REG - Chesnara PLC - Final Results
28/03/2024 07:15
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RNS Number : 6109I Chesnara PLC 28 March 2024
28 March 2024
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc (CSN.L)
("Chesnara" or "the Company")
CONTINUED STRONG CASH GENERATION WITH POSITIVE OUTLOOK FOR FURTHER M&A
Chesnara reports its 2023 full year results. Key highlights are:
· Completion of the acquisition of Conservatrix's insurance portfolio
in the Netherlands
· Acquisition of an individual protection portfolio from Canada Life
UK
· New UK strategic partnership with SS&C Technologies for policy
administration
· Strong group commercial cash generation of £53.0m (FY 2022:
£46.6m)
· Robust solvency of 205% (FY 2022: 197%), materially above our 140 -
160% normal operating range
· Economic value ("EcV") of £524.7m, 348p per share (FY 2022:
£511.7m, 340p per share)
· Commercial value of new business of £10.1m (FY 2022: £9.5m)
· Proposed 3% increase to the full year dividend (total 2023 dividend
of 23.97p per share)
· IFRS pre-tax profit of £1.8m (FY 2022: £62.1m loss)
Commenting on the results, Steve Murray, Group CEO, said:
"The two acquisitions we delivered in 2023 show we have continued momentum
behind our acquisition strategy. We have seen significant delivery across
the Group in the period including IFRS 17 and our new strategic partnership
with SS&C for policy administration, which supports Chesnara's future
growth ambitions in the UK. The wider business has continued to deliver for
our customers and has also performed robustly despite continuing market
volatility delivering economic value growth. Our solvency position remains
strong and significantly above our normal operating range. On M&A, we
begin 2024 with a positive pipeline and are optimistic about our ability to
participate in future deals. And we remain confident in our ability to finance
and execute transactions on attractive terms for both vendors and our
shareholders and deliver positive outcomes for customers."
A full year results presentation is being held at 9:30am on 28 March 2024 -
participants can register here
(https://stream.brrmedia.co.uk/broadcast/65d5c15435af67d51a41a2b9) .
Further details on the financial results are as follows:
2023 FULL YEAR FINANCIAL AND STRATEGIC HIGHLIGHTS
CASH GENERATION AND DIVIDENDS - 19 YEARS OF DIVIDEND GROWTH
· Group commercial cash((1)) generation of £53.0m in FY 2023 (FY
2022: £46.6m).
· Divisional commercial cash generation((1)) of £72.8m in FY
2023 (FY 2022: £25.9m)
· The results during the year, combined with the group's balance
sheet strength, support a further year of dividend growth for 2023.
· The Board has proposed a 2023 final dividend of 15.61p per
share (2023 total dividend of 23.97p), which equates to £36.1m and a 3%
increase compared to 2022 (£35.0m) and extends the period of uninterrupted
dividend growth to 19 years.
FINANCIAL RESILIENCE - FLEXIBILITY IN FINANCING FUTURE M&A
· Solvency II ratio of 205% as at 31 December 2023 (31 December
2022: 197%), materially above our normal operating range of between 140 -
160%.
· Cash balances at group holding companies increased over the
period to £124.1m (31 December 2022: £108.1m), providing substantial
resources to fund future acquisitions.
· Leverage ratio((2)) of 29.2% as at 31 December 2023 (restated
31 December 2022: 30.3%) following the introduction of IFRS 17 over the period
and a change in leverage definition to include 'net of tax and reinsurance
CSM'.
DELIVERING VALUE - GROWTH THROUGH ACQUISITIONS
· The acquisition of the Conservatrix insurance portfolio was
completed and the Canada Life UK protection portfolio transaction executed
during 2023, adding further scale to the Group's Dutch and UK businesses and
generating a combined day one EcV gain of £28.4m. The Group looks after c1m
policyholders.
· Commercial new business profit((3)) increased to £10.1m in FY
2023 (FY 2022: £9.5m).
· Economic Value ("EcV") of £524.7m as at 31 December 2023 (31
December 2022: £511.7m) has grown over the year due to the Conservatrix and
Canada Life acquisitions as well as positive equity markets, partly offset by
the payment of dividends and the negative impact of foreign exchange rates.
· The new SS&C partnership for policy administration services
will enable a scalable platform for M&A in the UK.
INTRODUCTION OF IFRS 17
· Introduction of IFRS 17 during the period, with IFRS pre-tax
profits of £1.8m in FY 2023 (FY 2022 restated IFRS pre-tax losses:
£(62.1)m), driven by positive investment returns over the period.
· Increase in CSM of £53.8m (£42.4m net of tax) over the year,
largely due to the completion of the two acquisitions over the period.
· IFRS capital base((4)), incorporating net equity and CSM (net
of reinsurance and tax), increased to £487.4m as at 31 December 2023 (31
December 2022: £469.2m).
DIVIDEND DETAILS
· The recommended final dividend of 15.61p per share is expected
to be paid on 28 May 2024. The ordinary shares will be quoted ex-dividend on
the London Stock Exchange as of 11 April 2024. The record date for
eligibility for payment will be 12 April 2024.
ANALYST PRESENTATION
· A presentation for analysts will be held at 9.30am on 28 March
2024 at the offices of RBC Capital Markets, 100 Bishopsgate, London, EC2N 4AA,
which will be available to join online and subsequently be posted to the
corporate website at www.chesnara.co.uk.
· To join the webcast, please register using the following link
here (https://stream.brrmedia.co.uk/broadcast/65d5c15435af67d51a41a2b9) .
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 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 19 years in succession. Further details are available on the
Company's website (www.chesnara.co.uk).
Notes
Note 1 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 and is used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring that other
constraints are managed.
Divisional cash generation represents the cash generated by the three
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 'net equity plus
debt plus net of tax and reinsurance CSM', as measured under IFRS.
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.
Note 4 IFRS capital base is the IFRS net equity for the group plus the
consolidated CSM net of reinsurance and tax. It is a better measure of the
value of the business than net equity as it takes into account the store of
deferred profits held in the balance sheet, as represented by the CSM,
including those as yet unrecognised profits from writing new business and
acquisitions.
The Board approved this statement on 27 March 2024.
CAUTIONARY STATEMENT
This document may contain forward-looking statements with respect to certain
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.
2023 HIGHLIGHTS
COMMERCIAL CASH GENERATION £53.0M 2022 £46.6M
GROUP CASH GENERATION £32.5M 2022 £82.7M
The group has again reported strong results across both cash metrics in
2023. Group cash generation includes a material adverse impact from the
symmetric adjustment (SA) of £13.1m (2022: +£28.2m). The recovery we have
seen across equity markets since 2022, whilst a positive overall for the
group, means we are required to hold additional capital which has a short term
impact on cash generation.
Commercial cash generation looks through the SA impact and is deemed to better
reflect the underlying business performance. Total divisional commercial
cash, excluding FX impacts, was £76.5m which provides over 210% coverage of
the 2023 full year dividend. The strong group and divisional commercial cash
result shows that Chesnara continues to deliver cash generation through a wide
variety of market conditions.
GROUP SOLVENCY 205% 2022 197%
The group's solvency has increased in the year and is well above our normal
operating range of 140-160%. The ratio does not include any temporary
impacts from either transitional benefits or a positive closing SA position.
The solvency position benefits from the capital efficiencies of the Tier 2
debt raised in 2022 and provides substantial headroom for future acquisitions.
FUNDS UNDER MANAGEMENT £11.5BN 2022 £10.6BN
FuM have increased by c8.5% since the start of the year. This is due to a
combination of investment returns on the existing business and the value added
through both new business written and the acquisitions completed in the year.
ECONOMIC VALUE £524.7M 2022 £511.7M
EcV has increased since the start of the year, as positive earnings (£59.1m)
offset the impact of dividend payments (£35.4m) and foreign exchange
consolidation impacts (£10.8m).
ECONOMIC VALUE EARNINGS £59.1M 2022 £84.7M LOSS
EcV earnings of £59.1m has been delivered (pre-dividend payments and FX
impact). Acquisition gains and real world returns have provided the most
material contributions, with Part VII synergies and new business further
positive contributing factors.
COMMERCIAL NEW BUSINESS PROFIT £10.1M 2022 £9.5M
Commercial new business profits exceed the prior year return with the UK
business also contributing new business alongside Movestic in Sweden and
Scildon in the Netherlands.
IFRS PRE-TAX PROFIT £1.8M 2022 £62.1M LOSS (restated as a result of IFRS 17
being applied retrospectively)
The IFRS results are being reported for the first time on an IFRS 17 basis in
the Annual Report & Accounts, and the comparatives have been adjusted to
apply this retrospectively. Profit before tax of £1.8m includes a net
insurance service loss of £5.1m and an investment result of £71.7m (2022:
£13.3m profit and £39.0m loss respectively).
IFRS TOTAL COMPREHENSIVE INCOME £10.3M 2022 £26.1M LOSS (restated as a
result of IFRS 17 being applied retrospectively)
Total comprehensive income includes a foreign exchange loss of £7.8m (2022:
£6.9m gain).
The adoption of IFRS 17 provides some more insight into the future profits
that are expected to emerge from the group's life insurance business.
However, the accounting standard does not include the group's significant
amount of policies that are classified as investment contracts, which also
represent a future profit stream for the business. As a result, whilst IFRS
17 does provide some level of alignment with the valuation regime of Solvency
II, it does not replace it and therefore the group continues to primarily
focus on Solvency II and its derivative KPIs of Economic Value and cash
generation in assessing the performance of the business.
FULL YEAR DIVIDEND INCREASED FOR THE 19(th) CONSECUTIVE YEAR
Increase in the full year dividend for the year of 3% to 23.97p per share
(8.36p interim and 15.61p proposed final), supported by material divisional
cash contributions in the year and a strong group solvency. Both of the
acquisitions that were executed in the year are expected to positively support
future cash generation and we continue to have clear line of sight to sources
of mid to long term cash generation.
VOLATILE INVESTMENT MARKET CONDITIONS HAVE CONTINUED
Overall, it has been a period of economic growth although volatility has
remained across most asset classes. As a result there have been
comparatively modest investment returns and mixed economic results in our
operating divisions with the varied economic factors having impacted each of
the businesses and our key financial metrics in different ways. We have seen
some equity market growth which has had a positive impact on the UK's and
Sweden's EcV growth but has dampened cash generation in these territories, and
we have seen the impact of falling yields putting some downward pressure on
the EcV of our Dutch businesses, but less so on cash generation. Sterling
appreciation against both EUR and SEK has caused adverse foreign exchange
impacts on the translation of our overseas divisional results, although this
has had some mitigation from our foreign exchange hedge. As we look forward
there continues to remain some uncertainty around economics with inflation and
interest rates persisting at a higher level than forecast by central banks.
THE GROUP CONTINUES TO EXPAND THROUGH M&A
2023 was another busy period for Chesnara with two acquisitions in the year,
delivering a combined day one EcV gain of £28.4m. Following the
announcement late in 2022, we completed the acquisition of the insurance
portfolio of Conservatrix in the Netherlands, with an EcV gain of £21.7m and
increase in Waard's policies under administration of c70,000. In May,
expansion in the UK continued for the second year running, with the
acquisition of a protection portfolio from Canada Life. The acquisition has
initially been executed through entering into a 100% reinsurance agreement
with Canada Life, and these policies will subsequently transfer to the
division through a Part VII transfer process. The transaction has delivered
an immediate EcV gain of £6.7m and additional policies of c47,000 to the UK
division.
Our 2024 acquisition pipeline looks positive and we remain optimistic about
the outlook for future deals. We have the operational bandwidth, material
solvency headroom, liquid resources and other financing levers to support our
ambitions.
NEW OUTSOURCING PARTNERSHIP, BUSINESS INTEGRATIONS, NEW PEOPLE AND IFRS 17
DELIVERY
In the UK, we have entered into a new long-term strategic partnership for the
outsourcing of operations for the majority of the division, providing surety
over the future operating costs of the business over a minimum 10 year
period. The Part VII transfer of the policies of CASLP to Countrywide
Assured was also successfully completed at the end of 2023. In the
Netherlands, the Conservatrix insurance portfolio was successfully integrated
into the Waard Group. At a group and divisional level, IFRS 17 has been
implemented for this first reporting year, with reporting processes now
bedding down into our business as usual operations following several years of
planning and implementation. From a people perspective we have seen some key
changes over the course of the year, with three new divisional CEOs joining
the group, coupled with the announcement of the change in our group CFO
planned for the first half of 2024.
WE ARE COMMITTED TO BECOMING A SUSTAINABLE CHESNARA
The group's sustainability programme has progressed well over the course of
the year. We are committed to delivering against our three key targets: to
be a net zero emitter; to invest in positive solutions; and to be an inclusive
place for all stakeholders. We have successfully baselined our financed and
operational emissions and also set our initial interim targets for financed
emissions. More detail can be found in our Annual Sustainability Report
(www.chesnara.co.uk/sustainability (http://www.chesnara.co.uk/sustainability)
).
These financial highlights include the use of Alternative Performance Measures
(APMs) that are not required to be reported under International Financial
Reporting Standards.
1 - 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.
2 - Divisional cash generation represents the cash generated by the three
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
3 - 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.
4 - Funds Under Management (FuM) represents the sum of all financial assets on
the IFRS balance sheet.
5 - 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.
6 - 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.
7 - 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.
8 - 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.
9 - 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.
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, the Report &
Accounts also adopt 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 (£359.9m)
· IFRS profits
ADDITIONAL METRICS:
· Solvency
o Own Funds (£683.7m)
o Solvency Capital Requirement (SCR)
o SCR plus management buffer
o Solvency position (absolute value)
o Solvency position ratio
· Cash generation
o Group cash generation
o Divisional cash generation
· Economic Value
o Balance sheet
o Earnings
· New business
o EcV
o Commercial
SOLVENCY
Solvency is a fundamental financial measure which is of paramount importance
to investors and policyholders. It represents the relationship between the
value of the business as measured on a Solvency II basis and the capital the
business is required to hold - the Solvency Capital Requirement (SCR).
Solvency can be reported as an absolute surplus value or as a ratio.
Solvency gives policyholders comfort regarding the security of their
provider. This is also the case for investors together with giving them a
sense of the level of potential surplus available to invest in the business or
distribute as dividends, subject to other considerations and approvals.
ECONOMIC VALUE
EcV is derived from Solvency II ('SII') Own Funds. It recognises the impact
of certain items that are not recognised in SII Own Funds, and also takes a
more commercial view of the risk margin than under Solvency II.
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, the 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 energy usage Tracking our scope 1, 2 and 3 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 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, with the equity
denominator adding back the net of tax CSM liability, as measured under IFRS.
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
The group has delivered strong cash generation and Economic Value growth
during the period whilst continuing to have a strong solvency position. This
has supported an increase in the full year dividend for a 19th consecutive
year and provides headroom for future M&A.
LUKE SAVAGE, CHAIR
STRONG CASH GENERATION AND SOLVENCY
Chesnara has continued its strong track record of delivering cash generation
across a variety of market conditions in 2023. Total commercial cash
generation of £53.0m supports us continuing to extend our dividend growth
track record. We are recommending that our shareholders will receive a final
dividend of 15.61p per share, an increase of 3% in the full year dividend for
the 19th consecutive year.
Having a strong and stable solvency position provides financial security for
customers and is also critical to the investment case for both our equity and
debt investors. And having material solvency headroom also supports our
ability to execute further M&A.
I am pleased to report a continued strong Solvency II ratio of 205%. This
remains significantly above our normal operating range of 140-160%, providing
us with considerable strategic flexibility. 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. And our businesses have delivered EcV growth even after the
impact of FX and dividends.
Steve talks about these financial dynamics further in his report.
PEOPLE AND OPERATIONAL DELIVERY
Across the group, our people continue to deliver, which includes the execution
of another two deals in the period. Firstly, we completed the acquisition of
the Conservatrix insurance portfolio in the Netherlands on 1 January. Later
in May, we announced the acquisition of Canada Life's protection portfolio in
the UK, which has been initially executed through a reinsurance arrangement.
The deals have created significant value for investors with £28.4m of day 1
EcV gains and we expect them to be an important source of value in the
long-term. Our teams in the Netherlands and UK have worked extremely hard
to integrate the newly acquired businesses and portfolios, including Sanlam
Life and Pensions (CASLP) which we purchased in the previous year. We have
completed the Part VII transfer of the CASLP policies into our main UK
insurance company Countrywide Assured, which has also had a positive impact on
cash generation and EcV, and the insurance portfolio of Conservatrix is now
fully integrated into the Waard Group.
Another major development during the period has been the announcement of a new
outsource partner in the UK, SS&C. This positive development creates a
sound commercial and operational foundation for long term customer support and
business development.
In Movestic we have continued to work on improving our customer service,
launching a new unique digital service in the year that allows customers to
customise how they utilise their occupational pension scheme. We have also
continued to build our custodian business through new partnerships in the
year.
And in the Netherlands Scildon has continued with its IT upgrade programme,
improving its customer and broker front end capabilities.
The transition to the new insurance contract accounting regime, IFRS 17, has
gone live in 2023 and our full year accounts have fully complied with the
statutory requirements of the new standard. This is the cumulation of
several hard years of planning and execution from teams across the group.
And finally, we have also been working hard to transition a number of
leadership roles. During the year, September saw Pauline Derkman became CEO
of Scildon and Jackie Ronson become our UK CEO and in December Sara Lindberg
became our CEO of Movestic. We wish them the very best in their roles. On
behalf of the board, I also wanted to thank Gert-Jan Fritzsche, Linnéa
Echorville and Ken Hogg for everything they have done for Scildon, Movestic
and CA respectively over the six, six and seven years they were CEOs of their
respective businesses.
We also announced that David Rimmington will not be seeking re-election at our
Annual General Meeting in May 2024 and that he will be stepping down from the
board and leaving his role as Group Finance Director at that meeting. He
will be replaced by Tom Howard who will become Group Chief Financial Officer,
subject to regulatory approval and should start with us no later than 1 May
2024. On behalf of the board, I want to thank David for everything he has
achieved at Chesnara over the last ten years and he leaves with our best
wishes. At the same time, we are delighted to be welcoming Tom to Chesnara
plc. He has extensive financial services experience particularly in life
insurance and asset management as well as expertise in M&A; these skills
align strongly with the group's strategic ambition.
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. We remain mindful that significant periods of operational delivery,
although rewarding, can be stressful and so we remain committed to investing
in staff welfare programmes to support our people.
PURPOSE
At Chesnara, we help protect customers and their dependants through the
provision of life, health, and disability cover or by providing savings and
pensions products 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 remain 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.
Delivering cash generation, EcV growth and solvency, will always remain of key
importance for many reasons. These include our desire to offer competitive
returns to shareholders and fund our debt investor coupon payments but also
because it creates financial stability for customers. We continue to be very
conscious of the need for the business to serve a wider purpose with an
increasing balance of focus across the 3Ps: Profit, People and Planet.
Governance is a core foundation to our business model and we have a
well-established governance framework. We continue to increase our focus on
environmental and social matters and are committed to becoming a sustainable
Chesnara. Alongside this document, we have published our 2023 Annual
Sustainability Report which details our wider ambitions and progress against
our targets and commitments. I encourage you to read the report and please
provide any feedback or thoughts to me or a member of the Chesnara team.
The path to sustainability will be long and complicated but we are investing
in sustainability-focused resource and infrastructure to support the group on
this journey. A very visible and encouraging development was the success of
our first group-wide Sustainability Summit held in June. I was hugely
encouraged by the level of engagement from all levels across the group and by
the clear alignment of ambitions leading to the identification of key
workstreams and objectives. The objectives are a mix of items that create
solid foundations for longer term change together with some shorter term
actions that will begin to make a real world positive impact. I am confident
that we will deliver against those objectives, and I look forward to updating
you on our progress.
OUTLOOK
Overall, it has been a good year of delivery and strong cash generation. The
start of 2024 has continued to show volatile market conditions with inflation
and interest rates persisting at higher levels than we have seen in recent
years. That said, we have seen more positive signs from equity markets and
stronger signals from central banks that we will return to normality in terms
of macro-economic conditions.
Our business model has delivered positively in these volatile environments,
and we continue to expect the UK and European M&A markets to be active.
Our strong and stable solvency, alongside the parent company cash balance,
leave us well positioned to participate in these markets.
And as we reach our 20th year as a listed company, the board and I look
forward to continuing to deliver for our shareholders in the future.
Luke Savage,
Chair
27 March 2024
CHIEF EXECUTIVE OFFICER'S REPORT
The group has generated material EcV earnings and delivered strong cash
generation. Our people have delivered two acquisitions, secured a new UK
strategic partnership and made the successful transition to IFRS 17. And we
are continuing to see plenty of M&A opportunities.
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
The key strategic areas of focus for 2023 have remined the same across
Chesnara namely:
1. Running in-force insurance and pensions books
efficiently and effectively;
2. Seeking out and delivering value enhancing M&A
opportunities; and
3. Writing focused, profitable new business where we
are satisfied an appropriate return can be made.
The momentum behind our acquisition strategy has continued with a further two
deals recognised in the year (five now in the last two years). These two
acquisitions have added £28m of immediate additional value to the group
against consideration paid of £9m and total group capital deployed of
£35m. Conservatrix and Robein Leven are now both fully integrated into
Waard and the UK completed the Part VII of CASLP policies into CA in December,
which has created synergies that have had a positive impact on cash generation
and EcV. We also saw an improved contribution from new business for the
period at £10m, including nearly £2m from the UK.
We have c1 million customers in Chesnara and we take the responsibility of
delivering for them every day very seriously. Our UK team have been working
hard to implement the new UK Consumer Duty regulation which will help continue
to ensure we focus on good outcomes and value for money for customers.
A major highlight in the year is the signing of a new outsource arrangement in
the UK, which we announced in May. Sixty-eight Chesnara colleagues
transferred to SS&C in August and we have a major programme of activity
underway to migrate our UK policies to our new operating platform including
both CASLP and those policies being acquired from Canada Life UK. SS&C
will be a key partner for us, enabling the UK business to continue to deliver
high quality and cost effective servicing with the capacity and flexibility to
support continued M&A developments in the UK where we see good
opportunities.
In Scildon, work has continued to improve the efficiency and usability of our
Individual Life platform which has seen positive feedback from brokers. And
for Sweden, further automation and use of AI alongside the build of digital
tools such as the pension calculator have also been material developments.
As Luke mentions, there has been an increased focus on defining and delivering
the group sustainability vision in line with the commitments we set out in our
Annual Sustainability Report (ASR), including our new initial interim targets
for financed emissions. We are committed to a 50% reduction by 2030 in our
scope 1 and 2 financed emissions investments that are within our control or
influence, which represents a material component of our assets under
management. We will also be working with partners and customers for those
assets where we have less control or influence, for example those where
policyholders self-select their own investments. We remain strongly committed
to net zero by 2050 for all our financed emissions and so our targets will
expand over time to include all asset classes.
The production of our transition plans will be a key step in identifying the
more detailed actions we will take to tackle all our financed emissions and
will also factor in how we manage a just transition which considers the needs
of all stakeholders, including nature and biodiversity. I am pleased to report
that we are taking tangible steps on our journey, including implementing new
platforms and tools to enable us to baseline our financed and operational
emissions. I share Luke's confidence that we will be able to successfully
deliver against our sustainability objectives and look forward to providing
updates on our future progress.
After five years of intensive work, there has also been a significant focus on
ensuring we could report on the new IFRS 17 basis. I am delighted to report
that our 2023 financial statements are compliant.
Process wise, we are in good shape regarding transitioning from the project to
recurring business as usual operations and the financial impact of the
transition to the new reporting framework is positive and in line with the
guidance we gave investors alongside our full year 2022 results.
Before the proposed FY dividend and FX impacts, the group Economic Value grew
materially by 12% (up £59.1m). We saw all components of the "Chesnara Fan"
growth model deliver positively over the year. We invested further in central
resources to support major projects such as IFRS 17 and M&A activity as
well as continuing to pay the coupon on our £200m Tier 2 debt instrument.
The derivative we put in place towards the end of 2022 to reduce the exposure
of our capital surplus to extreme FX movements has been renewed and slightly
broadened in 2023. Whilst this mitigates against extreme movements we do
remain exposed to the risks and opportunities relating to FX movements within
the cap and floor of the derivative. A primary driver of the hedge was to
reduce the capital we need to hold against currency risk and to limit more
extreme EcV exposure, rather than to fully hedge FX exposures across all
metrics. During 2023 sterling has strengthened slightly against the euro and
Swedish krona resulting in a negative FX impact on EcV of £10.8m.
The group continued to generate cash with total commercial cash generation of
£53.0m. We see this as a strong result given the underlying economic
conditions in the year. Our cash generation has benefitted from delivering a
mass lapse reinsurance arrangement in the UK towards the end of the year, and
has also been positively impacted by the UK's Solvency II reform, which
resulted in a reduction in the level of risk margin we are required to hold in
our UK business.
In terms of cash resources, we have again seen a significant flow of dividends
in the period from our divisions with £71m having been remitted to Chesnara
during the year. This contributed to a £16m increase in the parent company
surplus cash balance (including holding companies) and a closing amount of
£124m (which is post payment of the full year 2022 and interim 2023
dividends). Our group solvency ratio has also improved further during the
period closing at 205% (31 December 2022:197%). As Luke highlighted, this is
materially above our normal operating range of 140-160% and provides us with
substantial headroom to support further strategic activity.
Our inaugural IFRS 17 numbers show a £51.5m increase in net equity as at 31
December 2022. As at 31 December 2023 total net equity is £359.9m with a
contractual service margin (CSM) of £166.5m. This results in a leverage ratio
of 29.2% (including the CSM net of tax) which is a significant reduction
compared to the ratio of 37.6% reported at 31 December 2022 under the previous
IFRS reporting regime. Whilst the CSM gives a useful indication of future
profits on our insurance business it should be noted that in fact only 42% of
our total portfolio is classified as insurance. As such, the CSM by no means
represents the full future profit of the group as it excludes investment
contracts.
Whilst the move to IFRS 17 has been a very material programme of work for the
group, you will note that my wider review continues to focus on metrics linked
to Solvency II. We continue to believe that the Solvency II metrics better
support a commercial assessment of the business and remain the metrics upon
which we manage the group.
CASH GENERATION, GROUP LIQUIDITY AND STRONG SOLVENCY
At the heart of the Chesnara financial model and investment case is resilient
cash generation and stable solvency, across a wide variety of market
conditions.
STRONG CASH GENERATION
The total group commercial cash generation (excluding the impact of
acquisitions) during the year was £53.0m (2022: £46.6m). This more than
covers the proposed full year 2023 dividend of £36.1m.
Looking at how our businesses have generated cash, the divisional commercial
cash generation for the year, excluding FX translation impacts, was £76.5m
(2022: £28.3m). This represents c212% coverage of the total 2023 dividend and
shows we continue to have significant future dividend paying capacity. The
cash generation results include some positive impacts from management actions
taken during the year, including the impact of mass lapse reinsurance in the
UK and the benefits from the UK Solvency II reforms.
Commercial cash generation by territory:
£m
UK 48.5
Sweden 2.3
Netherlands 25.7
Divisional total 76.5
Other group (19.2)
FX (4.3)
Total 53.0
DIVISIONAL COMMERCIAL CASH GENERATION REPRESENTS c212% COVERAGE OF THE 2023
SHAREHOLDER DIVIDEND(Δ)
(Δ) excluding FX consolidation impacts
The Chesnara parent company cash (including holding companies) and instant
access liquidity fund balance at the year end has increased to £124m (31
December 2022: £108m). Cash reserves have benefitted from the £71m of
divisional dividend receipts during the year. This provides substantial
resources for future acquisitions and further supports the sustainable funding
of the group dividend and payment of our Tier 2 debt coupon. The group
continues to retain a Revolving Credit Facility with a further £100m of
capacity and an additional £50m accordion.
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 further increase in the group solvency ratio to
205% (2022: 197%).
Solvency ratio %* Solvency surplus £m
2018 155 210.8
2019 156 204.0
2020 152 190.7
2021 197 298.0
2022 205 351.0
*Normal operating solvency range = 140% to 160%
The closing headline solvency ratio of 205% is significantly above our normal
operating range of between 140% and 160%. Unlike many of our peers, the
solvency ratio does not adopt any of the temporary benefits available from
Solvency II transitional arrangements, although we do apply the volatility
adjustment in our UK and Dutch divisions. The ratio does include the benefit
of the capital efficiencies relating to the Tier 2 debt raised in 2022.
We expect to utilise this additional capital surplus as we undertake
acquisitions, which should result in the ratio reverting back to within the
robust and stable 140% to 160% historical range.
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.
THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTICULARLY THROUGH
M&A
The 'Chesnara fan' illustrates the additional areas of growth potential the
group may benefit from that aren't fully reflected in our Economic Value
metric.
We have previously highlighted 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. Over the year all components
have made positive contributions, although synergy related gains are offset by
the impact of central costs (development costs and Tier 2 interest).
Although there are limitations to tracking the growth metrics over short time
periods, it remains useful to assess how the results for the period mapped
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 tends to be the most volatile of the growth sources.
During the year, real-world returns added c£43m to EcV. This gain partially
offsets the significant economic value reduction from lower real world
investment returns we saw in 2022, whilst demonstrating the value potential
from even modestly beneficial economic conditions.
Over time, we expect improvements to operational effectiveness to be a source
of value creation, be that through M&A synergies, scale benefits or other
positive management actions (such as our recently announced partnership with
SS&C). During the year, the deals completed have generated positive
synergies. I am also pleased to report £10.1m of value growth resulting from
commercial new business profits which have slightly increased versus 2022.
Acquisitions in the period have also added £28.4m of EcV. We see continued
momentum behind the M&A strategy which is now materially contributing to
the growth of the group. Its worth noting that further value growth
expectations from this M&A are not recognised in the day one gains.
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 the year, we have seen
positive commercial new business profits of £10.1m (2022: £9.5m). This has
included a contribution of almost £2m from the UK.
We have grown our Funds Under Management (FuM) in 2023, largely through the
completion of the acquisition of the insurance portfolio of Conservatrix and
we have also reported a growth in underlying asset values.
Growth in FuM
GROWTH OF 61% SINCE 2018
Funds Under Management £bn
2018 7.1
2019 7.7
2020 8.5
2021 9.1
2022 10.6
2023 11.5
FOLLOWING THE RECENT ACQUISITIONS, WE NOW LOOK AFTER c1 MILLION POLICIES FOR
CUSTOMERS WHO HAVE £11.5BN OF THEIR ASSETS WITH US
CONTINUED DELIVERY OF ACQUISITIVE GROWTH
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 incoming 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 2023 we delivered two
acquisitions. The acquisition of the insurance portfolio of Conservatrix, a
specialist provider of life insurance products in the Netherlands, was
completed on 1 January 2023 having been originally announced in July 2022.
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. The
Conservatrix transaction increased the group's EcV by £21.7m and provides
further EcV accretion potential, including from future real world investment
returns and the run-off of the risk margin. We have already seen significant
recycling of some of the capital deployed to support the acquisition.
On 16 May 2023 Chesnara announced the acquisition of the onshore individual
protection line of business of Canada Life UK, which was closed to new
business in November 2022. As a result of the acquisition, the life
insurance and critical illness policies for approximately 47,000 customers
will transfer to Chesnara's UK subsidiary, Countrywide Assured plc (CA plc).
In the interim period, Canada Life UK will reinsure the portfolio to CA plc,
effective from 31 December 2022. The initial commission as part of the
reinsurance agreement was £9.0m, funded from internal group resources, and
the transaction has increased the group's Economic Value by £6.7m.
Positive progress continues on the work to complete the transition of CASLP
into our target operating platform and the approval of the Part VII transfer
of CASLP into CA in December was a further important milestone here and also
had a positive impact on EcV.
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.
2023 has continued to see an active M&A market across European insurance
for deals of £1bn and below with large international insurance groups
continuing to focus their strategies and management teams actively managing
business portfolios to release capital and simplify operations. Even with
the ongoing market volatility and macro-economic environment, we expect the
positive levels of insurance M&A to continue. An active market provides
opportunities for Chesnara as a consolidator and the five deals that we have
announced over the past two years is indicative of the momentum that we have
in this key strategic objective, providing confidence on our ability to
execute future M&A.
We continue to have material financial resources to deploy, with cash balances
of £124m at a group level. Our revolving credit facility is not currently
utilised and creates an additional level of working capital capacity of
£150m. For more transformational deals, we retain the ability to raise
equity and are mindful of the potential benefits from other funding
arrangements such as joint ventures or vendor part-ownership.
Our assessment of the market potential, our track record of delivery and the
actions we have taken to enhance our ability to execute M&A means we are
confident that acquisitions will continue to contribute to Chesnara's success
in the future.
PEOPLE CHANGES
There have been a number of changes in key personnel of the group over the
course of the year, as summarised below.
- In February 2023, we announced that after six years as our Scildon
CEO, Gert-Jan Fritzsche would be leaving the business. Having conducted a
full market search, we were delighted to announce in July that Pauline Derkman
agreed to take up the position of Scildon CEO on 1 September. She has a huge
amount of Dutch market experience including M&A from her time at Aegon,
ASR and PWC.
- In August 2023 we also announced that after six years as Movestic
CEO, Linnéa Ecorcheville would be leaving the business. Sara Lindberg, who
is a key member of our Movestic management team, was initially appointed as
interim CEO whilst a formal market search was performed. Sara was part of
this process and it was clear that Sara was the strongest candidate to fulfil
this position not least given her strong performance in the interim role and
she was consequently appointed as CEO on a permanent basis.
- In September 2023 we announced that after seven years Ken Hogg, UK
CEO would be leaving the business. We were delighted to announce that Jackie
Ronson would be taking up the role of UK CEO and started with Chesnara on 14
September. She brings with her over 25 years of experience across financial
services and beyond, working in a range of businesses from start-ups to FTSE
100 organisations.
- Regulatory approval was received for all three new appointments
and a full transition of responsibilities completed. I want to thank
Gert-Jan, Ken and Linnéa for all their efforts at Chesnara and wish them the
very best for the future.
- And in December we announced that David Rimmington, Group Finance
Director would not be seeking re-election at the 2024 AGM and that he would
step down as a director at that time. David has seen through the year end
2023 financial reporting process, including the inaugural annual reporting of
the group's results under IFRS 17. I would like to thank him for his service
to the business over the last 10 years, particularly the support and guidance
he has given me over the last two years. We wish him well as he considers
the next steps in his career.
- Having delivered the year end reporting process and associated
releases, David will support the orderly transition of his role to Tom Howard,
who will be joining us from Aviva in April. Tom has held a variety of senior
roles within Aviva plc, including Director of Mergers & Acquisitions for
Aviva Group and CFO for Aviva's Life and General Insurance business in
Ireland. Tom brings with him European actuarial and financial reporting
capabilities and a strong track record of leadership in finance, M&A,
capital management and business transformation. I am looking forward to
working closely with Tom as we push forward delivering the group's renewed
strategy.
I am confident that these changes will put us in a strong position to deliver
our ambitious plans for the future.
A SUSTAINABLE CHESNARA
We are committed to becoming a sustainable group and our principles are: "Do
no harm. Do good. Act now for later.". As a steward and a safe harbour for
our c1 million policyholders and £11.5bn of policyholder and shareholder
assets, we have a real responsibility to help drive the change needed to
deliver decarbonisation, protect nature and ensure a sustainable society and
economy. The path to sustainability will be long and complicated but we are
working to put sustainability at the heart of everything we do and during the
year we have taken action to embed sustainability into decision-making across
the group.
Our work is overseen by the Board and our Group Sustainability Committee which
is chaired by our Senior Independent Director, Jane Dale. The committee
consists of executive management from across the group with executive
sponsorship from myself and is focused on delivery of real world actions.
Our commitments are detailed within our Annual Sustainability Report and
simply put, we will make decisions based on all of our stakeholders, including
the planet and its natural resources. 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
As I highlighted earlier, these commitments are shaping what we do and how we
do it and we have set our initial interim 2030 targets for financed emissions.
In addition, we will be reporting on our sustainability position and
activities in line with the appropriate reporting frameworks. We have
reported under TCFD (Task Force on Climate-Related Financial Disclosures) for
several years, are reporting under the CFD regulations (Climate-related
Financial Disclosure) for the first time this year as required by an amendment
to the Companies Act, and we have commenced our work on CSRD (the EU Corporate
Sustainability Reporting Directive) reporting.
OUTLOOK
It has been pleasing to see economic earnings gains in the year as well as
continued strong cash generation. Whilst a volatile macro-economic backdrop
will continue to be a material factor in all our markets, we remain confident
that the Chesnara business model will continue to generate cash across a wide
variety of market conditions, as it has done over its history.
We also remain positive on the outlook for further M&A and are starting
2024 with a positive pipeline of opportunities. The two deals delivered in
2023 providing further evidence of the renewed momentum we have behind our
M&A activity.
Finally, the operational delivery we have seen during the year would not have
been possible without the fantastic efforts of our teams across the group.
In 2024, Chesnara will be celebrating the 20th anniversary of its listing.
It's a privilege to be leading the business in its 20th year and looking
ahead, I continue to believe there is a lot to look forward to here at
Chesnara.
Steve Murray,
Chief Executive Officer
27 March 2024
MANAGEMENT REPORT
OUR STRATEGY
Our strategy focuses on delivering value to customers and shareholders,
mindful of the interests of other stakeholders, 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 INVESTORS ROBUST REGULATORY COMPLIANCE A JUST TRANSITION TO A SUSTAINABLE GROUP
BUSINESS REVIEW | UK
The UK division consists of the operating company Countrywide Assured plc
which now includes the insurance business of CASLP following the Part VII
transfer on 31 December 2023. The business also reflects the impact of the
Canada Life deal that was entered into in May 2023.
The division manages c291,000 policies covering linked pension business, life
insurance, endowments, annuities and some with-profit business. The
division is largely closed to new business, but generates future value through
a small amount of new business, investment returns on linked policies,
increments to existing policies and periodic acquisitions.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
As a largely closed book, the division creates value through managing the
following key value drivers: expenses; policy attrition; investment returns;
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 2023
- In May 2023 the division entered into a new long-term strategic
partnership with Fin Tech market leader, SS&C Technologies. SS&C
will service the front to back office operations for the majority of the UK
division. This represents a landmark agreement for the division, and
provides a modern platform that delivers surety of future operating costs over
the longer term, will improve the efficiency of the existing business and
establishes a solid platform to scale the business via future acquisitions.
- This has initiated a programme of work to migrate the business
operations of CASLP to the SS&C target operating model. The first key
milestone of transferring CASLP staff to SS&C was met during the year.
- The planned Part VII insurance business transfer of CASLP into
CA plc completed on 31 December 2023 and has resulted in the realisation of
some immediate capital synergies. This also supports the delivery of future
operational efficiencies.
- In May 2023 the division agreed to acquire Canada Life's
individual protection business of 47,000 policies. This was initially
executed via a reinsurance agreement, with the policies expected to transfer
to CA through a Part VII insurance business transfer process following court
approval.
- CA has continued to optimise the risk/reward balance of its
investment portfolio, having executed a change in the assets backing the
non-linked, non-volatility adjustment portfolio during the year.
- In Q4 CA entered into a mass lapse reinsurance arrangement.
This provides cover against the risk of a large outflow of policies and as a
result reduces the amount of capital that is required to be held in a mass
lapse scenario.
- As a result of the Solvency II risk margin reforms that came
into force on 31 December 2023 the risk margin has reduced by £13.2m.
- The UK business paid total dividends of £56.0m to Chesnara plc
in the year and is reporting a year end 2023 dividend of £35.0m to be paid
later in 2024, with a closing post dividend solvency ratio of 149%.
FUTURE PRIORITIES
- Continued migration of the majority of the existing and the
acquired books of business to SS&C as strategic outsource partner.
- Complete the final stages of the integration plans of CASLP into
CA, including deauthorising and the subsequent dissolution of CASLP Limited.
- Complete the work necessary to prepare for the transfer the
policies of Canada Life into CA plc.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Identify potential capital management actions, focusing on those
that generate the appropriate balance of value and cash generation.
- Support Chesnara in identifying and delivering UK acquisitions.
KPIs
Economic Value - UK
£m 2019 2020 2021 2022 2023
EcV 204.6 187.4 181.9 209.3 191.4
Cumulative dividends 29.0 62.5 90.0 146.0
Total 204.6 216.4 244.4 299.3 337.4
The closing EcV at 31 December 2023 includes a £6.7m gain arising on the
Canada Life deal.
Cash generation - UK
£m 2019 2020 2021 2022 2023
Cash generation 33.6 29.5 27.4 40.8 45.0
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Delivering good customer outcomes is one of our primary responsibilities. We
strive to do this by providing good customer service, competitive fund
performance and offering overall fair value for money. We seek to offer
additional support to customers who may need it and provide easy to understand
information about our products and the benefits provided. We are committed to
meeting our regulatory responsibilities, including remaining operationally
resilient and maintaining a strong solvency position.
INITIATIVES AND PROGRESS IN 2023
- An ongoing focus of the division is to ensure that it complies
with the requirements of the FCA's "Consumer Duty". The business unit met
the requirements in relation to its open business by the regulatory deadline
of 31 July 2023 and the closed book operations are on track to comply with the
requirements by the later deadline of 31 July 2024.
- Another important multi-year focus is to ensure compliance with
the FCA's "Operational Resilience" regulations by 31 March 2025. This remains
on track and has included supporting the PRA in its industry-wide data
collection programme.
- The policies of CASLP were transferred to CA plc on 31 December
2023 following court approval on 21 December 2023. As part of this process
an independent expert for the transfer confirmed that all policyholders could
expect to receive the same benefits in their existing policies with the same
level of security under the transfer.
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 regulation by July 2024.
- Continued focus on delivering good customer outcomes and
maintaining strong service performance from all customer facing suppliers and
providers.
KPIs
Policyholder fund performance - UK
12 months ended 12 months ended
31 Dec 2023 31 Dec 2022
CA Managed Pension 7.5 (7.9)
CWA Balanced Managed Pension 7.5 (7.9)
S&P Managed Pension 7 (8.4)
Benchmark - ABI Mixed Inv 40%-85% shares 8.2 (9.8)
CASLP Manged Pension 6.7 (10.7)
Benchmark - ABI Mixed Inv 20%-40% shares 7.1 (9.7)
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 successful 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 2023
- In September Jackie Ronson joined Chesnara, succeeding Ken Hogg
as UK CEO. As well as overseeing the day to day operations of the division,
Jackie will apply her experience in M&A and leading large scale
transformation to deliver the UK's business strategy.
- During the course of the year the division successfully
delivered the integration of the policies and governance frameworks of CASLP
with CA. This was in preparation for the Part VII transfer of CASLP into CA
at the end of the year, and puts the CA board in good stead for overseeing the
enlarged business through a combined oversight structure going froward.
- Following entering into the new strategic partnership with
SS&C during the year, coupled with the new arrangement with Canada Life,
the division has focused on ensuring that its governance and oversight
routines have been adapted to reflect these new arrangements.
- CA has implemented IFRS 17 reporting into its overall financial
reporting framework, as required to support Chesnara's year end 2023 IFRS 17
reporting.
- The division has supported the wider group's sustainability
programme over the course of the year and will continue to focus on local
initiatives for 2024.
FUTURE PRIORITIES
- Continue embedding the new IFRS 17 financial reporting processes
into business as usual routines.
- Ensure appropriate governance arrangements are in place as the
division transitions the majority of its front to back operations to SS&C.
- Continue to horizon scan for future regulatory changes
- Continue engaging with our asset managers on progress towards
net zero and investing in positive solutions.
- Support the wider group-wide sustainability programme to
becoming a more sustainable group, including focusing on our operations,
social purpose, and ensuring the group's and division's reporting needs are
met.
KPIs
Divisional solvency remains strong and stable with surplus generated in the
year increasing the pre-dividend solvency ratio from 135 % to 183%.
SOLVENCY RATIO: 149%
£m Solvency Ratio
31 Dec 2022 surplus 35.7 135%
Surplus generation 49.2
31 Dec 2023 surplus (pre-div) 84.9 183%
2023 div (35.0)
31 Dec 2023 surplus 49.9 149%
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, together with custodian products via a
number of private banks and is well-regarded within both communities.
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 2023
- 2023 continued to see geopolitical uncertainty in many parts of
the world, which drove rising interest and inflation rates, although the trend
turned later in the year. The financial markets have been volatile, but
overall positive, due to an upswing in US and wider tech markets; this
development was reflected in the favourable returns on policyholders'
investment assets.
- Movestic continued to improve its offerings within both the
unit-linked and custody account segments through a number of activities for
example, continuing to monitor developments and ensuring products remain
relevant. In addition, Movestic has continued its retention initiatives during
the year, albeit high transfer activity is expected to remain a market feature
due to simplified processes and new regulations that have come into force.
- Over the year, Movestic has continued to develop its digital
offering such as: through extending its digital processing; establishing new
partnerships; and through continuing efforts to streamline processes and
increase the use of automation. New customer demands and a greater
digitalisation on the market overall have also caused the division to
intensify its efforts to create services that are easier and more efficient
for customers and partners to use. The work with automation and digitalisation
is also expected to add future synergies as we will be able to scale up the
business.
- Movestic's solvency ratio remains robust despite the development
of the symmetric adjustment following positive investment markets which
requires additional capital to be held. The closing FUM balance of £4.4bn
represents a full year increase of 18.5% when compared to 2022, driven by
overall favourable market conditions.
FUTURE PRIORITIES
- The Swedish life insurance industry is going through a major
transformation. Recent regulatory and technology developments (e.g. AI) will
create opportunities, but also lead to higher customer demand for
accessibility, information, and personalised products and services. Movestic
will keep working to increase the use of automation; streamline its processes
and improve its administrative efficiency and control.
- 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.
- 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.
- Seek out opportunities to bring in additional scale through
M&A, working collaboratively with the group.
KPIs (all comparatives have been presented using 2023 exchange rates)
Economic Value
£m 2019 2020 2021 2022 2023
Reported value 240.9 213.9 232.8 193.8 189.6
Cumulative dividends 5.9 11.0 14.0 25.2
Total 240.9 219.8 243.8 207.8 214.8
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 2023
- Movestic have developed a new sustainability rating for funds on
its platform, with the aim of providing an aggregated valuation of different
sustainability ratings that are available on the investment market (more
information is available on the Movestic website).
- Work to automate processes and make them more efficient has
taken place over the year. In addition, a new customer service case management
system was implemented over 2023. Both activities will help to ensure smoother
administration and improved customer service.
- Movestic continued to expand the custodian offering by
establishing new partnerships.
- To help customers plan their retirement, Movestic has developed
a unique digital service where customers can: plan; start withdrawing; and
change how they receive their occupational pension. In 2023, seven out of
every ten of the company's customers used this service to start withdrawing
their pension.
- A new digital medical underwriting tool and an improved digital
investment tool have been launched, making it easier for customers to choose
and exchange the funds in their portfolios.
- The long-term trend with more satisfied customers is continuing
as the company's Customer Satisfaction Index rose for the third consecutive
year.
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 and partners
through increased presence, both physical and digital.
- Continue to capitalise on the new rules that came into effect in
July 2022 that enhances the business's ability to transfer policies onto its
own platform where it is in the interest of customers to do so.
KPIs (all comparatives have been presented using 2023 exchange rates)
Broker assessment rating (out of 5)
2019 2020 2021 2022 2023
Rating 3.5 3.3 3.6 3.8 3.8
POLICYHOLDER AVERAGE INVESTMENT RETURN:
11.8%
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 2023
- IFRS 17 and IFRS 9 - the division has delivered its first full
year-end for 2023 under the new group accounting standards.
- Sustainability has remained a key focus area with work
progressing in a number of areas. A key example is work over the year to
develop a solution to digitally provide customers with individual
sustainability annual statements which is in accordance with new regulation
that came into force on 1 January 2023. Additionally, work has progressed in
respect of the Corporate Sustainability Reporting Directive (CSRD) which is an
EU adopted new directive on sustainability reporting. Movestic initiated an
impact assessment in December 2023, and we are working to understand the
likely effective date, given the complexities of the legislation.
- Analysis of the Global Minimum Tax (GMT) regulatory framework is
also underway, to determine how the new law affects the company's tax
situation.
- Work has commenced to implement the new regulatory framework,
Digital Operational Resilience Act (DORA), which is effective from January
2025. DORA is designed to improve the ability to withstand cyber threats and
the risks associated with information security.
FUTURE PRIORITIES
- Ensure new reporting processes are embedded into BAU operations
to support IFRS 17 requirements.
- Continue implementation of sustainability regulations.
KPIs (all comparatives have been presented using 2023 exchange rates)
SOLVENCY RATIO: 147%
Solvency remains strong post a foreseeable dividend of £7.8m
£m Solvency Ratio
31 Dec 2022 surplus 64.7 162%
Surplus generation (2.6)
31 Dec 2023 surplus (pre-div) 62.1 153%
2023 div (7.8)
31 Dec 2023 surplus 54.3 147%
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
continues to adopt a profitable pricing strategy.
INITIATIVES AND PROGRESS IN 2023
- Sales volumes for the unit-linked business have developed
positively over the year, representing a 15% rise on the prior year. The
custodian sales volumes slowed down during the year due to the less favourable
financial market conditions, particularly a lack of local IPOs.
- The division delivered a commercial new business profit of
£2.8m, which is slightly below last year, in part due to salary increases
below the inflation rate, which led to lower increment contributions.
- Movestic will continue to develop its pension and savings
offering to increase competitiveness and build customer loyalty.
- For the second year in a row, Movestic have been awarded
'Unit-linked Insurance Company of the Year' for 2023 by Söderberg &
Partners
FUTURE PRIORITIES
- Launch new risk product offerings in the broker channel,
including a new technical solution for administration.
- Continue to strengthen distribution capacity within all channels
and work to launch new partner collaboration within all lines of business.
KPIs (all comparatives have been presented using 2023 exchange rates)
Occupational pension market share %
% 2019 2020 2021 2022 2023
Market share 7.0 4.7 3.6 4.1 4.4
New business profit
£m 2019 2020 2021 2022 2023
New business profit 6.3 1.5 3.9 3.2 2.8
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses deliver growth through our acquisitive closed book
business Waard, which increased in size as a result of the Conservatrix
acquisition at the start of the year, 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 2023
- On 1 January 2023, Waard executed the acquisition of an
insurance portfolio from Conservatrix, a specialist provider of life insurance
products in the Netherlands that was declared bankrupt on 8 December 2020. The
integration of both the portfolio and staff, were successfully completed in
2023
- Scildon's IT system improvement project has progressed well over
the year, and cost efficiencies have materialised in line with the business
case. The project is expected to conclude in 2024.
- Over the year, Waard combined all holdings (excluding unit
linked) to one custodian. This will both save costs and enable to us to
better track our financed emissions and progress towards our net zero target.
- Both Waard and Scildon continue to have strong solvency
positions at the end of 2023, inclusive of the use of the volatility
adjustment, with Scildon at 184% and Waard at 353%.
FUTURE PRIORITIES
- Effective management of the closed book run-off in Waard to
enable ongoing dividend payments to Chesnara.
- Complete the IT improvement project and ensure the planned
efficiencies are delivered.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Identify potential capital management actions, focusing on those
that generate the appropriate balance of value and cash generation.
- Support Chesnara in identifying and delivering Dutch
acquisitions.
KPIs (all comparatives have been presented using 2023 exchange rates)
Economic Value - The Netherlands
£m 2019 2020 2021 2022 2023
EcV 217.6 224.3 213.4 218.3 255.1
Cumulative dividends 5.0 5.0 10.2 14.5
Total 217.6 229.3 218.4 228.5 269.9
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 2023
- Scildon has continued to make improvements to its customer
offering through new products and digitalisation options where possible. These
improvements will also reduce the level of physical mail, making all
communications with IFA's and customers digital.
- Scildon retained high customer satisfaction and Net Promotor
Score (NPS) in 2023.
- Through the acquisition of Conservatrix, Waard has safeguarded
policyholder interests and provided certainty to staff. Processes were put
in place to support the contact issues policyholders faced at the start of the
year with many policyholders restarting their premiums in the second half of
the year.
- Waard has also progressed work on digitalising its customer
portal to both make it easier for customers to access documents but also to
reduce the level of printing required, in turn helping the group
decarbonise. This is expected to be launched in 2024.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality and
to enhance and develop existing processes, infrastructure, and customer
experiences.
- Launch the new digital portal in Waard.
KPIs (all comparatives have been presented using 2023 exchange rates)
Scildon client satisfaction rating (out of 10)*
2019 2020 2021 2022 2022
Rating 7.7 7.8 8.1 8.3 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 2023
- Work is progressing to embed IFRS 17 and IFRS 9 processes into
normal finance activity, with significant strides being made during the year,
with this set of results being the first audited set of numbers under the new
accounting standard.
- Both business units have been progressing their sustainability
activity with a significant programme of work expected over 2024.
- Work has started on consideration of the Corporate
Sustainability Reporting Directive (CSRD) which is an EU adopted new directive
on sustainability reporting and we are working to understand the likely
effective date, given the complexities of the legislation.
FUTURE PRIORITIES
- Continue to work to fully embed IFRS 17.
- Progress the implementation of the Corporate Sustainability
Reporting Directive (CSRD).
KPIs (all comparatives have been presented using 2023 exchange rates)
SOLVENCY RATIO: SCILDON 184%; WAARD 353%
Solvency is robust in both businesses, with post-dividend solvency ratios
(inclusive of the volatility adjustment) of 184% and 353% for Scildon and
Waard respectively.
Scildon
£m Solvency Ratio
31 Dec 2022 surplus 60.7 188%
Surplus generation 0.2
31 Dec 2023 surplus 60.9 184%
Waard
£m Solvency Ratio
31 Dec 2022 surplus 64.7 591%
Surplus generation 12.7
31 Dec 2023 surplus (pre-div) 77.4 377%
2023 div (6.9)
31 Dec 2023 surplus 70.5 353%
Note: The 2022 closing solvency ratio for Waard includes additional capital
held in respect of the purchase of Conservatrix, with the acquisition and
business integration completing in 2023.
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 a
realistic market share. New business also helps the business maintain scale
and hence contributes to unit cost management.
INITIATIVES AND PROGRESS IN 2023
- Scildon continues to generate solid new business profits, with a
commercial new business result of £5.4m for 2023 (pre-tax). The market
remains tough with pressure on pricing, but we have a solid base to drive
further growth.
- Underpinning this, Scildon APE and policy count continue to
increase, closing the year with more than 236,000 policies. The market share
for the Scildon term product over 2023 was 10.5% (2022: 10.6%).
- Scildon were awarded a 5-star rating for the second year in a
row 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.
- Scildon continues to look to offer sustainable solutions for
their unit linked proposition.
KPIs (all comparatives have been presented using 2023 exchange rates)
Scildon - term assurance market share %
% Jun 2022 Dec 2022 Jun 2023 Dec 2023
Market share 11.6 10.6 12.1 10.5
Scildon - new business profit
£m 2019 2020 2021 2022 2023
New business profit 7.7 8.6 5.3 6.3 5.4
BUSINESS REVIEW | acquire life and pension businesses
During 2023 we completed the acquisition of the insurance portfolio of
Conservatrix in the Netherlands and entered into a deal in the UK with Canada
Life to transfer its onshore protection business to 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 with deals always giving full regard to Consumer Duty
responsibilities.
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.
TRANSACTIONS IN 2023
CONSERVATRIX
Territory EcV New policies Customer outcomes Risk appetite
NL £21.7m day 1 gain 70,000 Stable future in a well capitalised business In line with existing group
The acquisition of the insurance portfolio of Conservatrix, a specialist
provider of life insurance products in the Netherlands, was completed on 1
January 2023 having been originally announced in July 2022. 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.
The Conservatrix transaction increased the group's EcV by £21.7m on day 1 and
provides further EcV accretion potential from future real world investment
returns and the run-off of the risk margin. The Conservatrix portfolio was
integrated into the Waard business over the course of the year, including
allowing customers the option to restart their premiums on their policies.
CANADA LIFE UK
Territory EcV New policies Customer outcomes Risk appetite
UK £6.7m 47,000 Part VII into CA in 2025, a well capitalised company. In line with existing group
day 1 gain
Chesnara announced the acquisition of the onshore individual protection line
of business of Canada Life UK in May 2023. As a result of the acquisition,
the life insurance and critical illness policies for approximately 47,000
policies will transfer to Chesnara's UK subsidiary, Countrywide Assured plc
("CA plc").
Canada Life UK will reinsure the portfolio to CA plc, effective from 31
December 2022. The consideration as part of the reinsurance agreement was
£9 million, funded from internal group resources, and the transaction
resulted in an immediate day 1 EcV gain of £6.7m.
Customers' policies are expected to formally transfer to CA plc after
completion of a court-approved Part VII transfer. This is following the
successful completion in 2023 of the Part VII transfer of the CASLP entity to
CA plc.
ACQUISITION OUTLOOK
- We continue to see a healthy flow of acquisition opportunities
across the European insurance market.
- 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 and wider business and strategic needs.
- Our expectation is that sales of portfolios will continue and
our strong expertise and knowledge, 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 regulatory licenses.
- We continue to have immediately available acquisition firepower
of over £200m, noting we seek to hold cash reserves to cover costs for 12
months (dividend, coupon and working capital). We will continue to explore
how we can increase our funding capability further, including consideration of
partnerships as well as equity and debt to ensure we can compete for larger
deals.
- Our financing considerations, when looking at new deals, are:
that we operate in our normal operating solvency range of 140 - 160%; we
maintain our investment grade rating through managing our leverage ratio; we
retain liquid resources to cover the dividend, coupon and working capital for
approximately one year; and we continue to have the capacity to finance
smaller transactions without extra fundraising.
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 2023 31 Dec 2022
Own funds 684 605
SCR 333 307
Surplus 351 298
Solvency ratio % 205% 197%
SOLVENCY SURPLUS MOVEMENT*
*PRE INTRAGROUP DIVIDENDS
£m
Group surplus at 31 Dec 2022 298.4
UK 45.1
Movestic (2.6)
Waard 16.2
Scildon 0.2
Chesnara / consol adj (19.1)
Change in T2/T3 restrictions 46.4
Acquisition 8.8
Exchange rates (6.2)
Dividends (36.1)
Group surplus at 31 Dec 2023 351.0
Surplus:
The group has £351m of surplus over and above the capital requirements under
Solvency II, compared to £298m at the end of 2022. The group solvency ratio
has increased from 197% to 205%.
Own Funds:
Own Funds have risen by £115m (pre-dividends). The most material drivers
are the acquisition of the insurance portfolio of Conservatrix in Waard and
the reinsurance of policies from Canada Life in CA, which contributed £32m of
Own Funds on completion, coupled with the reduction in Tier 2 restrictions.
SCR:
The SCR has increased by £26m, owing mainly to a rise in equity risk (due to
the rise in equity markets and symmetric adjustment) and increases in market
and life underwriting SCR from the 2023 acquisitions.
Solvency II background
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds" (OF)
and this is measured in accordance with the rules of the newly adopted
Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital Requirement
(SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an
absolute surplus: OF less SCR.
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and includes a value
for future profits expected to arise from in-force policies.
The Own Funds valuation: A restriction is applied to reduce the aggregate
value of Tier 2 and eligible Tier 3 assets down to 50% of the reported SCR.
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.
The HMT's reforms to Solvency II were laid before parliament on 8 December,
and came into force on 31 December 2023. The reforms updated the risk margin
calculation for CA. We continue to monitor any further proposed changes
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 to take a
route that systemically makes it harder to do business in the UK.
EIOPA has proposed provisional reforms to Solvency II. These reforms need to
be presented to member states and the European Parliament for approval.
We are well capitalised at both a group and subsidiary level. We have
applied the volatility adjustment in Scildon, Waard Leven and CA, 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.
The numbers that follow present the divisional view of the solvency position
which may differ to the position of the individual insurance company(ies)
within the consolidated numbers. Note that year end 2022 figures have been
restated using 31 December 2023 exchange rates in order to aid comparison at a
divisional level.
UK
£m 31 Dec 2023 31 Dec 2022
Own funds (post dividend) 152 135
SCR 103 100
Buffer 21 20
Surplus 29 15
Solvency ratio % 149% 135%
Surplus: £29.4m above board's capital management policy.
Dividends: Solvency position is stated after £35.0m proposed dividend
(2022: £56.0m).
Own Funds: Increased by £51.5m (pre dividend), including the Canada Life
day 1 gain, positive economic experience, Part VII synergies and a decrease in
the risk margin due to the SII reforms.
SCR: Increased by £2.3m primarily due a fall in lapse risk due to the mass
lapse reinsurance, offset by increases as a result of the Canada Life deal,
Part VII synergies and a rise in equity risk capital.
SWEDEN
£m 31 Dec 2023 31 Dec 2022
Own funds (post dividend) 171 169
SCR 117 104
Buffer 23 21
Surplus 31 44
Solvency ratio % 147% 162%
Surplus: £30.9m above board's capital management policy.
Dividends: Solvency position is stated after £7.8m (100 MSEK) proposed
dividend (2022: £11.7m - 150 MSEK).
Own Funds: Increased by £10.1m (pre-dividend) largely owing to positive
economic movements, being offset by operating strain, primarily arising from
adverse lapse experience.
SCR: Increased by £12.7m due to positive equity growth and moderate rise in
currency and lapse risks.
NETHERLANDS - WAARD
£m 31 Dec 2023 31 Dec 2022
Own funds (post dividend) 98 78
SCR 28 13
Buffer 10 5
Surplus 61 60
Solvency ratio % 353% 591%
Surplus: £60.7m above board's capital management policy.
Dividends: Solvency position stated after £6.9m proposed dividend (2022:
£4.3m).
Own Funds: Increased by £28.3m (pre-dividend) largely due to the
Conservatrix deal, coupled with some positive operating items.
SCR: Increased by £14.7m, mainly due to the Conservatrix deal, which has
mostly impacted longevity, lapse and concentration risk.
NETHERLANDS - SCILDON
£m 31 Dec 2023 31 Dec 2022
Own funds (post dividend) 134 129
SCR 73 69
Buffer 55 52
Surplus 6 9
Solvency ratio % 184% 188%
Surplus: £6.2m above board's capital management policy.
Dividends: No foreseeable dividend is proposed (2022: £nil).
Own Funds: Increased by £4.3m due to positive operating variances and new
business profits.
SCR: Increased by £4.1m, chiefly made up of an increase in mortality and
catastrophe risks, offset by an increase in LACDT.
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 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 immediately (where the impacts are calculated on
the cash flows for the life of our portfolios) whereas solvency is often
protected in the short term and, to a certain extent, the longer term due to
compensating impacts on required capital.
Tier 2 debt has 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 also experience a corresponding reduction in base Own Funds and Own Funds
relating to Tier 2 capital. The total surplus is now more exposed to
downside risks than before the tier 2 debt but, importantly, the Tier 2 debt
itself has created more than sufficient additional headroom to accommodate
this.
Whilst cash generation has not been shown in the diagrams below, the impact of
these sensitivities on the group's solvency surplus has a direct read across
to the immediate impact on cash generation.
Solvency ratio Solvency surplus EcV
Impact % Impact range £m Impact range £m
20% sterling appreciation 10.7% (33.4) to (23.4) (69.2) to (59.2)
20% sterling depreciation (16.1)% 3.8 to 13.8 77.2 to 87.2
25% equity fall 7.9% (59.1) to (29.1) (86.2) to (66.2)
25% equity rise (15.4)% 2.5 to 32.5 70.3 to 90.3
10% equity fall 3.4% (20.8) to (10.8) (34.6) to (24.6)
10% equity rise (5.5)% 3.5 to 13.5 27.3 to 37.3
1% interest rate rise 5.7% 3.1 to 13.1 0.0 to 6.8
1% interest rate fall (8.0)% (26.3) to (6.3) (18.8) to (3.8)
50bps credit spread rise (5.1)% (22.1) to (12.1) (17.7) to (12.7)
25bps swap rate fall (4.5)% (15.6) to (5.6) (13.5) to (3.5)
10% mass lapse 2.7% (21.2) to (11.2) (35.8) to (25.8)
1% inflation (10.2)% (33.9) to (23.9) (29.4) to (19.4)
5% mortality increase (3.2)% (13.7) to (8.7) (13.7) to (8.7)
INSIGHT*
20% sterling appreciation: A material sterling appreciation reduces the
value of surplus in our overseas divisions and any overseas investments in our
UK entities, however this is partially mitigated by the group currency hedge
so the overall impact on solvency is reduced.
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:
-£20.1m to the SCR, 25% equity rise: +£30.2m 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 fall has a more adverse effect
on group economic value than an interest rate rise. Group solvency is 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 (above existing valuation 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
Our key performance indicators provide a good indication of how the business
has performed in delivering its three strategic objectives.
Summary of each KPI:
CASH GENERATION
GROUP CASH GENERATION excluding the impact of acquisitions £32.5M 2022:
£82.7M
DIVISIONAL CASH GENERATION excluding the impact of acquisitions £50.1M 2022:
£61.9M
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 2023
UK 45.0
Sweden (7.0)
Netherlands - Waard 15.3
Netherlands - Scildon (3.1)
Divisional cash generation 50.1
Other group activities (17.6)
Group cash generation 32.5
- Group cash generation was £32.5m for the year (2022: £82.7m)
and contains a material adverse impact from the symmetric adjustment of
£13.1m (2022: +£28.2m), which is a key component of the year on year
movement.
- The divisional result, despite the negative impact of the
symmetric adjustment, was again strong, with £50.1m reported for the year.
The UK division again underpinned divisional cash with £45.0m generated,
while there was also very positive contributions from Waard. Economic factors
supported the value growth in the UK, while cash generation in the Netherlands
was driven by the operating profits, offsetting the loss in Sweden owing to
the market driven rise capital requirements.
- The central group result includes the adverse impact of some
non-recurring development items (including M&A), central overheads and
Tier 2 coupon payments. The FX hedge had a positive cash impact of £2.5m,
offsetting some of the adverse FX movements experienced on consolidation of
divisional results.
IFRS
PRE-TAX PROFIT: £1.8M 2022: PRE-TAX LOSS £62.1M
TOTAL COMPREHENSIVE INCOME: £10.3M 2022: £26.1M LOSS
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. We believe that, for Chesnara, the IFRS
results in isolation do not recognise the wider financial performance of the
business, hence the use of supplementary Alternative Performance Measures to
enhance understanding of financial performance.
Risks
IFRS 17 is effective from 1 January 2023 and has been applied in the financial
statements in Section C. As a result, several accounting policies and
significant judgements and estimates have changed. IFRS 17 introduces a new
concept of insurance revenue which aims to reflect the insurance contract
services provided in each period in the income statement by establishing an
explicit measure of future profit (the Contractual Service Margin (CSM)) and
provides a framework as to how the CSM is recognised in a given period. The
'investment result' is presented separately from the 'insurance result' on the
face of the income statement. Market volatility impacting the surplus assets
will result in volatility in investment result and the IFRS pre-tax
profit/(loss). Foreign currency fluctuations will further affect total
comprehensive income.
£m 2023
Net insurance service result (5.1)
Net investment result 71.7
Fee, commission and other operating income 89.4
Other operating expenses (149.9)
Financing costs (11.0)
Profit arising on business combinations and portfolio acquisitions 6.7
Profit before income taxes 1.8
Tax 16.9
Forex & other (8.4)
Total comprehensive income 10.3
- Profit before tax for the year of £1.8m includes a net
insurance service loss of £5.1m and an investment result of £71.7m (2022:
£13.3m profit and £39.0m loss respectively).
- The negative insurance service result has been driven primarily
by adverse experience and assumption changes on lines of business, termed
'onerous contracts', for which the CSM has been extinguished meaning such
losses must be taken to the P&L rather than to the CSM. In 2022 this
effect was much more benign.
- The positive investment result in the year, is reflective of
investment market recoveries with improved equity returns and falling yields
being the main contributors. The comparative period in 2022 was adversely
impacted by falling equity markets and rising yields.
ECONOMIC VALUE (EcV)
£524.7M 31 DECEMBER 2022: £511.7M
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 2023.
£m
EcV 31 Dec 2022 511.7
EcV earnings before acquisitions 30.7
Acquisitions 28.4
Forex (10.8)
Pre-dividend EcV 31 Dec 2023 560.1
Dividends (35.4)
EcV 31 Dec 2023 524.7
- Economic Value increased 12% in 2023 prior to the impact of
dividend payments and FX losses (arising on consolidation).
- Growth has been delivered through a range of areas, with strong
new business profits, economic returns and significant gains through the
acquisitions delivered in the year. While economic profits form a material
part of the result, economic conditions have meant it was still a relatively
modest period for economic growth. The result also includes pleasing operating
profits in the Dutch divisions, as well as the adverse impact of some
exceptional non-recurring central costs. These factors combined, give further
reassurance of the robustness of the group and provides confidence of future
growth under more beneficial economic conditions.
ECV EARNINGS
£59.1M (including the impact of acquisitions) 2022: £84.7M LOSS
What is it?
In recognition of the longer-term nature of the group's insurance and
investment contracts, supplementary information is presented that provides
information on the Economic Value of our business.
The principal underlying components of the Economic Value result are:
- The expected return from existing business (being the effect of
the unwind of the rates used to discount the value in-force);
- Value added by the writing of new business;
- Variations in actual experience from that assumed in the opening
valuation;
- The impact of restating assumptions underlying the determination
of expected cash flows; and
- The impact of acquisitions.
Why is it important?
A different perspective is provided in the performance of the group and on the
valuation of the business. Economic Value earnings are an important KPI as
they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
have delivered against all three of our core strategic objectives. This
includes new business profits generated from writing profitable new business,
Economic Value profit emergence from our existing businesses, and the Economic
Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors,
including those highlighted within our principal risks and uncertainties and
sensitivities analysis. In addition to the factors that affect the IFRS
pre-tax profit and cash generation of the group, the EcV earnings can be more
sensitive to other factors such as the expense base and persistency
assumptions. This is primarily due to the fact that assumption changes in
EcV affect our long-term view of the future cash flows arising from our books
of business.
£m 2023
Total operating earnings (7.7)
Economic earnings 42.9
Other (4.5)
Acquisitions 28.4
Total EcV earnings 59.1
- Economic earnings were the largest component of the result, with
strong contributions from the UK and Swedish divisions, predominantly through
the positive impact of equity market growth on expected future fee income in
our unit linked policyholder funds. The Dutch divisions reported smaller
economic losses, with different economic factors being less beneficial and
offsetting one another to a certain extent.
- The operating loss of £7.7m has been impacted by a number of
one-off items, including investing in our M&A activity and future growth
of the group. It is pleasing to reporting strong operating profits from the
Dutch division, reflecting a marked improvement on prior years.
- Acquisitions in the year added £28.4m of growth, with £21.7m on
the Conservatrix portfolio in the Netherlands and a further £6.7m on the
protection portfolio of Canada Life in the UK.
- The "Other" category includes risk margin movement, tax impacts and
the cost of Tier 2 coupon payments.
CASH GENERATION
There is no reporting framework defined by the regulators for cash generation
and there is therefore inconsistency across the sector. We define cash
generation as being the movement in Solvency II own funds over and above the
group's internally required capital, which is based on Solvency II rules.
GROUP CASH GENERATION excluding the impact of acquisitions
£32.5M 2022: £82.7M
DIVISIONAL CASH GENERATION
£50.1M 2022: £61.9M
Cash generation in 2023 was impacted, at a divisional level, by adverse
movement in the symmetric adjustment (£13.1m - 2022: +£28.2m) following
equity market growth, while the group result also contains the impact of
exceptional and non-recurring central costs. 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'.
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.
- At a group level the result includes complex consolidation
adjustments relating to buffers, which can compromise how well the figure
truly reflects performance.
2023 £m 2022 £m
Movement in Movement in management's capital requirement Forex Cash Cash generated / (utilised)
Own Funds impact generated / (utilised)
UK 45.6 (0.6) - 45.0 40.8
Sweden 9.8 (14.9) (1.9) (7.0) 16.1
Netherlands - Waard Group 14.4 2.4 (1.5) 15.3 8.4
Netherlands - Scildon 4.3 (7.2) (0.2) (3.1) (3.4)
Divisional cash generation / (utilisation) 74.1 (20.4) (3.7) 50.1 61.9
Other group activities (27.1) 10.1 (0.6) (17.6) 20.8
Group cash generation / (utilisation) 47.1 (10.3) (4.3) 32.5 82.7
GROUP
- Other group activities include consolidation adjustments as well
as central costs and central SCR movements.
- Central costs include Tier 2 debt coupon payments (c£10m) and
uncovered central costs of (c£14m), of which a large proportion relates to
exceptional non-recurring development expenditure, such as IFRS 17, M&A
activity and strengthening of the group governance resource.
UK
- The UK division has continued to be the largest contributor to
cash generation, with £45.0m reported in the year, delivered mainly through
Own Funds growth. This has included the positive impact of investment market
performance; the benefit of a reduction in the risk margin as a result of the
first phase of UK Solvency II reforms and some synergies as a result of the
Part VII transfer of CASLP into CA on 31 December 2023. The cash result also
benefitted from a reduction in capital requirements during the year, which
included the positive impact of a new mass lapse reinsurance arrangements and
the general run off of the business, offsetting factors such as the need to
hold more capital as a result of equity market growth, including the symmetric
adjustment.
SWEDEN
- Movestic has reported cash utilisation of £7.0m for 2023, as
Own Funds growth was exceeded by a larger increase in capital requirements.
On the Own Funds side, growth was delivered primarily through the positive
impact of equity market movements, although this was offset by some negative
operating items, including the impact of ongoing challenges in outward policy
transfers. The equity market-driven growth in Own Funds has resulted in an
increase in market-risk related capital requirements, including the impact of
the symmetric adjustment, which increased significantly since the start of the
year. The divisional result also includes a foreign exchange loss on
consolidation, owing to a slight weakening of the krona versus sterling over
the year.
NETHERLANDS - WAARD
- Waard recorded pleasing cash generation of £15.3m in 2023,
delivered largely through value growth. Strong operating profits benefited
from a reduction in future expenses, benefitting from the economies of scale
arising from the addition of the Conservatrix portfolio. The result also
contains a reduction in capital requirements, supported by interest rate
movements and the reduction in future expenses. Additionally, the divisional
result bears the impact of sterling appreciation versus the euro during 2023,
leading to a small foreign exchange loss on consolidation.
NETHERLANDS - SCILDON
- Scildon has posted £3.1m of cash utilisation for the year.
Own Funds growth of £4.3m was driven by positive operating profits,
offsetting economic losses. Operating profits include the positive impacts of
new business profits and cost efficiencies, while the negative effect of
falling interest rates was the main component of the economic loss on Own
Funds. The negative cash result was underpinned by an increase in capital
requirements, outweighing the value growth. Rises in life risk and equity risk
capital, driven by equity growth and the consequential rise in the symmetric
adjustment, offsetting the positive impact of lower interest rates.
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. The results excluding such items are deemed to better reflect the
inherent commercial outcome (commercial cash generation).
COMMERCIAL CASH GENERATION excluding the impact of acquisitions
£53.0M 2022: £46.6M
UK SWEDEN NETHERLANDS NETHERLANDS SCILDON DIVISIONAL GROUP ADJ TOTAL
WAARD TOTAL
Base cash generation 45.0 (7.0) 15.3 (3.1) 50.1 (17.6) 32.5
Symmetric adjustment 3.0 7.3 0.5 1.3 12.2 0.9 13.1
WP restriction look through 0.5 - - - 0.5 - 0.5
Temporary tax impacts on the SCR - - - 10.0 10.0 (3.2) 6.8
Commercial cash generation 48.5 0.3 15.8 8.2 72.8 (19.8) 53.0
Commercial cash generation of £53.0m was primarily supported by contributions
of £48.5m from the UK business and £24.0m from the Netherlands. All
overseas divisions have also generated cash, even though returns have been
dampened by the depreciation of the euro and Swedish krona currencies against
sterling. The FX hedge that was implemented in 2022 and renewed again in
2023, has offset some of these currency impacts, providing a total cash
benefit of £2.5m over the year.
UK
The UK result primarily comes from investment market gains, influenced by
equity gains and falling yields, alongside the beneficial impact of the
implementation of the mass lapse reinsurance, the SII risk margin reforms and
some synergies arising from the Part VII transfer of CASLP into CA on 31
December 2023. This offset some expense strengthening, which largely
represents positive investment in the future and supports the growth of the
division.
The commercial cash outcome continues to illustrate that the UK remains at the
heart of the cash generation model.
SWEDEN
The Swedish result, after removing a loss caused by the increase in the
symmetric adjustment, was relatively neutral. The economic result is
positive, principally due to equity market gains, offset by the depreciation
of Swedish krona against sterling. The economic gains are offset by adverse
lapse experience, fee and rebate income pressure and a new business strain.
WAARD
Waard's positive cash result is supported by the positive post-acquisition
impact of integrating Conservatrix into the business, coupled with the impact
of positive expense assumption changes, slightly offset by an expense
operating variance. The result also benefits from economic impacts, albeit to
a lesser extent, predominantly owing to falling yields. The capital that plc
injected to support Conservatrix liabilities has been recycled back into
surplus.
SCILDON
Scildon's commercial cash generation reflects a combination of positive
economic impacts, largely owing to falling yields, alongside some negative
factors including adverse changes in lapse and mortality assumptions. The
commercial cash result, unlike base cash generation, benefits from a positive
increase in the amount of risk capital that is shielded by tax.
GROUP
The central group result is driven by uncovered group level expenditure,
resulting in a reduction in Own Funds. The central expenses include, Tier 2
debt coupon payments and a range of development activity, such as M&A
programmes, IFRS 17, as well as investment in the business to support the
future growth of the group. These factors outweigh investment returns, owing
to falling yields, and an overall £2.5m cash generation benefit from the FX
hedge.
EcV EARNINGS including the impact of acquisitions
£59.1M 2022: £84.7M LOSS
The EcV earnings of the group reflect the benefits of delivering our
acquisition strategy, coupled with positive economic earnings arising in
volatile markets.
Analysis of the EcV result in the period by earnings source:
£m 31 Dec 31 Dec
2023 2022
Expected movement in period 14.9 (1.3)
New business 4.4 8.0
Operating experience variances 0.8 (19.0)
Operating assumption changes (27.8) (14.5)
Total operating earnings (7.7) (26.8)
Total economic earnings 42.9 (109.1)
Other non-operating variances (11.9) (2.6)
Risk margin movement 1.1 20.4
Tax 6.3 12.0
Acquisitions 28.4 21.4
EcV earnings 59.1 (84.7)
Analysis of the EcV result in the year by business segment:
£m 31 Dec 31 Dec
2023 2022
UK 31.4 (24.6)
Sweden 6.8 (37.1)
Netherlands 19.5 (29.4)
Group and group adjustments (27.0) (15.0)
Acquisitions 28.4 21.4
EcV earnings 59.1 (84.7)
Total economic earnings: The economic result continues to be the largest
component of the total EcV earnings, with a profit of £42.9m in the year.
The result is in line with our reported sensitivities and is driven by the
following key market movements:
Rising equity indices:
- FTSE All Share index increased by 3.7% (year ended 31 December 2022:
decreased by 3.2%)
- Swedish OMX all share index increased by 15.6% (year ended 31 December
2022: decreased by 24.6%)
- The Netherlands AEX all share index increased by 13.4% (year ended 31
December 2022: decreased by 15.0%)
Credit spreads - mixed news:
- UK AA corporate bond yields decreased to 0.71% (31 December 2022
1.04%)
- European AA credit spreads increased to 0.63% (31 December 2022:
0.29%)
Decreasing yields:
- 10-year UK gilt yields have decreased to 3.64% (31 December 2022:
3.82%
- 10 year euro swap yield have decreased to 2.49% (31 December 2022:
3.20%)
The EcV results continue to illustrate how sensitive the results are to
economic factors. While investment market growth has been positive compared
to the prior year, it was still relatively muted versus previous periods of
growth. As outlined in the past, we continue to be of the view that short
term volatility has limited commercial impact on the business and of more
importance is the fact that, over the longer term, we expect EcV growth in the
form of real world investment returns. Total economic earnings: The economic
result continues to be the largest component of the total EcV earnings, with a
profit of £42.9m in the period. The result is in line with our reported
sensitivities and is driven by the following key market movements:
Total operating earnings: The operating loss for the year reflects a
significant reduction compared with last year, continuing the encouraging
trend of improvement. A number of the negative components that are
non-recurring in nature represent positive investment in the future and
support the growth of the group. Examples of key items in 2023 include:
- 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.
- Tier 2 debt servicing costs - EcV does not recognise the benefit of
the capital or the potential for future value adding transactions that it
provides.
Acquisitions: M&A activity continued to be a source of growth and
resulted in £28.4m of immediate EcV earnings in 2023. The incremental value
was delivered by the Conservatrix insurance portfolio acquisition (1 January
2023) and also a UK protection portfolio reinsurance arrangement with Canada
Life (16 May 2023), under the Waard Group and CA plc respectively.
Looking at the results by division:
UK: The UK division reported EcV earnings of £31.4m (excluding
acquisitions), with economic growth and the synergies from the Part VII of
CASLP into CA offsetting an operating loss. The operating result was largely
driven by non-recurring activity, as outlined above, relating to the expansion
of the division and investment in the business to facilitate future growth.
This outweighed positive results on fee income (due to lower policy attrition)
and other decrements. The economic gains of £23.1m arose primarily as a
result of the impact of equity market growth in unit linked funds, which
increases our projected future fee income. While the economic profit was
relatively subdued, it remains a significant improvement on the prior year.
Sweden: Movestic posted earnings of £6.8m for 2023. The division
benefitted from the impact that equity market growth had on its unit linked
funds, underpinning total economic earnings of £18.6m. This more than
outweighed an operating loss, due primarily to adverse transfer activity.
Lower fee and commission income, owing to pricing pressures, and suppressed
fund rebate income also contributed. Modest new business profits (on an EcV
basis) were £0.9m (2022: £1.8m), reflective of the continued competitive
market conditions and margin pressures.
Netherlands: The Dutch division has reported growth of £19.5m in the year,
with positive operating profits exceeding smaller economic losses in both
businesses. The operating result in Scildon of £8.7m represents a
significant upturn versus the losses reported in the prior year and includes
EcV new business profits £1.7m. Economic losses of £3.3m were primarily
the consequence of falling interest rates and flattening yield curves. Waard
has reported EcV growth of £16.0m, also driven by operating profits. This
included the benefit of some changes in expense assumptions, some positive
news in relation to policy lapses and the impact of reigniting premiums on
paused policies within the Conservatrix portfolio. Despite positive bond
returns exceeding expectations, the economic loss (£1.3m) stemmed from a
number of factors, primarily the negative impact of the fall in interest rates
and declining yields on the business's future liabilities, with subdued equity
performance also contributing.
Group: This component contains a variety of group-related expenses and
includes: non-maintenance related costs (such as acquisition activity); the
costs of the group's IFRS 17 programme; and Tier 2 debt interest costs, offset
by positive investment returns in the period.
EcV
£524.7M 2022: £511.7M
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 2023 to 31 Dec 2023:
£m
EcV 31 Dec 2022 511.7
EcV earnings before acquisitions 30.7
Acquisitions 28.4
Forex (10.8)
Pre-dividend EcV 560.1
Dividends (35.4)
EcV 31 Dec 2023 524.7
EcV earnings: EcV profits excluding acquisition impacts of £30.7m have been
delivered in 2023, supported by economic profits, with significant growth also
delivered through acquisitions.
Acquisitions: The group has delivered two deals during 2023; the
Conservatrix portfolio acquisition and the reinsurance arrangement with Canada
Life. This has resulted in day 1 EcV gains of £21.7m and £6.7m
respectively.
Foreign exchange: The closing EcV of the group reflects a foreign exchange
loss in the period, which is a consequence of sterling appreciation against
both the Swedish krona and also the euro.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £35.4m were paid during the year, representing the
final dividend from 2022 and interim dividend for 2023.
EcV by segment at 31 Dec 2023
£m
UK 191.4
Sweden 189.6
Netherlands 255.1
Other group activities (111.4)
EcV 31 Dec 2023 524.7
The above table shows that the EcV of the group is diversified across its
different markets.
EcV to Solvency II:
£m
EcV 31 Dec 2023 524.7
Risk margin (23.7)
Contract boundaries 0.4
Tier 2 debt 200.0
RFF & Tier 2/3 restrictions (0.8)
Deferred tax asset adjustment 6.6
Dividends (23.5)
SII Own Funds 31 Dec 2023 683.7
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 applying to our European businesses 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% (UK: 4%) cost of capital to a 3.25% cost of capital. On our UK
business, the Solvecny II reform risk tapering is also reversed.
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 £23.5m 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 as debt.
Under SII this debt is recognised at fair value, while for EcV this remains at
book value.
Tier 3: Under Solvency II the eligibility of Tier 3 Own Funds is restricted in
accordance with regulatory rules. For EcV the Tier 3 Own Funds are recognised
at a deemed realistic value.
IFRS
The group IFRS results are reported under IFRS 17 for the first time in the
annual financial statements. The following information provide an introduction
to IFRS 17 and how it impacts Chesnara, together with the IFRS results for the
year ended 31 December 2023 and comparative figures for 2022, which have been
restated under IFRS 17.
INTRODUCTION TO IFRS 17
What is IFRS 17?
IFRS 17 is the new accounting standard for recognising, measuring and
disclosing insurance contracts. This is effective for the first time in
these financial statements and replaces the previous standard, IFRS 4. IFRS
17 has been implemented as if it had always been in place and so previous
results have been restated.
IFRS 17 has been introduced with the aim of allowing greater comparability of
results between insurance companies and the wider market.
How does IFRS 17 impact Chesnara?
IFRS 17 'insurance contracts' represents an accounting change that does not
impact the fundamentals of the business. Specifically, the implementation of
IFRS 17 does not impact the growth ambition, value or cash generation of the
group. There are no changes to the solvency ratio, cash generation or
economic value of the group. There are also no changes to the dividend
expectations or strategy and capability for future M&A.
IFRS 17 only applies to those policies of the group that are classified as
'insurance contracts', which equates to 42% of the group's total policyholder
liabilities at the end of December 2023. The remaining contracts are
classified as investment business, which are valued under IFRS 9 'Financial
Instruments', which is also effective for the group for this period. Under
IFRS 9, there is no impact to the results from how these liabilities have been
previously valued under IAS 39. A key difference between the measurement of
contracts under IFRS 9 and IFRS 17 is that investment contracts equate to unit
value under IFRS 9 and their value therefore does not take into account future
profit, whereas insurance contracts include the contractual service margin
(CSM) and the risk adjustment that reflects the uncertainty around the amount
and timing of the cash flows.
How are profits earned under IFRS 17?
A fundamental concept introduced by IFRS 17 is the contractual service margin
(CSM). This represents the unearned profit that an entity expects to earn on
its insurance contracts as it provides insurance services.
The CSM embodies two principles:
1. An insurer must spread expected profits for profitable business
written over time.
This spread profit forms the CSM which can only be recognised in the income
statement as and when insurance services are provided. The CSM consequently
represents the expected amount of profits that have not yet been earned from
the insurance business of the group.
2. An insurer must recognise the expected losses for loss-making
business immediately.
An insurer cannot establish a "negative CSM" and defer loss recognition into
the future.
IFRS BALANCE SHEET
As at 31 December 2022 there is a £51m increase in IFRS net equity under IFRS
17 compared with the previously stated IFRS 4 position. Total net equity as
at 31 December 2023 is £360m and we have a CSM, which represents unrecognised
future insurance profits, of £167m (net of reinsurance). The adoption of
IFRS 17 has affected our gearing ratio, and in line with Fitch, we have added
back the net of tax CSM to the equity denominator in the calculation. On
this basis the gearing ratio as at 31 December 2023 is 29.2% which is
significantly lower than the most recent ratio reported prior to IFRS 17 (31
December 2022: 37.6%).
Some analysis has been provided below on the IFRS balance sheet of the group
on an IFRS 17 basis:
HOW IFRS 17 IMPACTS NET EQUITY AT DECEMBER 2022
£m
IFRS 4: shareholder equity 31 Dec 2022 333.1
Items derecognised (intangible assets net of deferred tax) (30.9)
Impact of IFRS 17 & IFRS 9 remeasurement 226.0
Creation of risk adjustment (31.3)
Creation of CSM (112.7)
IFRS 17: shareholder equity 31 Dec 2022 384.1
Under IFRS 17, the restated shareholder net equity at 31 December 2022 has
increased by £51m compared with as previously reported.
The combined impact of remeasuring the future cash flows for insurance and
reinsurance contracts under IFRS 17 and revaluing corresponding assets under
IFRS 9 at that date has added £226m of growth. Offset against this is the
recognition of liabilities for the Risk Adjustment (£31m) and the CSM
(£113m), representing a store of future profits that will be released to the
income statement as the associated future insurance services are provided.
A consequence of applying IFRS 17 is that the group has also derecognised
intangible assets and their associated tax balances in respect of insurance
contracts (£31m). These assets previously represented the immediate
recognition of future profits on insurance business, but under IFRS 17 profits
are now deferred and reflected in the CSM.
HOW THE CSM HAS MOVED IN THE PERIOD
£m
CSM: 1 Jan 2023 112.7
Interest accreted 3.9
New business 9.4
Acquisition 57.2
Experience & assumption changes 6.1
CSM release (19.8)
FX (3.0)
CSM: 31 Dec 23 166.5
The group has added £54m of CSM (future profits) in 2023.
The increase is largely driven by the two deals in the period, with the
Conservatrix portfolio acquisition adding £46m and the Canada Life
arrangement adding £11m.
The movement in the period also includes:
A £20m reduction which reflects the release to profit in the period as the
insurance services are provided and £9m of new business CSM, reflecting the
future profits arising on profitable new business written in the period.
Other smaller movements including the impact of foreign exchange, changes in
assumptions and the "interest" on unwinding the discounting that is embedded
within the opening CSM valuation.
CSM values are shown net of reinsurance but gross of tax. When calculating the
IFRS capital base a net of reinsurance and net of tax figure is used. The
equivalent net of reinsurance and tax movement of CSM during 2023 is £42m.
HOW DOES IFRS 17 COMPARE TO SOLVENCY II AND ECV?
A lot of the principles and underlying technical decisions are consistent
across EcV and IFRS, as they are based on common foundations; however, there
is one fundamental difference in how investment contracts are valued. For
investment contracts, expected future profits on existing policies are not
recognised in the IFRS balance sheet, with profits being reported as they
arise; this is in contrast to EcV, where they are fully recognised on the
balance sheet, subject to contract boundaries.
As such, at Chesnara, we believe that due to the hybrid nature of the
business, EcV and Solvency II, alongside cash generation, continue to give a
more holistic view of the financial dynamics of the group and are therefore
the key metrics that management use to manage the business.
HOW DOES IFRS 17 IMPACT LEVERAGE
The positive impact of IFRS 17 on net equity has been beneficial to the
group's gearing ratio. Rating agencies will be revisiting their definitions
of gearing for insurance groups as a result of IFRS 17, and in line with
guidance from Fitch, we have added back the net of tax CSM to the equity
denominator in the calculation. On this basis, the gearing of the group as
at 31 December 2023 was 29.2%.
IFRS INCOME STATEMENT
IFRS PRE-TAX PROFIT
£1.8M 2022: £62.1M LOSS
IFRS TOTAL COMPREHENSIVE INCOME
£10.3M 2022: £26.1M LOSS
Analysis of IFRS result between insurance service and investment results:
31 Dec 23 31 Dec 22
£m £m
Net insurance service result (5.1) 13.3
Net investment result 71.7 (39.0)
Fee, commission and other operating income 89.4 59.6
Other operating expenses (149.9) (100.8)
Financing costs (11.0) (10.5)
Profit arising on business combinations and portfolio acquisitions 6.7 15.4
Profit before income taxes 1.8 (62.1)
Income tax (charge)/credit 16.9 28.4
Profit for the period after tax 18.7 (33.7)
Foreign exchange (loss)/gain (7.8) 6.9
Other comprehensive income (0.6) 0.7
Total comprehensive income 10.3 (26.1)
Movement in IFRS capital base
Opening IFRS capital base 469.2 533.8
Movement in CSM (net of reinsurance and tax) 42.4 (5.4)
Total comprehensive income 10.3 (26.1)
Other adjustment made directly to net equity 0.9 1.2
Dividend (35.4) (34.3)
Closing IFRS capital base 487.4 469.2
IFRS REPORTING CATEGORY INSIGHT
Net insurance service result The net insurance service result of £5.1m loss can be broken down into the
following elements:
- gains from the release of risk adjustment and CSM of £23.3m (2022:
£19.8m). These gains represent a healthy and consistent source of future
profits for the group.
- losses of £28.4m (2022: £6.5m) caused by a combination of experience
and loss component impacts, where portfolios of contracts with no CSM have
suffered adverse impacts that would otherwise be offset in the balance sheet
if the CSM for the portfolio was positive.
The key driver behind the experience and loss component impact in the year is
adverse non-economic assumption changes (£25.1m loss). This should not be
considered in isolation however as there are corresponding offsets in the net
investment result due to the effect of locked in discount rates (£11.9m) and
also to the CSM in the balance sheet (£9.2m) as for some portfolios the
expense assumption changes created a positive impact to the CSM.
Under IFRS 17 adverse impacts on portfolios in a loss component position
cannot be offset with favourable impacts on other portfolios, thus creating an
asymmetric effect where losses on some portfolios are recognised in the income
statement but corresponding gains go to the CSM on the balance sheet.
The net insurance service result comprises the revenue and expenses from
providing insurance services to policyholders and ceding insurance business to
reinsurers and is in respect of current and past service only. Assumption
changes, that relate to future service, are therefore excluded from the
insurance result (as they adjust the CSM), unless the CSM for a given
portfolio of contracts falls below zero; thereby in a 'loss component'
position. Economic impacts are also excluded from the insurance service
result.
Movement in CSM During the period to 31 December 2023, the pre-tax CSM has increased by
£53.8m to £166.5m. The key components of this increase are a £57.2m
addition to the CSM from the group's two acquisitions in the period and £9.4m
of additional CSM arising from new business. These amounts are offset by
£19.8m released to the income statement. This remaining CSM will be earned
over the coverage period of the policies to which it relates, and the expected
earnings pattern is such that after 10 years more than 40% will remain to be
earned.
The movement in CSM is important to consider alongside the income statement.
New CSM represents future profits that are expected to be released to the
income statement over time and whilst a lot of the costs associated with
generating this new CSM are recognised in the year, the expected profit is
deferred over the life of the products.
Net investment result The positive investment result in the year, is reflective of investment market
recoveries with improved equity returns and falling yields being the main
contributors. The comparative period in 2022 was adversely impacted by
falling equity markets and rising yields.
The effect of Locked in Discount Rates has contributed £12.9m, largely offset
by loss component increases in insurance service result.
The net investment result contains the investment return earned on all assets
together with the financial impacts of movements in insurance and investment
contract liabilities.
Fee, commission and other operating income Fee, commission and other operating income shows an improvement on the 2022
comparative, but this is in part as a result of increased fee income in the
form of yield tax deducted from policyholders in Movestic (£18m in 2023
compared to £8m prior year) as a result of improving economic factors, with a
corresponding offset within other operating expenses. Increased returns from
assets under management in respect of investment business in Sweden and the UK
further contributed to the increase in fee income as did the fact that the
current year includes a full twelve months of fee income generated by CASLP
within the UK.
The most significant item in this line is the fee income that is charged to
policyholders in respect of the asset management services provided for
investment contracts. There is no income in respect of insurance contracts ion
this line, as this is all now reported in the insurance result
Other operating expenses The expenses incurred in 2023 are higher than in 2022, with the main reasons
as follows:
- In the UK, the AVIF for CASLP has been impaired by £21.0m due to a
combination of adverse persistency over 2023, coupled with a change in
management's view of assumed future investment returns. This is largely offset
in the net result by a corresponding deferred tax credit of £14.9m.
- In Movestic, the expense in respect of the yield tax on policyholder
funds has increased by £10m with the offset reported in fee, commission and
other operating income as stated above.
- Operating expenses have increased in the UK and Dutch divisions with
the acquisition of CASLP (which only included eight months of post-acquisition
results in 2022) and Conservatrix (which completed on 1 January 2023).
Furthermore, transition project costs of £4.6m have been recognised in the UK
which in due course will lead to a lower operating costs in the future.
- The parent company has also seen an increase in expenses, due to
project related expenditure, investment in business development and
strengthening of the central governance oversight team.
Other operating expenses consist of costs relating to the management of the
group's investment business, non-attributable costs relating to the group's
insurance business and other certain one-off costs such as project costs.
Other items of note are the amortisation of intangible assets in respect of
investment business and the payment of yield tax relating to policyholder
investment funds in Movestic, for which there is a corresponding income item
within the fee income line.
Financing costs This predominantly relates to the cost of servicing our Tier 2 corporate debt
notes which were issued in early 2022. Further details can be found in Note
D5 of the financial statements.
Profit arising on business combinations and portfolio acquisitions On 1 January 2023, Chesnara successfully completed the acquisition of the
insurance portfolio of Conservatrix, a specialist provider of life insurance
products in the Netherlands. This gave rise to a day 1 gain of £6.7m.
Further details can be found in Note I8 of the financial statements.
Foreign exchange The IFRS result of the group reflects a foreign exchange loss in the period, a
consequence of sterling appreciation, particularly against the euro.
Other comprehensive income This represents the impact of movements in the valuation of land and buildings
held in our Dutch division.
Income tax In 2022, the large pre-tax losses generated deferred tax credits, particularly
in the UK, in respect of investment and trading losses. The tax charge in
Income tax consists of both current and deferred taxes. the current year to date is similarly impacted by deferred tax movements on
investments, more than offset by the impact of the AVIF impairment (£15m).
Additionally on 31 December 2023, the insurance business of CASLP Ltd was
transferred to Countrywide Assured plc. Consequently, previously
unrecognised losses of Countrywide Assured plc have been recognised as
deferred tax assets at 31 December 2023. This has resulted in a £13m
additional tax asset being recognised at the balance sheet date.
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 Senior Leadership teams and 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 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 and divisions
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.
Risk 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, with
culture and processes at its heart, and to create a holistic, transparent and
focused approach to risk identification, assessment, management, monitoring
and reporting.
On the recommendation of the Audit & Risk Committee 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.
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. Senior Management are responsible for
the day to day implementation of the Risk and Control Board Policies. Subject
to the materiality of changes, 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 on the recommendation of the Audit &
Risk Committee 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 relevant
boards, 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.
The primary objective of the ORSA is to support the company's strategic
decision-making, by providing insights into the company's risks profile over
the business planning horizon. Effective ORSA reporting supports the Board, in
its role of protecting the viability and reputation of the company, reviewing
and challenging management's strategic decisions and recommendations.
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.
CLIMATE CHANGE RISK WITHIN CHESNARA'S RISK FRAMEWORK
Climate change is not recorded as a standalone principal risk. Instead, the
risks arising from climate change are integrated through existing
considerations and events within the framework. The following information 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's solvency position is not currently materially exposed to climate
change risk. However, Chesnara is not complacent about the wider risks arising
from climate change and the broader sustainability agenda, including
strategic, reputational and operational risks, some of which are material
risks for the group.
GEOPOLITICAL RISK
Geopolitical risk remains high, largely driven by the continuing wars in
Ukraine and more recently in the Middle East, with consequent impacts for
economic and financial stability as well as the potential to increase cyber
risk. The risk information that follows includes specific commentary where
appropriate.
In 2024, more than 40 countries, accounting for over 40 per cent of the world,
will hold national elections, making it the largest year for global democracy.
The UK and European Union are also scheduled to hold elections for their
respective parliaments.
MACROECONOMIC VOLATILITY
The global economy remains volatile albeit with inflationary pressures reduced
with 2022 and 2023 interest rate rises by Central Banks seemingly effective at
moving inflation back towards their long term targets. Uncertainty remains
regarding the future path of interest rates with many economists forecasting
Central Bank rate cuts to boost economic growth in the short term.
Economic uncertainty remains a prominent emerging risk for the Group, with
inflation driven expense risk and future investment returns being the affected
key areas with greatest potential impact.
principal risks and uncertainties
The following tables outline the principal risks and uncertainties of the
group. 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;
Ongoing global conflict, including more recently in the Middle East brings
- Utilising a range of investment funds and managers to avoid significant additional economic uncertainty and volatility to financial markets. This
concentrations of risk; creates additional risk of poor mid-term performance on shareholder and
policyholder assets.
- Having an established investment governance framework to provide review
and oversight of external fund managers;
- Regular liquidity forecasts;
- Considering the cost/benefit of hedging when appropriate;
- Actively optimising the risk / return trade-off between yield on fixed
interest assets compared with the associated balance sheet volatility and
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
markets, such as climate changes.
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,
Consumer Duty and IFRS 17 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 UK Treasury and EIOPA have both been undertaking a review of SII rules
business by: implementation. In the UK this has resulted in a reduction in the SII Risk
Margin and similar is expected for the overseas entities from the EIOPA
- Having processes in place for monitoring changes, to enable timely actions review. There is also potential for divergence of regulatory approaches
to be taken, as appropriate; amongst European regulators with potential implications for Chesnara's
capital, regulatory supervision and structure.
- Maintaining strong open relationships with all regulators, and proactively
discussing their initiatives to encourage a proportional approach The group is subject to evolving regimes governing the recovery, resolution or
restructuring of insurance companies. As part of the global regulatory
- Being a member of the ABI and equivalent overseas organisations and response to the risk that systemically important financial institutions could
utilising other means of joint industry representation; fail, banks, and more recently insurance companies, have been the focus of new
recovery and resolution planning requirements developed by regulators and
- Performing internal reviews of compliance with regulations; and policy makers nationally and internationally. More recently, the PRA has been
consulting on new proposed regulation requiring UK insurers to perform Solvent
- Utilising external specialist advice and assurance, when appropriate. Exit Analysis and maintain this analysis annually. Such analysis aims to
provide confidence that firms would identify solvency issues in a timely
Regulatory risk is monitored and scenario tests are performed to understand manner and have credible plans in place to resolve the business, should it get
the potential impacts of adverse political, regulatory or legal changes, along into financial difficulties.
with consideration of actions that may be taken to minimise the impact, should
they arise. The new accounting standard, IFRS 17 became effective from 01 January 2023.
Chesnara has progressed the development of processes and reporting which
became operational during 2023 and successfully delivered the half-year and
full-year reporting in line with IFRS 17 standards.
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 first key
regulatory deadline 31 July 2023 deadline required implementation for new
business, whilst all products including closed books must be compliant by 31
July 2024. Our UK business established a Consumer Duty project to deliver all
requirements across its businesses. Regulatory requirements for products open
to new business were successfully implemented in line with the regulatory
deadline of 31 July 2023. The project continues to work on requirements for
closed book products in the lead up to the regulatory implementation deadline
of 31 July 2024
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 There remains a positive pipeline of activity in relation to acquisitions,
hands acquirer" via regular contact with regulators, banks and target with the group also looking at whether further M&A is possible in Sweden.
companies enables the company to adopt a patient and risk-based approach to Chesnara completed acquisitions in the Netherlands and in the UK during
assessing acquisition opportunities. Operating in multi-territories provides 2023, whilst maintaining the established disciplines within the Acquisition
some diversification against the risk of changing market circumstances in one Policy.
of the territories. Consideration of additional territories within
Western-Europe remains on the agenda, if the circumstances of entry meet The successful Tier 2 debt raise in 2022, in addition to diversifying the
Chesnara's stated criteria. group's capital structure, has provided additional flexibility in terms of
funding 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 an appropriate 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 Cost of living pressures could give rise to higher surrenders and lapses
business to support best estimate assumptions and identify trends. There is should customers face personal finance pressures and not be able to afford
also partial risk diversification in that the group has a portfolio of annuity premiums or need to access savings. Currently there has been no evidence of
contracts where the benefits cease on death. material changes in behaviours. Chesnara continues to monitor closely and
respond appropriately.
Chesnara seeks to limit the impacts of adverse demographic experience by:
Any prolonged stagnation of the property market could reduce protection
- Aiming to deliver good customer service and fair customer outcomes; business sales compared to plan, particularly in the Netherlands.
- Having effective underwriting techniques and reinsurance programmes, The introduction of new legislation in 2022 made it easier for customers to
including the application of "Mass Lapse reinsurance", where appropriate; transfer insurance policies in Sweden, and this resulted in an increase in
transfers out. However, during 2023 transfer levels stabilised, albeit at a
- Carrying out regular investigations, and industry analysis, to support higher rate than pre Covid-19 levels, this risk continues to be actively
best estimate assumptions and identify trends; monitored.
- Active investment management to ensure competitive policyholder investment
funds; and
- Maintaining good relationships with brokers, which is independently
measured via yearly external surveys that considers brokers attitude towards
different insurers.
PR5 - EXPENSE RISK
DESCRIPTION Risk of expense overruns and unsustainable unit cost growth.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group is exposed to expenses being higher than expected as a result of
one-off increases in the underlying cost of performing key functions, or
through higher inflation of variable expenses.
A key underlying source of potential increases in regular expense is the
additional regulatory expectations on the sector.
For the closed funds, the group is exposed to the impact on profitability of
fixed and semi-fixed expenses, in conjunction with a diminishing policy
base.
For the companies open to new businesses, the group is exposed to the impact
of expense levels varying adversely from those assumed in product pricing.
Similar, for acquisitions, there is a risk that the assumed costs of running
the acquired business allowed for in pricing are not achieved in practice, or
any assumed cost synergies with existing businesses are not achieved.
KEY CONTROLS RECENT CHANGE / OUTLOOK
For all subsidiaries, the group maintains a regime of budgetary control. Chesnara has an ongoing expense management programme and various strategic
projects aimed at controlling expenses. Acquisitions also present
- Movestic and Scildon assume growth through new business such that the opportunities for unit cost reduction and the UK business announced a long
general unit cost trend is positive; term strategic partnership with FinTech market leader SS&C Technologies
("SS&C") in May 2023, to provide policy administration services to
- The Waard Group pursues a low cost-base strategy using a designated Chesnara's UK division.,
service company. The cost base is supported by service income from third
party customers; Through its exposures to investments in real asset classes, both direct and
indirect, Chesnara has an indirect hedge against the effects of inflation and
- Countrywide Assured pursues a strategy of outsourcing functions with will consider more direct inflation hedging options should circumstances
charging structures such that the policy administration cost is more aligned determine that to be appropriate.
to the book' s run off profile; and
The cost of living and energy crisis has driven increases in material supplier
- With an increased current level of operational and strategic change within costs. Whilst inflation started to fall towards the end of 2023, wage
the business, a policy of strict Project Budget Accounting discipline is being inflation remains high, directly impacting the group's internal costs.
upheld by the group for all material projects. Consideration is being continually given to balance the desire r growth the
business and ensuring we have the capabilities and capacity to support that
growth whilst continuing to keep tight cost control and also seeking
opportunities to exploit efficiencies/ synergies.
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. The next key regulatory deadline is 31 March 2025; the
a convenient and cost-effective way. deadline by which all firms should have sound, effective, and comprehensive
strategies, processes, and systems that enable them to address risks to their
Chesnara seeks to reduce the impact and likelihood of operational risk by: ability to remain within their impact tolerance for each important business
service (IBS) in the event of a severe but plausible disruption. To support
- Monitoring of key performance indicators and comprehensive management this the project is currently in the process of running a schedule of real
information flows; life severe but plausible scenario testing. Each Division continues to carry
out assurance activities through local business continuity programmes to
- Effective governance of outsourced service providers, in line with SS2/21 ensure robust plans are in place to limit business disruption in a range of
Outsourcing and Third Party Risk Management, including a regular financial severe but plausible events.
assessment. Appropriate contractual terms contain various remedies dependent
on the adverse circumstances which may arise. The Digital Operational Resilience Act (DORA) entered into force January 2023
and will apply from January 2025. It aims at strengthening the IT security of
- Regular testing of business continuity plans; financial entities such as banks, insurance companies and investment firms and
making sure that the financial sector in Europe is able to stay resilient in
- Regular staff training and development; the event of a severe operational disruption. Additionally, in the UK the PRA
published a consultation paper on Operational Resilience of Critical Third
- Employee performance management frameworks; Parties to the UK financial sector looking to deliver similar outcomes.
- 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;
Geopolitical unrest heightens the risk of cyber crime campaigns particularly
- Seeking ongoing specialist external advice, modifications to IT originating from state sponsored attacks.
infrastructure and updates as appropriate;
During 2023 the group has continued to test and seek assurance of the
- Delivering regular staff training and attestation to the information resilience to cyber risks, this has included:
security policy;
- Completed a 'desktop' ransomware scenario test;
- Regular employee phishing tests and awareness sessions;
- Regular phishing testing and training campaigns;
- Ensuring that the Board maintains appropriate information technology and
security knowledge; - Board training and awareness;
- Conducting penetration and vulnerability testing, including third party - Group wide cyber risk reviews; and
service providers;
- Ongoing penetration testing and vulnerability management
- Executive committee and board level responsibility for the risk, included
dedicated IT security committees with executive membership; Chesnara has implemented a new group-wide cyber response framework to guide
Chesnara and its Business Units in preparing and responding effectively to a
- Having established Chesnara and supplier disaster recovery and business Cyber-attack on any of the IT systems, infrastructure or data within the
continuity plans which are regularly monitored and tested; Group. The framework provides high-level guidance and decision-making
considerations at all stages of the cyber response process. It also sets out
- Ensuring Chesnara's outsourced IT service provider maintains relevant the minimum expected cyber response standards for every step of the incident
information security standard accreditation (ISO27001); and response process and provides clear communication, escalation and delegations
for all incident materiality levels.
- Monitoring network and system security including firewall protection,
antivirus and software updates.
- Chesnara has cyber insurance in place which covers all of the UK
operations including Head Office. Elsewhere in the group, where cyber
insurance is not in place, we are able to access support and resources (e.g.
forensic analysis) through existing contracts with third parties.
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 to new Increased expenses and price pressure remains a risk for the ongoing viability
business by: of writing profitable new business across the group and the Swedish transfer
market remains active following regulatory changes which give greater transfer
- Monitoring quarterly new business profit performance; freedom.
- Investing in brand and marketing; Market share is currently being maintained in the Netherlands with activity to
look at some broader wealth products.
- Maintaining good relationships with brokers;
In Sweden action is being taken to diversify distribution partners whilst
- Offering attractive products that suit customer needs; expanding product offering across Unit Linked, Custodian and Life & Health
markets.
- Monitoring market position and competitor pricing, adjusting as
appropriate; And for the first time there is a contribution from the UK, primarily through
the onshore bond wrapper acquired as part of the Sanlam Life and Pensions deal
- Maintaining appropriate customer service levels and experience; and which remains open to new business.
- Monitoring market and pricing movements.
PR9 - REPUTATIONAL RISK
DESCRIPTION Poor or inconsistent reputation with customers, advisors, 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,
- Open and honest communications interim targets for 2030 and short term actions including baselining our
financial emissions and beginning work to create our transition plan to be a
- HR policies and procedures net zero group.
- Fit & Proper procedures Chesnara has mobilised a group-wide sustainability project programme in
relation to the broader sustainability agenda making commitments to:
- Operational and IT Data Security Frameworks
- Become a net zero emitter
- Product governance and remediation frameworks
- Invest in positive solutions
- Appropriate due diligence and oversight of outsourcers and third parties
- Provide inclusivity for all stakeholders
- Proactive stakeholder engagement with inclusivity for all stakeholders
The FCA published final rules for a new Consumer Duty and response to feedback
to CP21/36 - A New Consumer Duty in July 2022. The Consumer Duty regulations
sets higher and clearer standards of consumer protection across financial
services and require firms to act to deliver good outcomes for customers. The
first key regulatory deadline 31 July 2023 deadline required implementation
for new business, whilst all products including closed books must be compliant
by 31 July 2024. The UK established a Consumer Duty project to deliver all
requirements across its businesses. Regulatory requirements for products open
to new business were successfully implemented in line with the regulatory
deadline in 31 July 2023. The project will continue to work on requirements
for closed book products in the lead up to the regulatory deadline of 31 July
2024
PR10 - MODEL RISK
DESCRIPTION Adverse consequences from decisions based on incorrect or misused model
outputs, or fines or reputational impacts from disclosure of materially
incorrect or misleading information..
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 Chesnara and each of its subsidiaries apply statistical, economic and
financial techniques and assumptions to process input data into quantitative
estimates. Inaccurate model results may lead to unexpected losses arising from
inaccurate data, assumptions, judgements, programming errors, technical
errors, and misinterpretation of outputs.
Potential risk impacts of inaccurate model results include:
- Poor decisions, for example regarding business strategy, operational
decisions, investment choices, dividend payments or acquisitions;
- Potentially overestimating the value of acquisitions resulting in over
payment;
Mis-statement of financial performance or solvency, resulting in misleading
key shareholders or fines; and
- Provision of inaccurate information to the Board on business performance
resulting in poorly informed or delayed decisions.
KEY CONTROLS RECENT CHANGE / OUTLOOK
- Robust model governance framework and independent standards of Model risk management is becoming an increased area of focus of the
"do-check-review"; regulators, particularly in the UK Banking industry, with PS6/23 and SS1/23
becoming effective for bank and building societies on 17 May 24, and an
- Independent model validation & Internal audit review; expectation that further guidance will follow for insurers.
- Monitoring and reporting of Risk Appetite Limits; IFRS17 remains in the early stages of being in-force and therefore, further
embedding and continued focus on validation of the more recently developed
- Documented processes and policies; models is needed.
- Model version control and user access restrictions; The group is in the final stages of embedding a new aggregation model
(Tagetik) that provides greater access control for group consolidation on both
- External audit; IFRS and SII bases.
- Robust Due Diligence processes on acquisitions including external support Many insurers, including Chesnara, are exploring the use of Artificial
on model development / review; and Intelligence, including the risks and opportunities arising. While this
increases the opportunity to benefit from expense synergies, it also has the
- Intra-group financial reporting planning, monitoring and delivery potential to introduce additional model risk. Conversely though, there are
management also opportunities to reduce model risk by applying machine learning
techniques to validation and sense checking of results.
As part of the group's Operational resilience programme, Chesnara is
undertaking a review of the operational resilience of its financial reporting
and modelling processes. This includes developing process maps and
resilience scenario testing the processes, and is expected to improve
efficiency and model risk mitigation.
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
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
2023.
The preliminary statement of annual results for the period ended 31 December
2023 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 cashflows. 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 27 March 2024. 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:
Initial adoption of IFRS 17
Key audit matter description IFRS 17: Insurance Contracts became effective from 1 January 2023, replacing
IFRS 4: Insurance Contracts. The new standard establishes principles for the
recognition, measurement, presentation, and disclosure of insurance contracts,
which are significantly different to those required under IFRS 4. The group's
financial statements for the year ended 31 December 2023 are the group's first
set of financial statements under the new standard and include comparative
financial information that has been restated from 1 January 2022. The
first-time adoption resulted in a reduction in the group's net equity of
£14.8m upon transition.
The application of IFRS 17 to the group's insurance contracts requires
significant management judgement in developing the valuation methodology,
defining the related accounting policies, and implementing those policies
appropriately within the relevant calculation models. The judgements, policy
choices and elections made have the potential to significantly impact the
financial results of the group.
The new standard has introduced a number of significant changes, including new
requirements regarding the recognition and measurement of insurance contracts
and related account balances and classes of transactions. This resulted in an
increased extent of audit effort, including the involvement of our internal
actuarial specialists.
Due to the pervasive impact of the IFRS 17 transition on the group's financial
reporting, we have concluded that the implementation of the new standard forms
a key audit matter.
The transitional approach and impact of IFRS 17 is documented within note A4
to the financial statements, and the Audit and Risk Committee report on page
112 of the annual report.
How the scope of our audit responded to the key audit matter In assessing management's judgements in the interpretation and application of
IFRS 17, we have performed the following procedures:
· with the involvement of IFRS 17 accounting and actuarial
specialists, we have critically evaluated the appropriateness of key technical
accounting decisions, judgements, assumptions, and elections made in
determining the impacts to assess compliance with the requirements of the
standard;
· assessed and validated materiality-based judgements taken by
management in the application of IFRS 17 to the group's contracts, by agreeing
key inputs back to audited source data;
· with the involvement of our actuarial specialists we assessed the
group's implementation of the defined methodology and IFRS 17 actuarial
models;
· substantiated the incremental data and other information required
for the IFRS 17 calculations, including the relevant input data; and
· evaluated the new ongoing disclosures and the disclosures related
to the transition impact and reconciled the disclosures to underlying
accounting records and supporting data.
Key observations Based on the procedures described above, we consider the group's initial
adoption of IFRS 17 to be appropriate and in compliance with the standard.
Expenses assumptions used in the valuation of insurance contract liabilities
Key audit matter description The insurance contract liabilities are one of the largest balances on the
balance sheet, held at £4.2bn (2022: £3.8bn) at 31 December 2023. The
valuation of insurance contract liabilities is determined using actuarial
assumptions that require complex judgements and estimates to be made by
management. A number of the assumptions, such as mortality and morbidity,
economic assumptions, and lapse rates, are made with reference to industry
tables and actual experience, and hence market benchmarking highlights
material deviations from industry practices. The expense assumptions require
management to make significant judgements and estimates relating to the future
expenses attributable to insurance contracts. The risk associated with the
expense assumptions has increased during the period, as a result of:
· the restructure of the administration outsourcing arrangements
for the UK business, including the anticipated project costs of migration and
termination;
· the impact of inflation on future expenses in the short- and
longer-term, particularly given the current high interest rate environment;
and
· the cost implications of maintaining insurance portfolios in
run-off, particularly where variable cost assumptions are used.
Given the significance of the insurance contract liabilities held within CA
plc (£1.4bn), Waard (£0.8bn) and Scildon (£1.9bn), our key audit matter has
been pinpointed to the expense assumptions within these subsidiaries. As the
expense assumptions are susceptible to manipulation by management, we have
determined that there was a risk of misstatement due to fraud.
The accounting policy relating to the insurance contract liabilities has been
presented in note A5(a), with details of the balance and movement set out
within note F1, of the financial statements. The expense assumptions used in
determining insurance contracts liabilities are also referred to in the Audit
and Risk Committee report on page 112 of the annual report.
How the scope of our audit responded to the key audit matter In respect of the expense assumptions used in the valuation of the insurance
contract liabilities, we have performed the following procedures:
· gained an understanding of the relevant controls in relation to
the derivation and approval of expense assumptions;
· with involvement of our actuarial specialists, we evaluated the
appropriateness of expense assumptions and methodology, by benchmarking with
industry expectations, and the assessment of management actions;
· tested the key inputs into significant judgements, such as
assessing whether the anticipated costs of migration and termination are
consistent with contractual arrangements;
· tested 'actual' expenses, and compared previous forecasts to
observed actuals to understand management's forecasting accuracy; and
· assessed the mechanical accuracy of the underlying calculation
verifying whether the methodology has been applied correctly.
Key observations Based on the procedures performed, we consider the expense assumptions used in
the valuation of insurance contract liabilities to be appropriate.
Valuation of Chesnara plc's investment in CA plc
Key audit matter description Chesnara plc, the parent company holds a total investment of £399.6m (2022:
£414.0m) on the company balance sheet relating to its investment in group
subsidiaries, at cost less impairment.
At 31 December 2022, the parent company held investments of £142.9m and
£62.9m in CA plc and CASLP Ltd, respectively. At 31 December 2023, following
a £14.4m impairment, an investment of £191.4m was held in CA plc as a result
of substantially all of the CASLP Ltd insurance business, and therefore
corresponding investment, being Part VII transferred into CA plc.
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 evaluated 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.
In recent periods the CA plc EcV has been on a downwards trend as over this
time period dividends paid to the parent company have exceeded its EcV growth,
with this dynamic being a function of it being a closed book. The impairment
assessment performed by management at the balance sheet date highlighted
£14.4m (2022: £25.0m) of impairment over the carrying value of the
investment. We therefore identified a key audit matter relating to the
valuation of the parent company'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 A5(z), with details of the impairment
sensitivities within note A6(k), of the financial statements. The investment
in CA plc is also referred to in the Audit and Risk Committee report on page
116 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 have performed the following
procedures:
· gained an understanding of the relevant controls in place around
the impairment assessment and EcV valuation;
· 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;
· evaluated management's assessment by performing benchmarking
against other recent industry transactions to gain corroborative and
contradictory evidence; and
· with the involvement of our actuarial specialists, we evaluated
the accuracy and completeness of adjustments made to the IFRS balance sheet to
determine EcV.
Key observations Based on the procedures performed, we consider the carrying value of Chesnara
plc's investment in CA plc is 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
27 March 2024
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December
2023 2022 (restated)
£m £m
Insurance revenue 228.0 225.1
Insurance service expense (224.7) (206.1)
Net expenses from reinsurance contracts held (8.4) (5.7)
Insurance service result (5.1) 13.3
Net investment return 1,023.5 (1,556.9)
Net finance (expenses)/income from insurance contracts issued (314.9) 548.8
Net finance income / (expenses) from reinsurance contracts held 6.7 (13.1)
Net change in investment contract liabilities (529.6) 589.3
Change in liabilities relating to policyholders' funds held by the group (114.0) 392.9
Net investment result 71.7 (39.0)
Fee, commission and other operating income 89.4 59.6
Total revenue net of investment result 156.0 33.9
Other operating expenses (149.9) (100.9)
Total income less expenses 6.1 (67.0)
Financing costs (11.0) (10.5)
Profit arising on business combinations and portfolio acquisitions 6.7 15.4
Profit / (loss) before income taxes 1.8 (62.1)
Income tax credit 16.9 28.4
Profit / (loss) for the period 18.7 (33.7)
Items that may be reclassified subsequently to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign (7.8) 6.9
operations
Revaluation of pension obligations after tax / IAS19 accounting (0.7) -
Revaluation of land and building 0.1 0.7
Other comprehensive (loss) / income for the period, net of tax (8.4) 7.6
Total comprehensive income / (loss) for the period 10.3 (26.1)
Basic earnings per share (based on profit or loss for the period) 12.41p (22.40)p
Diluted earnings per share (based on profit or loss for the period) 12.29p (22.13)p
CONSOLIDATED BALANCE SHEET
Year ended 31 December
2023 2022 (restated) 2021 (restated)
£m £m £m
Assets
Intangible assets 96.4 126.1 80.4
Property and equipment 8.4 7.9 7.8
Investment properties 88.1 94.5 1.1
Insurance contract assets 4.0 - -
Reinsurance contract assets 185.7 194.0 242.3
Amounts deposited with reinsurers 32.5 32.8 38.3
Financial investments 11,456.1 10,536.8 9,176.0
Derivative financial instruments 0.3 0.1 0.3
Other assets 57.7 46.4 47.3
Deferred tax assets 54.6 11.7 0.9
Cash and cash equivalents 146.0 204.6 70.1
Total assets 12,129.8 11,254.9 9,664.5
Liabilities
Insurance contract liabilities 4,203.0 3,821.6 4,032.1
Reinsurance contract liabilities 17.1 17.3 33.1
Other provisions 23.2 8.7 1.7
Investment contracts at fair value through income 5,872.3 5,660.8 3,982.0
Liabilities relating to policyholders' funds held by the group 1,281.8 986.8 990.6
Lease contract liabilities 1.2 1.2 2.0
Borrowings 207.9 212.0 47.2
Derivative financial instruments 4.4 3.8 -
Deferred tax liabilities 24.3 31.8 8.9
Deferred income 2.8 3.5 4.5
Other current liabilities 131.7 123.3 118.7
Bank overdrafts 0.2 - 0.3
Total liabilities 11,769.9 10,870.8 9,221.1
Net assets 359.9 384.1 443.4
Shareholders' equity
Share capital 7.5 7.5 7.5
Merger reserve 36.3 36.3 36.3
Share premium 142.5 142.3 142.1
Other reserves 6.5 14.9 7.3
Retained earnings 167.1 183.1 250.2
Total shareholders' equity 359.9 384.1 443.4
Approved by the Board of Directors and authorised for issue on 27 March 2024
and signed on its behalf by:
Luke Savage Steve Murray
Chairman Chief Executive Officer
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December
2023 2022
(restated)
£m £m
Profit / (loss) for the period 18.7 (33.7)
Adjustments for:
Depreciation of property and equipment 0.8 0.7
Depreciation on right of use assets 0.8 0.7
Amortisation of intangible assets 17.1 17.5
Impairment of intangible assets 21.0 -
Interest on lease liabilities - -
Share based payment 0.7 0.9
Tax paid / (recovered) (16.9) 13.0
Interest receivable (5.6) (9.5)
Dividends receivable (2.3) (1.5)
Interest expense 10.3 10.5
Fair value (gains) / losses on financial assets and investment properties (1,023.5) 1,428.2
Profit on business combinations and portfolio acquisitions (6.7) (15.4)
Increase in intangible assets related to investment contracts (10.2) (9.1)
Adjustment total (1,014.5) 1,436.0
Interest received 7.5 9.6
Dividends received 19.6 1.5
Changes in operating assets and liabilities:
Decrease / (increase) in financial assets and investment properties 327.6 (138.7)
(Increase) / decrease in net reinsurance contract assets 7.8 28.3
Decrease / (increase) in amounts deposited with reinsurers 0.3 5.5
(Increase) / decrease in other assets (19.5) 8.6
Increase / (decrease) in net insurance contract liabilities 93.7 (557.9)
Increase / (decrease) in investment contract liabilities 526.4 (747.9)
Increase / (decrease) in provisions 2.3 (2.8)
Increase / (decrease) in other current liabilities 5.7 (38.4)
Cash utilised from operations (24.2) (29.9)
Income tax paid (10.5) (12.1)
Net cash generated from operating activities (34.8) (42.0)
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired 30.3 55.6
Development of software - (2.4)
Net proceeds / (purchases) of property and equipment (0.8) (1.1)
Net cash generated by investing activities 29.5 52.1
Cash flows from financing activities
Net proceeds from the issue of share capital 0.2 0.3
Net proceeds from Tier 2 debt raised - 196.5
Proceeds from borrowings - 2.0
Repayment of borrowings (3.9) (37.1)
Repayment of lease liabilities (0.6) (0.3)
Dividends paid (35.4) (34.3)
Interest paid (10.1) (5.8)
Net cash (utilised) / generated by from financing activities (49.8) 121.3
Net (decrease) / increase in cash and cash equivalents (55.1) 131.4
Net cash and cash equivalents at beginning of period 204.6 69.8
Effect of exchange rate changes on net cash and cash equivalents (3.6) 3.4
Net cash and cash equivalents at end of the period 145.8 204.6
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2023
Share capital Share premium Merger reserve Other reserves Retained earnings Total
£m £m £m £m £m £m
Equity shareholders' funds at 1 January 2023 (restated) 7.5 142.3 36.3 14.9 183.1 384.1
Profit for the year - - - - 18.7 18.7
Dividends paid - - - - (35.4) (35.4)
Foreign exchange translation differences - - - (7.8) - (7.8)
Other items of comprehensive income - - - (0.6) - (0.6)
Issue of share premium - 0.2 - - - 0.2
Share based payment - - - - 0.7 0.7
Equity shareholders' funds at 31 December 2023 7.5 142.5 36.3 6.5 167.1 359.9
Year ended 31 December 2022
Share capital Share premium Merger reserve Other reserves Retained earnings Total
£m £m £m £m £m £m
Equity shareholders' funds at 1 January 2022 (as previously stated) 7.5 142.1 36.3 7.3 265.0 458.2
Transition adjustments (note 3) - - - - (14.8) (14.8)
Equity shareholders' funds at 1 January 2022 (restated) 7.5 142.1 36.3 7.3 250.2 443.4
Loss for the year - - - - (33.7) (33.7)
Dividends paid - - - - (34.3) (34.3)
Foreign exchange translation differences - - - 6.9 - 6.9
Other items of comprehensive income - - - 0.7 - 0.7
Issue of share premium - 0.2 - - 0.2
Share based payment - - - - 0.9 0.9
Equity shareholders' funds at 31 December 2022 (restated) 7.5 142.3 36.3 14.9 183.1 384.1
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of preparation
The consolidated and parent company financial statements have been prepared on
a going concern basis. The directors believe that they have a reasonable
expectation that the group has adequate resources to continue in operational
existence for the foreseeable future. In making this assessment, the directors
have taken into consideration the points as set out in the Financial
Management section of the report under the heading 'Maintain the group as a
going concern'.
The financial statements are presented in pounds sterling, rounded to the
nearest million, and are prepared on the historical cost basis except for
insurance and reinsurance contracts which are stated at their fulfilment value
in accordance with IFRS 17 and the following assets and liabilities which are
stated at their fair value: derivative financial instruments; financial
instruments at fair value through profit or loss; assets and liabilities held
for sale; investment property; and investment contract liabilities at fair
value through profit or loss.
Assets and liabilities are presented in a liquidity order in the balance
sheet. In addition, amounts expected to be recovered or settled within a
year are classified as current in the notes to the accounts. If they are
expected to be recovered or settled in more than one year, they are classified
as non-current in the notes to the accounts.
The preparation of financial statements in conformity with IFRSs requires
management to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income
and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making the
judgements about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Judgements made by management in the process of applying the group's
accounting policies that have a significant effect on the financial statements
and estimates with a significant risk of material adjustment in the next year
are set out in section 2 below.
The group prepares interim financial statements at half-year and as permitted
by IFRS 17 has elected to apply the 'year-to-date' method and restate
estimates in respect of insurance contracts made in the previous interim
financial statements, in these year-end financial statements. This accounting
policy election applies to all groups of insurance and reinsurance contracts.
The accounting policies set out below, unless otherwise stated, have been
applied consistently to all years presented in these consolidated financial
statements. This includes the changes in accounting policies introduced by
IFRS 17 'Insurance contracts' and IFRS 9 'Financial instruments', both of
which have been applied in these financial statements. The impact to the
group of adopting IFRS 17 and IFRS 9 is outlined below.
The consolidated financial statements have been prepared in accordance with
United Kingdom adopted international accounting standards in conformity with
the requirements of the Companies Act 2006. Both the parent company financial
statements and the group financial statements have been prepared and approved
by the directors in accordance with United Kingdom adopted international
accounting standards.
The group has applied IFRS 17 'Insurance contracts' and IFRS 9 'Financial
instruments' for the first time in these annual financial statements and as a
result comparative amounts and the shareholder equity position at 1 January
2022 has been restated to reflect this. The introduction of these standards
means there are significant changes to the accounting for insurance and
reinsurance contracts and financial instruments, although the impact for the
group in respect of IFRS 9 is less significant.
IFRS 17 'Insurance Contracts'
'IFRS17 Insurance Contracts' introduces significant changes in the
recognition, measurement, presentation and disclosure of insurance and
reinsurance contracts for the group.
The scope of IFRS 17 is very similar to that of IFRS 4 and all of the
insurance and reinsurance contracts accounted for under IFRS 4 are accounted
for under IFRS 17, with some additional benefits within the Swedish business
now accounted for under IFRS 17 that were previously accounted for under IAS
39. These contracts now come into scope for IFRS 17 due to the different
separation rules regarding component parts of contracts that now apply in IFRS
17 compared to IFRS 4.
Insurance and reinsurance contracts are aggregated into portfolios. The
portfolios are determined by identifying contracts that have similar risks and
that are managed together. The portfolios are then further divided into
contract groups based on annual cohorts (ie by year of issue) and
profitability.
Under IFRS 17, the insurance contract liabilities are broken down into the
following component parts:
(i) Present value of future cash flows (pvFCF):
estimates of future cash flows adjusted to reflect the effect of the time
value of money and other financial risks where applicable
(ii) Risk adjustment (RA) for non-financial risk: the
compensation required for bearing uncertainty about the amount and timing of
the cash flows that arises from non-financial risk
(iii) Contractual service margin (CSM): the unearned
profit that will be recognised as the group provides insurance contract
services
(iv) Liability for incurred claims (LIC) - claims and
expenses for insurance contracts that have not yet been paid, including claims
and expenses that have been incurred but not yet reported
Collectively, the pvFCF and RA are referred to as 'fulfilment cash flows'
(FCF). Changes in the FCF will impact either profit or loss or the CSM,
depending on whether they relate to future or current service and the
'measurement model' applicable to the group of contracts. If the CSM for a
group of contracts becomes onerous (ie negative) then a 'loss component' is
established in respect of the negative amount and the CSM is floored at zero,
with losses recognised in profit or loss immediately.
The FCF and the CSM are collectively referred to as the 'Liability for
remaining coverage' (LRC) and the total of the LRC and LIC make up the total
value for a given group of insurance contracts.
For reinsurance contracts held, in line with the description above of the
measurement components of the gross insurance contracts issued, the groups of
reinsurance contracts consists of an 'Asset for remaining coverage' (ARC) or
LRC and the 'Asset for incurred claims' (AIC). The components of the
reinsurance ARC / LRC are similar to the LRC arising from the insurance
contracts issued, with the following distinct differences:
- The RA for non-financial risk represents the amount of risk being
transferred by the group to the reinsurer
- The CSM represents the net cost or net gain on purchasing
reinsurance and can be positive or negative on initial recognition and
subsequent measurement
- To the extent that onerous insurance contracts are reinsured, a
'loss-recovery component' is established at the date the underlying onerous
losses are recognised to cater for the expected recoveries of the underlying
losses from the reinsurance contracts held
- There is an explicit allowance for the risk of non-performance of the
issuer of the reinsurance contract which includes allowance for expected
losses arising from disputes.
The following three measurement models are applicable under IFRS 17:
(i) General Measurement Model (GMM): this is the
default measurement method which determines how movements in the fulfilment
cash flows impact either profit and loss or the CSM. Under the GMM, changes in
the fulfilment cash flows that relate to future service impact the CSM with
other changes to the fulfilment cashflows instead impacting profit and loss.
(ii) Variable Fee Approach (VFA): this is used where
the contract meets the IFRS 17 definition of an insurance contract with direct
participating features. This means that the nature of the services provided
are substantially investment related with insurance benefits also being
provided. Under the VFA changes in the group's share of the underlying items
in respect of financial and economic impacts will adjust the CSM and not the
profit or loss.
(iii) Premium Allocation Approach (PAA): this is a
simplified approach that can be applied to eligible short-duration contracts
whereby all movements in the liability go to profit and loss (ie there is no
CSM).
Reinsurance contracts are considered separately to gross insurance contracts
with the majority of reinsurance contracts within the group measured under the
GMM and a small amount measured under PAA.
With the adoption of IFRS 17, certain line items in the group's consolidated
balance sheet have been replaced with new line items. For example, the group
now presents separately the carrying amount of portfolios of:
- Insurance contracts issued that are assets;
- Insurance contracts issued that are liabilities;
- Reinsurance contracts held that are assets; and
- Reinsurance contracts held that are liabilities.
The assessment as to whether a given portfolio is an asset or liability
considers the portfolio as a whole, so LRC plus LIC for gross insurance
contracts for example.
The line items in the consolidated income statement have also changed
significantly compared to that under IFRS 4 with specific line items now for:
- Insurance revenue;
- Insurance service expenses;
- Net income (expense) from reinsurance contracts held;
- Insurance finance income or expense (IFIE) for insurance contracts
issued; and
- Insurance finance income or expense (IFIE) for reinsurance contracts
held.
Under IFRS 17, for contracts not measured under the PAA, the group recognises
insurance revenue to depict the transfer of promised services provided under
groups of insurance contracts. The insurance revenue for each year represents
the changes in the LRC that relate to services provided in that year for which
the group expects to receive consideration. This mainly comprises the release
of expected claims, the release of the expired risk adjustment for
non-financial risk and the CSM amounts recognised in profit or loss in the
period.
For contracts measured under the PAA, the insurance revenue for each period is
the amount of expected premium receipts for providing services in the period.
'Insurance service expenses' in each reporting period represents the cost of
providing those services, broadly comprising incurred claims and benefits and
expenses that are directly attributable to providing the service in the
period.
'Net income/(expenses) from reinsurance contracts' generally comprises
reinsurance expenses and the recovery of incurred claims. Reinsurance expenses
are recognised similarly to insurance revenue, with the amount of reinsurance
expenses representing an allocation of the premiums paid to reinsurers that
depicts the received insurance contract services in the period.
Together, the insurance revenue, insurance service expenses and net
income/(expenses) from reinsurance contracts make up the insurance service
result, presented on the face of the income statement. 'Non-distinct
investment components' of insurance contracts represent amounts that the group
must repay back to the policyholder regardless of the occurrence of the
insured event and are excluded from profit or loss.
The 'investment result' comprises the 'net investment return', changes in net
investment contract liabilities and policyholder funds held by the group and
IFIE for both insurance and reinsurance contracts. The IFIE broadly includes
the effect of changes in the time value of money and the effect of financial
risk and changes in financial risk.
Transition approach - IFRS 17
Transition refers to the determination of the opening balance sheet at the
beginning of the annual reporting period immediately preceding the date of
IFRS 17 initial application (ie at 1 January 2022). The future cash flows and
risk adjustment are measured on a current basis in the same manner as they
would be calculated for subsequent measurement. The key component of
transition is therefore the determination of the CSM.
IFRS 17 is required to be applied retrospectively unless it is impracticable
to do so due to the lack of available and supportable historical information.
For a full retrospective approach (FRA), the CSM at the date of transition is
calculated by rolling forward the CSM from the initial recognition of the
groups of the insurance contracts to the transition date as if the accounting
policies under IFRS 17 had always applied. Where the FRA is impracticable, a
choice between a 'modified retrospective approach' (MRA) and a 'fair value
approach' (FVA) is permitted.
The group has been able to apply the FRA to its Dutch business divisions with
the inception date for the contracts acquired being the date of historical
acquisition into the group. The FVA has been applied for CA plc in the UK
where the length of time elapsed since acquisition into the group has meant
that the retrospective application of IFRS 17 is not possible or practicable
for any of the contract groups. The relatively small part of the Movestic
business in Sweden to which a CSM is applicable has also been treated as FVA
at the date of transition.
IFRS 9 - Financial Instruments
'IFRS 9 Financial Instruments' was effective from 1 January 2018 and replaces
'IAS 39 Financial Instruments: Recognition and Measurement'. The group
elected to defer the application of IFRS 9 in the consolidated financial
statements, applying the temporary exemption available under 'Amendments to
IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4'
up until the previously published group consolidated financial statements as
at 31 December 2022.
IFRS 9.4.1 requires financial assets to be classified into the following
measurement categories based on an assessment of the business model of the
group and the contractual cash flow characteristics of the assets:
- Amortised cost (AC) where the financial asset is in a 'hold to
collect' business model and where contractual cash flows arising are solely
payments of principal and interest (SPPI).
- Fair value through OCI (FVTOCI) where the financial asset is in a
'hold to collect and sell' business model and where contractual cash flows
arising are solely payments of principal and interest (SPPI).
- Fair value through Profit or Loss (FVTPL) where the financial
asset does not fit into either of the above classifications or where the
entity elects to measure financial assets at FVTPL.
Almost all accounting requirements for financial liabilities remain unchanged
from IAS 39. IFRS 9 has however introduced new requirements for accounting and
presentation of changes in the fair value of an entity's own credit risk where
the entity has designated to value at fair value (IFRS 9.5.7.7-8). Changes
in fair value attributable to the change in the entity's own credit risk are
presented in OCI unless this presentation would create or enlarge an
accounting mismatch in the P&L, as is the case for the Chesnara plc group.
The two financial liability classification categories are:
- Fair value through profit or loss (FVTPL); and
- Amortised cost (AC).
The majority of the group's financial assets and liabilities are classified as
FVTPL, either mandatorily as prescribed by IFRS 9, or by designating as such,
as permitted under IFRS 9.4.1.5 to avoid an accounting mismatch that would
otherwise have occurred with the valuation of the corresponding liabilities.
The majority of the group's financial instruments were already held at FVTPL
under IAS 39 and will continue to be valued at FVTPL under IFRS 9 to reflect
the way the business is managed and in line with a fair value approach to SII
and EcV reporting. The 'Solely Payments of Principal and Interest' (SPPI) test
is used to distinguish between those mandatorily classified as FVTPL and those
designated at FVTPL.
The mortgage portfolio held by Waard, comprising both direct mortgages and
savings mortgages, was previously valued at AC under IAS 39. Both types of
mortgage assets pass the SPPI test as the contractual terms require only fixed
payments on fixed dates or variable payments where the amount of the variable
payment for a period is determined by applying a floating market rate of
interest for that period. They are therefore not required to be classified at
FVTPL, but they have been designated as FVTPL as this will significantly
reduce the accounting mismatch with the corresponding liability, valued under
IFRS 17 using current market sourced discount rates, that would arise
otherwise. This application of the 'fair value option' aligns with the group's
business model which is to manage the business on a fair value basis.
Short-term receivables are classified as AC and no assets will be categorised
as FVTOCI.
Financial liabilities are generally classified and measured at AC (IFRS
9.4.2.1), however they can be classified and measured at FVTPL if held for
trading or designated as at FVTPL where doing so results in more relevant
information (IFRS 9.4.2.2), because either:
- It eliminates, or significantly reduces, a measurement of
recognition inconsistency; or
- A group of financial instruments is managed, and its performance
evaluated on a fair value basis in accordance with a documented risk
management or investment strategy, and information about the group is provided
internally on that basis to the entity's key management personnel.
The investment contracts help by the group meet the criteria above for
classification at FVTPL as this will significantly reduce the accounting
mismatch that would arise otherwise. This is also in line with the group's
business model is to manage the business on a fair value basis.
The borrowings liabilities do not match the exceptions listed above and it is
appropriate that they are classified as AC under IFRS 9, as was also the case
under IAS 39. This includes the Tier 2 debt within the parent company of the
group.
Effect of adoption of IFRS 17 and IFRS 9
The following table shows, by balance sheet line item, how the adoption of
IFRS 17 and IFRS 9 has impacted the balance sheet that was reported in the
consolidated financial statements of the group as at 31 December 2021.
31 December 2021 - as reported Items derecognised Items reclassified IFRS 17 and IFRS 9 remeasurement As at 1 January 2022
£m £m £m £m £m
Intangible assets 122.1 (41.7) - - 80.4
Property and equipment 7.8 - - - 7.8
Investment properties 1.1 - - - 1.1
Reinsurance contract assets 247.8 - 23.3 (28.8) 242.3
Amounts deposited with reinsurers 38.3 - - - 38.3
Financial investments 9,127.1 - - 48.9 9,176.0
Derivative financial instruments 0.3 - - - 0.3
Other assets 72.4 - (25.1) - 47.3
Deferred tax assets - 0.5 2.2 (1.8) 0.9
Cash and cash equivalents 70.1 - - - 70.1
Total assets / transition effects on assets 9,687.0 (41.2) 0.4 18.3 9,664.5
Insurance contract liabilities 3,818.4 - 106.5 107.2 4,032.1
Reinsurance contract liabilities - - - 33.1 33.1
Other provisions 1.0 - 0.7 - 1.7
Investment contracts at fair value through profit or loss 4,120.6 - - (138.6) 3,982.0
Liabilities relating to policyholder funds held by group 990.6 - - - 990.6
Lease contract liabilities 2.0 - - - 2.0
Borrowings 47.2 - - - 47.2
Derivative financial instruments - - - - -
Deferred tax liabilities 15.7 (9.6) 2.2 0.6 8.9
Deferred income 2.8 (0.5) 2.2 - 4.5
Other current liabilities 230.2 (0.4) (111.2) 0.1 118.7
Bank overdrafts 0.3 - - - 0.3
Total liabilities / transition effects on liabilities 9,228.8 (10.5) 0.4 2.4 9,221.1
Net assets / transition effects on shareholders' equity 458.2 (30.7) - 15.9 443.4
For the entities applying the full retrospective approach, the group has
identified, recognised and measured each group of insurance contracts as if
IFRS 17 had always applied since the date of their acquisition into the group;
derecognised any existing balances that would not exist if IFRS 17 had always
applied; and recognised any resulting difference in net equity. For entities
or contracts applying the fair value method this position is estimated using
fair value techniques.
IFRS 9 may be applied prospectively from 1 January 2023 but the group has
elected to apply IFRS 9 within these financial statements from 1 January 2022
in line with IFRS 17 in order to avoid an accounting mismatch for the
comparative period, as the measurement of assets under IFRS 9 cannot be
considered without reference to the liabilities under IFRS 17.
The overall impact to the net equity position of the group at 1st January 2022
as a result of applying IFRS 17 and IFRS 9 is a reduction in net equity of
£14.8m.
There are various offsetting impacts which result in this overall reduction of
net equity, the key ones being:
Items derecognised:
Derecognition of Acquired Value of in-force business (AVIF) and Deferred
Acquisition Costs (DAC) in respect of insurance contracts:
On transition to IFRS 17, AVIF previously recognised in respect of acquired
insurance contracts is derecognised as a balance that would not exist had IFRS
17 always applied. Similarly, DAC is no longer recognised for new contracts
written. Instead, acquisition cash flows paid or expected to be paid on or
after the initial recognition of the FRA and FVA groups of insurance
contracts, have been considered when determining the initial CSM of those
groups.
Intangible assets of £41.7m consisting of AVIF of £31.3m and DAC of £10.4m
have been derecognised from the consolidated group balance sheet at the date
of transition, with a corresponding adjustment to net equity. The
derecognition of the deferred tax liability of £9.6m is all in respect of
deferred tax balances relating to the AVIF and DAC assets. The derecognition
of the intangible assets and associated deferred tax, together with other
smaller impacts, results in an overall reduction of net equity of £30.7m at
the transition date.
IFRS 17 and IFRS 9 remeasurement:
(i) Recognition of the CSM as an explicit liability
representing future unearned profits: At 1 January 2022, a CSM of £119.6m net
of reinsurance was established resulting in a decrease to net equity.
(ii) Recognition of an explicit liability for Risk
Adjustment for non-financial risk. At 1 January 2022, a RA of £39.7m net of
reinsurance was established resulting in a decrease to net equity.
(iii) Change in classification of contracts between from
investment to insurance liabilities: The benefits for certain pension
contracts in the Swedish business were previously separated under IFRS 4 with
the savings element measured under IAS 39. The benefits can no longer be
separated under IFRS 17 and therefore they are removed from the investment
contract line in full and now reported within insurance contract liabilities.
This reduction of £138.6m to the investment contract liability line is
therefore largely offset by an increase in the insurance contract liability
line.
(iv) IFRS 9 impacts: The assets held in respect of certain
mortgage savings products in the Waard group previously valued at amortised
cost have been revalued to fair value under IFRS 9. The increase in value of
£48.9m in the financial investment line is largely offset by an increase in
the insurance contract liabilities line as both the asset cash flows and
liability cash flows are measured using similar techniques.
(v) Revaluation of the present value of future cash flows
for insurance and reinsurance contracts: A variety of local methodologies with
different areas of implicit margin has been replaced by a valuation of 'best
estimate' future cash flows, discounted at market interest rates.
The combined impacts in respect of items (i) to (v) above net of deferred tax
result in an overall increase to net equity of £15.9m at the transition date.
Items reclassified:
The group has also reclassified all rights and obligations arising from
portfolios of insurance and reinsurance contracts such as (i) outstanding
claims in respect of insurance contracts and the reinsurers share of
outstanding claims (ii) receivables and payables related to insurance and
reinsurance contracts. These reclassifications have not impacted the net
equity of the group at the transition date.
2 Judgements and estimates
Critical accounting judgements and key sources of estimation and uncertainty
remain largely unchanged from those described in Note 3 of the 2021 Annual
Report and Accounts.
3 Earnings per share
Earnings per share are based on the following:
Year ended 31 December
2023 2022
(restated)
Profit/(loss) for the year attributable to shareholders (£m) 18.7 (33.7)
Weighted average number of ordinary shares 150,528,597 150,239,599
Basic earnings per share 12.41p (22.40)p
Diluted earnings per share 12.29p (22.13)p
The weighted average number of ordinary shares in respect of the year ended 31
December 2023 is based upon 150,514,945 shares. No shares were held in
treasury.
There were 1,537,582 share options outstanding at 31 December 2023 (2022:
1,815,601). Accordingly, there is dilution of the average number of ordinary
shares in issue in respect of 2022 and 2023.
3 Retained earnings
Year ended 31 December
2023 2022
(restated)
£m £m
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January (restated) 183.1 250.2
Profit / (loss) for the period 18.7 (33.7)
Share based payment 0.7 0.9
Dividends:
Final approved and paid for 2021 - (22.1)
Interim approved and paid for 2022 - (12.2)
Final approved and paid for 2022 (22.8) -
Interim approved and paid for 2023 (12.6) -
Balance at 31 December 167.1 183.1
The interim dividend in respect of 2022, approved and paid in 2022 was paid at
the rate of 8.12p per share.
The interim dividend in respect of 2022, approved and paid in 2022 was paid at
the rate of 8.12p per share. The final dividend in respect of 2022, approved
and paid in 2023, was paid at the rate of 15.16p per share so that the total
dividend paid to the equity shareholders of the parent company in respect of
the year ended 31 December 2022 was made at the rate of 23.28p per share.
The interim dividend in respect of 2023, approved and paid in 2023, was paid
at the rate of 8.36 per share to equity shareholders of the parent company
registered at the close of business on 29 September 2023, the dividend record
date.
A final dividend of 15.61p per share in respect of the year ended 31 December
2023 payable on 28 May 2024 to equity shareholders of the parent company
registered at the close of business on 12 April 2024, the dividend record
date, was approved by the directors after the balance sheet date. The
resulting total final dividend of £23.5m has not been provided for in these
financial statements and there are no income tax consequences.
The following summarises dividends per share in respect of the year ended 31
December 2022 and 31 December 2023:
Year ended 31 December
2023 2022
Pence Pence
Interim - approved and paid 8.36 8.12
Final - proposed/paid 15.61 15.16
Total 23.97 23.28
6 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 2023 comprise:
UK: This segment comprises the UK's life insurance and pensions business
within Countrywide Assured plc (CA), the group's principal UK operating
subsidiary and Sanlam Life and Pensions (UK) Limited, acquired by the group on
28 April 2022 and subsequently renamed to CASLP Limited (CASLP). The majority
of the assets and liabilities of CASLP were transferred to CA on 31 December
2023 under a Part VII business transfer.
During the year, the group reached an agreement to acquire the onshore
individual protection business of Canada Life Ltd with the transaction
initially in the form of a reinsurance agreement accepted by CA.
Movestic: This segment comprises the group's Swedish life and pensions
business, Movestic Livförsäkring AB ('Movestic') and its subsidiary company
Movestic Fonder AB (investment fund management company). Movestic is open to
new business and primarily comprises unit-linked pension business and also
providing some life and health product offerings.
Waard Group: This segment represents the group's closed Dutch life insurance
business and comprises a number of acquisitions of closed insurance books of
business since the acquisition of the original Waard entities into the group
in 2015. The Waard group comprises a mixture of long-term savings and
protection business and also contains some non-life business.
During the year, the group acquired the insurance portfolio of Nederlandsche
Algemeene Maatschappij van Levensverzekering "Conservatrix" N.V.
("Conservatrix"), a specialist provider of life insurance products in the
Netherlands.
Scildon: This segment represents the Group's open Dutch life insurance
business. 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 2023.
(i) Segmental income statement for the year ended 31 December 2023
UK Movestic Waard Group Scildon Other Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands) (UK)
£m £m £m £m £m £m
Insurance revenue 65.8 11.1 36.1 115.0 - 228.0
Insurance service expense (65.6) (7.4) (37.8) (113.9) - (224.7)
Net expenses from reinsurance contracts held (5.5) (0.6) 0.4 (2.7) - (8.4)
Segmental insurance service result (5.3) 3.1 (1.3) (1.6) - (5.1)
Net investment return 339.3 432.5 63.2 181.2 7.3 1,023.5
Net finance (expenses)/income from insurance contracts issued (86.4) (16.0) (49.3) (163.2) - (314.9)
Net finance expenses from reinsurance contracts held 9.3 0.7 0.1 (3.4) - 6.7
Net change in investment contract liabilities (226.4) (299.6) (3.6) - - (529.6)
Change in liabilities relating to policyholders' funds held by the group - (114.0) - - - (114.0)
Segmental investment result 35.8 3.6 10.4 14.6 7.3 71.7
Fee, commission and other operating income 39.8 50.3 2.9 - (3.6) 89.4
Segmental revenue, net of investment result 70.3 57.0 12.0 13.0 3.7 156.0
Other operating expenses (39.9) (40.0) (3.5) (5.5) (23.1) (112.0)
Financing costs (0.2) (0.5) - - (10.3) (11.0)
Profit / (loss) before tax and consolidation adjustments 30.2 16.5 8.5 7.5 (29.7) 33.0
Other operating expenses:
Amortisation and impairment of intangible assets (26.7) (11.2) - - - (37.9)
Segmental income less expenses 3.5 5.3 8.5 7.5 (29.7) (4.9)
Post completion gain on portfolio acquisition - - 6.7 - - 6.7
Profit / (loss) before tax 3.5 5.3 15.2 7.5 (29.7) 1.8
Income tax credit 20.5 - (1.6) (1.9) (0.1) 16.9
Profit / (loss) after tax 24.0 5.3 13.6 5.6 (29.8) 18.7
(ii) Segmental balance sheet as at 31 December 2023
UK Movestic Waard Group Scildon Other Group Total
Activities
(UK) (Sweden) (Netherlands) (Netherlands) (UK)
£m £m £m £m £m £m
Total assets 4,527.2 4,519.4 946.8 2,009.1 127.3 12,129.8
Total liabilities (4,376.6) (4,422.2) (867.0) (1,894.6) (209.5) (11,769.9)
Net assets 150.6 97.2 79.8 114.5 (82.2) 359.9
Investment in associates - - - - - -
Additions to non-current assets - - - - - -
(iii) Segmental income statement for the year ended 31 December 2022
(restated)
UK Movestic Waard Group Scildon Other Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands) (UK)
£m £m £m £m £m £m
Insurance revenue 65.1 12.6 16.9 130.5 - 225.1
Insurance service expense (58.2) (4.5) (17.8) (125.6) - (206.1)
Net expenses from reinsurance contracts held (1.7) (2.9) (1.6) 0.5 - (5.7)
Segmental insurance service result 5.2 5.2 (2.5) 5.4 - 13.3
Net investment return (280.8) (876.8) (93.3) (302.4) (3.6) (1,556.9)
Net finance (expenses)/income from insurance contracts issued 161.6 20.5 91.0 275.7 - 548.8
Net finance expenses from reinsurance contracts held (24.1) (0.5) (0.3) 11.8 - (13.1)
Net change in investment contract liabilities 129.5 459.8 - - - 589.3
Change in liabilities relating to policyholders' funds held by the group - 392.9 - - - 392.9
Segmental investment result (13.8) (4.1) (2.6) (14.9) (3.6) (39.0)
Fee, commission and other operating income 16.4 43.1 0.1 - - 59.6
Segmental revenue, net of investment result 7.8 44.2 (5.0) (9.5) (3.6) 33.9
Other operating expenses (30.7) (29.7) (3.1) (5.7) (14.2) (83.4)
Financing costs (0.2) (0.8) - - (9.5) (10.5)
Profit / (loss) before tax and consolidation adjustments (23.1) 13.7 (8.1) (15.2) (27.3) (60.0)
Other operating expenses:
Amortisation and impairment of intangible assets (5.3) (12.2) - - - (17.5)
Segmental income less expenses (28.4) 1.5 (8.1) (15.2) (27.3) (77.5)
Post completion gain on portfolio acquisition 9.6 - 5.8 - - 15.4
(Loss)/profit before tax (18.8) 1.5 (2.3) (15.2) (27.3) (62.1)
Income tax credit 19.2 - (0.1) 3.9 5.4 28.4
(Loss)/profit after tax 0.4 1.5 (2.4) (11.3) (21.9) (33.7)
(iv) Segmental balance sheet for the year ended 31 December 2022 (restated)
UK Movestic Waard Group Scildon Other Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands) (UK)
£m £m £m £m £m £m
Total assets 4,748.9 3,948.2 542.6 1,902.5 112.7 11,254.9
Total liabilities (4,566.3) (3,842.0) (469.4) (1,791.4) (201.7) (10,870.8)
Net assets 182.6 106.2 73.2 111.1 (89.0) 384.1
Investment in associates - - - - - -
Additions to non-current assets - 10.4 0.3 -- - 10.7
7 Borrowings
Group
31 December
2023 2022
£m
£m
Tier 2 Debt 200.6 200.4
Amount due in relation to financial reinsurance 5.3 11.6
Bank Loan 2.0 -
Total 207.9 212.0
Current 203.4 204.3
Non-current 4.5 7.7
Total 207.9 212.0
In 2022, an existing 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 2023 was £148.4m (31 December 2022: £148.0m).
The fair value of amounts due in relation to financial reinsurance at 31
December 2023 was £5.1m (31 December 2022: £9.0m).
Term finance comprises capital amounts outstanding on mortgage bonds taken out
over properties held in the Unit-linked policyholder funds in the UK. The
mortgage over each such property is negotiated separately, varies in term from
5 to 20 years, and bears interest at fixed or floating rates that are agreed
at the time of inception of the mortgage. The fair value of the term finance
is not materially different to the carrying value shown above.
8 Financial investments
(a) Financial investments by classification
The carrying amounts of the financial investments and other financial assets
and liabilities held by the group at the balance sheet date are as follows:
31 December 2023 Total
Amortised Cost FVTPL - Designated FVTPL - Mandatory
£m £m £m £m
Financial investments:
Equity securities - - 194.2 194.2
Holdings in collective investment schemes - - 8,376.2 8,376.2
Debt securities - government bonds - 716.5 - 716.5
Debt securities - other - 520.6 - 520.6
Policyholder funds help by the group - 1,281.8 - 1,281.8
Mortgage loan portfolio - 366.8 - 366.8
Total - 2,885.7 8,570.4 11,456.1
Derivatives and other financial assets:
Derivative financial instruments - - 0.3 0.3
Other assets 57.7 - - 57.7
Cash and cash equivalents - 146.0 - 146.0
Total financial investments and financial assets 57.7 3,031.7 8,570.7 11,660.1
Financial liabilities
Investment contracts at fair value through profit or loss - 5,872.3 - 5,872.3
Liabilities relating to policyholder funds help by the group - 1,281.8 - 1,281.8
Derivative financial instruments - - 4.4 4.4
Borrowings 207.9 - - 207.9
Other current liabilities 131.7 - - 131.7
Total financial liabilities 339.6 7,154.1 4.4 7,498.1
31 December 2022 Total
Amortised Cost FVTPL - Designated FVTPL - Mandatory
£m £m £m £m
Financial investments:
Equity securities - - 160.2 160.2
Holdings in collective investment schemes - - 8,189.7 8,189.7
Debt securities - government bonds - 445.1 - 445.1
Debt securities - other - 489.0 - 489.0
Policyholder funds help by the group - - 986.8 986.8
Mortgage loan portfolio - 266.0 - 266.0
Total - 1,200.1 9,336.7 10,536.8
Derivatives and other financial assets:
Derivative financial instruments - - 0.1 0.1
Other assets 46.4 - - 46.4
Cash and cash equivalents - 204.6 - 204.6
Total financial investments and financial assets 46.4 1,404.7 9,336.8 10,787.9
Financial liabilities
Investment contracts at fair value through profit or loss - 5,660.8 - 5,660.8
Liabilities relating to policyholder funds help by the group - 986.8 - 986.8
Derivative financial instruments - - 3.8 3.8
Borrowings 212.0 - - 212.0
Other current liabilities 123.3 - - 123.3
Total financial liabilities 335.3 6,647.6 3.8 6,986.7
The directors consider that the carrying value amounts of financial assets and
financial liabilities recorded at amortised cost in the financial statements
are approximately equal to their fair values.
(b) Financial investment fair values
Fair value is the amount for which an asset or liability could be exchanged
between willing parties in an arm's length transaction. The tables below
show the determination of fair value according to a three-level valuation
hierarchy. Fair values are generally determined at prices quoted in active
markets (Level 1). However, where such information is not available, the group
applies valuation techniques to measure such instruments. These valuation
techniques make use of market-observable data for all significant inputs where
possible (Level 2), but in some cases it may be necessary to estimate other
than market-observable data within a valuation model for significant inputs
(Level 3).
Fair value measurement at 31 December 2023
Level 1 Level 2 Level 3 Total
£m £m £m £m
Investment properties - - 88.1 88.1
Financial assets -
Equities - Listed 194.2 - - 194.2
Holdings in collective investment schemes 8,233.7 - 142.5 8,376.2
Debt securities - government bonds 716.5 - - 716.5
Debt securities - other debt securities 520.6 - - 520.6
Policyholders' funds held by the group 1,239.4 - 42.4 1,281.8
Mortgage loan portfolio - 366.8 - 366.8
Derivative financial instruments - 0.3 - 0.3
Total 10,904.4 367.1 273.0 11,544.5
Current 9,095.5
Non-current 2,449.0
Total 10,904.4 367.1 273.0 11,544.5
Financial liabilities
Investment contracts at fair value through profit or loss - 5,872.3 - 5,872.3
Liabilities related to policyholders' funds held by the group 1,281.8 - - 1,281.8
Derivative financial instruments - 4.4 - 4.4
Total 1,281.8 5,876.7 - 7,158.5
Fair value measurement at 31 December 2022
Level 1 Level 2 Level 3 Total
£m £m £m £m
Investment properties 1.2 - 93.3 94.5
Financial assets
Equities - Listed 160.2 - - 160.2
Holdings in collective investment schemes 7,997.8 46.5 145.4 8,189.7
Debt securities - government bonds 420.9 24.2 - 445.1
Debt securities - other debt securities 434.0 55.0 - 489.0
Policyholders' funds held by the group 951.7 - 35.1 986.8
Mortgage loan portfolio - 266.0 - 266.0
Derivative financial instruments - 0.1 - 0.1
Total 9,965.8 391.8 273.8 10,631.4
Current 5,932.9
Non-current 4,698.5
Total 10,631.4
Financial liabilities
Investment contracts at fair value through profit or loss - 5,660.8 - 5,660.8
Liabilities related to policyholders' funds held by the group 986.8 - - 986.8
Derivative financial instruments - 3.8 - 3.8
Total 986.8 5,664.6 - 6,651.4
Investment properties
The investment properties are valued by external Chartered Surveyors using
industry standard techniques based on guidance from the Royal Institute of
Chartered Surveyors. The valuation methodology includes an assessment of
general market conditions and sector level transactions and takes account of
expectations of occupancy rates, rental income and growth. Properties undergo
individual scrutiny using cash flow analysis to factor in the timing of rental
reviews, capital expenditure, lease incentives, dilapidation and operating
expenses; these reviews utilise both observable and unobservable inputs.
Holdings in collective investment schemes
The fair value of holdings in collective investment schemes classified as
Level 2 are related to the UK segment and Scildon. These do not meet the
classification as Level 1, as their fair value is determined using valuation
techniques with observable market inputs. The holdings classified as Level 3
£142.5m (Dec 2022: £145.4m) also relate to Scildon, and represent
investments held in a mortgage fund. These are classified as level 3 as the
fair value is derived from valuation techniques that include inputs that are
not based on observable market data. There is also a small holding of assets
classified as level 3 £43.1m (Dec 2022: £35.1m) from our Movestic operation
which are unlisted. The valuation of the vast majority of these assets is
based on unobservable prices from trading on the over-the-counter market.
Debt securities
The debt securities classified as Level 2 at 2022 and 2023 are traded in
active markets with less depth or wider bid-ask spreads. This does not meet
the classification as Level 1 inputs. The fair values of debt securities not
traded in active markets are determined using broker quotes or valuation
techniques with observable market inputs. Financial instruments valued using
broker quotes are classified at Level 2, only where there is a sufficient
range of available quotes.
These assets were valued using counterparty or broker quotes and were
periodically validated against third-party models.
Derivative financial instruments
The derivatives financial instruments include a foreign currency hedge related
to the group. This was deemed to manage the exposure to foreign exchange
movements between sterling and both the euro and Swedish krona.
An uncapped collar which consists of two hedges:
one hedge to protect against the downside (sterling strengthening) (starting
at strike A), and one to remove the upside (weakening) (strike B); with the
strikes of these coordinated to result in no upfront premium.
the 2nd hedge (strike B) creates an uncapped liquidity requirement when it
bites.
The capped collar comes with an additional leg which creates value and
liquidity when exchange rates move beyond a certain point (strike C).
Within derivative financial instruments is a financial reinsurance embedded
derivative related to our Movestic operation. The group has entered into a
reinsurance contract with a third party that has a section that is deemed to
transfer significant insurance risk and a section that is deemed not to
transfer significant insurance risk. The element of the contract that does not
transfer significant insurance risk has two components and has been accounted
for as a financial liability at amortised cost and an embedded derivative
asset at fair value.
The embedded derivative represents an option to repay the amounts due under
the contract early at a discount to the amortised cost, with its fair value
being determined by reference to market interest rate at the balance sheet
date. It is, accordingly, determined at Level 2 in the three-level fair value
determination hierarchy set out above.
Investment contract liabilities
The investment contract liabilities in Level 2 of the valuation hierarchy
represent the fair value of linked and non-linked liabilities valued using
established actuarial techniques utilising market observable data for all
significant inputs, such as investment yields.
Significant unobservable inputs in level 3 instruments valuations
The level 3 instruments held in the group are in relation to investments held
in an Aegon managed Dutch Mortgage Fund that contains mortgage-backed assets
in the Netherlands. The fair value of the mortgage fund is determined by the
fund manager on a monthly basis using an in-house valuation model. The
valuation model relies on a number of unobservable inputs, the most
significant being the assumed conditional prepayment rate, the discount rate
and the impairment rate, all of which are applied to the anticipated modelled
cash flows to derive the fair value of the underlying asset.
The assumed conditional prepayment rate (CPR) is used to calculate the
projected prepayment cash flow per individual loan and reflects the
anticipated early repayment of mortgage balances. The CPR is based on 4
variables:
· Contract age - The CPR for newly originated mortgage loans will
initially be low, after which it increases for a couple of years to its
maximum expected value, and subsequently diminishes over time.
· Interest rate differential - The difference between the
contractual rates and current interest rates are positively correlated with
prepayments. When contractual rates are higher than interest rates of newly
originated mortgages, we observe more prepayments and the vice versa.
· Previous partial repayments - Borrowers who made a partial
prepayment in the past, are more likely to do so in the future.
· Burnout effect - Borrowers who have not made a prepayment in the
past, while their option to prepay was in the money, are less likely to prepay
in the future.
The projected prepayment cash flows per loan are then combined to derive an
average expected lifetime CPR, which is then applied to the outstanding
balance of the fund. The conditional prepayment rate used in the valuation of
the fund as at 31 December 2023 was 3.2% (31 December 2022: 4.9%).
The expected projected cash flows for each mortgage within the loan portfolio
are discounted using rates that are derived using a matrix involving the
following three parameters:
• The remaining fixed rate term of the mortgage
• Indexed loan to value (LTV) of each mortgage
• Current (Aegon) mortgage rates
At 31 December 2023 this resulted in discounting the cash flows in each
mortgage using a range from 4.67% to 4.68% (31 December 2022: 4.29% to 4.92%).
An impairment percentage is applied to those loan cashflows which are in
arrears, to reflect the chance of the loan actually going into default. For
those loans which are one, two or three months in arrears, an impairment
percentage is applied to reflect the chance of default. This percentage ranges
from 0.60% for one month in arrears to 13.70% for loans which are 3 months in
arrears (31 December 2022: 0.60% for one month in arrears to 13.70% for loans
which are 3 months in arrears).
Loans which are in default receive a 100% reduction in value.
The value of the fund has the potential to decrease or increase over time.
This can be as a consequence of a periodic reassessment of the conditional
prepayment rate and/or the discount rate used in the valuation model.
A 1 per cent increase in the conditional prepayment rate would reduce the
value of the asset by £1.9m (31 December 2022: £1.7m).
A 1 per cent decrease in the conditional prepayment rate would increase the
value of the asset by £2.1m (31 December 2022: £2.1m).
A 1 per cent increase in the discount rate would reduce the value of the asset
by £11.4m (31 December 2022: £9.6m).
A 1 per cent decrease in the discount rate would increase the value of the
asset by £13.3m (31 December 2022: £11.1m).
Reconciliation of Level 3 fair value measurements of financial instruments
31 December 31 December
2023 2022
£m £m
At start of period 273.8 190.2
Additions - acquisition of subsidiary - 103.0
Total gains and losses recognised in the income statement (8.6) (30.0)
Purchases 22.8 14.7
Settlements (10.8) (11.5)
Exchange rate adjustment (4.0) 7.4
At the end of period 273.0 273.8
31 December Carrying amount Fair value
2023 2022 2023 2022
£m £m £m £m
Financial liabilities:
Borrowings 207.9 212.2 155.4 157.0
Borrowings consist of the Tier 2 debt and an amount due in relation to
financial reinsurance. The fair value of the Tier 2 debt is calculated using
quoted prices in active markets and they are classified as Level 1 in the fair
value hierarchy. The amount due in relation to financial reinsurance is fair
valued with reference to market interest rates at the balance sheet date.
There were no other transfers between Levels 1, 2 and 3 during the year. The
group holds no Level 3 liabilities as at the balance sheet date.
9 Insurance and Reinsurance contracts
The following notes provide a quantitative analysis of the insurance and
reinsurance contract assets and liabilities and are disaggregated by the IFRS8
operating segments. This disaggregation has been chosen for the following
notes because it is the groups view that together with the information in the
Underwriting Risk section, it provides the most relevant information for
assessing the effect that contracts within the scope of IFRS 17 have on the
entity's financial performance and position.
(i) Composition of the balance sheet
The following tables show the breakdown of the insurance and reinsurance
contract assets and liabilities for each of the operating segments within
Chesnara.
31 December 2023 UK Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts £m £m £m £m £m
Insurance contract liabilities 1,383.0 171.8 785.3 1,862.9 4,203.0
Insurance contract assets (4.0) - - - (4.0)
Total insurance contract liabilities 1,379.0 171.8 785.3 1,862.9 4,199.0
Reinsurance contracts
Reinsurance contract assets 166.8 14.5 4.4 - 185.7
Reinsurance contract liabilities (2.2) - - (14.9) (17.1)
Total reinsurance contract liabilities 164.6 14.5 4.4 (14.9) 168.6
Current Non-current Total
£m £m £m
Insurance contract liabilities 1,801.1 2,401.9 4,203.0
Insurance contract assets - (4.0) (4.0)
Reinsurance contract assets 29.1 156.6 185.7
Reinsurance contract liabilities (2.1) 19.2 17.1
31 December 2022 Scildon
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts £m £m £m £m £m
Insurance contract liabilities 1,447.6 158.9 463.7 1,751.4 3,821.6
Insurance contract assets - - - - -
Net insurance contract liabilities 1,447.6 158.9 463.7 1,751.4 3,821.6
Reinsurance contracts
Reinsurance contract assets 174.7 15.8 3.5 - 194.0
Reinsurance contract liabilities (2.1) - - (15.2) (17.3)
Net reinsurance contract assets 172.6 15.8 3.5 (15.2) 176.7
Current Non-current Total
£m £m £m
Insurance contract liabilities 651.4 3,170.2 3,821.6
Insurance contract assets - - -
Reinsurance contract assets 33.8 160.2 194.0
Reinsurance contract liabilities (2.6) (14.7) (17.3)
(ii) Fair value of underlying items
The following table shows the fair value of the underlying items of the
group's direct participating contracts for each reporting segment.
Scildon
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
£m £m £m £m £m
Fair value of underlying items as at 31 December 2023 816.9 132.3 65.2 1,238.7 2,253.1
Fair value of underlying items as at 31 December 2022 953.0 118.5 74.4 1,126.0 2,271.9
Composition of underlying items: The majority of the fair value of underlying
items across the group are held in collective investment schemes. A small
proportion is held in equities, debt securities and in cash and deposits.
(iii) Insurance contract balances - analysis by remaining coverage and
incurred claims
Liabilities for remaining coverage Liabilities for incurred claims Total
Contracts not under PAA Contracts under PAA
Excluding Loss component Loss component PV of future cash flows Risk adjustment
£m £m £m £m £m £m
Net insurance contract liabilities as at 1 January 2023 3,582.2 83.6 116.0 38.2 1.6 3,821.6
Changes in the statement of profit and loss
Insurance revenue
Contracts measured under the fair value approach (58.2) - - - - (58.2)
Contracts measured under the fully retrospective approach (169.8) - - - - (169.8)
Insurance revenue total (228.0) - - - - (228.0)
Insurance service expenses - (50.4) 207.2 10.3 0.1 167.2
Incurred claims and other directly attributable expenses
Adjustments to liabilities for incurred claims - - - (3.4) (0.2) (3.6)
Losses and reversals of losses on onerous contracts - 57.7 - - - 57.7
Amortisation of insurance acquisition cash flows 3.4 - - - - 3.4
Insurance service expense total 3.4 7.3 207.2 6.9 (0.1) 224.7
Insurance service result (224.6) 7.3 207.2 6.9 (0.1) (3.3)
Net finance expenses from insurance contracts 312.7 0.4 - 2.0 (0.2) 314.9
Effect of movements in exchange rates (51.6) (1.9) (1.1) (1.1) (0.1) (55.8)
Total amounts recognised in comprehensive income 36.5 5.8 206.1 7.8 (0.4) 255.8
Investment components (309.8) - 309.8 - - -
Cash flows
Premiums received 326.6 - - - - 326.6
Claims and other directly attributable expenses paid - - (518.5) (8.9) - (527.4)
Insurance acquisition cash flows (5.6) - - - - (5.6)
Acquisitions 328.0 - - - - 328.0
Total cash flows 649.0 - (518.5) (8.9) - 121.6
Net insurance contract liabilities as at 31 December 2023 3,957.9 89.4 113.4 37.1 1.2 4,199.0
Liabilities for remaining coverage Liabilities for incurred claims Total
Contracts not under PAA Contracts under PAA
Excluding Loss component Loss component PV of future cash flows Risk adjustment
£m £m £m £m £m £m
Net insurance contract liabilities as at 1 January 2022 3,805.4 65.7 112.0 46.7 2.2 4,032.0
Changes in the statement of profit and loss
Insurance revenue
Contracts measured under the fair value approach (59.8) - - - - (59.8)
Contracts measured under the fully retrospective approach (165.3) - - - - (165.3)
Insurance revenue total (225.1) - - - - (225.1)
Insurance service expenses - (19.3) 185.4 10.8 0.1 177.0
Incurred claims and other directly attributable expenses
Adjustments to liabilities for incurred claims - - - (6.6) (0.4) (7.0)
Losses and reversals of losses on onerous contracts - 32.6 - - - 32.6
Amortisation of insurance acquisition cash flows 3.5 - - - - 3.5
Insurance service expense total 3.5 13.3 185.4 4.2 (0.3) 206.1
Insurance service result (221.6) 13.3 185.4 4.2 (0.3) (19.0)
Net finance expenses from insurance contracts (547.1) 0.3 - (1.7) (0.3) (548.8)
Effect of movements in exchange rates 110.0 4.3 2.6 (1.0) - 115.9
Total amounts recognised in comprehensive income (658.7) 17.9 188.0 1.5 (0.6) (451.9)
Investment components (299.0) - 299.0 - - -
Cash flows
Premiums received 327.8 - - - - 327.8
Claims and other directly attributable expenses paid - - (483.0) (9.9) - (492.9)
Insurance acquisition cash flows (6.7) - - - - (6.7)
Acquisitions 413.3 - - - - 413.3
Total cash flows 734.4 - (483.0) (9.9) - 241.5
Net insurance contract liabilities as at 31 December 2022 3,582.1 83.6 116.0 38.3 1.6 3,821.6
(iv) Insurance contract balances - analysis by measurement component -
contracts not measured under PAA
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Net insurance contract liabilities as at 1 January 2023 3,587.3 46.0 105.7 40.7 3,779.7
Changes that relate to current service
CSM recognised for services provided - - (17.4) (3.4) (20.8)
Change in risk adjustment for non-financial risk for risk expired - (6.7) - - (6.7)
Experience adjustments (29.6) - - - (29.6)
Revenue recognised for incurred policyholder tax expenses (0.1) - - - (0.1)
(29.7) (6.7) (17.4) (3.4) (57.2)
Changes that relate to future service (75.8) 10.1 68.6 - 2.9
Contracts initially recognised in the period
Changes in estimates that adjust the CSM (3.4) 0.1 13.9 (10.6) -
Changes in estimates that result in losses or reversals of losses on onerous 54.6 - - - 54.6
underlying contracts
(24.6) 10.2 82.5 (10.6) 57.5
Changes that relate to past service
Adjustments to liabilities for incurred claims - - - - -
Insurance service result (54.3) 3.5 65.1 (14.0) 0.3
Net finance expenses from insurance contracts 304.9 3.9 3.4 0.9 313.1
Effect of movements in exchange rates (50.0) (0.9) (3.5) (0.1) (54.5)
Total amounts recognised in comprehensive income 200.6 6.5 65.0 (13.2) 258.9
Cash flows
Premiums received 316.2 - - - 316.2
Claims and other directly attributable expenses paid (518.5) - - - (518.5)
Insurance acquisition cash flows (5.6) - - - (5.6)
Acquisitions 328.0 - - - 328.0
Total cash flows 120.1 - - - 120.1
Net insurance contract liabilities as at 31 December 2023 3,908.0 52.5 170.7 27.5 4,158.7
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Net insurance contract liabilities as at 1 January 2022 3,772.2 54.8 113.3 41.1 3,981.4
Changes that relate to current service
CSM recognised for services provided - - (14.1) (5.6) (19.7)
Change in risk adjustment for non-financial risk for risk expired - (6.9) - - (6.9)
Experience adjustments (16.9) - - - (16.9)
(16.9) (6.9) (14.1) (5.6) (43.5)
Changes that relate to future service
Contracts initially recognised in the period (21.1) 9.1 19.1 - 7.1
Changes in estimates that adjust the CSM 7.8 5.9 (18.7) 5.0 -
Changes in estimates that result in losses or reversals of losses on onerous 30.4 (5.0) - - 25.4
underlying contracts
17.1 10.0 0.4 5.0 32.5
Changes that relate to past service
Adjustments to liabilities for incurred claims - - - - -
Insurance service result 0.2 3.1 (13.7) (0.6) (11.0)
Net finance expenses from insurance contracts (533.8) (13.7) 0.4 0.3 (546.8)
Effect of movements in exchange rates 109.6 1.8 5.7 (0.1) 117.0
Total amounts recognised in comprehensive income (424.0) (8.8) (7.6) (0.4) (440.8)
Cash flows
Premiums received 315.4 - - - 315.4
Claims and other directly attributable expenses paid (482.9) - - - (482.9)
Insurance acquisition cash flows (6.7) - - - (6.7)
Acquisitions 413.3 - - - 413.3
Total cash flows 239.1 - - - 239.1
Net insurance contract liabilities as at 31 December 2022 3,587.3 46.0 105.7 40.7 3,779.7
(v) Reinsurance contract balances - analysis by remaining coverage and
incurred claims
Total
Assets for Remaining Coverage Assets for Incurred Claims
For contracts not under PAA Contracts under PAA
Loss-Recovery component Future cash flows Risk adjustment
Excluding Loss-Recovery Component
£m £m £m £m £m £m
Net reinsurance contract assets as at 1 January 2023 130.1 4.5 26.6 15.2 0.3 176.7
Reinsurance expenses - allocation of reinsurance premiums paid (52.3) - - - - (52.3)
Amounts recoverable from reinsurers: - - 40.2 3.1 0.1 43.4
Recoveries of incurred claims and other insurance service expenses
Changes in the expected recoveries for past claims - - - (1.2) (0.1) (1.3)
Changes in the loss recovery component - 1.8 - - - 1.8
Effect of changes in non-performance risk of reinsurers - - - - - -
Net (expenses) / income from reinsurance contracts held (52.3) 1.8 40.2 1.9 - (8.4)
Net Finance expenses from reinsurance contracts 6.0 - - 0.8 (0.1) 6.7
Effect of movements in exchange rates 0.6 (0.1) (0.2) (0.4) - (0.1)
Total amounts recognised in comprehensive income (45.7) 1.7 40.0 2.3 (0.1) (1.8)
Investment components (2.6) - 2.6 - - -
Cash flows
Premiums paid net of ceding commission 42.2 - - - - 42.2
Recoveries from reinsurance contracts held - - (45.9) (2.6) - (48.5)
Acquisitions - - - - - -
Total cash flows 42.2 - (45.9) (2.6) - (6.3)
Net reinsurance contract assets as at 31 December 2023 124.0 6.2 23.3 14.9 0.2 168.6
Total
Assets for Remaining Coverage Assets for Incurred Claims
For contracts not under PAA Contracts under PAA
Excluding Loss-Recovery Component Loss-Recovery component Future cash flows Risk adjustment
£m £m £m £m £m £m
Net reinsurance contract assets as at 1 January 2022 162.4 2.5 25.1 18.6 0.6 209.2
Reinsurance expenses - allocation of reinsurance premiums paid (54.0) - - - - (54.0)
Amounts recoverable from reinsurers: - - 47.1 2.7 - 49.8
Recoveries of incurred claims and other insurance service expenses
Changes in the expected recoveries for past claims - - - (3.1) (0.2) (3.3)
Changes in the loss recovery component - 1.8 - - - 1.8
Effect of changes in non-performance risk of reinsurers - - - - - -
Net (expenses) / income from reinsurance contracts held (54.0) 1.8 47.1 (0.4) (0.2) (5.7)
Net Finance expenses from reinsurance contracts (12.6) - - (0.4) (0.1) (13.1)
Effect of movements in exchange rates (1.6) 0.2 0.5 (0.4) - (1.3)
Total amounts recognised in comprehensive income (68.2) 2.0 47.6 (1.2) (0.3) (20.1)
Investment components (4.0) - 4.0 - - -
Cash flows
Premiums paid net of ceding commission 42.4 - - - - 42.4
Recoveries from reinsurance contracts held - - (50.1) (2.2) - (52.3)
Acquisitions (2.5) - - - (2.5)
Total cash flows 39.9 - (50.1) (2.2) - (12.4)
Net reinsurance contract assets as at 31 December 2022 130.1 4.5 26.6 15.2 0.3 176.7
(vi) Reinsurance contract balances - analysis by measurement component -
contracts not measured under PAA
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Net reinsurance contract assets as at 1 January 2023 112.6 14.3 26.1 7.9 160.9
Changes that relate to current service
CSM recognised for services received - - (0.5) (0.5) (1.0)
Change in risk adjustment for non-financial risk for risk expired - (2.2) - - (2.2)
Experience adjustments (6.1) - - - (6.1)
Total changes that relate to current service (6.1) (2.2) (0.5) (0.5) (9.3)
Changes that relate to future service (3.1) 0.9 2.2 - -
Contracts initially recognised in the period
Changes in estimates that adjust the CSM 2.8 1.7 (2.6) (1.9) -
CSM adjustment for income on initial recognition of onerous underlying - - (0.3) - (0.3)
contracts
Changes in recoveries of losses on onerous underlying contracts that adjust - - 1.8 - 1.8
the CSM
Total changes that relate to future service (0.3) 2.6 1.1 (1.9) 1.5
Changes that relate to past service
Adjustments to assets for incurred claims - - - - -
Total changes that relate to past service - - - - -
Effect of changes in non-performance risk of reinsurers - - - -
-
Net (expense) / income from reinsurance contracts held (6.4) 0.4 0.6 (2.4) (7.8)
Net finance income from reinsurance contracts held 4.9 0.7 0.3 0.1 6.0
Effect of movements in exchange rates 1.1 (0.2) (0.6) - 0.3
Total amounts recognised in comprehensive income (0.4) 0.9 0.3 (2.3) (1.5)
Cash flows
Premiums paid net of ceding commission 40.6 - - - 40.6
Recoveries from reinsurance contracts held (45.9) - - - (45.9)
Acquisitions - - - - -
Total cash flows (5.3) - - - (5.3)
Net reinsurance contract assets as at 31 December 2023 106.9 15.2 26.4 5.6 154.1
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Net reinsurance contract assets as at 1 January 2022 140.1 15.3 27.4 7.4 190.2
Changes that relate to current service
CSM recognised for services received - - (3.6) (1.0) (4.6)
Change in risk adjustment for non-financial risk for risk expired - (2.1) - - (2.1)
Experience adjustments 2.4 - - - 2.4
Total changes that relate to current service 2.4 (2.1) (3.6) (1.0) (4.3)
Changes that relate to future service
Contracts initially recognised in the period (5.3) 1.6 3.7 - -
Changes in estimates that adjust the CSM 1.3 1.8 (4.5) 1.4 -
CSM adjustment for income on initial recognition of onerous underlying - - 1.4 - 1.4
contracts
Changes in recoveries of losses on onerous underlying contracts that adjust - - 0.1 - 0.1
the CSM
Total changes that relate to future service (4.0) 3.4 0.7 1.4 1.5
Changes that relate to past service
Adjustments to assets for incurred claims - - - - -
Total changes that relate to past service - - - - -
Effect of changes in non-performance risk of reinsurers - - - -
-
Net (expense) / income from reinsurance contracts held (1.6) 1.3 (2.9) 0.4 (2.8)
Net finance income from reinsurance contracts held (10.0) (2.8) 0.2 0.1 (12.6)
Effect of movements in exchange rates (2.9) 0.6 1.4 - (0.9)
Total amounts recognised in comprehensive income (14.5) (1.0) (1.3) 0.5 (16.3)
Cash flows
Premiums paid net of ceding commission 39.6 - - - 39.6
Recoveries from reinsurance contracts held (50.1) - - - (50.1)
Acquisitions (2.5) - - - (2.5)
Total cash flows (13.0) - - - (13.0)
Net reinsurance contract assets as at 31 December 2022 112.6 14.3 26.1 7.9 160.9
10 Business combination and portfolio acquisition
Conservatrix
On 22 July 2022, Chesnara announced the acquisition of the insurance portfolio
of Nederlandsche Algemeene Maatschappij van Levensverzekering "Conservatrix"
N.V. ("Conservatrix"), a specialist provider of life insurance products in the
Netherlands that was declared bankrupt on 8 December 2020. The acquisition
was completed on 1 January 2023, following Court and Regulatory approvals.
The acquisition was affected through the transfer of the insurance portfolio
(together with other assets and liabilities as set out in the table below)
into Waard Leven N.V., Chesnara's Dutch closed-book subsidiary. In order to
support the solvency position of the Conservatrix insurance portfolio, a
capital contribution of £35m was provided by Chesnara, consisting of a
£21.4m contribution from Chesnara and £14m of existing Waard resources.
The cash consideration for the acquisition was €1.
The acquisition is classed as a Business Combination under IFRS3 and the fair
value of the assets and liabilities recognised on 1 January 2023 are as
follows:
Fair value
£m
Assets
Financial investments 366.9
Other assets 1.3
Deferred tax asset 36.5
Cash 30.8
Total assets 435.5
Liabilities
Insurance contracts 346.2
Other provisions 12.6
Investment contracts 70.0
Total liabilities 428.8
Fair value of net assets 6.7
Net assets acquired 6.7
Total consideration paid -
Profit arising on business combination and portfolio acquisitions 6.7
A profit of £6.7m has been recognised on acquisition. This has been
recorded as a "Profit arising on business combinations and portfolio
acquisitions" on the face of the statement of comprehensive income. This day
one gain has arisen 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.
The CSM on acquisition has been calculated as the difference between the fair
value of the insurance liabilities and the fulfilment cash flows. This has
resulted in a CSM of £45.9m being recognised as at 1 January 2023. This
amount forms part of the CSM value for 'Contracts initially recognised in the
year' and is included in the "insurance contracts" balance within the table
above.
The group determined that a significant number of the contracts acquired did
not have any significant insurance risk at the acquisition date and have
therefore been classed as investment contracts, to be accounted for under IFRS
9.
The assets and liabilities acquired are included within the respective line
items on the face of the cash flow statement.
The results of Conservatrix have been included in the consolidated financial
statements of the group with effect from 1 January 2023, within Waard Group.
Canada Life
On 16 May 2023, Chesnara announced it had reached an agreement to acquire the
onshore UK individual protection business of Canada Life Limited, representing
approximately 47,000 life insurance and critical illness policies. The
transaction is initially in the form of a reinsurance agreement with the
liabilities 100% ceded by Canada Life Limited and accepted by CA plc, with the
effective date being 1 January 2023. From this date all risks and rewards
relating to the policies were transferred to CA plc along with the economic
benefit of those risks and rewards.
The initial commission paid by CA plc to Canada Life Limited for this
reinsurance inwards transaction was £9.0m and was funded from internal group
resources. The CSM on initial recognition has been calculated as £11.0m as
at 1 January 2023.
Customers' policies are expected to transfer to CA plc in the future via a
Part VII transfer, following Court approval.
11 Post balance sheet events
The Directors are not aware of any significant post balance sheet events that
require disclosure in the condensed interim financial statements.
12 Approval of consolidated report for the year ended 31 December 2023
This consolidated report was approved by the Board of Directors on 27 March
2024. A copy of the report will be available to the public at the Company's
registered office, 2nd Floor, Building 4, West Strand Business Park, West
Strand Road, Preston, PR1 8UY and at www.chesnara.co.uk
(http://www.chesnara.co.uk)
FINANCIAL CALENDAR
28 March 2024
Results for the year ended 31 December 2023 announced
11 April 2024
Ex-dividend date
12 April 2024
Dividend record date
29 April 2024
Last date for dividend reinvestment plan elections
14 May 2024
Annual General Meeting
28 May 2024
Dividend payment date
September 2024
Half year results for the 6 months ending 30 June 2024 announced
KEY CONTACTS
Registered and head office
2nd Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
T: 01772 972050
www.chesnara.co.uk
Advisors
Burness Paull LLP
Exchange Plaza
50 Lothian Road
Edinburgh
EH3 9WJ
Auditor
Deloitte LLP
Statutory Auditor
4 Brindley Place
Birmingham
B1 2HZ
Registrars
Link Group
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint Stockbrokers and
Corporate Advisors
Panmure Gordon
40 Gracechurch Street
London
EC3V 0BT
RBC Capital Markets
100 Bishopsgate
London
EC2N 4AA
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3rd Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
15 St Helen's Place
London
EC3A 6DQ
ALTERNATIVE PERFORMANCE MEASURES
Throughout this report we use alternative performance measures (APMs) to
supplement the assessment and reporting of the performance of the group.
These measures are those that are not defined by statutory reporting
frameworks, such as IFRS or Solvency II.
The APMs aim to assess performance from the perspective of all stakeholders,
providing additional insight into the financial position and performance of
the group and should be considered in conjunction with the statutory reporting
measures such as IFRS and Solvency II.
The following table identifies the key APMs used in this report, how each is
defined and why we use them.
APM What is it? Why do we use it?
Group cash generation Cash generation is used by the group as a measure of assessing how much Cash generation is a key measure, because it is the net cash flows to Chesnara
dividend potential has been generated, subject to ensuring other constraints from its life and pensions businesses which support Chesnara's dividend-paying
are managed. capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
Group cash generation is calculated as the movement in the group's surplus own from existing business'.
funds above the group's internally required capital, as determined by applying
the group's capital management policy, which has Solvency II rules at its
heart.
Divisional cash generation Cash generation is used by the group as a measure of assessing how much It is an important indicator of the underlying operating performance of the
dividend potential has been generated, subject to ensuring other constraints business before the impact of group level operations and consolidation
are managed. adjustments.
Divisional cash generation represents the movement in surplus own funds above
local capital management policies within the three operating divisions of
Chesnara. Divisional cash generation is used as a measure of how much
dividend potential a division has generated, subject to ensuring other
constraints are managed.
Commercial cash generation Cash generation is used by the group as a measure of assessing how much Commercial cash generation aims to provide stakeholders with enhanced insight
dividend potential has been generated, subject to ensuring other constraints into cash generation, drawing out components of the result relating to
are managed. technical complexities or exceptional items. The result is deemed to better
reflect the underlying commercial performance, show key drivers within that.
Commercial cash generation excludes the impact of technical adjustments,
modelling changes and corporate acquisition activity; representing the
underlying commercial cash generated by the business.
Economic Value (EcV) EcV is a financial metric that is derived from Solvency II Own Funds. It EcV aims to reflect the market-related value of in-force business and net
provides a market consistent assessment of the value of existing insurance assets of the non-insurance business and hence is an important reference point
businesses, plus adjusted net asset value of the non-insurance business within by which to assess Chesnara's value. A life and pensions group may typically
the group. be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
We define EcV as being the Own Funds adjusted for contract boundaries, risk business over time. The EcV development of the Chesnara group over time can be
margin and restricted with-profit surpluses. As such, EcV and Own Funds a strong indicator of how we have delivered to our strategic objectives.
have many common characteristics and tend to be impacted by the same factors.
Economic Value (EcV) earnings The principal underlying components of the Economic Value earnings are: By recognising the market-related value of in-force business (in-force value),
a different perspective is provided in the performance of the group and on the
- The expected return from existing business (being the effect of the unwind valuation of the business. Economic Value earnings are an important KPI as
of the rates used to discount the value in-force); they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
- Value added by the writing of new business; have delivered against all three of our core strategic objectives.
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the determination of expected
cash flows; and
- The impact of acquisitions.
EcV operating earnings This is the element of EcV earnings (see above) that are generated from the EcV operating earnings are important as they provide an indication of the
company's ongoing core business operations, excluding any profit earned from underlying value generated by the business. It can help identify profitable
investment market conditions in the period and any economic assumption changes activities and also inefficient processes and potential management actions.
in the future.
EcV economic earnings This is the element of EcV earnings (see above) that are derived from EcV economic earnings are important in order to measure the additional value
investment market conditions in the period and any economic assumption changes generated from investment market factors.
in the future.
Commercial new business profit A more commercially relevant measure of new business profit than that This provides a fair commercial reflection of the value added by new business
recognised directly under the Solvency II regime, allowing for a modest level operations and is more comparable with how new business is reported by our
of return, over and above risk-free, and exclusion of the incremental risk peers, improving market consistency.
margin Solvency II assigns to new business.
Solvency Solvency is a fundamental financial measure which is of paramount importance Solvency gives policyholders comfort regarding the security of their
to investors and policyholders. It represents the relationship between the provider. This is also the case for investors together with giving them a
value of the business as measured on a Solvency II basis and the capital the sense of the level of potential surplus available to invest in the business or
business is required to hold - the Solvency Capital Requirement (SCR). distribute as dividends, subject to other considerations and approvals.
Solvency can be reported as an absolute surplus value or as a ratio.
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.
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, with the equity denominator held by Chesnara.
adding back the net of tax CSM liability, as measured under IFRS.
IFRS capital base This is the IFRS net equity for the group plus the consolidated CSM net of It is a better measure of the value of the business than net equity as it
reinsurance and tax. takes into account the store of deferred profits held in the balance sheet, as
represented by the CSM, including those as yet unrecognised profits from
writing new business and acquisitions.
Policies / policy count Policy count is the number of policies that the group manages on behalf of This is important to show the scale of the business, particularly to provide
customers. 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.
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.
CASLP Sanlam Life & Pensions UK Limited
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 inherent commercial cash
generated by the business.
Core surplus emargence Absolute surplus movement of the divisions including Chesnara entity but
adjustments will be made for the impact of items such as FX, T2/T3
restrictions, acquisition impacts and shareholder dividends as deemed
appropriate. Note: Any adjustments will be subject to Board approval (and
Remco approval if they impact remuneration) and will be transparently
reported.
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.
CSM Contractual Service Margin (CSM) represents the unearned profit that an entity
expects to earn on its insurance contracts as it provides services.
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. 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.
GMM General measurement model - the default measurement model which applies to
insurance contracts with limited or no pass-through of investment risks to
policyholders.
Group Chesnara plc 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 Advisor.
KPI Key performance indicator.
LACDT Loss Absorbing Capacity of Deferred Tax
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, with the equity denominator
adding back the net of tax CSM liability, 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 5 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.
PAA Premium allocation approach - a simplified measurement model which can be
applied to short term contracts.
PRA Prudential Regulation Authority.
QRT Quantitative Reporting Template.
RA Risk adjustment is the additional reserve held for non-financial risks.
RCF 3 year Revolving Credit Facility of £100m (currently unutilised) put in
place in July 2021
Resolution The resolution set out in the notice of General Meeting set out in this
document.
RMF Risk Management Framework.
Robein Leven Robein Leven N.V.
Scildon Scildon N.V.
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.
Solvency (absolute) surplus A measure of how much the value of the company (Own Funds) exceeds the level
of capital it is required to hold
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 UK's 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.
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.
Transfer ratio The proportion of new policies transferred into the business in relation to
those transferred out.
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, S&P and CASLP
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.
VFA Variable fee approach - the measurement model that is applied to insurance
contracts with significant investment-related pass-through elements.
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, as well as the portfolio of
policies acquired from Canada Life on 16 May 2023 and reinsured into
Countrywide Assured plc
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;
Robein Leven NV acquired on 28 April 2022; and the insurance portfolio of
Conservatrix acquired on 1 January 2023
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.
Cautionary and Forward-Looking Statements
This document has been prepared for the members of Chesnara plc and no one
else. Chesnara plc, its directors or agents do not accept or assume
responsibility to any other person in connection with this document and any
such responsibility or liability is expressly disclaimed. Nothing in this
document should be construed as a profit forecast or estimate.
This document may contains, and we may make other statements (verbal or
otherwise) containing, forward-looking statements with respect to certain of
the plans and current expectations relating to the future financial condition,
business performance, and results, strategy and/or objectives (including
without limitation, climate-related plans and goals) of Chesnara plc.
Statements containing the words 'believes', intends', 'will', ' expects',
plans', 'aims', 'seeks', 'targets', 'continues' and 'anticipates' or other
words of similar meaning are forward looking.
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, political, social, environmental
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.
No representation is made with regard to forward looking statements, including
that any future results will be achieved. As a result, you are cautioned not
to place undue reliance on such forward-looking statements contained in this
document. Chesnara undertakes no obligation to update any of the
forward-looking statements contained within this document or any other
forward-looking statements we make. Forward-looking statements in this report
are current only as of the date on which such statements are made.
The climate metrics used in this document should be treated with special
caution, as they are more uncertain than, for example, historical financial
information and given the wider uncertainty around the evolution and impact of
climate change. Climate metrics include estimates of historical emissions and
historical climate change and forward-looking climate metrics (such as
ambitions, targets, climate scenarios and climate projections and forecasts).
Our understanding of climate change and its impact continue to evolve.
Accordingly, both historical and forward-looking climate metrics are
inherently uncertain and Chesnara expects that certain climate disclosures
made in this document are likely to be amended, updated, recalculated or
restated in the future.
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