Chesnara Regulatory News (CSN)

Chesnara plc

LEI Number: 213800VFRMBRTSZ3SJ06

15 April 2020

PAST PRUDENCE PAYS DIVIDENDS

During 2019 Chesnara continued to deliver strong cash generation, funding the dividend strategy as well as maintaining a robust group solvency ratio. Economic Value increased significantly as a result of favourable economic conditions, despite the impact of a substantive foreign exchange loss due to currency fluctuations. Prudent financial and operational management has resulted in Chesnara's operations, solvency and dividends all being resilient to the impacts of Covid-19, however the Economic Value will have fallen subsequent to the year end.

· GROUP CASH GENERATION OF £36.7M (2018: £47.8M) Note 1

The 2019 result includes a cash strain of £24.7m from the symmetric adjustment impact Note 1. The prior year benefited from a positive symmetric adjustment impact and £20m of net releases from the with-profits fund (2019: £5.1m net growth in restricted surplus).

· DIVISIONAL CASH GENERATION OF £50.8M (2018: £63.9M) 

Operational and capital optimisation management actions together with modestly beneficial economic conditions have resulted in a strong divisional cash outcome.

· GROUP SOLVENCY RATIO OF 155% (31 DECEMBER 2018: 158%)

We are well capitalised at both group and subsidiary level under Solvency II. We continue not to apply transitional arrangements however we have applied the volatility adjustment for the first time in 2019 in both of our Dutch subsidiaries.

· 3.00% INCREASE IN FINAL DIVIDEND COMPARED WITH 2018

The results support the continued growth of the final dividend to 13.87p per share (2018 final: 13.46p per share).

· ECONOMIC VALUE (ECV) OF £670.0M (31 DECEMBER 2018: £626.1M) Note 2

Movement in the year is stated after dividend distributions of £31.3m and includes a foreign exchange loss of £28.8m.

· ECV EARNINGS NET OF TAX OF £104.0M (2018: £(60.9)M)

The result includes £121.1m of earnings resulting from investment market movements (2018: investment market loss of £49.7m).

· COMMERCIAL NEW BUSINESS PROFIT OF £14.4M (2018: £15.4M) Note 3

Scildon has reported a 65% year on year improvement due to record term assurance policy sales and a reduction in acquisition costs. Pricing pressures and changes in transfer regulations have driven a 32% reduction in Movestic's new business value.

· IFRS PROFIT BEFORE TAX OF £96.1M (2018: £27.0M)

The 2019 result includes £49.1m of profits relating to economic market conditions, predominantly asset growth in Scildon. Conversely, economic conditions created a £15.5m loss in 2018 which explains the large year on year movement.

· IFRS TOTAL COMPREHENSIVE INCOME OF £60.6M (2018: £23.7M)

The 2019 result includes a foreign exchange loss of £18.7m (2018: gain of £0.8m).

GOOD OPERATIONAL AND FINANCIAL RESILIENCE

The Company's focus has been, and remains, on ensuring that it continues to support its customers and colleagues whilst maintaining its financial and operational resilience.

Financial update

Chesnara remains well capitalised. Based on the closing market position on 31 March 2020, our solvency cover ratio is estimated (Note 4) at approximately 163% (31 December 2019: 155%), after allowing for the payment of a proposed dividend of £20.8m (13.87 pence per share) which represents a 3% uplift on the 2018 final dividend. Subject to approval at the AGM, this dividend will be paid on 2 June 2020 to shareholders on the register on 24 April 2020.

This preliminary announcement shows that we are foreseeing dividend income from our divisions during 2020 of £50.1m. Based on divisional solvency and liquidity estimates as at 31 March 2020 this amount is still expected to be paid during the second quarter, although we will await the results from our full quarter one valuation prior to making the payments. There is a degree of risk that following the deferral period and on reassessment a proportion of the total expected divisional dividends is not paid. Even assuming a realistic worst-case outcome regarding divisional dividends Chesnara retains a healthy post dividend cash balance.

As expected, and in line with our reported sensitivities, market movements up to 31 March 2020 have had an adverse impact on our Economic Value. We estimate the impact of market movements to that date to be a reduction of approximately £90m from the 31 December 2019 position of £670m.

Operational update

Despite the challenging circumstances our operations at both Head Office and our divisions continue to function effectively. Our business continuity plans have been implemented and continue to be adapted as the Covid-19 situation evolves, with new working arrangements in place and with the vast majority of our colleagues and outsource partners now working from home. Our risk management and control framework continues to be effective.

New business activity in the Netherlands and Sweden for Q1 has seen some small impact from the current environment. The impact is expected to be greater in the rest of the year, with a corresponding reduction consequently in the capital required to support new business.

John Deane, Chief Executive said:

"Historical investment decisions have given us a balanced risk profile as a business. Prudent, yet progressive, historical dividend payments, a low gearing ratio (11%) and a keen focus on operational resilience have resulted in the business being able to cope well with the challenges of Covid-19 and provide our customers, investors and other stakeholders with a strongly capitalised business that provides stability and security in these uncertain times. Colleagues are able to work from home whilst still providing good levels of customer service. The solvency of the group has held up well which has enabled us to continue our dividend strategy without compromising the financial stability of the business."

Note 1 Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.

Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara. Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed.

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.

Note 2 Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced with-profit funds. We consider the Solvency II rules understate the commercial value of these items. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin rules, in our view, overstate the cost of capital.

Note 3 During the year we have assessed our new business profitability measurement criteria. This review was initiated to ensure the figures reported, which were previously directly linked to the Solvency II measurement regime, are in fact a fair commercial reflection of value being added. As part of the assessment we also compared how our peers report new business profits to ensure market consistency. As a result of the assessment we have made two changes to how we quantify new business profits. Firstly, we now base the future cash flows on assuming a modest level of return over and above risk-free returns. No premium to risk-free was applied in the past. Secondly, we now exclude the incremental risk margin that Solvency II modelling assigns to the new business. We believe the revised profitability measurement better reflects the value of the best estimate cash flows we expect to emerge from new business written. The 2018 comparatives have been restated to the new basis.

Note 4 The 31 March estimated solvency position takes a high-level approach using the established divisional solvency estimation routines, market movements and sensitivities to calculate the expected impacts. Market indices are considered by each division depending on their exposure, including equity markets, yields and spreads. Items such as the potential mortality and longevity changes or cost base changes are not factored into the estimate; however, analysis has been undertaken that indicates the expected impact of not allowing for these is not significant.

The Board approved this statement on 14 April 2020.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

Roddy Watt, FWD Consulting - 0207 623 2368 / 07714 770493

Notes to Editors

Chesnara is a life and pensions company listed on the London Stock Exchange. It administers approximately one million policies with the assets under management spread broadly equally across businesses in the UK, the Netherlands and Sweden. Chesnara operates as Countrywide Assured in the UK, as The Waard Group and Scildon in the Netherlands, and as Movestic in Sweden.

Following a three pillar strategy, Chesnara's primary responsibility is the efficient administration of its customers' life and savings policies, ensuring good customer outcomes and providing a secure and compliant environment to protect policyholder interests. It also adds value by writing profitable new business in Sweden and the Netherlands and by undertaking value-adding acquisitions of either companies or portfolios.

Consistent delivery of the Company strategy has enabled Chesnara to increase its dividend for 15 years in succession.

Further details are available on the Company's website (www.chesnara.co.uk).

2019 HIGHLIGHTS 

IFRS PRE-TAX PROFIT £96.1M 2018 £27.0M

The 2019 result includes £49.1m of profits relating to economic market conditions, predominantly asset growth in Scildon. Conversely, economic conditions created a £15.5m loss in 2018.

IFRS TOTAL COMPREHENSIVE INCOME £60.6M 2018 £23.7M

The 2019 result includes a foreign exchange loss of £18.7m (2018: gain of £0.8m).

GROUP SOLVENCY 155% 2018 158%

We are well capitalised at both group and subsidiary level under Solvency II. We have applied the volatility adjustment for the first time in 2019 in both of our Dutch subsidiaries.

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ECONOMIC VALUE £670.0M 2018 £626.1M 

Movement in the year is stated after dividend distributions of £31.3m and includes a foreign exchange loss of £28.8m.

ECONOMIC VALUE EARNINGS £104.0M 2018 £(60.9)M

The result includes £121.1m of earnings resulting from investment market movements (2018: investment market loss of £49.7m).

COMMERCIAL NEW BUSINESS PROFIT £14.4M 2018 £15.4M 

This new metric is deemed to better reflect the commercial impact of writing new business than the previous measure that was based more directly on Solvency II rules. Scildon has reported a 65% year on year improvement due to record term assurance policy sales and a reduction in acquisition costs. Pricing pressures and changes in transfer regulations have driven a 37% reduction in Movestic's new business value.

GROUP CASH GENERATION £36.7M 2018 £47.8M

The 2019 result includes a cash strain of £24.7m from the symmetric adjustment impact. The enhanced cash analysis identifies the material components of this headline cash result. The prior year benefited from a positive symmetric adjustment impact and £20m of net releases from the with-profits fund (2019: £5.1m net growth in restricted surplus).

DIVISIONAL CASH GENERATION £50.8M 2018 £63.9M

Operational and capital optimisation management actions together with modestly beneficial economic conditions have resulted in a strong divisional cash outcome.

FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 3% to 21.30p per share (7.43p interim and 13.87p proposed final). This compares with 20.67p in 2018 (7.21p interim and 13.46p final).

2019 SAW EQUITY MARKET GROWTH, FALLING INTEREST RATES, STERLING RECOVERY

The financial results for 2019 reflect rising equity markets and narrowing bond spreads which have supported significant investment returns and economic earnings. The economic conditions, including further downward pressure on interest rates, have been less beneficial for cash generation and in particular the rising equity markets driving a negative symmetric adjustment. A strengthening of sterling against the euro and Swedish krona has led to foreign exchange translation losses.

EXPANSION IN THE NETHERLANDS WITH TWO PORTFOLIO ACQUISISTIONS

Operations in the Netherlands continued to grow following the successful completion and integration of our first small policy portfolio acquisition from Monuta Insurance and the announcement of a more significant portfolio acquisition from Argenta Bank (subject to regulatory approval), at a discount to EcV of c22%.

MEASURING OUR PERFORMANCE

HOW WE MEASURE PERFORMANCE WITHIN THIS PRELIMINARY ANNOUNCEMENT

Throughout this preliminary announcement we use measures to assess and report how well we have performed. The range of measures is broad and includes many measures that are not based on IFRS. The financial analysis of a life and pensions business also needs to recognise the importance of Solvency II figures, the basis of regulatory solvency. In addition, the measures aim to assess performance from the perspective of all stakeholders.

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

Whilst the IFRS results form the core of the preliminary announcement and hence retain prominence as a key financial performance metric, there is a general acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business.

In light of the limitations of IFRS reporting, this preliminary announcement adopts several Alternative Performance Measures (APMs) to present a more meaningful view of the financial position and performance. The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and, as such, all major financial APMs are derived from a defined rules-based regime. The diagram below shows the core financial metrics that sit alongside the IFRS results, together with their associated KPIs and interested parties.

FINANCIAL STATEMENT KPIS:

· IFRS net assets

· IFRS profits

ADDITIONAL METRICS:

· Solvency

o Own Funds

o Solvency Capital Requirement (SCR)

o SCR plus management buffer

o Solvency position (absolute value)

o Solvency position ratio

· Cash generation

o Group cash generation

o Divisional cash generation

· Economic Value

o Balance sheet

o Earnings

· New business

o EcV

o Commercial

SOLVENCY

Solvency is a fundamental financial measure which is of paramount importance to investors and policyholders. It represents the relationship between the value of the business as measured on a Solvency II basis and the capital the business is required to hold - the Solvency Capital Requirement (SCR). Solvency can be reported as an absolute surplus value or as a ratio.

Solvency gives policyholders comfort regarding the security of their provider. This is also the case for investors together with giving them a sense of the level of potential surplus available to invest in the business or distribute as dividends (subject to other considerations and approvals).

ECONOMIC VALUE

Economic Value (EcV) is deemed to be a more meaningful measure of the long-term value of the group and it generally approximates to Embedded Value reporting, which was used before the introduction of SII. In essence, the IFRS balance sheet is not generally deemed to represent a fair commercial value of our business as it does not fully recognise the impact of future profit expectations of long-term policies.

EcV is derived from Solvency II Own Funds and recognises the impact of future profit expectations from existing business.

An element of the EcV earnings each period is the economic value of new business. Factoring in the real world investment returns and removing the impact of risk margins is used by the group to determine the value of new business on a commercial basis.

CASH GENERATION

Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.

Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara. Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed.

OPERATIONAL AND OTHER PERFORMANCE MEASURES

In addition to the financial performance measures, this preliminary announcement includes measures that consider and assess the performance of all our key stakeholder groups. The diagram below summarises the performance measures adopted throughout the preliminary announcement.

Against a backdrop of continuing political uncertainty over the year, further downward pressure on interest rates and during a period of significant operational development, the Chesnara business model has performed robustly.

Economic Value has increased by 7%, with earnings of £104.0m significantly exceeding the payment of the total 2019 dividend and a foreign exchange loss of £28.8m. From an IFRS results perspective, the profit before tax of £96.1m is significantly up on the comparative result in 2018 of £27.0m. This is predominantly due to the strong Scildon results, which benefited from valuation gains in its bond portfolio as a result of narrowing spreads.

At the heart of Chesnara's proposition as a reliable income stock, the UK book has continued to generate sufficient cash to support the Chesnara dividend. This, combined with a total positive cash contribution from the overseas divisions, has resulted in a solid group cash generation of £36.7m (2018: £47.8m).

The dynamics of this year's cash result are particularly complex, and the total result represents the net impact of many individually significant items. In light of this and given the importance of cash, we have included enhanced cash analysis. This analysis shows an adjusted cash result, which excludes the impact of technical items such as the "symmetric adjustment" and other non-recurring modelling and technical items, of £75.3m.

The Solvency II standard formula capital model is more onerous regarding capital requirements for equity exposure during a period of strong equity market recovery as has been the case in 2019. This dynamic, termed the symmetric adjustment is therefore a key feature of the cash result in the year having increased capital requirements during the period, with a corresponding cash strain of £24.7m. During the final quarter of 2018 when equity markets fell sharply, we experienced a material opposite positive impact from the "symmetric adjustment".

Total new business profits of £14.4m are slightly lower than the prior year (2018: £15.4m). The Scildon contribution has continued to improve as the business improvement programme begins to have a positive impact on volumes and profitability. Movestic has maintained volumes in a competitive market but fee pressures and the impact of regulatory changes have led to a reduction in their total new business profit. We retain our expectation to replace a meaningful proportion of the value lost from payment of the dividend through writing new business.

The resilience of the closed book business units creates a strong foundation to support the continued development programme in Scildon and Movestic.

I will now report on how we have delivered against our three strategic objectives in a little more detail:

Cash generated is reassuring especially considering the material adverse impact (c£36.5m) of continued reductions in interest rates. Excluding the impact of the symmetric adjustment and foreign exchange losses, all divisions have made positive cash contributions which in turn has enabled all divisions to propose dividend payments to Chesnara with a total value of over £50m.

The UK business has generated £33.6m of cash, which continues to more than fund the dividend strategy.

On a cumulative basis Scildon has generated £21.0m of cash since it was acquired in 2016, which confirms our initial assessment that through a combination of business performance and capital management actions the division would make a meaningful contribution to Chesnara dividend funding requirements.

In Movestic, excluding the impact of the symmetric adjustment and foreign exchange losses the underlying result is a gain of £11.5m. This together with the positive cash outcomes in 2017 and 2018, has enabled Movestic to propose a record dividend of £6.2m.

All divisions have made material positive contributions to the overall Economic Value earnings of £104.0m. Much of the improvement is driven by an increase in equity and fixed interest investment valuations. It is pleasing to see the Economic Value losses in 2018 being more than fully recovered. Movestic has delivered 11% growth despite fully recognising the adverse future impact of regulatory changes regarding policy transfer processes and charges. The total pre dividend growth in Economic Value of £75.2m includes foreign exchange losses of £28.8m.

ANNOUNCEMENT OF OUR ACQUISITION OF ARGENTA INSURANCE AT A 22% DISCOUNT TO ECONOMIC VALUE CONFIRMS OUR PRESENCE IN THE DUTCH MARKET AND THAT DEALS ARE AVAILABLE WITHIN OUR PRICING CRITERIA

We have seen a rise in seller's valuations and prices paid for potential targets. Against this backdrop and following our acquisition and transfer of a small portfolio in the Netherlands, we were pleased to announce a further addition to our Dutch portfolio, acquired at a 22% discount to Economic Value. This confirms that it remains feasible to do deals whilst retaining our price discipline.

We are committed to maintaining our discipline when assessing potential acquisitions and ensuring that any offer we make is in the interests of all of our stakeholders, with suitable reward for the additional risks taken on. Chesnara has strong support from shareholders and lending institutions to progress our acquisition strategy. We also believe that our operating model has the flexibility to accommodate a wide range of potential target books. We believe our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures that we are aware of most viable opportunities in the UK and Western Europe. With this in mind, we are well positioned to continue the successful acquisition track record in the future.

Chesnara writes new business in both Sweden and the Netherlands. The ultimate aim is to create sufficient annual profits, either through returns on the existing business, or through writing new business, to replace a significant proportion of the Economic Value lost by way of dividend payments. Movestic continues to deliver within its target volume range although profits of £6.9m for 2019 are lower than the prior year (2018: £10.9m). This is due to several factors, including a shift away from single premium transfers, pressure on fee levels and legislative changes regarding transfer-out charges and processes. Movestic has progressed several key initiatives during the year and these are expected to help protect the business from any future price pressures and enhance volumes by modernising the customer and broker experience. These include:

- Further roll-out of the ongoing digitalisation programme with the specific objective to enhance the broker experience e.g. extending access to robot advice functionality to brokers;

- Adding new funds and functionality, including the recent launch of funds with protected return features and the plan to launch further products to broaden the customer offering; and

- Simplifying the corporate structure.

Scildon are not yet delivering to their full potential regarding new business profits. That said, further improvements in performance in the period combined with adopting a more commercially meaningful assessment of new business profits does mean that current new business value represents a meaningful contribution to replacing dividend payments. The new business profit for 2019 of £7.5m has improved by 65% from the prior year with positive development in both volumes and operational efficiency. There remains much to do but seeing some real rewards from the hard work to date gives cause for optimism that increasingly meaningful new business profits are attainable.

Solvency

The group continues to show a robust solvency ratio of 155% at 31 December 2019 (31 December 2018: 158%). To continue to manage capital effectively and as a result of the ongoing volatility that has been witnessed in bond spreads over recent periods, we have applied the Volatility Adjustment for the first time within Scildon's and Waard's results, which has had a modest positive impact and will also help protect against future volatility. The closing solvency position is stated after recognising the £20.8m cost of the final dividend, which will be paid in June 2020.

Regulation and governance

IFRS 17

Our programme has progressed well in the year, with our immediate focus being on assessing the key areas of technical judgement and identifying the necessary operational changes. From an operational and risk management perspective, the further proposed one-year implementation delay helps due to the complexity of the implementation but we believe it could cause additional costs.

We continue to be of the view that IFRS 17 should not have any significant bearing on the commercial assessment of Chesnara, with our expectation that capital management decision making will continue to be driven by regulatory solvency and Economic Value as opposed to our IFRS results and position.

Regulatory compliance

Compliance with regulation remains a priority for the group. We have continued to maintain a positive and constructive relationship with regulatory bodies across the group.

Governance framework

We continue to maintain a strong risk and governance culture across the group. Our current focus is on enhancing our operational resilience to improve understanding of any vulnerabilities and to strengthen and test our contingency options, providing greater assurance that all important business services can continue following any unexpected disruption.

AT CHESNARA 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.

Corporate purpose and Section 172 Reporting

Chesnara has always assessed its corporate purpose by considering the following eight aspects of our business and by looking at the business from the perspective of all stakeholders. Increased emphasis on reporting in line with Section 172 of the Companies Act (S172) has therefore not required any notable change in our approach to decision making. It has however formalised the requirement to consider and report how we ensure we act in a way to find an optimal long-term balance for stakeholder outcomes. The Annual Report & Accounts include a new section that demonstrates how we comply with S172 requirements and how our governance framework and culture considers the interests of all stakeholders. The new section also provides detailed insight into the major decisions the board has made during the year and reports how we have assessed the long-term impact on our stakeholders.

Business model

- Our acquisition strategy is built upon long term commitments to any markets we operate in. Our consolidation model therefore offers a genuine solution to the challenges certain insurance markets face.

The products and services we provide

- We help protect people and their dependants through the provision of life, health and disability cover or by providing savings and pensions which help customers with their financial needs in the future. We seek to provide customers and their advisers with helpful and reliable support.

Sustainability

- Driven in part by consumer demand, especially in our Dutch and Swedish operations, there is a continued positive shift towards an increased focus of sustainable fund investments.

- The nature of our business is such that in general we have a relatively low carbon footprint, even so we choose to fully offset our carbon emissions.

Shareholder proposition

- Investors, especially in a low interest rate environment do have a genuine need for income and hence our investor proposition, track record and responsible approach provides an investment opportunity for individuals seeking sustainable equity-based income.

Taxation

- As detailed in our tax strategy, we adopt a responsible and open approach to taxation and, consequently, pay the appropriate taxes throughout the group.

Staff

- We provide high quality jobs with competitive remuneration and good working conditions both directly and through outsourced arrangements.

Suppliers and partners

- We seek mutually respectful and sustainable relationships with our suppliers. We believe that supplier relationships only work in the long term if the terms and conditions are mutually beneficial. Our instinct and natural preference is to maintain established long-term supplier relationships where they remain commercially competitive and operationally viable.

Local community

- In the UK our investment and continued commitment to the North West and Preston in particular creates high quality financial services roles outside of London.

- All divisions support local community initiatives to the extent deemed appropriate given our financial responsibilities as a PLC.

OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE PURPOSE.

Outlook

Since the end of 2019, Covid-19 has emerged as a pandemic. This has had a significant impact on investment markets and society in general, and we have been closely assessing the impact on Chesnara and our stakeholders. Whilst the market impacts have been extreme, the scale of impact remains within the ranges we test as a matter of course within our established governance procedures. It is also useful to note that the Solvency II regime is designed specifically to ensure that we hold sufficient capital to withstand the kind of adverse conditions we are currently experiencing. Chesnara remains well capitalised and, based on the closing market position on 31 March 2020, our solvency cover ratio is estimated at approximately 163%, after allowing for payment of our proposed final dividend. The estimate does not allow for any increase in insurance claims because analysis suggests the increase in the level of claims experience will not be material.

Whilst the solvency position post year end has held up well, the Economic Value of the group is estimated to have dropped by approximately c£90m, in line with our reported sensitivities.

The Chesnara parent company had cash and near cash balances at the end of 2019 of over £75m. This balance had built in part as a result of our disciplined historical dividend strategy whereby we have prioritised the ability to sustain the dividend during difficult times over the payment of special dividends. In addition to this, these Annual Report & Accounts show that we are foreseeing dividend income from our divisions during 2020 of £50.1m. Based on divisional solvency and liquidity estimates as at 31 March 2020 this amount is still expected to be paid during the second quarter, although we will await the results from our full quarter one valuation prior to making the payments. There is a degree of risk that following the deferral period and on reassessment a proportion of the total expected divisional dividends is not paid. Even assuming a realistic worst case outcome regarding divisional dividends Chesnara retains a healthy post dividend cash balance.

It remains too early to quantify the potential long-term impact on our financial performance arising from Covid-19, although we continue to have a strong and viable business. At this point, we remain focused on supporting our customers and colleagues while maintaining our financial and operational resilience. To date, our operations in all divisions and at group have undertaken a fairly smooth transition to remote working conditions, with no significant or prolonged disruption to key business services anticipated.

Beyond the Covid-19 situation, based on my early assessment of the business, Chesnara has a clear strategic direction and the ability to deliver against its objectives, which in turn fund our well-established dividend strategy. In particular:

- value and cash are expected to continue to emerge from our existing books of business, both in the UK and our overseas divisions;

- we have sufficient scale and presence in both the UK and the Netherlands to continue our focus on acquisition activity in those territories. We also remain open minded about new territories, but the benefits would need to outweigh the inherent challenge of adding another regulatory environment into our business model; and

- we remain committed to writing new business in both Sweden and the Netherlands with a view to replacing a meaningful proportion of the dividend strain through our new business operations.

From a Brexit perspective, the structure of the group, with established regulated entities in three European countries, together with the fact we do not trade or share resource across territories, means I share the previously stated Chesnara view that whatever the outcome from the Brexit negotiations, we expect it to have little direct impact on our business model

In light of the above, I am confident that after we have overcome the short-term challenges from Covid-19 including doing everything in our power to keep colleagues and business partners safe and sound, Chesnara is well positioned to continue to provide value to policyholders and shareholders and I look forward to working with a business that has been handed over to my Chairmanship in such good condition.

Luke Savage

Chairman

14 April 2020

OVERVIEW OF STRATEGY

Our strategy focuses on delivering value to policyholders and shareholders. The strategy is delivered through a proven business model underpinned by a robust risk management and governance framework and our established culture & values.

Covid-19 is not deemed to invalidate any of the future priorities reported below. There is, however, an over-arching priority to ensure business continuity through the crisis. Revised working practices and other operational challenges are not expected to have a permanent material impact on the benefits expected but delivery timeframes are likely to be extended.

BUSINESS REVIEW | UK

The UK division is principally made up of the insurance company Countrywide Assured plc. The company manages c256,000 policies and is in run-off. Countrywide Assured follows an outsourcer based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced. A central governance team is responsible for managing all outsourced operations.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

As a closed book, the division creates value through managing the following key value drivers: costs; policy attrition; investment return; and reinsurance strategy.

In general, surplus regulatory capital emerges as the book runs off. The level of required capital is closely linked to the level of risk to which the division is exposed. Management's risk-based decision-making process seeks to continually manage and monitor the balance of making value enhancing decisions whilst maintaining a risk profile in line with the board's risk appetite.

At the heart of maintaining value is ensuring that the division is governed well from a regulatory and customer perspective.

INITIATIVES AND PROGRESS IN 2019

- The division has continued to generate value in the year, driven by a combination of market-driven factors and operational deliverables.

- One of the key value initiatives that has progressed in the year is the consolidation of our fund manager arrangements from the current four to one. A selection process has taken place and the preferred supplier has been chosen. The division has plans in place to deliver the required operational change during 2020, and the work is progressing to plan. The 2019 results reflect the benefit of the expected future cost savings arising from the revised arrangements, amounting to £12.4m pre-tax.

- The division has benefited from positive lapse experience during the year, which has continued to support the emergence of value.

FUTURE PRIORITIES

- Completion of the division's fund manager rationalisation programme during 2020.

- Retaining the division's focus on maintaining an efficient and cost-effective operating model.

- Continue to support Chesnara in identifying and delivering UK acquisitions.

- Continue to ensure that our investment strategy and associated asset mix is delivering the risk and rewards that we expect as the book runs off.

KPIs

Economic Value

Cash generation

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Treating customers fairly is one of our primary responsibilities. We seek to do this by having effective customer service operations together with competitive fund performance whilst giving full regard to all regulatory matters. This supports our aim to ensure policyholders receive good returns, appropriate communication, and service in line with customer expectations.

INITIATIVES AND PROGRESS IN 2019

- Further improvements to the Countrywide Assured website were made during the year. This included a new fund centre, coupled with additional content to support the customer in understanding their products. Subsequent customer research in relation to these changes has been positive.

- As part of the division's customer strategy programme the following was also delivered during the year:

o Completed our initial programme for contacting customers that have "gone away". This has involved a full screening of our policy base.

o Revised some key written communications to our customers in order to meet good practice, including annual statements and retirement communications across all our books.

- Maintained good levels of customer satisfaction during the year.

FUTURE PRIORITIES

- Roll out the remaining updates to written customer communications.

- Key business as usual activities include:

o Continuing to complete product reviews which are designed to support our assessment of providing fair outcomes to our customers. Deliver any resultant remediation activity as required.

o Implementing a new routine process for continuing to stay in touch with customers who have not provided us with their most recent contact details. This will build on the one-off exercise we have completed.

- Continue to focus on ensuring we manage our policyholders in a way that minimises risk of any customer complaints and, in the instance a customer is not happy with our service, deal with these in an appropriate manner.

KPIs

Policyholder fund performance

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 2019

- Strong delivery of the division's business as usual governance responsibilities, including open and constructive dialogue with our regulators.

- The operational resilience programme has progressed well. This programme has been established in order to ensure that we comply with the high standards expected by our regulators, who have issued further guidance during the year to support their objective of maintaining operational resilience in the financial services sector as a whole.

- Good progress made on the division's IFRS 17 programme.

- Further to the introduction of the Master Trust Authorisation & Supervision Regime, a decision was taken to wind-up five Master Trust Schemes and assign members' benefits into their own individual arrangement. We engaged with tPR and obtained legal advice to complete this with limited customer impact. Mailing to confirm the wind-up will complete in 2020.

FUTURE PRIORITIES

- 2020 will see a focus on the operational impact of the IFRS 17 programme, including a planned software supplier selection process, coupled with planning and starting to implement the process changes that will be required to embed the selected solution into our financial reporting routines.

KPIs

SOLVENCY RATIO: 160%

Surplus generated in the period increases solvency ratio from 130% to 160%. After the dividend, due to be paid in 2020, the ratio is 131%.

BUSINESS REVIEW | SWEDEN

Movestic is a life and pensions business based in Sweden and is open to new business. From its Stockholm base, Movestic operates as an innovative brand in the Swedish life insurance market. It offers personalised unit-linked pension and savings solutions through brokers and is well-rated within the broker community.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

Movestic creates value predominantly by generating growth in the unit-linked assets under management (AuM), whilst assuring a high quality customer proposition and maintaining an efficient operating model. AuM 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 2019

- The operational changes that were made last year have led to a 9% reduction in internal operational expenses.

- Negative transfer ratio with transfers out exceeding transfers in, with new government legislation making the transfer process easier for customers.

- Despite the adverse transfer ratio, positive net client cash flows together with investment growth contributed to a 24.8% increase in assets under management.

- Positive renegotiation of reinsurance arrangements.

- Corporate structure changes in the form of progressing the acquisition of the full ownership of Modernac, an associate holding and repatriating SICAV asset management operations from Luxembourg will create future value.

- Asset data enhancements have resulted in a reduction in capital requirements of £2.5m.

- Proposed record dividend payment to Chesnara of £6.2m.

FUTURE PRIORITIES

- Continue the journey of digitalising and automating processes, with a view to improving both efficiency and control.

- Continue to develop more digitalised and individualised customer proposition and experience.

- Provide a predictable and sustainable dividend to Chesnara.

KPIs (all comparatives have been presented using 2019 exchange rates)

Economic Value

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 2019

- Policyholder average investment return of 18.9% in the year (2018: -6.0%).

- Launch of Movestic Avancera into the Swedish market, a new type of product linked to a fund with capital protection, in co-operation with Morgan Stanley.

- Launch of a digital occupational pension solution for SMEs

- New website for partners and customers launched in 2019.

- Launch of a new claims system.

FUTURE PRIORITIES

- Continue to develop new solutions and tools to support the brokers value enhancing customer proposition.

- Further work on the direct distribution channels.

KPIs (all comparatives have been presented using 2019 exchange rates)

Broker assessment rating (out of 5)

POLICYHOLDER AVERAGE INVESTMENT RETURN:

18.9%

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 2019

- Introduction of digital invoice handling.

- Movestic has successfully implemented the second phase of the Insurance Distribution Directive (IDD) which applied from 1 October 2019.

- The IFRS 17 project has progressed well with delivery of first dry-run and a study of the potential effects on operations and business architecture.

FUTURE PRIORITIES

- Design and implement a target business architecture to support the group in complying with IFRS 17.

- Implementation of a sub ledger which aims to improve and automate the process for reporting to the supervisory authority.

- Continue to deliver compliance with the new Insurance Distribution Directive (IDD). The IDD seeks to strengthen consumer protection and transparency within the distribution of insurance-based products.

KPIs (all comparatives have been presented using 2019 exchange rates)

SOLVENCY RATIO: 159%

Solvency remains strong. After the dividend, due to be paid in 2020, the ratio is 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 dividend strategy. 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 2019

- Fee and lapse pressures have led to a reduction in new business profits with 2019 new business profits of £4.3m on our EcV and of £6.9m on our more commercially realistic metric.

- Launch of a digital life insurance product through partnership with an insurtech company. This will be used in the broker and direct channel and as a cross selling product.

- We have remained resilient to the harsh competitive environment, with market shares remaining within long-term target throughout the year.

- An improved profitability measurement model has been implemented, as well as developing an enhanced pricing strategy with further profitability focus.

FUTURE PRIORITIES

- Continue to write new business within the target range.

- Ongoing digitalisation of processes to improve customer and broker experience.

- Focus on increasing brand awareness.

- Enhance processes around cross selling.

- Develop a new pricing strategy.

- Further develop a pension draw down proposition.

KPIs (all comparatives have been presented using 2019 exchange rates)

Occupational pension market share %

New business profit*

*2019 and 2018 new business figures have been calculated using the commercially realistic metric. Values prior to this are retained at that which they were previously reported.

BUSINESS REVIEW | NETHERLANDS

Our Dutch businesses aim to deliver growth and earnings through their dual closed and open book approach and through the group acquisition strategy will integrate portfolios and businesses into their operations.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

Both Waard and Scildon have a common aim to make capital available to the Chesnara group to fund further acquisitions or to contribute to the dividend funding. Whilst their aims are common, the dynamics by which the businesses add value differ:

- Waard is in run-off and has the benefit that the capital requirements reduce in-line with the attrition of the book.

- As an "open business", Scildon's capital position does not benefit from book run-off. It therefore adds value and creates surplus capital through writing new business and by efficient operational management and capital optimisation.

INITIATIVES AND PROGRESS IN 2019

- The Scildon improvement plan has taken steps to reduce the cost base and headcount and enacted a new reinsurance treaty, with full year benefits expected in 2020.

- Reductions in the internal capital management buffer for both Dutch companies from 100% to 85% were approved by the DNB as at 31 December 2019.

- Waard has completed a portfolio acquisition of c6,000 policies from Monuta Insurance in October and announced the acquisition of a portfolio of term life and savings products from Argenta Bank, which is expected to complete during 2020.

- Scildon has optimised its risk-based return through de-risking its asset portfolio and investing into mortgage funds.

- Continuation of the dividend policy with dividends of £11.9m being proposed.

FUTURE PRIORITIES

- Continue to provide dividends to group.

- Complete the Scildon improvement plan covering cost management, process efficiency and business model assessments.

- Continue to actively manage the investment strategy and expand the Scildon holding in mortgage funds.

- Progress capital management and cash generation initiatives across the group, particularly in Scildon.

KPIs (all comparatives have been presented using 2019 exchange rates)

Scildon Economic Value

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 2019

- The recently launched mortgage term product won a five-star rating and best product award from independent research agency, MoneyView.

- Scildon has continued to engage with its IFA network and has again received an award from Afdiz, the Dutch broker organisation. In 2019, the business was awarded 'Best Investment Policy Provider' continuing a long run of winning awards across its product range.

- Scildon continues work on the migration and digitalisation of its policy administration system, which is expected to complete in 2021.

FUTURE PRIORITIES

- Regular engagement with its customers to improve service quality and to enhance and develop existing processes, infrastructure and customer experiences.

- Continue with the migration and digitalisation of the Scildon IT platform.

- Continue to engage with its broker network to develop our processes in line with their requirements.

KPIs (all comparatives have been presented using 2019 exchange rates)

Scildon client satisfaction rating (out of 10)

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 2019

- We continued to support our governance structures with a new Supervisory Board chair, Haik de Jong, and with the Group CEO, John Deane, becoming a member.

- The IFRS 17 project has progressed well with delivery of first dry-run and a study of the potential effects on operations and business architectures.

FUTURE PRIORITIES

- IFRS 17 implementation to continue with further dry runs, technical decisions and operational implementations, including expected local migration to Dutch GAAP for Scildon.

- Continuously enhance the governance and risk management framework.

KPIs (all comparatives have been presented using 2019 exchange rates)

SOLVENCY RATIO: SCILDON 220%; WAARD 555%

Solvency is robust in both businesses, with post-dividend solvency ratios of 210% and 510% for Scildon and Waard respectively.

Scildon

Waard

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

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 2019

- Increased new business profits in the year on both our EcV and more commercially realistic metrics. This has been partly delivered through cost saving initiatives as detailed above.

- Average term market share for 2019 was 11.6% compared to 7.6% in 2018. In isolation, the market share for December 2019 was 13.7%.

- The number of policies managed by Scildon increased by 6%.

FUTURE PRIORITIES

- Continue to deliver product innovation and cost management actions to ensure we meet our full potential in terms on new business value.

- Consider alternative routes to market that do not compromise our existing broker relationships, such as product white labelling.

KPIs (all comparatives have been presented using 2019 exchange rates)

Scildon - term assurance market share %

Scildon - new business profit*

*2019 and 2018 new business figures have been calculated using the commercially realistic metric. Values prior to this are retained at that which they were previously reported.

BUSINESS REVIEW | acquire life and pension businesses

Well considered and appropriately priced acquisitions maintain the effectiveness of the operating model, create a source of value enhancement and sustain the cash generation potential of the group.

HOW WE DELIVER OUR ACQUISITION STRATEGY

- Identify potential deals through an effective network of advisers and industry associates, utilising both group and divisional management expertise as appropriate.

- We primarily focus on acquisitions in the UK and Netherlands, although will consider other territories should the opportunity arise.

- We assess deals applying well established criteria which consider the impact on cash generation and Economic Value under best estimate and stressed scenarios.

- We work cooperatively with regulators.

- The financial benefits are viewed in the context of the impact the deal will have on the enlarged group's risk profile.

- Transaction risk is minimised through stringent risk-based due diligence procedures and the senior management team's acquisition experience and positive track record.

- We fund deals with a combination of debt, equity or cash depending on the size and cash flows of each opportunity.

HOW WE ASSESS DEALS

Cash generation

- Collectively our future acquisitions must be suitably cash generative to continue to fund the Chesnara dividend strategy.

Value enhancement

- Acquisitions are required to have a positive impact on the Economic Value per share under best estimate and certain more adverse scenarios.

Customer outcomes

- Acquisitions must ensure we protect, or ideally enhance, customer interests.

Risk appetite

- Acquisitions should normally align with the group's documented risk appetite. If a deal is deemed to sit outside our risk appetite the financial returns must be suitably compelling.

RISKS

- There is the risk that if a lack of suitable acquisition opportunities come to market at a realistic valuation, the investment case for Chesnara diminishes over time.

- There is the risk that we make an inappropriate acquisition that adversely impacts the financial strength of the group.

WHAT WE CAN DO ABOUT THIS

- Operating in three territories increases our options thereby reducing the risk that no further value adding deals are done.

- A broader target market also increases the potential for deals that meet our strategic objectives.

- Flexibility over the timing of subsequent divisional dividend flows provide an element of management control over the sterling value of cash inflows.

- Each acquisition is supported by a financial deal assessment model which includes high quality financial analysis. This is reviewed and challenged by management and the board, mitigating the risk of a bad deal being pursued.

INITIATIVES AND PROGRESS IN 2019

During 2019, the group entered into two transactions:

1. Monuta transaction

On 3 October 2019, Chesnara announced the completion of the acquisition and transfer of a term life and endowment portfolio of 6,000 policies from of Monuta Insurance, a large provider of funeral insurance products in the Netherlands.

The transaction was enacted through the Waard group. The consideration was a nominal €1 and entailed the transfer of assets of £28.1m and liabilities of £25.7m, resulting in a reported immediate EcV gain of £2.4m.

2. Argenta transaction

On 22 November 2019, Chesnara announced the agreement to acquire a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V. The transaction is expected to be both earnings and EcV accretive on completion. Chesnara estimates that the acquired portfolio will have a positive cumulative cash generation profile over its remaining life.

The transaction, which is expected to complete in 2020, will involve the transfer of a portfolio of approximately 44,000 term and savings policies, for a consideration of €29.2m (approximately £24.8m), to be paid in cash. The consideration represents a discount of 17% to the acquired portfolio's Solvency II own funds, calculated on a Chesnara-consistent basis, and a 22% discount (c.€8.0m gain) to Chesnara's estimate of Economic Value as at 30 June 2019. As at 30 June 2019, the acquired portfolio had gross assets of c.€380m (c.£323m at 31 December 2019 exchange rates).

ACQUISITION OUTLOOK

- Overall, we have witnessed an increase in acquisition activity in the year. This increase has coincided with, what we perceive to be, a rise in seller's valuations and prices paid for potential targets.

- In light of this, it is worth reiterating that Chesnara continues to measure potential targets against its stringent acquisition assessment model which takes into account; (a) the price compared to the EcV; (b) the cash generation capability; (c) the strategic fit; and (d) the risks within the target. We are committed to maintaining our discipline when assessing potential acquisitions.

- The environment in which European life insurance companies operate continues to increase in complexity, such as the forthcoming application of IFRS 17. We believe this additional complexity will potentially drive further consolidation as institutions seek to remove operational complexity and potentially release capital or generate funds from capital intensive life and pension businesses.

- We continue to have strong support from shareholder and lending institutions to progress our acquisition strategy, and we also believe that our operating model has the flexibility to accommodate a wide range of potential target books.

- Our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures that we are aware of most viable opportunities in the UK and Western Europe. With this in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

CAPITAL MANAGEMENT | Solvency II

Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for liquid resources available to fund items such as dividends, acquisitions or business investment. As such, Chesnara defines cash generation as the movement in surplus, above management buffers, during the period.

What is solvency and capital surplus?

- Solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold.

- The value of the company is referred to as its "Own Funds" (OF) and this is measured in accordance with the rules of the newly adopted Solvency II regime.

- The capital requirement is again defined by Solvency II rules and the primary requirement is referred to as the Solvency Capital Requirement (SCR).

- Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF LESS SCR

WHAT ARE OWN FUNDS?

A valuation which reflects the net assets of the company and includes a value for future profits expected to arise from in-force policies.

The Own Fund valuation is deemed to represent a commercially meaningful figure with the exception of:

- Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain policies despite a high probability of receipt.

- Risk margin: The Solvency II rules require a "risk margin" liability which is deemed to be above the realistic cost.

- Restricted with profit surpluses: Surpluses in the group's with-profit funds are not recognised in Solvency II Own Funds despite their commercial value.

We define Economic Value (EcV) as being the Own Funds adjusted for the items above. As such our Own Funds and EcV have many common characteristics and tend to be impacted by the same factors.

Transitional measures, introduced as part of the long-term guarantee package when Solvency II was introduced, are available to temporarily increase Own Funds. Chesnara does not take advantage of such measures.

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 Own Funds include writing profitable new business, reducing the expense base and improvements to lapse rates.

WHAT IS CAPITAL REQUIREMENT?

The solvency capital requirement can be calculated using a "Standard formula" or "internal model". Chesnara adopts the "Standard formula".

The standard formula requires capital to be held against a range of risk categories. The following chart shows the categories and their relative weighting for Chesnara:

Note: The table above does not include the impact of the loss absorbing capacity of deferred tax.

There are three levels of capital requirement:

Minimum dividend paying requirement/risk appetite requirement

The board sets a minimum solvency level above the SCR which means a more prudent level is applied when making dividend decisions.

Solvency Capital Requirement

Amount of capital required to withstand a 1 in 200 event. The SCR acts as an intervention point for supervisory action including cancellation or the deferral of distributions to investors.

Minimum Capital Requirement

The MCR is between 45% and 25% of the SCR. At this point Chesnara would need to submit a recovery plan which if not effective within three months may result in authorisation being withdrawn.

How does the SCR change?

Given the largest component of Chesnara's SCR is market risk, changes in investment mix or changes in the overall value of our assets has the greatest impact on the SCR. For example, equity assets require more capital than low risk bonds. Also, positive investment growth in general creates an increase in SCR. Book run-off will tend to reduce SCR but this will be partially offset by an increase as a result of new business.

CHESNARA GROUP SOLVENCY METRICS

We are well capitalised at both a group and subsidiary level. We have applied the volatility adjustment in our Dutch businesses for the first time in this period but have not used any other elements of the long-term guarantee package within the group. The volatility adjustment is an optional measure that can be used in solvency calculations to reduce volatility arising from large movements in bond spreads.

CHESNARA GROUP

SOLVENCY POSITION

SOLVENCY SURPLUS

Surplus: The group has £172.8m of surplus over and above the internal capital management policy, compared to £168.0m at the end of 2018. The group solvency ratio has decreased slightly, from 158% to 155%. The growth in surplus has arisen from a rise in Own Funds, which have increased more than the rise in required capital.

Dividends: The closing solvency position is stated after deducting the £20.8m proposed dividend (31 December 2018: £20.2m), and reflects the payment of an interim dividend of £11.1m.

Own Funds: Own Funds have risen by £70.3m (pre-dividends). This is driven largely by equity market and spread narrowing gains during the year. In addition, management actions such as Fund Manager Rationalisation, a with-profit capital extraction and the Monuta Insurance portfolio transfer have resulted in Own Funds growth.

SCR: The SCR has risen by £30.5m this year. The key movements underlying this are increases in equity risk, currency risk and lapse risk, partially offset by reduced spread risk, in part due to Scildon de-risking activities.

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 2018 figures have been restated using 31 December 2019 exchange rates in order to aid comparison at a divisional level.

UK

Surplus: £11.4m above board's capital management policy.

Dividends: Solvency position stated after £32.0m proposed dividend (2018: £59.0m).

Own Funds: Increased by £46.8m (pre-dividend) due to asset returns over the period, the impact of FMR and with-profits capital extraction, partially offset by the negative impact of the fall in the yield curve.

SCR: Increased by £11.0m, driven by market risk rise. Equity risk has increased, due to equity market gains (with knock-on impacts on currency).

SWEDEN

Surplus: £51.8m above board's capital management policy.

Dividends: Solvency position stated after £6.2m proposed dividend (2018: £2.7m).

Own Funds: Growth of £45.0m (pre-dividend) due to investment returns over the period, in particular following gains in equity markets. Partially offset by adverse assumption changes for transfer rates, future fund management income and fund rebates.

SCR: Capital requirements have risen by £39.0m. Equity risk is the main driver due to the equity market gains during the year.

NETHERLANDS - WAARD

Surplus: £28.7m above board's capital management policy (£1.4m rise due to buffer reduction: 100% to 85%).

Dividends: Solvency position stated after £4.9m proposed dividend (2018: £3.1m).

Own Funds: Growth of £4.5m (pre-dividend) due to positive returns, Monuta Insurance acquisition, mortality experience and revised mortality assumptions.

SCR: Increased by £1.7m, due to acquisition and rise in equity and currency risk, due to equity gains.

NETHERLANDS - SCILDON

Surplus: £17.9m above board's capital management policy (£10.8m rise due to buffer reduction: 100% to 85%).

Dividends: Solvency position stated after £7.0m proposed dividend (2018: £4.9m).

Own Funds: Growth of £5.4m (pre-dividend) due to significant spread returns and the introduction of the volatility adjustment, partially offset by yield curve movements.

SCR: Decreased by £3.2m, driven by fall in spread risk following de-risking exercises.

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 and longer-term impact of certain sensitivities that the group is exposed to, covering solvency, cash generation and Economic Value. As can be seen, EcV tends to take the 'full force' of adverse conditions whereas cash generation is often protected in the short term and, to a certain extent, the longer term due to compensating impacts on required capital.

Key:

INSIGHT*

20% sterling appreciation: A material Sterling appreciation reduces the value of surplus in our overseas divisions and hence has an immediate impact on group cash generation. It also reduces the value of projected Own Funds growth in our overseas divisions and also reduces the value of overseas investments in CA.

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 is larger than Own Funds, resulting in an immediate impact on surplus. Conversely, in an equity fall, Own Funds and SCR both fall. The extent to which the SCR reduction offsets the Own Funds depends on the stress applied. The impacts are not symmetrical due to management actions and tax. The change in symmetric adjustment has a significant impact (25% equity fall: -£19m to the SCR, 25% equity rise: +£39m to SCR). The EcV impacts are more intuitive as they are more directly linked to Own Funds impact. CA and Movestic contribute the most due to their large amounts of unit-linked business.

Interest rate sensitivities: An interest rate rise is generally positive across the group. An interest rate fall results in a larger impact on Own Funds than an interest rate rise, given the current low interest rate environment. CA, Movestic and Scildon all contribute towards the total group cash generation impact.

50bps credit spread rise: A credit spread rise has an adverse impact on surplus and future cash generation, particularly in Scildon due to corporate and non-local government bond holdings that form part of the asset portfolios backing non-linked insurance liabilities. Scildon's sensitivity has reduced due to the asset de-risk but is still significant. The impact on the other divisions is less severe.

25bps swap rate fall: This sensitivity measures the impact of a fall in the swap discount curve with no change in the value of assets. The result is that liability values increase in isolation. The most material impacts are on CA and Scildon due to the size of the non-linked book.

10% mass lapse: This sensitivity has a small impact on surplus as the reduction in Own Funds is largely offset by the SCR fall. However, with fewer policies on the books there is less potential for future profits. The division most affected is Movestic; the loss in future fee income following a mass lapse hits Own Funds by more than the reduction in SCR.

10% expense rise + 1% inflation rise: The expense sensitivity hits the solvency position immediately as the increase in future expenses and inflation is capitalised into the balance sheet.

10% mortality increase: This sensitivity has an adverse impact on surplus and cash generation, particularly for Scildon due to their term products.

*BASIS OF PREPARATION ON REPORTING:

Although it is not a precise exercise, the general aim is that the sensitivities modelled are deemed to be broadly similar (with the exception that the 10% equity movements are naturally more likely to arise) in terms of likelihood. Whilst sensitivities provide a useful guide, in practice, how our results react to changing conditions is complex and the exact level of impact can vary due to the interactions of events and starting position.

FINANCIAL REVIEW

The key performance indicators are a reflection of how the business has performed in delivering its three strategic objectives.

Summary of each KPI:

IFRS

PRE-TAX PROFIT: £96.1M (2018: £27.0M)

TOTAL COMPREHENSIVE INCOME: £60.6M (2018: £23.7M)

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?

Whilst the IFRS results form the core of reporting and hence retain prominence as a key financial performance metric, there is a general acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business.

Risks

The IFRS profit can be affected by a number of our principal risks and uncertainties. Volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit, and foreign currency fluctuations can affect total comprehensive income. The IFRS results of Scildon are potentially relatively volatile, in part, due to the different approach used by the division for valuing assets and liabilities, as permitted under IFRS 4.

*includes other comprehensive income

- Strong results in the UK and Scildon drive substantial profits in 2019, with positive contributions from all operating businesses.

- Significant earnings have been generated from both operating items (£46.2m) and economic (£49.1m) factors.

- The Waard result benefited from a one-off gain of £0.8m following the acquisition of a policy portfolio from Monuta Insurance.

- Total comprehensive income includes a foreign exchange loss of £18.7m relating to sterling's appreciation against both the euro and Swedish krona.

CASH GENERATION

GROUP CASH GENERATION £36.7M (2018: £47.8M)

DIVISIONAL CASH GENERATION £50.8M (2018: £63.9M)

What is it?

Cash generation is calculated as being the movement in Solvency II Own Funds over the internally required capital. The internally required capital is determined with reference to the group's capital management policies, which have Solvency II rules at their heart. Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Why is it important?

Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we are performing against our stated objective of 'maximising value from existing business'. However, our cash generation is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of the group.

Risks

The ability of the underlying regulated subsidiaries within the group to generate cash is affected by a number of our principal risks and uncertainties. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, it is impacted by similar drivers, and therefore factors such as yields on fixed interest securities and equity and property performance contribute significantly to the level of cash generation within the group.

Divisional cash generation

- Cash generation from both the UK and Scildon support the divisional result, with cash being utilised in Sweden.

- The UK contribution was delivered through significant growth in Own Funds, whilst the main driver in Scildon was asset optimisation and reduction in capital requirements.

- Movestic also delivered substantial growth in Own Funds, although this was outweighed by the increases in capital requirements, resulting in cash utilisation for the year.

- The result also includes the non-recurring benefit of a £7.9m capital transfer from restricted with-profit funds in the UK (net movement is c£5.1m growth in restricted surplus, 2018: net £20m release).

Group cash generation

- Total group cash generation includes the impact of other group activities, primarily the impact of group expenses on own funds and a reduction in capital requirements upon consolidation of divisions.

ECONOMIC VALUE (EcV)

£670.0M (2018: £626.1M)

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. Conceptually, EcV is broadly similar to EEV in that both reflect a market-consistent assessment of the value of existing insurance business, plus adjusted net asset value of the non-insurance business within the group.

Why is it important?

EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is an important reference point by which to assess Chesnara's value. A life and pensions group may typically be characterised as trading at a discount or premium to its Economic Value. Analysis of EcV provides additional insight into the development of the business over time.

The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through writing profitable new business. It ignores the potential of new business to be written in the future (the franchise value of our Swedish and Dutch businesses) and the value of the company's ability to acquire further businesses.

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets, yields on fixed interest securities and bond spreads. In addition, the EcV position of the group can be materially affected by exchange rate fluctuations. For example, a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group within a range of £90m-£140m, based on the composition of the group's EcV at 31 December 2019.

- Economic value rose by 7% to £670.0m in 2019.

- Group EcV earnings of £104.0m, supported by substantial economic profits across the divisions.

- The movement in EcV since the start of the year includes the impact of the payment of the final 2018 and interim 2019 dividends.

- Foreign exchange losses stemmed from the translation of the Dutch and Swedish divisional results, representing the strengthening of sterling against the euro and Swedish krona since the start of the year.

ECV EARNINGS

£104.0M (2018: £(60.9)M)

What is it?

In recognition of the longer-term nature of the group's insurance and investment contracts, supplementary information is presented that provides information on the Economic Value of our business.

The principal underlying components of the Economic Value result are:

- The expected return from existing business (being the effect of the unwind of the rates used to discount the value in-force);

- Value added by the writing of new business;

- Variations in actual experience from that assumed in the opening valuation;

- The impact of restating assumptions underlying the determination of expected cash flows; and

- The impact of acquisitions.

Why is it important?

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 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 as set out above. 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.

- Total EcV earnings of £104.0m were generated in 2019.

- Economic earnings drive the result following an upturn in market conditions since the start of the year, primarily equity market returns and the narrowing of bond spreads.

- Underlying operating activities were modest, suffering from the impact of the strengthening of assumptions in Movestic and operating experience in Scildon. The UK and Waard delivered positive operating earnings.

- Material other operating items relate to one-off strengthening of assumptions in Movestic, following changes to the transfer process and changes to local transfer legislation. This was offset by subsequent changes to trail commission expectations. Also included is a gain on completion of the acquisition of a policy portfolio from Monuta Insurance (£2.4m), under the Waard Group.

- Other mostly relates to tax and changes in risk margin.

CASH GENERATION

GROUP CASH GENERATION

£36.7M (2018: £47.8M)

DIVISIONAL CASH GENERATION

£50.8M (2018: £63.9M)

The UK and Scildon have delivered significant cash contributions, driving a total divisional cash generation of £50.8m for the year. Cash is generated from increases in the group's solvency surplus, which is represented by the excess of own funds held over management's internal capital needs. These are based on regulatory capital requirements, with the inclusion of additional 'management buffers'.

Definition: Defining cash generation in a Life and Pensions business is complex and there is no reporting framework defined by the regulators. This leads to inconsistency across the sector. We define cash generated as being the movement in Solvency II surplus over and above the SCR, plus 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.

GROUP

- The headline cash results of £36.7m more than covers the annual dividend.

- Divisional cash generation supports the total proposed dividends to the Chesnara parent company of £50.1m

- The headline cash result is heavily impacted by technical matters such as the symmetric adjustment, with-profit restrictions, and model enhancements. An adjusted cash result which looks through such items, shows an underlying "commercial cash" result of £75.3m.

- The commercial cash result is made up of £37.5m from changing economic conditions, £43.3m from management actions and a residual balance of £(5.5)m from operating performance.

UK

- Good value growth significantly outweighs an increase in SCR resulting in solid cash generation that more than covers the Chesnara dividend. The prior year comparison benefitted from an unusually high release from the with-profits fund.

SWEDEN

- As a predominately unit linked business with a high proportion of equity investments, strong equity performance has created significant asset value, however this has created a corresponding increase in SCR. The SCR increase includes £13.3m arising from the symmetric adjustment, whilst in 2018 the adjustment was a reduction in SCR. This explains much of the year on year cash movement.

NETHERLANDS - WAARD

- Although Waard has reported a further strong growth in Own funds, unlike in previous years the capital requirement has also increased during the year. Much of the capital requirement increase is due to the acquisition of a policy portfolio from Monuta Insurance. Excluding the acquisition impact and before foreign exchange losses on the opening surplus, the underlying cash of £3.6m remains towards the top end of the range for steady state expectations.

NETHERLANDS - SCILDON

- Scildon is less exposed to equity markets. Unlike the other divisions, the Scildon cash result is dominated by a large reduction in management's capital requirements primarily as a result of a shift to a more capital efficient investment strategy. The Scildon result incorporates a significant loss resulting from further downward pressure on yields. Considering the yield pressures, it is reassuring to note that the Scildon cash profit in 2019 more than covers the prior year loss with cumulative cash generation of £21.0m since acquisition being in line with expectations.

CASH GENERATION - ENHANCED ANALYSIS

COMMERCIAL CASH

£75.3M

ECONOMIC CASH

£37.5M

All operating divisions delivered positive commercial cash generation in 2019.

Cash generation, alongside EcV growth, is critical to the Chesnara investment case. It is therefore important that the dynamics beneath the headline results are understood. Unlike other metrics such as the IFRS results, there is no prescribed disclosure framework for cash reporting. We have therefore produced some enhanced analysis with the disclosure format being broadly based upon how Embedded Value profits were historically reported.

The format of the analysis draws out components of the cash results relating to technical complexities, modelling issues or exceptional corporate activity (e.g. acquisitions). The result excluding such items is deemed to better reflect the underlying commercial outcome (commercial cash). This commercial result is then analysed to show the key drivers of that result. In particular, the analysis draws out the extent by which the result is due to external economic conditions. The analysis also highlights the impacts of management actions and exceptional items. There are a number of approximations in the analysis, and as such each individual line item should only be used as a guide to the factors that have influenced cash generation in the year.

INSIGHT

1. Symmetric adjustment increases capital requirements during periods of equity growth.

2. Surplus that builds up in the with-profit funds is restricted for solvency assessment purposes. This adjustment looks through this temporary restriction.

3. Reduced interest rates led to a sharp increase in capital required to cover lapse risk in Scildon. This increase reverses out on consolidation.

4. The cash result is sensitive to four main economic variables: equity values; country and corporate bond spreads; sterling exchange rates against the euro and Swedish krona; and yields. In summary, during 2019 the overall economic cash, including the symmetric adjustment, is only £12.8m. Despite the symmetric adjustment, equity growth created a £42.1m gain with sizeable gains from narrowing spreads broadly offsetting losses due to yield reductions and foreign exchange losses.

5. Modest operating cash of £1.0m includes the operating loss in Scildon, which relates largely to the effectiveness of reinsurance arrangements. Addressing this issue is a management priority in 2020. The loss under group activities stems largely from group level expenses.

6. Material other operating items are where we have drawn out the adverse impact of non-recurring regulatory changes in Sweden.

7. Other generally relates to tax and movements in risk margin.

8. Management actions have had a notable positive impact during the year:

a) CA have initiated a project to rationalise from the existing four external fund managers to a single partner.

b) During the year we have assessed the capital efficiency of the assets held by Scildon. The resultant shift to more capital efficient and generally lower risk assets has reduced the capital requirement materially.

c) Continued work to improve the classification of assets in Movestic has resulted in less being defaulted to more onerous capital requirement categories.

d) The application of the volatility adjustment in our Dutch divisions delivered a material increase in the value of Own Funds.

EcV EARNINGS

£104.0M (2018: £(60.9)M)

The group has reported significant EcV earnings in 2019, aided largely by equity growth and bond spreads narrowing since the start of the year. Growth has been seen across all operating divisions.

Analysis of the EcV result in the period by earnings source:

Analysis of the EcV result in the year by business segment:

Note 1 - Economic conditions: The EcV result is sensitive to investment market conditions, as reflected by the £121.1m of economic earnings in the year. A significant proportion of these earnings were driven by favourable movement in equities and corporate bonds. Key movements in investment market conditions during the year are as follows:

- The FTSE All share index has increased by 14.2% (12 months to 31 December 2018: decreased by 13.0%);

- The Swedish OMX all share index has increased by 29.6% (12 months to 31 December 2018: decreased by 7.7%);

- The Netherlands AEX all share index has increased by 20.3% (12 months to 31 December 2018: increased by 11.6%); and

- 10 year UK gilt yields have decreased from 1.32% to 0.84%.

Note 2 - Material other operating items: This includes operating items that were individually material and have therefore been separately analysed to aid an understanding of the operating result. In Movestic a strengthening of assumed transfer rates (£6.0m) was undertaken to reflect recent changes in the transfer out process and to align with changes to local legislation. There was a further one-off negative adjustment of (£3.5m) relating to transfer fee modelling, also a consequence of the changes to transfer legislation. This was largely offset by a positive revision to future trail commission expectations, following the IDD legislative changes (£9.3m). The other component relates to the gain on completion of the acquisition of a policy portfolio from Monuta Insurance (£2.4m), under the Waard Group.

Note 3 - UK: The UK delivered growth of £48.9m in the year. Solid operating earnings of £22.6m stemmed from favourable movements in both mortality experience and fee income. Lower than expected rates of attrition across the books of business, resulted in higher assumed future fee income. The result also includes the benefit arising from the fund manager rationalisation exercise undertaken by the division (£12.4m pre-tax), primarily through a reduction in assumed future expenses. Economic profits of £36.6m underpin the result, supported by market conditions. The key component driving the economic result is investment returns achieved, predominantly on equity holdings offset by a fall in the yield curve.

Note 4 - Sweden: Movestic recorded substantial earnings of £43.8m in 2019, with the result underpinned by investment market returns. Economic earnings of £55.3m predominantly arose from growth in equity investments. This was reflected by average policyholder investment returns of 18.9% (2018: -6.0%). While operating experiences were favourable, the strengthening of other assumptions resulted in operating losses. The main assumption changes include increased lapse rates resulting from legislative changes regarding procedures for processing transfers, regulatory changes to transfer-out charges and reductions in assumed future performance fees and fund rebates. New business profits on an EcV basis were modest (£4.3m) and reflective of the challenging market, with lower volumes of single premiums and transfers-in, coupled with margin pressures.

Note 5 - Netherlands: The Dutch division has reported earnings of £16.7m for the year. Scildon contributed earnings of £12.0m following valuation gains in its bond portfolio and the narrowing of spreads, offsetting operational losses driven by lapse, expense and reinsurance experience. Waard delivered earnings of £4.7m, which included a £2.4m gain on acquisition of the Monuta Insurance policy portfolio. Underlying operating profits benefitted from favourable mortality experience and subsequent assumption changes, whilst economic earnings stemmed from bond performance and equity market returns.

Note 6 - Group: This component includes costs incurred at group level and the impact of consolidation activities, with a loss reported for the year.

ECONOMIC VALUE

£670.0M (31 DEC 2018: £626.1M)

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 2019 to 31 Dec 2019:

EcV earnings: Earnings of £104.0m have been reported for the year. The primary driver of this was the significant economic profits arising from market conditions in the year, particularly the impact of equity growth, return on assets and the narrowing of spreads.

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £31.3m were paid during the period, being the final dividend from 2018 and the 2019 interim dividend.

Foreign exchange: The EcV of the group suffered a foreign exchange loss in the period, a consequence of the sterling appreciation against the euro and Swedish krona.

EcV by segment at 31 Dec 2019:

The above table shows that the EcV of the group is diversified across its different markets.

EcV to Solvency II:

Our reported EcV is based on a Solvency II assessment of the value of the business, but adjusted for certain items where it is deemed that Solvency II does not reflect the commercial value of the business. The above waterfall shows the key difference between EcV and SII, with explanations for each item below.

Risk margin:  Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 3.25% cost of capital.

Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain in-force contracts, despite the high probability of receipt. We therefore make an adjustment to reflect the realistic value of the cash flows under EcV.

Ring-fenced fund restrictions: Solvency II rules require a restriction to be placed on the value of surpluses that exist within certain ring-fenced funds. These restrictions are reversed for EcV valuation purposes as they are deemed to be temporary in nature.

Dividends: The proposed final dividend of £20.8m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

IFRS

IFRS PRE-TAX PROFIT

£96.1M (2018: £27.0M)

IFRS TOTAL COMPREHENSIVE INCOME

£60.6M (2018: £23.7M)

The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major components: stable core, variable element and growth operation.

Executive summary

The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major components:

Stable core: At the heart of surplus, and hence cash generation, are the core CA (excluding the S&P book) and Waard Group segments. The requirements of these books are to provide a predictable and stable platform for the financial model and dividend strategy. As closed books, the key is to sustain this income source as effectively as possible. The IFRS results below show that the stable core continues to deliver against these requirements.

Variable element: Included within the CA segment is the S&P book. This can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements due to product guarantees. The IFRS results of Scildon are potentially relatively volatile although this is, in part, due to reserving methodology rather than 'real world' value movements.

Growth operation: The long-term financial models of Movestic and Scildon are based on growth, with levels of new business and premiums from existing business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee income.

IFRS results

The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:

Note 1: The CA segment result has outperformed 2018, with a particularly strong year on year movement emerging within the more variable S&P book. This is mainly reflective of the positive equity markets in 2019 which recovered from the large falls recorded in late 2018. Overall economic profits were consequently circa £22m higher year on year. Operating profits of £24.8m are slightly below the prior year.

Note 2: Movestic continues to contribute positively to the overall group IFRS result, posting an increase in profits when compared to 2018. Higher investment returns due to favourable market factors, together with positive claims development and reduced operational expenses were the main drivers.

Note 3: The Waard Group result was slightly ahead of expectations, in line with favourable investment market performance. Waard also made a one-off gain of £0.8m on the acquisition of a policy portfolio which completed during the year.

Note 4: Scildon has delivered a strong result driven mainly by positive investment returns arising from narrowing spreads. Operational expense savings have also contributed to the result for the year.

Note 5: The Chesnara result largely represents holding company expenses. The current year loss is marginally higher than last year largely due to 2019 including larger one-off items such as project related expenditure.

Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets. These are lower than last year largely due to a non-recurring adjustment to the impairment of acquisition costs within Movestic in 2018.

Note 7: Sterling strengthened against both the euro and Swedish krona in the period, resulting in a sizeable exchange loss in 2019.

Note 8: The IFRS operating result demonstrates the stability of the underlying business. Product based income and favourable movements in operating experience in the UK, were offset slightly by the marginal strengthening of expense reserves to support future developments. Higher transfer fees, fund rebates and positive claims development experience in the year supported the Movestic operating result. Both the Waard Group and Scildon continue to report solid operating results.

Note 9: Economic profit represents the components of the earnings that are directly driven by movements in economic variables. During 2019, all divisions benefited from favourable prevailing market conditions.

FINANCIAL management

The group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators.

Summary:

OBJECTIVES

The group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators. Accordingly we aim to:

- Maintain solvency targets

- Meet the dividend expectations of shareholders

- Optimise the gearing ratio to ensure an efficient capital base

- Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors

- Maintain the group as a going concern

HOW WE DELIVER TO OUR OBJECTIVES

In order to meet our obligations we employ and undertake a number of methods. These are centred on:

1. Monitor and control risk & solvency

2. Longer-term projections

3. Responsible investment management

4. Management actions

OUTCOMES

Key outcomes from our financial management process, in terms of meeting our objectives, are set out below:

1. SOLVENCY:

Group Solvency Ratio: 155%

2. SHAREHOLDER RETURNS

2017-2019 TSR (0.71)%

2019 dividend yield 6.6%

Based on average 2019 share price and full year 2019 dividend of 21.30p.

3. CAPITAL STRUCTURE

Gearing ratio of 11.0%

This does not include the financial reinsurance within the Swedish business.

4. LIQUIDITY AND POLICYHOLDER RETURNS

Policyholders' reasonable expectations maintained.

Asset liability matching framework operated effectively in the year.

Sufficient liquidity in the Chesnara holding company.

5. MAINTAIN THE GROUP AS A GOING CONCERN

Group remains a going concern

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

1. Capital structure

The group is funded by a combination of share capital, retained earnings and debt finance The debt gearing (excluding financial reinsurance in Sweden) was 11.0% at 31 December 2019 (15.6% at 31 December 2018).

The level of debt that the board is prepared to take on is driven by the group's "Debt and leverage policy" which incorporates the board's risk appetite in this area.

Over time, the level of gearing within the group will change, and is a function of:

- funding requirements for future acquisitions; and

- repayment of existing debt.

Acquisitions are funded through a combination of debt, equity and internal cash resources. The ratios of these three funding methods vary on a deal-by-deal basis and are driven by a number of factors including, but not limited to:

- size of the acquisition;

- current cash resources of the group;

- current gearing ratio and the board's risk tolerance limits for additional debt;

- expected cash generation profile and funding requirements of the existing subsidiaries and potential acquisition;

- future financial commitments; and

- regulatory rules.

In addition to the above, Movestic uses a financial reinsurance arrangement to fund its new business operation.

2. Maintain the group as a going concern

The directors have considered whether the financial statements should continue to be prepared on a going concern basis. This has included an assessment as to whether the group is expected to be able to meet its liabilities as they fall due for a period of at least 12 months from the date that the financial statements have been signed. The assessment has paid close attention to the group's position at 31 December 2019, how the group has developed since then, and how it is expected to develop subsequent to the signing of the financial statements. In particular, this work has considered the impact of Covid-19 on the group's operations, regulatory position, solvency position and liquidity position.

- Solvency: The group and its divisions are well capitalised, and our analysis has shown that we expect to remain well capitalised over the business planning horizon, even after the significant equity market falls, widening of bond spreads and falls in bond yields that were witnessed since year end. This assessment has leveraged the work from the group's most recent business plan and Own Risk and Solvency Assessment (ORSA), which includes financial projections on both a base case and some stressed scenarios. The stressed scenarios included:

o Equity market declines;

o Reduction in yield curves;

o Credit spread rise;

o Swap rate fall;

o Adverse mortality and lapse experience;

o Adverse expense experiences;

o Reduced new business volumes; and

o Adverse exchange rate experience

- Liquidity: The group and its divisions have strong levels of cash and high quality short-term government bonds such that we do not have concerns in being able to fulfil our cash commitments over both the shorter term and the business planning horizon. At a Chesnara level we have sufficient levels of liquidity in order to meet our dividend and loan repayment commitments, and we continue to expect to receive the foreseeable dividends that have been referred to in this preliminary announcement. There is, however, a degree of risk as a result of Covid-19 that a proportion of the total expected divisional dividends is not paid. Even assuming a realistic worst-case outcome regarding divisional dividends Chesnara expects to retain a healthy post dividend level of liquidity.

- Regulatory position: Group and divisional teams have performed an assessment of the impact of Covid-19 and have confirmed that they expect to continue to meet their regulatory and contractual requirements. We have responded to any enquiries that our regulators have asked to date regarding management's assessment of the impact of Covid-19 on our solvency and operations.

- Operations: Covid-19 has had an impact on how we operate. We have been required to draw on our well-established business continuity plans, including those of our key suppliers/outsourcers, to ensure that we can continue to deliver our critical business services across the group, focusing largely on our customers services. In this environment, the board have recognised that the group will need to adjust its client service and operational capabilities as events unfold in the period ahead, and are in response upscaling our ability to deliver core services from the home environment, and executing plans to minimise the risk of transmission from within the group's office space. Whilst delivering some of these short-term changes has caused some level of disruption, we have continued to deliver our critical business services, and expect to continue to do so over the foreseeable future.

In light of the above, the board has concluded that it remains appropriate to continue to adopt the going concern assumption when preparing the financial statements.

3. Assessment of prospects

Our prospects are primarily considered through the annual business planning process, updated for key events that may occur in-between business plans. This covers a three-year horizon and captures the operating plans required to meet the group's strategic objectives.

The business plans include underlying operational deliverables, an assessment of the business model and the financial consequences of following the plans. Our plans also consider the principal risks and uncertainties that the group faces and how these might affect our financial prospects.

A more detailed assessment of our prospects has been shown below, updated for our consideration of the impact of Covid-19. This has been structured around our three key strategic objectives:

Value from in-force book

The group has c900,000 policies in force at 31 December 2019. These are generally long-term policies, and the associated policy cash flows can, at an overall portfolio level, be reasonably well predicted on base case and stressed scenarios. The group is well capitalised at both a group and divisional level and we have high quality assets backing our insurance liabilities. From a Covid-19 perspective, although solvency is well protected from the impact of equity market falls, sustained depressed market values do adversely impact fee income streams and therefore if markets do not recover then profitability prospects reduce. Similarly further reductions in yields would adversely impact prospects. Temporary market volatility is however a natural feature of investment markets and our financial model is well positioned to withstand difficult conditions without creating any permanent harm to the longer-term profitability prospects.

Acquisition Strategy

The outlook and prospects of continuing to deliver against this strategic objective is covered in the business review. From a Corona virus outbreak perspective there is no reason to believe that the impact of Covid-19 will reduce the propensity for vendors to bring businesses or portfolios to the market. The financial position of the Group continues to support financing deals through the use of our own resources or by raising debt however in the short term equity funding would likely be less attractive.

Value from new business

Chesnara is in a fortunate position in that its prospects do not fundamentally rely on the ability to sustain new business volumes. The expectation is that in the short-term new business levels will suffer as a result of Covid 19. In the medium to long term we have no reason to believe the market for Term assurance and Pension savings contracts will not recover to pre Covid 19 levels.

4. Assessment of viability

The board's assessment of the viability of the group is performed through a combination of the three-year business plan and the Own Risk and Solvency Assessment (ORSA) process. The board has assessed that being financially viable includes continuing to pay an attractive and sustainable level of dividends to investors and meeting all other financial obligations, including debt repayments. This is assessed through performing projections of the group's solvency and liquidity positions on a base case and a number of stressed scenarios.

The scenarios that are assessed include:

- Equity market declines;

- Reduction in yield curves;

- Credit spread rise;

- Swap rate fall;

- Adverse mortality and lapse experience;

- Adverse expense experiences;

- Reduced new business volumes; and

- Adverse exchange rate experience.

Due to the group's strong capital position and the group's business model, although the Covid-19 outbreak has caused significant global economic disruption, these scenarios have demonstrated that the group and the company remain well capitalised, and has sufficient liquidity. As such we can continue to remain confident that, even if the negative financial market impact of Covid-19 is sustained, the group will continue to be viable over the three year period of the business plan.

Underpinning the base case and stressed scenario 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 to remain in line with most recent plans.

- The projections apply the actuarial assumptions, such as mortality and morbidity, lapse and expense assumptions, from our most recent business plan. This is deemed appropriate given our assessment that Covid-19 will have an immaterial impact on those assumptions.

From a Covid-19 perspective our viability assessment has assumed that the equity price falls seen in 2020 will not recover over the 3 year planning horizon. Whilst there has been some short-term operational disruption from dealing with the restricted operating environment in light of Covid-19, our assessment has shown that both our internal functions and those operated by our key outsourcers and suppliers can adapt to these restrictions and do not cause concern as to our viability.

5. Viability statement

Based on the results of the analysis above, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. Based on the results of the analysis above, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

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 along with coordinated and economical application of resources 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 adjusted as appropriate across the group taking into account size, nature and complexity, with a single set of risk and governance principles applied consistently across the business.

In all divisions we maintain processes for identifying, evaluating and managing all material risks faced by the group, which are regularly reviewed by the divisional and group Audit & Risk Committees. Our risk assessment processes have regard to the significance of risks, the likelihood of their occurrence and take account of the controls in place to manage them. The processes are designed to manage the risk profile within the board's approved risk appetite.

Group and divisional risk management processes are enhanced by stress and scenario testing, which evaluates the impact on the group of certain adverse events occurring separately or in combination. The results, conclusions and any recommended actions are included within divisional and group ORSA Reports to the relevant boards. There is a strong correlation between these adverse events and the risks identified in 'Principal risks and uncertainties'. The outcome of this testing provides context against which the group can assess whether any changes to its risk appetite or to its management processes are required.

ROLE OF THE BOARD

The Chesnara board is responsible for the adequacy of the design and implementation of the group's risk management and internal control system and its consistent application across divisions. All significant decisions for the development of the group's risk management system are the group board's responsibility.

Risk and Control Policies

Chesnara has a set of Risk and Control Policies that set out the key policies, processes and controls to be applied. The Chesnara board approves the review, updates and attestation of these policies at least annually.

Strategy and Risk Appetite

Chesnara group and its divisions have a defined risk strategy and supporting risk appetite framework to embed an effective risk management framework, culture and processes at its heart and to create a holistic, transparent and focused approach to risk identification, assessment, management, monitoring and reporting.

The Chesnara board approves a set of risk preferences which articulate, in simple terms, the desire to increase, maintain, or reduce the level of risk taking for each main category of risk. The risk position of the business is monitored against these preferences using risk tolerance limits, where appropriate, and they are taken into account by the management teams across the group when taking strategic or operational decisions that affect the risk profile.

Risk Identification

The group maintains a register of risks which are specific to its activity and scans the horizon to identify potential risk events (e.g. political; economic; technological; environmental, legislative & social).

On an annual basis the board approves the materiality criteria to be applied in the risk scoring and in the determination of what is considered to be a principal risk. At least quarterly the principal and emerging risks are reported to the board, assessing their proximity, probability and potential impact.

Own Risk and Solvency Assessment (ORSA)

On an annual basis, or more frequently if required, the group produces a group ORSA Report which aggregates the divisional ORSA findings and supplements these with an assessment specific to group activities. The group and divisional ORSA policies outline the key processes and contents of these reports.

The Chesnara board is responsible for approving the ORSA, including steering in advance how the assessment is performed and challenging the results.

Risk Management System Effectiveness

The group and its divisions undertake a formal annual review of and attestation to the effectiveness of the risk management system. The assessment considers the extent to which the risk management system is embedded.

The Chesnara board is responsible for monitoring the Risk Management System and its effectiveness across the group. The outcome of the annual review is reported to the group board which make decisions regarding its further development.

principal risks and uncertainties

The following tables outline the principal risks and uncertainties of the group and the controls in place to mitigate or manage their impact. It has been drawn together following regular assessment, performed by the Audit & Risk Committee, of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. The impacts are not quantified in the tables. However, by virtue of the risks being defined as principal, the impacts are potentially significant. Those risks with potential for a material financial impact are covered within the sensitivities. The information below has been updated in consideration of the Covid-19 pandemic which emerged post year end. Overall, Covid-19 has not introduced any new principal risks.