significant additional market risk, as described in note 6 'Management of
financial risk'.
Movestic: This segment comprises the group's Swedish life and pensions
business, Movestic Livförsäkring AB ('Movestic') and its subsidiary company
Movestic Kapitalforvaltning AB (investment fund management company) 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 2019, the Waard Group
acquired a small portfolio of 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. On 25 November 2021, Waard entered
into an agreement with Monument Re Group to acquire Robein Leven, a specialist
provider of traditional and linked savings products, mortgages and annuities
in the Netherlands. The acquisition was successfully completed on 28 April
2022, thereby extending the existing group. 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. This segment is closed to new
business.
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 2022.
(i) Segmental income statement for the year ended 31 December 2022
Other Group activities
(UK)
Movestic Waard Group Scildon
UK (Sweden) (Netherlands) (Netherlands) Total
£000 £000 £000 £000 £000 £000
Insurance premium revenue 33,065 12,120 32,128 240,144 - 317,457
Insurance premium ceded to reinsurers (14,170) (4,651) (3,776) (22,224) - (44,821)
Net insurance premium revenue 18,895 7,469 28,352 217,920 - 272,636
Fee and commission income 27,928 15,927 133 49,392 - 93,380
Net investment return (297,659) (876,844) (6,599) (302,326) (3,585) (1,487,013)
Other operating income 17,704 30,667 - - - 48,371
Segmental revenue, net of investment return (233,132) (822,781) 21,886 (35,014) (3,585) (1,072,626)
Net insurance contract claims and benefits incurred 137,517 (937) (23,640) (42,797) - 70,143
Net change in investment contract liabilities 130,099 871,205 - - - 1,001,304
Fees, commission and other acquisition costs (20,827) (22,348) (1,303) (390) - (44,868)
Administrative expenses:
Depreciation charge on property and equipment (36) - - - - (36)
Other (25,081) (13,287) (6,939) (25,523) (14,231) (85,061)
Operating expenses (2) (8,698) - - - (8,700)
Financing costs (228) (823) (1) - (9,497) (10,549)
(Loss)/profit before tax and consolidation adjustments (11,690) 2,331 (9,997) (103,724) (27,313) (150,393)
Other operating expenses:
Charge for amortisation of acquired value of in-force business (7,075) (2,171) (830) (3,183) - (13,259)
Charge for amortisation of acquired value of customer relationships - (45) - - - (45)
Fees, commission and other acquisition costs - 1,312 - 124 - 1,436
Segmental income less expenses (18,765) 1,427 (10,827) (106,783) (27,313) (162,261)
Post completion gain on portfolio acquisition 9,565 -- 5,796 - - 15,361
(Loss)/profit before tax (9,200) 1,427 (5,031) (106,783) (27,313) (146,900)
Income tax credit 14,177 14 1,307 27,686 5,383 48,567
(Loss)/profit after tax 4,977 1,441 (3,724) (79,097) (21,930) (98,333)
(ii) Segmental balance sheet as at 31 December 2022
Other Group Activities
Waard Group Scildon (UK)
Movestic (Netherlands) (Netherlands) Total
UK (Sweden)
£000 £000 £000 £000 £000 £000
Total assets 4,772,475 3,952,482 587,787 1,927,937 112,671 11,353,352
Total liabilities (4,601,373) (3,850,513) (519,950) (1,846,714) (201,685) (11,020,235)
Net assets 171,102 101,969 67,837 81,223 (89,014) 333,117
Investment in associates - - - - - -
Additions to non-current assets - 10,548 254 769 - 11,571
(iii) Segmental income statement for the year ended 31 December 2021
Other Group Activities
Waard Group Scildon (UK)
UK Movestic (Netherlands) (Netherlands) Total
(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/(loss) 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/(loss) 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
(iv) Segmental balance sheet as at 31 December 2021
Other Group Activities
Waard Group Scildon (UK)
UK Movestic (Netherlands) (Netherlands) Total
(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
4. Borrowings
Group
31 December
2022 2021
£000
£000
Bank loan - 31,273
Tier 2 Debt 200,356 -
Amount due in relation to financial reinsurance 9,607 15,912
Amount due in relation to financial reinsurance 2,013 -
Total 211,976 47,185
Current 204,327 36,907
Non-current 7,649 10,278
Total 211,976 47,185
Company
31 December
2022 2021
£000
£000
Bank loan - 31,273
Tier 2 Debt 200,356 -
Total 200,356 31,273
Current 200,356 31,273
Non-current - -
Total 200,356 31,273
In 2022, the bank loan was fully repaid and replaced by Tier 2 Subordinated
Notes Debt. The fair value of amounts due in relation to Tier 2 debt at 31
December 2022 was £148.0m (31 December 2021: £nil).
The bank loan as at 31 December 2021 comprised 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 2022 was
£nil (31 December 2021: £12.0m).
The fair value of the euro denominated bank loan at 31 December 2022 was £nil
(31 December 2021: £18.5m).
The fair value of amounts due in relation to financial reinsurance at 31
December 2022 was £9.0m (31 December 2021: £16.4m).
Bank loans are presented net of unamortised arrangement fees. Arrangement fees
are recognised in profit or loss using the effective interest rate method.
5. Earnings per share
Earnings per share are based on the following:
Year ended 31 December 2022 2021
Profit for the year attributable to shareholders (£000) (98,333) 27,294
Weighted average number of ordinary shares 150,239,599 150,118,548
Basic earnings per share (65,45)p 18.18p
Diluted earnings per share (64,67)p 18.00p
The weighted average number of ordinary shares in respect of the year ended 31
December 2022 is based upon 150,369,603 shares. No shares were held in
treasury.
There were 1,815,601 share options outstanding at 31 December 2022 (2021:
1,501,566). Accordingly, there is dilution of the average number of ordinary
shares in issue in respect of 2021 and 2022.
6. Retained earnings
Group
Year ended 31 December
2022 2021
£000 £000
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January 265,052 270,442
Profit for the year (98.333) 27,294
Share based payment 867 593
Dividends
Final approved and paid for 2020 - (21,446)
Interim approved and paid for 2021 - (11,831)
Final approved and paid for 2021 (22,101) -
Interim approved and paid for 2022 (12,195) -
Balance at 31 December 133,290 265,052
The interim dividend in respect of 2021, approved and paid in 2021 was paid at
the rate of 7.88p per share. The final dividend in respect of 2021, approved
and paid in 2022, was paid at the rate of 14.72p per share so that the total
dividend paid to the equity shareholders of the parent company in respect of
the year ended 31 December 2021 was made at the rate of 22.60p per share.
The interim dividend in respect of 2022, approved and paid in 2022, was paid
at the rate of 8.12p per share to equity shareholders of the parent company
registered at the close of business on 21 October 2022, the dividend record
date.
A final dividend of 15.16p per share in respect of the year ended 31 December
2022 payable on 26 May 2023 to equity shareholders of the parent company
registered at the close of business on 6 April 2023, the dividend record date,
was approved by the directors after the balance sheet date. The resulting
total final dividend of £22.8m has not been provided for in this preliminary
announcement and there are no income tax consequences.
The following summarises dividends per share in respect of the year ended 31
December 2021 and 31 December 2022:
Year ended 31 December
2022 2021
P P
Interim - approved and paid 8.12 7.88
Final - proposed/paid 15.16 14.72
Total 23.28 22.60
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) other companies over which the directors have significant influence; and
(iv) 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:
2022 2021
£000 £000
Short-term employee benefits 1,204 2,342
Post-employment benefits 65 85
Share-based payments 869 593
Total 2,138 3,020
The share-based payments charge comprises £0.3m (2021: £0.2m) of Short-term
Incentive Scheme (STI), and £0.2m (2021: £0.2m) 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:
2022 2021
£000 £000
Annual bonus scheme (included in the short-term employee benefits above) 546 934
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:
Year ended 31 December
2022 2021
£000
£000
Recovery of expenses 4,762 4,771
(iii) Transactions with persons related to key management
personnel
During the year, there were no transactions with persons related to key
management personnel (31 December 2021: £nil).
8. Business combination & portfolio acquisition
On 13 September 2021, Chesnara has entered into an agreement with Sanlam UK
Limited to acquire Sanlam Life & Pensions UK Limited (now CASLP), a
specialist provider of insurance and long-term savings products in the UK. The
acquisition was completed on 28 April 2022. CASLP is a specialist provider
of insurance and long-term savings products in the UK, with approximately
£2.9 billion of assets under administration and 80,000 policies. The
acquisition of CASLP was initially announced in September 2021.
The acquisition has given rise to an immediate profit of £9.6m, calculated as
follows:
Book value Fair value adjustments Fair value
£000 £000 £000
Assets
Intangible assets
Acquired value of in-force business - 59,579 59,579
Property and equipment 46 - 46
Investment properties 102,974 - 102,974
Reinsurers' share of insurance contract provisions 1,014 - 1,014
Financial assets 2,612,574 2,612,574
Other assets and receivables 15,084 - 15,084
Cash and cash equivalents 93,407 - 93,407
Total assets 2,825,099 59,579 2,884,678
Liabilities
Insurance contract provisions 209,640 - 209,640
Other provisions 9,809 - 9,809
Investment contracts at fair value through profit and loss 2,547,789 - 2,547,789
Deferred tax liabilities 9,787 40,548 50,335
Other payables 19,690 - 19,690
Total liabilities 2,796,715 40,548 2,837,263
Net assets 28,384 19,031 47,415
Net assets acquired 47,415
Total consideration, paid in cash (37,850)
Profit arising on business combination 9,565
There has been a change in the valuation of the profit arising on business
combination from what was reported in the group's Half Year Report for the 6
months ended 30 June 2022. Under IFRS 3 Business Combination, it allows a
period of 12 months from the acquisition date to refresh our estimates. In our
half year 2022 reporting, our valuation was based on 31 March 2022. This was
refined post half year and at the year-end the valuation was based on the
actual acquisition date, 28 April 2022.
The Acquired Value of In-force business (AVIF) has materially changed since
the half year reporting. This was due to the change in discount rate used in
the calculation of the AVIF business to take into account the weighted average
cost of capital in Chesnara plc. The discount rate used was 5.75% at the
half-year, and 8.0% in the final AVIF calculation. The run-off profile for the
AVIF is over a 30 year period.
The other material changes were related to the financial assets and cash and
cash equivalents, which takes into account an additional month of transactions
and market fluctuations.
The assets and liabilities at the acquisition date have been amended compared
with what was reported in the group's Half Year Report for the 6 months ended
30 June 2022. This is because the information disclosed at that point in
time included some provisional numbers. These have now been finalised
following a review that was completed during the second half of 2022.
Acquired value of in-force business: The acquisition has resulted in the
recognition of net of a tax intangible asset amounting to £19.0m, which
represents the present value of the future post-tax cash flows expected to
arise from policies that were in force at the point of acquisition. The
asset has been valued using a discounted cash flow model that projects the
future surpluses that are expected to arise from the business. The model
factors in a number of variables, of which the most influential are; the
policyholders' ages, mortality rates, expected policy lapses, expenses that
are expected to be incurred to manage the policies and future investment
growth, as well as the discount rate that has been applied. This asset will
be amortised over its expected useful life.
Gain on acquisition: As shown above, a gain of £9.6m has been recognised on
acquisition. Under IFRS 3, a gain on acquisition is defined as being a
"bargain purchase". A day one gain has arisen on business combination, as by
applying the pricing model that we generally adopt, we offered a purchase
price which was at a discount to our own assessment of the value of the net
assets to be acquired.
Acquisition-related costs: Chesnara concluded the deal and obtained control
of CASLP as of 28 April 2022. The consideration transferred by Chesnara for
the acquisition of CASLP consisted of cash totalling £37.9m. There was also a
capital contribution made by Chesnara to CASLP amounting to £25m immediately
following completion. The costs in respect of the transaction amounted to
£1.7m which have been included within the "Administrative Expenses" on the
Consolidated Statement of Comprehensive Income.
Results of CASLP: The results of CASLP have been included in the
consolidated financial statements of the Group with effect from 28 April 2022.
Net insurance premium revenue for the period was £1.2m, with contribution to
overall consolidated loss before tax of £11.2m, before the amortisation of
the AVIF and deferred acquisition cost intangible assets. Had CASLP been
consolidated from 1 January 2022, the Consolidated Statement of Comprehensive
Income would have included net insurance premium revenue of £1.9m and would
have contributed £25.7m to the overall consolidated loss before tax.
On 25 November 2021, the Waard Group, has agreed to acquire 100% of the shares
of Robein Leven N.V. and its subsidiary, a specialist provider of traditional
and linked savings products, mortgages and annuities in the Netherlands, from
Monument Re Group. The completion took place on 28 April 2022. The
consideration transferred by Waard Leven for the acquisition of Robein
consisted of cash amounting to £14.1m.
The transaction has given rise to a post completion profit on acquisition of
£5.8m calculated as follows:
Fair value
£'000
Assets
Financial assets 202,908
Investment in subsidiaries(1) 1,461
Other assets and receivables 4,784
Cash and cash equivalents 7,301
Total assets 216,454
Liabilities
Insurance contract provisions 188,279
Value of business acquired 1,645
Investment contracts at fair value through income 6,245
Total liabilities 196,168
Net assets 20,286
Net assets acquired 20,286
Total consideration, paid in cash (14,490)
Post completion profit on portfolio acquisition 5,796
( )
The investment in subsidiaries relates to Robein Effecten Dienstverlening,
which is subsidiary of Robein Leven.
There has been a change in the valuation of the profit arising on business
combination from the reported half year position. Under, IFRS 3 Business
Combination, it allows a period of 12 months from the acquisition date to
refresh our estimates. There was a material increase in financial assets
reported at half year compared to year-end.
The insurance portfolio and the related assets from are transferred from
Robein into Waard Leven on 27 December 2022. At the date of transfer, Robein
will remain a separate legal entity within the group structure of Waard. The
insurance license held by Robein will be forfeited. In the course of financial
year 2023 most of the owns funds will be paid out as a dividend to Waard
Leven.
Profit on acquisition: A profit of £5.8m has been recognised on acquisition.
This profit on acquisition has been recorded as a "post completion gains on
portfolio acquisition" on the face of the statement of comprehensive income. A
day one gain has arisen on business combination, as by applying the pricing
model that we generally adopt, we offered a purchase price which was at a
discount to our own assessment of the value of the net assets to be acquired.
Acquisition-related costs: Waard Leven incurred costs of around £0.2m in
relation to the acquisition.
The assets and liabilities acquired fare included within changes in insurance
provisions and financial assets within operating cash flows on the face of the
cash flow statement.
Results of Robein Leven: The results of Robein Leven have been included in
the consolidated financial statements of the Group with effect from 28 April
2022, within Waard Group. Had Robein Leven been consolidated from 1 January
2022, the Consolidated Statement of Comprehensive Income would have
contributed £0.2m to the overall consolidated profit before tax.
During the year, Waard also acquired 3,000 policies in August 2022 from SRLEV
N.V. in the Netherlands. As Waard was already administering these policies
as Proxy Agent on behalf of the vendor, the integration of the policies was
completed in a short time frame.
FINANCIAL CALENDAR
30 March 2023
Results for the year ended 31 December 2022 announced
06 April 2023
Ex-dividend date
11 April 2023
Dividend record date
27 April 2023
Last date for dividend reinvestment plan elections
16 May 2023
Annual General Meeting
26 May 2023
Dividend payment date
21 September 2023
Half year results for the 6 months ending
30 June 2023 announced
KEY CONTACTS
Registered and head office
2(nd) Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
T: 01772 972050
www.chesnara.co.uk (http://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
Burness Paull LLP
Exchange Plaza
50 Lothian Road
Edinburgh
EH3 9WJ
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
40 Gracechurch Street
London
EC3V 0BT
Investec Bank plc
30 Gresham Street
London
EC2V 7QP
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8(th) Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3(rd) 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, showing the
Commercial cash generation excludes the impact of technical adjustments,
modelling changes and corporate acquisition activity; representing the key drivers within that.
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.
Tier 2 Term debt capital (Tier 2 Subordinated Notes) issued in February 2022 with a
10.5 year maturity and 4.75% coupon rate.
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;
CASLP - 'SLP' Sanlam Life & Pensions (UK) Limited which was acquired 28 April 2022 and
includes subsidiaries CASFS Limited and CASLPTS Limited;
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 Robein Leven NV acquired on 28 April 2022;
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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