REG - Chesnara PLC - Half-year Report
31/08/2022 07:00
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RNS Number : 6650X Chesnara PLC 31 August 2022
31 August 2022
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc
("Chesnara" or "the Company")
ACQUISITION MOMENTUM, CASH GENERATION AND STRONG SOLVENCY SUPPORT 3% GROWTH IN
INTERIM DIVIDEND
Chesnara reports its 2022 half year results. Key highlights are:
· Completion of the Sanlam Life & Pensions and Robein Leven
transactions
· Proposed acquisition of Conservatrix's insurance portfolio in the
Netherlands
· Positive divisional commercial cash generation of £18.6m
· Strong solvency of 195%, above usual 140-160% operating range
· Economic value ("EcV") of £526.7m (351p per share)
· 3% increase to the interim dividend to 8.12p per share
Commenting on the results, Steve Murray, Group CEO, said:
"The two acquisitions we completed in April and the recently announced
acquisition of Conservatrix's insurance portfolio in July show we have real
momentum behind our acquisition strategy. The wider business has performed
robustly despite the high level of market volatility. We retain a strong and
resilient solvency position with substantial cash balances at the holding
company level, supporting our continued track record of growing our dividend.
We remain optimistic about our ability to participate in future M&A and
continue to be highly confident in our ability to finance and execute such
transactions on attractive terms for both vendors and our shareholders."
A half year results presentation is being held at 9:30am on 31 August 2022 -
participants can register here
(https://stream.brrmedia.co.uk/broadcast/62e14ceb8228112a06ee1e2b) .
Further details on the financial results are as follows:
2022 HALF YEAR FINANCIAL AND STRATEGIC HIGHLIGHTS
CASH GENERATION AND DIVIDENDS - 18 YEARS OF DIVIDEND GROWTH
· Total divisional cash generation((1)) for HY 2022 was £60.1m
(HY 2021: £11.5m).
· Divisional commercial cash((1)) generation of £18.6m in HY
2022 despite volatile market conditions.
· The results during the year to date, combined with the Group's
balance sheet strength, support a further year of dividend growth. The Board
has declared a 2022 interim dividend of 8.12p per share (HY 2021 interim
dividend of 7.88p), which is a 3% increase compared to HY 2021 and extends the
period of uninterrupted dividend growth to 18 years.
FINANCIAL RESILIENCE - WELL POSITIONED FOR FUTURE M&A
· Solvency II ratio of 195% as 30 June 2022 (31 December 2021:
152%), above our normal operating range of between 140-160%. The increase
has been driven in part by the issue of £200m of Tier 2 subordinated debt in
February 2022.
· Cash balances at Group holding companies increased over the
period to £155.4m (31 December 2021: £46.1m), providing resources of over
£100m for future acquisitions and to support the dividend strategy.
· Estimated Fitch leverage ratio((2)) of 35.1% as at 30 June
2022 (31 December 2021: 6.4%) has increased as a result of the £200m Tier 2
debt issuance.
DELIVERING VALUE - REVITALISED STRATEGY
· The Sanlam Life & Pensions and Robein Leven transactions
completed in April 2022, adding further scale to the Group's UK and Dutch
businesses respectively and increasing expected annual steady state cash
generation by £6m per annum.
· The Group also announced the acquisition of the insurance
portfolio of Conservatrix in the Netherlands in July, with the transaction
expected to double Waard's steady state cash generation to £8m per annum.
· Commercial new business profit((3)) of £4.6m in HY 2022 (HY
2021: £6.6m).
· In line with our FY 2021 sensitivities, Economic Value ("EcV")
of £526.7m (31 December 2021: £624.2m) has reduced over the year to date due
to economic conditions, including the fall in equity markets, partly offset by
the positive impacts of the acquisitions of Sanlam Life & Pensions and
Robein Leven.
· Multiple sources of growth create a long-term commercial value
which is significantly in excess of the reported Economic Value.
IFRS PRE-TAX PROFITS
· IFRS pre-tax losses were £104.6m in HY 2022 (HY 2021 IFRS
pre-tax profits: £20.8m), driven by adverse investment conditions.
DIVIDEND DETAILS
· The interim dividend of 8.12p per share is expected to be paid
on 21 October 2022. The ordinary shares will be quoted ex-dividend on the
London Stock Exchange as of 8 September 2022. The record date for
eligibility for payment will be 9 September 2022.
ANALYST PRESENTATION
· A presentation for analysts will be held at 9.30am on 31 August
2022 at the offices of Panmure Gordon & Co, One New Change, London, EC4M
9AF which will be available to join online. A replay will subsequently be
posted to the corporate website at www.chesnara.co.uk.
· To join the webcast, please register using the following link
here (https://stream.brrmedia.co.uk/broadcast/62e14ceb8228112a06ee1e2b) .
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 is a European life and pensions consolidator listed on the London
Stock Exchange. It administers approximately one million policies and
operates as Countrywide Assured and Sanlam Life & Pensions in the UK, as
The Waard Group and Scildon in the Netherlands, and as Movestic in Sweden.
Following a three pillar strategy, Chesnara's primary responsibility is the
efficient administration of its customers' life and savings policies, ensuring
good customer outcomes and providing a secure and compliant environment to
protect policyholder interests. It also adds value by writing profitable new
business in Sweden and the Netherlands and by undertaking value-adding
acquisitions of either companies or portfolios.
Consistent delivery of the Company strategy has enabled Chesnara to increase
its dividend for 18 years in succession. Further details are available on the
Company's website (www.chesnara.co.uk).
Notes
Note 1 Divisional cash generation represents the cash generated by the
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
Commercial cash generation is used as a measure of assessing how much dividend
potential has been generated, subject to ensuring other constraints are
managed. It excludes the impact of technical adjustments, modelling changes
and corporate acquisition activity; representing the group's view of the
Commercial cash generated by the business. A comparative is not presented
as a commercial cash calculation was not produced for HY 2021.
Note 2 The estimated Fitch leverage ratio is a financial measure that
demonstrates the degree to which the company is funded by debt financing
versus equity capital, presented as a ratio. It is defined as debt divided
by debt plus equity, as measured under IFRS.
Note 3 Commercial new business profit is a more commercially relevant
measure of new business profit than that recognised directly under the
Solvency II regime, allowing for a modest level of return, over and above
risk-free, and exclusion of the incremental risk margin Solvency II assigns to
new business. This provides a fair commercial reflection of the value added
by new business operations and is more comparable with how new business is
reported by our peers, improving market consistency.
The Board approved this statement on 30 August 2022.
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.
HIGHLIGHTS
GROUP CASH GENERATION (exc. acquisition impact) £21.9M SIX MONTHS ENDED 30
JUNE 2021 £5.4M
DIVISIONAL CASH GENERATION £60.1M SIX MONTHS ENDED 30 JUNE 2021 £11.5M
Positive cash generation continued in the first half of 2022 with group cash
generation of £21.9m (excluding the day 1 impact of the two acquisitions
completed in the period), which includes £60.1m cash generation from our
divisions. These results have benefitted from the positive impact of the
symmetric adjustment (which has been beneficial as a result of falling equity
prices during the period).
GROUP SOLVENCY 195% 31 DECEMBER 2021: 152%
The group solvency improvement is largely due to the impact of the Tier 2 debt
raised, being significantly higher than the strains from the acquisitions
completed in the period. Looking through these transaction impacts, the
underlying solvency has increased by 10%.
FUNDS UNDER MANAGEMENT £11.2BN 31 DECEMBER 2021: £9.1BN
FuM growth since the start of the year has been primarily delivered through
our two completed acquisitions. Volatile economic conditions impacted asset
values which has had an adverse impact on FuM.
ECONOMIC VALUE £526.7M 31 DECEMBER 2021 £624.2M
The reduction in EcV is largely driven by material falls in equity markets.
Other factors include the impact of dividend distributions (£22.1m) and
acquisitions (EcV gains of £13.9m).
ECONOMIC VALUE EARNINGS £(89.6)M SIX MONTHS ENDED 30 JUNE 2021 £38.5M
The year-on-year swing is predominantly due to changing economic conditions.
COMMERCIAL NEW BUSINESS PROFIT £4.6M SIX MONTHS ENDED 30 JUNE 2021 £6.6M
Profits from Scildon remain stable but challenging equity market conditions in
Sweden have had a negative impact on their new business result.
IFRS PRE-TAX LOSS £(104.6)M SIX MONTHS ENDED 30 JUNE 2021 £20.8M
The result contains losses arising from economic conditions of £105.1m (six
months ended 30 June 2021: £7.4m). Our reserving approach means that the
result bears the full impact of interest rate increases on asset values but no
credit is recognised for the associated reduction in liabilities.
IFRS TOTAL COMPREHENSIVE INCOME £(66.5)M SIX MONTHS ENDED 30 JUNE 2021 £1.9M
There is minimal foreign exchange impact in the period compared (six months
ended 30 June 2021: loss of £23.9m). Total comprehensive income benefits from
£36.4m of tax adjustments (6 months ended 30 June 2021: £3.0m loss).
INTERIM DIVIDEND INCREASED FOR THE 18TH CONSECUTIVE YEAR
Increase in interim dividend of 3% to 8.12p per share (2021: 7.88p interim and
14.72p final) supported by strong underlying commercial cash generation from
our business units. The two completed acquisitions and one recently
announced acquisitions are expected to positively support future cash
generation.
2022 HAS SEEN VOLATILE ECONOMIC CONDITIONS WITH RISING INTEREST RATES, FALLING
EQUITY MARKETS AND INFLATIONARY PRESSURE
The financial results have been heavily impacted by the economic conditions in
the first half of 2022. Conflict in Ukraine and uncertainty in financial
markets has been reflected in falling equity values and rising interest rates
which, coupled with the impact of inflationary pressures, has led to negative
investment returns and economic losses across the operating divisions. The
impact of these economic factors has been reflected, to varying degrees,
across all of our financial metrics.
THE GROUP CONTINUES TO EXPAND THROUGH M&A
During the first half of 2022 we completed the two acquisitions announced late
in 2021 and announced a further acquisition in the Netherlands. The
acquisitions of Sanlam Life & Pensions (UK) Limited (SLP) and Robein Leven
in the Netherlands, both completed successfully during the second quarter,
delivering a combined c9% uplift in policies within the group portfolio. Work
is due to commence on delivering the transfer of the respective businesses
into the principal operating companies of the UK (CA plc) and Waard Group
(Waard Leven).
Expansion in the Netherlands continues within the Waard Group, following the
announcement of the acquisition of the insurance portfolio of Conservatrix NV,
expected to complete later in 2022 subject to regulatory approvals. It is
anticipated this will deliver a material increase in Waard's policies under
administration (c70%). We remain optimistic about the outlook for future
deals.
These financial highlights include the use of Alternative Performance Measures
(APMs) that are not required to be reported under International Financial
Reporting Standards.
1 - Economic profit is a measure of pre-tax profit earned from investment
market conditions in the period and any economic assumption changes in the
future.
2 - Operating profit is a measure of the pre-tax profit earned from a
company's ongoing core business operations, excluding any profit earned from
investment market conditions in the period and any economic assumption changes
in the future.
3 - Funds Under Management (FuM) represents the sum of all financial assets on
the IFRS balance sheet.
4 - Economic Value (EcV) is a financial metric derived from Solvency II. It
provides a market consistent assessment of the value of existing insurance
businesses, plus adjusted net asset value of the non-insurance business within
the group.
5 - Economic Value earnings are a measure of the value generated in the
period, recognising the longer-term nature of the group's insurance and
investment contracts.
6 - Commercial new business represents the best estimate of cash flows
expected to emerge from new business written in the period. It is deemed to be
a more commercially relevant and market consistent measurement of the value
generated through the writing of new business, in comparison to the
restrictions imposed under the Solvency II regime.
7 - Group cash generation represents the surplus cash that the group has
generated in the period. Cash generation is largely a function of the
movement in the solvency position, used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring other
constraints are managed.
8 - Divisional cash generation represents the cash generated by the three
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
9 - Commercial cash generation is used as a measure of assessing how much
dividend potential has been generated, subject to ensuring other constraints
are managed. It excludes the impact of technical adjustments, modelling
changes and corporate acquisition activity; representing the group's view of
the Commercial cash generated by the business.
CHAIR'S STATEMENT
I am delighted to report that our divisions have continued to deliver a strong
level of cash generation despite significant economic volatility during the
period. This has supported an increase in our interim dividend for an 18th
consecutive year.
LUKE SAVAGE, CHAIR
CASH EMERGENCE, DIVIDEND AND FINANCIAL STABILITY
Chesnara has a strong track record of delivering cash generation across a
variety of market conditions. The first half of 2022 has been no different,
with total divisional cash generation leaving us well positioned to further
extend our 18 years of continued dividend growth for our shareholders
(shareholders will receive 8.12p per share, an increase of 3%).
Financial stability is at the heart of the Chesnara business and its financial
model. First and foremost, it is fundamental to providing financial security
to our customers. Strong and stable solvency is also critical to the
investment case for both our equity and debt investors.
In light of this, I am pleased to report our solvency position remains robust,
with a closing Solvency II ratio of 195%, significantly above our target
operating range, even after the payment of consideration for our recent
acquisitions. Our solvency position remains underpinned by a well-diversified
business model, a focus on responsible risk-based management and resilient and
reliable cash flows from our businesses. Our previously announced Tier 2
debt raise was also a material contributor to our improved solvency ratio.
PEOPLE AND DELIVERY
Following the initial impact from the pandemic, operating conditions have
stabilised somewhat and across the group we have settled into effective and
flexible hybrid working conditions. However, as operating conditions become
less challenging we are aware that our workforce is becoming increasingly
challenged by the wider cost of living crisis. With this in mind, we have
supported all UK staff whose salaries are below the higher rate tax threshold
with a one-off payment broadly in line with the estimated increase in average
household expenditure witnessed to date.
Across the group our people have continued to deliver. We have completed the
acquisitions of Sanlam Life & Pensions (UK) Limited in the UK and Robein
Leven in the Netherlands. On both deals our teams have been working hard on
the early stages of integrating those new businesses into the group.
Furthermore, in July we announced the acquisition of the insurance portfolio
of Conservatrix in the Netherlands. This transaction will transform our Dutch
closed life business, Waard, increasing its policies under administration by
over 70% and creating a second material closed book consolidation business
alongside Chesnara's existing UK platform.
In Sweden there has been a strong focus on improving the transfer ratio where
there has been a marked reduction in the rate at which business transfers out
from our portfolio. There are also positive early signs of improved new
business as local management focus on maximising the expected opportunity from
imminent regulatory changes in Sweden.
We delivered a successful Tier 2 debt raise in February which leaves us well
placed to fund acquisition activity. Staff have also been working hard to
ensure we can meet the requirements of IFRS 17 for which the effective date is
now less than six months away. Our programme is progressing well as we move
through our schedule of dry runs and we are working with Deloitte to finalise
the technical and operational implementation.
Of course, these major developments are in addition to continuing to deliver
all customer and regulatory business-as-usual responsibilities.
In short, it has been a period of significant operational delivery and I would
like to take this opportunity to thank staff for their continued commitment
and efforts.
PURPOSE
At Chesnara, we help protect customers and their dependents through the
provision of life, health, and disability cover or by providing savings and
pensions to meet future financial needs. These are very often customers that
have come to us through acquisition, and we are committed to ensuring that
they are positively supported by us.
We have always managed our business in a responsible way and have a strong
sense of acting in a fair manner, giving full regard to the relative interests
of all stakeholders.
Our equity investors are a key stakeholder, and I am pleased that we have
announced a 3% increase in the interim dividend to 8.12 pence per share.
We have also been fully respectful of Environmental, Social and Governance
('ESG') matters. In particular, we have positioned governance as being a
core foundation to the business model and have a well-established governance
framework.
Over recent years we have increased our focus on environmental matters and we
have accelerated and deepened this focus during the first half of 2022. As
we take stock of our environmental status we continue to believe that our
current position is relatively strong across all divisions and there are many
examples of positive environmental actions. That said, we are also extremely
conscious that we need to more formally substantiate our environmental
footprint and, based on this assessment, agree and report targets for how we
commit to reduce to net zero.
A group wide sustainability programme has been initiated during the period
which is building on the excellent work done in the divisions thus far. The
programme has Executive and Non-Executive sponsorship, with David Rimmington
and Jane Dale being assigned to oversee the programme, which will look to
transform Chesnara into a more sustainable business. The scale of the task for
us and the rest of the industry is huge and a priority for the programme
during the remainder of 2022 will be to formally measure our scope 3 financed
emissions, to go with our understanding of the impact of our operating
framework. This will allow us to establish formal net zero targets and an
action-based transition plan to demonstrate how we will deliver the associated
real world change. We will report targets and action plans for
decarbonisation, as well as key activities for the wider sustainability
strategy, in our 2022 Annual Report and Accounts.
OUTLOOK
Sources of future growth remain strong. The reduction in Economic Value during
the period has been driven largely by the impact the war in Ukraine and wider
geopolitical factors have had on equity markets. However, we retain our view
that, despite such short term market volatility, equities continue to offer a
source of long term value enhancement.
In addition, the outlook for acquisitions is positive. We continue to expect
the market to be active and we have taken actions to enhance our ability to
participate in that market, including the issuance of our inaugural Tier 2
bond in February. In addition, the recent appointment of Amanda Wright as
Group General Counsel and Company Secretary, with Al Lonie moving to a Chief
of Staff role, has further strengthened the group's capability and capacity to
undertake further M&A in future.
Luke Savage,
Chair
30 August 2022
CHIEF EXECUTIVE OFFICER'S REPORT
The acquisition of the Conservatrix insurance portfolio was the third
transaction Chesnara has announced over the past year and shows the growth
potential of the group.
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
The extreme and volatile economic and geopolitical back-drop over the first
half of 2022 has yet again left many of us using the word 'unprecedented'. As
part of my annual 2021 report I commented on Chesnara's track record of
delivering through a very wide range of market conditions over its history. I
am pleased to report that this has continued during the first six months of
2022 where we have had a busy and successful start to the year. Our divisions
have generated approximately £18.6m of Commercial cash, representing 153%
coverage of the 2022 interim dividend and clearly demonstrating the resilience
of our business model. Our solvency position remains robust and well above our
target operating range of 140%-160%.
We have re-energised our strategy whilst remaining focussed on doing three
things:
1. Running in-force insurance and pensions books efficiently and
effectively.
- We now look after c941,000 policyholders and customers who have
c£11.2bn of their assets with us post the completion of the acquisitions of
Sanlam Life & Pensions (UK) Limited (SLP) and Robein Leven. The
acquisition of Conservatrix's insurance portfolio is expected to add a further
c70,000 policyholders to the group, meaning we will have over 1m policyholders
under our care for the first time in our history.
- We have seen the benefits of positive retention activity. In Sweden,
we have seen a marked reduction in the rate at which policies have been
transferring out from the Movestic portfolio.
2. Seeking out and delivering value enhancing M&A opportunities:
- This is an area where we have seen extensive activity across the
group compared to recent years. During the first half of 2022 we completed the
acquisitions of SLP and Robein Leven and the integration of these businesses
within the group is well underway.
- In July, we announced the acquisition of the insurance portfolio of
Conservatrix in the Netherlands. A capital contribution of £35m will be
provided by the group to support the solvency position of the Conservatrix
business, ensuring that Conservatrix customers will benefit from becoming part
of a well capitalised group after a significant period of uncertainty. We
expect the transaction will add c£18m to Economic Value and deliver steady
state cash generation of c£4m each year, supporting our dividend strategy. As
a reminder, SLP and Robein Leven combined added £13.9m in EcV and should
deliver additional steady state cash generation of £6m each year.
- Our February Tier 2 debt raise of £200m proved to be very well
timed to support this activity with capital resources required to support our
three announced transactions, totalling over £100m. And it provides financial
flexibility to support further acquisitions where we continue to have material
resources of over £100m.
3. Writing focused, profitable new business where we are satisfied an
appropriate return can be made.
- During the period we have delivered record market shares of Term new
business in Scildon which has resulted in a 3.5% period on period increase in
total volumes. In Movestic we have seen increments return to pre COVID-19
levels plus an encouraging trend in new transfer business.
Remaining focussed on these three strategic aims has had a positive impact on
the results in the period and importantly enhanced the outlook for the group.
However, these positive impacts have been more than offset by the adverse
short term impacts of very volatile economic and market conditions on the IFRS
and Economic Value (EcV) results during the period, where we have reported
losses of £104.6m and £89.6m respectively.
CONTINUED DELIVERY OF RESILIENT CASH GENERATION AND ROBUST STABLE SOLVENCY
At the heart of the Chesnara financial model and investment case is resilient
cash generation and stable solvency.
RESILIENT CASH GENERATION
The total group cash generation (excluding the impact of acquisitions) during
the six months to 30 June 2022 was £21.9m (six months to 30 June 2021;
£5.4m). As a reminder, we define cash as the movement in the group's
surplus Own Funds above the group's internally required capital. The surplus
can be impacted by equity markets and currency movements in the near term and
by consolidation adjustments. The divisional results pre-consolidation are
therefore, we believe, a better reflection of the dividend potential than the
consolidated group figures.
The total divisional cash generation for the six months to 30 June 2022 was
£60.1m (six months to 30 June 2021: £11.5m) creates significant dividend
paying capacity. The headline divisional cash generation was positively
impacted by £41.5m by technical factors such as the symmetric
adjustment(†). This is a feature of the Solvency II Standard Formula whereby
reduced capital levels need to be held following periods of sharp equity
market falls, such as we have seen this year.
To get a better sense of the inherent cash generation in Chesnara, our
alternative Commercial cash metric looks through the symmetric adjustment and
foreign exchange translation impacts, along with other less material technical
impacts (see Financial Review section for more detailed cash generation
analysis).
At a total divisional level we have generated £18.6m of Commercial cash which
more than covers the interim shareholder dividend. In addition to the
underlying cash expectations Countrywide Assured has benefited from expense
synergies resulting from the acquisition of SLP. Countrywide Assured and
Scildon have also benefitted from the general increase in long term yields
over the period.
(†)Symmetric adjustment: the Solvency II capital requirement calculation
includes an adjusting factor that reduces or increases the level of the equity
capital required depending on historical market conditions. Following periods
of market growth, the factor tends to increase the level of capital required
and conversely, in falling markets the capital requirement becomes less
onerous.
Cash generation by territory: 6 months ended 30 Jun 2022
Divisional cash generation £m
UK 31.3
Sweden 14.2
Netherlands 14.6
Total 60.1
Commercial cash generation £m
UK 11.0
Sweden (7.0)
Netherlands 14.6
Total 18.6
DIVISIONAL COMMERCIAL CASH GENERATION REPRESENTS 153% COVERAGE OF THE 2022
INTERIM SHAREHOLDER DIVIDEND
The Chesnara parent company cash (including Chesnara BV) and instant access
liquidity fund balance at 30 June 2022 has increased to £155.4m (31 December
2021; £46.1m), which provides future acquisition funding capacity and further
supports the sustainability of the funding of the group dividend. Cash
reserves have increased largely as a result of the post year end Tier 2 debt
raise offset by partial utilisation to repay existing RCF balances of £31.3m
and £62.9m funding for the Sanlam Life & Pensions (UK) Limited (SLP)
acquisition. Excluding these big ticket movements the underlying balance has
remained largely constant as divisional dividend receipts have broadly matched
the shareholder dividend payment and other working capital outflows.
Looking forward, we continue to have a strong line of sight to future cash
generation over the 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.
STABLE AND ROBUST SOLVENCY
During the 6 months to 30 June 2022 we have seen a sharp increase in the group
solvency ratio to 195%. The table below illustrates that this increase is
largely due to the Tier 2 debt issuance, partly offset by the capital
resources (mainly the payment of consideration) required to complete the SLP
and Robein Leven acquisitions, together with the impact of a swing in the
scale and direction of the symmetric adjustment. As a reminder, the symmetric
adjustment is an inbuilt 'shock absorber' that dampens the impact of equity
market rises and falls requiring us to hold capital when markets rise
significantly with this capital then being released if markets fall or
stabilise. Excluding these individually material movements the ratio has
continued to remain stable with an underlying modest increase of 2%.
Solvency ratio
Solvency ratio %* Solvency surplus £m
2018 158 202.4
2019 155 210.8
2020 156 204.0
2021 152 190.7
Jun 2022 195 313.9
*Preferred operating solvency range = 140% to 160%
The closing headline solvency ratio of 195% is significantly above our target
operating range of between 140% and 160%. The solvency ratio does not adopt
any of the temporary benefits available from Solvency II transitional
arrangements (though we do apply the volatility adjustment in our UK and Dutch
divisions). However, the ratio is impacted by the symmetric adjustment†; a
feature of the Solvency II Standard Formula whereby additional capital needs
to be held following periods of strong equity growth. At the end of 2021 the
symmetric adjustment was suppressing the solvency ratio by 8%. We noted that
this supressing impact was likely to reverse out over time. This is indeed
exactly what we have observed during the first half of 2022 when equity
markets have fallen, with the symmetric adjustment shifting to a position
where it is now enhancing the headline ratio by 12%.
Solvency ratio movement
Solvency ratio %
SII % 31 Dec 2021 152
Tier 2 debt issuance 48
Acquisitions - Robein Leven (2)
Acquisitions - SLP (13)
Symmetric adjustment 12
Foreseeable dividend impact (4)
Underlying business 2
SII % 30 Jun 2022 195
The closing solvency ratio of 195% will not be the new long-term position as
we expect to utilise this additional capital surplus as we undertake
acquisitions, which should result in the ratio reverting back within the
robust and stable 140% to 160% historical range. For example, the recently
announced Conservatrix acquisition is expected to reduce the solvency ratio by
approximately 14% on a pro forma basis as at 30 June 2022. Strategically, its
our intention to deploy further capital in support of value enhancing
acquisitions in the future.
THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTCULARLY THROUGH M&A
In our 2021 full year accounts we introduced the concept of the Chesnara 'fan'
which illustrates the additional areas of growth potential the group may
benefit from that aren't reflected in our Economic Value metric.
In the 2021 full year accounts we stated "Over the medium term, we expect all
components of the growth model to be positive, although there can be a level
of shorter-term volatility in each element."
Although the time period is short it is worth looking at how the results for
the 6 months to 30 June 2022 fare 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 equity market performance this
source of value is the most volatile of the growth sources. In 2021 real world
returns represented growth of c£110m however, a large proportion of this has
reversed with a corresponding loss in the first half of 2022 of c£91.1m.
Despite this volatility in the short term, over the long term we expect
average returns in excess of risk free, as we have seen historically. Whilst
also a short period we have seen positive momentum across most global equity
indices in July and early August. Valuing the group assuming relatively
conservative returns above the risk free yield, for example using an average
of 5% total equity returns per annum, would add significantly upwards of
£150m of incremental EcV. In addition, we might reasonably expect a
significant proportion of the recent losses to be reversed in the event that
markets recovered.
Over time, we expect improvements to operational effectiveness to be a source
of value creation, be that through M&A synergies, scale or other positive
management actions. During the first half of the year Countrywide Assured in
particular has benefitted from synergies from the SLP acquisition. Over
recent years, including 2021, we have suffered some operational losses
particularly relating to investments made in IT systems (especially in
Scildon), some regulatory changes, and higher than expected pension transfer
outflows in Sweden. It is hugely encouraging to report that there has been a
marked reduction in the rate at which business has transferred from the
Swedish portfolio. The Countrywide Assured expense synergies together with the
positive transfer experience in Sweden mean the outlook for operational value
growth is much improved.
The other value growth components have all been a source of actual growth
during the period. The Own Funds of the group have increased by £14.6m
directly as a result of risk margin reductions. Acquisitions completed in the
period have also added £13.9m of EcV on a marginal costing basis.
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 6 months to 30 June 2022
we have seen Commercial new business profits of c£4.6m.
EQUITY MARKET PERFORMANCE HAS DRIVEN A MARKED REDUCTION IN EcV
We have seen falls in equity markets over the period, particularly in Sweden,
and this has been the primary reason why we are reporting a group EcV loss of
£89.6m in the period. Since the end of the half year period, equity market
recovery suggests a proportion of the reported economic loss will have
reversed. The overall movement in the group's EcV over the period includes a
£13.9m positive impact of the two acquisitions that we completed in the year.
We have grown our Funds Under Management (FuM) in the first half of 2022,
largely through the completion of SLP and Robein Leven. This growth was
partially offset by the negative effects of increasing yields and falling
equity markets on the value of funds over the first half of the year.
Growth in FuM
Funds Under Management £bn
2018 7.1
2019 7.7
2020 8.5
2021 9.1
Jun 2022 8.0
Acquisitions 2022 3.2
Pro forma acquisitions 2022 0.5
Jun 2022 Total 11.7
Growth in policies in force
Policies 000's
2019 891
2020 894
2021 877
Jun 2022 862
Acquisitions 2022 79
Pro forma acquisitions 2022 69
Jun 2022 Total 1,010
AN INCREASED FOCUS ON ACQUISITION ACTIVITY
The primary purpose of Chesnara when it was formed back in 2004 was to acquire
other closed book businesses and acquisition activity has been a core
component of our historical EcV growth. As well as the immediate benefit from
any price discount to EcV, acquisitions also improve the future growth outlook
by enhancing the potential from the other value elements of the Chesnara
'fan'.
Successful acquisitions have been key to Chesnara's development and will
remain so in the future. During 2022, we completed two acquisitions, Robein
Leven in the Netherlands and SLP in the UK. Robein Leven added further scale
to the Waard, the group's Dutch closed book operations, and SLP increased the
UK Funds Under Management by £2.9bn. Together they added £13.9m of EcV on
a marginal cost basis and are expected to create additional steady cash
generation potential of c£6m per annum.
In July 2022 we announced the acquisition of Conservatrix in the Netherlands.
We expect this deal to deliver an immediate increase of £18m of EcV, with
further value generated from future real world investment returns and the
run-off of the risk margin. The new portfolio is expected to generate c£4m of
steady state incremental cash per annum meaning the enlarged Waard business
will generate c£8m of cash per year, covering about one quarter of the
shareholder dividend. Taken together, accessing these value enhancing
acquisitions will require us to deploy over £100m of capital resources
primarily from the £200m inaugural Tier 2 debt raise we executed in February.
CONFIDENCE IN OUR ABILITY TO EXECUTE M&A IN THE FUTURE
We remain optimistic about the prospect of future acquisitions and believe
that we can deliver further value accretive deals in future. Even relatively
small transactions can have a material positive cumulative impact, as the
group delivers synergies from integrating businesses and portfolios into its
existing operations.
2022 has continued to see an active M&A market across European insurance
with sources of capital (particularly through private equity firms) readily
available to support transactions, large international insurance groups
refocusing their strategies away from legacy businesses and management teams
that actively managed their business portfolios being rewarded by
shareholders.
Even with the current market volatility, we expect positive activity levels in
insurance M&A to continue. A market with plenty of activity provides
opportunities for Chesnara as a consolidator. We continue to believe there
is also likely to be a little less competition in the sub £500m valuation
deal end of the market that we currently participate in. The three deals that
we have announced in recent times should provide positive reference points for
sellers and their advisors about our renewed ability to execute M&A.
We continue to have material cash resources to deploy following the £200m
Tier 2 debt issue and, after paying down existing debt and funding the SLP
deal, we hold cash balances of £155.4m at a group level (of which c£100m is
readily available for deployment post the impact of the Conservatrix insurance
portfolio deal). Our revolving credit facility creates an additional level of
working capital flexibility. For more transformational deals, we retain the
ability to raise equity and are mindful of the potential benefits from other
funding arrangements such as joint ventures or vendor part-ownership.
We announced that Sam Perowne was joining our executive team early this year
who has extensive M&A experience along with two new Independent NED
appointments in February, Karin Bergstein and Carol Hagh, who also have
M&A experience. In August, we announced two further changes to our
senior leadership team with Al Lonie currently our Company Secretary moving to
become my Chief of Staff and Amanda Wright joining from abrdn to become
General Counsel and Company Secretary. These changes will further enhance the
capacity, capability and experience we have available to pursue further
strategic opportunities.
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.
A SUSTAINABLE CHESNARA
Core to our beliefs of transitioning to a sustainable Chesnara is that we need
to consider the impact of our operations and investments on our business but
also, and arguably more importantly, consider the impact of our operations and
investments on all of our stakeholders.
Positive outcomes for any particular stakeholder at the cost of inappropriate
outcomes for other stakeholders is not acceptable. We want Chesnara to make
a positive contribution to people, the planet, and the natural world and our
groupwide sustainability programme will build on the work done by the
divisions and their individual strengths to deliver this. We really are
stronger together.
We are taking a number of positive actions across the group with each one
making a difference. We do however recognise that we are only at the start of
this journey and there remains a huge amount to do for us, the industry, and
the wider world. As a steward and a safe harbour for our almost 1 million
policyholders and over £11bn of policyholder and shareholder assets, we have
a real responsibility to help drive the change needed to deliver
decarbonisation and a sustainable society and economy. We will take
responsibility for the things that we can influence and the actions we can
take.
My team and I are passionate about transforming the group into a sustainable
business but we recognise that we cannot do this alone and so will need to
work with other parties in the industry and beyond to initiate and deliver the
change needed. Thus far, we have not sufficiently detailed what we do and
why we do it and so my team is working on developing and detailing our
strategy. As I said at year end, more formality is required around some of
our processes and disclosures to make sure we inform and educate our
stakeholders about what we are doing well. And I am determined that not only
will we talk about the good things we are doing but also the things that we
need to improve on or the things we are finding difficult. It is only by
talking about the whole range of activities that we are doing and being open
and honest about the difficulties we face and the progress we are making that
we can tackle the challenge. An honest narrative will be key to us making
the required changes.
Our current focus is on determining our scope 3 financed emissions so we can
conclude on a credible transition plan to net zero in line with the Paris
Agreement, including those all-important short and medium term targets for a
just transition. We will provide details of these plans in our 2022 full
year report and accounts.
OUTLOOK
Chesnara has an excellent track record of sustainable long term cash
generation over its history through recessions, pandemics, global financial
crisis and other variable market conditions. The first half of 2022 has seen
us continue this impressive record of cash generation in difficult markets.
The war in Ukraine has played a large role in the volatile start to the year
we have seen across global markets. The Chesnara business model has
delivered positive cash generation in uncertain markets before, and we have
confidence it will continue to do so in future. We are not dismissive of the
material reduction in Economic Value that equity market falls and interest
rate rises have created during 2022 but equally, we do not see the value loss
in the period as being a factor that compromises the medium to longer term
outlook.
We have ambitious plans to grow the business and the achievements during the
first half of 2022 leave us well positioned to do so.
Finally, I want to thank our people across the UK, Sweden and the Netherlands
for all their remarkable efforts during what has been another busy period.
When I joined Chesnara just over one year ago I strongly believed the group
had some great opportunities in front of it. A year on with the continued
drive and determination of our people, I have every confidence that the future
remains bright for Chesnara.
Steve Murray,
Chief Executive Officer
30 August 2022
MANAGEMENT REPORT
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to customers and shareholders through
our three strategic pillars, executed across our three territories.
STRATEGIC OBJECTIVES
1. 2. 3.
MAXIMISE THE VALUE FROM EXISTING BUSINESS ACQUIRE LIFE AND PENSIONS BUSINESSES ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
Managing our existing customers fairly and efficiently is core to delivering Acquiring and integrating companies into our business model is key to Writing profitable new business supports the growth of our group and helps
our overall strategic aims. continuing our growth journey. mitigate the natural run-off of our book.
KPIs KPIs KPIs
Cash generation Cash generation EcV growth
EcV earnings EcV growth Customer outcomes
Customer outcomes Customer outcomes
Risk appetite
OUR CULTURE AND VALUES -
RESPONSIBLE RISK BASED MANAGEMENT
RESPONSIBLE RISK BASED MANAGEMENT FOR THE BENEFIT OF ALL OUR STAKEHOLDERS FAIR TREATMENT OF CUSTOMERS MAINTAIN ADEQUATE FINANCIAL RESOURCES PROVIDE A COMPETITIVE RETURN TO OUR SHAREHOLDERS ROBUST REGULATORY COMPLIANCE
BUSINESS REVIEW | UK
The UK division is made up of Countrywide Assured plc and Sanlam Life &
Pensions (UK) Limited (SLP). SLP was acquired by Chesnara on 28 April 2022
following the announcement to purchase the company in September 2021. The
combined businesses manage c279,000 policies covering linked pension business,
life insurance, endowments, annuities and some with profit business.
Countrywide Assured follows an outsourcer-based operating model, whereas SLP's
is largely delivered through internal resources.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
As a predominantly closed book, the division creates value through managing
the following key value drivers: costs; policy attrition; investment return;
and reinsurance strategy.
In general, surplus regulatory capital emerges as the book runs off. The
level of required capital is closely linked to the level of risk to which the
division is exposed. Management's risk-based decision-making process seeks
to continually manage and monitor the balance of making value enhancing
decisions whilst maintaining a risk profile in line with the board's risk
appetite.
At the heart of maintaining value is ensuring that the division is governed
well from a regulatory and customer perspective.
INITIATIVES AND PROGRESS IN 2022
- The acquisition of Sanlam Life & Pensions (UK) Limited (SLP)
was successfully completed on 28 April 2022. This increased the number of
policies by over 68,000 and added EcV of £52.8m to the division.
- Combined UK division cash generation of £31.3m in the period.
- As a result of the acquisition, central overheads can now be
shared across a wider policy base, which has resulted in a benefit to CA Own
Funds of £8.1m.
- Work has started on delivering the planned target operating
model for SLP.
- CA completed a transfer of £13.4m of capital out of its
with-profit funds. This increased solvency surplus by £9.9m
- Investment markets have influenced the results of the division
over the period. Falls in equity prices and rises in yields have generally
been positive to our solvency position, but less favourable to the division's
EcV.
- CA solvency has increased during the period, largely driven by
the aforementioned group cost sharing exercise, the with-profit capital
extraction and the positive benefits from increasing yields and the fall in
the symmetric adjustment.
FUTURE PRIORITIES
- Continue to progress our plans to integrate SLP into the
division, with a focus on delivering our longer-term target operating model.
- Commence that work that is required to deliver the planned
transfer of the insurance business of SLP into the UK's principal operating
company, Countrywide Assured plc.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Support Chesnara in identifying and delivering UK acquisitions.
KPIs
Economic Value - UK
£m 2018 2019 2020 2021 Jun 2022
EcV 214.7 204.6 187.4 181.9 211.2
Cumulative dividends 59.0 88.0 121.5 149.0
Total 214.7 263.6 275.4 303.4 360.2
Cash generation - UK
£m 2018 2019 2020 2021 Jun 2022
Cash generation 55.8 33.6 29.5 27.4 31.3
From June 2022, the figure includes SLP.
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Treating customers fairly is one of our primary responsibilities. We seek to
do this by having effective customer service operations together with
competitive fund performance whilst giving full regard to all regulatory
matters. This supports our aim to ensure policyholders receive good returns,
appropriate communication, and service in line with customer expectations.
INITIATIVES AND PROGRESS IN 2022
- Following the acquisition of SLP, the customer-facing website
was developed and we have ensured customers continue to receive the same high
quality standard of service. The division is in the process of aligning,
where appropriate, SLP's and CA's customer governance framework.
- Our operational resilience programme has remained a key focus.
Work is in progress on the next phase of the work, which includes identifying
and remediating any weaknesses.
- We have continued with our activity of seeking to stay in
contact with customers and to reunite customers with unclaimed assets. This
will remain a priority throughout 2022.
- The activity on product reviews has continued in line with our
prioritisation schedule and remediation undertaken where required.
- The FCA published their final paper on the Consumer Duty in July
2022. An assessment of actions needed to meet the requirements of the paper
is being undertaken for the division, with no major concerns identified to
date.
FUTURE PRIORITIES
- The operational resilience programme will remain a priority,
with plans in place to ensure we achieve the regulatory deadline of March
2025.
- Progress any actions needed to meet the requirements of the
Consumer Duty for CA and SLP.
KPIs
Policyholder fund performance - CA plc
Jun 2022 Jun 2021
CA Pension Managed (2.8)% 17.9%
CWA Balanced Managed Pension (2.8)% 17.2%
S&P Managed Pension (3.3)% 18.8%
Benchmark - ABI Mixed Inv 40%-85% shares (6.8)% 16.7%
The division's main managed funds outperformed benchmark for the 12 months to
30 June 2022.
GOVERNANCE
BACKGROUND INFORMATION
Maintaining effective governance and a constructive relationship with
regulators underpins the delivery of the division's strategic plans.
Having robust governance processes provides management with a platform to
deliver the other aspects of the business strategy. As a result, a
significant proportion of management's time and attention continues to be
focused on ensuring that both the existing governance processes, coupled with
future developments, are delivered.
INITIATIVES AND PROGRESS IN 2022
- With the acquisition of SLP during the period a key focus has
been on integrating the business into the existing governance framework.
- The division's IFRS 17 project has remained a key focus over the
period. Good progress has been made, both on the existing CA project as well
as integrating SLP's existing programme into the wider group programme.
FUTURE PRIORITIES
- Continue the transition of SLP to align with the UK division's
governance framework.
- Continue to deliver against our IFRS 17 plans in preparation for
the standard becoming effective from 1 January 2023.
- Support the group-wide ESG programme.
KPIs
SOLVENCY RATIO CA: 192%
Solvency is strong in both businesses with surplus generated in the year to
date increasing the solvency ratio from 130% to 192% and 148% in CA and SLP
respectively.
£m Solvency Ratio
31 Dec 2021 surplus 30.5 130%
Surplus generation 33.4
30 Jun 2022 surplus 63.9 192%
SOLVENCY RATIO SLP: 148%
£m Solvency Ratio
31 Dec 2021 surplus 9.7 124%
Surplus generation 5.1
31 Mar 2022 surplus 4.6 112%
Surplus generation 14.3
30 Jun 2022 surplus 18.9 148%
BUSINESS REVIEW | SWEDEN
Movestic is a life and pensions business based in Sweden and is open to new
business. From its Stockholm base, Movestic operates as an innovative brand
in the Swedish life insurance market. It offers personalised unit-linked
pension and savings solutions through brokers and is well-rated within the
broker community.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Movestic creates value predominantly by generating growth in the unit-linked
Funds Under Management (FuM), whilst assuring a high-quality customer
proposition and maintaining an efficient operating model. FuM growth is
dependent upon positive client cash flows and positive investment
performance. Capital surplus is a factor of both the value and capital
requirements and hence surplus can also be optimised by effective management
of capital.
INITIATIVES AND PROGRESS IN 2022
- The first 6 months of 2022 have seen uncertainty in financial
markets, resulting in rising interest rates and inflation and falling equity
markets, driven by a number of international factors such as Russia's invasion
of Ukraine and China's zero tolerance towards COVID-19.
- These events were reflected in the returns on the policyholders'
investment assets as well as Movestic's own investments.
- We have strengthened our offering and distribution within our
custodian business, whereby we provide a life and pensions wrapper to third
party managed customers. The effect on incoming volumes is positive compared
to both previous year and expectations.
- Pension transfers continue to be a feature of the market through
new regulations, along with digitalisation, transparency, lower fees, and new
working processes. However, the negative development due to competitors'
aggressive activities, coupled with retention initiatives, seems to have
slowed down and the net transfer outflow has improved compared to the same
period previous year.
- Favourable claims development within the risk insurance segment.
FUTURE PRIORITIES
- Continue to build a solid and long-term sustainable value
creation for customers and owners through a diversified business model with
continued growth of volumes and market shares in selected segments.
- Continue to build the digital leadership in the industry through
the development of digitalised and tailored customer propositions and
experience. Movestic will also continue the journey to digital and automated
processes to further improve efficiency and control.
- Focus on customer loyalty and attractive offerings to both
retain customers and reach more volumes on the transfer market.
- Provide a predictable and sustainable dividend to Chesnara.
KPIs (all comparatives have been presented using 2022 exchange rates)
Economic Value
£m 2018 2019 2020 2021 Jun 2022
Reported value 208.7 248.5 220.6 240.1 190.3
Cumulative dividends 2.7 8.8 14.0 17.1
Total 208.7 251.1 229.4 254.1 207.4
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 continue to offer our products and
services through advisors and licenced brokers.
INITIATIVES AND PROGRESS IN 2022
- A new concept "Movestic Frihet", which includes personal advice
on savings and insurance for customers approaching retirement, was launched
during the period with positive response from the market.
- A new partnership with Lexly, who delivers online legal advisory
services, provides Movestic customers with access to legal advice.
- A new concept for onboarding of individuals within the direct
market segment was launched during the first half year.
- Increased demands for digital processes and availability have
also led to increased efforts to create services, such as customised advice,
for both customers and brokers.
- A new survey demonstrates the importance of occupational pension
as the most important benefit when choosing a new employer, hence an important
tool for employers to stay attractive.
FUTURE PRIORITIES
- Continued development of new digital self-service solutions and
tools to support the brokers' value enhancing customer proposition, and to
facilitate smooth administrative processes making Movestic a partner that is
easy to do business with.
- Further strengthen the relationship with brokers through
increased presence, both physical and digital.
- Seek to capitalise on the new rules that came into effect in
July 2022 that mean transferring pensions between providers will be easier for
customers in future.
KPIs (all comparatives have been presented using 2022 exchange rates)
Broker assessment rating (out of 5)
2017 2018 2019 2020 2021
Rating 3.7 3.8 3.5 3.3 3.6
POLICYHOLDER AVERAGE INVESTMENT RETURN:
-16.5%
GOVERNANCE
BACKGROUND INFORMATION
Movestic operates to exacting regulatory standards and adopts a robust
approach to risk management.
Maintaining strong governance is a critical platform to delivering the various
value-enhancing initiatives planned by the division.
INITIATIVES AND PROGRESS IN 2022
- The IFRS17 programme has continued during the period in
preparation for the standard becoming effective from 1 January 2023.
- Sustainability has remained a focus area and Movestic has hired
a Sustainability manager to support our activities. Efforts have been made
to integrate sustainability risk in various internal processes in order to be
compliant with changes in the Solvency II delegated regulation which enter
into force in August 2022.
FUTURE PRIORITIES
- Deliver the remaining aspects of the division's IFRS 17
programme.
KPIs (all comparatives have been presented using 2022 exchange rates)
SOLVENCY RATIO: 172%
Solvency remains strong despite adverse economic conditions in the first half
of the year
£m Solvency Ratio
31 Dec 2021 surplus 74.4 148%
Surplus generation 2.0
30 Jun 2022 surplus 76.4 172%
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
As an "open" business, Movestic not only adds value from sales but as it gains
scale, it will become increasingly cash generative which will fund further
growth or contribute towards the group's attractive dividend. Movestic has a
clear sales focus and targets a market share of 6% -10% of the advised
occupational pension market. This focus ensures we are able to adopt a
profitable pricing strategy.
INITIATIVES AND PROGRESS IN 2022
- Sales volumes have developed positively, and are well above the
same period last year. There has been positive sales development in the
core broker distributed occupational pension, and from the newer custodian
business through the partnership with Carnegie.
- Commercial new business profit of £1.5m (30 June 2021: £2.7m).
The prior period included higher pension increments profit, largely due to
salary and bonus processes being postponed in 2020 to 2021, which is not the
case in 2022.
- Movestic will continue to develop its offering to increase
competitiveness and build customer loyalty. A special focus will also be put
on new volumes that will be available on the Swedish transfer market from the
second half-year.
- The intense competition in the advised occupational pension
market continues, resulting in Movestic's market share of new business
currently being below the long-term target. That said Movestic saw some
positive sales development in the broker channel.
FUTURE PRIORITIES
- Launch new risk product offerings in the broker channel,
including a new technical solution for administration.
- Strengthen distribution capacity within the direct business
area, as a complement to the broker channel and partner distributed custodian
business.
KPIs (all comparatives have been presented using 2022 exchange rates)
Occupational pension market share %
% 2017 2018 2019 2020 2021
Market share 7.6 6.6 6.5 4.5 3.6
New business profit*
£m 2018 2019 2020 2021 Jun 2022
New business profit 10.6 6.6 1.6 4.1 1.5
*New business figures from 2018 onwards represent commercial new business.
Values prior to this are retained at that which they were previously reported.
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through their dual
closed and open book approach and through the group acquisition strategy will
integrate portfolios and businesses into their operations.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Both Waard and Scildon have a common aim to make capital available to the
Chesnara group to fund further acquisitions or to contribute to the dividend
funding. Whilst their aims are common, the dynamics by which the businesses
add value differ:
- Waard is in run-off and has the benefit that the capital
requirements reduce in-line with the attrition of the book.
- As an "open business", Scildon's capital position does not
benefit from book run-off. It therefore adds value and creates surplus
capital through writing new business and by efficient operational management
and capital optimisation.
INITIATIVES AND PROGRESS IN 2022
- Waard completed the acquisition of Robein Leven on 28 April and
integration is underway, which is expected to conclude before the end of 2022.
- In July 2022, we announced the acquisition of the insurance
portfolio of Conservatrix, our 7th acquisition in the Netherlands, also under
the Waard Group, which is expected to complete during the second half of 2022.
This acquisition will add 70,000 policies and £0.5bn of assets under
management.
- Scildon launched an IT system improvement project for individual
products that is expected to run until 2024 and generate cost efficiencies.
- Implementation for Waard of an actuarial tool for the majority
of portfolios.
- Both businesses report strong solvency of 213% (Scildon) and
364% (Waard), despite adverse market movements seen during the first half of
2022.
FUTURE PRIORITIES
- Continue to integrate Robein Leven
- Complete the acquisition of the Conservatrix portfolio and start
the integration process
- Effective management of the closed book run off in Waard.
- Continue to progress the ongoing IT projects to generate capital
efficiencies.
KPIs (all comparatives have been presented using 2022 exchange rates)
Economic Value - The Netherlands
£m 2018 2019 2020 2021 Jun 2022
EcV 214.6 222.9 209.7 218.0 203.8
Cumulative dividends 42.2 47.2 47.2 58.6
Total 214.6 265.1 256.9 265.2 262.4
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Great importance is placed on providing customers with high quality service
and positive outcomes.
Whilst the ultimate priority is the end customer, in Scildon we also see the
brokers who distribute our products as being customers and hence developing
processes to best support their needs is a key focus.
INITIATIVES AND PROGRESS IN 2022
- Scildon's focus has been providing flexible solutions and
offerings to our clients and continuing to meet the needs of our customers
during the impacts of the war in Ukraine and the cost of living crisis.
- Work has continued on the group pension portal making
improvements and efficiencies. Scildon has commenced work to improve the
existing system that services all other products providing improved
functionality for customers.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality and
to enhance and develop existing processes, infrastructure and customer
experiences in Scildon.
- Continue to progress the IT development programme in Scildon to
enhance functionality for customers.
KPIs (all comparatives have been presented using 2022 exchange rates)
Scildon client satisfaction rating (out of 10)
2017 2018 2019 2020 2021
Rating 7.6 7.7 7.8 8.1 8.1
GOVERNANCE
BACKGROUND INFORMATION
Waard and Scildon operate in a regulated environment and comply with rules and
regulations both from a prudential and from a financial conduct point of view.
INITIATIVES AND PROGRESS IN 2022
- The IFRS 17 work has continued to progress, with significant
strides being made during the first half of 2022. We have continued to work
with our auditors on the technical decisions and the operational processes
underpinning the implementation.
FUTURE PRIORITIES
- The remaining time to live reporting for IFRS 17 will be spent
performing further dry runs and working with Deloitte to complete their audit
work. We will also integrate new acquisitions into the programme.
KPIs (all comparatives have been presented using 2022 exchange rates)
SOLVENCY RATIO: SCILDON 213%; WAARD 364%
Solvency is robust in both businesses with solvency ratios of 213% and 364%
for Scildon and Waard respectively. The Waard Group solvency reported above
includes that of its immediate holding company. The reported year-end
dividend was paid from Waard Leven (£6.0m) and Scildon (£5.0m) to its
immediate holding company during the first half of the year, but was not
remitted up to Chesnara plc as it is being retained to support future
corporate activity.
Scildon
£m Solvency Ratio
31 Dec 2021 surplus 77.0 192%
Surplus generation (1.9)
30 Jun 2022 surplus 75.1 213%
Waard
£m Solvency Ratio
31 Dec 2021 surplus 34.1 399%
Surplus generation 5.9
31 Dec 2022 surplus 40.1 364%
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
Scildon brings a "New business" dimension to the Dutch division. Scildon sell
protection, individual savings and group pensions contracts via a broker-led
distribution model. The aim is to deliver meaningful value growth from
realistic market share. Having realistic aspirations regarding volumes means
we are able to adopt a profitable pricing strategy. New business also helps
the business maintain scale and hence contributes to unit cost management.
INITIATIVES AND PROGRESS IN 2022
- Despite a tough and uncertain market, we continued to generate
commercial new business profits with £3.1m earned during H1 2022.
- Average term market share over the first half year of 19%.
- We continue to grow our portfolio through a white labelling
relationship with our distribution partner, Dazure demonstrating a positive
additional route to market to enable us to service more policyholders. This
relationship has continued to grow during H1 2022.
FUTURE PRIORITIES
- Continue to deliver product innovation and cost management
actions.
- Consider alternative routes to market that do not compromise our
existing broker relationships, such as further product white labelling.
KPIs (all comparatives have been presented using 2022 exchange rates)
Scildon - term assurance market share %
% 2018 2019 2020 2021 Jun 2022
Market share 7.6 11.6 14.2 16.1 19.0
Scildon - new business profit*
£m 2018 2019 2020 2021 Jun 2022
New business profit 2.0 1.9 4.8 7.9 3.1
*New business figures from 2018 onwards represent commercial new business.
Values prior to this are retained at that which they were previously reported.
BUSINESS REVIEW | acquire life and pension businesses
During the period we completed the acquisitions of Sanlam Life & Pensions
and Robein Leven and announced the purchase of Conservatrix.
Well considered acquisitions create a source of value enhancement and sustain
the cash generation potential of the group.
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of
advisers and industry associates, utilising both group and divisional
management expertise as appropriate.
- We primarily focus on acquisitions in our existing territories,
although 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 Value1 per share in the medium term under best estimate and certain
more adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance,
customer interests.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite the
financial returns must be suitably compelling.
INITIATIVES AND PROGRESS IN 2022
In July 2022, Chesnara announced the acquisition of the insurance portfolio of
Conservatrix, a specialist provider of life insurance products in the
Netherlands that was declared bankrupt on 8 December 2020. The insurance
portfolio will increase Waard's number of policies under administration by
over 50%, transforming Waard into a second material closed book consolidation
business alongside Chesnara's existing UK platform.
This is the third acquisition announced by Chesnara over the past year and the
seventh transaction undertaken in the Dutch market. Conservatrix's savings,
annuity and funeral plan products are well aligned with Chesnara's existing
life and pension liability mix in the Netherlands,and will add approximately
70,000 additional policies and £0.5 billion of assets to the group.
A capital contribution of £35 million will be provided by the group to
support the solvency position of the Conservatrix business and Conservatrix
customers will benefit from becoming part of a well capitalised Group, after a
significant period of uncertainty.
Future cash generation from the acquisition under steady state conditions is
expected to be c.£4 million per annum, supporting Chesnara's progressive
dividend strategy. Waard will become a material contributor to the group's
dividends, with expected total annual cash generation of £8 million following
completion of the acquisition.
The Conservatrix transaction is expected to increase the group's EcV by £18
million and provides further EcV accretion potential from future real world
investment returns and the run-off of the risk margin.
In addition, we also completed two transactions during April 2022 that were
originally announced in 2021: Robein Leven in the Netherlands (announced in
November 2021) and SLP in the UK (announced in September 2021).
ACQUISITION OUTLOOK
- We have continued to see a healthy flow of acquisition activity
in the year across European insurance including UK and the Netherlands.
Sources of capital particularly from private equity have remained high.
- We recognise that the consolidation markets in these countries
are mature but the key drivers for owners to divest portfolios continue to
remain relevant and create a strong pipeline. These include better uses of
capital (e.g. return to investors or supporting other business lines),
operational challenges (e.g. end of life systems), management distraction,
regulatory challenges, business change (e.g. IFRS 17) and wider business and
strategic needs.
- Our expectation is that sales of portfolios will continue; with
a number of transactions already announced during 2022. Our strong expertise
and knowledge in the markets, good regulatory relationships and the
flexibility of our operating model means that Chesnara is very well placed to
manage the additional complexity associated with these portfolio transfers and
provide beneficial outcomes for all stakeholders. These transactions may not
be suitable for all potential consolidators, in particular those who do not
have existing licences in these territories.
- Chesnara will continue its robust acquisition assessment model
which takes into account; (a) the strategic fit; (b) the cash generation
capability; (c) the medium term impact on EcV per share; and (d) the risks
within the target. We will also continue to assess the long-term commercial
value of acquisitions as part of our objective to maximise the value from
in-force business.
- The £200m Tier 2 subordinated debt issue in February 2022
together with the existing £100m Revolving Credit Facility arrangement (with
an additional £50m accordion option) provides funding capability on
commercially attractive terms. We will continue to explore how we can increase
our funding capability further, including consideration of partnerships.
- Our good network of contacts in the adviser community, who
understand the Chesnara acquisition model, supported by our engagement
activity with potential targets, ensures that we are aware of viable
opportunities in the UK and Western Europe. With this in mind, we are
confident that we are well positioned to continue our successful acquisition
track record in the future.
CAPITAL MANAGEMENT | Solvency II
Subject to ensuring other constraints are managed, surplus capital is a useful
proxy measure for liquid resources available to fund items such as dividends,
acquisitions or business investment. As such, Chesnara defines cash
generation as the movement in surplus, above management buffers, during the
period.
GROUP SOLVENCY
SOLVENCY POSITION
£m 30 Jun 2022 31 Dec 2021
Own funds 644 558
SCR 330 367
Buffer 33 37
Surplus above buffer 281 154
Solvency ratio % 195% 152%
SOLVENCY SURPLUS
£m
Group solvency surplus at 31 Dec 2021 190.7
CA 33.4
SLP (8.8)
Movestic 5.1
Waard 0.9
Scildon 3.2
Chesnara / consol adj (21.2)
Tier 2 165.0
Acquisition (43.1)
Exchange rates 1.0
Dividends (12.2)
Group solvency surplus at 30 Jun 2022 313.9
Surplus:
The group has £280.9m of surplus over and above the group's internal capital
management policy requirements, compared to £154.0m at the end of 2021. The
group solvency ratio has increased from 152% to 195%.
Dividend:
The closing solvency position is stated after deducting the £12.2m proposed
interim dividend (31 December 2021: £22.1m).
Own Funds:
Own Funds have risen by £98.6m (pre-dividends). The most material driver is
the introduction of £200m Tier 2 debt of which £165.0m is recognised as
eligible Own Funds. This is offset by a reduction in divisional Own Funds,
largely due to the fall in equity markets.
SCR:
The SCR has fallen by £36.8m, owing mainly to a material fall in equity risk
(due to the fall in equity markets), currency risk (following the fall in Own
Funds of overseas divisions) and the positive benefits of rising interest
rates.
What is solvency and capital surplus?
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds" (OF)
and this is measured in accordance with the rules of the newly adopted
Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital Requirement
(SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an
absolute surplus OF less SCR
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and includes a value
for future profits expected to arise from in-force policies.
The Own Fund valuation is deemed to represent a commercially meaningful figure
with the exception of:
- Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain policies despite a high
probability of receipt.
- Risk margin: The Solvency II rules require a "risk margin"
liability which is deemed to be above the realistic cost.
- Restricted with profit surpluses: Surpluses in the group's
with-profit funds are not recognised in Solvency II Own Funds despite their
commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted for the items
above. As such our Own Funds and EcV have many common characteristics and
tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term guarantee package
when Solvency II was introduced, are available to temporarily increase Own
Funds. Chesnara does not take advantage of such measures, however we do
apply the volatility adjustment within our Dutch and UK divisions.
How do Own Funds change?
Own Funds (and Economic Value) are sensitive to economic conditions. In
general, positive equity markets and increasing yields lead to OF growth and
vice versa. Other factors that improve OF include writing profitable new
business, reducing the expense base and improvements to lapse rates.
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a "standard formula"
or "internal model". Chesnara adopts the "standard formula".
There are three levels of capital requirement:
Minimum dividend paying requirement/risk appetite requirement
The board sets a minimum solvency level above the SCR which means a more
prudent level is applied when making dividend decisions.
Solvency Capital Requirement
Amount of capital required to withstand a 1 in 200 event. The SCR acts as an
intervention point for supervisory action including cancellation or the
deferral of distributions to investors.
Minimum Capital Requirement
The MCR is between 45% and 25% of the SCR. At this point Chesnara would need
to submit a recovery plan which if not effective within three months may
result in authorisation being withdrawn.
How does the SCR change?
Given the largest component of Chesnara's SCR is market risk, changes in
investment mix or changes in the overall value of our assets has the greatest
impact on the SCR. For example, equity assets require more capital than low
risk bonds. Also, positive investment growth in general creates an increase
in SCR. Book run-off will tend to reduce SCR, but this will be partially
offset by an increase as a result of new business.
A review of the UK's application of Solvency II is currently underway, led by
HM Treasury. In 2021 the PRA oversaw a Quantitative Impact Study (QIS) to
inform a potential "comprehensive package of reforms". In April 2022 the PRA
published a statement indicating its agreement with the view that the risk
margin and matching adjustment can be reformed so as to reduce overall capital
levels for life insurers by around 10% to 15% in current economic
conditions. We are monitoring this closely and future financial statements
will report on the UK specific application of Solvency II as it diverges from
the EU's regime. We see no specific reason to expect the PRA to use their
enhanced freedoms take a route that systemically makes it harder to do
business in the UK.
We are well capitalised at both a group and subsidiary level. We have
applied the volatility adjustment in Scildon, Waard Leven, CA and SLP, 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 2021 figures have been
restated using 30 June 2022 exchange rates in order to aid comparison at a
divisional level.
UK - CA
£m 30 Jun 2022 31 Dec 2021
Own funds (post dividend) 133 131
SCR 69 102
Buffer 14 20
Surplus 50 10
Solvency ratio % 192% 130%
Surplus: £50.0m above board's capital management policy.
Dividends: Dividend of £27.5m was paid to Chesnara in Q2 2022.
Own Funds: Increased by £2.2m due to an extraction of WP capital, reduced
expense assumptions, offset by the fall in equity markets.
SCR: Decreased by £31.2m due to sharp fall in equity risk and moderate fall
in currency, spread and insurance risks.
SWEDEN
£m 30 Jun 2022 31 Dec 2021
Own funds (post dividend) 182 230
SCR 106 156
Buffer 21 31
Surplus 55 43
Solvency ratio % 172% 148%
Surplus: £55.2m above board's capital management policy.
Dividends: Dividend of £3.1m was paid to Chesnara in Q2 2022.
Own Funds: Decreased by £47.8m largely due to fall in equity markets,
although slightly offset by the rise in yields.
SCR: Decreased by £49.9m due to sharp fall in equity risk and moderate
falls in spread, currency and lapse risks, due to the market movements.
NETHERLANDS - WAARD
£m 30 Jun 2022 31 Dec 2021
Own funds (post dividend) 55 46
SCR 15 11
Buffer 5 4
Surplus 35 30
Solvency ratio % 364% 399%
Surplus: £34.7m above board's capital management policy.
Dividends: No foreseeable dividend is proposed.
Own Funds: Increased by £9.6m. The main driver is the receipt of £5.2m
dividend from Scildon to support acquisition activity in Waard Group. There
is also a small gain on acquisition of Robein Leven.
SCR: Risen by £3.7m, mainly due to acquisition of Robein Leven, which has
mostly impacted equity, expense and concentration risk.
NETHERLANDS - SCILDON
£m 30 Jun 2022 31 Dec 2021
Own funds (post dividend) 142 150
SCR 67 78
Buffer 50 59
Surplus 25 13
Solvency ratio % 213% 192%
Surplus: £25.2m above board's capital management policy.
Dividends: Dividend of £5.2m was paid in Q2 2022.
Own Funds: Decreased by £8.6m due to the rise in interest rates and adverse
mortality and lapse experience. This is partly offset by a variance on
spreads, as the volatility adjustment increased more than the spread on bonds
held.
SCR: Decreased by £11.8m, largely due to falls in equity and lapse risk,
due to the fall in equities and rising yields, respectively.
UK - SLP
£m 30 Jun 2022 Acquisition
Own funds (post dividend) 58 59
SCR 39 43
Buffer 8 9
Surplus 11 7
Solvency ratio % 148% 137%
Surplus: £11.1m above board's capital management policy.
Dividends: No foreseeable dividend is proposed.
Own Funds: In Q2, post-acquisition, Own Funds fell by £1.2m, largely due to
economic conditions with equity market decline, widening spreads and falling
asset values.
SCR: Fallen by £4m in the post-acquisition period, mainly due to reductions
in equity and lapse risks.
CAPITAL MANAGEMENT | Sensitivities
The group's solvency position can be affected by a number of factors over
time. As a consequence, the group's EcV and cash generation, both of which
are derived from the group's solvency calculations, are also sensitive to
these factors.
The table below provides some insight into the immediate impact of certain
sensitivities that the group is exposed to, covering solvency surplus and
Economic Value. As can be seen, EcV tends to take the 'full force' of
adverse conditions whereas solvency is often protected in the short term and,
to a certain extent, the longer term due to compensating impacts on required
capital.
The Tier 2 debt raise has had a material impact on the reported sensitivities
because, as capital requirements move, the amount of the Tier 2 debt able to
be recognised in the Own Funds also moves, creating a new moving part. For
example, where FX movements reduce the SCR, we now also experience a
corresponding reduction in base Own Funds and also Own Funds relating to Tier
2 capital. The total surplus is now more exposed to downside risks but,
importantly, the Tier 2 itself has created more than sufficient additional
headroom to accommodate this.
Whilst cash generation has not been shown in the table below, the impact of
these sensitivities on the group's solvency surplus has a direct read across
to the immediate impact on cash generation.
Solvency ratio Solvency surplus EcV
Impact % Impact range £m Impact range £m
20% sterling appreciation (3.2)% (67.5) to (57.5) (99.9) to (89.3)
20% sterling depreciation 3.2% 67.5 to 57.5 89.3 to 99.3
25% equity fall 0.6% (52.8) to (22.8) (78.8) to (58.8)
25% equity rise (11.2)% 17.9 to 47.9 69.8 to 89.8
10% equity fall (0.7)% (23.5) to (13.5) (33.3) to (23.3)
10% equity rise (2.9)% 9.9 to 19.9 24.2 to 34.2
1% interest rate rise 7.5% 8.7 to 13.7 (3.2) to 2.8
1% interest rate fall (6.0)% (22.6) to (2.6) (11.7) to 3.3
50bps credit spread rise (3.0)% (14.4) to (9.4) (16.4) to (11.1)
25bps swap rate fall (6.0)% (22.4) to (12.4) (20.6) to (10.6)
10% mass lapse (1.9)% (29.7) to (24.7) (52.5) to (37.5)
1% inflation (8.7)% (32.5) to (22.5) (30.5) to (20.5)
10% mortality increase (5.2)% (20.6) to (15.6) (21.2) to (16.2)
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, hence has an immediate impact on group solvency surplus and
EcV. There is also a large fall in the amount of Tier 2 capital that can be
recognised, due to the reduced size of the balance sheet.
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: -£9m
to the SCR, 25% equity rise: +£37m to SCR). The EcV impacts are more
intuitive as they are more directly linked to Own Funds impact. CA and
Movestic contribute the most due to their large amounts of unit-linked
business, much of which is invested in equities.
Interest rate sensitivities: An interest rate rise is generally positive
across the group. An interest rate fall results in a larger impact on Own
Funds than an interest rate rise, given the current low interest rate
environment. CA, SLP, Movestic and Scildon all contribute towards the total
solvency surplus impact.
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: A rise in inflation increases the amount of expected
future expenses. This is capitalised into the balance sheet, thus hits the
solvency position immediately.
10% mortality increase: This sensitivity has an adverse impact on surplus and
cash generation, particularly for Scildon due to their term products.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that the
sensitivities modelled are deemed to be broadly similar (with the exception
that the 10% equity movements are naturally more likely to arise) in terms of
likelihood. Whilst sensitivities provide a useful guide, in practice, how
our results react to changing conditions is complex and the exact level of
impact can vary due to the interactions of events and starting position.
FINANCIAL REVIEW
The key performance indicators are a reflection of how the business has
performed in delivering its three strategic objectives.
Summary of each KPI:
CASH GENERATION
GROUP CASH GENERATION excluding the impact of acquisitions £21.9M 30 JUNE
2021: £5.4M
DIVISIONAL CASH GENERATION £60.1M 30 JUNE 2021: £11.5M
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 Jun 2022
UK 31.3
Sweden 14.2
Netherlands - Waard 2.2
Netherlands - Scildon 12.4
Divisional cash generation 60.1
Other group activities (38.2)
Group cash generation 21.9
Divisional cash generation
- The operating businesses have delivered a strong divisional cash
result for the period, exceeding prior year performance.
- As expected, the UK result was the largest component with cash
generation of £31.3m, but material contributions were also supplied from all
operating divisions.
- In each division the value of Own Funds was adversely impacted
by investment market conditions, particularly rising interest rates and
falling asset values, culminating in economic losses. Conversely, these
economic factors also had a beneficial effect for each business, with
favourable movements in market risks and symmetric adjustment driving
reductions in SCR.
Group cash generation
- Total group cash generation contains acquisition activity, being
the Own Funds impact of the capital outlay and incremental capital
requirements. Other group activities is largely consolidation adjustments and
the dynamic of buffer movements in calculating the group SCR, central costs,
including Tier 2 related costs and some non-recurring SCR items.
IFRS
PRE-TAX LOSS: £(104.6)M 30 JUNE 2021: PRE-TAX PROFIT £20.8M
TOTAL COMPREHENSIVE INCOME: £(66.5)M 30 JUNE 2021: £1.9M
What is it?
Presentation of the results in accordance with International Financial
Reporting Standards (IFRS) aims to recognise the profit arising from the
longer-term insurance and investment contracts over the life of the policy.
Why is it important?
The IFRS results form the core of reporting and hence retain prominence as a
key financial performance metric. There is however a general acceptance that
the IFRS results in isolation do not recognise the wider financial performance
of a typical life and pensions business, hence the use of supplementary
Alternative Performance Measures to enhance understanding of financial
performance.
Risks
The IFRS profit/(loss) can be affected by a number of our principal risks and
uncertainties. Volatility in equity markets and bond yields can result in
volatility in the IFRS pre-tax profit/(loss), and foreign currency
fluctuations can affect total comprehensive income. The IFRS results of
Scildon can be relatively volatile from interest rate and spread changes, in
part, due to the different approach used by the division for valuing assets
and liabilities, as permitted under IFRS 4. The dynamics of our IFRS results
will change once IFRS 17 comes in force, which will be effective from 1
January 2023.
£m 30 Jun 2022
Operating loss (10.4)
Economic loss (105.1)
Profit/ on portfolio acquisition 10.9
Profit before tax (104.6)
Tax 36.4
Forex impact 1.7
Total comprehensive income (66.5)
- Pre-tax losses were reported in each territory with economic
conditions underpinning the results.
- The loss on economic activities was in excess of £105m for the
period, with the divisions all suffering the impact various economic factors
such as rising interest rate and reductions in bond values, coupled with
falling equity markets and negative investment returns.
- The result also includes profit on acquisitions of £10.9m,
comprising gains arising on the SLP and Robein Leven deals in the UK and
Netherlands.
- Total comprehensive income includes a positive movement in tax
liability (owing to the operating losses) and a small foreign exchange gain on
translation of the Dutch and Swedish divisional results.
ECONOMIC VALUE (EcV)
£526.7M 31 DECEMBER 2021: £624.2M
What is it?
Economic value (EcV) was introduced following the introduction of Solvency II
at the start of 2016, with EcV being derived from Solvency II Own Funds. EcV
reflects a market-consistent assessment of the value of the existing insurance
business, plus the adjusted net asset value of the non-insurance businesses
within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force business and net
assets of the non-insurance business and hence is an important reference point
by which to assess Chesnara's value. A life and pensions group may typically
be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
business over time.
The EcV development of the Chesnara group over time can be a strong indicator
of how we have delivered to our strategic objectives, in particular the value
created from acquiring life and pensions businesses and enhancing our value
through writing profitable new business. It ignores the potential of new
business to be written in the future (the franchise value of our Swedish and
Dutch businesses) and the value of the company's ability to acquire further
businesses.
Risks
The Economic Value of the group is affected by economic factors such as equity
and property markets, yields on fixed interest securities and bond spreads.
In addition, the EcV position of the group can be materially affected by
exchange rate fluctuations. For example, a 20.0% weakening of the Swedish
krona and euro against sterling would reduce the EcV of the group within a
range of £89m-£99m, based on the composition of the group's EcV at 30 June
2022.
£m
EcV 31 Dec 2021 624.2
EcV earnings (89.6)
Forex 0.3
Acquisitions 13.9
Pre-dividend EcV 548.8
Dividends (22.1)
2021 Group EcV 526.7
- Prior to any dividend payment impact Economic Value fell by 12%
since the start of the year. The reported position does not include the
positive impact of the Tier 2 debt capital.
- The closing position reflects an earnings loss of £89.6m,
driven by adverse investment market conditions, with some operating losses
including group level expense strain.
- The change in EcV during the period includes the impact of the
payment of the final 2021 dividend and the benefit of the SLP and Robein Leven
acquisitions.
- A marginal forex gain arose on translation of the Dutch and
Swedish divisional results, representing Swedish krona depreciation and euro
appreciation against sterling, largely mitigating one another.
ECV EARNINGS
£(89.6)M 30 JUNE 2021: £38.5M
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 Jun 2022
Total operating earnings (20.7)
Economic earnings (91.1)
Other 22.2
Total EcV earnings (89.6)
- An EcV loss of £89.6m was reported in the opening six months of
the year.
- The total operating earnings loss contains group level expense
strain, including finance costs relating to debt servicing and also
non-maintenance expenditure. In Movestic, a deterioration in fund rebate
income also contributes and while transfer activity has reduced, levels were
still above short-term expectations.
- Other operating components are, predominantly, favourable
movements in risk margin and tax.
- Economic conditions during the period, with the adverse impact
of rising interest rates, falling bond values and negative equity market
returns, resulted in substantial economic losses of £91.9m (30 Jun 2021: gain
of £73.0m).
CASH GENERATION
GROUP CASH GENERATION excluding the impact of acquisitions
£21.9M 30 JUNE 2021: £5.4M
DIVISIONAL CASH GENERATION
£60.1M 30 JUNE 2021: £11.5M
A strong divisional cash result exceeding £60m was supported by contributions
from each territory, while the group result includes the impact of
acquisitions completed in the period. Cash is generated from increases in the
group's solvency surplus, which is represented by the excess of own funds held
over management's internal capital needs. These are based on regulatory
capital requirements, with the inclusion of additional 'management buffers'.
Definition: Defining cash generation in a Life and Pensions business is
complex and there is no reporting framework defined by the regulators. This
can lead to inconsistency across the sector. We define cash generation as
being the movement in Solvency II surplus own funds over and above the group's
internally required capital, which is based on Solvency II rules.
Implications of our cash definition:
Positives
- Creates a strong and transparent alignment to a regulated
framework.
- Positive cash results can be approximated to increased dividend
potential.
- Cash is a factor of both value and capital and hence management
are focused on capital efficiency in addition to value growth and indeed the
interplay between the two.
Challenges and limitations
- In certain circumstances the cash reported may not be
immediately distributable by a division to group or from group to
shareholders.
- Brings the technical complexities of the SII framework into the
cash results e.g. symmetric adjustment, with-profit fund restrictions, model
changes etc, and hence the headline results do not always reflect the
underlying commercial or operational performance.
- At a group level the result includes complex consolidation
adjustments relating to buffers, which can compromise how well the figure
truly reflects performance.
Jun 2022 £m Jun 2021 £m
Movement in Movement in management's capital requirement Forex Cash Cash generated / (utilised)
Own Funds impact generated / (utilised)
UK (8.7) 40.0 - 31.3 12.2
Sweden (44.8) 59.8 (0.8) 14.2 (23.6)
Netherlands - Waard Group (1.7) 3.5 0.4 2.2 3.7
Netherlands - Scildon (8.4) 20.2 0.6 12.4 19.1
Divisional cash generation / (utilisation) (63.6) 123.5 0.2 60.1 11.5
Other group activities (7.0) (32.2) 1.0 (38.2) (6.1)
Group cash generation / (utilisation) (70.6) 91.3 1.2 21.9 5.4
GROUP
- The group activities cash includes consolidation adjustments to
remove capital buffer movements, as well as direct movements in central costs
and SCR.
- The buffer adjustment is a volatile and relatively arbitrary
technical item and is hence removed from the Commercial cash results.
- Central costs of approximately £13m include a large proportion
of exceptional non-recurring expenditure.
- Central SCR movements have minimal real cash flow implications,
being a more solvency dynamic. The central SCR movement in the period includes
c£6m of non-recurring items.
UK
- Another strong period of cash generation has been delivered by
the division, albeit largely due to the symmetric adjustment creating capital
requirement reductions following a significant decline in equity values, which
offset the adverse impact of investment conditions on Own Funds.
- Economic conditions and their associated impact, primarily
falling equity and interest rate risk, drive the positive movement in capital
requirements. Conversely, Own Funds suffered the effect of a corresponding
reduction in asset values.
- Own Funds include a £13.4m capital transfer from the
with-profit funds, although £5.5m of surplus has built up in this fund in the
period which is not recognised in the result.
SWEDEN
- Movestic has reported a solid cash result for the period, with a
substantial reduction in capital requirements overshadowing a sizeable
decrease in Own Funds.
- The division is particularly sensitive to investment market
movements and economic condition during the period underpin the cash result.
Own Funds bear the impact of economic conditions and negative investment
returns (particularly equity driven). This loss in value was offset by a
larger decrease in market-risk related capital requirements, including the
impact of the symmetric adjustment.
NETHERLANDS - WAARD
- Waard again delivered a period of stable cash generation in line
with expectations, following a reduction in capital requirements that exceeded
a fall in Own Funds.
- Economic losses due to the negative effect of rising interest
rates on bond values and mortgage portfolio, was the main component of the
value reduction. This also had a positive impact on capital requirements,
aiding a material decrease in equity risk and symmetric adjustment in the
period.
NETHERLANDS - SCILDON
- Scildon posted healthy cash generation for the first half of
2022, a result dominated by economic factors which drive reduction in both Own
Funds and required capital.
- Rising interest rates with falling bond and equity values had a
negative impact on Own Funds, with the division suffering economic losses of
£22.0m. However, these factors also supported a larger in reduction in SCR,
particularly market risks and fall in the symmetric adjustment, as well as
lapse risk with lower exposure to the cost of guarantees.
CASH GENERATION - ENHANCED ANALYSIS
The format of the analysis draws out components of the cash generation results
relating to technical complexities, modelling issues or exceptional corporate
activity (e.g. acquisitions). The results excluding such items are deemed to
better reflect the inherent commercial outcome (Commercial cash generation).
DIVISIONAL COMMERCIAL CASH GENERATION
£18.6M
COMMERCIAL CASH GENERATION
£(3.0)M
UK SWEDEN NETHERLANDS NETHERLANDS SCILDON DIVISIONAL GROUP ADJ TOTAL
WAARD TOTAL
Base cash generation 31.3 14.2 2.2 12.4 60.1 (38.2) 21.9
Symmetric adjustment (12.4) (21.2) - - (33.6) 2.8 (30.8)
WP restriction look through (7.9) - - - (7.9) - (7.9)
Group buffer difference - - - - - 13.8 13.8
Commercial cash generation 11.0 (7.0) 2.2 12.4 18.6 (21.6) (3.0)
The total commercial divisional result is impacted by several different
external economic factors. The net effect of these is that about half of the
total profit of £18.6m is directly due to economic conditions. The residual
gain from operating items is broadly in line with expectations. The negative
group adjustment contains several material non-recurring items including c£7m
of project costs covering IFRS 17, Tier 2 and other acquisition costs. The
central loss also includes over £5m of one-off SCR increases.
UK
In the main, the UK result relates to expected steady-state operating surplus
emergence, largely due to book run-off. The result has also benefited from
modest economic gains of c£3m, which is slightly lower than the steady-state
average expectation.
The commercial cash outcome illustrates that UK remains at the heart of the
cash generation model. The acquisition of SLP will positively contribute to
the longevity of this core source of cash.
SWEDEN
The Swedish result, which excludes the large benefits from the symmetric
adjustment, is largely a direct consequence of the sharp decline in equity
values and a widening of credit spreads during the period, which are partially
offset by benefits from yield increases. A modest underlying operating result
is broadly in line with expectation, in light of the natural level of new
business strain of an open business.
WAARD
The Waard Commercial cash gain is mainly due to synergies arising on the
acquisition completed in the period.
SCILDON
Scildon has benefited from the increasing interest rates during the period,
with the vast majority of their Commercial cash generation being directly due
to how yields have reduced capital requirements. A modest underlying operating
gain is broadly in line with expectations.
EcV EARNINGS
£(89.6)M 30 JUNE 2021: £38.5M
The EcV earnings of the group reflect the economic conditions in the first
half of the year, with negative equity returns, rising interest rates and
falling bond values, delivering economic losses across the operating
divisions.
Analysis of the EcV result in the period by earnings source:
£m 30 Jun 30 Jun 31 Dec
2022 2021 2021
Expected movement in period (0.8) (0.8) (1.7)
New business 3.6 4.0 2.4
Operating experience variances (23.4) (7.8) (19.2)
Operating assumption changes (1.0) (4.6) (13.9)
Other operating variances 0.9 (23.2) (26.4)
Total operating earnings (20.7) (32.4) (58.8)
Economic experience variances (221.7) 45.6 79.5
Economic assumption changes 130.6 27.3 30.1
Total economic earnings (91.1) 73.0 109.6
Other non-operating variances 0.8 0.8 4.5
Risk margin movement 14.6 5.1 10.8
Tax 6.8 (8.0) (8.2)
EcV earnings (89.6) 38.5 57.8
Analysis of the EcV result in the year by business segment:
£m 30 Jun 30 Jun 31 Dec
2022 2021 2021
UK (20.8) 13.7 28.0
Sweden (46.8) 14.0 26.1
Netherlands (15.0) 11.8 8.3
Group and group adjustments (7.0) (1.0) (4.6)
EcV earnings (89.6) 38.5 57.8
Total economic earnings: The EcV result is sensitive to investment market
conditions, reflecting significant economic losses in the period. The result
includes the adverse impact of movements in interest rates and spreads,
alongside falling equity markets. Key movements in investment market
conditions during the year that have contributed to the economic loss are:
- CPI (consumer price index) increased by 4.0% to 9.4% (30 June
2021: 2.5%)
- FTSE All Share index decreased by 6.3% (6 months to 30 June
2021: increased by 9.3%);
- Swedish OMX All Share index decreased by 29.2% (6 months to 30
June 2021: increased by 19.3%);
- The Netherlands AEX All Share index decreased by 18.8% (6 months
to 30 June 2021: increased by 15.0%); and
- 10-year UK gilt yields have increased by 133bp from 0.98% to
2.31% during the period.
Total operating earnings: Operational profits in CA and Waard were offset by
central group expenses, including non-recurring and finance investment cost,
as well as a small operating loss in Movestic. The profit in Waard was
delivered largely from favourable mortality experience and resultant changes
in assumptions, while growth in CA was the result of synergies arising from
the SLP acquisition (and a reduction in future expenses). Group level expenses
includes finance costs relating to Tier 2 debt arrangement and interest fees
(£7.3m), as well as non-maintenance related activity (corporate activity and
major projects). The loss in Movestic includes the effect of a general
deterioration in fund rebate income in 2022, while Scildon was adversely
impacted by higher mortality payments and guarantees within certain policies.
UK: Operating earnings in CA were overshadowed by economic factors with the
UK division reporting a combined loss of £20.8m, as both CA and SLP were
impacted by economic conditions in the period. As indicated above, operational
profits were driven by positive movements in expense assumptions, coupled with
mortality assumption and risk margin releases. Rising interest rates and
decreasing bond values, alongside equity market falls, resulted in material
economic losses that underpin the divisional result. SLP posted an operational
loss though this was largely due to a one-off strengthening of expense
assumptions as part of the post-acquisition process.
Sweden: Movestic recorded a significant loss, with the division heavily
impacted by economic factors. Investment market conditions, particularly
rising interest rates and falling equity values, resulted in negative economic
returns (£48.4m). Operational activities were hampered by a reduction in fund
rebate income and continued adverse experience in transfers (although to a
much lesser extent than the prior year). Modest new business profits of £0.7m
were reported (30 June 2021: £1.8m), reflecting difficult market conditions
and margin pressures in the first half, due to sharp equity falls.
Netherlands: The Dutch businesses posted a combined loss of £15.0m for the
opening half of 2022, as both divisions suffered economic losses that underpin
the result. In Scildon, economic experience was £(100.2)m with rising
interest rates adversely impacting bond values. This was partly offset by the
reduction in liabilities corresponding to changes in assumptions (£78.2m). As
indicated earlier, Scildon has reported a small operating loss, which includes
the impact of guarantee related costs and higher mortality driven outgoings
than anticipated.
Waard, despite the operating gains mentioned above, has reported an EcV loss
of £1.7m, with economic experience being the main component. The impact of
rising interest rates on yields and falling bond values outweighing subsequent
changes to economic assumptions and profit from operating activities.
Group: This component includes various group-related costs and includes:
non-maintenance related costs (such as acquisition costs); the costs of the
group's IFRS 17 programme; and some material economic-related items such as
financing costs, primarily in relation to the Tier 2 debt servicing fees.
EcV
£526.7M (31 DEC 2021: £624.2M)
The Economic Value of Chesnara represents the present value of future profits
of the existing insurance business, plus the adjusted net asset value of the
non-insurance business within the group. EcV is an important reference point
by which to assess Chesnara's intrinsic value.
Value movement: 1 Jan 2022 to 30 Jun 2022:
£m
EcV 31 Dec 2021 624.2
EcV earnings (89.6)
Forex 0.3
Acquisitions 13.9
Pre-dividend EcV 548.8
Dividends (22.1)
EcV 30 Jun 2022 526.7
EcV earnings: A loss of £89.6m has been reported for the opening half of
2022. Significant economic losses arising from the adverse economic
investment market conditions witnessed during the period, drive the result.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £22.1m were paid during the first half of the year,
being the final dividend from 2021.
Foreign exchange: The closing EcV of the group reflects a marginal foreign
exchange gain in the period, a consequence of the sterling appreciation
against Swedish krona being offset by depreciation versus the euro.
EcV by segment at 30 Jun 2022
£m
UK 211.2
Sweden 190.3
Netherlands 203.8
Other group activities (78.6)
EcV 30 Jun 2022 526.7
The above table shows that the EcV of the group is diversified across its
different markets.
EcV to Solvency II:
£m
EcV 30 Jun 2022 526.7
Risk margin (36.8)
Contract boundaries 1.2
Tier 2 200.0
Tier 2 restrictions (35.0)
Dividends (12.2)
SII Own Funds 30 Jun 2022 643.9
Our reported EcV is based on a Solvency II assessment of the value of the
business but adjusted for certain items where it is deemed that Solvency II
does not reflect the commercial value of the business. The above waterfall
shows the key difference between EcV and SII, with explanations for each item
below.
Risk margin: Solvency II rules require a significant 'risk margin' which is
held on the Solvency II balance sheet as a liability, and this is considered
to be materially above a realistic cost. We therefore reduce this margin for
risk for EcV valuation purposes from being based on a 6% cost of capital to a
3.25% cost of capital.
Contract boundaries: Solvency II rules do not allow for the recognition of
future cash flows on certain in-force contracts, despite the high probability
of receipt. We therefore make an adjustment to reflect the realistic value
of the cash flows under EcV.
Ring-fenced fund restrictions: Solvency II rules require a restriction to be
placed on the value of surpluses that exist within certain ring-fenced
funds. These restrictions are reversed for EcV valuation purposes as they
are deemed to be temporary in nature.
Dividends: The proposed interim dividend of £12.2m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
Tier 2: The tier 2 debt is treated as "quasi equity" for Solvency II
purposes. For EcV, consistent with IFRS, we continue to report this is debt.
IFRS
IFRS PRE-TAX LOSS
£(104.6)M 30 JUNE 2021 : PRE-PROFIT £20.8M
IFRS TOTAL COMPREHENSIVE INCOME
£(66.5)M 30 JUNE 2021 : £1.9M
The group IFRS results reflect the natural dynamics of the segments of the
group, which can be characterised in three major components: stable core,
variable element and growth operation.
Executive summary
Stable core: At the heart of surplus, and hence cash generation, are the core
UK (excluding the S&P book) and Waard Group segments. The requirements
of these books are to provide a predictable and stable platform for the
financial model and dividend strategy. As closed books, the key is to
sustain this income source as effectively as possible. During the year, two
new acquisitions were added to this stable core; Sanlam Life and Pensions (UK)
Limited (SLP) and Robein Leven.
Variable element: Included within the CA segment is the S&P book. This
can bring an element of short-term earnings volatility to the group, with the
results being particularly sensitive to investment market movements due to
product guarantees. The IFRS results of Scildon are potentially relatively
volatile although this is, in part, due to reserving methodology rather than
'real world' value movements.
Growth operation: The long-term financial models of Movestic and Scildon are
based on growth, with levels of new business and premiums from existing
business being targeted to more than offset the impact of policy attrition,
leading to a general increase in assets under management and, hence,
management fee income.
IFRS results
The financial dynamics of Chesnara, as described above, are reflected in the
following IFRS results:
Unaudited Year
6 months ended Ended
30 Jun 22 30 Jun 21 31 Dec 21
£m £m £m Note
UK (16.2) 15.0 35.6 1
Movestic (1.5) 6.7 12.1 2
Waard Group (6.4) 1.3 0.1 3
Scildon (76.0) 6.0 (0.5) 4
Chesnara (12.7) (5.1) (12.6) 5
Consolidation adjustments (2.7) (2.9) (5.8) 6
(Loss)/profit before tax (115.5) 20.9 28.9
and acquisitions
Post completion gain/(loss) on acquisition of subsidiary/portfolio 10.9 (0.1) (0.1) 11
(Loss)/profit before tax (104.6) 20.8 28.8
Tax 36.4 (3.0) (1.5) 7
(Loss)/profit after tax (68.2) 17.8 27.3
Foreign exchange 1.7 (15.9) (23.9) 8
Other comprehensive income - - 0.4
Total comprehensive income (66.5) 1.9 3.8
Unaudited Year
6 months ended Ended
30 Jun 22 30 Jun 21 31 Dec 21
£m £m £m Note
Operating (loss)/profit (10.4) 28.3 40.7 9
Economic (loss) (105.1) (7.4) (11.8) 10
(Loss)/profit before tax and acquisitions (115.5) 20.9 28.9
Post completion gain/(loss) on acquisition of subsidiary/portfolio 10.9 (0.1) (0.1) 11
(Loss)/profit before tax (104.6) 20.8 28.8
Tax 36.4 (3.0) (1.5)
(Loss)/profit after tax (68.2) 17.8 27.3
Foreign exchange 1.7 (15.9) (23.9) 8
Other comprehensive income - - 0.4
Total comprehensive income (66.5) 1.9 3.8
All divisions have recorded IFRS losses in the first half of 2022,
predominantly as a result of the adverse economic conditions prevailing in the
period, which have been underpinned by inflationary pressures and the Ukraine
conflict.
Note 1: The UK results include the post-acquisition result of SLP. Both CA
and SLP have reported IFRS losses, underpinned by investment market related
losses, offset by modest operating profits in the period.
Note 2: The Movestic result also reflects adverse investment returns due to
adverse inflation and interest rate movements, partially offset by a
favourable operational result in relation to claims development and reduced
operational expenses.
Note 3: The Waard Group result reflects economic losses arising from rising
yields in the period. Whilst rising yields are generally good for the
business, under IFRS 4 reserving methods in the Netherlands, liabilities do
not generally reduce in a rising yield environment, but the associated backing
assets tend to fall. Additionally, the division also incurred some adverse
lapse experience on its mortgage related business. The results also include
the post-acquisition results of its newly acquired Robein Leven subsidiary
which completed in the period.
Note 4: The Scildon result has been severely impacted by the impact of
adverse spread movements and interest rate increases in the period. This has
been partially offset from operational gains made from positive mortality and
lapse experience.
Note 5: The Chesnara result largely represents holding company expenses.
The current year loss is higher than last year due to Tier 2 arrangement and
debt servicing costs of £7.3m in the period.
Note 6: Consolidation adjustments relate to items such as the amortisation
and impairment of intangible assets.
Note 7: The large tax credit in the period is reflective of the large pre-tax
losses that have been recorded in the first half of the year.
Note 8: Sterling movements against both the euro and Swedish krona in the
period, created a modest exchange gain at the end of the half-year.
Note 9: The current year operating profit, has seen a decline across all
divisions, in what has been a difficult trading period for the group.
Note 10: Economic profit, represents the components of the earnings that are
directly driven by movements in economic variables. These are markedly worse
than the prior year comparative, which reflected a less unstable year for
global investment markets.
Note 11: This includes the acquisition gains arising on the SLP and Robein
Leven deals in the UK and Netherlands, of £10.9m.
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 the material risks faced by the group, which are regularly reviewed
by the divisional and group Audit & Risk Committees. Our risk assessment
processes have regard to the significance of risks, the likelihood of their
occurrence and take account of the controls in place to manage them. The
processes are designed to manage the risk profile within the board's approved
risk appetite.
Group and divisional risk management processes are enhanced by stress and
scenario testing, which evaluates the impact on the group of certain adverse
events occurring separately or in combination. The results, conclusions and
any recommended actions are included within divisional and group ORSA Reports
to the relevant boards. There is a strong correlation between these adverse
events and the risks identified in 'Principal risks and uncertainties'. The
outcome of this stress testing provides context against which the group can
assess whether any changes to its risk appetite or to its management processes
are required.
ROLE OF THE BOARD
The Chesnara board is responsible for the adequacy of the design and
implementation of the group's risk management and internal control system and
its consistent application across divisions. All significant decisions for the
development of the group's risk management system are the group board's
responsibility.
Risk and Control Policies
Chesnara has a set of Risk and Control Policies that set out the key policies,
processes and controls to be applied. The Chesnara board approves the
review, updates and attestation of these policies at least annually.
Strategy and Risk Appetite
Chesnara group and its divisions have a defined risk strategy and supporting
risk appetite framework to embed an effective risk management framework,
culture and processes at its heart and to create a holistic, transparent and
focused approach to risk identification, assessment, management, monitoring
and reporting.
The Chesnara board approves a set of risk preferences which articulate, in
simple terms, the desire to increase, maintain, or reduce the level of risk
taking for each main category of risk. The risk position of the business is
monitored against these preferences using risk tolerance limits, where
appropriate, and they are taken into account by the management teams across
the group when taking strategic or operational decisions that affect the risk
profile.
Risk Identification
The group maintains a register of risks which are specific to its activity and
scans the horizon to identify potential risk events (e.g., political;
economic; technological; environmental, legislative & social).
On an annual basis the board approves the materiality criteria to be applied
in the risk scoring and in the determination of what is considered to be a
principal risk. At least quarterly the principal and emerging risks are
reported to the board, assessing their proximity, probability and potential
impact.
Own Risk and Solvency Assessment (ORSA)
On an annual basis, or more frequently if required, the group produces a group
ORSA Report which aggregates the divisional ORSA findings and supplements
these with an assessment specific to group activities. The group and
divisional ORSA policies outline the key processes and contents of these
reports.
The Chesnara board is responsible for approving the ORSA, including steering
in advance how the assessment is performed and challenging the results.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of and
attestation to the effectiveness of the risk management system. The assessment
considers the extent to which the risk management system is embedded.
The Chesnara board is responsible for monitoring the Risk Management System
and its effectiveness across the group. The outcome of the annual review is
reported to the group board which make decisions regarding its further
development.
COVID-19
Although COVID-19 has been a material event, and continues to have economic as
well as demographic impacts, restrictions are now substantially lifted. It is
not documented here as a principal risk in its own right, as the impacts from
COVID-19 are already covered by other principal risks, for example, market
risks, mortality risk and other risks associated with operational failure and
business continuity. The Chesnara group has continued to remain operationally
and financially stable throughout the COVID-19 pandemic, providing a high
level of assurance regarding operational resilience processes and the
suitability of the approach taken.
CLIMATE CHANGE RISK WITHIN CHESNARA'S RISK FRAMEWORK
Climate change is not considered as a standalone principal risk. Instead,
the risks arising from climate change are integrated through existing
considerations and events within the framework. The information in the
following pages has been updated to reflect Chesnara's latest views on the
potential implications of climate change risk and wider developments and
activity in relation to Environmental, Social and Governance (ESG).
Chesnara has embedded climate change risk within the group's risk framework
during the past few years and includes a detailed assessment as part of the
group's regular ORSA exercise, to date concluding that the group is not
materially exposed to climate change risk.
GEOPOLITICAL UNREST
With the continued Russian attack of Ukraine and more recently the threat of a
Chinese invasion of Taiwan, this is considered as an emerging risk for
Chesnara group in the sense they are rapidly evolving situations and has
potential implications for Chesnara's Principal risks.
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.
COVID-19 Chesnara continues to monitor this closely given the heightened level of
uncertainty and volatility but remains within risk appetite in terms of its
exposures.
CLIMATE CHANGE RISK Chesnara's risk analysis of transition risk demonstrates that this is well
within its risk appetite and within its standard economic sensitivities.
UKRAINE CONFLICT The group has limited exposure in terms of investments in Russian funds or
companies via customer unit linked funds, and we are working with customers
that are exposed to help them.
PR2 REGULATORY CHANGE RISK (INCLUDING BREXIT)
DESCRIPTION The risk of adverse changes in industry practice/regulation, or inconsistent
application of regulation across territories.
RISK APPETITE The group aims to minimise any exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Chesnara currently operates in three regulatory domains and is therefore
exposed to potential for inconsistent application of regulatory standards
across divisions, such as the imposition of higher capital buffers over and
above regulatory minimum requirements. Potential consequences of this risk for
Chesnara are the constraining of efficient and fluid use of capital within the
group or creating a non-level playing field with respect to future new
business/acquisitions.
Regulatory developments continue to drive a high level of change activity
across the group, with items such as operational resilience, climate change
and IFRS17 being particularly high profile. Such regulatory initiatives
carry the risk of expense overruns should it not be possible to adhere to them
in a manner that is proportionate to the nature and scale of Chesnara's
businesses. The group is therefore exposed to the risk of:
- incurring one-off costs of addressing regulatory change as well as any
permanent increases in the cost base in order to meet enhanced standards;
- erosion in value arising from pressure or enforcement to reduce future
policy charges;
- erosion in value arising from pressure or enforcement to financially
compensate for past practice; and
- regulatory fines or censure in the event that it is considered to have
breached standards or fails to deliver changes to the required regulatory
standards on a timely basis.
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.
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).
COVID-19 Chesnara does not expect the pandemic to have a material impact on mortality
experience and costs in the long-term.
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.
COVID-19, BREXIT & UKRAINE Inflation has materially increased during 2021 and 2022 in all territories
including primarily due to economic supply and demand impacts of Brexit,
COVID-19 and the Ukraine War. Expense assumptions have been updated
appropriately, though it is acknowledged that there is a greater level of
uncertainty regarding the assumption for future inflation levels.
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.
COVID-19 In response to COVID-19, Chesnara, its subsidiaries and outsourced service
providers all adapted to remote working conditions, utilising communication
technology as required and implementation of additional controls. Most parts
of the business have adopted hybrid working arrangements which has become a
"new normal" working practice, with suitable additional risk controls deployed
as appropriate.
PR7 IT / DATA SECURITY & CYBER RISK
DESCRIPTION Risk of IT/ data security failures or impacts of malicious cyber-crime
(including ransomware) on continued operational stability.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Cyber risk is a growing risk affecting all companies, particularly those who
are custodians of customer data. The most pertinent risk exposure relates to
information security (i.e. protecting business sensitive and personal data)
and can arise from failure of internal processes and standards, but
increasingly companies are becoming exposed to potential malicious
cyber-attacks, organisation specific malware designed to exploit
vulnerabilities, phishing attacks etc. The extent of Chesnara's exposure to
such threats also includes third party service providers.
The potential impact of this risk includes financial losses, inability to
perform critical functions, disruption to policyholder services, loss of
sensitive data and corresponding reputational damage or fines.
COVID-19 The move to remote working, as a result of COVID-19, had the potential to
increase cyber risk for businesses and therefore various steps were taken to
enhance security, processes and controls to protect against this.
UKRAINE CONFLICT Cyber-crime campaigns originating from Russia have increased, with some
suppliers reporting an increase in information security threats, which some
are saying is state sponsored. Although Chesnara is not necessarily considered
to be a direct target of any such campaigns, all business units have confirmed
that they have increased monitoring and detection/ protection controls in
relation to the increased threat.
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.
COVID-19 Overall volumes during the pandemic were lower than historic levels, largely
as a result of restrictions on face-to-face sales meetings and customer
demand. There is potential for COVID-19 to influence the operating environment
on a long-term basis and drive changes in competitor, regulator or
counterparty (e.g. broker) behaviours. For example, any restrictions on
Brokers meeting new customers face to face could result in increased focus on
the existing customers and risk of churn.
PR9 REPUTATIONAL RISK
DESCRIPTION Poor or inconsistent reputation with customers, regulators, investors, staff
or other key stakeholders/counterparties.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group is exposed to the risk that litigation, employee misconduct,
operational failures, the outcome of regulatory investigations, press
speculation and negative publicity, disclosure of confidential client
information (including the loss or theft of customer data), IT failures or
disruption, cyber security breaches and/or inadequate services, amongst
others, whether true or not, could impact its brand or reputation. The group's
brand and reputation could also be affected if products or services
recommended by it (or any of its intermediaries) do not perform as expected
(whether or not the expectations are realistic) or in line with the customers'
expectations for the product range.
Any damage to the group's brand or reputation could cause existing customers
or partners to withdraw their business from the group, and potential customers
or partners to elect not to do business with the Group and could make it more
difficult for the group to attract and retain qualified employees.
CLIMATE CHANGE RISK The group is exposed to strategic and reputational risks arising from its
action or inaction in response to climate change as well the regulatory and
reputational risks arising from its public disclosures on the matter.
UKRAINE CONFLICT In relation to the Ukraine / Russia conflict, no material exposure has been
identified in terms of the group's key counterparty connections. There are
limited indirect connections through third parties who have a presence in
Russia.
GOING CONCERN
After making appropriate enquiries, including consideration of the ongoing
high inflation environment, the impacts of the ongoing invasion of Ukraine and
to a lesser extent, the reducing impact of COVID-19 on the group's operations
and financial position and prospects, the directors confirm that they are
satisfied that the company and the group have adequate resources to continue
in business for the foreseeable future. Accordingly, they continue to adopt
the going concern basis in the preparation of the financial statements.
In performing this work, the board has considered the current solvency and
cash position of the group and company, coupled with the group's and company's
projected solvency and cash position as highlighted in its most recent
business plan and Own Risk and Solvency Assessment (ORSA) process. These
processes consider the financial projections of the group and its subsidiaries
on both a base case and a range of stressed scenarios, covering projected
solvency, liquidity, EcV and IFRS positions. In particular these projections
assess the cash generation of the life insurance divisions and how these flow
up into the Chesnara parent company balance sheet, with these cash flows being
used to fund debt repayments, shareholder dividends and the head office
function of the parent company. The directors believe these scenarios will
encompass any potential future impact of high inflation, the Ukraine crisis
and COVID-19 on the group, as Chesnara's most material ongoing exposure to
these potential threats are any associated future investment market impacts.
Underpinning the projections process outlined above are a number of
assumptions. The key ones include:
- We do not assume that a future acquisition needs to take place
to make this assessment.
- We make long term investment return assumptions on equities and
fixed income securities.
- The base case scenario assumes exchange rates remain stable, and
the impact of adverse rate changes are assessed through scenario analysis.
- Levels of new business volumes and margins are assumed.
- The projections apply the most recent actuarial assumptions,
such as mortality and morbidity, lapses and expenses.
The group's strong capital position and business model, provides a degree of
comfort that although the high inflation environment, ongoing Ukraine crisis
and COVID-19 all have the potential to cause further significant global
economic disruption, the group and the company remain well capitalised and has
sufficient liquidity. As such we can continue to remain confident that the
group will continue to be in existence in the foreseeable future. The
information in the Capital Management section indicates a strong Solvency II
position as at 30 June 2022 as measured at both the individual regulated life
company levels and at the group level. As well as being well-capitalised the
group also has a healthy level of cash reserves to be able to meet its debt
obligations as they fall due and does not rely on the renewal or extension of
bank facilities to continue trading. This position has been further enhanced
in early 2022, when the company announced the successful pricing of its
inaugural debt capital markets issuance of £200m Tier 2 Subordinated Notes,
the net proceeds of which are being utilised for corporate purposes, including
investments and acquisitions.
The group's subsidiaries rely on cash flows from the maturity or sale of fixed
interest securities which match certain obligations to policyholders, which
brings with it the risk of bond default. In order to manage this risk, we
ensure that our bond portfolio is actively monitored and well diversified.
Other significant counterparty default risk relates to our principal
reinsurers. We monitor their financial position and are satisfied that any
associated credit default risk is low.
Whilst there was some short-term operational disruption from dealing with the
restricted operating environment in light of COVID-19, our assessment has
shown that both our internal functions and those operated by our key
outsourcers and suppliers adapted to these restrictions and do not cause any
issues as to our going concern.
DIRECTORS' RESPONSIBILITIES STATEMENT
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in
accordance with United Kingdom adopted IAS 34 'Interim Financial Reporting';
- the management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and description of principal risks and uncertainties for the remaining
six months of the year); and
- the management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions and
changes therein).
By order of the board
Luke Savage Steve Murray
Chairman Chief
Executive Officer
30 August 2022 30 August 2022
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2022 which comprises the condensed consolidated statement of
comprehensive income, the condensed consolidated balance sheet, the condensed
consolidated statement of changes in equity, the condensed consolidated
statement of cash flows and related notes 1 to 9.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 is not prepared, in all
material respects, in accordance with United Kingdom adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of
the United Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and consequently does
not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
As disclosed in note 1, the annual financial statements of the group will be
prepared in accordance with United Kingdom adopted international accounting
standards. The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with United
Kingdom adopted International Accounting Standard 34, "Interim Financial
Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE (UK), however future events or conditions may cause the entity to
cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the group's ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate the
company or to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly financial report, we are responsible for
expressing to the group a conclusion on the condensed set of financial
statement in the half-yearly financial report. Our conclusion, including our
Conclusions Relating to Going Concern, are based on procedures that are less
extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the company in accordance with International
Standard on Review Engagements (UK) 2410 "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity" issued by the
Financial Reporting Council. Our work has been undertaken so that we might
state to the company those matters we are required to state to it in an
independent review 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, for our review work, for this report, or for the conclusions
we have formed.
Deloitte LLP
Birmingham
United Kingdom
30 August 2022
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
Unaudited Year ended 31 December
Six months ended
30 June
2022 2021 2021
Note £000 £000 £000
Insurance premium revenue 160,421 152,291 312,046
Insurance premium ceded to reinsurers (22,392) (20,610) (115,881)
Net insurance premium revenue 138,029 131,681 196,165
Fee and commission income 46,272 45,732 89,975
Net investment return (1,517,897) 621,272 1,172,988
Other operating income 22,898 23,491 46,568
Total income net of investment return (1,310,698) 822,176 1,505,696
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (240,339) (255,462) (506,490)
Net increase/(decrease) in insurance contract provisions 419,640 (38,308) (23,577)
Reinsurers' share of claims and benefits 7,714 14,149 60,168
Net insurance contract claims and benefits 187,015 (279,621) (469,899)
Change in investment contract liabilities 1,092,743 (470,272) (902,579)
Reinsurers' share of investment contract liabilities (2,755) 2,635 4,110
Net change in investment contract liabilities 1,089,988 (467,637) (898,469)
Fees, commission and other acquisition costs (19,322) (11,848) (24,023)
Administrative expenses (44,338) (33,316) (67,925)
Other operating expenses
Charge for amortisation of acquired value of in-force business (3,508) (4,107) (8,184)
Charge for amortisation of acquired value of customer relationships (23) (28) (55)
Other (5,410) (3,698) (5,964)
Total expenses net of change in insurance contract provisions and investment 1,204,402 (800,255) (1,474,519)
contract liabilities
Total income less expenses (106,296) 21,921 31,177
Post completion gains/(losses) on acquisitions 7 10,866 (94) (93)
Financing costs (9,180) (990) (2,272)
(Loss)/profit before income taxes 4 (104,610) 20,837 28,812
Income tax credit/(expense) 36,418 (2,982) (1,518)
(Loss)/profit for the period 4 (68,192) 17,855 27,294
Foreign exchange translation differences arising on the revaluation of foreign 1,666 (15,948) (23,879)
operations
Revaluation of land and building 25 (3) 369
Other comprehensive income for the year, net of tax 1,691 (15,951) (23,510)
Total comprehensive income for the period (66,501) 1,904 3,784
Basic earnings per share (based on profit for the period) 2 (45.42)p 11.90p 18.18p
Diluted earnings per share (based on profit for the period) 2 (44.87)p 11.81p 18.00p
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
Unaudited Year ended
as at 31 December
30 June
2022 2021 2021
Note £000 £000 £000
Assets
Intangible assets
Deferred acquisition costs 62,724 65,417 63,327
Acquired value of in-force business 112,000 54,701 49,629
Acquired value of customer relationships 292 358 320
Software assets 8,743 8,486 8,885
Property and equipment 7,363 7,635 7,830
Investment properties 81,478 1,073 1,071
Reinsurers' share of insurance contract provisions 222,523 190,737 247,750
Amounts deposited with reinsurers 34,147 38,014 38,295
Financial assets
Equity securities at fair value through income 229,103 5,562 6,352
Holdings in collective investment schemes at fair value through income 8,181,768 6,871,529 6,858,054
Debt securities at fair value through income 963,168 1,002,546 978,199
Policyholders' funds held by the group 858,010 502,051 990,700
Financial assets held at amoritised cost 302,637 319,652 293,811
Derivative financial instruments 25 137 264
Total financial assets 10,534,711 8,701,477 9,127,380
Insurance and other receivables 49,528 44,135 35,613
Prepayments 14,495 12,431 13,245
Reinsurers' share of accrued policyholder claims 14,737 18,096 16,340
Income taxes 11,449 5,978 7,233
Cash and cash equivalents 209,482 72,595 70,087
Total assets 4 11,363,672 9,221,133 9,687,005
Liabilities
Insurance contract provisions 3,845,631 3,874,578 3,818,412
Other provisions 12,110 681 992
Financial liabilities
Investment contracts at fair value through income 5,776,414 4,135,734 4,120,572
Liabilities relating to policyholders' funds held by the group 858,010 502,051 990,700
Lease contract liabilities 1,651 2,361 2,019
Borrowings 5 214,782 51,574 47,185
Derivative financial instruments 473 126 -
Total financial liabilities 6,851,330 4,691,846 5,160,476
Deferred tax liabilities 41,111 16,450 15,699
Reinsurance payables 59,265 4,403 70,414
Payables related to direct insurance and investment contracts 121,497 101,988 129,262
Deferred income 2,591 3,061 2,809
Income taxes 10,832 6,002 6,527
Other payables 48,448 52,312 23,991
Bank overdrafts 790 1,918 256
Total liabilities 4 10,993,605 8,753,239 9,228,838
Net assets 370,067 467,894 458,167
Shareholders' equity
Share capital 7,496 7,496 7,496
Merger reserve 36,272 36,272 36,272
Share premium 142,085 142,172 142,085
Other reserves 8,953 14,821 7,262
Retained earnings 3 175,261 267,133 265,052
Total shareholders' equity 370,067 467,894 458,167
Approved by the Board of Directors and authorised for issue on 30 August 2022
and signed on its behalf by:
Luke Savage Steve Murray
Chairman Chief
Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Unaudited Year ended 31 December
Six months ended
30 June
2022 2021 2021
£000 £000 £000
(Loss)/(profit for the period (68,192) 17,855 27,294
Adjustments for:
Depreciation of property and equipment 355 351 749
Amortisation of deferred acquisition costs 4,082 6,818 13,370
Amortisation of acquired value of in-force business 3,098 3,684 8,184
Amortisation of acquired value of customer relationships 23 28 55
Amortisation of software assets 895 36 1,382
Depreciation on right of use assets 346 320 739
Interest on lease liabilities 17 23 95
Share based payment 504 282 593
Tax (recovery)/paid (36,417) 2,961 1,518
Interest receivable (5,696) (1,268) (2,269)
Dividends receivable (1,461) (1,529) (614)
Interest expense 9,163 967 2,177
Fair value gains/(losses) on financial assets 1,280,945 (597,225) (990,914)
Profit on business combination (10,565) - -
Increase in intangible assets related to insurance and investment (314) (6,484) (8,938)
contracts
Interest received 6,216 2,395 2,493
Dividends received 1,292 2,401 1,930
Changes in operating assets and liabilities:
Decrease/(Increase) in financial assets (13,825) 68,929 (187,975)
Decrease/(increase) in reinsurers share of insurance contract provisions 27,363 2,857 (37,747)
Decrease/(increase) in amounts deposited with reinsurers 4,148 (988) 5,858
Decrease/(increase) in insurance and other receivables 9,298 (2,172) 5,980
(Increase)/decrease in prepayments (1,236) 275 (873)
(Decrease) /increase in insurance contract provisions (268,001) 21,089 15,534
(Decrease) /increase in investment contract liabilities (986,315) 482,409 1,098,809
Increase in provisions 1,327 102 445
(Decrease) /increase in reinsurance payables (11,152) 1,674 67,766
(Decrease) /increase in payables related to direct insurance and investment (18,639) 7,128 35,701
contracts
Increase/(decrease) in other payables 6,472 2,708 (24,950)
Cash (utilised)/generated from operations (66,269) 15,626 36,392
Income tax paid 9,390 (9,440) (9,796)
Net cash generated from operating activities (56,879) 6,186 26,596
Cash flows from investing activities
Business combinations 59,766 - -
Development of software - (1,209) -
Purchases of property and equipment (1,005) 741 (3,636)
Net cash generated/(utilised) by investing activities 58,761 (468) (3,636)
Cash flows from financing activities
Proceeds from issue of share premium - 87 -
Proceeds from Tier 2 debt 200,000 - -
Repayment of borrowings (32,097) (12,777) (16,102)
Repayment of principal under lease liabilities (361) (404) (598)
Dividends paid (22,103) (21,445) (33,276)
Interest paid (9,178) (989) (2,271)
Net cash generated/(utilised) by from financing activities 136,261 (35,528) (52,247)
Net increase/(decrease) in cash and cash equivalents 138,143 (29,810) (29,287)
Cash and cash equivalents at beginning of period 69,831 103,706 103,706
Effect of exchange rate changes on cash and cash equivalents 718 (3,219) (4,588)
Cash and cash equivalents at end of the period 208,692 70,677 69,831
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
Unaudited six months ended 30 June 2022
Share capital Share premium Merger reserve Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2022 7,496 142,085 36,272 7,262 - 265,052 458,167
Loss for the period - - - - - (68,192) (68,192)
Dividends paid - - - - - (22,103) (22,103)
Foreign exchange translation differences - - - 1,666 - - 1,666
Revaluation of land and building - - - 25 - -- 25
Issue of share capital - - - - - - -
Issue of share premium - - - - - - -
Share based payment - - - - - 504 504
Equity shareholders' funds at 30 June 2022 7,496 142,085 36,272 8,953 - 175,261 370,067
Unaudited six months ended 30 June 2021
Share capital Share premium Merger reserve Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2021 (as previously stated) 43,768 142,085 - 30,772 - 270,442 487,067
Transfer to merger reserve (36,272) - 36,272 - - - -
Equity shareholders' funds at 1 January 2021 (restated) 7,496 142,085 36,272 30,772 - 270,442 487,067
Profit for the year - - - - - 17,855 17,855
Dividends paid - - - - - (21,446) (21,446)
Foreign exchange translation differences - - - (15,948) - - (15,948)
Revaluation of land and building - - - (3) - -- (3)
Issue of share capital - - - - - - -
Issue of share premium - 87 - - - - 87
Share based payment - - - - - 282 282
Equity shareholders' funds at 30 June 2021 7,496 142,172 36,272 14,821 - 267,133 467,894
Year ended 31 December 2021
Share capital Share premium Merger reserve Other reserves Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2021 (as previously stated) 43,768 142,085 - 30,772 - 270,442 487,067
Transfer to merger reserve (36,272) - 36,272 - - - -
Equity shareholders' funds at 1 January 2021 (restated) 7,496 142,085 36,272 30,772 - 270,442 487,067
Profit for the year - - - - - 27,294 27,294
Dividends paid - - - - - (33,277) (33,277)
Foreign exchange translation differences - - - (23,879) - - (23,879)
Revaluation of land and building - - - 369 - -- 369
Issue of share capital - - - - - - -
Issue of share premium - - - - - -
Share based payment - - - - - 593 593
Equity shareholders' funds at 31 December 2021 7,496 142,085 36,272 7,262 - 265,052 458,167
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of presentation
The annual financial statements of Chesnara are prepared in accordance with
United Kingdom adopted International Financial Reporting Standards. This
condensed set of consolidated financial statements has been prepared in
accordance with United Kingdom adopted IAS 34 'Interim Financial Reporting'.
As required by the Disclosure and Transparency Rules of the Financial Conduct
Authority, the condensed set of consolidated financial statements has been
prepared applying the accounting policies and presentation which were applied
in the preparation of the group's published consolidated financial statements
for the year ended 31 December 2021.
Any judgements and estimates applied in the condensed set of financial
statements are consistent with those applied in the preparation of the group's
published consolidated financial statements for the year ended 31 December
2021.
The financial information shown in these interim financial statements is
unaudited and does not constitute statutory accounts within the meaning of
section 434 of the Companies Act 2006.
The comparative figures for the financial year ended 31 December 2021 are not
the company's statutory accounts for that financial year. Those accounts have
been reported on by the company's auditor and delivered to the Registrar of
Companies. The report of the auditor was (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act 2006.
Going concern
After making appropriate enquiries, including detailed consideration of the
impact on the group's operations and financial position and prospects, the
directors confirm that they are satisfied that the company and the group have
adequate resources to continue in business for the foreseeable future, a
period of not less than 12 months from the date of this report. Accordingly,
they continue to adopt the going concern basis in the preparation of these
half year financial statements. Further detail on the key considerations made
by the directors in making this assessment has been included in the 'Going
Concern' section of this interim report.
IFRS 17
The new accounting standard for insurance contracts, IFRS 17, is effective for
periods ending on or after 1 January 2023. IFRS 9 Financial Instruments is
also effective for insurers from that date. IFRS 17 will significantly change
how the group measures and reports its insurance contracts. Implementation
activities continued during the period with the groupwide calculation engine
going live and divisions completing dry runs and system/process refinements.
We have also continued to work with our auditors on the technical decisions
and operational processes underpinning the implementation. These
implementation activities are ongoing and the remaining time to live reporting
for IFRS 17 and IFRS 9 will be spent performing further dry runs. Beyond the
information above, it is not practicable to provide a reasonable estimate of
the effect of these standards until further work is performed.
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. The potential impact on the group has been considered in
the preparation of these half year condensed financial statements, including
management's evaluation of critical accounting judgements and estimates, which
has led to the following assessments being undertaken: -
Estimate of future operating expenses - Sanlam Life & Pensions (UK)
Limited (SLP): One of the key components underpinning the acquisition
accounting for SLP, is the estimation of future operating expenses under
Chesnara ownership and in particular, those relating to the cost of
outsourcing the day to day operations of the business to a third party service
provider. At the time of calculating the initial impact of the acquisition, we
have estimated those costs based upon a range of quotes obtained from
prospective service providers. It is however recognised, that until an
outsource partner has been selected and contract terms put in place, these
estimated costs are potentially subject to change.
2. Earnings per share
Earnings per share are based on the following:
Unaudited Year ended 31 December
Six months ended
30 June
2022 2021 2021
Profit/(loss) for the period attributable to shareholders (£000) (68,192) 17,855 27,294
Weighted average number of ordinary shares 150,153,465 150,091,045 150,118,548
Basic earnings per share (45.42)p 11.90p 18.18p
Diluted earnings per share (44.87)p 11.81p 18.00p
The weighted average number of ordinary shares in respect of the six months
ended 30 June 2022 is based upon 150,145,602 shares in issue at the beginning
of the period and 150,157,451 at the end of the period. No shares were held
in treasury.
The six months ended 30 June 2021 is based upon 150,065,457 shares in issue at
the beginning of the period, and 150,145,602 shares in issue at the end of the
period. No shares were held in treasury.
The weighted average number of ordinary shares in respect of the year ended 31
December 2021 is based upon 150,145,602 shares. in issue at the beginning of
the period and 150,061,567 shares in issue at the end of the period. No
shares were held in treasury.
There were 1,815,601 share options outstanding at 30 June 2022 (30 June 2021:
1,092,286). Accordingly, there is dilution of the average number of ordinary
shares in issue. There were 1,501,566 share options outstanding as at 31
December 2021.
3. Retained earnings
Unaudited Year ended 31 December
Six months ended
30 June
2022 2021 2021
£000 £000 £000
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January 265,052 270,442 270,442
(Loss)/profit for the period (68,192) 17,855 27,294
Share based payment 504 282 593
Dividends:
Final approved and paid for 2020 - (21,446) (21,446)
Interim approved and paid for 2021 - - (11,831)
Final approved and paid for 2021 (22,103) - -
Balance at period end 175,261 267,133 265,052
The interim dividend in respect of 2021, approved and paid in 2021 was paid at
the rate of 7.88p per share.
The final dividend in respect of 2021, approved and paid in 2022, was paid at
the rate of 14.72p per share so that the total dividend paid to the equity
shareholders of the company in respect of the year ended 31 December 2021 was
made at the rate of 22.60p per share.
An interim dividend of 8.12p per share in respect of the year ending 31
December 2022 payable on 21 October 2022 to equity shareholders of the company
registered at the close of business on 9 September 2022, the dividend record
date, was approved by the Directors after the balance sheet date. The
resulting dividend of £12.2m has not been provided for in these financial
statements and there are no income tax consequences.
The following table summarises dividends per share in respect of the six-month
period ended 30 June 2022 and the year ended 31 December 2021:
Six months ended Year ended 31
30 June 2022 December 2021
Pence Pence
Interim - approved/paid 8.12 7.88
Final - proposed/paid - 14.72
Total 8.12 22.60
4. 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 30 June 2022 comprise:
UK: This segment represents the group's UK life insurance and pensions
run-off portfolio and comprises the original business of Countrywide Assured
plc, the group's principal UK operating subsidiary, and of City of Westminster
Assurance Company Limited which was acquired in 2005 and the long-term
business of which was transferred to Countrywide Assured plc during 2006. This
segment also contains Save & Prosper Insurance Limited which was acquired
on 20 December 2010 and its then subsidiary Save & Prosper Pensions
Limited. The S&P business was transferred to CA during 2011. This segment
also contains the business of Protection Life, which was purchased on 28
November 2013 and the business of which was transferred to CA effective from 1
January 2015. This also includes the acquisition of Sanlam Life and Pensions
(UK) Limited (SLP) on 28 April 2022. CA & SLP are responsible for
conducting unit-linked and non-linked business. Additionally CA has a
with-profits portfolio, which carries significant additional market risk, as
described in note 6 'Management of financial risk' of the 2021 Annual Report
and Accounts.
Movestic: This segment comprises the group's Swedish life and pensions
business, Movestic Livförsäkring AB (Movestic) and its subsidiary and
associated companies, which are open to new business and which are responsible
for conducting both pensions, savings, including unit-link and custodian
business, and providing some life and health product offerings.
Waard Group: This segment represents the group's Dutch life and general
insurance business which is in run-off, acquired on 19 May 2015 and which
comprises the two insurance companies Waard Leven N.V. and Waard Schade N.V.,
and a servicing company, Waard Verzekeringen B.V. On 25 November 2021, Waard
entered into an agreement with Monument Re Group to acquire a Robein Leven, a
specialist provider of traditional and linked savings products, mortgages and
annuities in the Netherlands. The acquisition was successfully completed on 28
April 2022, thereby extending the existing group. The Waard Group's policy
base is predominantly made up of term life policies, although also includes
unit-linked policies and some non-life policies, covering risks such as
occupational disability and unemployment. This segment is closed to new
business.
Scildon: This segment represents the group's open Dutch life insurance
business, which was acquired on 5 April 2017. Scildon's policy base is
predominantly made up of individual protection and savings contracts. It is
open to new business and sells protection, individual savings and group
pension contracts via a broker-led distribution model.
Other group activities: The functions performed by the ultimate holding
company within the group, 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 and on the total assets and liabilities of the
reporting segments and the group. There were no changes to the measurement
basis for segment profit during the six months ended 30 June 2022.
(i) Segmental income statement for the six months ended 30 June 2022
Scildon Other Group Activities
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Insurance premium revenue 17,063 6,123 16,296 120,939 - 160,421
Insurance premium ceded to reinsurers (7,247) (2,244) (1,877) (11,024) - (22,392)
Net insurance premium revenue 9,816 3,879 14,419 109,915 - 138,029
Fee and commission income 14,362 7,546 75 24,289 - 46,272
Net investment return (349,385) (891,034) (14,264) (265,356) 2,142 (1,517,897)
Other operating income 6,106 16,792 - - - 22,898
Segmental revenue, net of investment return (319,101) (862,817) 230 (131,152) 2,142 (1,310,698)
Net insurance contract claims and benefits incurred 122,531 (186) (2,918) 67,588 - 187,015
Net change in investment contract liabilities 200,186 889,802 - - - 1,089,988
Fees, commission and other acquisition costs (8,593) (11,235) (208) (259) - (20,295)
Administrative expenses:
Amortisation charge on software assets - (899) - - - (899)
Depreciation charge on property and equipment (37) (52) (29) (266) - (384)
Other (11,249) (5,621) (3,506) (11,922) (10,757) (43,055)
Operating expenses (1) (5,409) - - - (5,410)
Financing costs (13) (5,067) (1) - (4,099) (9,180)
Profit/(loss) before tax and consolidation adjustments (16,277) (1,484) (6,432) (76,011) (12,714) (112,918)
Other operating expenses:
Charge for amortisation of acquired value of in-force business (436) (1,088) (410) (1,574) - (3,508)
Charge for amortisation of acquired value of customer relationships - (23) - - - (23)
Fees, commission and other acquisition costs - 850 - 123 - 973
Segmental income less expenses (16,713) (1,745) (6,842) (77,462) (12,714) (115,476)
Post completion profit on acquisition 10,565 - 301 - - 10,866
(Loss)/profit before tax (6,148) (1,745) (6,541) (77,462) (12,714) (104,610)
Income tax (expense)/credit 12,339 3 1,715 19,942 2,419 36,418
Profit/(loss) after tax 6,191 (1,742) (4,826) (57,520) (10,295) (68,192)
(ii) Segmental balance sheet as at 30 June 2022
Scildon Other Group Activities
Movestic Waard Group Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Total assets 5,005,658 3,749,599 555,873 1,891,226 161,316 11,363,672
Total liabilities (4,833,372) (3,650,154) (512,678) (1,791,787) (205,614) (10,993,605)
Net assets 172,286 99,445 43,195 99,439 (44,298) 370,067
Additions to non-current assets - 4,884 39 335 - 5,258
(iii) Segmental income statement for the six months ended 30 June 2021
Scildon Other Group Activities
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Insurance premium revenue 18,674 7,200 13,822 112,595 - 152,291
Insurance premium ceded to reinsurers (7,846) (2,880) (975) (8,909) - (20,610)
Net insurance premium revenue 10,828 4,320 12,847 103,686 - 131,681
Fee and commission income 11,081 8,856 39 25,756 - 45,732
Net investment return 106,481 419,302 5,208 90,278 3 621,272
Other operating income 6,740 16,751 - - - 23,491
Segmental revenue, net of investment return 135,130 449,229 18,094 219,720 3 822,176
Net insurance contract claims and benefits incurred (63,348) (656) (14,637) (200,980) - (279,621)
Net change in investment contract liabilities (48,673) (418,964) - - - (467,637)
Fees, commission and other acquisition costs (171) (11,729) (210) (933) - (13,043)
Administrative expenses:
Amortisation charge on software assets - (1,453) - (204) - (1,657)
Depreciation charge on property and equipment -- (125) (51) (459) - (635)
Other (7,923) (5,311) (1,895) (11,160) (4,735) (31,024)
Operating expenses (1) (3,698) - - 1 (3,698)
Financing costs -- (609) (1) - (380) (990)
Profit/(loss) before tax and consolidation adjustments 15,014 6,684 1,300 5,984 (5,111) 23,871
Other operating expenses:
Charge for amortisation of acquired value of in-force business (721) (1,247) (423) (1,716) - (4,107)
Charge for amortisation of acquired value of customer relationships (28) - - - (28)
Fees, commission and other acquisition costs 901 - 294 - 1,195
Segmental income less expenses 14,293 6,310 877 4,562 (5,111) 20,931
Post completion loss on portfolio acquisition - - (94) - - (94)
Profit/(loss) before tax 14,293 6,310 783 4,562 (5,111) 20,837
Income tax (expense)/credit (2,603) (8) (228) (1,125) 982 (2,982)
Profit/(loss) after tax 11,690 6,302 555 3,437 (4,129) 17,855
(iv) Segmental balance sheet as at 30 June 2021
Scildon Other Group Activities
Movestic Waard Group Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Total assets 2,523,294 4,114,246 420,281 2,098,354 64,958 9,221,133
Total liabilities (2,410,052) (4,004,127) (376,299) (1,929,613) (33,148) (8,753,239)
Net assets 113,242 110,119 43,982 168,741 31,810 467,894
Additions to non-current assets - 31 - 2,272 - 2,303
(v) Segmental income statement for the year ended 31 December 2021
Scildon Other Group Activities
Movestic
Waard Group Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Insurance premium revenue 36,004 13,796 32,546 229,700 - 312,046
Insurance premium ceded to reinsurers (87,353) (5,374) (3,406) (19,748) - (115,881)
Net insurance premium revenue (51,349) 8,422 29,140 209,952 - 196,165
Fee and commission income 22,140 18,029 76 49,730 - 89,975
Net investment return 179,662 821,381 11,928 160,006 11 1,172,988
Other operating income/(expense) 13,681 32,887 - - - 46,568
Segmental revenue, net of investment return 164,134 880,719 41,144 419,688 11 1,505,696
Net insurance contract claims and benefits incurred (34,545) (2,787) (35,849) (396,718) - (469,899)
Net change in investment contract liabilities (77,568) (820,901) - - - (898,469)
Fees, commission and other acquisition costs (316) (23,598) (713) (1,816) - (26,443)
Administrative expenses:
Amortisation charge on software assets - (1,306) - (36) - (1,342)
Depreciation charge on property and equipment - (115) (54) (577) - (746)
Other (16,090) (12,794) (4,407) (20,992) (11,554) (65,837)
Operating (expenses)/income 5 (5,972) - - 3 (5,964)
Financing costs - (1,179) (1) - (1,092) (2,272)
Profit/(loss) before tax and consolidation adjustments 35,620 12,067 120 (451) (12,632) 34,724
Consolidation adjustments:
Charge for amortisation of acquired value of in-force business (1,443) (2,467) (838) (3,436) - (8,184)
Charge for amortisation of acquired value of customer relationships - (55) - - - (55)
Fees, commission and other acquisition costs - 1,878 - 542 - 2,420
Segmental income less expenses 34,177 11,423 (718) (3,345) (12,632) 28,905
Post completion gain on portfolio acquisition - - (93) - - (93)
Profit/(loss) before tax 34,177 11,423 (811) (3,345) (12,632) 28,812
Income tax (expense)/credit (4,979) (1) 188 444 2,830 (1,518)
Profit/(loss) after tax 29,198 11,422 (623) (2,901) (9,802) 27,294
(vi) Segmental balance sheet as at 31 December 2021
Other Group Activities
Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Total assets 2,551,611 4,568,400 389,846 2,122,474 54,674 9,687,005
Total liabilities (2,420,861) (4,462,163) (347,961) (1,963,052) (34,801) (9,228,838)
Net assets 130,750 106,237 41,885 159,422 19,873 458,167
Additions to non-current assets - 11,590 197 4,483 - 16,270
5. Borrowings
Unaudited 31 December
30 June
2022 2021 2021
£000 £000 £000
Bank loan - 30,437 31,273
Tier 2 Debt 200,000 - -
Property mortgages 2,584 - -
Amount due in relation to financial reinsurance 12,198 21,137 15,912
Total 214,782 51,574 47,185
In February 2022, the outstanding bank loans (both the sterling and euro
loans) in the form of a Revolving Credit Facility (RCF) was re-paid in full.
The facility, which was put in place in July 2021 still exists. The RCF is
operated on a syndicated basis and provides an unsecured multi-currency debt
facility up to the value of £100m sterling equivalent. The facility is
initially for a term of 3 years from July 2021, extendable by up to two 12
month periods upon request. The RCF also has an accordion option which can
extend the loan capacity by up to a further £50m upon request. This facility
provides further financial flexibility above and beyond the Tier 2 debt raised
in February 2022 and will enable us to fulfil our appetite of financing future
deals up to the maximum levels of gearing set out in our debt and leverage
policy, in a timely and efficient manner.
In 2022, a Tier 2 Subordinated Notes Debt was launched.
The fair value of the sterling bank loan at 30 June 2022 was £nil (31
December 2021: £12.0m).
The fair value of the euro denominated bank loan at 30 June 2022 was £nil (31
December 2021: £18.5m).
The fair value of the Tier 2 debt was £200.0m (31 December 2021: £nil).
The fair value of amounts due in relation to financial reinsurance was £12.1m
(31 December 2021: £16.4m).
The property mortgage balance within SLP, comprises of capital amounts
outstanding on mortgage bonds taken out over properties held in the
Unit-linked policyholder funds. 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.
Bank loans are presented net of unamortised arrangement fees. Arrangement
fees are recognised in profit or loss using the effective interest rate
method.
6. Financial instruments fair value disclosures
The table below shows the determination of the fair value of financial assets
and financial liabilities 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).
The group held the following financial instruments at fair value at 30 June
2022.
Fair value measurement at 30 June 2022
Level 1 Level 2 Level 3 Total
Financial assets £000 £000 £000 £000
Equities
Listed 229,103 - - 229,103
Holdings in collective investment schemes 8,015,413 - 166,355 8,181,768
Debt securities - fixed rate
Government Bonds 514,692 20,752 - 535,444
Corporate Bonds 360,607 63,356 - 423,963
Debt securities - floating rate 3,761 - - 3,761
Listed
Total debt securities 879,060 84,108 - 963,168
Policyholders' funds held by the group 858,010 - - 858,010
Derivative financial instruments - 25 - 25
Total 9,981,586 84,133 166,355 10,232,074
Current 2,204,789
Non-current 8,027,285
Total 10,232,074
Financial liabilities
Investment contracts at fair value through income - 5,776,414 - 5,776,414
Liabilities related to policyholders' funds held by the group 858,010 - - 858,010
Derivative financial instruments - 473 - 473
Total 858,010 5,776,887 - 6,634,897
Fair value measurement at 31 December 2021
Level 1 Level 2 Level 3 Total
Financial assets £000 £000 £000 £000
Equities
Listed 6,352 - - 6,352
Holdings in collective investment schemes 6,602,615 65,210 190,229 6,858,054
Debt securities - fixed rate
Government Bonds 554,146 96 - 554,242
Corporate Bonds 406,608 - - 406,608
Debt securities - floating rate 17,349 - - 17,349
Listed
Total debt securities 978,103 96 - 978,199
Policyholders' funds held by the group 990,700 - - 990,700
Derivative financial instruments - 264 - 264
Total 8,577,770 65,570 190,229 8,833,569
Current 2,309,678
Non-current 6,523,891
Total 8,833,569
Financial liabilities
Investment contracts at fair value through income - 4,120,573 - 4,120,573
Liabilities related to policyholders' funds held by the group 990,700 - - 990,700
Total 990,700 4,120,573 - 5,111,273
Holdings in collective investment schemes
The fair value of holdings in collective investment schemes classified as
Level 3 also relate to our Scildon operation, 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 £22.1m (December 2021: £16.3m) 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 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
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 non-linked and guaranteed income and growth bonds
liabilities valued using established actuarial techniques utilising market
observable data for all significant inputs, such as investment yields.
Significant unobservable inputs in level 3 instrument 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 30 June 2022 was 6.1% (31 December 2021: 6.1%).
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 30 June 2022 this resulted in discounting the cash flows in each mortgage
using a range from 3.39% to 4.45% (31 December 2021: 1.29% to 2.02%).
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 2021: 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 £0.3m (31 December 2021: £0.3m).
A 1 per cent decrease in the conditional prepayment rate would increase the
value of the asset by £0.4m (31 December 2021: £0.5m).
A 1 per cent increase in the discount rate would reduce the value of the asset
by £11.4m (31 December 2021: £13.7m).
A 1 per cent decrease in the discount rate would increase the value of the
asset by £13.1m (31 December 2021: £15.8m)
Sensitivity of level 3 instruments measured at fair value on the statement of
financial position to changes in key assumptions
There is a risk that the value of the fund decreases or increases over time.
This can be as a consequence of a periodic reassessment of the constant
prepayment rate and the discount rate used in the valuation model.
Reconciliation of Level 3 fair value measurements of financial instruments
30 June 30 June 31 December
2022 2021 2021
£'000 £'000 £'000
At start of period 190,229 185,424 185,424
Transfers into level 3 - - 16,314
Total gains and losses recognised in the income statement (27,155) (279) 796
Purchases - - -
Settlements - - -
Exchange rate adjustment 3,281 (8,464) (12,305)
At the end of period 166,355 176,681 190,229
Except as detailed in the following table, 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:
Carrying amount Fair value
30 June 30 June 31 December 30 June 30 June 31 December
2022 2021 2021 2022 2021 2020
£000 £000 £000 £000 £000 £000
Financial liabilities:
Borrowings 214,782 51,574 47,185 214,696 52,461 46,588
Borrowings consist of bank loans, tier 2, property mortgage and an amount due
in relation to financial reinsurance.
The fair value of the bank loans are taken as the principal outstanding at the
balance sheet date.
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 transfers between levels 1, 2 and 3 during the period.
The group holds no Level 3 liabilities as at the balance sheet date.
7. Business combination
Sanlam Life & Pensions (UK) Limited (SLP)
On 13 September 2021, Chesnara entered into an agreement with Sanlam UK
Limited to acquire Sanlam Life & Pensions (UK) Limited (SLP), a specialist
provider of insurance and long-term savings products in the UK. The
acquisition was successfully completed on 28 April 2022.
The transaction has given rise to a provisional post completion profit on
acquisition of £10.6m calculated as follows:
Fair value
£'000
Assets
Acquired value of in-force business 69,212
Property and equipment 25
Investment properties 79,618
Reinsurers' share of insurance contract provisions 1,014
Financial assets 2,733,120
Other assets and receivables 26,967
Cash 67,866
Total assets 2,977,822
Liabilities
Insurance contract provisions 241,715
Other provisions 9,809
Investment contracts at fair value through income 2,590,918
Derivative financial instruments 2,771
Deferred tax liabilities 62,776
Other payables 21,418
Total liabilities 2,929,407
Net assets 48,415
Net assets acquired 48,415
Total consideration paid (37,850)
Post completion profit on acquisition 10,565
The table above represents a provisional assessment of the impact of the
business combination on the group and is based upon provisional figures as at
31 March 2022 rather than as at the actual acquisition date. Work is ongoing
to produce an accurate assessment of the assets, liabilities and acquired
value of in-force business as at the 28 April 2022 and as a consequence, the
numbers presented above will undergo refinement during the second half of the
year and a re-stated business combination note will be presented in our
full-year 2022 annual accounts. Although we do not expect the final business
combination impact to be materially different to the numbers presented above,
based upon our initial assessment of the surplus merging between the 31 March
and the 30 June 2022, it is highly likely that the individual assets and
liability captions above will change in value (particularly financial assets
and insurance/investment contract provisions), due to factors such as
financial market movements and claims and lapse experience.
Acquired value of in-force business: The acquisition has resulted in the
recognition of intangible asset amounting to £69.2m, which represents the
present value of the future post-tax cash flows expected to arise from
policies that were in force at the point of acquisition. The asset has been
valued using a discounted cash flow model that projects the future surpluses
that are expected to arise from the business. The model factors in a number of
variables, of which the most influential are; the policyholders' ages,
mortality rates, expected policy lapses, expenses that are expected to be
incurred to manage the policies and future investment growth, as well as the
discount rate that has been applied. This asset will be amortised over its
expected useful life.
Insurance contracts provision: Upon acquisition, the insurance contract
provision was reassessed, and as a result the insurance contract provision was
aligned to reserving basis applied in Chesnara.
Profit on acquisition: A provisional profit of £10.6m has been recognised
on acquisition. This profit on acquisition has been recorded as a "post
completion profit on acquisition" on the face of the statement of
comprehensive income.
Acquisition-related costs: Chesnara concluded the deal and obtained control
of SLP as of 28 April 2022. The consideration transferred by Chesnara for the
acquisition of SLP consisted of cash totalling to £37.8m. There was also a
capital contribution made by Chesnara to SLP amounting to £25m.
The assets and liabilities acquired are included within changes in insurance
provisions and financial assets within operating cash flows on the face of the
cash flow statement.
Robein Leven
On 25 November 2021, Waard entered into an agreement with Monument Re Group to
acquire Robein Leven, a specialist provider of traditional and linked savings
products, mortgages and annuities in the Netherlands. The acquisition was
successfully completed on 28 April 2022.
The transaction has given rise to a post completion profit on acquisition of
£0.3m calculated as follows:
Fair value
£'000
Assets
Financial assets 197,086
Other assets and receivables 4,301
Deferred tax asset 2,155
Cash 7,960
Total assets 211,502
Liabilities
Insurance contract provisions 196,935
Total liabilities 196,935
Net assets 14,567
Net assets acquired 14,567
Total consideration paid (14,266)
Post completion profit on acquisition 301
Profit on acquisition: A profit of £0.3m has been recognised on
acquisition. This profit on acquisition has been recorded as a "post
completion profit on business combination" on the face of the statement of
comprehensive income.
Acquisition-related costs: Waard concluded the deal and obtained control of
Robein Leven as of 28 April 2022. The consideration transferred by Waard Leven
for the acquisition of Robein Leven consisted of cash totalling €16.5m.
The assets and liabilities acquired are included within changes in insurance
provisions and financial assets within operating cash flows on the face of the
cash flow statement.
8. Post balance sheet event
On 22 July 2022, Chesnara announced the acquisition of the insurance portfolio
of Conservatrix, a specialist provider of life insurance products in the
Netherlands that was declared bankrupt on 8 December 2020. The insurance
portfolio will increase Waard's number of policies under administration to
approximately 165,0000. A Capital Contribution of £35 million will be
provided by the group to support the solvency position of the Conservatrix
business, financed from the Group's existing resources.
9. Approval of consolidated report for the six months ended 30 June
2022
This condensed consolidated report was approved by the Board of Directors on
30 August 2022. 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
31 August 2022
Results for the six months ended 30 June 2022 announced
08 September 2022
Interim ex-dividend date
09 September 2022
Interim dividend record date
23 September 2022
Last date for dividend reinvestment plan elections
21 October 2022
Interim dividend payment date
31 December 2022
End of financial year
KEY CONTACTS
Registered and head office
2(nd) Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
T: 01772 972050
www.chesnara.co.uk (http://www.chesnara.co.uk)
Advisors
Ashurst LLP
Broadwalk House
5 Appold Street
London
EC2A 2HA
Addleshaw Goddard LLP
One St Peter's Square
Manchester
M2 3DE
Auditor
Deloitte LLP
Statutory Auditor
Four Brindleyplace
Birmingham
B1 2HZ
Registrars
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint Stockbrokers and Corporate Advisors
Panmure Gordon
One New Change
London
EC4M 9AF
Investec Bank plc
30 Gresham Street
London
EC2V 7QP
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8(th) Floor, 135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3(rd) Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
145 Leadenhall Street
London
EC3V 4QT
ALTERNATIVE PERFORMANCE MEASURES
Throughout this report we use alternative performance measures (APMs) to
supplement the assessment and reporting of the performance of the group.
These measures are those that are not defined by statutory reporting
frameworks, such as IFRS or Solvency II.
The APMs aim to assess performance from the perspective of all stakeholders,
providing additional insight into the financial position and performance of
the group and should be considered in conjunction with the statutory reporting
measures such as IFRS and Solvency II.
The following table identifies the key APMs used in this report, how each is
defined and why we use them.
APM What is it? Why do we use it?
Group cash generation Cash generation is used by the group as a measure of assessing how much Cash generation is a key measure, because it is the net cash flows to Chesnara
dividend potential has been generated, subject to ensuring other constraints from its life and pensions businesses which support Chesnara's dividend-paying
are managed. capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
Group cash generation is calculated as the movement in the group's surplus own from existing business'.
funds above the group's internally required capital, as determined by applying
the group's capital management policy, which has Solvency II rules at its
heart.
Divisional cash generation Cash generation is used by the group as a measure of assessing how much It is an important indicator of the operating performance of the business
dividend potential has been generated, subject to ensuring other constraints before the impact of group level operations and consolidation adjustments.
are managed.
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 group's view of commercial performance, show key drivers within
Commercial cash generation excludes the impact of technical adjustments, that.
modelling changes and corporate acquisition activity; representing the
inherent commercial cash generated by the business.
Economic Value (EcV) EcV is a financial metric that is derived from Solvency II Own Funds. It EcV aims to reflect the market-related value of in-force business and net
provides a market consistent assessment of the value of existing insurance assets of the non-insurance business and hence is an important reference point
businesses, plus adjusted net asset value of the non-insurance business within by which to assess Chesnara's value. A life and pensions group may typically
the group. be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
We define EcV as being the Own Funds adjusted for contract boundaries, risk business over time. The EcV development of the Chesnara group over time can be
margin and restricted with-profit surpluses. As such, EcV and Own Funds a strong indicator of how we have delivered to our strategic objectives.
have many common characteristics and tend to be impacted by the same factors.
Economic Value (EcV) earnings The principal underlying components of the Economic Value earnings are: By recognising the market-related value of in-force business (in-force value),
a different perspective is provided in the performance of the group and on the
- The expected return from existing business (being the effect of the unwind valuation of the business. Economic Value earnings are an important KPI as
of the rates used to discount the value in-force); they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
- Value added by the writing of new business; have delivered against all three of our core strategic objectives.
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the determination of expected
cash flows; and
- The impact of acquisitions.
EcV operating earnings This is the element of EcV earnings (see above) that are generated from the EcV operating earnings are important as they provide an indication of the
company's ongoing core business operations, excluding any profit earned from underlying value generated by the business. It can help identify profitable
investment market conditions in the period and any economic assumption changes activities and also inefficient processes and potential management actions.
in the future.
EcV economic earnings This is the element of EcV earnings (see above) that are derived from EcV economic earnings are important in order to measure the additional value
investment market conditions in the period and any economic assumption changes generated from investment market factors.
in the future.
Commercial new business profit A more commercially relevant measure of new business profit than that This provides a fair commercial reflection of the value added by new business
recognised directly under the Solvency II regime, allowing for a modest level operations and is more comparable with how new business is reported by our
of return, over and above risk-free, and exclusion of the incremental risk peers, improving market consistency.
margin Solvency II assigns to new business.
Funds under management (FuM) FuM reflects the value of the financial assets that the business manages, as FuM is important as it provides an indication of the scale of the business,
reported in the IFRS Consolidated Balance Sheet. and the potential future returns that can be generated from the assets that
are being managed.
Operating profit, excluding AVIF impairment A measure of the pre-tax profit earned from the company's ongoing business Operating earnings are important as they provide an indication of the
operations, excluding any profit earned from investment market conditions in underlying profitability of the business. It can help identify profitable
the period and any economic assumption changes in the future. This also activities and also inefficient processes and potential management actions.
excludes any intangible asset adjustments that are not practicable to ascribe
to either operating or economic conditions.
Economic profit, excluding AVIF impairment A measure of pre-tax profit earned from investment market conditions in the Economic earnings are important in order to measure the surplus generated from
period and any economic assumption changes. This also excludes any investment market factors.
intangible asset adjustments that are not practicable to ascribe to either
operating or economic conditions.
Acquisition value gain (incremental value) Acquisition value gains reflect the incremental Economic Value added by a The EcV gain from acquisition will be net of any associated increase in risk
transaction, exclusive of any additional risk margin associated with absorbing margin. The risk margin is a temporary Solvency II dynamic which will run off
the additional business. over time.
Leverage / gearing A financial measure that demonstrates the degree to which the company is It is an important measure as it indicates the overall level of indebtedness
funded by debt financing versus equity capital, presented as a ratio. It is of Chesnara, and it is also a key component of the bank covenant arrangements
defined as debt divided by debt plus equity, as measured under IFRS. held by Chesnara.
GLOSSARY
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches
between assets and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for
measuring the annual equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
BAU Cash Generation This represents divisional cash generation plus the impact of non-exceptional
group activity.
BLAGAB Basic life assurance and general annuity business
Cash Generation This represents the operational cash that has been generated in the period.
The cash generating capacity of the group is largely a function of the
movement in the solvency position of the insurance subsidiaries within the
group and takes account of the buffers that management has set to hold over
and above the solvency requirements imposed by our regulators. Cash generation
is reported at a group level and also at an underlying divisional level
reflective of the collective performance of each of the divisions prior to any
group level activity.
Commercial Cash Generation Cash generation excluding the impact of technical adjustments, modelling
changes and exceptional corporate activity; the underlying commercial cash
generated by the business.
Divisional Cash Generation This represents the cash generated by the three operating divisions of
Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the
regulator of our Dutch subsidiaries.
DPF Discretionary Participation Feature - A contractual right under an insurance
contract to receive, as a supplement to guaranteed benefits, additional
benefits whose amount or timing is contractually at the discretion of the
issuer.
Dutch Business Scildon and the Waard Group, consisting of Waard Leven N.V., Waard Schade N.V.
and Waard Verzekeringen B.V.
Economic Profit A measure of pre-tax profit earned from investment market conditions in the
period and any economic assumption changes in the future (alternative
performance measure - APM).
EcV Economic Value is a financial metric that is derived from Solvency II Own
Funds that is broadly similar in concept to European Embedded Value. It
provides a market consistent assessment of the value of existing insurance
businesses, plus adjusted net asset value of the non-insurance business within
the group.
FCA Financial Conduct Authority.
FI Finansinspektionen, being the Swedish Financial Supervisory Authority.
Form of Proxy The form of proxy relating to the General Meeting being sent to shareholders
with this document.
FSMA The Financial Services and Markets Act 2000 of England and Wales, as amended.
Group 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 Adviser.
LACDT Loss Absorbing Capacity of Deferred Tax
KPI Key performance indicator.
Leverage (gearing) A financial measure that demonstrates the degree to which the company is
funded by debt financing versus equity capital, usually presented as a ratio,
defined as debt divided by debt plus equity, as measured under IFRS
London Stock Exchange London Stock Exchange plc.
LTI Long-Term Incentive Scheme - A reward system designed to incentivise executive
directors' long-term performance.
Movestic Movestic Livförsäkring AB.
Modernac Modernac SA, a previously associated company 49% owned by Movestic.
New business The present value of the expected future cash inflows arising from business
written in the reporting period.
Official List The Official List of the Financial Conduct Authority.
Operating Profit A measure of the pre-tax profit earned from a company's ongoing core business
operations, excluding any profit earned from investment market conditions in
the period and any economic assumption changes in the future (alternative
performance metric - APM).
Ordinary Shares Ordinary shares of five pence each in the capital of the company.
ORSA Own Risk and Solvency Assessment
Own Funds Own Funds - in accordance with the UK's regulatory regime for insurers it is
the sum of the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the company in those
capital resources.
PRA Prudential Regulation Authority.
QRT Quantitative Reporting Template.
ReAssure ReAssure Limited.
Resolution The resolution set out in the notice of General Meeting set out in this
document.
RMF Risk Management Framework.
Robein Leven Robein Leven N.V.
Scildon Scildon N.V.
Shareholder(s) Holder(s) of Ordinary Shares.
SLP Sanlam Life & Pensions (UK) Limited
Solvency II A fundamental review of the capital adequacy regime for the European insurance
industry. Solvency II aims to establish a set of EU-wide capital requirements
and risk management standards and has replaced the Solvency I requirements.
Standard Formula The set of prescribed rules used to calculate the regulatory SCR where an
internal model is not being used.
STI Short-Term Incentive Scheme - A reward system designed to incentivise
executive directors' short-term performance.
SCR In accordance with the UKs regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Swedish Business Movestic and its subsidiaries and associated companies.
S&P Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
Transfer ratio The proportion of new policies transferred into the business in relation to
those transferred out.
TCF Treating Customers Fairly - a central PRA principle that aims to ensure an
efficient and effective market and thereby help policyholders achieve fair
outcomes.
Tier 2 Term debt capital (Tier 2 Subordinated Notes) issued in February 2022 with a
10.5 year maturity and 4.75% coupon rate.
TSR Total Shareholder Return, measured with reference to both dividends and
capital growth.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK Business CA and S&P.
UNSDG United Nations Sustainable Development Group
VA The volatility adjustment is a measure to ensure the appropriate treatment of
insurance products with long-term guarantees under Solvency II. It represents
an adjustment to the rate used to discount liabilities to mitigate the effect
of short-term volatility bond returns.
Waard The Waard Group
NOTE ON TERMINOLOGY
As explained in the IFRS financial statements, the principal reporting
segments of the group are:
CA which comprises the original business of Countrywide Assured plc, the group's
original UK operating subsidiary; City of Westminster Assurance Company
Limited, which was acquired by the group in 2005, the long-term business of
which was transferred to Countrywide Assured plc during 2006; S&P which
was acquired on 20 December 2010. This business was transferred from Save
& Prosper Insurance Limited and Save & Prosper Pensions Limited to
Countrywide Assured plc on 31 December; and Protection Life Company Limited
which was acquired by the group in 2013, the long-term business of which was
transferred into Countrywide Assured plc in 2014;
CASLP - 'SLP' Sanlam Life & Pensions (UK) Limited which was acquired 28 April 2022 and
includes subsidiaries CASFS Limited and CASLPTS Limited;
Movestic which was purchased on 23 July 2009 and comprises the group's Swedish
business, Movestic Livförsäkring AB and its subsidiary and associated
companies;
The Waard Group which was acquired on 19 May 2015 and comprises two insurance companies; Waard
Leven N.V. and Waard Schade N.V.; and a service company, Waard Verzekeringen;
and Robein Leven NV acquired on 28 April 2022;
Scildon which was acquired on 5 April 2017; and
Other group activities which represents the functions performed by the parent company, Chesnara
plc. Also included in this segment are consolidation adjustments.
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