REG - Chesnara PLC - Half-year Report
21/09/2023 07:00
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RNS Number : 1323N Chesnara PLC 21 September 2023
21 September 2023
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc
("Chesnara", the "Company" or the "Group")
CONTINUED ACQUISITION MOMENTUM DRIVES ECONOMIC VALUE GROWTH AND POSITIVE CASH
GENERATION
Chesnara reports its 2023 half year results. Key highlights for the period
are:
· Completion of the acquisition of Conservatrix's insurance portfolio
in the Netherlands
· Acquisition of an individual protection portfolio from Canada Life
UK
· New UK strategic partnership with SS&C Technologies
· Positive Group commercial cash generation of £21.8m
· Robust solvency of 205%, materially above our 140-160% normal
operating range
· Increased Economic value ("EcV") of £523.2m (347p per share)
· Improved commercial new business growth of £6.3m delivered
· IFRS profit before tax of £16.0m, and increase of CSM of £54.2m
in the period
· 3% increase to the interim dividend to 8.36p per share; the 19(th)
year of consecutive increases
Commenting on the results, Steve Murray, Group CEO, said:
"The two acquisitions we delivered in the first half of 2023 show we have
continued momentum behind our acquisition strategy. The first half of the
year has been one of strong delivery including IFRS 17 and our new strategic
partnership with SS&C which supports Chesnara's future growth ambitions in
the UK. The wider business has also performed robustly despite continuing
market uncertainty. We retain a strong and resilient solvency position
significantly above our normal operating range and substantial cash balances
at the holding company level to fund future acquisitions. 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 21 September 2023
- participants can register here
(https://stream.brrmedia.co.uk/broadcast/64c8fcd2a1eaa5d7760401ef) .
Further details on the financial results are as follows:
2023 HALF YEAR FINANCIAL AND STRATEGIC HIGHLIGHTS
CASH GENERATION AND DIVIDENDS - 19 YEARS OF DIVIDEND GROWTH
· Divisional commercial cash((1)) generation excluding FX
translation impacts of £20.0m in HY 2023 (HY 2022: £18.4m).
· Group commercial cash((1)) generation of £21.8m in HY 2023 (HY
2022: £(3.0)m).
· The Board has declared a 2023 interim dividend of 8.36p per
share (HY 2022 interim dividend of 8.12p), which is a 3% increase compared to
HY 2022 and extends the period of uninterrupted interim dividend growth to 19
years.
FINANCIAL RESILIENCE - FLEXIBILITY IN FINANCING FUTURE M&A
· Solvency II ratio of 205% as at 30 June 2023 (31 December 2022:
197%), materially above our normal operating range of between 140-160%.
· Cash balances at Group holding companies increased over the
period to £127.5m (31 December 2022: £108.1m), providing substantial
resources to fund future acquisitions.
· Leverage ratio((2)) of 29.5% as at 30 June 2023 (31 December
2022: 37.6%, restated 31 December 2022: 30.3%) following the introduction of
IFRS 17 over the period and a change in leverage definition to include 'net of
tax CSM'.
DELIVERING VALUE - GROWTH THROUGH ACQUISITIONS
· The acquisition of the Conservatrix insurance portfolio was
completed and the Canada Life UK protection portfolio transaction executed
during the first half of 2023, adding further scale to the Group's Dutch and
UK businesses respectively.
· Commercial new business profit((3)) of £6.3m in HY 2023 (HY
2022: £4.6m).
· Economic Value ("EcV") of £523.2m (31 December 2022: £511.7m)
has increased over the year to date due to the Conservatrix and Canada Life
acquisitions as well as positive equity markets in Sweden and the Netherlands,
partly offset by the payment of the 2022 Final Dividend and the negative
impact of foreign exchange rates.
INTRODUCTION OF IFRS 17
· Introduction of IFRS 17 during the period, with starting
shareholder equity as at 31 December 2022 of £384.6m, compared to £333.1m
under IFRS 4.
· IFRS pre-tax profits were £16.0m in HY 2023 (HY 2022 restated
IFRS pre-tax losses: £54.2m), driven by insurance profits and positive
investment returns over the period.
· Increase in CSM of £54.2m over the first six months of the
year, largely due to the completion of the two acquisitions over the period.
DIVIDEND DETAILS
· The interim dividend of 8.36p per share is expected to be paid
on 10 November 2023. The ordinary shares will be quoted ex-dividend on the
London Stock Exchange as of 28 September 2023. The record date for
eligibility for payment will be 29 September 2023.
ANALYST PRESENTATION
· A presentation for analysts will be held at 9.30am on 21
September 2023 at the offices of RBC Capital Markets, 100 Bishopsgate, London,
EC2N 4AA, 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/64c8fcd2a1eaa5d7760401ef) .
Investor Enquiries
Sam Perowne
Head of Strategic Development & Investor Relations
Chesnara plc
E - sam.perowne@chesnara.co.uk
Media Enquiries
Roddy Watt
Director, Capital Markets
FWD
T - 020 7280 0651 / 07714 770 493
E - roddy.watt@fwdconsulting.co.uk
Notes to Editors
Chesnara (CSN.L) is a European life and pensions consolidator listed on the
London Stock Exchange. It administers over one million policies and operates
as Countrywide Assured and CASLP in the UK, as The Waard Group and Scildon in
the Netherlands, and as Movestic in Sweden.
Following a three-pillar strategy, Chesnara's primary responsibility is the
efficient administration of its customers' life and savings policies, ensuring
good customer outcomes and providing a secure and compliant environment to
protect policyholder interests. It also adds value by writing profitable new
business in Sweden and the Netherlands and by undertaking value-adding
acquisitions of either companies or portfolios.
Consistent delivery of the Company strategy has enabled Chesnara to increase
its dividend for 19 years in succession.
Further details are available on the Company's website (www.chesnara.co.uk
(http://www.chesnara.co.uk) ).
Notes
Note 1 Group cash generation represents the surplus cash that the group
has generated in the period. Cash generation is largely a function of the
movement in the solvency position, used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring that other
constraints are managed.
Divisional cash generation represents the cash generated by the three
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
Commercial cash generation is used as a measure of assessing how much dividend
potential has been generated, subject to ensuring other constraints are
managed. It excludes the impact of technical adjustments, modelling changes
and corporate acquisition activity; representing the group's view of the
commercial cash generated by the business.
The cash generation results excludes the day 1 impacts of acquisitions in the
period.
Note 2 The leverage ratio is a financial measure that demonstrates the
degree to which the company is funded by debt financing versus equity capital,
presented as a ratio. It is defined as 'debt' divided by 'net equity plus
debt plus net of tax CSM', as measured under IFRS.
Note 3 Commercial new business profit is a more commercially relevant
measure of new business profit than that recognised directly under the
Solvency II regime, allowing for a modest level of return, over and above
risk-free, and exclusion of the incremental risk margin Solvency II assigns to
new business. This provides a fair commercial reflection of the value added
by new business operations.
The Board approved this statement on 20 September 2023.
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. the impact of acquisitions) £11.1M SIX MONTHS
ENDED 30 JUNE 2022 £21.9M
COMMERCIAL CASH GENERATION (exc. the impact of acquisitions) £21.8M SIX
MONTHS ENDED 30 JUNE 2022 £(3.0)M
Both of the group's cash metrics were positive over the period. Group cash
generation includes a material adverse impact from the symmetric adjustment
(SA) of £10.6m (six months to 30 June 2022: +£30.8m). The recovery we have
seen across equity markets in H1 whilst a positive overall for the group means
we hold additional capital which has a short term impact on cash generation.
Commercial cash looks through the SA impact and is deemed to better reflect
the underlying business performance. Total divisional commercial cash,
excluding FX impacts is £20.0m which, on an annualised basis, provides 115%
coverage of the 2022 dividend. No specific capital enhancing management
actions have been executed during the period, as is often the case during the
first half of the year.
GROUP SOLVENCY 205% 31 DECEMBER 2022: 197%
The group's solvency has increased in the period and shows material headroom
over and above our normal operating range of 140-160%. The ratio does not
include any temporary impacts from either transitional benefits or a
materially positive closing SA position. The headline ratio benefits from the
capital efficiencies of the Tier 2 debt raised in 2022.
FUNDS UNDER MANAGEMENT £11.0BN 31 DECEMBER 2022: £10.6BN
FuM have increased by c4% since the year end. This is largely due to the
acquisitions in the period. Excluding the acquisition impacts, FUM remain
broadly unchanged.
ECONOMIC VALUE £523.2M 31 DECEMBER 2022 £511.7M
Strong earnings in the period have more than offset the impact of the latest
dividend payment (£22.8m) and FX consolidation impact (£26.8m)* resulting in
a £11.5m growth in Economic Value.
* Of the FX consolidation impact, c£6.7m was offset by movement in the fair
value of derivatives held to hedge FX movements.
ECONOMIC VALUE EARNINGS £61.0M SIX MONTHS ENDED 30 JUNE 2022 £(75.7)M
A strong EcV earnings period with all elements of the EcV growth model ('the
Chesnara fan') making individually significant positive contributions.
Acquisition gains and real world returns have had the most material impact but
it is equally pleasing to see a modest positive operating result following a
period of negative operating variances.
COMMERCIAL NEW BUSINESS PROFIT £6.3M SIX MONTHS ENDED 30 JUNE 2022 £4.6M
Commercial new business profits increased for the period which is a positive
result given the local market challenges in both Sweden and the Netherlands.
At current profit levels we deem the new business strategy to be materially
beneficial to the wider group outlook.
IFRS PRE-TAX PROFIT (UNAUDITED) £16.0M SIX MONTHS ENDED 30 JUNE 2022 £54.2M
LOSS
The result is a material improvement on H1 22 and includes an acquisition gain
of £4m and investment profits of £25.0m. Acquisitions in the period have
added £55.7m of CSM* which by design is not recognised in the profit in the
period and will instead contribute to insurance profits in future periods. The
prior year loss was largely due to adverse economic market impacts but is much
reduced versus the corresponding loss reported under IFRS 4.
* Contractual Service Margin (CSM) represents the unearned profit that an
entity expects to earn on its insurance contracts as it provides services.
IFRS TOTAL COMPREHENSIVE INCOME £0.2M SIX MONTHS ENDED 30 JUNE 2022 £29.8M
LOSS
Total comprehensive income includes a foreign exchange loss of £15.3m (six
months to 30 June 2022: £1.9m gain).
INTERIM DIVIDEND INCREASED FOR THE 19TH CONSECUTIVE YEAR
Increase in the interim dividend for the year of 3% to 8.36p per share (2022:
8.12p interim), supported by divisional cash contributions in the period and a
strong group solvency. The previously announced acquisition in the
Netherlands of the insurance portfolio of Conservatrix completed on 1 January
2023 and we also announced the acquisition of an individual protection
portfolio in the UK from Canada Life on 16 May 2023, with a corresponding
reinsurance agreement executed. Both of these acquisitions are expected to
positively support future cash generation and we continue to have clear line
of sight to sources of mid to long term cash generation.
ECONOMIC BACKDROP
Overall it has been a period of economic growth. Significant volatility has
remained across most asset classes and inflation has continued to run ahead of
central bank targets with materially increased interest rates. There have
therefore been comparatively modest investment returns and mixed economic
results in our operating divisions. Different economic factors have impacted
each of the businesses to varying extents across our main financial metrics.
Key items include the impact of rising yields and equity indices supporting
growth in the UK and Sweden respectively, while in both the Netherlands and
Sweden, currency movements, specifically sterling appreciation, caused adverse
foreign exchange impacts to the divisional results on consolidation.
THE GROUP CONTINUES TO EXPAND THROUGH M&A
The opening half of 2023 has been another busy period for Chesnara with two
acquisitions recognised in the period, delivering a combined day one EcV gain
of £28.4m. Following the announcement late in 2022, we completed the
acquisition of the insurance portfolio of Conservatrix in the Netherlands,
with an EcV gain of £21.7m and increase in Waard's policies under
administration of c50% to 170,000.
In May, expansion in the UK continued for the second year running, with the
acquisition of a protection portfolio from Canada Life. The acquisition has
initially been executed through entering into a 100% reinsurance agreement
with Canada Life, and these policies will subsequently transfer to the
division through a Part VII transfer process. The transaction has delivered an
EcV gain of £6.7m and additional policies of c47,000 to the UK division. We
remain optimistic about the outlook for future deals and have material
solvency headroom and liquid resources to support our ambitions.
NEW OUTSOURCING ARRANGEMENTS, BUSINESS INTEGRATIONS & IFRS 17 DELIVERY
In the UK, we have entered into a new long-term strategic partnership for the
outsourcing of operations for the majority of the division, providing surety
over the future operating costs of the business over a 10 year period. The
Part VII transfer of the policies of CASLP to Countrywide Assured plc has
progressed well, remaining on track to be delivered by the end of 2023.
In the Netherlands, following completion of the acquisition in January, the
Conservatrix policy portfolio was successfully integrated into the Waard
Group. At a group and divisional level, IFRS 17 has been implemented for this
first reporting period, with reporting processes now transitioning to business
as usual operations following several years of planning and implementation.
These financial highlights include the use of Alternative Performance Measures
(APMs) that are not required to be reported under International Financial
Reporting Standards.
1 - Group cash generation represents the surplus cash that the group has
generated in the period. Cash generation is largely a function of the
movement in the solvency position, used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring other
constraints are managed.
2 - Divisional cash generation represents the cash generated by the three
operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of
group level activity.
3 - Commercial cash generation is used as a measure of assessing how much
dividend potential has been generated, subject to ensuring other constraints
are managed. It excludes the impact of technical adjustments, modelling
changes and corporate acquisition activity; representing the group's view of
the Commercial cash generated by the business.
4 - Funds Under Management (FuM) represents the sum of all financial assets on
the IFRS balance sheet.
5 - Economic Value (EcV) is a financial metric derived from Solvency II. It
provides a market consistent assessment of the value of existing insurance
businesses, plus adjusted net asset value of the non-insurance business within
the group.
6 - Economic Value earnings are a measure of the value generated in the
period, recognising the longer-term nature of the group's insurance and
investment contracts.
7 - Commercial new business represents the best estimate of cash flows
expected to emerge from new business written in the period. It is deemed to be
a more commercially relevant and market consistent measurement of the value
generated through the writing of new business, in comparison to the
restrictions imposed under the Solvency II regime.
8 - Economic profit is a measure of pre-tax profit earned from investment
market conditions in the period and any economic assumption changes in the
future.
9 - Operating profit is a measure of the pre-tax profit earned from a
company's ongoing core business operations, excluding any profit earned from
investment market conditions in the period and any economic assumption changes
in the future.
CHAIR'S STATEMENT
The group has delivered positive cash generation and Economic Value growth
during the period whilst continuing to have a strong solvency position. This
has supported an increase in the interim dividend for a 19th consecutive year.
LUKE SAVAGE, CHAIR
CASH EMERGENCE, DIVIDEND GROWTH AND FINANCIAL STABILITY
As I have highlighted to investors before, Chesnara has a strong track record
of delivering cash generation across a variety of market conditions. The
first half of 2023 has been no exception, with total divisional commercial
cash generation of £20.0m (before FX impacts), leaving us well positioned to
continue to extend our dividend growth. Our shareholders will receive 8.36p
per share interim dividend, an increase of 3% for the 19th consecutive year.
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 and provides us the
solvency headroom to execute M&A.
I am pleased to report a continued strong and stable Solvency II ratio of
205%. This is significantly above our normal operating range, providing us
with considerable strategic flexibility. Our solvency position remains
underpinned by a well-diversified business model, a focus on responsible
risk-based management and resilient and reliable cash flows from our
businesses.
Steve will talk about these financial dynamics further in his report that
follows.
PEOPLE AND DELIVERY
Across the group, our people continue to deliver. We have another two deals
to report in the period. Firstly, we completed the previously announced
acquisition of the Conservatrix insurance portfolio in the Netherlands. Later
in May, we announced the acquisition of Canada Life's protection portfolio in
the UK (initially executed through a reinsurance arrangement). It is clear
from the results that the deals have created significant value for investors
(£28.4m of Economic Value gains). What is sometimes less obvious is the
operational impact of such deals. Staff in the Netherlands and UK have
worked extremely hard to integrate the newly acquired businesses and
portfolios, including Sanlam Life and Pensions (CASLP). We have made good
progress implementing the operational and governance framework required, and
the insurance portfolio of Conservatrix is now fully integrated into the Waard
Group. We remain mindful that such challenging work, although rewarding, can
be stressful and so we continue to invest in staff welfare programmes to
support our people.
Another major development during the period has been the announcement of a new
long term outsource partner in the UK, SS&C. This positive development
creates a sound commercial and operational foundation for long term customer
support and business development.
Last but not least, the transition to the new insurance contract accounting
regime, IFRS 17, has gone live in 2023 and our half year accounts have applied
both IFRS 17 and IFRS 9. Resource across the group has worked tirelessly on
this programme for many years and whilst there is still more to do for the
full year financial statements, we remain on track and the change has been
delivered at a cost that is well within generally recognised industry
benchmarks.
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 dependants 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 remain positively supported by us.
We have always managed our business in a responsible way and have a strong
sense of acting in a fair manner, giving full regard to the relative interests
of all stakeholders.
Profitability, which in our case manifests itself in cash generation. EcV
growth and solvency, will always remain of key importance for many reasons.
These include our desire to offer competitive returns to shareholders and fund
our debt investor coupon payments but also because it creates financial
stability for customers. However, we continue to be very conscious of the need
for the business to serve a wider purpose with an increasing balance of focus
across the 3P's; Profit, People and Planet.
We have always been fully respectful of Environmental, Social and Governance
('ESG') matters. In particular, we have positioned governance as being a
core foundation to the business model and have a well-established governance
framework.
Over recent years we have increased our focus on environmental and social
matters and we have accelerated and deepened this focus during the year. Our
inaugural Annual Sustainability Report (ASR) issued in March 2023 laid out our
wider ambitions in this regard. We need to move from positive intent to real
action and I am pleased to report that this has begun in earnest during the
year. The path to sustainability can be long and complicated but we have begun
to invest in developing sustainability focused resource and infrastructure and
a well-resourced and well supported group wide programme is in place. A very
visible and encouraging development was the success of our first group-wide
Sustainability Summit held in June. I was hugely encouraged by the level of
engagement from all levels across the group and by the clear alignment of
ambitions. Building on our published commitments, the programme has identified
very specific workstreams which in turn have defined initial and long term
objectives. I am confident that we will deliver against those objectives and
will report progress in my year end statement. The objectives are a mix of
items that create solid foundations for longer term change together with some
shorter term actions that will begin to make a real world positive impact.
Our sources of future growth remain strong. In fact, in the first half of
2023 all components of the "Chesnara fan" (a diagrammatic illustration of
value growth sources) were materially positive. The resultant EcV earnings of
£61.0m represents a significant level of recovery of the economic value
reduction primarily from falling equity markets we saw in 2022. We retain our
view that, despite 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 our strong and stable solvency, alongside the
increased parent company cash balance, leave us well positioned to participate
in that market.
Luke Savage,
Chair
20 September 2023
CHIEF EXECUTIVE OFFICER'S REPORT
The group has continued to generate cash and we have also seen material EcV
earnings generated for the period. Our people have delivered another two
acquisitions as well as extensive work on acquisition integrations, securing a
new UK strategic partnership and the transition to IFRS 17.
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
The first half of 2023 has been another busy and productive period for
Chesnara across all aspects of strategic focus areas namely:
1. Running in-force insurance and pensions books
efficiently and effectively;
2. Seeking out and delivering value enhancing M&A
opportunities: and
3. Writing focused, profitable new business where we
are satisfied an appropriate return can be made.
The increased momentum behind the acquisition strategy, one of our three
strategic pillars, has continued with a further two deals recognised in the
period (5 now in the last 2 years). The two recent acquisitions have added
£28.4m of additional value to the group against consideration paid of £9m
and total group capital deployed of £35m. And on both deals we have made
significant progress with the integration of these businesses into our
operation and governance framework. We also saw an increased contribution
from new business for the period primarily driven by increased sales in
Scildon.
We have over 1 million customers in Chesnara and we take the responsibility of
delivering for them every day very seriously.
A major highlight in the period is the signing of a new outsource arrangement
in the UK, which we announced in May. 68 Chesnara colleagues have now
transferred to SS&C and we have begun the process to migrate our UK
policies to our new operating platform. I am confident that SS&C will
become a key partner, enabling the UK business to continue to deliver high
quality and cost effective servicing with the capacity and flexibility to
support continued M&A developments in the UK.
There has been an increased focus on defining and delivering the group
sustainability vision in line with the commitments we set out in our inaugural
Annual Sustainability Report (ASR).
After five years of planning, there has also been a significant focus on
ensuring we could report on the new IFRS 17 basis. Process wise, we are in
good shape and the financial impact of the transition to the new reporting
framework is positive and in line with the guidance we gave investors
alongside our full year 2022 results. We have worked closely with our
auditors over the course of our implementation programme in order to ensure
the audit of our opening balance sheet and restated 2022 financial statements
will be fully audited in time for the release of our year end 2023 Annual
Report and Accounts.
Pre dividend and FX impacts, the group Economic Value grew materially by
£61.0m or 12%. All aspects of our business model and the "Chesnara Fan",
including new business, M&A, and driving value from the in force business
were materially positive:
EcV Earnings £m
New business 4.7
Operating 3.9
Economic & non-operating 24.0
Acquisitions 28.4
Total 61.0
The derivative we put in place towards the end of 2022 to reduce the exposure
to extreme FX movements also supported cash and capital generation in 2022. We
do however remain exposed to the risks and opportunities relating to FX
movements within the cap and floor of the derivative. During the first half of
2023 sterling has strengthened marginally against the euro and more markedly
against the Swedish krona resulting in a negative FX impact on EcV of £26.8m.
The group continued to generate cash with total commercial cash generation of
£21.8m. We see this as a good result given the underlying economic
conditions in the first half and the fact that no material capital management
actions have been completed in the first half of the year. We will continue to
assess management actions and determine the most appropriate time to activate
them.
In terms of cash resources, as expected we have seen a significant flow of
dividends in the period from our divisions with £57m having been remitted to
Chesnara at the half year (a further £10m has been received in September and
c£5m is also due later in 2023). This contributed to a £19m increase in the
parent company (including holding companies) surplus cash balance and a
closing amount of £128m (which included the payment of the FY dividend).
Our group solvency ratio has also improved further during the period closing
at 205% (31 December 2022:197%). As Luke highlighted, this is materially
above our normal operating range of 140-160% and provides us with substantial
headroom to support further strategic activity.
Our inaugural IFRS 17 numbers show a £51.5m increase in net equity as at 31
December 2022. As at 30 June 2023 total net equity is £362.4m with a
contractual service margin (CSM) of £157.2m. This results in a leverage ratio
of 29.5% (including the CSM) which is a significant reduction compared to the
ratio of 37.6% reported at 31 December 2022 under the previous IFRS reporting
regime. Whilst the CSM gives a useful indication of future profits on our
insurance business it should be noted that in fact only 42% of our total
portfolio is classified as insurance. As such the CSM by no means represents
the full future profit of the group as it excludes investment contracts.
Whilst the move to IFRS 17 has been a very material programme of work for the
group, you will note that my wider review continues to focus on metrics linked
to Solvency II. We continue to believe that the Solvency II metrics better
support a commercial assessment of the business and remain the metrics upon
which we manage the group.
CONTINUED CASH GENERATION AND STRONG SOLVENCY
At the heart of the Chesnara financial model and investment case is resilient
cash generation and stable solvency, across a wide variety of market
conditions.
RESILIENT CASH GENERATION
The total group commercial cash generation (excluding the impact of
acquisitions) during the period to 30 June 2023 was £21.8m (6 months to 30
June 2022: £(3.0)m). As a reminder, we define cash generation as the
movement in the group's surplus Own Funds above the group's internally
required capital. Commercial cash generation then excludes the impact of the
symmetric adjustment*. The surplus can be impacted by equity markets and
currency movements in the near term and also by consolidation adjustments.
The divisional results pre-consolidation therefore give a good reflection of
the dividend potential rather than looking at the consolidated group figures
in isolation.
The divisional commercial cash generation for the period excluding FX
translation impacts was £20.0m (six months to 30 June 2022: £18.4m), with
all territories contributing positively over the period. On an annualised
basis the total of £40.0m represents 115% coverage of the total 2022 dividend
payment and shows significant future dividend paying capacity. There remains
the potential to take management actions during the remainder of the year.
This means we continues to be very confident in our ability to cover dividend
and debt coupon payments for the full year and further forward.
(*)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.
Commercial cash generation by territory:
Divisional cash generation £m
UK 12.6
Sweden 4.7
Netherlands 2.8
Divisional Total 20.0
Other group 8.8
FX (7.0)
Group Total 21.8
DIVISIONAL COMMERCIAL CASH GENERATION REPRESENTS 115% COVERAGE OF THE 2022
SHAREHOLDER DIVIDEND(Δ)
(Δ) on an annualised basis excluding FX consolidation impacts
The Chesnara parent company cash (including holding companies) and instant
access liquidity fund balance at 30 June 2023 has increased to £128m (31
December 2022: £108m). Cash reserves have benefitted from the £57.0m of
divisional dividend receipts in the first half of the year, with an additional
£10m having been received in September (a further c£5m is also due later in
the year). This provides future acquisition funding capacity and further
supports the sustainable funding of the group dividend and payment of our Tier
2 debt coupon.
Looking forward, we continue to have a strong line of sight to future cash
generation over the medium and longer term from the unwind of risk margin and
SCR, investment returns above risk free rates, wider synergies and management
actions. And that's before further potential benefits from new business and
further acquisitions.
STRONG SOLVENCY
During the period we have seen a further increase in the group solvency ratio
to 205%.
Solvency ratio
Solvency ratio %* Solvency surplus £m
2019 155 211
2020 156 204
2021 152 191
2022 197 298
Jun 2023 205 345
*Normal operating solvency range = 140% to 160%
The closing headline solvency ratio of 205% is significantly above our normal
operating range of between 140% and 160%. Unlike many of our peers, the
solvency ratio does not adopt any of the temporary benefits available from
Solvency II transitional arrangements, although we do apply the volatility
adjustment in our UK and Dutch divisions. The ratio does however include the
benefit of the capital efficiencies relating to the Tier 2 debt raised in
2022.
Solvency ratio movement
Solvency ratio %
SII % 31 Dec 2022 197
Operating 2
Economic (Exc. SA) 8
Symmetric adjustment (4)
FX (2)
Dividend payments (4)
Acquisition - Conservatrix (9)
Acquisition - Canada Life 1
Change in T2 asset recognition 16
SII % 30 Jun 2023 205
We expect to utilise this additional capital surplus as we undertake
acquisitions, which should result in the ratio reverting back to within the
robust and stable 140% to 160% historical range.
THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTCULARLY THROUGH M&A
We have previously highlighted that over the medium term, we expect all
components of the growth model to be positive, although there can be a level
of shorter-term volatility in each element. In this six month period, all
components have made positive contributions.
Although there are limitations to tracking the growth metrics over short times
periods, it remains useful to assess how the results for the period mapped
against the value growth components of the Chesnara 'fan'.
A key element of the growth model is real world investment returns. The
reported EcV of the group assumes risk free returns on shareholder and
policyholder assets. Given the direct link to external market performance
this source of value tends to be the most volatile of the growth sources.
During the first half of the year equity and fixed income asset market
movements created £20.6m of value growth. This gain partially offsets the
economic value reduction from lower real world investment returns we saw in
2022, whilst demonstrating the value potential from even modestly beneficial
economic conditions.
Over time, we expect improvements to operational effectiveness to be a source
of value creation, be that through M&A synergies, operating variances,
scale or other positive management actions. During the first half of the
year, I am pleased to report £8.6m of EcV growth resulting from operational
items (including new business profits).
The other value growth components have all been a source of growth during the
period. The Economic Value of the group has increased by c£0.9m directly as
a result of risk margin reductions. This increase does not include the
expected risk margin reduction as a result of UK government changes coming
soon.
Acquisitions in the period have also added £28.4m of EcV with further value
growth expectations not recognised in the day one gains. This shows that the
increased momentum behind the M&A strategy is now materially contributing
to the growth of the group.
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 2023,
we have seen improved commercial new business profits of £6.3m (6 months to
30 June 2022: £4.6m).
We have grown our Funds Under Management (FuM) in 2023, largely through the
completion of the acquisition of the insurance portfolio of Conservatrix and
we have also reported a modest growth in underlying asset values.
Growth in FuM
Funds Under Management £bn
2018 7.1
2019 7.7
2020 8.5
2021 9.1
2022 10.6
Jun 2023 11.0
FOLLOWING THE RECENT ACQUISITIONS, WE NOW LOOK AFTER OVER 1 MILLION
POLICYHOLDERS & CUSTOMERS WHO HAVE £11BN OF THEIR ASSETS WITH US
CONTINUED DELIVERY OF ACQUISITIVE GROWTH
The primary purpose of Chesnara when it was formed back in 2004 was to acquire
other closed book businesses and acquisition activity has been a core
component of our historical EcV growth. As well as the immediate benefit
from any price discount to EcV, acquisitions also improve the future growth
outlook by enhancing the potential from the other value elements of the
Chesnara 'fan'.
Successful acquisitions have been key to Chesnara's development historically
and will remain so in the future. During the first half of 2023 we delivered
two acquisitions. The acquisition of the insurance portfolio of Conservatrix,
a specialist provider of life insurance products in the Netherlands, was
completed on 1 January 2023 having been originally announced in July 2022. The
insurance portfolio has increased Waard's number of policies under
administration by over 50%, transforming Waard into a second material closed
book consolidation business alongside Chesnara's existing UK platform. The
Conservatrix transaction increased the group's EcV by £21.7m as at 30 June
2023 and provides further EcV accretion potential, including from future real
world investment returns and the run-off of the risk margin. The acquisition
is expected to deliver c£4m per annum of incremental steady-state cash
generation.
On 16 May 2023 Chesnara announced the acquisition of the onshore individual
protection line of business of Canada Life UK, which was closed to new
business in November 2022. As a result of the acquisition, the life insurance
and critical illness policies for approximately 47,000 customers will transfer
to Chesnara's UK subsidiary, Countrywide Assured plc (CA plc). Customers'
policies are expected to transfer to CA plc in 2024, subject to the completion
of a court-approved Part VII transfer. In the interim period, Canada Life UK
will reinsure the portfolio to CA plc, effective from 31 December 2022. The
initial commission as part of the reinsurance agreement is £9.0m, funded from
internal group resources, and the transaction has increased the group's
Economic Value by £6.7m as at 30 June 2023. The transaction is expected to
deliver additional cash generation over the next five years of approximately
£16m.
Positive progress continues on the work to complete the transition of CASLP
into our target operating platform and to transfer policies via Part VII into
our CA legal entity.
CONFIDENCE IN OUR ABILITY TO EXECUTE FUTURE M&A
We remain optimistic about the prospect of future acquisitions and believe
that we can deliver further value accretive deals. Even relatively small
transactions can have a material positive cumulative impact, as the group
delivers synergies from integrating businesses and portfolios into its
existing operations.
2023 has continued to see an active M&A market across European insurance
for deals of £1bn and below with large international insurance groups
continuing to focus their strategies and management teams actively managing
business portfolios to release capital and simplify operations. Even with the
ongoing market volatility and macro-economic environment, we expect the
positive levels of insurance M&A to continue. An active market provides
opportunities for Chesnara as a consolidator and the five deals that we have
announced over the past two years provides confidence to sellers and their
advisors about our ability to execute future M&A.
We continue to have material financial resources to deploy, with cash balances
of £128m at a group level. Our revolving credit facility creates an
additional level of working capital flexibility. For more transformational
deals, we retain the ability to raise equity and are mindful of the potential
benefits from other funding arrangements such as joint ventures or vendor
part-ownership.
Our assessment of the market potential, our track record of delivery and the
actions we have taken to enhance our ability to execute M&A means we are
confident that acquisitions will continue to contribute to Chesnara's success
in the future.
PEOPLE CHANGES
In February this year, we announced that our Scildon CEO, Gert-Jan Fritzsche
would be leaving the business as we enter the next phase of Scildon's
strategic development. Having conducted a full market search, we were
delighted to announce in July that Pauline Derkman has agreed to take up the
position of Scildon CEO on 1 September. She has a huge amount of Dutch
market experience including M&A from her time at Aegon, ASR and PWC. I
am looking forward to working with her and the wider Scildon team going
forward.
Last month, we also announced that after 8 years with Movestic (6 as Movestic
CEO), Linnea Ecorcheville will be leaving the business. We thank Linnea for
all she has done for Movestic over the last 8 years and wish her all the best
for the future. Sara Lindberg, who is a key member of our Movestic management
team, has been made Interim CEO and we have now started a formal market search
for a successor.
And we announced on 12th September that after 7 years Ken Hogg, UK CEO will be
leaving to focus on his non-executive career. On behalf of the board, I
wanted to thank him for everything he has done during his time at Chesnara and
wish him every success in the future. We were also delighted to announce that
Jackie Ronson will be taking up the role of UK CEO, subject to regulatory
approval, and started with Chesnara on 14th September. She brings with her
over 25 years of experience across financial services and beyond working in a
range of businesses from start-ups to FTSE 100 organisations. Ken and Jackie
are already working actively on the effective hand over of responsibilities.
A SUSTAINABLE CHESNARA
We are committed to becoming a sustainable group and our principles are: "Do
no harm. Do good. Act now for later.". As a steward and a safe harbour for
our c1 million policyholders and c£11bn of policyholder and shareholder
assets, we have a real responsibility to help drive the change needed to
deliver decarbonisation and a sustainable society and economy.
We published our commitments within our inaugural Annual Sustainability Report
(ASR) in March and simply put, we will make decisions based on all of our
stakeholders, including the planet and its natural resources. Positive
outcomes for any particular stakeholder at the cost of inappropriate outcomes
for other stakeholders is not acceptable. Based on this, we're committed to:
1. Supporting a sustainable future, including our net
zero transition plans
2. Making a positive impact, including our plans to
invest in positive solutions
3. Creating a fairer world, ensuring our group is an
inclusive environment for all employees, customers and stakeholders
These commitments are shaping what we do and how we do it. In addition, there
will be changes to sustainability based reporting requirements at a divsional
and group level. The path to sustainability will be long and complicated but
we are working to put sustainability at the heart of everything we do. We
are making progress against our 2023 plans and this work is combining what
short term actions we can take whilst also considering the longer term
strategy, processes and changes we need to make in order to be truly
sustainable. Our Group Sustainability Committee chaired by our Senior
Independent Director, Jane Dale, and consisting of senior management from
across the group, including myself, is overseeing our work that is being led
by Dave Rimmington.
OUTLOOK
It has been pleasing to see economic gains in the first half of the year as
well as positive cash generation. Whilst a volatile macro-economic backdrop
will continue to be a material factor in all our markets, we remain confident
that the Chesnara business model will continue to generate cash across a wide
variety of market conditions, as it has done over its history.
We also remain positive on the outlook for further M&A with the two deals
delivered in the period providing further evidence of the renewed momentum we
have behind our M&A activity.
Finally, the operational delivery we have seen in the first part of the year
would not have been possible without the fantastic efforts of our teams across
the group.
Looking forward to the rest of 2023 and beyond, I continue to believe there is
a lot to look forward to here at Chesnara.
Steve Murray,
Chief Executive Officer
20 September 2023
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 INVESTORS ROBUST REGULATORY COMPLIANCE A JUST TRANSITION TO A SUSTAINABLE GROUP
BUSINESS REVIEW | UK
The UK division consists of Countrywide Assured plc (including the recent
Canada Life deal) and CASLP Limited, formerly Sanlam Life and Pensions,
acquired in April 2022. The combined businesses manage c308,000 policies
covering linked pension business, life insurance, endowments, annuities and
some with-profit business. The division is largely closed to new business,
but grows through above risk free returns, increments to existing policies and
periodic acquisitions.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
As a largely closed book, the division creates value through managing the
following key value drivers: 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 2023
- The division entered into a new long-term strategic partnership
with Fin Tech market leader, SS&C Technologies. SS&C will service
the front to back office operations for the majority of the UK division.
This represents a landmark agreement for the division and provides surety over
the future operating costs of the business over a 10 year period.
- The initial focus of the arrangement with SS&C is to migrate
the business of CASLP to its end state operating model. This transition and
transformation programme has progressed well to date, with an initial key
milestone of transferring the majority of CASLP staff to SS&C having
recently been met.
- The planned Part VII transfer of the policies of CASLP to CA plc
is progressing well, remaining on track to be delivered by the end of 2023.
This is expected to create further operational and capital efficiencies.
- In May 2023 the division entered into an agreement with Canada
Life Limited to acquire its individual protection business of 47,000
policies. The acquisition has initially been executed through entering into
a 100% reinsurance agreement with Canada Life, and these policies will
subsequently transfer to the division through a Part VII transfer process.
- Further work has been performed to refine the investment
portfolio of CA plc, with a re-balancing of the portfolio backing the
non-linked, non-volatility adjustment portfolio having been delivered in the
period.
- CA plc has settled its year end 2022 foreseeable dividend of
£46m, with the CASLP dividend settled in September, resulting in a combined
total £56m being paid up to Chesnara plc.
- Solvency has strengthened in both UK businesses with combined
EcV earnings of £11m in a period of muted economic growth, as rising
inflation dampened the impact of investment market returns. The EcV result
includes an element of new business profit in CASLP of £0.5m (£0.7m on a
commercial new business basis), as the CASLP onshore bond remains open to new
business via third party links.
FUTURE PRIORITIES
- Delivery of the division's transition and transformation
programme, which focuses on the end state migration of front to back office
operations to SS&C for the majority of the UK division.
- Deliver the remaining aspects of the programme to transfer the
policies of CASLP and Canada Life into CA plc.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Identify potential capital management actions, focusing on those
that generate the appropriate balance of value and cash generation.
- Support Chesnara in identifying and delivering UK acquisitions.
KPIs
Economic Value - UK
£m 2019 2020 2021 2022 Jun 2023
EcV 204.6 187.4 181.9 209.3 181.0
Cumulative dividends 29.0 62.5 90.0 136.0
Total 204.6 216.4 244.4 299.3 317.0
The closing EcV for June 2023 includes a £6.7m gain delivered through the
Canada Life deal.
Cash generation - UK
£m 2019 2020 2021 2022 Jun 2023
Cash generation 33.6 29.5 27.4 40.8 10.0
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Delivering good customer outcomes is one of our primary responsibilities. We
seek to do this by having effective customer service operations together with
competitive fund performance whilst giving full regard to all regulatory
matters including a strong solvency position. This supports our aim to
ensure policyholders receive good returns, appropriate communication, and
service in line with customer expectations.
INITIATIVES AND PROGRESS IN 2023
- An ongoing focus of the division is to ensure that it complies
with the requirements of the FCA's "Consumer Duty". CASLP, as an operation
that continues to write a small amount of new business, met the requirements
by the regulatory deadline of 31 July 2023. CA plc's closed book operation
is on track to comply with the requirements by the later deadline of 31 July
2024.
- The process for transferring the policies of CASLP to CA plc is
progressing well. The independent expert for the transfer has confirmed that
he does not expect any reduction in the benefits that existing policyholders
expect to receive from their products, or any deterioration in the security of
those benefits. Court approval has been received for the scheme to progress to
the next stage, culminating in a November Sanction Hearing.
- From an operational resilience perspective the division has
continued to successfully deliver its programme. This has included
supporting the PRA in its industry wide data collection programme and the
minor feedback received has already been incorporated into the ongoing 2023
plans.
FUTURE PRIORITIES
- Continued focus on the operational resilience programme to
ensure the regulatory deadline of March 2025 is achieved.
- Execute the board agreed plans and progress any actions needed
to meet the requirements of the Consumer Duty for the division.
KPIs
Policyholder fund performance - CA plc
12 months ended 12 months ended
30 Jun 2023 30 Jun 2022
CA Pension Managed 1.0% (2.8)%
CWA Balanced Managed Pension 1.0% (2.8)%
S&P Managed Pension 0.5% (3.3)%
Benchmark - ABI Mixed Inv 40%-85% shares 3.6% (6.8)%
Markets remained volatile throughout the year and our main managed funds
under-performed the reported ABI sector index benchmark due to the portfolio
allocation and investing style over the period. This was due in part to the
slightly higher UK equity component held within the portfolio relative to the
index, but also impacted by lower Fixed Income performance due to
unprecedented volatile conditions. For periods greater than one year,
performance remains strong, outperforming the sector benchmark and ranked in
top or second quartile.
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 2023
- Following the acquisition of CASLP during 2022, the division has
focused on ensuring that the business is appropriately governed in line with
the division's risk framework. Following entering into the new strategic
partnership with SS&C during the period, the division is at the next phase
of its governance oversight journey for CASLP, with SS&C having taken on
the CASLP operation in Bristol from 1 August this year.
- As a result of the new arrangement with Canada Life, the
division has focused on ensuring that there is appropriate oversight over the
reinsurance arrangement prior to the planned transfer of the policies to CA
through a Part VII process.
- Both CASLP and CA have now implemented IFRS 17 reporting into
their overall financial reporting framework, as required to support the
inaugural IFRS 17 reporting for the Chesnara group for this half year.
- In the second half of 2023, a group wide impact assessment and
gap analysis of sustainability reporting requirements will conclude, which
will inform the UK divisions implementation plan and next steps. It is
expected that the FY 2024 reporting will see a number of key changes following
the implementation of the new sustainability standards IFRS S1 and S2. Work
will also progress on the transition plans, although this will largely fall
into 2024.
FUTURE PRIORITIES
- Transition the new financial reporting processes in place to
support IFRS 17 reporting into BAU.
- Ensure appropriate governance arrangements are in place as the
division transitions the majority of its front to back operations to SS&C.
- Continue to progress towards net zero as part of the group-wide
programme to become a sustainable group. And undertake further work on
ensuring sustainability reporting obligations are met.
KPIs
Solvency is strong in both businesses with surplus generated in the period
increasing the solvency ratio from 134% to 146% and from 139% to 154% in CA
and CASLP respectively.
SOLVENCY RATIO CA: 146%
£m Solvency Ratio
31 Dec 2022 surplus 21.9 134%
Surplus generation 10.0
30 Jun 2023 surplus 31.9 146%
SOLVENCY RATIO SLP: 154%
£m Solvency Ratio
31 Dec 2022 surplus 13.8 139%
Surplus generation 4.5
30 Jun 2022 surplus 18.3 154%
BUSINESS REVIEW | SWEDEN
Our Swedish division consists of Movestic, a life and pensions business which
is open to new business. It offers personalised unit-linked pension and
savings solutions through brokers & partners and is well-rated within the
broker community.
Sӧderberg & Partners have, in their recent annual report, named Movestic
as insurance company of the year for unit-linked insurance, ahead of
competition from 12 other insurance providers in the Swedish market.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Movestic creates value predominantly by generating growth in unit-linked Funds
Under Management (FuM), whilst assuring a high-quality customer proposition
and maintaining an efficient operating model. FuM growth is dependent upon
positive client cash flows and positive investment performance. Capital
surplus is a factor of both the value and capital requirements and hence
surplus can also be optimised by effective management of capital.
INITIATIVES AND PROGRESS IN 2023
- In the first half-year of 2023, the financial markets have been
volatile but overall positive due to an upswing in US and wider tech markets.
This development was reflected in the favourable returns on the policyholders'
investment assets.
- The division has continued to strengthen its offering and
distribution within its custodian business.
- Further regulation was introduced in July 2022 to further open
up parts of the market to be accessible for transfer into newer unit linked
products. This change, along with further improvements in our proposition and
broker plan offerings has led to a material improvement to inflows. This,
combined with the removal of competitors' aggressive pricing activities and
the impact of Movestic's retention initiatives, has led to a much improved
position on outflows overall albeit still slightly ahead of our long term
assumptions.
- Movestic's solvency ratio remained robust after the dividend
payment of £11.0m during the second quarter and despite the development of
the symmetric adjustment following positive investment markets, which requires
us to hold some additional capital.
- The financial result is positive for H1 2023 with fees on
increased FuM the main driver for revenue. AUM has a closing balance of
£4.0bn which is a YTD increase of +15%.
FUTURE PRIORITIES
- Continue to build solid and long-term sustainable value creation
for customers and owners through a diversified business model with continued
profitable growth of volumes and market shares in selected segments.
- Focus on building digital leadership in the industry through the
development of digitalised and tailored customer propositions and
experience. Movestic will also continue the journey to digital and automated
processes to further improve efficiency and control.
- Remain focused on customer loyalty and providing attractive
offerings to both retain customers and reach more volumes on the transfer
market.
- Provide a predictable and sustainable dividend to Chesnara.
- Seek out opportunities to bring in additional scale through
M&A.
KPIs (all comparatives have been presented using 2023 exchange rates)
Economic Value
£m 2019 2020 2021 2022 Jun 2023
Reported value 225.3 200.0 217.7 181.2 185.0
Cumulative dividends 5.6 10.2 13.1 24.0
Total 225.3 205.6 227.9 194.3 209.0
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Movestic provides personalised long-term savings, insurance policies and
occupational pensions for individuals and business owners. We believe that
recurring independent financial advice increases the likelihood of a solid and
well-planned financial status, hence we are offering our products and services
through advisors and licenced brokers.
INITIATIVES AND PROGRESS IN 2023
- A third-party survey completed during H1 2023 demonstrated the
importance of an occupational pension as the most important benefit when
choosing a new employer, hence an important tool for employers to stay
attractive.
- A new sustainability rating has been developed and implemented
aiming at providing an aggregated valuation of all the different
sustainability ratings that are available on the investment market.
- Automation and a new customer service system have both been
implemented during the period, ensuring smoother administration and better
customer service.
- A new digital medical underwriting tool and an improved digital
investment tool have been launched, making it easier for customers to choose
and exchange the funds in their portfolios.
FUTURE PRIORITIES
- Continued development of new digital self-service solutions and
tools to support the brokers' value enhancing customer proposition, and to
facilitate smooth administrative processes making Movestic a partner that is
easy to do business with.
- Further strengthen the relationship with brokers and partners
through increased presence, both physical and digital.
- Continue to capitalise on the new rules that came into effect in
July 2022 that enhances the business's ability to transfer policies onto its
own platform where it is in the interest of customers to do so.
KPIs (all comparatives have been presented using 2023 exchange rates)
Broker assessment rating (out of 5)
2018 2019 2020 2021 2022
Rating 3.8 3.5 3.3 3.6 3.8
POLICYHOLDER AVERAGE INVESTMENT RETURN:
10.8%
GOVERNANCE
BACKGROUND INFORMATION
Movestic operates to exacting regulatory standards and adopts a robust
approach to risk management.
Maintaining strong governance is a critical platform to delivering the various
value-enhancing initiatives planned by the division.
INITIATIVES AND PROGRESS IN 2023
- IFRS 17 entered into force 1 January 2023 and Movestic has
delivered their first set of financial reports under the new standard. Further
IFRS 17 enhancements are required in the remainder of the year.
- Sustainability has remained a focus area. Among other things,
efforts have been made to develop a solution to, in a digital way, provide
customers with individual sustainability annual reports in accordance with the
delegated rules (RTS) to the Disclosure Regulation, which entered into force
on 1 January 2023.
- Further efforts have been made to deepen employees' knowledge
regarding sustainability. A training programme has been developed and started.
Movestic has also been playing a strong role in the group's wider
sustainability programme.
FUTURE PRIORITIES
- Ensure new reporting processes are embedded into BAU operations
to support IFRS 17 requirements.
- Continue implementation of sustainability regulations.
KPIs (all comparatives have been presented using 2023 exchange rates)
SOLVENCY RATIO: 155%
Solvency remains strong post payment of dividends to Chesnara of £11.0m
£m Solvency Ratio
31 Dec 2022 surplus 60.5 162%
Surplus generation 1.1
30 Jun 2023 surplus 61.6 155%
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 2023
- Sales volumes have developed positively in 2023 and were 19%
above the same period in 2022 for the unit-linked segment. The custodian
sales volumes are below the previous year (-14%) due to the less favourable
financial market conditions, particularly a lack of local IPOs.
- The division delivered new business profit of £2.0m which was
31% above the same period in 2022. The main driver for the increase was the
success in attracting new transfer in volumes.
- Movestic will continue to develop its pension offering to
increase competitiveness and build customer loyalty. A special focus has
been put on new volumes that became available on the Swedish transfer market
from the second half of 2022, which for the first half-year of 2023 has
resulted in transfer in volumes 109% above previous year.
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.
- Continued work to launch new partner collaborations within all
lines of business.
KPIs (all comparatives have been presented using 2023 exchange rates)
Occupational pension market share %
% 2018 2019 2020 2021 2022
Market share 6.6 7.0 4.7 3.6 4.1
New business profit
£m 2019 2020 2021 2022 Jun 2023
New business profit 6.4 1.5 4.0 3.2 2.0
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through the closed
book business, Waard, which seeks to acquire and integrate portfolios and the
open book business, Scildon, which seeks to write profitable term, investments
and savings business.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Both Waard and Scildon have a common aim to make capital available to the
Chesnara group to fund further acquisitions or to contribute to the dividend
funding. Whilst their aims are common, the dynamics by which the businesses
add value differ:
- Waard is in run-off and has the benefit that the capital
requirements reduce in-line with the attrition of the book.
- As an "open business", Scildon's capital position does not
benefit from book run-off. It therefore adds value and creates surplus
capital through writing new business and by efficient operational management
and capital optimisation.
INITIATIVES AND PROGRESS IN 2023
- Waard completed the acquisition of the insurance portfolio of
Conservatrix on 1 January 2023, with the integration now largely complete,
adding c70,000 policies and c£0.4bn of assets under management. This
acquisition further strengthens Waard's position as an acquirer of business
and portfolios in the Netherlands.
- Scildon continued to make progress on its IT system improvement
project and the expected completion date (early 2024) and anticipated savings
remain on track.
- Including the use of the volatility adjustment, both businesses
have strong solvency positions, noting the Waard solvency ratio has reduced
from FY 2022, albeit from a very high ratio, following the acquisition of the
insurance portfolio of Conservatrix, as expected.
- Despite a period of mixed investment returns and volatility seen
across different asset classes, the division has delivered Economic Value
growth through operating profits and a gain on completion of the Conservatrix
deal.
FUTURE PRIORITIES
- Continue to support Chesnara in identifying and delivering Dutch
acquisitions.
- Effective management of the closed book run-off in Waard to
enable ongoing divided payments to Chesnara.
- Work towards finalisation of the IT projects and ultimate
recognition of their capital efficiencies.
KPIs (all comparatives have been presented using 2023 exchange rates)
Economic Value - The Netherlands
£m 2019 2020 2021 2022 Jun 2023
EcV 222.2 209.0 217.3 216.2 248.7
Cumulative dividends 5.0 5.0 10.1 10.1
Total 222.2 214.0 222.3 226.3 258.8
Note: The 2022 closing value includes the additional EcV in Waard relating to
the capital injection from Chesnara plc in respect of the Conservatrix
acquisition. There is a corresponding value outflow of £21.5m at the parent
company. The acquisition was completed on 1 January 2023 and is reflected in
the current period EcV.
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Great importance is placed on providing customers with high quality service
and positive outcomes.
Whilst the ultimate priority is the end customer, in Scildon we also see the
brokers who distribute our products as being customers and hence developing
processes to best support their needs is a key focus.
INITIATIVES AND PROGRESS IN 2023
- Scildon's focus remains on providing flexible solutions and
offerings to its clients, including sustainable options. This has involved
things such as: digitalising some customer service processes; reviewing
sales channels for its term insurance product for tenants to maximise
accessibility to customers; and continual review of its investing solutions to
try and rationalise its investment portfolio in order to offer sustainable and
profitable investment products to customers.
- Waard has been focused on working with Conservatrix
policyholders to enable them, where appropriate, to restart premiums or
transfer out funds, following a long period pre acquisition where policyholder
assets remained 'locked'.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality and
to enhance and develop existing processes, infrastructure and customer
experiences.
- Continue to review and progress appropriate initiatives to meet
the needs of customers.
KPIs (all comparatives have been presented using 2023 exchange rates)
Scildon client satisfaction rating (out of 10)*
2018 2019 2020 2021 2022
Rating 7.7 7.8 8.1 8.1 8.3
*Source MWM(2 ) market research agency, Netherlands
GOVERNANCE
BACKGROUND INFORMATION
Waard and Scildon operate in a regulated environment and comply with rules and
regulations both from a prudential and from a financial conduct point of view.
INITIATIVES AND PROGRESS IN 2023
- The multi year IFRS 17 and IFRS 9 project has largely come to a
close with this report representing the first external reporting output under
the new framework.
- Further implementation on the EU sustainability regulation (the
SFDR and the EU Taxonomy) was carried out during the first half of the year.
- Preparations to implement the Corporate Sustainability Reporting
Directive (CSRD) are also underway for both Scildon and Waard and are expected
to come into force in respect of FY 2025.
- Pauline Derkman commenced as the new CEO of Scildon on 1
September 2023 bringing a wealth of experience to the role.
FUTURE PRIORITIES
- Continued implementation of sustainability regulations.
- Embedding of IFRS 17 into BAU functions.
KPIs (all comparatives have been presented using 2023 exchange rates)
SOLVENCY RATIO: SCILDON 187%; WAARD 273%
Solvency is robust in both businesses, with post-dividend solvency ratios
(inclusive of the volatility adjustment) of 187% and 273% for Scildon and
Waard respectively. Note, the Waard opening solvency ratio includes the
benefit of the £21.5m capital injection from group in respect of the
acquisition of the insurance portfolio of Conservatrix, completed 1 January
2023.
Scildon
£m Solvency Ratio
31 Dec 2022 surplus 60.1 188%
Surplus generation 2.4
30 Jun 2023 surplus 62.5 187%
Waard
£m Solvency Ratio
31 Dec 2022 surplus 64.0 591%
Surplus generation (5.2)
30 Jun 2023 surplus 58.8 273%
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 2023
- Scildon has continued to generate commercial new business
profits with £3.7m earned to date (30 June 2022: £3.2m).
- The market share for Scildon's term lifestyle product for June
is 12.1% (11.4% average for the first half of 2023). This has increased from
11.6% in June 2022.
- The Dutch housing market remains subdued with a corresponding
impact on the overall term market. Conversely as interest rates have risen,
annuities have become increasingly popular.
Note, the market share methodology approach has changed when compared to FY
2022, and has resulted in a change in calculation. At FY 2022, under the old
methodology, the full year market share was 18.2%, which is 12.9% under the
new approach.
FUTURE PRIORITIES
- Continue to deliver product innovation and cost management
actions.
KPIs (all comparatives have been presented using 2023 exchange rates)
Scildon - term assurance market share %
% Jun 2022 Dec 2022 Jun 2023
Market share 11.6 10.6 12.6
Scildon market share calculation basis has changed and has resulted in a lower
position than the previous methodology, the 2022 comparators on the new basis
have been included for context.
Scildon - new business profit
£m 2019 2020 2021 2022 Jun 2023
New business profit 7.7 8.7 5.3 6.3 3.7
BUSINESS REVIEW | acquire life and pension businesses
During the first half of 2023 we completed the acquisition of the insurance
portfolio of Conservatrix in the Netherlands and entered into a deal in the UK
with Canada Life to transfer its onshore protection business to the group.
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of own
contacts and advisers and industry associates, utilising both group and
divisional management expertise as appropriate.
- We primarily focus on acquisitions in our existing territories,
although we will consider other territories should the opportunity arise and
this is supportive of our strategic objectives.
- We assess deals by applying well established criteria which
consider the impact on cash generation and Economic Value under best estimate
and stressed scenarios.
- We work cooperatively with regulators.
- The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group's risk profile.
- Transaction risk is reduced through stringent risk-based due
diligence procedures and the senior management team's acquisition experience
and positive track record.
- We fund deals with a combination of own resources, debt or
equity depending on the size and cash flows of each opportunity and commercial
considerations.
HOW WE ASSESS DEALS
Cash generation
- Collectively our future acquisitions must be suitably cash
generative to continue to support Chesnara delivering attractive dividends.
Value enhancement
- Acquisitions are required to have a positive impact on the
Economic Value per share in the medium term under best estimate and certain
more adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance,
customer interests with deals always giving full regard to Consumer Duty
responsibilities.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite the
financial returns must be suitably compelling.
INITIATIVES AND PROGRESS IN 2023
The acquisition of the insurance portfolio of Conservatrix, a specialist
provider of life insurance products in the Netherlands, was completed on 1
January 2023 having been originally announced in July 2022. The insurance
portfolio has increased Waard's number of policies under administration by
over 50%, transforming Waard into a second material closed book consolidation
business alongside Chesnara's existing UK platform.
This is the seventh transaction undertaken in the Dutch market. Conservatrix's
savings, annuity and funeral plan products are well aligned with Chesnara's
existing life and pension liability mix in the Netherlands, adding
approximately 70,000 additional policies and £0.4bn of assets to the group.
A capital contribution of £25m was provided by the group, along with an
additional £10m from Waard's own resources to support the solvency position
of the Conservatrix business. Post acquisition, we expect that Waard will
become a material contributor to the group's dividends, with expected total
annual steady state cash generation of £8 million. The Conservatrix
transaction increased the group's EcV by £21.7m as at 30 June 2023 and
provides further EcV accretion potential from future real world investment
returns and the run-off of the risk margin.
In addition, on 16 May 2023 Chesnara announced the acquisition of the onshore
individual protection line of business of Canada Life UK, which was closed to
new business in November 2022. As a result of the acquisition, the life
insurance and critical illness policies for approximately 47,000 customers
will transfer to Chesnara's UK subsidiary, Countrywide Assured plc (CA plc).
Customers' policies are expected to transfer to CA plc in 2024, subject to the
completion of a court-approved Part VII transfer. In the interim period,
Canada Life UK will reinsure the portfolio to CA plc, effective from 31
December 2022. The consideration as part of the reinsurance agreement is £9
million, funded from internal group resources, and the transaction has
increased the group's EcV by £6.7m as at 30 June 2023. The transaction is
expected to deliver additional cash generation over the next five years of
approximately £16m. The impact on the group's Solvency II ratio as a result
of the transaction was 1%.
ACQUISITION OUTLOOK
- We continue to see a healthy flow of acquisition opportunities
across European insurance including the UK and the Netherlands.
- We recognise that the consolidation markets in these countries
are mature but the key drivers for owners to divest portfolios continue to
remain relevant and create a strong pipeline. These include better uses of
capital (e.g. return to investors or supporting other business lines),
operational challenges (e.g. end of life systems), management distraction,
regulatory challenges, business change (e.g. IFRS 17) and wider business and
strategic needs.
- Our expectation is that sales of portfolios will continue and
our strong expertise and knowledge in the markets, good regulatory
relationships and the flexibility of our operating model means that Chesnara
is very well placed to manage the additional complexity associated with these
portfolio transfers and provide beneficial outcomes for all stakeholders.
These transactions may not be suitable for all potential consolidators, in
particular those who do not have existing licences in these territories.
- Chesnara will continue its robust acquisition assessment model
which takes into account; (a) the strategic fit; (b) the cash generation
capability; (c) the medium term impact on EcV per share; and (d) the risks
within the target. We will also continue to assess the long-term commercial
value of acquisitions as part of our objective to maximise the value from
in-force business.
- The £200m Tier 2 subordinated debt issue in February 2022
together with the existing £100m Revolving Credit Facility arrangement (with
an additional £50m accordion option) provides funding capability on
commercially attractive terms. We continue to have immediately available
acquisition firepower of over £100m, supported by a strong group solvency
position. We will continue to explore how we can increase our funding
capability further, including consideration of partnerships to ensure we can
compete for larger deals.
- Our strong network of contacts including the corporate finance
adviser community, who understand the Chesnara acquisition model, supported by
our engagement activity with potential targets, ensures that we are aware of
viable opportunities in the UK and Western Europe. With this in mind, we are
confident that we are well positioned to continue our successful acquisition
track record in the future.
CAPITAL MANAGEMENT | Solvency II
Subject to ensuring other constraints are managed, surplus capital is a useful
proxy measure for liquid resources available to fund items such as dividends,
acquisitions or business investment.
GROUP SOLVENCY
SOLVENCY POSITION
£m 30 Jun 2023 31 Dec 2022
Own funds 673 605
SCR 328 307
Surplus 345 298
Solvency ratio % 205% 197%
SOLVENCY SURPLUS
£m
Group solvency surplus at 31 Dec 2022 298.4
CA 5.9
CASLP 4.5
Movestic 1.2
Waard 2.4
Scildon 2.5
Chesnara / consol adj 5.7
Change in T2/T3 restrictions 39.9
Acquisition 8.8
Exchange rates (11.9)
Dividends (12.6)
Group solvency surplus at 30 Jun 2023 344.8
Surplus:
The group has £345m of surplus over and above the capital requirements under
Solvency II, compared to £298m at the end of 2022. The group solvency ratio
has increased from 197% to 205%.
Own Funds:
Own Funds have risen by £80.2m (pre-dividends). The most material drivers
are the acquisition of the insurance portfolio of Conservatrix in Waard and
the reinsurance of policies from Canada Life in CA, which contribute £33.7m
to Own Funds and the reduction in Tier 2 restrictions.
SCR:
The SCR has increased by £21.3m, owing mainly to a rise in equity risk (due
to the rise in equity markets and symmetric adjustment) and increases in
market and life underwriting SCR from the 2023 acquisitions.
Solvency II background
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds" (OF)
and this is measured in accordance with the rules of the newly adopted
Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital Requirement
(SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an
absolute surplus: OF less SCR.
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and includes a value
for future profits expected to arise from in-force policies.
The Own Funds valuation: The Own Funds valuation, before considering the
benefit of Tier 2 and Tier 3 capital (which is restricted to 50% of the
value of the reported SCR), is deemed to represent a commercially meaningful
figure with the exception of:
Contract boundaries: Solvency II rules do not allow for the recognition of
future cash flows on certain policies despite a high probability of receipt.
Risk margin: The Solvency II rules require a 'risk margin' liability which
is deemed to be above the realistic cost.
Restricted with profit surpluses: Surpluses in the group's with-profit funds
are not recognised in Solvency II Own Funds despite their commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted for the items
above. As such our Own Funds and EcV have many common characteristics and
tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term guarantee package
when Solvency II was introduced, are available to temporarily increase Own
Funds. Chesnara does not take advantage of such measures, however we do
apply the volatility adjustment within our Dutch and UK divisions.
How do Own Funds change?
Own Funds (and Economic Value) are sensitive to economic conditions. In
general, positive equity markets and increasing yields lead to OF growth and
vice versa. Other factors that improve OF include writing profitable new
business, reducing the expense base and improvements to lapse rates.
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a "standard formula"
or "internal model". Chesnara adopts the "standard formula".
There are three levels of capital requirement:
Minimum dividend paying requirement/risk appetite requirement
The board sets a minimum solvency level above the SCR which means a more
prudent level is applied when making dividend decisions.
Solvency Capital Requirement
Amount of capital required to withstand a 1 in 200 event. The SCR acts as an
intervention point for supervisory action including cancellation or the
deferral of distributions to investors.
Minimum Capital Requirement
The MCR is between 45% and 25% of the SCR. At this point Chesnara would need
to submit a recovery plan which if not effective within three months may
result in authorisation being withdrawn.
How does the SCR change?
Given the largest component of Chesnara's SCR is market risk, changes in
investment mix or changes in the overall value of our assets has the greatest
impact on the SCR. For example, equity assets require more capital than low
risk bonds. Also, positive investment growth in general creates an increase
in SCR. Book run-off will tend to reduce SCR, but this will be partially
offset by an increase as a result of new business.
A review of the UK's application of Solvency II is currently underway, led by
HM Treasury. In April 2022 the PRA published a statement indicating its
agreement with the view that the risk margin and matching adjustment can be
reformed so as to reduce overall capital levels for life insurers. In
November 2022 the UK government announced plans to legislate the reforms to
Solvency II. On 29 June 2023 the PRA started consultation CP12/23 setting out
the proposed reforms. We continue to monitor this closely and future
financial statements will report on the UK specific application of Solvency II
as it diverges from the EU's regime. We see no specific reason to expect the
PRA to use their enhanced freedoms take a route that systemically makes it
harder to do business in the UK.
We are well capitalised at both a group and subsidiary level. We have
applied the volatility adjustment in Scildon, Waard Leven, CA and CASLP, but
have not used any other elements of the long-term guarantee package within the
group. The Volatility Adjustment is an optional measure that can be used in
solvency calculations to reduce volatility arising from large movements in
bond spreads.
The numbers that follow present the divisional view of the solvency position
which may differ to the position of the individual insurance company(ies)
within the consolidated numbers. Note that year end 2022 figures have been
restated using 30 June 2023 exchange rates in order to aid comparison at a
divisional level.
UK - CA
£m 30 Jun 2023 31 Dec 2022
Own funds (post dividend) 102 87
SCR 70 65
Buffer 14 13
Surplus 18 9
Solvency ratio % 146% 134%
Surplus: £18.0m above board's capital management policy.
Dividends: During Q2 2023 a £46.0m dividend in was paid up to Chesnara.
(2022: £27.5m).
Own Funds: Increased by £15.2m due to Canada Life reinsurance, and positive
economic experience.
SCR: Increased by £5.2m primarily due to Canada Life reinsurance, increase
in symmetric adjustment and an increase in bond holdings.
UK - CASLP
£m 30 Jun 2023 31 Dec 2022
Own funds (post dividend) 52 49
SCR 34 36
Buffer 7 7
Surplus 12 6
Solvency ratio % 154% 139%
Surplus: £11.5m above board's capital management policy.
Dividends: Solvency position stated after £10.0m proposed dividend, due to
be paid in the second half of the year.
Own Funds: Own Funds increased by £3.0m, largely due to an increase in
interest rates, offset by adverse lapse experience and a strengthening of
expense assumptions.
SCR: Fallen by £1.5m, due to reductions in underwriting risks following the
rise in interest rates.
SWEDEN
£m 30 Jun 2023 31 Dec 2022
Own funds (post dividend) 173 158
SCR 111 97
Buffer 22 19
Surplus 39 41
Solvency ratio % 155% 162%
Surplus: £39.4m above board's capital management policy.
Dividends: During Q2 2023 a £11.0m dividend was paid up to Chesnara (2022:
£3.0m).
Own Funds: Increased by £15.2m largely owing to positive economic
movements, being slightly offset by adverse lapse experience and depreciation
of SEK against GBP.
SCR: Increased by £14.1m due to positive equity growth and moderate rise in
currency and lapse and risks.
NETHERLANDS - WAARD
£m 30 Jun 2023 31 Dec 2022
Own funds (post dividend) 85 77
SCR 31 13
Buffer 11 5
Surplus 43 59
Solvency ratio % 273% 591%
Surplus: £42.8m above board's capital management policy.
Dividends: Solvency position stated after £5.1m proposed dividend (2022:
£6.4m), due to be paid in the second half of the year.
Own Funds: Increased by £7.6m largely due to the Conservatrix deal.
SCR: Increased by £17.9m, mainly due to the Conservatrix transaction, which
has mostly impacted longevity, lapse and concentration risk.
NETHERLANDS - SCILDON
£m 30 Jun 2023 31 Dec 2022
Own funds (post dividend) 135 128
SCR 72 68
Buffer 54 51
Surplus 8 9
Solvency ratio % 187% 188%
Surplus: £8.4m above board's capital management policy.
Dividends: No foreseeable dividend is proposed (2022: £5.3m).
Own Funds: Increased by £6.5m due to positive operating variances and new
business profits.
SCR: Increased by £4.1m, largely due to positive equity market growth and
rise in symmetric adjustment, as well as an increase in spread risk due to a
rise in bond values.
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 immediately (where the impacts are calculated on the cash
flows for the life of our portfolios) whereas solvency is often protected in
the short term and, to a certain extent, the longer term due to compensating
impacts on required capital.
As we highlighted in our FY 2022 report, the Tier 2 debt raise in February
2022, has had a material impact on the reported sensitivities because, as
capital requirements move, the amount of the Tier 2 debt able to be recognised
in the Own Funds also moves, creating a new dynamic. For example, where FX
movements reduce the SCR, we now also experience a corresponding reduction in
base Own Funds and Own Funds relating to Tier 2 capital. The total surplus is
now more exposed to downside risks 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 diagrams below, the impact of
these sensitivities on the group's solvency surplus has a direct read across
to the immediate impact on cash generation.
Solvency ratio Solvency surplus EcV
Impact % Impact range £m Impact range £m
20% sterling appreciation 14.6% (27.0) to (17.0) (64.7) to (54.7)
20% sterling depreciation (12.2)% 26.4 to 36.4 73.5 to 83.5
25% equity fall 6.9% (59.0) to (29.0) (85.7) to (65.7)
25% equity rise (16.2)% 1.1 to 31.1 68.1 to 88.1
10% equity fall 2.6% (21.4) to (11.4) (33.6) to (23.6)
10% equity rise (5.4)% 4.2 to 14.2 25.4 to 35.4
1% interest rate rise 6.8% 2.2 to 12.2 (16.6) to (6.6)
1% interest rate fall (7.3)% (19.9) to 0.1 4.0 to 19.0
50bps credit spread rise (2.1)% (15.6) to (5.6) (20.9) to (15.9)
25bps swap rate fall (5.5)% (19.8) to (9.8) (13.5) to (3.5)
10% mass lapse (0.7)% (29.9) to (19.9) (45.3) to (35.3)
1% inflation (6.9)% (26.5) to (16.5) (26.2) to (16.2)
10% mortality increase (4.9)% (21.3) to (16.3) (22.6) to (17.6)
INSIGHT*
20% sterling appreciation: A material sterling appreciation reduces the
value of surplus in our overseas divisions and any overseas investments in our
UK entities, however this is partially mitigated by the group currency hedge
so the overall impact on solvency is reduced.
Equity sensitivities: The equity rise sensitivities cause both Own Funds and
SCR to rise, as the value of the funds exposed to risk is higher. The
increase in SCR can be larger than Own Funds, resulting in an immediate
reduction in surplus, depending on the starting point of the symmetric
adjustment. The converse applies to an equity fall sensitivity, although the
impacts are not fully symmetrical due to management actions and tax. The
Tier 2 debt value also changes materially in these sensitivities. The change
in symmetric adjustment can have a significant impact (25% equity fall:
-£17.3m to the SCR, 25% equity rise: +£26.7m to SCR). The EcV impacts are
more intuitive as they are more directly linked to Own Funds impact. CA and
Movestic contribute the most due to their large amounts of unit-linked
business, much of which is invested in equities.
Interest rate sensitivities: An interest rate rise currently has a more
adverse effect on group economic value than an
interest rate fall. This is a consistent with the change in exposure
following continued rise in interest rates over 2023. However, group
solvency is still less exposed to rising interest rates as a rise in rates
causes capital requirements to fall, increasing solvency.
50bps credit spread rise: A credit spread rise has an adverse impact on
surplus and future cash generation, particularly in Scildon due to corporate
and non-local government bond holdings that form part of the asset portfolios
backing non-linked insurance liabilities. The impact on the other divisions
is less severe.
25bps swap rate fall: This sensitivity measures the impact of a fall in the
swap discount curve with no change in the value of assets. The result is
that liability values increase in isolation. The most material impacts are
on CA and Scildon due to the size of the non-linked book.
10% mass lapse: In this sensitivity Own Funds fall as there are fewer
policies on the books, thus less potential for future profits. This is
largely offset by a fall in SCR, although the amount of eligible Tier 2
capital also falls. The division most affected is Movestic as it has the
largest concentration of unit-linked business.
1% inflation rise: This sensitivity measures a permanent increase in
inflation in every future year. Such a rise in inflation increases the
amount of expected future expenses. This is capitalised into the balance
sheet and hits the solvency position immediately.
10% mortality increase: This sensitivity has an adverse impact on surplus and
cash generation, particularly for Scildon due to their term products.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that the
sensitivities modelled are deemed to be broadly similar (with the exception
that the 10% equity movements are naturally more likely to arise) in terms of
likelihood. Whilst sensitivities provide a useful guide, in practice, how
our results react to changing conditions is complex and the exact level of
impact can vary due to the interactions of events and starting position.
FINANCIAL REVIEW
Our key performance indicators provide a good indication of how the business
has performed in delivering its three strategic objectives.
Summary of each KPI:
CASH GENERATION
GROUP CASH GENERATION excluding the impact of acquisitions £11.1M 30 JUNE
2022: £21.9M
DIVISIONAL CASH GENERATION excluding the impact of acquisitions £2.3M 30 JUNE
2022: £60.1M
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 2023
UK 10.0
Sweden (6.4)
Netherlands - Waard (0.4)
Netherlands - Scildon (0.9)
Divisional cash generation 2.3
Other group activities 8.8
Group cash generation 11.1
- Cash generation of £11.1m (30 June 2022: £21.9m) includes a
material adverse impact from the symmetric adjustment of £10.6m (30 June
2022: +£30.8m), which is a key factor in the year on year movement.
- The divisional result of £2.3m was supported by solid returns
from the UK division. The result has been impacted by market driven economic
factors that have caused capital requirements to rise. This was particularly
the case in Sweden where the value gains delivered through equity growth were
more than offset by associated rises in SCR including the impact of the
symmetric adjustment.
- The central group contribution includes the benefit of a cash
gain from our FX hedge, which has risen in value to offset some (£10.6m) of
the adverse FX movements experienced elsewhere in the group, helping to reduce
capital requirements. The reduction in SCR offsets the adverse impact of
consolidation adjustments, central development expenditure (including M&A)
and central recurring overheads.
IFRS
PRE-TAX PROFIT: £16.0M 30 JUNE 2022: PRE-TAX LOSS £54.2M
TOTAL COMPREHENSIVE INCOME: £0.2M 30 JUNE 2022: £29.8M LOSS
What is it?
Presentation of the results in accordance with International Financial
Reporting Standards (IFRS) aims to recognise the profit arising from the
longer-term insurance and investment contracts over the life of the policy.
Why is it important?
The IFRS results form the core of reporting and hence retain prominence as a
key financial performance metric. We believe that, for Chesnara, the IFRS
results in isolation do not recognise the wider financial performance of the
business, hence the use of supplementary Alternative Performance Measures to
enhance understanding of financial performance.
Risks
IFRS 17 is effective from 1 January 2023 and has been applied in the financial
statements in Section C. As a result, several accounting policies and
significant judgements and estimates have changed. IFRS 17 introduces a new
concept of insurance revenue which aims to remove volatility from the income
statement by establishing an explicit measure of future profit (the
Contractual Service Margin (CSM)) and provides a framework as to how the CSM
is recognised in a given period. The 'investment result' is presented
separately from the 'insurance result' on the face of the income statement.
Market volatility impacting the surplus assets will result in volatility in
investment result and the IFRS pre-tax profit/(loss). Foreign currency
fluctuations will further affect total comprehensive income.
£m 30 Jun 2023
Net insurance service result 9.5
Net investment result 25.0
Fee, commission and other operating income 48.5
Other operating expenses (65.5)
Financing costs (5.5)
Profit arising on business combinations and portfolio acquisitions 4.0
Profit before income taxes 16.0
Tax (0.4)
Forex & other (15.4)
Total comprehensive income 0.2
- Profit before tax in the period of £16.0m includes a net
insurance service profit of £9.5m and an investment result of £25.0m (six
months to 30 June 2022: £3.2m profit and £46.2m loss respectively).
- The positive insurance result comprises a gain from gross
business of £15.7m and a loss from reinsurance of (£6.2m). Investment
returns reflect market recoveries from the lows experienced in 2022, with
rising bond yields, improved equity returns and narrowing credit spreads being
the main contributors.
ECONOMIC VALUE (EcV)
£523.2M 31 DECEMBER 2022: £511.7M
What is it?
Economic value (EcV) was introduced following the introduction of Solvency II
at the start of 2016, with EcV being derived from Solvency II Own Funds. EcV
reflects a market-consistent assessment of the value of the existing insurance
business, plus the adjusted net asset value of the non-insurance businesses
within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force business and net
assets of the non-insurance business and hence is an important reference point
by which to assess Chesnara's value. A life and pensions group may typically
be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
business over time.
The EcV development of the Chesnara group over time can be a strong indicator
of how we have delivered to our strategic objectives, in particular the value
created from acquiring life and pensions businesses and enhancing our value
through writing profitable new business. It ignores the potential of new
business to be written in the future (the franchise value of our Swedish and
Dutch businesses) and the value of the company's ability to acquire further
businesses.
Risks
The Economic Value of the group is affected by economic factors such as equity
and property markets, yields on fixed interest securities and bond spreads.
In addition, the EcV position of the group can be materially affected by
exchange rate fluctuations. For example, a 20.0% weakening of the Swedish
krona and euro against sterling would reduce the EcV of the group within a
range of £55m-£65m, based on the composition of the group's EcV at 30 June
2023.
£m
EcV 31 Dec 2022 511.7
EcV earnings 32.6
Acquisitions 28.4
Forex (26.8)
Pre-dividend EcV 546.0
Dividends (22.8)
EcV 30 Jun 2023 523.2
- The opening half of 2023 has shown good value growth, with an
increase in Economic Value of c12% (excluding the impact of FX losses that
arise on consolidation and the dividend payment).
- This result is particularly pleasing as the growth has been
delivered across all areas of Chesnara's 'Fan' core components, including
strong new business results, both operating and economic profits, as well as
substantial incremental gains through acquisitions. Furthermore, while we have
seen some improvement in financial markets since 2022, it has still been a
relatively modest period in terms of economic growth. The result therefore
gives further reassurance of the robustness of the group and provides
confidence of future growth under more beneficial economic conditions.
ECV EARNINGS
£61.0M (including the impact of acquisitions) 30 JUNE 2022: £75.7M LOSS
What is it?
In recognition of the longer-term nature of the group's insurance and
investment contracts, supplementary information is presented that provides
information on the Economic Value of our business.
The principal underlying components of the Economic Value result are:
- The expected return from existing business (being the effect of
the unwind of the rates used to discount the value in-force);
- Value added by the writing of new business;
- Variations in actual experience from that assumed in the opening
valuation;
- The impact of restating assumptions underlying the determination
of expected cash flows; and
- The impact of acquisitions.
Why is it important?
A different perspective is provided in the performance of the group and on the
valuation of the business. Economic Value earnings are an important KPI as
they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
have delivered against all three of our core strategic objectives. This
includes new business profits generated from writing profitable new business,
Economic Value profit emergence from our existing businesses, and the Economic
Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors,
including those highlighted within our principal risks and uncertainties and
sensitivities analysis. In addition to the factors that affect the IFRS
pre-tax profit and cash generation of the group, the EcV earnings can be more
sensitive to other factors such as the expense base and persistency
assumptions. This is primarily due to the fact that assumption changes in
EcV affect our long-term view of the future cash flows arising from our books
of business.
£m Jun 2023
Total operating earnings 8.6
Economic earnings 31.6
Other (7.6)
Acquisitions 28.4
Total EcV earnings 61.0
- In an encouraging improvement on the prior year, operating
activities have delivered earnings of £8.6m, which includes improved new
business profits from Scildon and Movestic.
- The majority of the economic earnings arose in Movestic, where
equity market growth, particularly in Swedish and European indices, has driven
investment returns and growth in unit linked policyholder funds. Economic
earnings across the other divisions were more modest, with different economic
factors offsetting one another to a certain extent.
- Acquisitions in the period added £28.4m of earnings, with
£21.7m on the Conservatrix portfolio (completed 1 Jan 2023) and a further
£6.7m on the protection portfolio of Canada Life (reinsurance arrangement
executed on 16 May 2023) under the Dutch and UK divisions respectively.
- The "Other" category includes risk margin movement, negative tax
impacts and the cost of Tier 2 coupon payments.
CASH GENERATION
There is no reporting framework defined by the regulators for cash generation
and there is therefore inconsistency across the sector. We define cash
generation as being the movement in Solvency II own funds over and above the
group's internally required capital, which is based on Solvency II rules.
GROUP CASH GENERATION excluding the impact of acquisitions
£11.1M 30 JUNE 2022: £21.9M
DIVISIONAL CASH GENERATION
£2.3M 30 JUNE 2022: £11.55M
Cash generation of £11.1m for the period was impacted at a divisional level
by adverse movement in the symmetric adjustment following positive equity
market growth. Cash is generated from increases in the group's solvency
surplus, which is represented by the excess of own funds held over
management's internal capital needs. These are based on regulatory capital
requirements, with the inclusion of additional 'management buffers'.
Implications of our cash definition:
Positives
- Creates a strong and transparent alignment to a regulated
framework.
- Positive cash results can be approximated to increased dividend
potential.
- Cash is a factor of both value and capital and hence management
are focused on capital efficiency in addition to value growth and indeed the
interplay between the two.
Challenges and limitations
- In certain circumstances the cash reported may not be
immediately distributable by a division to group or from group to
shareholders.
- Brings the technical complexities of the SII framework into the
cash results e.g. symmetric adjustment, with-profit fund restrictions, model
changes etc, and hence the headline results do not always reflect the
underlying commercial or operational performance.
- At a group level the result includes complex consolidation
adjustments relating to buffers, which can compromise how well the figure
truly reflects performance.
Jun 2023 £m Jun 2022 £m
Movement in Movement in management's capital requirement Forex Cash Cash generated / (utilised)
Own Funds impact generated / (utilised)
UK 12.3 (2.3) - 10.0 31.3
Sweden 16.1 (17.9) (4.6) (6.4) 14.2
Netherlands - Waard Group 4.1 (2.4) (2.1) (0.4) 2.2
Netherlands - Scildon 6.6 (7.2) (0.3) (0.9) 12.4
Divisional cash generation / (utilisation) 39.1 (29.8) (7.0) 2.3 60.1
Other group activities (5.4) 13.5 0.7 8.8 (38.2)
Group cash generation / (utilisation) 33.7 (16.3) (6.3) 11.1 21.9
GROUP
- Other group activities includes consolidation adjustments as
well as central costs and central SCR movements.
- Central costs of approximately £5m include a large proportion
of exceptional non-recurring expenditure and Tier 2 interest costs.
UK
- The UK division has continued to be the largest contributor to
cash generation, with £10.0m reported in the period, delivered through Own
Funds growth. The positive impact of rising yields and to a lesser extent,
equity growth, provided economic returns that underpins the growth. Favourable
results on fee income and future expenses also support the result. A smaller
increase in capital requirements during the period was primarily due to the
impacts of equity market growth (and symmetric adjustment) and also following
changes to the asset mix of the division.
SWEDEN
- Movestic has reported cash utilisation of £6.4m for the opening
half of 2023, as Own Funds growth was exceeded by a larger increase in capital
requirements. On the Own Funds side, growth was delivered primarily through
economic returns, with the division being particularly sensitive to equity
market movements, specifically the rise in Swedish and European equity
indices. Conversely, this equity market-driven growth in Own Funds has
resulted in an increase in market-risk related capital requirements, including
the impact of the symmetric adjustment, which increased significantly since
the start of the year. The divisional result also includes a material foreign
exchange loss on consolidation, owing the weakening of the krona versus
sterling during the period.
NETHERLANDS - WAARD
- Waard recorded cash utilisation of £0.4m for the period. While
value growth was delivered through solid operating profits, outweighing
smaller economic losses, there was an increase in capital requirements and a
foreign exchange loss, driving the cash utilisation. The increase in capital
requirements includes an increase in market risks following rising interest
and spread risk. The divisional result also bears the impact of sterling
appreciation versus the euro during 2023, leading to foreign exchange loss on
consolidation.
NETHERLANDS - SCILDON
- In Scildon a small cash utilisation of £0.9m was posted for the
year to date. Own Funds growth of £6.6m was driven by positive operating
profits of £13.1m, offsetting economic losses (being predominantly the
negative impact of rising yields). This value growth was offset by a slightly
larger increase in capital requirements. Key drivers were predominantly rises
in market based risks, with equity growth driving an increase in symmetric
adjustment and rising corporate bond values leading to an increase in spread
risk.
CASH GENERATION - ENHANCED ANALYSIS
The format of the analysis draws out components of the cash generation results
relating to technical complexities, modelling issues or exceptional corporate
activity (e.g. acquisitions). The results excluding such items are deemed to
better reflect the inherent commercial outcome (Commercial cash generation).
COMMERCIAL CASH GENERATION excluding the impact of acquisitions
£21.8M 30 JUNE 2022: £(3.0)M
UK SWEDEN NETHERLANDS NETHERLANDS SCILDON DIVISIONAL GROUP ADJ TOTAL
WAARD TOTAL
Base cash generation 10.0 (6.4) (0.4) (0.9) 2.3 8.8 11.1
Symmetric adjustment 2.5 6.5 0.5 1.1 10.6 - 10.6
WP restriction look through 0.1 - - - 0.1 - 0.1
Commercial cash generation 12.6 0.1 0.1 0.2 13.0 8.8 21.8
Commercial cash generation excluding FX impacts 12.6 4.7 2.2 0.5 20.0 1.4 21.4
The UK businesses drove the majority of the group's commercial cash
generation, with a total UK result of £12.6m, of which a rise in yields is a
key proponent of growth. The overseas divisions have generated smaller gains
which have been dampened by the depreciation of the euro and Swedish krona
currencies against sterling. The FX hedge that was implemented in 2022 has
offset some of these currency impacts, providing a total cash benefit of
£10.6m over the year to date.
UK
The UK result primarily comes from economic gains, particularly the rise in
yields which has led to a reduction in capital requirements. This is backed up
by a small operating profit arising from a reduction in expense assumptions
and release of capital requirements as the book runs off.
The commercial cash outcome illustrates that the UK remains at the heart of
the cash generation model.
SWEDEN
The Swedish result, after removing a loss caused by the increase in the
symmetric adjustment, is fairly neutral. The economic result is positive,
principally due to gains on overseas equities offset by the depreciation of
Swedish krona against sterling. The economic gains are offset by an operating
loss driven by adverse lapse experience and a new business strain.
WAARD
Waard's commercial cash result is made up of a small economic loss, primarily
driven by the depreciation of the euro versus sterling, and a small operating
gain arising from positive mortality experience and the unwind of the discount
rate.
SCILDON
Scildon's commercial cash result consists of a small operating cash gain
offsetting an economic loss, due to a fall in bond values relative to
liabilities and the depreciation of euro against sterling.
GROUP
The central group cash generation includes a £10.6m cash gain from the FX
hedge, which has risen in value to offset some of the FX losses experienced
elsewhere in the group and slightly increased its beneficial impact on capital
requirements. The group has also benefited from interest rate changes that
have driven a reduction in group SCR. These positive effects are offset by
central expenses, including overheads, coupon payments on the Tier 2 debt and
centrally incurred business development investments e.g. M&A activity,
IFRS 17.
EcV EARNINGS including the impact of acquisitions
£61.0M 30 JUNE 2022: £75.7M LOSS
A period of strong EcV earnings have been delivered through a number of
sources, with solid new business gains, operating and economic profits,
alongside significant growth through acquisitions.
Analysis of the EcV result in the period by earnings source:
£m 30 Jun 30 Jun 31 Dec
2023 2022 2022
Expected movement in period 7.7 (0.8) (1.3)
New business 4.7 3.6 8.0
Operating experience variances 1.6 (22.5) (19.0)
Operating assumption changes (5.4) (1.0) (14.5)
Total operating earnings(†) 8.6 (20.7) (26.8)
Total economic earnings(†) 31.6 (91.1) (109.1)
Other non-operating variances (4.8) 0.8 (2.6)
Risk margin movement 0.9 14.6 20.4
Tax (3.7) 6.8 12.0
Acquisitions 28.4 13.9 21.4
EcV earnings 61.0 (75.7) (84.7)
Analysis of the EcV result in the year by business segment:
£m 30 Jun 30 Jun 31 Dec
2023 2022 2022
UK 11.0 (20.8) (24.6)
Sweden 15.0 (46.8) (37.1)
Netherlands 12.1 (15.0) (29.4)
Group and group adjustments (5.5) (7.0) (15.0)
Acquisitions 28.4 13.9 21.4
EcV earnings 61.0 (75.7) (84.7)
Total economic earnings: The economic result continues to be the largest
component of the total EcV earnings, with a profit of £31.6m in the period.
The result is in line with our reported sensitivities and is driven by the
following key market movements:
Rising equity indices:
- FTSE All Share index increased by 0.5% (6 months to 30 June 2022:
decreased by 2.4%);
- Swedish OMX all share index increased by 8.4% (6 months to 30 June
2022: decreased by 20.7%);
- The Netherlands AEX all share index increased by 10.2% (6 months to 30
June 2022: decreased by 10.8%); and
Widening credit spreads:
- UK AA corporate bond yields increased to 1.06% (31 December 2022
1.04%)
- European AA credit spreads increased to 0.48% (31 December 2021:
0.29%).
Increased yields:
- 10-year UK gilt yields have increased to 4.43%. (31 December 2022:
3.78%).
The EcV results continue to illustrate how sensitive the results are to
economic factors. While investment market growth has been positive compared to
the prior year, it was still relatively muted versus previous periods of
growth. As outlined in the past, we continue to be of the view that short term
volatility has limited commercial impact on the business and of more
importance is the fact that steady state, over the longer term, we expect EcV
growth in the form of real world investment returns
Total operating earnings: Earnings for the period reflect a significant
uplift on the losses reported in recent years and continues the encouraging
trend of improvement. It is also worth noting that the result includes a
number of negative components that represent positive investment in the future
and items that are non-recurring in nature. Examples of key items in 2023
include:
- Recurring central development overheads including those associated with
the M&A strategy. Whilst the cost of this development investment is
recognised, EcV does not recognise the potential returns we expect from it.
- Non-recurring development expenditure such as IFRS 17.
- Transition and transformational costs relating to the UK's new outsourcing
arrangements and business integrations post-acquisition.
- Tier 2 debt servicing costs - EcV does not recognise the benefit of the
capital or the potential for future value adding transactions that it
provides.
Acquisitions: M&A activity continued to be a source of growth and
supplied £28.4m of EcV earnings in the period. The incremental value was
delivered by the Conservatrix insurance portfolio acquisition (1 January 2023)
and also a UK protection portfolio reinsurance arrangement with Canada Life
(16 May 2023), under the Waard Group and CA plc respectively.
Looking at the results by division:
UK: The UK division reported a modest operating profit, with positive
results on fee income (due to lower policy attrition) and a reduction in
future expenses (under the new outsourcing arrangements), which offset some
expense pressure in the period owing to non-recurring transition and migration
activity. An economic gain of £8.3m drives the divisional result. This was
primarily the positive impact of rising yields plus, to a lesser extent, an
improvement in equity indices. While the economic profit was relatively
subdued, it remains a significant improvement on the prior year.
Sweden: Movestic posted earnings of £15.0m for the opening half of 2023,
with the division benefitting from external economic factors. Investment
markets, in particular rising equity markets in Sweden and Europe, have
underpinned economic returns of £19.8m. This more than outweighed a smaller
operating loss, due to adverse transfer activity, lower fee and commission
income (owing to pricing pressures) and suppressed fund rebate income.
Modest new business profits (on an EcV basis) were £1.5m (30 June 2022:
£0.7m), reflective of the continued competitive market conditions and margin
pressures, though an improvement on 2022.
Netherlands: The Dutch division has reported growth of £12.1m in the
period, with operating profits mitigating economic losses in both
businesses. The operating result in Scildon, delivering growth of £13.1m,
represents a significant upturn versus the losses sustained in prior periods
and includes new business profits £2.7m. Economic losses of £3.3m were
primarily the consequence of rising yields, partly offset by the volatility
adjustment impact. Waard has reported EcV growth of £3.7m, supported by
operating profits of £5.1m, which included favourable mortality experience
and the positive impact of surrenders on expenses. Despite positive bond
returns exceeding expectations, the economic loss (£0.6m) stemmed from a
number of factors including subdued equity growth and changes in the market
value of our mortgage portfolio. The negative impact of a fall in interest
rates also offset the benefit of rising yields on the business's future
liabilities.
Group: This component contains a variety of group-related expenses and
includes: non-maintenance related costs (such as acquisition activity
costs); the costs of the group's IFRS 17 programme; as well as some material
economic-related items such as financing costs, primarily in relation to the
Tier 2 debt interest costs, and positive investment returns for the period.
EcV
£523.2M (31 DEC 2022: £511.7M)
The Economic Value of Chesnara represents the present value of future profits
of the existing insurance business, plus the adjusted net asset value of the
non-insurance business within the group. EcV is an important reference point
by which to assess Chesnara's intrinsic value.
Value movement: 1 Jan 2023 to 30 Jun 2023:
£m
EcV 31 Dec 2022 511.7
EcV earnings 32.6
Acquisitions 28.4
Forex (26.7)
Pre-dividend EcV 546.0
Dividends (22.8)
EcV 30 Jun 2023 523.2
EcV earnings: EcV profits of £61.0m have been delivered in the opening half
of the year, supported by both economic and operating profits, with
significant growth also delivered through acquisitions.
Acquisitions: The group has delivered two deals during the first half of
2023; the Conservatrix portfolio acquisition and the reinsurance arrangement
with Canada Life. This has resulted in day 1 EcV gains of £21.7m and £6.7m
respectively.
Foreign exchange: The closing EcV of the group reflects a foreign exchange
loss in the period, which is a consequence of sterling appreciation against
both the Swedish krona and also the euro.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £22.8m were paid during the first half of the
year, representing the final dividend from 2022.
EcV by segment at 30 Jun 2023
£m
UK 181.0
Sweden 185.0
Netherlands 248.7
Other group activities (91.5)
EcV 30 Jun 2022 523.2
The above table shows that the EcV of the group is diversified across its
different markets.
EcV to Solvency II:
£m
EcV 30 Jun 2023 523.2
Risk margin (38.4)
Contract boundaries (2.6)
Own Funds restrictions (0.1)
Tier 2 debt 200.00
Tier 2/3 restrictions (6.8)
Deferred tax asset adjustment 10.0
Dividends (12.6)
SII Own Funds 30 Jun 2023 672.7
Our reported EcV is based on a Solvency II assessment of the value of the
business but adjusted for certain items where it is deemed that Solvency II
does not reflect the commercial value of the business. The above table 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 £12.6m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
Tier 2: The tier 2 debt is treated as "quasi equity" for Solvency II
purposes. For EcV, consistent with IFRS, we continue to report this as debt.
Under SII this debt is recognised at fair value, while for EcV this remains at
book value.
Tier 3: Under Solvency II the eligibility of Tier 2 and 3 Own Funds is
restricted in accordance with regulatory rules.
IFRS
The group IFRS results are reported under IFRS 17 for the first time. The
following section provides an introduction to IFRS 17 and how it impacts
Chesnara, together with the unaudited IFRS results for the 6 months to 30 June
2023 and comparative periods, which have been restated under IFRS 17.
INTRODUCTION TO IFRS 17
What is IFRS 17?
IFRS 17 is the new accounting standard for valuing and disclosing insurance
contracts. This is effective for the first time in these half year financial
statements and replaces the previous standard, IFRS 4. IFRS 17 has been
implemented as if it had always been in place and so previous results have
been restated.
IFRS 17 has been introduced with the aim of allowing greater comparability of
results between insurance companies and the wider market.
How does IFRS 17 impact Chesnara?
IFRS 17 'insurance contracts' represents an accounting policy change that does
not impact the fundamentals of the business. Specifically, the
implementation of IFRS 17 does not impact the growth ambition, value or cash
generation of the group. There are no changes to the solvency ratio, cash
generation or economic value of the group. There are no changes to the
dividend expectations or strategy and capability for future M&A.
IFRS 17 only applies to those policies of the group that are classified as
'insurance contracts', which equates to 42% of the group's total policyholder
liabilities at the end of June 2023. The remaining contracts are classified
as investment business, which are valued under IFRS 9 'Financial Instruments',
and is also effective for the group for this period. Under IFRS 9, there is
no impact to the results from how these liabilities have been previously
valued under IAS 39. A key difference between the measurement of contracts
under IFRS 9 and IFRS 17 is that investment contracts equate to unit value
under IFRS 9 and their value therefore does not take into account future
profit, whereas insurance contracts contain prudence in the form of the risk
adjustment (RA) and contractual service margin (CSM).
The group's net equity position has increased at 31 December 2022 under IFRS
17 compared to that reported under IFRS4, thereby lowering the gearing ratio
to 30.3% compared to 37.6% under IFRS 4. The gearing ratio at HY 23 is 29.5%.
How are profits earned under IFRS 17?
A fundamental concept introduced by IFRS 17 is the contractual service margin
(CSM). This represents the unearned profit that an entity expects to earn on
its insurance contracts as it provides insurance services.
The CSM embodies two principles:
1. An insurer must spread expected profits for profitable business
written over time.
This spread profit forms the CSM which can only be recognised in the income
statement as and when insurance services are provided. The CSM consequently
represents the expected amount of profits that have not yet been earned from
the insurance business of the group.
2. An insurer must recognise the expected losses for loss-making
business immediately.
An insurer cannot establish a "negative CSM" and defer loss recognition into
the future.
IFRS BALANCE SHEET
As at 31 December 2022 the transition to IFRS 17 has created a £52m increase
in IFRS net equity compared with the previously stated IFRS 4 position.
Total net equity as at 30 June 2023 is £362m and we have a CSM, which
represents unrecognised future insurance profits, of £157m. The adoption
of IFRS 17 has affected our gearing ratio, and whilst Fitch have not stated
how they will calculate leverage under IFRS 17 they have indicated that the
calculation will include adding back the CSM to the equity denominator in its
calculation. On this basis the gearing ratio as at 30 June 2023 is 29.5%
which is significantly lower than the most recent ratio reported prior to IFRS
17 (31 December 2022: 37.6%).
Some analysis has been provided below on the IFRS balance sheet of the group
on an IFRS 17 basis:
HOW IFRS 17 IMPACTS NET EQUITY AT DECEMBER 2022
£m
IFRS 4: shareholder equity 31 Dec 2022 333.0
Remeasurement of liabilities 285.4
Creation of CSM (102.8)
Creation of risk adjustment (32.0)
Other asset changes inc deferred tax and AVIF (99.0)
IFRS 17: shareholder equity 31 Dec 2022 384.6
Under IFRS 17, the restated shareholder net equity at 31 December 2022 has
increased by £52m compared with as previously reported.
The re-measurement of insurance contract liabilities at that date has added
£150m of that growth. This uplift includes £103m of CSM (i.e. future
profits) that will be released to the income statement as the associated
future insurance services are provided.
A consequence of applying IFRS 17 is that the group has also re-measured
certain intangible assets (and their associated tax balances) that were
previously recognised on previous acquisitions that included insurance
contracts. These assets at the time essentially represented future profits,
but under IFRS 17 these are now reflected in the CSM.
HOW THE CSM HAS MOVED IN THE PERIOD
£m
CSM: 1 Jan 2023 102.9
Interest accreted to CSM 1.8
Assumption & experience variances 4.0
New business CSM 5.8
Release of profit (9.8)
Acquisition CSM 55.7
Foreign exchange rate impacts (3.4)
CSM: 30 Jun 23 157.0
The group has added £54m of CSM (future profits) in the 6 months to 30 June
2023.
The increase is largely driven by the two deals in the period, with the
Conservatrix portfolio acquisition adding £45m and the Canada Life
arrangement adding £10m.
The movement in the period also includes:
- a £10m reduction which reflects the release to profit in the
period as the insurance services are provided
- £6m of new business CSM, reflecting the future profits arising
on profitable new business written in the period.
Other smaller movements including the impact of foreign exchange, changes in
assumptions and the "interest" on unwinding the discounting that is embedded
within the opening CSM valuation.
HOW DOES IFRS 17 COMPARE TO SOLVENCY II AND ECV?
£m
EcV 523.2
Investment business value (105.1)
Different treatment of expenses 55.2
Technical & other 18.6
Tax (12.3)
IFRS 17 net equity + nCSM 479.6
A lot of the principles and underlying technical decisions are consistent
across EcV and IFRS, as they are based on common foundations; however, there
is one fundamental difference in how investment contracts are valued. For
investment contracts, expected future profits on existing policies are not
recognised in the IFRS balance sheet, with profits being reported as they
arise; this is in contrast to EcV, where they are fully recognised on the
balance sheet, subject to contract
boundaries.
As such, at Chesnara, we believe that due to the hybrid nature of a portfolio,
EcV and Solvency II, alongside cash generation, continue to give a more
holistic view of the financial dynamics of the group and are therefore the key
metrics that management use to manage the business.
HOW DOES IFRS 17 IMPACT LEVERAGE
The positive impact of IFRS 17 on net equity has been beneficial to the
group's gearing ratio. Rating agencies will be revisiting their definitions
of gearing for insurance groups as a result of IFRS 17, although these have
yet to be formalised. Fitch has indicated that a gearing ratio that takes
debt divided by debt plus equity, with
the equity denominator adding back the net of tax CSM liability, could be an
acceptable definition. On this basis, the gearing of the group as at 30 June
2023 was 29.5%.
IFRS INCOME STATEMENT
IFRS PRE-TAX PROFIT
£16.0M 30 JUNE 2022 : £54.2M LOSS
IFRS TOTAL COMPREHENSIVE INCOME
£0.2M 30 JUNE 2022 : £29.8M LOSS
Analysis of IFRS result between insurance service and investment results:
Unaudited* Unaudited*
Six months ended Year ended
30 Jun 23 30 Jun 22 31 Dec 22
£m £m £m
Net insurance service result 9.5 3.2 12.1
Net investment result 25.0 (46.2) (58.8)
Fee, commission and other operating income 48.5 32.2 73.3
Other operating expenses (65.5) (48.6) (93.4)
Financing costs (5.5) (4.6) (10.5)
Profit arising on business combinations and portfolio acquisitions 4.0 9.9 15.4
Profit before income taxes 16.0 (54.2) (61.9)
Income tax (charge)/credit (0.4) 22.4 28.6
Profit for the period after tax 15.6 (31.7) (33.3)
Foreign exchange (loss)/gain (15.3) 1.9 7.0
Other comprehensive income (0.1) - 0.7
Total comprehensive income 0.2 (29.8) (25.6)
Movement in CSM 54.2 6.0 (6.1)
*We have decided not to include a review opinion in these half year financial
statements. Our decision assessed the process impact risk in comparison to the
relatively limited scope of the half year review, with the focus instead being
on completion of audit procedures over the restated balance sheets under IFRS
17 and IFRS 9 for the years ended 31 December 2021 and 31 December 2022.
IFRS REPORTING CATEGORY INSIGHT
Net insurance service result The net insurance service result of £9.5m is up £6.3m compared to the same
period in 2022, driven by a combination of higher CSM amortisation of £9.7m
(HY 2022 £8.1m) plus improved experience and loss component effects of £2.4m
loss (HY 2022 £7.2m loss). The latter has largely been as a result of an
improved performance from Waard.
At the close of the period the CSM of the group amounted to £157m, having
increased by £54m since the start of the year. This remaining CSM will be
earned over the cover period of the policies to which this relates.
The net insurance service result comprises the revenue and expenses from
providing insurance services to policyholders and ceding insurance business to
reinsurer's and is in respect of current service only. Assumption changes are
therefore excluded from the insurance result, unless the CSM for a given
portfolio of contracts falls below zero; thereby in a 'loss component'
position. Economic impacts are also excluded from the insurance service
result.
Movement in CSM During the period to 30 June 2023, the CSM has increased by £54.2m. The key
components of this increase are £55.7m of new CSM through the group's two
acquisitions in the period and £6m of additional CSM arising from new
business, offset by £10m released to the income statement.
The movement in CSM is important to consider alongside the income statement.
New CSM represents future profits that are expected to be released to the
income statement over time and whilst a lot of the costs associated with
generating this new CSM are recognised in the year, the expected profit is
deferred over the life of the products.
Net investment result The positive investment result in the year to date, is reflective of
investment market recoveries, with rising bond yields, improved equity returns
and narrowing credit spreads being the main contributors. The comparative
period in 2022 was adversely impacted by falling equity markets, following the
Russian invasion of Ukraine.
The net investment result contains the investment return earned on all assets
together with the financial impacts of movements in insurance and investment
contract liabilities.
Fee, commission and other operating income The year-to-date figures are an improvement on the 2022 six-month comparative,
reflecting the fact that the current year to date number includes a full six
months of fee income generated by CASLP within the UK, whereas the June 2022
number only included two months of income, post the CASLP acquisition in late
April 2022. Movestic also contributed to the improvement on the comparative
figure, as higher assets under management values as a result of market
improvements generated higher fund rebate income.
The most significant item in this line is the fee income that is charged to
policyholders in respect of the asset management services provided for
investment contracts. There is no income in respect of insurance contracts ion
this line, as this is all now reported in the insurance result
Other operating expenses The expenses incurred in the first six months of 2023 are higher than the
corresponding six months in 2022. This is due to a number of factors. In
Movestic, the expense in respect of the yield tax on policyholder funds has
increased significantly, in line with the underlying gains on the policyholder
funds, due to improving economic factors.
In the UK, costs have increased when comparing to the half year and full year
comparatives, due to the acquisition of CASLP, which has a full six months of
expenses in 2023, compared to two months in 2022. Similarly, expenses have
increased in Waard, following the acquisition of the Conservatrix book in
January 2023. The parent company has also seen an increase in expenses, due to
project related expenditure and strengthening of the central governance
oversight team..
Other operating expenses consist of costs relating to the management of the
group's investment business, non-attributable costs relating to the group's
insurance business and other certain one-off costs such as project costs.
Other items of note are the amortisation of intangible assets in respect of
investment business and the payment of yield tax relating to policyholder
investment funds in Movestic, for which there is a corresponding income item
within the fee income line.
Financing costs This predominantly relates to the cost of servicing our Tier 2 corporate debt
notes which were issued in early 2022. Further details can be found in Note 12
of the financial statements.
Profit arising on business combinations and portfolio acquisitions On 1 January 2023, Chesnara successfully completed the acquisition of the
insurance portfolio of Conservatrix, a specialist provider of life insurance
products in the Netherlands. This gave rise to a day 1 gain of £4.0m.
Income tax In 2022, the large pre-tax losses generated deferred tax credits, particularly
in the UK, in respect of investment and trading losses. The tax charge in the
Income tax consists of both current and deferred taxes. current year to date is similarly impacted by deferred tax movements on
investment movements and non-taxable profits in Movestic, which instead are
subject to a yield tax charge.
Foreign exchange The IFRS result of the group reflects a foreign exchange loss in the period, a
consequence of sterling appreciation, particularly against the Swedish krona
and to a lesser extent against the euro.
Other comprehensive income This represents the impact of movements in the valuation of an investment
property held in our Dutch division.
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.
Strategy and Risk Appetite
Chesnara group and its divisions have a defined risk strategy and supporting
risk appetite framework to embed an effective risk management framework,
culture and processes at its heart and to create a holistic, transparent and
focused approach to risk identification, assessment, management, monitoring
and reporting.
The Chesnara board approves a set of risk preferences which articulate, in
simple terms, the desire to increase, maintain, or reduce the level of risk
taking for each main category of risk. The risk position of the business is
monitored against these preferences using risk tolerance limits, where
appropriate, and they are taken into account by the management teams across
the group when taking strategic or operational decisions that affect the risk
profile.
Risk and Control Policies
Chesnara has a set of Risk and Control Policies that set out the key policies,
processes and controls to be applied. The Chesnara board approves the
review, updates and attestation of these policies at least annually.
Risk Identification
The group maintains a register of risks which are specific to its activity and
scans the horizon to identify potential risk events (e.g. political; economic;
technological; environmental, legislative & social).
On an annual basis the board approves the materiality criteria to be applied
in the risk scoring and in the determination of what is considered to be a
principal risk. At least quarterly the principal and emerging risks are
reported to the board, assessing their proximity, probability and potential
impact.
Own Risk and Solvency Assessment (ORSA)
On an annual basis, or more frequently if required, the group produces a group
ORSA Report which aggregates the divisional ORSA findings and supplements
these with an assessment specific to group activities. The group and
divisional ORSA policies outline the key processes and contents of these
reports.
The Chesnara board is responsible for approving the ORSA, including steering
in advance how the assessment is performed and challenging the results.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of and
attestation to the effectiveness of the risk management system. The assessment
considers the extent to which the risk management system is embedded.
The Chesnara board is responsible for monitoring the Risk Management System
and its effectiveness across the group. The outcome of the annual review is
reported to the group board which make decisions regarding its further
development.
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 section has been updated to reflect Chesnara's latest views on the
potential implications of climate change risk and wider developments and
activity in relation to Environmental, Social and Governance (ESG).
Chesnara has embedded climate change risk within the group's risk framework
and includes a detailed assessment as part of the group's regular ORSA
exercise, concluding that the group is not materially exposed to climate
change risk.
UKRAINE CONFLICT
The ongoing invasion of Ukraine by Russia continues to be an area of emerging
risk for Chesnara group in the sense that it is an evolving situation and has
potential implications for Chesnara's Principal risks.
MACROECONOMIC VOLATILITY
Geopolitical instability and conflict remains a significant risk to global
economic growth. Economic volatility and uncertainty remains high as Central
Banks tackle persistently high inflation, particularly in the UK. Most
economies have seen yield curve increases not seen since the 1980s and
prospects of this stabilising are very dependent on inflation.
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.
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.
CLIMATE CHANGE RISK With greater global emphasis being placed on environmental and social factors
when selecting investment strategies, the group has a particular emerging
exposure to 'transition risk' arising from changing preferences and influence
of, in particular, institutional investors. This has the potential to result
in adverse investment returns on any assets that perform poorly as a result of
'ESG transition'. Chesnara has established a 'Sustainability Programme' to
embed Chesnara's Sustainability strategy.
UKRAINE CONFLICT The conflict in Ukraine / Russia brings additional economic uncertainty and
volatility to financial markets, including the potential for higher
inflationary pressures in the short term (given impacts on the supply chain).
The group has no direct 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.
MACRO-ECONOMIC VOLATILITY There remains significant economic volatility globally and particularly in the
UK with more persistent inflation, and so there is a heightened risk of poor
mid-term performance on shareholder and policyholder assets.
Chesnara continues to operate within its stated Risk Appetite but is currently
undertaking a review of its interest rate matching approach given the recent
yield curve paradigm shift.
REGULATORY CHANGE RISK
DESCRIPTION The risk of adverse changes in industry practice/regulation, or inconsistent
application of regulation across territories.
RISK APPETITE The group aims to minimise any exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Chesnara currently operates in three 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 Consumer Duty, Operational Resilience,
Climate Change/ESG 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.
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.
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).
MACRO-ECONOMIC VOLATILITY Cost of living pressures could give rise to higher surrenders and lapses
should customers face personal finance pressures and not be able to afford
premiums or need to access savings. Any downturn in the property market could
reduce protection business sales particularly in the Netherlands. Currently
there has been no evidence of changes in behaviours other than a slow down
sales in Netherlands. Chesnara continues to monitor closely and respond
appropriately
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.
MACRO-ECONOMIC VOLATILITY High inflation and the energy crisis has driven increases in supplier costs,
particularly in the UK with its outsourcing model. Wage inflation is generally
lower than headline inflation but is currently much higher than the long term
valuation assumptions, with consideration needed regarding the balancing of
employee remuneration versus turnover /retention / motivation risks / tight
labour markets. The risk is currently higher in the UK than in Sweden and
Netherlands since the UK inflation has been more persistent.
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.
Operational resilience remains a key focus for the business and high on the
regulatory agenda following the regulatory changes published by the BoE, PRA
and FCA. Chesnara continues to progress activity under the UK operational
resilience project.
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.
UKRAINE CONFLICT The ongoing invasion of Ukraine by Russia heightens the risk of cyber crime
campaigns originating from Russia, with some suppliers reporting an increase
in information security threats which some are saying is state sponsored.
Although Chesnara is not 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.
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.
MACRO-ECONOMIC VOLATILITY Some of Chesnara's new business is linked to the property market such as the
mortgage term protection product in the Netherlands. Where there has been a
slow down in the property market, we have seen a corresponding slow down in
sales of such products, as expected. There is a risk that this persists
longer than expected resulting in lower sales than expected in the business
plan.
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 Given the global focus on climate change as well as the significant momentum
in the finance industry, the group is exposed to strategic and reputational
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. Chesnara supports the UN Sustainable Development Goals (SDGs),
including Climate Action. We have set our long term net zero targets and
during 2023, we will produce our transition plan and the all-important shorter
term 2025 and 2030 targets.
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 and Chesnara has confirmed that there are no obvious links with Russia
through its shareholders or stockbrokers.
GOING CONCERN
Going concern
After making appropriate enquiries, including consideration of the ongoing
high inflation environment and the impacts of the ongoing invasion of Ukraine
on the group's operations and financial position and prospects, the directors
confirm that they are satisfied that the company and the group have adequate
resources to continue in business for the foreseeable future. Accordingly,
they continue to adopt the going concern basis in the preparation of the
financial statements.
In performing this work, the board has considered the current solvency and
cash position of the group and company, coupled with the group's and company's
projected solvency and cash position as highlighted in its most recent
business plan and Own Risk and Solvency Assessment (ORSA) process. These
processes consider the financial projections of the group and its subsidiaries
on both a base case and a range of stressed scenarios, covering projected
solvency, liquidity, EcV and IFRS positions. In particular these projections
assess the cash generation of the life insurance divisions and how these flow
up into the Chesnara parent company balance sheet, with these cash flows being
used to fund debt repayments, shareholder dividends and the head office
function of the parent company. Further insight into the immediate and
longer-term impact of certain scenarios, covering solvency, cash generation
and Economic Value, can be found in the Chesnara Half Year Report for the six
months ended 30 June 2023, under the section headed 'Capital Management
Sensitivities'. The directors believe these scenarios will encompass any
potential future impact of high inflation and the Ukraine crisis 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 and ongoing Ukraine
crisis have the potential to cause further significant global economic
disruption, the group and the company remain well capitalised and has
sufficient liquidity. As such we can continue to remain confident that the
group will continue to be in existence in the foreseeable future. The
information set out in the Capital Management section indicates a strong
Solvency II position at 30 June 2023, as measured at both the individual
regulated life company levels and at the group level. As well as being
well-capitalised the group also has a healthy level of cash reserves to be
able to meet its debt obligations as they fall due and does not rely on the
renewal or extension of bank facilities to continue trading. This position
was further enhanced in early 2022, when the company announced the
successful pricing of its inaugural debt capital markets issuance of £200m
Tier 2 Subordinated Notes, the net proceeds of which 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.
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
20 September 2023 20 September 2023
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Unaudited Unaudited Year ended 31 December
Six months ended
30 June
2023 2022 restated 2022 restated
£000 £000 £000
Insurance revenue 118,048 106,673 224,031
Insurance service expense (102,388) (99,288) (205,872)
Net income expenses from reinsurance contracts held (6,144) (4,179) (6,036)
Insurance service result 9,516 3,206 12,123
Net investment return 603,012 (1,588,102) (1,556,870)
Net finance (expenses) / income from insurance contracts issued (151,895) 483,275 547,694
Net finance expenses from reinsurance contracts held (2,527) (9,208) (13,491)
Net change in investment contract liabilities (356,895) 725,977 570,974
Change in liabilities relating to policyholders' funds held by the group (66,705) 341,856 392,884
Net investment result 24,990 (46,202) (58,809)
Fee, commission and other operating income 48,485 32,201 73,363
Total revenue net of investment result 82,991 (10,795) 26,677
Other operating expenses (65,501) (48,642) (93,405)
Total income less expenses 17,490 (59,437) (66,728)
Financing costs (5,508) (4,583) (10,549)
Profit arising on business combinations and portfolio acquisitions 3,969 9,866 15,361
Profit / (loss) before income taxes 15,951 (54,154) (61,916)
Income tax(expense) / credit (420) 22,443 28,627
Profit / (loss) for the period 15,531 (31,711) (33,289)
Items that may be reclassified subsequently to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign (15,315) 1,876 6,982
operations
Revaluation of land and building (54) 25 674
Other comprehensive (loss) / income for the period, net of tax (15,369) 1,901 7,656
Total comprehensive income / (loss) for the period 162 (29,810) (25,633)
Basic earnings per share (based on profit or loss for the period) 10.32p (21.12)p (22.16)p
Diluted earnings per share (based on profit or loss for the period) 10.25p (20.87)p (21.90)p
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
Unaudited Unaudited as at 31 December Unaudited
as at 30 2022 as at 31 December
June 2021
2023
restated restated
£000 £000 £000
Assets
Intangible assets 114,820 124,186 77,665
Property and equipment 7,539 7,893 7,830
Investment properties 98,749 94,481 1,071
Insurance contract assets 10,190 - -
Reinsurance contract assets 179,341 193,952 242,343
Amounts deposited with reinsurers 32,113 32,803 38,295
Financial investments 11,008,759 10,566,147 9,176,010
Derivative financial instruments 3,160 141 264
Other assets 48,897 46,041 47,316
Deferred tax assets 49,908 10,179 922
Cash and cash equivalents 144,284 175,293 70,086
Total assets 11,697,760 11,251,116 9,661,802
Liabilities
Insurance contract liabilities 4,104,519 3,821,101 4,032,070
Reinsurance contract liabilities 12,807 13,536 28,812
Other provisions 16,947 8,651 1,712
Investment contracts at fair value through income 5,695,738 5,660,778 3,981,976
Liabilities relating to policyholders' funds held by the group 1,116,495 986,768 990,700
Lease contract liabilities 1,474 1,233 2,018
Borrowings 209,344 211,976 47,185
Derivative financial instruments 127 3,850 -
Deferred tax liabilities 33,941 31,770 10,567
Deferred income 3,022 3,470 4,473
Other current liabilities 140,788 123,373 118,633
Bank overdrafts 206 19 256
Total liabilities 11,335,408 10,866,525 9,218,402
Net assets 362,352 384,591 443,400
Shareholders' equity
Share capital 7,503 7,502 7,496
Merger reserve 36,272 36,272 36,272
Share premium 142,387 142,332 142,085
Other reserves (451) 14,918 7,262
Retained earnings 176,641 183,567 250,285
Total shareholders' equity 362,352 384,591 443,400
Approved by the Board of Directors and authorised for issue on 20 September
2023 and signed on its behalf by:
Luke Savage Steve Murray
Chairman Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Unaudited Unaudited
Six months ended 30 June Six months
ended 30 June
2023 2022
£000 £000
Profit / (loss) for the period 15,531 (31,711)
Adjustments for:
Depreciation of property, plant and equipment 724 701
Amortisation of intangible assets 5,654 3,384
Interest on lease liabilities 27 17
Share based payment 342 504
Tax paid / (recovery) 1,944 (36,419)
Interest receivable (8,323) (5,696)
Dividends receivable (7,825) (1,461)
Interest expense 4,750 9,163
Fair value (gains)/losses on financial assets (586,864) 1,580,945
Profit on business combinations and portfolio acquisitions (3,969) (9,866)
Loss on sale of fixed assets 149 -
Increase in intangible assets related to investment contracts (4,187) (314)
Interest received 8,914 6,216
Dividends received 7,481 1,292
Changes in operating assets and liabilities:
Decrease/(increase) in financial assets 510,950 (102,886)
Decrease in reinsurers contract assets 1,075 309
Decrease in amounts deposited with reinsurers 690 4,148
(Increase)/decrease in other assets (17,639) 16,827
Decrease in insurance contract liabilities (62,754) (550,840)
Decrease in investment contract liabilities (35,115) (836,471)
Increase in reinsurance contract liabilities 9,867 1,332
Increase/(decrease) in provisions 144,125 (92,928)
(Decrease)/Increase in other current liabilities (4,295) 1,289
Cash utilised from operations (18,748) (42,465)
Income tax paid (213) (9,390)
Net cash generated from operating activities (18,961) (51,855)
Cash flows from investing activities
Business combinations 31,415 49,251
Development of software (1,130) -
Disposal of investment properties 1,987 2,758
Purchases of property and equipment (1,513) (1,005)
Net cash generated by investing activities 30,759 51,004
Cash flows from financing activities
Proceeds from issue of share premium 56 -
Proceeds from Tier 2 debt - 200,000
Repayment of borrowings - (31,273)
Repayment of principal under lease liabilities (186) (385)
Dividends paid (22,799) (22,103)
Interest paid (4,750) (9,178)
Net cash (utilised)/generated by from financing activities (27,679) 137,061
Net (decrease)/increase in cash and cash equivalents (15,881) 136,210
Cash and cash equivalents at beginning of period 175,274 69,830
Effect of exchange rate changes on cash and cash equivalents (15,315) 718
Cash and cash equivalents at end of the period 144,078 206,758
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Unaudited - six months ended 30 June 2023
Share capital Share premium Merger reserve Other reserves Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2023 restated 7,502 142,332 36,272 14,918 183,567 384,591
Profit for the period - - - - 15,531 15,531
Dividends paid - - - - (22,799) (22,799)
Foreign exchange translation differences - - - (15,315) - (15,315)
Revaluation of land and building - - - (54) - (54)
Issue of share capital 1 - - - - 1
Issue of share premium - 55 - - - 55
Share based payment - - - - 342 342
Equity shareholders' funds at 30 June 2023 7,503 142,387 36,272 (451) 176,641 362,352
Unaudited - six months ended 30 June 2022
Share capital Share premium Merger reserve Other reserves Retained earnings Total
£000 £000 £000 £000 £000 £000
Equity shareholders' funds at 1 January 2022 (as previously stated) 7,496 142,085 36,272 7,262 265,052 458,167
Transition adjustments (note 3) - - - - (14,767) (14,767)
Equity shareholders' funds at 1 January 2022 (restated) 7,496 142,085 36,272 7,262 250,285 443,400
Loss for the period - - - - (31,711) (31,711)
Dividends paid - - - - (22,103) (22,103)
Foreign exchange translation differences - - - 1,876 - 1,876
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 9,163 196,975 391,991
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of preparation
The annual financial statements of Chesnara plc 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 International Accounting Standard 34 'Interim Financial
Reporting'.
This is the first set of the group's financial statements in which 'IFRS 17
Insurance contracts' (IFRS 17) and 'IFRS 9 Financial instruments' (IFRS 9)
have been applied. The changes to significant accounting policies arising
from the adoption of IFRS 17 and IFRS 9 are set out in Note 2.
The results from the full year 2022 and half year 2022 have been restated to
reflect the retrospective application of IFRS 17 and IFRS 9 from 1 January
2022. The comparative figures for the financial year ended 31 December 2022
are not the group's statutory accounts for that financial year but are derived
from those accounts. 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.
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 directors have elected to not
obtain a review opinion over the half year 2023 financial statements by the
group's auditor, Deloitte. In the opinion of the directors it is more
optimal for both Deloitte and Chesnara group management to focus resources on
completing the audit procedures over the restated balance sheets under IFRS17
and IFRS9 for both the year ended 31 December 2021 and 31 December 2022.
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 Half Year Report for the six months ended 30 June
2023.
Judgements and estimates
The critical accounting judgements and key sources of estimation and
uncertainty and their potential impact on the group have been updated and
evaluated by management in the preparation of these half year condensed
financial statements. Note 2 provides details of the critical accounting
judgements and estimates that now exist for the group following the
application of IFRS 17 and IFRS 9 in these condensed financial statements.
2 Changes in significant accounting policies and significant
judgements, estimates and assumptions
The group has initially applied IFRS17 and IFRS9, including any consequential
amendment to other standards, from 1 January 2023. The introduction of these
standards mean there are significant changes to the accounting for insurance
and reinsurance contracts and financial instruments, although the impact for
the group in respect of IFRS9 is less significant. As a result of these
standards becoming effective for the group from 1 January 2023, the group has
restated certain comparative amounts and restated the opening shareholder
equity position as at 1 January 2022. The nature and effects of the key
changes in the group's accounting policies resulting from its adoption of
IFRS17 and IFRS9 are set out below.
(a) IFRS 17 - Insurance contracts
(i) Components of insurance and reinsurance contracts
'IFRS17 Insurance Contracts' is effective for annual reporting periods
beginning on or after 1 January 2023 and brings about significant changes in
the recognition, measurement and presentation of insurance and reinsurance
contracts for the group.
IFRS17 requires insurance liabilities to be broken down into separate
component parts, consisting of the 'Liability for Remaining Coverage' (LRC)
and the 'Liability for Incurred Claims' (LIC).
The LRC comprises the present value of future cash flows (pvFCF) and also
introduces a risk adjustment (RA) for non-financial risk, measuring
uncertainty in the amount and timing of the cash flows. The pvFCF and RA are
collectively described as 'fulfilment cash-flows' and the movements in the
fulfilment cash-flows either impact the profit and loss or the Contractual
Service Margin (CSM); the final component of the LRC. The CSM represents the
future unearned profits of the insurance contracts and as such will be a key
measure in the future reporting of insurance contracts. In the case that a
group of contracts is onerous (ie, CSM < zero), a loss component is
established instead of a CSM, with losses on onerous contracts recognised in
profit or loss immediately.
The LIC represents outstanding claims for insured events that have already
occurred. Any subsequent changes in the incurred value of outstanding claims
are recognised in profit or loss.
For reinsurance contracts held, the reinsurance contract assets will consist
of the 'Asset for Remaining Coverage' (ARC) and the 'Asset for Incurred
Claims' (AIC). The components of the ARC are similar to the LRC, with the
following distinct differences:
- The risk adjustment for non-financial risk represents the amount
of risk being transferred by the cedant to the reinsurer;
- The CSM represents the net cost or net gain on purchasing
reinsurance and can be positive or negative; and
- To the extent that onerous contracts are reinsured, a loss
recovery component shall be established at the date the underlying onerous
losses are recognised to cater for the expected recoveries of the underlying
losses from the reinsurance contracts held.
(ii) Presentation in the profit and loss and balance sheet
IFRS17 has a significant impact on the presentation of the income statement
with a separate insurance service result and investment result.
Under IFRS 17, for contracts not measured under the 'Premium Allocation
Approach' (PAA), the group recognises insurance revenue as it satisfies its
performance obligations - i.e. as it provides services under groups of
insurance contracts. The insurance revenue relating to services provided for
each year represents the total of the changes in the LRC that relate to
services for which the group expects to receive consideration. This mainly
comprises the release of expected claims, the risk adjustment expired and the
CSM amortised in the period.
For contracts measured under the PAA, the insurance revenue for each period is
the amount of expected premium receipts for providing services in the period.
'Insurance service expenses' in each reporting period represents the cost of
providing those services, broadly comprising incurred claims and benefits and
expenses that are directly attributable to providing the service in the
period.
'Net income (expenses) from reinsurance contracts' generally comprises
reinsurance expenses and the recovery of incurred claims. Reinsurance expenses
are recognised similarly to insurance revenue, with the amount of reinsurance
expenses representing an allocation of the premiums paid to reinsurers that
depicts the received insurance contract services in the period.
Together, the insurance revenue, insurance service expenses and net income
(expenses) from reinsurance contracts make up the insurance service result,
presented on the face of the income statement. 'Non-distinct investment
components' of insurance contracts represent amounts that the group must pay
out in all circumstances and are not included within insurance revenue or
elsewhere within the profit or loss account, being recognised instead directly
in the balance sheet.
The 'investment result' comprises the 'net investment return', changes in
investment contract liabilities and policyholder funds held by the group and
insurance finance income or expense (IFIE) for both insurance and reinsurance
contracts. The IFIE broadly includes the effect of changes in the
time value of money and the effect of financial risk and changes in financial
risk.
Portfolios of insurance contracts that are assets and those that are
liabilities, and portfolios of reinsurance contracts that are assets and those
that are liabilities, are presented separately in the statement of financial
position. Any assets or liabilities recognised for cash flows arising before
the recognition of the related group of contracts (including any assets for
insurance acquisition cash flows) are included in the carrying amount of the
related portfolios of contracts.
(iii) Fulfilment cash flows
The fulfilment cash flows are the current estimates of the future cash flows
within the contract boundary of a group of contracts that the group expects to
collect from premiums and pay out for claims, benefits and expenses, adjusted
to reflect the timing and the uncertainty of those amounts.
Fulfilment cash flows comprise:
· estimates of future cash flows;
· an adjustment to reflect the time value of money and the
financial risks related to future cash flows, to the extent that the financial
risks are not included in the estimates of future cash flows; and
· a risk adjustment for non-financial risk.
In estimating future cash flows, the group incorporates, in an unbiased way,
all reasonable and supportable information that is available without undue
cost or effort at the reporting date. This information includes both internal
and external historical data about claims and other experience, updated to
reflect current expectations of future events. The estimates of future cash
flows reflect the group's view of current conditions at the reporting date, as
long as the estimates of any relevant market variables are consistent with
observable market prices.
The estimates of future cash flows are adjusted using the current discount
rates to reflect the time value of money and the financial risks related to
those cash flows, to the extent not included in the estimates of cash flows.
The discount rates reflect the characteristics of the cash flows arising from
the groups of insurance contracts, including timing, currency and liquidity of
cash flows. The determination of the discount rate that reflects the
characteristics of the cash flows and liquidity characteristics of the
insurance contracts requires significant judgement and estimation.
Significant judgements, estimates and assumptions - Discounting, Investment
Return & Inflation
Cashflows are discounted using currency-specific, risk-free yield curves
adjusted for the characteristics of the cash flows and the liquidity of the
insurance contracts. The group applies a 'bottom-up' approach to determining
discount rates and follows the methodology used by the PRA and EIOPA to
determine risk-free yield curves and ultimate forward rates for regulatory
solvency calculations. To reflect the liquidity or otherwise of the insurance
contracts, the risk-free yield curves are adjusted by an illiquidity premium.
For certain Dutch 'savings mortgage' products where there is a direct
connection to the policyholder's mortgage and the premiums and crediting rate
are set such that the account value will be equal to the balance on the loan
then the cashflows are discounted using a curve derived from mortgage rates
available in the market.
When the present value of future cash flows is estimated using stochastic
modelling, the cash flows are discounted at scenario-specific rates
calibrated, on average, to be the risk free rates as adjusted for illiquidity.
Inflation rate are set at a market consistent level.
Risk adjustments for non-financial risk are determined to reflect the
compensation that the individual issuing entity would require for bearing
non-financial risk, separately for the non-life and other contracts, and are
allocated to groups of contracts based on an analysis of the risk profiles of
the groups.
Significant judgements, estimates and assumptions - Risk adjustment
The group calculates the risk adjustment using a 'cost of capital' (CoC)
methodology similar to the PRA and EIOPA Solvency II Risk Margin approach,
whilst incorporating risk drivers consistent with the contract boundaries
applicable under IFRS 17. Each entity determines a risk adjustment by applying
a CoCl rate to the amount of capital required for each future reporting date
and discounting the result using risk-free rates adjusted for illiquidity.
The required capital is determined using stresses and diversification factors
aligned to the relevant Solvency II methodologies and allocated to groups of
contracts in a way that is consistent with the risk profiles of the groups.
The CoC rate reflects that used in the group's own EcV reporting, currently
3.25%pa (2022: 3.25%).
To determine the risk adjustments for non-financial risk for reinsurance
contracts, the group applies these techniques both gross and net of
reinsurance and derives the amount of risk being transferred to the reinsurer
as the difference between the two results.
Over a one year time horizon and on a net of reinsurance basis, this risk
adjustment corresponds to a confidence level of 82%. This is equivalent to
estimating that the probability that any changes in best estimate liabilities
from non-financial risk over the next year will be less than 82%."
(iv) Transition
IFRS17 is required to be applied retrospectively unless it is impracticable to
do so due to the lack of available and supportable historical information. For
a fully retrospective approach (FRA) the CSM at the date of transition is
calculated by rolling forward the CSM determined at inception of the contract
as if the accounting policies under IFRS17 had always applied. Where the FRA
is impracticable, a choice between a 'modified retrospective approach' (MRA)
and a 'fair value approach' (FVA) is permitted.
The group has been able to apply the FRA to its Dutch business divisions with
the inception date for the contracts acquired being the date of historical
acquisition into the group. The FVA has been applied for CA plc in the UK
where the length of time elapsed since acquisition into the group has meant
that the retrospective application of IFRS17 is not possible or practicable.
Note 3 provides details of the quantitative impact of applying IFRS 17 in
these financial statements as at 1 January 2022.
Significant judgements, estimates and assumptions - Fair value methodology
As the fully retrospective approach was impracticable for CA, the group have
elected to apply a fair value approach as permitted by IFRS17.C5 to calculate
the CSM at the transition date.
The CSM is defined as the difference between the fair value of a group of
insurance contracts (i.e. the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date) and the fulfilment cash flows measured
at that date. The CSM using a fair value approach can therefore be expressed
as being equal to the price required to transfer the business less the
fulfilment cash flows under IFRS17.
The price required to transfer the business includes, but is not necessarily
limited to:
(i) a market participant's assessment of risk adjusted
realistic liabilities; plus
(ii) a market participant's compensation for holding
capital to support those risks; plus
(iii) any margin for non-performance risk required by the
market participant.
The group has assumed that:
(i) the market participants risk adjusted liabilities is
equal to: CA's IFRS 17 pvFCF plus CA's IFRS 17 RA;
(ii) the market participants compensation for holding
capital is based on a CoC approach using the projected SII required capital
plus a solvency buffer; and
(iii) the market participants assessment of non-performance
risk is zero.
The above assumptions result in the CSM being equal to the market
participant's compensation for holding capital.
(v) Insurance contract definition, classification and
measurement models
Contracts under which the group accepts significant insurance risk from a
policyholder by agreeing to compensate the policyholder if a specified
uncertain future event adversely affects the policyholder are classified as
insurance contracts. Contracts held by the group under which it transfers
significant insurance risk related to underlying insurance contracts are
classified as reinsurance contracts. Insurance and reinsurance contracts also
expose the group to financial risk.
Contracts that have a legal form of insurance, but do not transfer significant
insurance risk and expose the group to financial risk are classified as
investment contracts and follow accounting for financial instruments as per
IFRS9.
Under IFRS 17, insurance contracts are classified as direct participating
contracts or contracts without direct participation features. Direct
participating contracts are contracts for which, at inception:
- the contractual terms specify that the policyholder participates
in a share of a clearly identified pool of underlying items;
- the group expects to pay to the policyholder an amount equal to
a substantial share of the fair value returns on the underlying items; and;
- the group expects a substantial proportion of any change in the
amounts to be paid to the policyholder to vary with the change in fair value
of the underlying items.
All other insurance contracts and all reinsurance contracts are classified as
contracts without direct participation features.
The classification of insurance contracts is important as it determines which
measurement model the contracts fall under and therefore impacts subsequent
measurement.
IFRS17 contains three measurement models:
a) General Measurement Model (GMM) - this is the default measurement
model and applies to contracts that do not contain direct participating
features. Reinsurance contracts must be measured under the GMM.
b) Variable Fee Approach (VFA) - this is the measurement model used for
contracts that are classified as contracts with direct participating features.
Such contracts are viewed as creating an obligation to pay policyholders an
amount that is equal to the fair value of underlying items, less a variable
fee for service. The variable fee comprises the groups share of the fair value
of underlying items in the form of investment management service fees. This
measurement approach is a modification of GMM whereby the financial and
economic impacts affecting the entity are taken to the CSM rather than profit
or loss, as is the case under GMM.
c) Premium Allocation Approach (PAA) - for short-duration contracts,
IFRS17 permits a simplified approach which can be applied to contracts that
have a duration of 12 months or less or for which such simplification would
produce a measurement of the LRC that would not differ materially from the one
that would be produced applying GMM. Disclosure requirements are modified for
contracts measured under the PAA.
The implication for subsequent measurement for contracts under GMM and VFA are
outlined further in section (xi).
Significant judgements, estimates and assumptions - Measurement model
classification
Short-term, stand-alone protection business and associated reinsurance is
measured as PAA. Otherwise non-participating business and reinsurance is
measured as GMM whilst most participating business has been deemed to qualify
to be treated as VFA. However, there are some participating products/policies
which, due to the relatively high levels of guarantees or protection benefits
over and above any underlying item, that have been classed as GMM business.
(vi) Aggregation of insurance and reinsurance contracts
Insurance contracts are aggregated into groups for measurement purposes.
Groups of insurance contracts are determined by identifying portfolios of
insurance contracts, each comprising contracts that are subject to similar
risks and are managed together. Each portfolio is divided into annual
cohorts (i.e. by year of issue) and each annual cohort into a maximum of three
groups based on the profitability of contracts:
- any contracts that are onerous on initial recognition;
- any contracts that, on initial recognition, have no significant
possibility of becoming onerous subsequently; and
- any remaining contracts in the annual cohort.
Contracts within a portfolio that would fall into different groups only
because law or regulation specifically constrains the group's practical
ability to set a different price or level of benefits for policyholders with
different characteristics are included in the same group.
Groups of reinsurance contracts are established such that each group comprises
a single contract.
(vii) Recognition
An insurance contract issued by the group is recognised from the earliest of:
- the beginning of its coverage period (i.e. the period during
which the group provides services in respect of any premiums within the
boundary of the contract);
- when the first payment from the policyholder becomes due or, if
there is no contractual due date, when it is received from the policyholder;
and
- when facts and circumstances indicate that the contract is
onerous.
An insurance contract acquired in a transfer of contracts or a business
combination is recognised on the date of acquisition.
When the contract is recognised, it is added to an existing group of contracts
or, if the contract does not qualify for inclusion in an existing group, it
forms a new group to which future contracts are added. Groups of contracts are
established on initial recognition and their composition is not revised once
all contracts have been added to the group.
A group of reinsurance contracts is recognised on the following dates.
- Reinsurance contracts initiated by the group that provide
proportionate coverage: The date on which any underlying insurance contract is
initially recognized, if later than the beginning of the coverage period of
the reinsurance contract.
- Other reinsurance contracts initiated by the group: The
beginning of the coverage period of the group of reinsurance contracts.
However, if the group recognises an onerous group of underlying insurance
contracts on an earlier date and the related reinsurance contract was entered
into before that earlier date, then the group of reinsurance contracts is
recognised on that earlier date.
- Reinsurance contracts acquired: The date of acquisition.
(viii) Derecognition
The group derecognises a contract when it is extinguished - i.e. when the
specified obligations in the contract expire or are discharged or cancelled.
The group also derecognises a contract if its terms are modified in a way that
would have changed the accounting for the contract significantly had the new
terms always existed, in which case a new contract based on the modified terms
is recognised. If a contract modification does not result in derecognition,
then the group treats the changes in cash flows caused by the modification as
changes in estimates of fulfilment cash flows.
(ix) Insurance acquisition cash flows
Insurance acquisition cash flows are cash flows arising from the costs of
selling, underwriting and starting a group of insurance contracts (issued or
expected to be issued) that are directly attributable to the portfolio of
insurance contracts to which the group belongs. Such cash flows are allocated
to groups of insurance contracts using a systematic and rational method and
considering, in an unbiased way, all reasonable and supportable information
that is available without undue cost or effort.
Insurance acquisition cash flows arising before the recognition of the related
group of contracts are recognised as an asset. Assets for insurance
acquisition cash flows arise when they are paid or when a liability is
required to be recognised under a standard other than IFRS 17. Such an asset
is recognised for each group of contracts to which the insurance acquisition
cash flows are allocated. The asset is derecognised, fully or partially, when
the insurance acquisition cash flows are included in the measurement of the
group of contracts.
(x) Initial measurement
On initial recognition, the group measures a group of insurance contracts as
the total of (a) the fulfilment cash flows, which comprise estimates of future
cash flows, adjusted to reflect the time value of money and the associated
financial risks, and a risk adjustment for non-financial risk; and (b) the
CSM. The fulfilment cash flows of a group of insurance contracts do not
reflect the group's non-performance risk.
The risk adjustment for non-financial risk for a group of insurance contracts,
determined separately from the other estimates, is the compensation required
for bearing uncertainty about the amount and timing of the cash flows that
arises from non-financial risk.
The CSM of a group of insurance contracts represents the unearned profit that
the group will recognise as it provides services under those contracts. On
initial recognition of a group of insurance contracts, if the total of (a) the
fulfilment cash flows, (b) any cash flows arising at that date and (c) any
amount arising from the derecognition of any assets or liabilities previously
recognised for cash flows related to the group (including assets for insurance
acquisition cash flows under (ix)) is a net inflow, then the group is not
onerous. In this case, the CSM is measured as the equal and opposite amount of
the net inflow, which results in no income or expenses arising on initial
recognition.
For groups of contracts acquired in a transfer of contracts or a business
combination, the consideration received for the contracts is included in the
fulfilment cash flows as a proxy for the premiums received at the date of
acquisition. In a business combination, the consideration received is the fair
value of the contracts at that date. If the total is a net outflow, then the
group is onerous. In this case, the net outflow is recognised
as a loss in profit or loss, or as an adjustment to goodwill or a gain on a
bargain purchase if the contracts are acquired in a business combination. A
loss component is created to depict the amount of the net cash outflow, which
determines the amounts that are subsequently presented in profit or loss as
reversals of losses on onerous contracts and are excluded from insurance
revenue.
(xi) Subsequent measurement
The carrying amount of a group of insurance contracts at each reporting date
is the sum of the LRC and the LIC. The LRC comprises (a) the fulfilment cash
flows that relate to services that will be provided under the contracts in
future periods and (b) any remaining CSM at that date. The LIC includes the
fulfilment cash flows for incurred claims and expenses that have not yet been
paid, including claims that have been incurred but not yet reported.
The fulfilment cash flows (FCF) of groups of insurance contracts are updated
by the group for current assumptions at the end of every reporting period,
using the current estimates of the amount, timing and uncertainty of future
cash flows and of discount rates. The way in which the changes in estimates of
the FCF are treated depends on which estimate is being updated:
a) changes that relate to current or past service are recognised in profit or
loss; and
b) changes that relate to future service are recognised by adjusting the CSM
or the loss component within the LRC as per the policy below.
For insurance contracts under the GMM, the following adjustments relate to
future service and thus adjust the CSM:
a) experience adjustments - arising from premiums
received in the period that relate to future service and related cash flows
such as insurance acquisition cash flows and premium-based taxes;
b) changes in estimates of the present value of future
cash flows in the LRC, except those described in the following paragraph;
c) differences between any investment component
expected to become payable in the period and the actual investment component
that becomes payable in the period, determined by comparing (i) the actual
investment component that becomes payable in a period with (ii) the payment in
the period that was expected at the start of the period plus any insurance
finance income or expenses related to that expected payment before it becomes
payable; and
d) changes in the risk adjustment for non-financial risk
that relate to future service.
Adjustments (a), (b) and (d) above are measured using discount rates
determined on initial recognition (the locked-in discount rates).
For insurance contracts under the GMM, the following adjustments do not adjust
the CSM:
a) changes in the FCF for the effect of the time value
of money and the effect of financial risk and changes thereof;
b) changes in the FCF relating to the LIC;
c) experience adjustments - arising from premiums
received in the period that do not relate to future service and related cash
flows, such as insurance acquisition cash flows and premium-based taxes; and
d) experience adjustments relating to insurance service
expenses (excluding insurance acquisition cash flows).
For insurance contracts under the VFA, the following adjustments relate to
future service and thus adjust the CSM:
a) changes in the amount of the group's share of the
fair value of the underlying items; and
b) changes in the FCF that do not vary based on the
returns of underlying items:
i. changes in the effect of the time value of money
and financial risks including the effect of financial guarantees;
ii. experience adjustments arising from premiums
received in the period that relate to future service and related cash flows,
such as insurance acquisition cash flows and premium-based taxes;
iii. changes in estimates of the present value of future
cash flows in the LRC, except those described in the following paragraph;
iv. differences between any investment component expected
to become payable in the period and the actual investment component that
becomes payable in the period, determined by comparing (i) the actual
investment component that becomes payable in a period with (ii) the payment in
the period that was expected at the start of the period plus any insurance
finance income or expenses related to that expected payment before it becomes
payable; and
v. changes in the risk adjustment for non-financial
risk that relate to future service.
Adjustments (ii)-(v) are measured using the current discount rates.
For insurance contracts under the VFA, the following adjustments do not adjust
the CSM:
a) changes in the obligation to pay the policyholder the
amount equal to the fair value of the underlying items;
b) changes in the FCF that do not vary based on the
returns of underlying items:
i. changes in the FCF relating to the LIC;
ii. experience adjustments arising from premiums
received in the period that do not relate to future service and related cash
flows, such as insurance acquisition cash flows and premium-based taxes; and
iii. experience adjustments relating to insurance
service expenses (excluding insurance acquisition cash flows).
Significant judgements, estimates and assumptions - CSM coverage units
The CSM at the end of the reporting period is allocated to profit and loss
based on the relevant underlying coverage units where the number of coverage
units in a group is determined by considering, for each contract, the quantity
of the benefits provided under a contract and its expected coverage period.
The quantity of benefits provided is based on the maximum benefit payment
which may become due in a period.
For contracts that provide an investment return or investment related service
the account balance is generally considered the main driver for determining
the amount of service provided in a period. For products that provide an
insurance service the sum assured, in excess of any account balance, is
considered the main driver for determining the amount of insurance service
provided in a period.
(xii) Loss components
The group establishes a loss component of the liability for remaining coverage
for onerous groups of insurance contracts. The loss component determines the
amounts of fulfilment cash flows that are subsequently presented in profit
or loss as reversals of losses on onerous contracts and are excluded from
insurance revenue when they occur. When the fulfilment cash flows are
incurred, they are allocated between the loss component and the liability for
remaining coverage excluding the loss component on a systematic basis.
(xiii) Contract boundaries
The measurement of a group of contracts includes all of the future cash flows
within the boundary of each contract in the group. For insurance contracts,
cash flows are within the contract boundary if they arise from substantive
rights and obligations that exist during the reporting period in which the
group can compel the policyholder to pay premiums or has a substantive
obligation to provide services (including insurance coverage and any
investment services).
A substantive obligation to provide insurance contract services ends when
either:
a) the group has the practical ability to reassess the risks of the
particular policyholder and as a result can set a price or level of benefits
that fully reflects those risks, or
b) the group has the practical ability to reassess the risks of the
portfolio of insurance contracts that contain the contract and as a result can
set a price or level of benefits that fully reflects the risk of that
portfolio unless the pricing of the premiums up to the date when the risks are
reassessed takes into account the risks that relate to periods after the
assessment.
For reinsurance contracts cash flows are within the contract boundary if they
arise from substantive rights and obligations that exist during the reporting
period in which the group is compelled to pay amounts to the reinsurer or has
a substantive right to receive services from the reinsurer.
(xiv) Separation of distinct investment components
At inception, the group separates distinct investment components from an
insurance or reinsurance contract and accounts for them as if they were
stand-alone financial instruments. Distinct investment components are
investment components that are not highly inter-related with the insurance
components and for which contracts with equivalent terms are sold, or could be
sold, separately in the same market or the same jurisdiction.
(xv) Non-distinct investment components
Insurance revenue and insurance service expenses exclude any 'non-distinct
investment components'. The group identifies the investment component of a
contract by determining the amount that it would be required to repay to the
policyholder in all scenarios with commercial substance. These include
circumstances in which an insured event occurs or the contract matures or is
terminated without an insured event occurring. Investment components are
excluded from insurance revenue and insurance service expenses.
(xvi) Application of accounting policies impacting presentation
The group does not disaggregate amounts recognised in the statement of profit
or loss and OCI as permitted by IFRS17.88.
Income and expenses from reinsurance contracts are presented separately from
income and expenses from insurance contracts. Income and expenses from
reinsurance contracts, other than insurance finance income or expenses, are
presented on a net basis as 'net expenses from reinsurance contracts' in the
insurance service result.
The group does not disaggregate changes in the risk adjustment for
non-financial risk between the insurance service result and insurance finance
income or expenses. All changes in the risk adjustment for non-financial risk
are included in the insurance service result.
(xvii) Acquisition accounting
IFRS17 provides specific guidance on accounting for transfers of insurance
contracts under a business combination and as such the requirements of IFRS3
'Business Combinations' are modified as a result on IFRS17 becoming effective.
There is no longer any 'Acquired Value of In-Force Business' (AVIF) calculated
in respect of insurance contracts on acquisition and no immediate profit
recognised on insurance contracts acquired as was the case when IFRS4 was
extant.
Instead a CSM is established, recognising the future profit that will be
earned from the insurance contracts acquired as the insurance and investment
related service is provided. As a result, IFRS17 will generally result in
delayed profit recognition compared to IFRS4. A delay in profit recognition
will also generally be true for existing business as changes in fulfilment
cash flows considered to be in respect of future service will adjust the CSM,
with revenue recognised only for the current service provided. This is in
contrast to IFRS4 where all changes in the insurance contract value were
booked immediately to profit and loss.
(xviii) Additional information on key assumptions
Demographic assumptions
Best estimate assumptions about mortality/longevity, morbidity and
policyholder behaviour, such as surrenders, used in estimating future cash
flows are developed for homogeneous product types and groups of policyholders
at a local entity level. Demographic assumptions are generally based on a
combination of national data, standard industry tables, the local entity's
recent experience and also future expectations. Experience is monitored
through regular studies, the results of which are reflected both in the
pricing of new products and in the measurement of existing contracts.
Expense assumptions
Best-estimate assumptions regarding expenses used in the estimation of future
cash flows are set at a level that reflects the groups expectations as to
future expenditure based on each entity's cost base and annual budgeting
process along with longer term expectations as to how the business will run
off. Transition costs and major project expenses are reviewed on a case by
case basis as to whether they should be treated as non-attributable. Expenses
pertaining to investment costs on assets backing liabilities where no
investment service is provided to policyholders, generally term assurance and
annuities, are also excluded.
Non-performance of reinsurance
Where appropriate reinsurance cashflows are adjusted for the possibility of
loss due to reinsurer default using an approach equivalent to the PRA &
EIOPA methodology for the Solvency II Credit Default Adjustment.
(b) IFRS 9 - Financial Instruments
'IFRS 9 Financial Instruments' was effective from 1 January 2018 and replaces
'IAS 39 Financial Instruments: Recognition and Measurement'. The group
elected to defer the application of IFRS9 in the consolidated financial
statements, applying the temporary exemption available under 'Amendments to
IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4'
up until the previously published group consolidated financial statements as
at 31 December 2022.
(i) Financial assets
IFRS9.4.1 requires financial assets to be classified into the following
measurement categories based on an assessment of the business model of the
group and the contractual cash flow characteristics of the assets:
a) Amortised cost (AC) where the financial asset is in a 'hold to
collect' business model and where contractual cash flows arising are solely
payments of principal and interest (SPPI).
b) Fair value through OCI (FVTOCI) where the financial asset is in a
'hold to collect and sell' business model and where contractual cash flows
arising are solely payments of principal and interest (SPPI).
c) Fair value through Profit or Loss (FVTPL) where the financial asset
does not fit into either of the above classifications or where the entity
elects to measure financial assets at FVTPL.
(ii) Financial liabilities
Almost all accounting requirements for financial liabilities remain unchanged
from IAS 39. IFRS 9 has however introduced new requirements for accounting and
presentation of changes in the fair value of an entity's own credit risk where
the entity has designated to value at fair value (IFRS 9.5.7.7-8): changes in
fair value attributable to the change in the entity's own credit risk are
presented in OCI unless this presentation would create or enlarge an
accounting mismatch in the P&L, as is the case for the Chesnara plc group.
The two financial liability classification categories are:
a) Fair value through profit or loss (FVTPL); and
b) Amortised cost (AC).
(iii) Classification of financial assets
The majority of the group's financial assets and liabilities will be
classified as FVTPL, either mandatorily as prescribed by IFRS9, or by
designating as such, as permitted under IFRS9.4.1.5 to avoid an accounting
mismatch that would otherwise have occurred with the valuation of the
corresponding liabilities.
The majority of the group's financial instruments were already held at FVTPL
under IAS39 and will continue to be valued at FVTPL under IFRS9 to reflect the
way the business is managed and in line with a fair value approach to SII and
EcV reporting. The 'Solely Payments of Principal and Interest' (SPPI) test is
used to distinguish between those mandatorily classified as FVTPL and those
designated at FVTPL.
The mortgage portfolio held by Waard, comprising both direct mortgages and
savings mortgages, was previously valued at AC under IAS39. Both types of
mortgage assets pass the SPPI test as the contractual terms require only fixed
payments on fixed dates or variable payments where the amount of the variable
payment for a period is determined by applying a floating market rate of
interest for that period. They are therefore not required to be classified at
FVTPL but they have been designated as FVTPL as this will significantly reduce
the accounting mismatch with the corresponding liability, valued under IFRS17
using current market sourced discount rates, that would arise otherwise. This
application of the 'fair value option' aligns with the group's business model
which is to manage the business on a fair value basis.
Short-term receivables will be classified as AC and no assets will be
categorised as FVTOCI.
Significant judgements, estimates and assumptions - Valuation of 'savings
mortgages' assets
For certain mortgage assets related to Dutch 'savings mortgage' products,
where there is (i) a direct connection to the policyholder's mortgage and (ii)
the premiums and crediting rate are set such that the account value will be
equal to the balance on the loan; then the asset cashflows are discounted
using a curve derived from mortgage rates available in the market.
(iv) Classification of financial liabilities
Financial liabilities are generally classified and measured at AC (IFRS
9.4.2.1), however they can be classified and measured at FVTPL if held for
trading or designated as at FVTPL where doing so results in more relevant
information (IFRS 9.4.2.2), because either:
a) It eliminates, or significantly reduces, a measurement of recognition
inconsistency; or
b) A group of financial instruments is managed and its performance
evaluated on a fair value basis in accordance with a documented risk
management or investment strategy, and information about the group is provided
internally on that basis to the entity's key management personnel.
The investment contracts help by the group meet the criteria above for
classification at FVTPL as this will significantly reduce the accounting
mismatch that would arise otherwise. This is also in line with the group's
business model is to manage the business on a fair value basis.
The borrowings liabilities do not match the exceptions listed above and it is
appropriate that they are classified as AC under IFRS9, as was also the case
under IAS39. This includes the Tier 2 debt within the parent company of the
group.
(v) Impairment and Expected Credit Losses
IFRS 9 includes an expected loss impairment model (IFRS 9.5.5.1-8) for assets
classified as AC or FVTOCI that requires entities to recognise a loss
allowance for Expected Credit Losses (ECLs) in line with a three-stage model:
a) Stage 1 impairment: if the credit risk on a financial instrument has
not increased significantly since initial recognition, a loss allowance equal
to a 12-month ECL is recognised.
b) Stage 2 impairment: if the credit risk has increased significantly
since initial recognition, a loss allowance equal to lifetime ECLs must be
recognised. If the credit risk subsequently improves, it is possible for a
financial instrument to revert to a stage 1 impairment and for the loss
allowance to be reduced.
c) Stage 3 impairment: if an impairment event has occurred, a
financial asset is written off and derecognised when the entity has no
reasonable expectation of recovering it.
There is also a simplified approach to impairment that is available as a
policy choice for contract assets and lease receivables. The standard
stipulates the following [IFRS 9:5.5.15]:
1) For trade receivables or IFRS 15 contract assets with no significant
financing component, the simplified approach is required.
2) For trade receivables or IFRS 15 contract assets with a significant
financing component, the simplified approach is optional.
3) For IFRS 16 lease receivables, the simplified approach is optional.
The simplified approach requires recognition of a loss allowance for an amount
equal to lifetime ECLs without the need to consider credit quality of the
financial asset for staging purposes. A provision matrix can be used to apply
relevant loss rates to outstanding balances at the reporting date as follows:
a) Determine appropriate groupings of assets.
b) Determine the historical loss rates over an appropriate period.
c) Incorporate forward looking macro-economic factors into loss rates.
d) Calculate the expected credit losses.
The assets held by the group at AC are short-term receivables that include
those arising from insurance contracts, those arising from investment
contracts, accrued interest income and receivables from fund management
companies. The simplified approach to impairment has been applied for all
these short-term receivables.
Using the provision matrix method the group has concluded that the provision
for ECLs would be materially correct at £nil due to the short-term nature of
the financial instruments held and minimal level of historical credit losses.
The potential for future defaults has also been taken into account in this
assessment. The intercompany balances included in individual company accounts
will also have a materially correct ECL provision of £nil due to minimal
historical credit losses and low potential for future defaults.
(vi) Transition
The group has elected to apply IFRS 9 from 1 January 2022 in these
consolidated financial statements. Note 4 provides details of the impact as a
result of adopting IFRS 9 in these financial statements as at 1 January 2022.
All other accounting policies remain unchanged from those stated in the 2022
year-end consolidated financial statements.
3 Impact of IFRS 17 and IFRS 9 at transition date
The following table shows, by balance sheet line item, how the adoption of
IFRS17 and IFRS9 has impacted the balance sheet that was reported in the
consolidated financial statements of the group as at 31 December 2021.
Unaudited
31 December 2021 - as reported Items derecognised Items reclassified IFRS 17 and As at 1 January 2022
IFRS 9 remeasurement
£000 £000 £000 £000 £000
Intangible assets 122,161 (44,496) - - 77,665
Property and equipment 7,830 - - - 7,830
Investment properties 1,071 - - - 1,071
Reinsurance contract assets 247,750 - 23,297 (57,516) 213,531
Amounts deposited with reinsurers 38,295 - - - 38,295
Financial investments 9,127,116 - - 48,895 9,176,011
Derivative financial instruments 264 - - - 264
Other assets 72,431 - (25,118) - 47,313
Deferred tax assets - 498 2,239 (1,816) 921
Cash and cash equivalents 70,087 - - - 70,087
Total assets / transition effects on assets 9,687,005 (43,998) 418 (10,437) 9,632,988
Insurance contract liabilities 3,818,412 - 106,437 107,221 4,032,070
Other provisions 992 - 720 - 1,712
Investment contracts at fair value through income 4,120,572 - 20 (138,616) 3,981,976
Liabilities relating to policyholder funds held by group 990,700 - - - 990,700
Lease contract liabilities 2,019 - - - 2,019
Borrowings 47,185 - - - 47,185
Derivative financial instruments - - - - -
Deferred tax liabilities 15,699 (9,561) 2,239 2,191 10,568
Deferred income 2,809 (504) 2,168 - 4,473
Other current liabilities 230,194 (399) (111,166) - 118,629
Bank overdrafts 256 - - - 256
Total liabilities / transition effects on liabilities 9,228,838 (10,464) 418 (29,204) 9,189,588
Net assets / transition effects on shareholders' equity 458,167 (33,534) - 18,767 443,400
The group has adopted IFRS17 retrospectively, applying the fully retrospective
approach across the group with the exception of CA, for which the fair value
at transition approach was applied.
Accordingly, for the entities applying the full retrospective approach, the
group has identified, recognised and measured each group of insurance
contracts as if IFRS17 had always applied since the date of their acquisition
into the group; derecognised any existing balances that would not exist if
IFRS17 had always applied; and recognised any resulting difference in net
equity. For insurance contracts within the group that are eligible for PAA,
the group has concluded that only current and prospective information was
required to reflect the circumstances at the transition date.
For CA, the group has determined that the necessary historical information is
not available in order to apply the fully retrospective for any of the
contract groups. It was therefore impracticable to apply the fully
retrospective approach and the fair value approach has been applied.
The group has elected to apply IFRS9 within these condensed financial
statements from 1 January 2022 in line with IFRS17 in order to avoid any
potential accounting mismatch that may otherwise arise, as the measurement of
assets under IFRS9 cannot be considered without reference to the liabilities
under IFRS17.
The overall impact to the net equity position of the group at 1(st) January
2022 as a result of applying IFRS17 and IFRS9 is a reduction in net equity of
£14.767m.
There are various offsetting impacts which result in this overall reduction of
net equity, the key ones being:
Items derecognised:
Derecognition of Acquired Value of in-force business (AVIF) and Deferred
Acquisition Costs (DAC) in respect of insurance contracts:
Under IFRS17 there is no insurance AVIF recognised on acquisitions and which
is then subsequently amortised. Similarly, DAC is no longer recognised for new
contracts written, instead an asset for insurance acquisition cash flows is
recognised in the balance sheet for the relevant group of contracts and is
derecognised on initial calculation of the opening CSM for the contract group.
AVIF of £34.1m and DAC of £10.4m have been derecognised from the
consolidated group balance sheet at the date of transition, with a
corresponding adjustment to net equity. Together with the deferred tax and
other smaller impacts, this results in a reduction of net equity of £33.5m at
the transition date.
IFRS17 and IFRS9 remeasurement:
- Recognition of the CSM as an explicit liability representing
future unearned profits. At 1 January 2022 a CSM of £109.1m net of
reinsurance was established resulting in a decrease to net equity.
- Recognition of an explicit liability for Risk Adjustment for
non-financial risk. At 1 January 2022 a RA of £39.7m net of reinsurance was
established resulting in a decrease to net equity.
- In addition to the above factors, the move from a variety of local
methodologies with different areas of implicit margin to a valuation of 'best
estimate' future cash flows discounted using market interest rates. Net of
reinsurance this results in an increase to net equity of £167.6m at 1 January
2022.
Items reclassified:
The group has also reclassified all rights and obligations arising from
portfolios of insurance and reinsurance contracts such as (i) outstanding
claims in respect of insurance contracts and the reinsurers share of
outstanding claims (ii) receivables and payables related to insurance and
reinsurance contracts. These reclassifications have not impacted the net
equity of the group at the transition date.
4 Earnings per share
Earnings per share are based on the following:
Unaudited Unaudited
Six months ended Year ended
30 June 31 December
2023 2022 2022
Profit/(loss) for the period attributable to shareholders (£000) 15,531 (31,711) (33,289)
Weighted average number of ordinary shares 150,430,393 150,153,465 150,239,599
Basic earnings per share 10.32p (21.12)p (22.16)p
Diluted earnings per share 10.25p (20.87)p (21.90)p
The weighted average number of ordinary shares in respect of the six months
ended 30 June 2023 is based upon 150,369,603 shares in issue at the beginning
of the period and 150,570,190 at the end of the period. No shares were held
in treasury.
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 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 2022 is based upon 150,145,602 shares in issue at the beginning of
the period and 150,369,603 shares in issue at the end of the period. No
shares were held in treasury.
There were 1,165,272 share options outstanding at 30 June 2023 (30 June 2022:
1,815,601). 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 2022.
5 Retained earnings
Unaudited
Six months
ended
30 June
2023 2022
£000 £000
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January (as reported) 265,052
Transition adjustment (note 3) (14,767)
Balance at 1 January (restated) 183,567 250,285
Profit / (loss) for the period 15,531 (31,711)
Share based payment 342 504
Dividends:
Final approved and paid for 2021 - (22,103)
Final approved and paid for 2022 (22,799) -
Balance at period end 176,641 196,975
The interim dividend in respect of 2022, approved and paid in 2022 was paid at
the rate of 8.12p per share.
The final dividend in respect of 2022, approved and paid in 2023, was paid at
the rate of 15.16p per share so that the total dividend paid to the equity
shareholders of the company in respect of the year ended 31 December 2022 was
made at the rate of 23.28p per share.
An interim dividend of 8.36p per share in respect of the year ending 31
December 2023 payable on 10 November 2023 to equity shareholders of the
company registered at the close of business on 29 September 2023, the dividend
record date, was approved by the Directors after the balance sheet date. The
resulting dividend of £12.6m 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 2023 and the year ended 31 December 2022:
Unaudited Six months ended Year ended 31
30 June 2023 December 2022
Pence Pence
Interim - approved/paid 8.36 8.12
Final - proposed/paid - 15.16
Total 8.36 23.28
6 Operating segments
The group considers that it has no product or distribution-based business
segments. It reports segmental information on the same basis as reported
internally to the chief operating decision maker, which is the board of
directors of Chesnara plc.
The segments of the group as at 30 June 2023 comprise:
UK: This segment represents the group's UK life insurance and pensions
run-off portfolio and comprises the business of Countrywide Assured plc (CA)
and Sanlam Life & Pensions UK (CASLP).
CA consists of its original business and that of City of Westminster Assurance
Company Limited which was acquired in 2005 and the long-term business
transferred to CA during 2006. It also contains Save & Prosper Insurance
Limited which was acquired on 20 December 2010 and its then subsidiary Save
& Prosper Pensions Limited. The Save & Prosper business was
transferred to CA during 2011. It 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, as well as the portfolio of
policies acquired from Canada Life on 16 May 2023.
Sanlam Life and Pensions UK (CASLP) was acquired on 28 April 2022 and
subsequently changed its legal name to CASLP.
CA & CASLP 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 2022 Annual Report and Accounts.
Movestic: This segment comprises the group's Swedish life and pensions
business, Movestic Livförsäkring AB (Movestic) and its subsidiary company
Movestic Kapitalforvaltning AB (investment fund management company) which are
open to new business and which are responsible for conducting both unit-linked
and pensions and savings business and providing some life and health product
offerings.
Waard Group: This segment represents the group's closed Dutch life business
which was acquired on 19 May 2015 and comprised the three insurance companies
Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a
servicing company, Waard Verzekering.
During 2017, the book of policies held within Hollands Welvaren Leven N.V. was
successfully integrated into Waard Leven and consequently Hollands Welvaren
Leven N.V. was deregistered on 19 December 2018. The Waard Group's policy base
is predominantly made up of term life policies, although also includes
unit-linked policies and some non-life policies, covering risks such as
occupational disability and unemployment.
On 1 October 2019, the Waard Group acquired a small portfolio of policies from
Monuta insurance, which consists of term and savings policies.
On 21 November 2019, the Waard Group completed a deal to acquire a portfolio
of term life insurance policies and saving mortgages insurance policies. The
completion took place on the 31 August 2020, at which stage Waard Group
obtained control.
On 31 December 2020, Waard entered into an agreement to acquire a portfolio of
term life insurance policies, Unit Linked policies and funeral insurance
policies from Dutch insurance provider Brand New Day Levensverzekeringen N.V.
(BND). The portfolio was successfully migrated on 10 April 2021.
On 25 November 2021, Waard entered into an agreement with Monument Re Group to
acquire Robein Leven, a specialist provider of traditional and linked savings
products, mortgages and annuities in the Netherlands. The acquisition was
successfully completed on 28 April 2022, thereby extending the existing group.
On 1 January 2023, Waard Leven N.V, completed the acquisition of the insurance
portfolio of Nederlandsche Algemeene Maatschappij van Levensverzekering
"Conservatrix" N.V. ("Conservatrix"), a specialist provider of life insurance
products in the Netherlands that was declared bankrupt on 8 December 2020. A
capital contribution of £35m has been provided by Chesnara to support the
solvency position of the Conservatrix business, consisting of a £21m
contribution from Chesnara and £14m of existing Waard resources.
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 2023.
(i) Segmental reporting for the six months ended 30 June 2023
Unaudited Scildon Other Group Activities
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Insurance revenue 35,088 5,459 21,222 56,279 - 118,048
Insurance service expense (31,575) (2,895) (11,815) (56,103) - (102,388)
Net expenses from reinsurance contracts held (2,544) (991) (1,009) (1,600) - (6,144)
Insurance service result 969 1,573 8,398 (1,424) - 9,516
Net investment return 112,876 360,943 30,630 91,091 7,472 603,012
Net finance income/(expenses) from insurance contracts issued (21,742) (18,411) (29,975) (81,767) - (151,895)
Net finance income/(expenses) from reinsurance contracts held (1,461) (144) 50 (972) - (2,527)
Net change in investment contract liabilities (83,782) (274,551) 1,438 - - (356,895)
Change in liabilities relating to policyholders' funds held by the group - (66,705) - - - (66,705)
Net investment result 5,891 1,132 2,143 8,352 7,472 24,990
Fee, commission and other operating income 18,878 29,411 193 - 3 48,485
Total revenue net of investment result 25,738 32,116 10,734 6,928 7,475 82,991
Other operating expenses (18,419) (28,072) (4,691) (2,300) (12,019) (65,501)
Financing costs (46) (289) (6) - (5,167) (5,508)
Profit arising on business combinations and portfolio acquisitions - - 3,969 - - 3,969
Profit / (loss) before tax 7,273 3,755 10,006 4,628 (9,711) 15,951
(ii) Segmental assets and liabilities as at 30 June 2023
Unaudited Scildon Other Group
Movestic Waard Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Segment assets 4,577,236 4,105,753 956,095 1,919,903 138,773 11,697,760
Segment liabilities (4,434,047) (4,020,113) (873,416) (1,804,885) (202,947) (11,335,408)
Segment net assets 143,189 85,640 82,679 115,018 (64,174) 362,352
(iii) Segmental reporting for the six months ended 30 June 2022
Unaudited Scildon Other Group Activities
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Insurance revenue 32,158 6,016 7,540 60,959 - 106,673
Insurance service expense (31,953) (2,578) (7,570) (57,187) - (99,288)
Net expenses from reinsurance contracts held (733) (1,974) (668) (804) - (4,179)
Insurance service result (528) 1,464 (698) 2,968 - 3,206
Net investment return (343,661) (895,636) (85,591) (265,356) 2,142 (1,588,102)
Net finance income from insurance contracts issued 134,726 24,570 79,171 244,808 - 483,275
Net finance (expenses) / income from reinsurance contracts held (17,465) (802) (192) 9,251 - (9,208)
Net change in investment contract liabilities 199,940 526,037 - - - 725,977
Change in liabilities relating to policyholders' funds held by the group - 341,856 - - - 341,856
Net investment result (26,460) (3,975) (6,612) (11,297) 2,142 (46,202)
Fee, commission and other operating income 8,204 23,922 75 - - 32,201
Total revenue net of investment result (18,784) 21,411 (7,235) (8,329) 2,142 (10,795)
Other operating expenses (12,086) (21,602) (1,844) (2,353) (10,757) (48,642)
Financing costs (13) (470) (1) - (4,099) (4,583)
Profit arising on business combinations and portfolio acquisitions 9,565 - 301 - - 9,866
Loss before tax (21,318) (661) (8,779) (10,682) (12,714) (54,154)
(iv) Segmental reporting for the year ended 31 December 2022
Unaudited Scildon Other Group Activities
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Insurance revenue 65,117 11,895 16,907 130,112 - 224,031
Insurance service expense (58,194) (4,079) (17,751) (125,848) - (205,872)
Net (expenses) / income from reinsurance contracts held (1,729) (2,899) (1,563) 155 - (6,036)
Insurance service result 5,194 4,917 (2,407) 4,419 - 12,123
Net investment return (280,802) (876,844) (93,313) (302,326) (3,585) (1,556,870)
Net finance income from insurance contracts issued 161,633 19,052 90,960 276,049 - 547,694
Net finance (expenses) / income from reinsurance contracts held (24,083) (501) (275) 11,368 - (13,491)
Net change in investment contract liabilities 109,718 461,256 - - - 570,974
Change in liabilities relating to policyholders' funds held by the group - 392,884 - - - 392,884
Net investment result (33,534) (4,153) (2,628) (14,909) (3,585) (58,809)
Fee, commission and other operating income 29,120 44,110 133 - - 73,363
Total revenue net of investment result 780 44,874 (4,902) (10,490) (3,585) 26,677
Other operating expenses (28,909) (41,568) (3,142) (5,555) (14,231) (93,405)
Financing costs (228) (823) (1) - (9,497) (10,549)
Profit arising on business combinations and portfolio acquisitions 9,565 - 5,796 - - 15,361
(Loss) / profit before tax (18,792) 2,483 (2,249) (16,045) (27,313) (61,916)
(v) Segmental assets and liabilities as at 31 December 2022
(vi)
Unaudited Other Group Activities
Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
£000 £000 £000 £000 £000 £000
Segment assets 4,748,869 3,945,968 542,640 1,900,968 112,671 11,251,116
Segment liabilities (4,566,294) (3,843,690) (469,434) (1,785,422) (201,685) (10,866,525)
Segment net assets 182,575 102,278 73,206 115,546 (89,014) 384,591
7 Insurance service result
Unaudited Six months ended
30 June
Unaudited
Six months ended
30 June
2023 2022
Insurance revenue £000 £000
Contracts not measured under the PAA:
Amounts relating to changes in the liability for remaining coverage:
Expected incurred claims and other directly attributable expenses 90,610 81,969
Change in risk adjustment for non-financial risk for the risk expired 8,287 6,463
CSM recognised for the services provided 11,964 10,605
Insurance acquisition cash flows recovery 1,728 1,620
Insurance revenue for contracts not measured under the PAA 112,589 100,657
Insurance revenue for contracts measured under the PAA 5,459 6,016
Total insurance revenue 118,048 106,673
Insurance service expenses
Incurred claims and other directly attributable expenses (78,701) (76,874)
Changes that relate to past service - changes in the FCF relating to the LIC 3,145 2,922
Losses on onerous contracts and reversals of those losses (25,104) (23,716)
Insurance acquisition cash flows amortisation (1,728) (1,620)
Insurance acquisition cash flows impairment - -
Total insurance service expenses (102,388) (99,288)
Net income / (expenses) from reinsurance contracts held
Reinsurance expenses (allocation of reinsurance premiums paid) - contracts not
measured under the PAA
Amounts relating to changes in the remaining coverage:
Expected incurred claims and other directly attributable expenses recovery (23,353) (23,007)
Change in risk adjustment for non-financial risk for the risk expired (1,098) (1,042)
CSM recognised for the services received (2,282) (2,473)
Reinsurance expenses (allocation of reinsurance premiums paid) - contracts not (26,733) (26,522)
measured under the PAA
Reinsurance expenses (allocation of reinsurance premiums paid) - contracts (1,112) (1,974)
measured under the PAA
Amounts recoverable for incurred claims and other incurred insurance service 23,076 22,996
expenses
Changes in amounts recoverable that relate to past service - adjustments to (1,513) 458
incurred claims
Recoveries of loss on recognition of onerous underlying contracts 292 1,050
Recoveries of losses on onerous underlying contracts and reversals of such (154) (187)
losses
Effect of changes in the risk of reinsurers' non-performance - -
Total net expenses from reinsurance contracts held (6,144) (4,179)
Total insurance service result 9,516 3,206
8 Net investment result
In the tables that follow the investment return on surplus shareholder assets
is included in the insurance contracts column.
Investment result for the six months ended 30 June 2023 (unaudited)
Insurance contracts Investment contracts (without DPF's) Total
Net Investment return £000 £000 £000
Interest revenue from financial assets not measured at FVTPL - - -
Net income from FVTPL investments 179,412 423,600 603,012
Net credit impairment losses - - -
Total net investment return 179,412 423,600 603,012
Finance income / (expenses) from insurance contracts issued
Change in fair value of underlying assets of contracts measured under VFA (126,274) - (126,274)
Interest accreted (28,311) - (28,311)
Effect of changes in interest rates and other financial assumptions 1,130 - 1,130
Effect of changes in FCF at current rates when CSM is unlocked at locked in 1,560 - 1,560
rates
Total finance expenses from insurance contracts issued (151,895) - (151,895)
Finance income from reinsurance contracts issued
Interest accreted 2,721 - 2,721
Effect of changes in interest rates and other financial assumptions (4,716) - (4,716)
Effect of changes in FCF at current rates when CSM is unlocked at locked in (532) - (532)
rates
Total finance expenses from reinsurance contracts issued (2,527) - (2,527)
Net change in investment contract liabilities - (356,895) (356,895)
Change in liabilities relating to policyholder funds held by the group - (66,705) (66,705)
Net investment result 24,990 - 24,990
Investment result for the six months ended 30 June 2022 (unaudited)
Insurance contracts Investment contracts (without DPF's) Total
Net Investment return £000 £000 £000
Interest revenue from financial assets not measured at FVTPL - - -
Net income from FVTPL investments (520,269) (1,067,833) (1,588,102)
Net credit impairment losses - - -
Total net investment return (520,269) (1,067,833) (1,588,102)
Finance income / (expenses) from insurance contracts issued
Change in fair value of underlying assets of contracts measured under VFA 249,854 - 249,854
Interest accreted 16,113 - 16,113
Effect of changes in interest rates and other financial assumptions 220,813 - 220,813
Effect of changes in FCF at current rates when CSM is unlocked at locked in (3,505) - (3,505)
rates
Total finance income from insurance contracts issued 483,275 - 483,275
Finance income from reinsurance contracts issued
Interest accreted (1,579) - (1,579)
Effect of changes in interest rates and other financial assumptions (7,622) - (7,622)
Effect of changes in FCF at current rates when CSM is unlocked at locked in (7) - (7)
rates
Total finance expenses from reinsurance contracts issued (9,208) - (9,208)
Net change in investment contract liabilities - 725,977 725,977
Change in liabilities relating to policyholder funds held by the group - 341,856 341,856
Net investment result (46,202) - (46,202)
9 Financial assets and liabilities
The carrying amount of financial assets and liabilities held by the group
split by classification category are shown in the tables below.
Amortised cost FVTPL - Designated FVTPL - Mandatory Total
Financial assets and liabilities as at 30 June 2023 (unaudited)
£000 £000 £000 £000
Equity securities - - 203,439 203,439
Holdings in collective investment schemes - - 8,139,658 8,139,658
Debt securities - 1,191,239 - 1,191,239
Policyholder funds held by the group - 1,116,495 - 1,116,495
Mortgage loan portfolio - 357,928 - 357,928
Total financial investments - 2,665,662 8,343,097 11,008,759
Derivative financial instruments - - 3,160 3,160
Other assets 48,897 - - 48,897
Cash and cash equivalents - 144,284 - 144,284
Total financial assets 48,897 2,809,946 8,346,257 11,205,100
Financial liabilities
Investment contract liabilities - 5,629,313 - 5,629,313
Liabilities relating to policyholder funds held by the group - 1,116,495 - 1,116,495
Borrowings 209,344 - - 209,344
Derivative financial instruments - - 127 127
Other current liabilities 140,788 - - 140,788
Total financial liabilities 350,132 6,745,808 127 7,096,067
Amortised cost FVTPL - Designated FVTPL - Mandatory Total
Financial assets and liabilities as at 31 December 2022 (unaudited)
£000 £000 £000 £000
Equity securities - - 223,472 223,472
Holdings in collective investment schemes - - 8,157,208 8,157,208
Debt securities - 932,711 - 932,711
Policyholder funds held by the group - 986,768 - 986,768
Mortgage loan portfolio - 265,988 - 265,988
Total financial investments - 2,185,467 8,380,680 10,566,147
Derivative financial instruments - - 141 141
Other assets 46,041 - - 46,041
Cash and cash equivalents - 175,293 - 175,293
Total financial assets 46,041 2,360,760 8,380,821 10,787,622
Financial liabilities
Investment contract liabilities - 5,660,778 - 5,660,778
Liabilities relating to policyholder funds held by the group - 986,768 - 986,768
Borrowings 211,976 - - 211,976
Derivative financial instruments - - 3,850 3,850
Other current liabilities 123,373 - - 123,373
Total financial liabilities 335,349 6,647,546 3,850 6,986,745
10 Financial asset and liability 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
2023.
Fair value measurement at 30 June 2023 (unaudited)
Level 1 Level 2 Level 3 Total
£000 £000 £000 £000
Investment properties 1,176 - 97,573 98,749
Financial assets
Equities - Listed 203,439 - - 203,439
Holdings in collective investment schemes 8,014,796 - 124,862 8,139,658
Debt securities - Government Bonds 666,417 24,384 - 690,801
Debt securities - Other debt securities 446,116 54,322 - 500,438
Policyholders' funds held by the group 1,090,430 - 26,065 1,116,495
Mortgage loan portfolio - 357,928 - 357,928
Derivative financial instruments - 3,160 - 3,160
Total 10,422,374 439,794 248,500 11,110,668
Financial liabilities
Investment contracts at fair value through income - 5,695,738 - 5,695,738
Liabilities related to policyholders' funds held by the group 1,116,495 - - 1,116,495
Derivative financial instruments - 127 - 127
Total 1,116,495 5,695,865 - 6,812,360
Fair value measurement at 31 December 2022 (unaudited)
Level 1 Level 2 Level 3 Total
£000 £000 £000 £000
Investment properties 1,215 - 93,266 94,481
Financial assets
Equities - Listed 223,472 - - 223,472
Holdings in collective investment schemes 7,977,562 46,505 133,141 8,157,208
Debt securities - Government Bonds 420,681 24,200 - 444,881
Debt securities - Other debt securities 432,870 54,960 - 487,830
Policyholders' funds held by the group 951,667 - 35,101 986,768
Mortgage loan portfolio - 265,988 - 265,988
Derivative financial instruments - 141 - 141
Total 10,007,467 391,794 261,508 10,660,769
Financial liabilities
Investment contracts at fair value through income - 5,660,778 - 5,660,778
Liabilities related to policyholders' funds held by the group 986,768 - - 986,768
Derivative financial instruments - 3,850 - 3,850
Total 986,768 5,664,628 - 6,651,396
Investment properties
The investment properties are valued by external Chartered Surveyors using
industry standard techniques based on guidance from the Royal Institute of
Chartered Surveyors. The valuation methodology includes an assessment of
general market conditions and sector level transactions and takes account of
expectations of occupancy rates, rental income and growth. Properties undergo
individual scrutiny using cash flow analysis to factor in the timing of rental
reviews, capital expenditure, lease incentives, dilapidation and operating
expenses; these reviews utilise both observable and unobservable inputs.
Policyholder funds held by the group
There is a small holding of assets classified as level 3 amounting to £26.0m
(December 2022: £35.1m) from our Movestic operation which are unlisted. The
valuation of the vast majority of these assets is based on unobservable prices
from trading on the over-the-counter market.
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 £26.0m (December 2022: £35.1m) from our Movestic operation which are
unlisted. The valuation of the vast majority of these assets is based on
unobservable prices from trading on the over-the-counter market.
Debt securities
The debt securities classified as Level 2 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 2023 was 4.9% (31 December 2022: 4.9%).
The expected projected cash flows for each mortgage within the loan portfolio
are discounted using rates that are derived using a matrix involving the
following three parameters:
· The remaining fixed rate term of the mortgage
· Indexed loan to value (LTV) of each mortgage
· Current (Aegon) mortgage rates
At 30 June 2023 this resulted in discounting the cash flows in each mortgage
using a range from 4.29% to 4.92% (31 December 2022: 4.29% to 4.92%)
An impairment percentage is applied to those loan cashflows which are in
arrears, to reflect the chance of the loan actually going into default. For
those loans which are one, two or three months in arrears, an impairment
percentage is applied to reflect the chance of default. This percentage ranges
from 0.60% for one month in arrears to 13.70% for loans which are 3 months in
arrears (31 December 2022: 0.60% for one month in arrears to 13.70% for loans
which are 3 months in arrears). Loans which are in default receive a 100%
reduction in value.
The value of the fund has the potential to decrease or increase over time.
This can be as a consequence of a periodic reassessment of the conditional
prepayment rate and/or the discount rate used in the valuation model.
A 1 per cent increase in the conditional prepayment rate would reduce the
value of the asset by £1.7m (31 December 2022: £1.7m).
A 1 per cent decrease in the conditional prepayment rate would increase the
value of the asset by £2.0m (31 December 2022: £2.1m).
A 1 per cent increase in the discount rate would reduce the value of the asset
by £9.0m (31 December 2022: £9.6m).
A 1 per cent decrease in the discount rate would increase the value of the
asset by £10.4m (31 December 2022: £11.1m).
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
Unaudited 30 31 December
June 2022
2023
£'000 £'000
At start of period 261,508 190,229
Additions - acquisition of a subsidiary - 102,974
Transfers into level 3 - -
Total gains and losses recognised in the income statement (10,388) (42,224)
Purchases 4,471 14,691
Settlements (48) (11,452)
Exchange rate adjustment (7,043) 7,290
At the end of period 248,500 261,508
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:
Unaudited Carrying amount Fair value
30 June 31 December 30 June 31 December
2023 2022 2023 2022
£000 £000 £000 £000
Financial liabilities:
Borrowings 209,344 211,976 152,433 157,000
Borrowings consist of tier 2 debt, property mortgage loans and an amount due
in relation to financial reinsurance.
The tier 2 debt is fair valued based on the price available in the market 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.
11 Insurance and Reinsurance contracts
11 (a) Composition of the balance sheet
(i) Composition of the balance sheet as at 30 June 2023 (unaudited)
Scildon
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts £000 £000 £000 £000 £000
Insurance contract liabilities 1,390,100 161,614 780,343 1,772,462 4,104,519
Assets for insurance acquisition cash flows - - - - -
Total 1,390,100 161,614 780,343 1,772,462 4,104,519
10,190 - - - 10,190
Insurance contract assets
Assets for insurance acquisition cash flows - - - - -
Total 10,190 - - - 10,190
Reinsurance contracts
Reinsurance contract assets 164,502 12,108 2,731 - 179,341
Reinsurance contract liabilities 2,000 - - 10,807 12,807
(ii) Composition of the balance sheet as at 31 December 2022 (unaudited)
Scildon
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts £000 £000 £000 £000 £000
Insurance contract liabilities 1,447,584 160,570 463,714 1,749,233 3,821,101
Assets for insurance acquisition cash flows - - - - -
Total 1,447,584 160,570 463,714 1,749,233 3,821,101
- - - - -
Insurance contract assets
Assets for insurance acquisition cash flows - - - - -
Total - - - - -
Reinsurance contracts
Reinsurance contract assets 174,678 15,806 3,468 - 193,952
Reinsurance contract liabilities 2,149 - - 11,387 13,536
(iii) Composition of the balance sheet as at 1 January 2022 (unaudited)
Scildon
Movestic Waard Group
Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts £000 £000 £000 £000 £000
Insurance contract liabilities 1,536,138 189,369 386,315 1,920,248 4,032,070
Assets for insurance acquisition cash flows - - - - -
Total 1,536,138 189,369 386,315 1,920,248 4,032,070
- - - - -
Insurance contract assets
Assets for insurance acquisition cash flows - - - - -
Total - - - - -
Reinsurance contracts
Reinsurance contract assets 217,678 19,081 5,584 - 242,343
Reinsurance contract liabilities - - - 28,812 28,812
11 (b) Movements in insurance contract balances - Analysis by remaining
coverage and incurred claims
(i) Movements in insurance contract balances for the period 1 January
2023 to 30 June 2023 (unaudited)
Liabilities for Remaining Coverage Liabilities for Incurred Claims
Excluding Loss Component Loss component For contracts not under PAA Total
PV of future cash flows Risk adjustment
£000 £000 £000 £000 £000 £000
Insurance contract liabilities as at 1 January 2023 3,579,890 85,321 116,130 38,170 1,590 3,821,101
Changes in the statement of profit and loss
Insurance revenue
Contracts measured under the fair value approach (29,976) - - - - (29,976)
Contracts measured under the fully retrospective approach (88,072) - - - - (88,072)
Insurance revenue total (118,048) - - - - (118,048)
Insurance service expenses - (33,121) 105,903 5,860 59 78,701
Incurred claims and other directly attributable expenses
Adjustments to liabilities for incurred claims - - (121) (2,864) (160) (3,145)
Losses and reversals of losses on onerous contracts - 25,104 - - - 25,104
Amortisation of insurance acquisition cash flows 1,728 - - - - 1,728
Insurance service expense total 1,728 (8,017) 105,782 2,996 (101) 102,388
Insurance service result (116,320) (8,017) 105,782 2,996 (101) (15,660)
Net finance expenses from insurance contracts 151,783 196 - (123) 39 151,895
Effect of movements in exchange rates (88,367) (2,514) (1,413) (3,349) (141) (95,784)
Total amounts recognised in comprehensive income (52,904) (10,335) 104,369 (476) (203) 40,451
Investment components (140,734) - 140,734 - - -
Cash flows
Premiums received 499,567 - - - - 499,567
Claims and other directly attributable expenses paid - - (258,909) (4,769) - (263,678)
Insurance acquisition cash flows (3,112) - - - - (3,112)
Total cash flows 496,455 - (258,909) (4,769) - 232,777
Insurance contract liabilities as at 30 June 2023 3,882,707 74,986 102,324 32,925 1,387 4,094,329
(ii) Movements in insurance contract balances for the period 1 January
2022 to 31 December 2022 (unaudited)
Liabilities for Remaining Coverage Liabilities for Incurred Claims
Excluding Loss Component Loss component For contracts not under PAA Total
PV of future cash flows Risk adjustment
£000 £000 £000 £000 £000 £000
Insurance contract liabilities as at 1 January 2022 3,803,839 67,332 112,000 46,707 2,192 4,032,070
Changes in the statement of profit and loss
Insurance revenue
Contracts measured under the fair value approach (59,145) - - - - (59,145)
Contracts measured under the fully retrospective approach (164,886) - - - - (164,886)
Insurance revenue total (224,031) - - - - (224,031)
Insurance service expenses - (19,413) 184,895 10,993 103 176,578
Incurred claims and other directly attributable expenses
Adjustments to liabilities for incurred claims - - - (6,645) (373) (7,018)
Losses and reversals of losses on onerous contracts - 32,805 - - - 32,805
Amortisation of insurance acquisition cash flows 3,507 - - - - 3,507
Insurance service expense total 3,507 13,392 184,895 4,348 (270) 205,872
Insurance service result (220,524) 13,392 184,895 4,348 (270) (18,159)
Net finance expenses from insurance contracts (545,963) 265 23 (1,735) (284) (547,694)
Effect of movements in exchange rates 109,806 4,332 2,683 (1,033) (48) 115,740
Total amounts recognised in comprehensive income (656,681) 17,989 187,601 1,580 (602) (450,113)
Investment components (292,261) - 292,261 - - -
Cash flows
Premiums received 731,644 - - - - 731,644
Claims and other directly attributable expenses paid - - (475,732) (10,117) - (485,849)
Insurance acquisition cash flows (6,651) - - - - (6,651)
Total cash flows 724,993 - (475,732) (10,117) - 239,144
Insurance contract liabilities as at 31 December 2022 3,579,890 85,321 116,130 38,170 1,590 3,821,101
11 (c) Movements in insurance contract balances - Analysis by measurement
component - contracts not measured under the PAA
(i) Movements in insurance contract balances for the period 1 January
2023 to 30 June 2023 (unaudited)
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£000 £000 £000 £000 £000
Insurance contract liabilities as at 1 January 2023 3,594,193 44,907 103,662 36,275 3,779,037
Changes that relate to current service
CSM recognised for services provided - - (9,390) (2,574) (11,964)
Change in risk adjustment for non-financial risk for risk expired - (3,353) - - (3,353)
Experience adjustments (22,759) - - - (22,759)
Total changes that relate to current service (22,759) (3,353) (9,390) (2,574) (38,076)
Changes that relate to future service (69,710) 8,913 62,652 - 1,855
Contracts initially recognised in the period
Changes in estimates that adjust the CSM (13,264) 12,063 1,133 68 -
Changes in estimates that result in losses or reversals of losses on onerous 27,901 (5,123) 468 - 23,246
underlying contracts
Total changes that relate to future service (55,073) 15,853 64,253 68 25,101
Changes that relate to past service
Adjustments to liabilities for incurred claims (121) - - - (121)
Total changes that relate to past service (121) - - - (121)
Insurance service result (77,953) 12,500 54,863 (2,506) (13,096)
Net finance expenses from insurance contracts 149,639 391 1,574 374 151,978
Effect of movements in exchange rates (86,557) (1,281) (4,252) - (92,090)
Total amounts recognised in comprehensive income (14,871) (11,610) 52,185 (2,132) 46,792
Cash flows
Premiums received 494,091 - - - 494,091
Claims and other directly attributable expenses paid (258,909) - - - (258,909)
Insurance acquisition cash flows (3,111) - - - (3,111)
Total cash flows 232,071 - - - 232,071
Insurance contract liabilities as at 30 June 2023 3,811,393 56,517 155,847 34,143 4,057,900
(ii) Movements in insurance contract balances for the period 1 January
2022 to 31 December 2022 (unaudited)
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£000 £000 £000 £000 £000
Insurance contract liabilities as at 1 January 2022 3,781,561 53,393 110,966 35,395 3,981,315
Changes that relate to current service
CSM recognised for services provided - - (13,760) (5,380) (19,140)
Change in risk adjustment for non-financial risk for risk expired - (6,729) - - (6,729)
Experience adjustments (17,278) - - - (17,278)
Total changes that relate to current service (17,278) (6,729) (13,760) (5,380) (43,147)
Changes that relate to future service (21,133) 9,106 19,155 - 7,128
Contracts initially recognised in the year
Changes in estimates that adjust the CSM 6,611 6,077 (18,625) 5,937 -
Changes in estimates that result in losses or reversals of losses on onerous 30,620 (4,944) - - 25,676
underlying contracts
Total changes that relate to future service 16,098 10,239 530 5,937 32,804
Changes that relate to past service
Adjustments to liabilities for incurred claims - - - - -
Total changes that relate to past service - - - - -
Insurance service result (1,180) 3,510 (13,230) 557 (10,343)
Net finance expenses from insurance contracts (532,545) (13,765) 313 323 (545,674)
Effect of movements in exchange rates 109,481 1,769 5,613 - 116,863
Total amounts recognised in comprehensive income (424,244) (8,486) (7,304) 880 (439,154)
Cash flows
Premiums received 719,259 - - - 719,259
Claims and other directly attributable expenses paid (475,732) - - - (475,732)
Insurance acquisition cash flows (6,651) - - - (6,651)
Total cash flows 236,876 - - - 236,876
Insurance contract liabilities as at 31 December 2022 3,594,193 44,907 103,662 36,275 3,779,037
11 (d) Movements in reinsurance contract balances - Analysis by remaining
coverage and incurred claims
(i) Movements in reinsurance contract balances for the period 1 January
2023 to 30 June 2023 (unaudited)
Assets for Remaining Coverage Assets for Incurred Claims
Loss-Recovery component For contracts not under PAA Total
Excluding Loss-Recovery Component
Future cash flows Risk adjustment
£000 £000 £000 £000 £000 £000
Reinsurance contract assets as at 1 January 2023 134,397 4,001 26,498 15,108 412 180,416
Reinsurance expenses - allocation of reinsurance premiums paid (27,844) - - - - (27,844)
Amounts recoverable from reinsurers: - - 21,441 1,609 24 23,074
Recoveries of incurred claims and other insurance service expenses
Changes in the expected recoveries for past claims - - - (1,442) (71) (1,513)
Changes in the loss recovery component - 139 - - - 139
Effect of changes in non-performance risk of reinsurers - - - - - -
Net i(expenses) / income from reinsurance contracts held (27,844) 139 21,441 167 (47) (6,144)
Net Finance expenses from reinsurance contracts (2,387) 4 - (152) 8 (2,527)
Effect of movements in exchange rates 781 (132) (349) (1,287) (35) (1,022)
Total amounts recognised in comprehensive income (29,450) 11 21,092 (1,272) (74) (9,693)
Investment components (1,253) - 1,253 - - -
Cash flows
Premiums paid net of ceding commission 20,550 - - - - 20,550
Recoveries from reinsurance contracts held - - (23,299) (1,440) - (24,739)
Total cash flows 20,550 - (23,299) (1,440) - (4,189)
Reinsurance contract assets as at 30 June 2023 124,244 4,012 25,544 12,396 338 166,534
11 (d) Movements in reinsurance contract balances - Analysis by remaining
coverage and incurred claims
(ii) Movements in reinsurance contract balances for the period 1 January
2022 to 31 December 2022 (unaudited)
Assets for Remaining Coverage Assets for Incurred Claims
Loss-Recovery component For contracts not under PAA Total
Excluding Loss-Recovery Component
Future cash flows Risk adjustment
£000 £000 £000 £000 £000 £000
Reinsurance contract assets as at 1 January 2022 166,636 2,493 25,140 18,635 627 213,531
Reinsurance expenses - allocation of reinsurance premiums paid (53,787) - - - - (53,787)
Amounts recoverable from reinsurers: - - 47,045 2,714 48 49,807
Recoveries of incurred claims and other insurance service expenses
Changes in the expected recoveries for past claims - - - (3,207) (171) (3,378)
Changes in the loss recovery component - 1,320 - - - 1,320
Effect of changes in non-performance risk of reinsurers - - - 2 - 2
Net (expenses) / income from reinsurance contracts held (53,787) 1,320 47,045 (491) (123) (6,036)
Net Finance expenses from reinsurance contracts (12,984) (6) - (423) (78) (13,491)
Effect of movements in exchange rates (1,347) 194 525 (414) (14) (1,056)
Total amounts recognised in comprehensive income (68,118) 1,508 47,570 (1,328) (215) (20,583)
Investment components (3,951) - 3,951 - - -
Cash flows
Premiums paid net of ceding commission 39,830 - - - - 39,830
Recoveries from reinsurance contracts held - - (50,163) (2,199) - (52,362)
Total cash flows 39,830 - (50,163) (2,199) - (12,532)
Reinsurance contract assets as at 31 December 2022 134,397 4,001 26,498 15,108 412 180,416
11 (e) Movements in reinsurance contract balances - Analysis by measurement
component - contracts not measured under the PAA
(i) Movements in reinsurance contract balances for the period 1 January
2023 to 30 June 2023 (unaudited)
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£000 £000 £000 £000 £000
Reinsurance contract assets as at 1 January 2023 113,366 14,302 29,081 7,864 164,613
Changes that relate to current service
CSM recognised for services received - - (1,974) (307) (2,281)
Change in risk adjustment for non-financial risk for risk expired - (1,098) - - (1,098)
Experience adjustments (2,109) - - - (2,109)
Total changes that relate to current service (2,109) (1,098) (1,974) (307) (5,488)
Changes that relate to future service (1,666) 483 1,183 - -
Contracts initially recognised in the period
Changes in estimates that adjust the CSM 1,987 694 (1,018) (1,557) 106
CSM adjustment for income on initial recognition of onerous underlying - - 292 - 292
contracts
Changes in recoveries of losses on onerous underlying contracts that adjust - - (63) - (63)
the CSM
Total changes that relate to future service 321 1,177 394 (1,557) 335
Changes that relate to past service
Adjustments to assets for incurred claims - - - - -
Total changes that relate to past service - - - - -
Effect of changes in non-performance risk of reinsurers - - - - -
Net (expense) / income from reinsurance contracts held (1,788) 79 (1,580) (1,864) (5,153)
Net finance income from reinsurance contracts held (2,639) 61 141 54 (2,383)
Effect of movements in exchange rates 1,529 (366) (897) - 266
Total amounts recognised in comprehensive income (2,898) (226) (2,336) (1,810) (7,270)
Cash flows
Premiums paid net of ceding commission 20,381 - - - 20,381
Recoveries from reinsurance contracts held (23,299) - - - (23,299)
Total cash flows (2,918) - - - (2,918)
Reinsurance contract assets as at 30 June 2023 107,550 14,076 26,745 6,054 154,425
(ii) Movements in reinsurance contract balances for the period 1 January
2022 to 31 December 2022 (unaudited)
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£000 £000 £000 £000 £000
Reinsurance contract assets as at 1 January 2022 141,961 15,224 29,840 7,423 194,448
Changes that relate to current service
CSM recognised for services received - - (4,039) (1,039) (5,078)
Change in risk adjustment for non-financial risk for risk expired - (2,100) - - (2,100)
Experience adjustments 2,412 - - - 2,412
Total changes that relate to current service 2,412 (2,100) (4,039) (1,039) (4,766)
Changes that relate to future service (5,381) 1,659 3,722 - -
Contracts initially recognised in the year
Changes in estimates that adjust the CSM 625 1,769 (3,804) 1,410 -
CSM adjustment for income on initial recognition of onerous underlying - - 1,333 - 1,333
contracts
Changes in recoveries of losses on onerous underlying contracts that adjust - - 296 - 296
the CSM
Total changes that relate to future service (4,756) 3,428 1,547 1,410 1,629
Changes that relate to past service
Adjustments to assets for incurred claims - - - - -
Total changes that relate to past service - - - - -
Effect of changes in non-performance risk of reinsurers - - - - -
Net (expense) / income from reinsurance contracts held (2,344) 1,328 (2,492) 371 (3,137)
Net finance income from reinsurance contracts held (10,396) (2,847) 182 70 (12,991)
Effect of movements in exchange rates (2,780) 597 1,551 - (632)
Total amounts recognised in comprehensive income (15,520) (922) (759) 441 (16,760)
Cash flows
Premiums paid net of ceding commission 37,089 - - - 37,089
Recoveries from reinsurance contracts held (50,164) - - - (50,164)
Total cash flows (13,075) - - - (13,075)
Reinsurance contract assets) as at 31 December 2022 113,366 14,302 29,081 7,864 164,613
12 Borrowings
31 December
Unaudited 30 June 2022
2023
£000 £000
Tier 2 Debt 200,471 200,356
Amount due in relation to financial reinsurance 6,667 9,607
Other 2,206 2,013
Total 209,344 211,976
The fair value of amounts due in relation to Tier 2 debt at 30 June 2023 was
£144.0m (31 December 2022: £148.0m).
The fair value of amounts due in relation to financial reinsurance at 30 June
2023 was £6.2m (31 December 2022: £9.0m).
Other borrowings comprises capital amounts outstanding on mortgage bonds taken
out over properties held in the Unit-linked policyholder funds of the UK
division. The mortgage over each property is negotiated separately, varies in
term and bears interest at fixed or floating rates that are agreed at the time
of inception of the mortgage. The fair value is not materially different to
the carrying values shown above.
13 Business combination
Conservatrix
On 22 July 2022, Chesnara announced the acquisition of the insurance portfolio
of Nederlandsche Algemeene Maatschappij van Levensverzekering "Conservatrix"
N.V. ("Conservatrix"), a specialist provider of life insurance products in the
Netherlands that was declared bankrupt on 8 December 2020. The acquisition was
completed on 1 January 2023, following Court and Regulatory approvals.
The acquisition was effected through the transfer of the insurance portfolio
(together with other assets and liabilities set out in the table below) into
Waard Leven N.V., Chesnara's Dutch closed-book subsidiary. In order to support
the solvency position of the Conservatrix insurance portfolio, a Capital
Contribution of £35m has been provided by Chesnara, consisting of a £21m
contribution from Chesnara and £14m of existing Waard resources. The cash
consideration for the acquisition was €1.
The acquisition is classed as a Business Combination under IFRS3 and the fair
value of the assets and liabilities recognised at 1 January 2023 are as
follows:
Unaudited Fair value
£'000
Assets
Financial investments 366,698
Other assets 1,308
Deferred tax asset 33,387
Cash 31,415
Total assets 432,808
Liabilities
Insurance contracts 346,173
Other provision 12,591
Investment contracts 70,075
Total liabilities 428,839
Fair value of net assets 3,969
Net assets acquired 3,969
Total consideration paid -
Profit arising on business combination 3,969
A profit of £4.0m has been recognised on acquisition. This profit on
acquisition has been recorded as a "Profit arising on business combinations
and portfolio acquisitions" on the face of the statement of comprehensive
income. A day one gain has arisen on business combination, as by applying the
pricing model that we generally adopt, we offered a purchase price which was
at a discount to our own assessment of the value of the net assets to be
acquired.
The CSM on acquisition has been calculated as the difference between the fair
value of the insurance liabilities and the fulfilment cash flows. This has
resulted in a CSM of £45.4m being recognised as at 1 January 2023. This
amount forms part of the CSM value for 'Contracts initially recognised in the
year' in note 11(c)(i).
The group determined that a significant number of the contracts acquired did
not have any significant insurance risk at the acquisition date and have
therefore been classed as investment contracts, to be accounted for under
IFRS9.
The assets and liabilities acquired are included within the respective line
items on the face of the cash flow statement.
The results of Conservatrix have been included in the consolidated financial
statements of the group with effect from 1 January 2023, within Waard Group.
14 Portfolio transfer
Canada Life
On 16 May 2023, Chesnara announced it had reached an agreement to acquire the
onshore individual protection business of Canada Life Ltd, representing
approximately 47,000 life insurance and critical illness policies. The
transaction is initially in the form of a reinsurance agreement with the
liabilities 100% ceded by Canada Life Ltd and accepted by CA plc, with the
effective date being 1 January 2023. From this date all risks and rewards
relating to the policies were transferred to CA plc along with the economic
benefit of those risks and rewards.
The initial commission paid by CA plc to Canada Life Ltd for this reinsurance
inwards transaction was £9.0m and was funded from internal group resources.
The CSM on initial recognition has been calculated as £10.3m as at 1 January
2023.
Customers' policies are expected to transfer to CA plc in 2024, subject to the
completion of a court-approved Part VII transfer.
15 Post balance sheet event
The Directors are not aware of any significant post balance sheet events that
require disclosure in the condensed interim financial statements.
16 Approval of consolidated report for the six months ended 30 June
2023
This condensed consolidated report was approved by the Board of Directors on
20 September 2023. 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
21 September 2023
Results for the six months ended 30 June 2023 announced
28 September 2023
Interim ex-dividend date
29 September 2023
Interim dividend record date
20 October 2023
Last date for dividend reinvestment plan elections
10 November 2023
Interim dividend payment date
31 December 2023
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
Addleshaw Goddard LLP
One St Peter's Square
Manchester
M2 3DE
Burness Paull LLP
Exchange Plaza
50 Lothian Road
Edinburgh
EH3 9WJ
Auditor
Deloitte LLP
Statutory Auditor
3 Rivergate
Temple Quay
Bristol
BS1 6GD
Registrars
Link Group
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint Stockbrokers and
Corporate Advisors
Panmure Gordon
40 Gracechurch Street
London
EC3V 0BT
RBC Capital Markets
100 Bishopsgate
London
EC2N 4AA
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
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
15 St Helen's Place
London
EC3A 6DQ
ALTERNATIVE PERFORMANCE MEASURES
Throughout this report we use alternative performance measures (APMs) to
supplement the assessment and reporting of the performance of the group.
These measures are those that are not defined by statutory reporting
frameworks, such as IFRS or Solvency II.
The APMs aim to assess performance from the perspective of all stakeholders,
providing additional insight into the financial position and performance of
the group and should be considered in conjunction with the statutory reporting
measures such as IFRS and Solvency II.
The following table identifies the key APMs used in this report, how each is
defined and why we use them.
APM What is it? Why do we use it?
Group cash generation Cash generation is used by the group as a measure of assessing how much Cash generation is a key measure, because it is the net cash flows to Chesnara
dividend potential has been generated, subject to ensuring other constraints from its life and pensions businesses which support Chesnara's dividend-paying
are managed. capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
Group cash generation is calculated as the movement in the group's surplus own from existing business'.
funds above the group's internally required capital, as determined by applying
the group's capital management policy, which has Solvency II rules at its
heart.
Divisional cash generation Cash generation is used by the group as a measure of assessing how much It is an important indicator of the underlying operating performance of the
dividend potential has been generated, subject to ensuring other constraints business before the impact of group level operations and consolidation
are managed. adjustments.
Divisional cash generation represents the movement in surplus own funds above
local capital management policies within the three operating divisions of
Chesnara. Divisional cash generation is used as a measure of how much
dividend potential a division has generated, subject to ensuring other
constraints are managed.
Commercial cash generation Cash generation is used by the group as a measure of assessing how much Commercial cash generation aims to provide stakeholders with enhanced insight
dividend potential has been generated, subject to ensuring other constraints into cash generation, drawing out components of the result relating to
are managed. technical complexities or exceptional items. The result is deemed to better
reflect the underlying commercial performance, show key drivers within that.
Commercial cash generation excludes the impact of technical adjustments,
modelling changes and corporate acquisition activity; representing the
underlying commercial cash generated by the business.
Economic Value (EcV) EcV is a financial metric that is derived from Solvency II Own Funds. It EcV aims to reflect the market-related value of in-force business and net
provides a market consistent assessment of the value of existing insurance assets of the non-insurance business and hence is an important reference point
businesses, plus adjusted net asset value of the non-insurance business within by which to assess Chesnara's value. A life and pensions group may typically
the group. be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
We define EcV as being the Own Funds adjusted for contract boundaries, risk business over time. The EcV development of the Chesnara group over time can be
margin and restricted with-profit surpluses. As such, EcV and Own Funds a strong indicator of how we have delivered to our strategic objectives.
have many common characteristics and tend to be impacted by the same factors.
Economic Value (EcV) earnings The principal underlying components of the Economic Value earnings are: By recognising the market-related value of in-force business (in-force value),
a different perspective is provided in the performance of the group and on the
- The expected return from existing business (being the effect of the unwind valuation of the business. Economic Value earnings are an important KPI as
of the rates used to discount the value in-force); they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
- Value added by the writing of new business; have delivered against all three of our core strategic objectives.
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the determination of expected
cash flows; and
- The impact of acquisitions.
EcV operating earnings This is the element of EcV earnings (see above) that are generated from the EcV operating earnings are important as they provide an indication of the
company's ongoing core business operations, excluding any profit earned from underlying value generated by the business. It can help identify profitable
investment market conditions in the period and any economic assumption changes activities and also inefficient processes and potential management actions.
in the future.
EcV economic earnings This is the element of EcV earnings (see above) that are derived from EcV economic earnings are important in order to measure the additional value
investment market conditions in the period and any economic assumption changes generated from investment market factors.
in the future.
Commercial new business profit A more commercially relevant measure of new business profit than that This provides a fair commercial reflection of the value added by new business
recognised directly under the Solvency II regime, allowing for a modest level operations and is more comparable with how new business is reported by our
of return, over and above risk-free, and exclusion of the incremental risk peers, improving market consistency.
margin Solvency II assigns to new business.
Funds under management (FuM) FuM reflects the value of the financial assets that the business manages, as FuM are important as it provides an indication of the scale of the business,
reported in the IFRS Consolidated Balance Sheet. and the potential future returns that can be generated from the assets that
are being managed.
Acquisition value gain (incremental value) Acquisition value gains reflect the incremental Economic Value added by a The EcV gain from acquisition will be net of any associated increase in risk
transaction, exclusive of any additional risk margin associated with absorbing margin. The risk margin is a temporary Solvency II dynamic which will run off
the additional business. over time.
Leverage / gearing A financial measure that demonstrates the degree to which the company is It is an important measure as it indicates the overall level of indebtedness
funded by debt financing versus equity capital, presented as a ratio. It is of Chesnara, and it is also a key component of the bank covenant arrangements
defined as debt divided by debt plus equity, with the equity denominator held by Chesnara.
adding back the net of tax CSM liabilility, as measured under IFRS.
GLOSSARY
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches
between assets and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for
measuring the annual equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
CASLP Sanlam Life & Pensions UK Limited
BAU cash generation This represents divisional cash generation plus the impact of non-exceptional
group activity.
BLAGAB Basic life assurance and general annuity business
Cash generation This represents the operational cash that has been generated in the period.
The cash generating capacity of the group is largely a function of the
movement in the solvency position of the insurance subsidiaries within the
group and takes account of the buffers that management has set to hold over
and above the solvency requirements imposed by our regulators. Cash generation
is reported at a group level and also at an underlying divisional level
reflective of the collective performance of each of the divisions prior to any
group level activity.
Commercial cash generation Cash generation excluding the impact of technical adjustments, modelling
changes and exceptional corporate activity; the inherent commercial cash
generated by the business.
Divisional cash generation This represents the cash generated by the three operating divisions of
Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.
CSM Contractual Service Margin (CSM) represents the unearned profit that an entity
expects to earn on its insurance contracts as it provides services.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the
regulator of our Dutch subsidiaries.
DPF Discretionary Participation Feature - A contractual right under an insurance
contract to receive, as a supplement to guaranteed benefits, additional
benefits whose amount or timing is contractually at the discretion of the
issuer.
Dutch business Scildon and the Waard Group, consisting of Waard Leven N.V., Waard Schade N.V.
and Waard Verzekeringen B.V.
Economic profit A measure of pre-tax profit earned from investment market conditions in the
period and any economic assumption changes in the future (alternative
performance measure - APM).
EcV Economic Value is a financial metric that is derived from Solvency II Own
Funds 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.
GMM General measurement model - the default measurement model which applies to
insurance contracts with limited or no pass-through of investment risks to
policyholders.
Group Chesnara plc and its existing subsidiary undertakings.
Group cash generation This represents the absolute cash generation for the period at total group
level, comprising divisional cash generation as well as both exceptional and
non-exceptional group activity.
Group Own Funds In accordance with the UK's regulatory regime for insurers it is the sum of
the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the group in those capital
resources.
Group SCR In accordance with the UK's regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Group solvency Group solvency is a measure of how much the value of the company exceeds the
level of capital it is required to hold in accordance with Solvency II
regulations.
HCL HCL Insurance BPO Services Limited.
IFRS International Financial Reporting Standards.
IFA Independent Financial Advisor.
KPI Key performance indicator.
LACDT Loss Absorbing Capacity of Deferred Tax
Leverage (gearing) A financial measure that demonstrates the degree to which the company is
funded by debt financing versus equity capital, usually presented as a ratio,
defined as debt divided by debt plus equity, as measured under IFRS
London Stock Exchange London Stock Exchange plc.
LTI Long-Term Incentive Scheme - A reward system designed to incentivise executive
directors' long-term performance.
Movestic Movestic Livförsäkring AB.
Modernac Modernac SA, a previously associated company 49% owned by Movestic.
New business The present value of the expected future cash inflows arising from business
written in the reporting period.
Official List The Official List of the Financial Conduct Authority.
Operating profit A measure of the pre-tax profit earned from a company's ongoing core business
operations, excluding any profit earned from investment market conditions in
the period and any economic assumption changes in the future (alternative
performance metric - APM).
Ordinary shares Ordinary shares of 5 pence7 each in the capital of the company.
ORSA Own Risk and Solvency Assessment.
Own Funds Own Funds - in accordance with the UK's regulatory regime for insurers it is
the sum of the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the company in those
capital resources.
PAA Premium allocation approach - a simplified measurement model which can be
applied to short term contracts.
PRA Prudential Regulation Authority.
QRT Quantitative Reporting Template.
RA Risk adjustment is the additional reserve held for non-financial risks.
RCF 3 year Revolving Credit Facility of £100m (currently unutilised) put in
place in July 2021
Resolution The resolution set out in the notice of General Meeting set out in this
document.
RMF Risk Management Framework.
Robein Leven Robein Leven N.V.
Scildon Scildon N.V.
Shareholder(s) Holder(s) of ordinary shares.
Solvency II A fundamental review of the capital adequacy regime for the European insurance
industry. Solvency II aims to establish a set of EU-wide capital requirements
and risk management standards and has replaced the Solvency I requirements.
Standard Formula The set of prescribed rules used to calculate the regulatory SCR where an
internal model is not being used.
STI Short-Term Incentive Scheme - A reward system designed to incentivise
executive directors' short-term performance.
SCR In accordance with the UK's regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Swedish business Movestic and its subsidiaries and associated companies.
S&P Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
TCF Treating Customers Fairly - a central PRA principle that aims to ensure an
efficient and effective market and thereby help policyholders achieve fair
outcomes.
Tier 2 Term debt capital (Tier 2 Subordinated Notes) issued in February 2022 with a
10.5 year maturity and 4.75% coupon rate.
Transfer ratio The proportion of new policies transferred into the business in relation to
those transferred out.
TSR Total Shareholder Return, measured with reference to both dividends and
capital growth.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK business CA, S&P and CASLP
VA The Volatility Adjustment is a measure to ensure the appropriate treatment of
insurance products with long-term guarantees under Solvency II. It represents
an adjustment to the rate used to discount liabilities to mitigate the effect
of short-term volatility bond returns.
VFA Variable fee approach - the measurement model that is applied to insurance
contracts with significant investment-related pass-through elements.
Waard The Waard Group.
NOTE ON TERMINOLOGY
As explained in the IFRS financial statements, the principal reporting
segments of the group are:
CA which comprises the original business of Countrywide Assured plc, the group's
original UK operating subsidiary; City of Westminster Assurance Company
Limited, which was acquired by the group in 2005, the long-term business of
which was transferred to Countrywide Assured plc during 2006; S&P which
was acquired on 20 December 2010. This business was transferred from Save
& Prosper Insurance Limited and Save & Prosper Pensions Limited to
Countrywide Assured plc on 31 December; and Protection Life Company Limited
which was acquired by the group in 2013, the long-term business of which was
transferred into Countrywide Assured plc in 2014, as well as the portfolio of
policies acquired from Canada Life on 16 May 2023;
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; and the insurance portfolio of
Conservatrix acquired on 1 January 2023;
Scildon which was acquired on 5 April 2017; and
Other group activities which represents the functions performed by the parent company, Chesnara
plc. Also included in this segment are consolidation adjustments.
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