Chesnara Regulatory News (CSN)

CHESNARA plc

("Chesnara" or "the Company")

30 March 2021

LEI Number: 213800VFRMBRTSZ3SJ06

FINAL RESULTS

Chesnara plc

Protecting our Stakeholders

2020 has been a unique and challenging year for everyone. Whilst our core strategic priorities remain unchanged, the pandemic has created a focus on additional short-term priorities relating to staff welfare, customers and regulators, the ongoing protection of shareholder dividends and maximising the company's potential to succeed in a post-Covid-19, post-Brexit environment.

We are pleased to report good outcomes against each of these criteria, resulting in a good balance of positive outcomes for all key stakeholders.

· EMPLOYEE WELFARE

From very early in the pandemic, our initial priority was to ensure staff could work safely from home. At the same time, we have invested to make sure our offices are as safe as possible so that on the occasions any staff do need to work from the office and when government guidelines allowed, they could do so with minimum risk. From an economic welfare perspective, all employees have been paid in full throughout, without the use of any government support schemes.

· BUSINESS CONTINUITY - CUSTOMERS AND REGULATORS

The emergence of Covid-19 gave rise to significant changes in the way we work, largely as a result of the group having to respond to governmental rules that were put in force in the jurisdictions within which we (and our outsourcers) operate. It is pleasing to report that we undertook a smooth transition to these remote working conditions, which have remained largely in force over the course of the year, with no significant immediate or ongoing disruption to key customer related business services or regulatory routines.

· SHAREHOLDER DIVIDEND INCREASE

Prudent financial management and solid results mean we have been able to maintain our dividend model and increase the dividend payment in 2020 by 3%. Importantly, this has been done without compromising the financial stability of group. The post dividend group solvency ratio has increased slightly to 156% (31 December 2019: 155%) and the closing Chesnara cash balance remains healthy at £59.9m (31 December 2019: £75.5m) having repaid debt of £15.4m in the year.

· PROTECTING THE BUSINESS

Funds under management (9% increase), policy counts (3% increase) and new business market shares remains strong. Our gearing is low at 7.4%. Together this creates a solid foundation for profit growth post Covid-19.

· GROUP CASH GENERATION OF £27.7M (2019: £36.7M) Note1

Cash generation in the year has enabled the divisions to propose total dividends to Chesnara of £48m note5, representing c150% dividend coverage.

· DIVISIONAL COMMERCIAL CASH GENERATION OF £38.0M (2019: £99.2M) Note 2 

All divisions have delivered solid positive results. The UK remains the stable dominant component (£18.7m) and Movestic has made a significant contribution of £13.1m. A more modest contribution from Scildon of £3.5m reflects the impact of new business strain and further downward pressure on yields.

· GROUP SOLVENCY RATIO OF 156% (31 December 2019: 155%) 

We are well capitalised at both group and subsidiary level under Solvency II, with group solvency increasing marginally in 2020.

· 3% INCREASE IN FINAL DIVIDEND

The results support the continued growth of the final dividend to 14.29p per share (2019 final: 13.87p per share) ), resulting in a 3% increase in the total full year dividend to 21.94p per share (2019 full year: 21.30p per share). This constitutes the 16th consecutive annual dividend increase for shareholders.

· ECONOMIC VALUE (ECV) OF £636.8M (31 December 2019: £670.0M) Note 3

Pre-dividend Economic Value has remained largely unchanged. Factoring in dividend distributions of £32.3m have resulted in a 5% overall reduction (2019: 7% increase).

· COMMERCIAL NEW BUSINESS PROFIT OF £10.5M (2019: £14.4M) Note 4

During 2020, Scildon has increased market share in both term and individual life markets, which has driven a record new business result (£8.8m) and an uplift of 12.5% on 2019. Covid-19 restrictions have had a marked impact on broker activity in Sweden which has contributed to a significant reduction in new business volume and profitability. Given a general market shift from unit linked investments, market shares have held up relatively well and we are confident of a good recovery when Covid-19 restrictions lift and market conditions are more conducive to the attractiveness of unit linked products.

· ACQUISITIONS

During the year we completed the acquisition of a portfolio of c40,000 policies from Argenta in the Netherlands which created c£9m of incremental value and a 40% increase in the policies in force of Waard. We also agreed a further small portfolio acquisition, expected to complete in the first half of 2021. The combined impact of these deals together with the Monuta portfolio in 2019, result in a total value gain of c£13m for Waard.

· IFRS PRE-TAX PROFIT OF £24.6M (2019: pre-tax profit £96.1M)

Profits arising from economic market conditions of £21.2m were lower than in 2019 (£49.1m). The result also includes an intangible asset impairment charge of £27.6m note 6

· IFRS TOTAL COMPREHENSIVE INCOME OF £43.3M (2019: £60.6M)

The 2020 result includes a foreign exchange gain of £22.6m (2019: loss of £18.7m).

John Deane, Chief Executive said:

"I am pleased to report that even after paying the increased 2020 final dividend, Chesnara's cash reserves and solvency surplus remain largely unchanged compared to the pre-pandemic position.

It is this robustness of both solvency and cash that supported the payment of a record 2020 interim dividend, and it enables us to increase the final dividend once again by a further 3% - a progressive return for the 16th successive year. 2020 has shone a spotlight on the operations of the group and I am proud of the strong and stable business we have created which, despite the pandemic, enables us to provide comfort regarding dividend sustainability. Ongoing cash generation from the existing portfolios underpinned by strong and stable solvency levels and parent company liquidity and supplemented by management actions, acquisitions and new business gives confidence in the sustainability of the investor proposition.

Our operations have proved to be resilient to the challenges that Covid-19 has presented. Our IT infrastructure has supported a near seamless transition to remote working; however, we have seen some impact of Covid-19 on our new business operations, with reduced activity particularly during the second half of the year.

I would like to express my thanks to our staff and business partners for all their commitment and flexibility in dealing with the current environment and their work in previous years. This has provided the solid base to enable the business to continue to provide our usual high standards of customer service throughout 2020. We have not furloughed any staff as a result of the pandemic and have not used any other state support packages in the UK, Sweden or the Netherlands.

We continue to increase our focus on ESG matters and environmental sustainability in particular. We have again ensured our operations are carbon neutral. The focus moving forward will include improving the sustainability characteristics of the investment portfolio.

The return to pre-Covid-19 investment market conditions will take some time, but we also believe this will provide us with acquisition opportunities as the market reacts to changing circumstances. In the meantime, we will as ever continue to work hard to ensure positive outcomes for customers and investors."

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.

Note 2 Divisional commercial cash generation draws out components of the cash generation in the group's divisions 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 generation). This commercial result is then analysed to show the key drivers of that result. 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.

Note 3 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 4 Commercial new business is a more commercially relevant measure of new business profit than that recognised directly under the Solvency II regime, allowing for a modest level of return, over and above risk-free, and exclusion of the incremental risk margin Solvency II assigns to new business. This provides a fair commercial reflection of the value added by new business operations and is more comparable with how new business is reported by our peers, improving market consistency.

Note 5 The Movestic dividend of £10m is planned to be paid in Q4 2021.

Note 6 This is largely in relation to Scildon. During the year the Scildon AVIF intangible asset written down by £26.6m as a result of a reduction in the assessed value of the future cash flows of policies that were in force at the point of acquisition. The impairment is in part driven by the low yield environment we are currently operating in.

The Board approved this statement on 29 March 2021.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

Roddy Watt, Director, Capital Markets, FWD - 020 7280 0651

Notes to Editors

Chesnara is a life and pensions company listed on the London Stock Exchange. It administers over one million policies and operates as Countrywide Assured in the UK, as The Waard Group and Scildon in the Netherlands, and as Movestic in Sweden.

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

Consistent delivery of the Company strategy has enabled Chesnara to increase its dividend for 16 years in succession.

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

2020 HIGHLIGHTS 

IFRS PRE-TAX PROFIT £24.6M 2019 £96.1M

This includes profits arising from economic market conditions of £21.2m and an intangible asset impairment charge of £27.6m.

IFRS TOTAL COMPREHENSIVE INCOME £43.3M 2019 £60.6M

The 2020 result includes a foreign exchange gain of £22.6m (2019: loss of £18.7m).

GROUP SOLVENCY 156% 2019 155%

We are well capitalised at both group and subsidiary level under Solvency II.

FUNDS UNDER MANAGEMENT £8.5BN 2019 £7.7BN 

Strong performance in volatile investment markets during 2020.

ECONOMIC VALUE £636.8M 2019 £670.0M 

Movement in the year is stated after dividend distributions of £32.3m (2019: £31.3m) and includes a foreign exchange gain of £36.7m (2019: loss of £28.8).

ECONOMIC VALUE EARNINGS £(37.6)M 2019 £104.0M

The result includes £22.9m of earnings resulting from investment market movements (2019: investment market gain of £121.1m) and operating losses of £49.8m (2019: profit of £4.1m).

COMMERCIAL NEW BUSINESS PROFIT £10.5M 2019 £14.4M 

During 2020 Scildon has increased market share in both term and individual life markets, which has driven a healthy new business result (£8.8m) and an uplift of 12.5% on 2019. Pricing pressures and changes to fee income and rebates have continued to suppress Movestic's new business value in 2020, with more modest returns of £1.6m (2019: £6.9m).

GROUP CASH GENERATION £27.7M 2019 £36.7M

DIVISIONAL CASH GENERATION £23.6M 2019 £50.8M

FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 3% to 21.94p per share (7.65p interim and 14.29p proposed final). This compares with 21.30p in 2019 (7.43p interim and 13.87p final).

2020 HAS SEEN SIGNIFICANT VOLATILITY IN INVESTMENT MARKETS AS A RESULT OF COVID-19 EMERGING AS A GLOBAL PANDEMIC

2020 was a turbulent period for equity markets with the impact of the pandemic being felt early in the year as asset values plummeted. At its lowest point the FTSE 100 value fell to c34% below that at the start of the year and, despite gradual recovery, the index closed the year 14% lower than the opening value. Falling interest rates and continued downward pressure on bond yields throughout 2020 also impacted the businesses to varying degrees. Sterling depreciation against the euro and Swedish krona has led to foreign exchange translation gains.

EXPANSION IN THE NETHERLANDS CONTINUES

Our presence in the Netherlands continued to grow following regulatory approval of a portfolio acquisition from Argenta Bank (announced in 2019), at a discount to EcV of c22%, which completed on 31 August 2020.

THE GROUP HAS REMAINED OPERATIONALLY RESILIENT DURING THE COVID-19 PANDEMIC

Changes in working practices have been required in order to accommodate appropriate safety measures, such as staff working from home. The group has remained operationally resilient throughout this transition, in particular focusing on ensuring key business services relating to customers continue to be delivered. Where necessary we have introduced changes to processes to help customers who may be in a vulnerable position due to Covid-19, and have ensured that any Covid-19 death claims have been dealt with compassionately.

These financial highlights include the use of Alternative Performance Measures (APMs) that are not required to be reported under International Financial Reporting Standards.

1 - Economic profit is a measure of pre-tax profit earned from investment market conditions in the period and any economic assumption changes in the future.

2 - Operating profit is a measure of the pre-tax profit earned from a company's ongoing core business operations, excluding any profit earned from investment market conditions in the period and any economic assumption changes in the future.

3 - Funds Under Management (FuM) represents the sum of all financial assets on the IFRS balance sheet.

4 - Economic Value (EcV) is a financial metric derived from Solvency II. It provides a market consistent assessment of the value of existing insurance businesses, plus adjusted net asset value of the non-insurance business within the group.

5 - Economic Value earnings are a measure of the value generated in the period, recognising the longer-term nature of the group's insurance and investment contracts.

6 - Commercial new business represents the best estimate of cash flows expected to emerge from new business written in the period. It is deemed to be a more commercially relevant and market consistent measurement of the value generated through the writing of new business, in comparison to the restrictions imposed under the Solvency II regime.

7 - Group cash generation represents the surplus cash that the group has generated in the period. Cash generation is largely a function of the movement in the solvency position, used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

8 - Divisional cash generation represents the cash generated by the three operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.

MEASURING OUR PERFORMANCE

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

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

The IFRS results form the core of the Report & Accounts and hence retain prominence as a key financial performance metric. However, this Report & Accounts also adopts several Alternative Performance Measures (APMs).

These measures compliment the IFRS metrics and present additional insight into the financial position and performance of the business, from the perspective of all stakeholders.

The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and, as such, all major financial APMs are derived from a defined rules-based regime. The 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 Report & Accounts includes measures that consider and assess the performance of all our key stakeholder groups. The diagram below summarises the performance measures adopted throughout the Report & Accounts.

* For the purposes of this key performance indicator assessment business partners refers to major suppliers and outsource partners.

2020 has been a unique and challenging year. Whilst our core strategic priorities remain unchanged, the pandemic has created a focus on additional short-term priorities, namely:

- The welfare of employees;

- Ensuring good business continuity with no detrimental impact on customer outcomes or the regulatory framework;

- Maintaining the shareholder dividend strategy without compromising financial stability; and

- Protecting the business fundamentals to maximise the potential for post Covid-19 recovery.

Despite the emerging new priorities, adverse operating conditions and continued downward pressure on yields, it is reassuring to report a stable pre-dividend Economic Value and cash generation levels that enable the divisions to propose a further c£48m of dividends to the parent company.

The financial stability during the year combined with a clear expectation of future divisional dividends means I am pleased to report continuation of our dividend strategy with a 3% increase in the proposed final dividend and hence total dividend.

LUKE SAVAGE,

CHAIRMAN

Before I report the headline results and expand upon how we have delivered against our core strategic priorities, I would like to concentrate on how the Covid-19 pandemic has impacted our short-term attention and how we have worked hard to ensure our stakeholders have been well protected during such difficult conditions. Our areas of enhanced short-term focus relate to staff welfare, customers and regulators, shareholder dividends and maximising the potential for post-Covid-19 recovery. Taking each in turn:

Employee welfare

From very early in the pandemic our initial priority was to ensure staff could work safely from home. At the same time we have invested to make sure our offices are as safe as possible so that on the occasions any staff do need to work from the office and when government guidelines allowed, they could do so with minimum risk. From an economic welfare perspective all employees have been paid in full throughout, without use of the government furlough scheme.

Business Continuity - customers and regulators

The emergence of Covid-19 gave rise to significant changes in the way we work, largely as a result of the group having to respond to local governmental rules that were put in force in the jurisdictions within which we (and our outsourcers) operate. It is pleasing to report that we undertook a smooth transition to these remote working conditions, which have remained largely in force over the course of the year, with no significant immediate or ongoing disruption to key customer related business services.

Maintaining the shareholder dividend strategy

We have managed to maintain our dividend model and increase the dividend payment in 2020 by 3%. Importantly this has been done without compromising the financial stability of group. The post dividend group solvency ratio has increased slightly to 156% (31 December 2019: 155%) and the closing Chesnara cash and instant access liquidity funds balance remains healthy at £59.9m (31 December 2019: £75.5m).

Protecting the business

A balance has been struck between delivering good results in the year and protecting the business so that we can maximise the potential for future profits as the world recovers from the pandemic. As things stand, we believe the business fundamentals remain solid and offer a good foundation for the future. Total Funds under Management closed higher than the opening position, policy persistency in our closed operations was better than expected and despite the challenges of Covid, Scildon goes into 2021 with over 7% more policies in-force than was the case pre-Covid-19 at the end of 2019. Despite smaller total new business markets in the year, our new business market shares have held up relatively well in Sweden and we have made notable market share gains in the Netherlands. In summary, the business in terms of funds, policy counts and new business market shares remains strong and offers a solid foundation for profit growth post Covid-19. In short, to date we have weathered the pandemic storm well and emerge in good shape.

Moving onto the results during the year. Despite the aforementioned generally positive assessment of the year, the reality is that in the short-term, adverse conditions have had a detrimental impact on the results. In Scildon, cash generation has been adversely impacted by the continued downward pressure on yields, which contributes to an overall cash loss of £22.3m (2019: gain £22.6m). Against this backdrop, with the exception of Scildon cash, I am pleased that the consolidated results on all metrics demonstrate a level of resilience synonymous with Chesnara's financial track record and ability to increase the dividend through difficult conditions.

From an IFRS perspective, we are reporting a reduction in pre-tax profits compared with the 2019 result of £96.1m, to £24.6m in 2020. All divisional results are generally lower than last year, with Scildon seeing the largest reduction. In addition, the group results include the impact of a £27.6m impairment to the AVIF (Acquired Value in Force) intangible assets, largely relating to Scildon. From an IFRS balance sheet perspective it is pleasing to report that Funds Under Management have grown c10% since the start of the year.

Although we were able to protect the pre dividend Economic Value which closed the year at £669.1m, marginally lower than at the end of 2019, the impact of the dividend payment resulted in an overall post dividend reduction in EcV of 5% (2019: 7% increase in post dividend EcV). Our long-term aim is to at least protect the post-dividend value. Clearly and perhaps unsurprisingly, this has not been achieved during 2020. However, in light of the challenges faced the level of reduction has been well contained. The reduction was significantly less than the gains in 2019. In addition, actions regarding catastrophe risk reinsurance and lapse risk reduction, together with the impact of post balance sheet yield recovery, will have reversed a good proportion of the Scildon 2020 cash loss.

Despite a level of increased uncertainty at the point the 2019 accounts were issued, as predicted we received the vast majority of the 2019 closing proposed divisional dividends. Total divisional dividend receipts of £40.6m have ensured we close the difficult year with £59.9m in cash and instant access liquidity funds at the Chesnara company level. The cash generation results for the year mean we expect further divisional dividend receipts totalling £47.8m during 2021, comfortably funding the 2021 shareholder dividends whilst maintaining a healthy residual cash balance. We do not expect the Movestic dividend of c£10m to be received until the final quarter of 2021.

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

The businesses have continued to generate sufficient cash to support Chesnara's dividend strategy. In addition, during the challenging conditions, management have focused on capital management actions to optimise the solvency and cash generation potential across the group. This has resulted in material enhancements to the cash results in 2020. We have also progressed further actions to the point they will be applied in the first half of 2021 and will in turn enhance cash generation in 2021.

Overall, we have been able to protect the pre-dividend value of the existing businesses. There have however been specific areas where conditions, in part driven by Covid-19, have resulted in value losses. Conditions during the pandemic in Sweden have driven a notable increase in transfer activity. This has led to a loss in value from an increase in policies transferring out. Despite this increase in transfers, the overall Funds under Management have marginally increased and to the extent the current spike in outward transfers is considered to be partially due to Covid-19 conditions including temporary competitor pricing, we would expect the Swedish business to stabilise in 2021.

In addition to the capital management actions, management have also delivered notable value enhancing actions. In particular changes to asset management providers have added c£14m of incremental EcV (£10m of this value was recognised in the 2019 results).

COMPLETION OF OUR ACQUISITION OF ARGENTA INSURANCE IN THE NETHERLANDS

Small deals will not transform Chesnara but they can, along with other actions mean we can deliver gradual EcV growth whilst continuing the dividend payment strategy. Similarly, in the UK we remain optimistic about more significant opportunities but likewise are mindful of the cumulative merits of smaller, well priced transactions.

Our balance sheet and existing debt arrangements which create a 7.4% leverage ratio, provide sufficient funding capacity for numerous small deals or a larger deal of up to approximately £120m without the need for additional funding sources such as Tier 2 debt or equity.

Chesnara writes new business in both Sweden and the Netherlands. The ultimate aim is to create sufficient annual profits, either through returns on existing business, or through writing new business, to replace a significant proportion of the Economic Value lost by way of dividend payments.

Despite a degree of Covid-19 related pressure on Dutch new business markets, especially during the second half of the year, new business volumes have held up well, largely due to a welcome improvement in market shares. This has resulted in a further improvement in new business profits with an increase of 12.5% to £8.8m (2019: £7.8m - restated at 2020 exchange rates).

By contrast, pension new business broker markets in Sweden were hit more heavily by pandemic restrictions. In addition, we experienced a modest reduction in market shares. This tends to be the case during periods of heightened equity market volatility when unit-linked companies such as Movestic are deemed less attractive than traditional investments with guarantees or performance smoothing. This has resulted in a reduction in Movestic's new business profitability with a total profit in the year of £1.6m (2019: £6.9m). Historically, as equity markets stabilise or increase in value then the Movestic market shares have tended to recover. We would therefore expect a degree of recovery in 2021 with steady state post Covid-19 profit levels ultimately recovering to pre-pandemic levels.

Covid-19 has undoubtedly accelerated the move towards people transacting remotely using digital solutions. Therefore, whilst we do not believe the pandemic will have any permanent impact on the demand for the core products we sell and administer we do recognise that the impact of sales and service methods and preferences will be permanent. We have continued to deliver solutions to remain competitive in the digital world.

In Movestic we are nearing completion of our digitalisation programme and in Scildon we are coming to the final stages of modernising our pensions processes. This is expected to have a positive impact on both costs and pension new business levels in Scildon, with the business well positioned to take advantage of the anticipated growth in the defined contribution market. The programme will then move to the term product migration through 2021 and into 2022, delivering expected efficiencies and strengthening the business's market and operating position. The expected costs and benefits are included within the 2020 year end position.

Solvency

The group continues to show a robust solvency ratio of 156% at 31 December 2020 (31 December 2019: 155%). The closing solvency position is stated after recognising the £21.4m cost of the proposed final dividend, which is expected to be paid in May 2021.

To further improve capital efficiency we have also chosen to apply the volatility adjustment in the UK in 2021, which will be implemented alongside plans to refine the mix of assets that back certain non-linked policies in the UK, following approval from the PRA.

Regulation and governance

IFRS 17

Our programme has progressed well during the year. Notably we selected Willis Towers Watson to provide a group-wide tool to calculate the contractual service margin and store the associated data and implementation of the tool commenced during the second half of 2020. As part of our continual assessment of our plans, we have increased our budget to reflect the complexity and scale of the programme and have fully provided for the costs in our solvency position. Looking forward, 2021 will be focused on the operational implementation of the CSM tool and associated processes, and as such is a key priority for management and the group board.

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 positive and constructive relationships with regulatory bodies across the group.

Governance framework

We continue to maintain a strong risk and governance culture across the group. Our focus this year has been on ensuring that we continue to adhere to these core principles whilst dealing with the challenges of the global pandemic, and it is extremely pleasing to report that investment in operational resilience across the group over recent years has made operating in these conditions significantly easier, with all important business services having been delivered.

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 Report & Accounts include a section that demonstrates how we comply with S172 requirements and how our governance framework and culture considers the interests of all stakeholders.

The 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 the 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

- We continued in 2020 to build on our sustainability/ESG activities, looking at both our own operational impacts and also investments, whether they are under our own control or by offering sustainable fund offerings for client chosen investments.

- Movestic became a signatory to the UN's Principles of Responsible Investment and targeted five of the UN's Sustainable Development Goals to focus on., This was replicated in the UK through completion of our fund manager rationalisation project and selection of Schroders, with availability of ESG data, reporting and focus being at the core of our decision to place our funds with them for management.

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. Across the group staff have been able to work from home during Covid-19 restrictions.

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.

Outlook

Sustainability of the business model

Our assessment is that the impacts of the pandemic have had minimal permanent adverse impact on the business model. In fact, three out of our four businesses have actually grown in terms of scale through the year and hence the risk that loss of scale compromises the business model is not apparent. The UK division has experienced continued reduction in policy volumes however, Funds under Management remain relatively stable and even in the absence of acquisitions the cost base is deemed sufficiently variable to absorb the impact of run off for many years.

We believe one consequence of the pandemic will be an acceleration towards remote, digital customer engagement. In light of this I am pleased to report that Movestic's digitalisation programme is nearing completion and Scildon is shortly due to migrate to a new pension platform with enhanced end to end processes. Both these successful developments leave us well positioned to react to shifting customer service demands.

Brexit

We have consistently reported that we expected minimal impact from Brexit. Having now exited the EU we have indeed experienced very limited disruption. The only area where we have seen an impact is with regards to a modest divergence of the Solvency II regulatory rules from the PRA compared to those from EIOPA. The changes have had no financial impact at this stage. We continue to expect a high level of equivalence between regulatory reporting regimes but are mindful of the possibility of an increased level of divergence as the PRA are enabled to move to UK specific terms. We see no specific reason to expect the PRA to use their enhanced freedoms to take a route that systemically makes it harder to do business in the UK. That said, we continue to monitor the potential impact of Brexit closely and it continues to be identified within our Principal Risks and Uncertainties.

Sustainability of the dividend

We do not provide specific forward-looking financial projections or guidance however there are several financial metrics and factors that provide a level of comfort regarding dividend sustainability:

- Ongoing cash generation expectations from the existing portfolios - The cash generation model continues to show a good level of resilience to difficult conditions. Longer term the EcV offers a useful proxy to the total level of future cash. The closing EcV (which conservatively assumes risk free asset returns) represents over 19 years coverage of the current full year dividend.

- New business has minimal positive impact on short term cash due to the associated acquisition costs and capital strain. New business does however create future positive cash flows. Incremental future cash flows at the end of 2020 as a result of new business in the year are £22.4m (2019: £27.0m).

- Strong and stable solvency.

- Management actions and acquisitions - there remains the potential for capital management actions and acquisitions to create material future cash generation and capital releases. Actions are scheduled for 2021 including catastrophe risk reinsurance in Scildon and cross group lapse capital optimisation. These actions in particular have a material positive impact on the prospects of future dividends from Scildon.

- Chesnara plc cash reserves - in the medium term the existence of £59.9m of cash and instant access liquidity funds on the parent company balance sheet, combined with a 7.4% gearing ratio provide comfort over the ability to support future dividend payments.

Sustainability in ESG terms

We continue to increase our focus on ESG matters and environmental sustainability in particular. We have again ensured our operations are carbon neutral and commit to this as a permanent objective. The focus moving forward will shift towards improving the sustainability characteristics of the investment portfolio.

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, Chesnara is well positioned to continue to provide value to policyholders and shareholders.

Luke Savage

Chairman

29 March 2021

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.

BUSINESS REVIEW | UK

The UK division principally consists of the insurance company Countrywide Assured plc. The company manages c240,000 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 2020

- The division has completed its fund management rationalisation programme during the year, which has involved consolidating the vast majority of unit-linked fund management with one investment management company. This programme's purpose was to deliver a combination of cost efficiencies, whilst also continuing to provide customers with strong fund performance.

- The division has been investigating revising its investment approach for assets backing some of its non-linked policies, and in conjunction has been assessing the benefits of applying for the volatility adjustment ("VA") when calculating its solvency position. An application to the PRA was made during December 2020 to apply the VA. We plan to implement this change to our investment mix at the same time as applying the volatility adjustment following approval from the PRA.

- The Economic Value of the division, excluding the impact of dividend distributions, has increased over the course of the year, despite the investment market volatility arising from Covid-19.

FUTURE PRIORITIES

- Implement planned changes to investments backing certain non-linked liabilities and apply the VA when calculating its solvency position.

- Manage the transition from using a risk-free curve based on LIBOR (London Interbank Offering Rate) for discounting insurance liabilities under Solvency II to using SONIA (Sterling Overnight Index Average) as required by the PRA.

- Continue to focus on maintaining an efficient and cost-effective operating model.

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

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 2020

- A key focus during the year has been ensuring that we continue to meet the needs of our customers during the ongoing Covid-19 pandemic. This has resulted in a need for a large proportion of the organisation, and its key outsource partners, to work from home. Despite the necessary changes, all important business services have continued to operate effectively, having adapted our processes accordingly.

- During the year we have implemented changes that enable customers to contact us in new ways.

- The multi-year customer strategy implementation program was successfully completed, with any revised processes having been transferred into business as usual operations.

- The division's operational resilience programme has continued. This is a multi-year programme which was set up to ensure that we comply with expectations of our regulators and customers. Whilst the regulators' requirements are still at a consultation stage, we recognise the business and customer benefits of ensuring resilience in our business services.  

FUTURE PRIORITIES

- Continue to deliver the division's operational resilience programme, focusing primarily on business services affecting our customers. This will include reviewing and responding to any new rules that are introduced by the regulators.

- Key business as usual activities include:

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

o Continuing to work at getting back in touch with customers who have not provided us with their most recent contact details.

KPIs

Policyholder fund performance

During a very volatile year, our three main managed funds under-performed the reported ABI sector benchmark, due to the portfolio asset positioning being higher in equities during the earlier stages of the year, which saw significant equity falls driven by Covid-19. Whilst in the second half of the year the funds outperformed the sector benchmark, this did not quite result in the overall full year position exceeding sector index.

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 2020

- The division has continued to deliver on its business as usual governance responsibilities despite the Covid-19 situation. The organisation has transitioned to a predominantly working from home environment, both in terms of our outsourcers and the oversight governance team itself. This process was successfully implemented with no material issues.

- Throughout the year, especially at the start of the pandemic, the business implemented enhanced monitoring of key measures, such as claims and customer service, ensuring performance levels were maintained despite the impact of the pandemic.

- The IFRS 17 programme has continued to progress in line with plans. We have been working with Willis Towers Watson as the group's provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

- From an IFRS 17 perspective, 2021 is a year that will see some of the operational changes that are required being tested and implemented.

KPIs

SOLVENCY RATIO: 163%

Surplus generated in the year increases solvency ratio from 131% to 163%. After the dividend, due to be paid in 2021, the ratio is 130%.

BUSINESS REVIEW | SWEDEN

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

Movestic creates value predominantly by generating growth in the unit-linked Funds under Management (FuM), whilst assuring a high quality customer proposition and maintaining an efficient operating model. FuM growth is dependent upon positive client cash flows and positive investment performance. Capital surplus is a factor of both the value and capital requirements and hence surplus can also be optimised by effective management of capital.

INITIATIVES AND PROGRESS IN 2020

- Covid-19 resulted in significant volatility in financial markets during the year, though Swedish equities recovered well delivering 10.8% growth in 2020.

- The division has completed the liquidation of Modernac as part of its corporate restructuring initiatives. This has released £1m of surplus capital.

- Policyholder transfers continues to be a feature of the business due to the competitive Swedish market. High transfer activity has resulted in an adverse transfer ratio, with slightly negative net client cash flows. That said, Movestic has strengthened its transfer out assumptions in light of this dynamic, resulting in an increase in reserves of £18.7m, which includes short-term cover for temporary Covid-19 related pressures. The company has also increased its focus on business retention activity.

- New industry-wide regulations have been introduced in order to make it easier for customers to transfer their pension funds. As part of this, further rules are expected during 2021 that limit the amount that can be charged when transferring policies, with an adverse EcV impact of £3.1m.

- Despite turbulent financial markets FuM increased by 1.8% over the year.

- Continuation of dividend policy with a proposed record payment of £10.2m.

- As part of streamlining its fund management proposition the division closed its Luxembourg based operation and set up 5 new funds in Sweden.

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 propositions and experience.

- Strengthen distribution capacity with the direct business area, as a complement to the broker channel.

- Provide a predictable and sustainable dividend to Chesnara.

- Increased focus on retention.

KPIs (all comparatives have been presented using 2020 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 2020

- Policyholder average investment return of 2.7% in the year (2019: 18.9%), despite Covid-19 the Swedish equity index rose 10.8%, however other equities and non-equity investments were less positive resulting in lower total investment returns.

- Broker and customer servicing have been a key focus during the pandemic. The division has adjusted its processes accordingly in order to ensure that such servicing continues to an acceptable level.

- Development of customer and broker offerings remained a focus with new transparent and personalised unit-linked pension and savings solutions as well as insurance products, delivering enhanced digital service and functionality.

- The division received a rating from UNPRI (UN initiative for responsible investment) that is better than, or in accordance with its peers, while the sustainable customer fund offerings have remained a focus.

FUTURE PRIORITIES

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

- Strengthen the relationship with brokers further and continue to develop improved functionality and digital administration self-services for brokers.

- Continue to build distribution capacity in the direct business area.

- Broaden product and service offering for other customer segments.

KPIs (all comparatives have been presented using 2020 exchange rates)

Broker assessment rating (out of 5)

Following the broker assessment review we have conducted our own satisfaction surveys. These surveys gave a more positive result, and the feedback, both positive and negative helped identify further actions as we continue to work on improving broker satisfaction.

POLICYHOLDER AVERAGE INVESTMENT RETURN:

2.7%

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 2020

- Dealing with the impact of Covid-19 has been a key management focus in 2020.

- The company has ensured that it is operating in line with local government guidelines, which essentially recommend that employees should work from home unless they cannot.

- In setting up these arrangements, management has focused on ensuring that the IT infrastructure, both in terms of employee usability and security resilience, can accommodate the revised working practices.

- Movestic has also focused on staff well-being throughout the lock down given its significant change for many staff members.

- The division's digitisation programme has progressed well and was completed during the fourth quarter. The business now has a more robust platform and the ongoing enhancement to this, and our customer experience, continues as part of our core mission.

- The division has continued its strategic focus on strengthening relations with new and existing brokers and partners, building direct distribution capacity.

- IFRS 17 continues to progress with Willis Towers Watson selected as provider of the contractual service margin (CSM) tool and implementation initiated.

FUTURE PRIORITIES

- The Covid-19 situation will continue to be monitored closely, with returning to the office options under continuous review.

- A focus on the application decisions and operational impact of the IFRS 17 programme, including implementation of the contractual service margin (CSM) tool.

KPIs (all comparatives have been presented using 2020 exchange rates)

SOLVENCY RATIO: 165%

Solvency remains strong. After the dividend, due to paid in 2021, the ratio is 158%.

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 2020

- Movestic reported commercial new business profit1 of £1.6m (2019: £7.0m). The decrease compared with 2019 is largely due to reduced sales volumes and increased transfer activity with strengthened transfer out assumptions, driven by Covid-19 dynamics and the effects of price pressure on the Swedish market.

- Sales volumes were affected by lower activity across the market during 2020, due to the pandemic, particularly during the second half of the year, as we sign-posted in our Half Year Report. As the Swedish market also experienced continued price pressure, the division developed its offering to increase competitiveness and build customer loyalty for the future.

FUTURE PRIORITIES

- Continued focus on sales activities and competitive offerings in the broker channel as well as increasing distribution capacity in the direct business area.

- Ongoing development of the customer offering and delivery of new functionality on web platforms to improve customer and broker experience.

KPIs (all comparatives have been presented using 2020 exchange rates)

Occupational pension market share %

New business profit*

*New business figures from 2018 onwards represent commercial new business. Values prior to this are retained at that which they were previously reported.

BUSINESS REVIEW | NETHERLANDS

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

INITIATIVES AND PROGRESS IN 2020

- Waard completed the acquisition of a portfolio of term life and savings products from Argenta Bank and has migrated the policies onto our systems. Towards the end of the year, a further portfolio acquisition was agreed (subject to regulatory approval), further strengthening Waard's position as an acquirer of small portfolios that are not core to vendors.

- Despite the market turmoil caused by the Covid-19 pandemic, both businesses continue to have strong solvency positions, inclusive of the use of the volatility adjustment. Scildon remains strong at 178%, above the internal capital management policy of 175%. Waard continued to maintain significant solvency levels, the ratio ending the year at 438%.

- Scildon has continued to optimise its risk-based return through de-risking its asset portfolio and investing into mortgage funds with c£170m held as at 31 December 2020.

FUTURE PRIORITIES

- Integrate the new acquisition into the Waard business and continue to support Chesnara in identifying and delivering Dutch acquisitions.

- Progress capital management and cash generation initiatives across the group, particularly in Scildon, with the aim of creating future dividend potential.

- Effective management of the closed book run-off in Waard to enable ongoing divided payments to Chesnara.

KPIs (all comparatives have been presented using 2020 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 2020

- A key focus during the year has been ensuring that we continue to meet the needs of our customers during the ongoing Covid-19 pandemic. This has resulted in a need for a large proportion of the organisation to work remotely. Our processes have been adapted accordingly and we have continued to effectively operate all key business services.

- Scildon continues work on the migration and digitalisation of its policy administration system. Work has focussed on development of the pension proposition with key portals going live in 2021, positioning the business well to take advantage of expected growth in the defined contribution market. The project will then move to the term product migration through 2021 and into 2022, delivering expected efficiencies and strengthening the business's market and operating position. The expected costs and benefits are included within the 2020 year end position.

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.

KPIs (all comparatives have been presented using 2020 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 2020

- We have engaged with the regulator throughout 2020 and the business implemented enhanced monitoring of key measures, such as claims and customer service, ensuring performance levels were maintained despite the impact of the pandemic.

- The division has continued to deliver on its business as usual governance responsibilities despite the Covid-19 situation. The organisation successfully and rapidly transitioned to a predominantly remote working environment.

- The IFRS 17 programme has continued to progress in line with plans. We began working with Willis Towers Watson as the group's provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

- During 2021 we plan to implement changes that mean Scildon will directly benefit from the lapse capital reversal currently at group.

- From an IFRS 17 perspective, 2021 is a year that will see some of the required operational changes being tested and implemented.

KPIs (all comparatives have been presented using 2020 exchange rates)

SOLVENCY RATIO: SCILDON 178%; WAARD 438%

Solvency is robust in both businesses, with post-dividend solvency ratios of 178% and 438% for Scildon and Waard respectively. The Scildon reduction includes the impact of an increase in lapse capital which reverses out at group level.

Scildon

Waard

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

Scildon brings a "New business" dimension to the Dutch division. Scildon sell protection, individual savings and group pensions contracts via a broker-led distribution model. The aim is to deliver meaningful value growth from realistic market share. Having realistic aspirations regarding volumes means we are able to adopt a profitable pricing strategy. New business also helps the business maintain scale and hence contributes to unit cost management.

INITIATIVES AND PROGRESS IN 2020

- Despite a tough and uncertain market, we continue to see increasing new business profits, with £8.8m earned in the year on our commercially realistic metric. As noted previously, we will face headwinds to maintain this progress, but we have a solid base to take advantage.

- Underpinning this, Scildon policy count continues to increase, now with in excess of 200,000 policies. Also, the term market share for Scildon term lifestyle product for the month of December 2020 has risen to 16.3%, although the market size has decreased, partly as a result of Covid-19.

- We have established a white labelling relationship with Dazure (a distribution partner) as a route to market to enable us to service more of the market.

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 2020 exchange rates)

Scildon - term assurance market share %

Scildon - new business profit*

*New business figures from 2018 onwards represent commercial new business. Values prior to this are retained at that which they were previously reported.

BUSINESS REVIEW | acquire life and pension businesses

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 and commercial considerations.

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 2020

During 2020, the group completed one transaction:

Argenta transaction

On 1 September 2020, Chesnara announced the completion of an acquisition of a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V. The transaction was 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 involved the transfer of a portfolio of in excess of 40,000 term and savings policies, for a consideration of €29.2m (approximately £25m), 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 delivered c£9m of incremental value1. The acquired portfolio had IFRS gross assets of c.£368m (at 31 December 2020 exchange rates) and contributed growth of over 40% to the Waard Group policy count.

A further small portfolio acquisition, with approximately 9,000 policies has been agreed before the year end. This will complete upon regulatory approval in 2021.

ACQUISITION OUTLOOK

- Despite the Covid-19 restrictions, we have continued to see a healthy flow of acquisition activity in the year. We have also continued to see the continuation of, what we perceive to be, high 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 become more challenging. The long-term economic implications resulting from Covid-19, in particular the further reduction in both short and long-term interest rates is likely to increase the challenges of businesses who own non-core back-books. We believe this will potentially drive further consolidation as institutions seek to remove operational complexity, refocus on core business lines and potentially release capital or generate funds from capital intensive life and pension businesses.

- Historically we have had 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.

- 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, however we do apply the volatility adjustment within our Dutch division and have applied to do so in the UK.

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:

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 and applied to do so in the UK 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 £167.6m of surplus over and above the internal capital management policy, compared to £172.8m at the end of 2019. The group solvency ratio has increased from 155% to 156%. Solvency surplus has fallen as a result of own funds falling slightly more than the capital requirements, after the proposed dividend is taken into account.

Dividends: The closing solvency position is stated after deducting the £21.4m proposed dividend (31 December 2019: £20.8m), and reflects the payment of an interim dividend of £11.5m.

Own Funds: Own Funds have risen by £9.7m (pre-dividends). Drivers of growth include a UK with-profit net transfer of £9.2m and completion of the Argenta acquisition. These factors were partly offset by the impact of the fall in yields and operating strains.

SCR: The SCR has fallen by £16.4m, mainly due to a material reduction in equity risk, currency and lapse risk; partially offset by an increase in expense and catastrophe risk.

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 2019 figures have been restated using 31 December 2020 exchange rates in order to aid comparison at a divisional level.

UK

Surplus: £10.5m above board's capital management policy.

Dividends: Solvency position stated after £33.5m proposed dividend (2019: £29.0m)

Own Funds: Increased by £26.2m (pre-dividend) due to a net with-profit capital transfer and modest economic growth, offset by a strengthening of operating assumptions.

SCR: Fallen by £5.3m, driven by fall in equity risk capital. Currency risk and lapse risk have also contributed to SCR reduction.

SWEDEN

Surplus:  £53.6m above board's capital management policy.

Dividends: Solvency position stated after £10.2m proposed dividend (2019: £6.8m).

Own Funds:  Fallen by £20.4m (pre-dividend) mainly driven by operating losses due to changes in transfer legislation and modelling, and fund management fees.

SCR: Fallen by £22.6m, driven by material fall in equity risk, spread risk and lapse risk reductions.

NETHERLANDS - WAARD

Surplus: £28.6m above board's capital management policy (£1.0m rise due to buffer reduction: 85% to 75%).

Dividends: Solvency position stated after £4.0m proposed dividend (2019: £5.2m).

Own Funds: Increased by £3.5m, mainly due to completion of the Argenta acquisition.

SCR: Risen by £1.3m, as business run-off reductions were more than offset by additional Argenta SCR, mainly due to an increase in lapse, expense and catastrophe risk from the new portfolio.

NETHERLANDS - SCILDON

Surplus: £2.6m above board's capital management policy (£8.6m rise due to buffer reduction: 85% to 75%).

Dividends: No foreseeable dividend is proposed. The 2019 foreseeable dividend of £7.4m was not paid.

Own Funds: Fallen by £7.3m due to operating losses, partially offset by modest economic profits.

SCR: Increased by £9.5m, largely due to increases in underwriting risks due to the fall in yields, which mainly reverses at group level.

CAPITAL MANAGEMENT | Sensitivities

The group's solvency position can be affected by a number of factors over time. As a consequence, the group's EcV and cash generation, both of which are derived from the group's solvency calculations, are also sensitive to these factors.

The table below provides some insight into the immediate impact of certain sensitivities that the group is exposed to, covering solvency surplus and Economic Value. As can be seen, EcV tends to take the 'full force' of adverse conditions whereas solvency is often protected in the short term and, to a certain extent, the longer term due to compensating impacts on required capital. Whilst cash generation has not been shown in the diagrams below, the impact of these sensitivities on the group's solvency surplus has a direct read across to the immediate impact on cash generation.

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 solvency surplus and EcV. It 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 can be larger than Own Funds, resulting in an immediate reduction in surplus, depending on the starting point of the symmetric adjustment. 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 fully symmetrical due to management actions and tax. The change in symmetric adjustment has a significant impact (25% equity fall: -£21m to the SCR, 25% equity rise: +£30m to SCR). The EcV impacts are more intuitive as they are more directly linked to Own Funds impact. CA and Movestic contribute the most due to their large amounts of unit-linked business, much of which is invested in equities.

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

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

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

10% mass lapse: 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 mass lapse hits Own Funds by more than the SCR reduction.

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: £24.6M (2019: £96.1M)

TOTAL COMPREHENSIVE INCOME: £43.3M (2019: £60.6M)

What is it?

Presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the profit arising from the longer-term insurance and investment contracts over the life of the policy.

Why is it important?

The IFRS results form the core of reporting and hence retain prominence as a key financial performance metric. There is however a general acceptance that the IFRS results in isolation do not recognise the wider financial performance of a typical life and pensions business, hence the use of supplementary alternative performance measures to enhance understanding of financial performance.

Risks

The IFRS profit/(loss) can be affected by a number of our principal risks and uncertainties. Volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit/(loss), and foreign currency fluctuations can affect total comprehensive income. The IFRS results of Scildon 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.

- Solid profits were delivered in each of the operating divisions, despite the challenging year and impact of Covid-19 on investment markets.

- Operating profits, excluding AVIF impairment were down on last year's £46.2m, in part due to a strengthening of reserves (c£10m) in Scildon.

- Economic earnings, excluding AVIF impairment were also more muted than in 2019 (£49.1m) and reflect the pandemic-related low equity growth environment compared with the previous year.

- The AVIF impairment charge has arisen from reassessing the future profits from Scildon, which has been hit in part by falling yields in the year.

- Total comprehensive income includes foreign exchange gains on translation of the Dutch and Swedish divisional results, owing to sterling depreciation against the euro and Swedish krona.

CASH GENERATION

GROUP CASH GENERATION £27.7M (2019: £36.7M)

DIVISIONAL CASH GENERATION £23.6M (2019: £50.8M)

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 in the UK is the largest component of the divisional result.

- The UK contribution was delivered through solid value growth, while a reduction in capital requirements, in excess of the reduction in Own Funds, underpinned the Swedish result. Cash returns in Waard benefit from the completion of the Argenta policy portfolio acquisition.

- Scildon reported cash utilisation of £22.3m following a reduction in Own Funds and an increase in capital requirements. Modest economic positives were insufficient to offset operational losses, which were themselves partially due to reducing yields. The rise in SCR included a strain from reinvesting low risk cash into mortgages (mortgage balance £170m at 31 December 2020) and falling yields caused a lapse SCR increase that reverses at group.

- The 2020 result includes the benefit of a net £9.2m capital transfer from restricted with-profit funds in the UK (2019: £5.1m net increase in restriction).

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 and as consequence of a management action to reduce SCR.

ECONOMIC VALUE (EcV)

£636.8M (2019: £670.0M)

What is it?

Economic value (EcV) was introduced following the introduction of Solvency II at the start of 2016, with EcV being derived from Solvency II Own Funds. EcV reflects a market-consistent assessment of the value of the existing insurance business, plus the adjusted net asset value of the non-insurance businesses within the group.

Why is it important?

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

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

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets, yields on fixed interest securities and bond spreads. In addition, the EcV position of the group can be materially affected by exchange rate fluctuations. For example, a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group within a range of £90m-£100m, based on the composition of the group's EcV at 31 December 2020.

- Prior to any dividend payment impact, the total Economic Value remains largely unchanged from the prior year.

- The closing position includes an EcV earnings loss of £37.6m, heavily impacted by the pandemic's impact on both business conditions and the economic environment, with operating losses in Scildon and Movestic and modest investment market returns compared to prior years.

- The change in EcV over the year includes the impact of the payment of the final 2019 and interim 2020 dividends.

- Foreign exchange gains arose on translation of the Dutch and Swedish divisional results, representing the weakening of sterling against both the euro and Swedish krona.

ECV EARNINGS

£(37.6)M (2019: £104.0M)

What is it?

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

The principal underlying components of the Economic Value result are:

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

- Value added by the writing of new business;

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

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

- The impact of acquisitions.

Why is it important?

A different perspective is provided in the performance of the group and on the valuation of the business. Economic Value earnings are an important KPI as they provide a longer-term measure of the value generated during a period. The Economic Value earnings of the group can be a strong indicator of how we have delivered against all three of our core strategic objectives. This includes new business profits generated from writing profitable new business, Economic Value profit emergence from our existing businesses, and the Economic Value impact of acquisitions.

Risks

The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties and sensitivities analysis. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the future cash flows arising from our books of business.

- An EcV loss of £37.6m was incurred in 2020.

- The underlying operating earnings1 loss in the year is largely driven by losses in Scildon and Movestic. Movestic's are a function of fund rebate pressures across the industry, whilst Scildon's are largely driven by the impact of the current low yield environment. CA and Waard delivered positive operating earnings.

- Material other operating items largely relates to Movestic, and reflects changes in transfer out assumptions. Off-setting this is a £7.2m gain on completion of a portfolio acquisition in the Waard Group.

- Economic earnings were more modest than in 2019, owing to muted equity market returns, falling bond yields and widening bond spreads, largely due to the effect of Covid-19.

CASH GENERATION

GROUP CASH GENERATION

£27.7M (2019: £36.7M)

DIVISIONAL CASH GENERATION

£23.6M (2019: £50.8M)

The UK and Swedish businesses delivered solid cash contributions, supporting a total cash generation of £27.7m in 2020. Cash is generated from increases in the group's solvency surplus, which is represented by the excess of own funds held over management's internal capital needs. These are based on regulatory capital requirements, with the inclusion of additional 'management buffers'.

Definition: Defining cash generation in a Life and Pensions business is complex and there is no reporting framework defined by the regulators. This can lead to inconsistency across the sector. We define cash generation as being the movement in Solvency II surplus own funds over and above the group's internally required capital, which is based on Solvency II rules.

Implications of our cash definition:

Positives

- Creates a strong and transparent alignment to a regulated framework.

- Positive cash results can be approximated to increased dividend potential.

- Cash is a factor of both value and capital and hence management are focused on capital efficiency in addition to value growth and indeed the interplay between the two.

Challenges and limitations

- In certain circumstances the cash reported may not be immediately distributable by a division to group or from group to shareholders.

- Brings the technical complexities of the SII framework into the cash results e.g. symmetric adjustment, with-profit fund restrictions, model changes etc, and hence the headline results do not always reflect the underlying commercial or operational performance.

GROUP

- Group cash generation of £27.7m reflects a challenging year operationally and significantly lower economic returns than the prior year.

- Cash utilisation in Scildon is the largest component of the year on year reduction. Further analysis of the key drivers of cash generation across the group is provided below.

UK

- The division continued to deliver sound value growth, supported by a smaller reduction in capital requirements, resulting in solid cash generation. The result includes the benefit of a £20.0m capital transfer from the with-profit funds, off-set by a further restricted surplus build up of £10.8m.

SWEDEN

- The division has reported positive cash generation compared to cash utilisation during 2019. Detailed analysis is provided in the enhanced analysis, with the movement year on year including exchange rate impacts (2020: +£6.0m; 2019: -£4.4m) coupled with equity-market driven impacts, including the symmetric adjustment (2020: £+11.7m; 2019: +£6.0m). The equity-market driven cash generation in the current year is in part due to customers moving out of equity exposures due to volatility during the year, which reduces the level of capital Movestic is required to hold.

NETHERLANDS - WAARD

- Waard has again reported growth in Own funds, outweighing an increase in the capital requirement, resulting in yet another year with positive cash generation contributing to the overall group result. Much of the growth is due to the Argenta policy portfolio acquisition, while the result also benefits from foreign exchange gains due to sterling's depreciation against the euro.

NETHERLANDS - SCILDON

- The Scildon cash generation was disappointing, moving from positive in 2019 to cash utilisation during the current year. The result does however include a £6.0m loss as a direct consequence of yield reductions, coupled with the reinvestment from cash to higher returning mortgage investments, which also had a negative impact of c£6m. This change of investments was a continuation of a wider programme to improve capital efficiency, which resulted in £24.1m of cash generation during 2019.

CASH GENERATION - ENHANCED ANALYSIS

The format of the analysis draws out components of the cash generation results relating to technical complexities, modelling issues or exceptional corporate activity (e.g. acquisitions). The results excluding such items are deemed to better reflect the underlying commercial outcome (commercial cash generation). This commercial result is then analysed to show the key drivers of that result. In particular, the analysis draws out the extent by which cash generation 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.

COMMERCIAL CASH GENERATION

£27.7M (2019: £75.3M)

ECONOMIC CASH GENERATION

£24.7M (2019: £37.5M)

At a total group level commercial cash generation is the same as base case generation. At a divisional level there are however some significant differences. The underlying commercial result for Scildon is significantly better than the base result when adjustments are made to give credit for components that reverse on consolidation and one-off model enhancement impacts. Conversely whilst the commercial cash generation for the UK remains significant, it is lower than the base result which includes the benefit of transfers from previously built up surpluses in the with-profit funds.

Impacts from economic conditions

At a total level the commercial cash result includes £24.7m of economic benefits with notable losses from reducing yields being more than offset by foreign exchange and equity market related gains.

Despite volatility, equity markets in Sweden actually increased by 10% over the year and this together with the impact of fund reallocations from equity to fixed interest investments, has contributed to a total economic cash gain of £23.6m. Scildon is more exposed to the impact of reducing yields. Yield related losses were greater than spread and foreign exchange gains, resulting is a small net economic loss.

Core operating cash generation

In total the divisions have delivered a core operating cash gain of £26.1m.

The closed book operations in the UK and the Netherlands benefit from the impact of book run-off resulting in £5.3m of core operating cash generation. There is also a book run-off benefit in Scildon but this is broadly offset by new business strain, drawn out as a separate item. The central group item of £(18.1)m is the total value of numerous items including uncovered central expenses incurred, changes in central provisions for future expenses, interest payments, an increases in counterparty capital and capital requirement consolidation adjustments.

New business strain

As an open operation selling relatively capital-intensive term contracts, the Scildon result is impacted by new business strain and this has been drawn out from the core result. The strain in Movestic is less material so not drawn out as a separate item.

Material other operating items

This includes operating items that were individually material and have therefore been separately analysed to aid the understanding of the operating cash generation in the year. The Movestic loss includes the impact of regulatory changes on transfer rates plus the temporary impact due to both Covid-19 conditions and competitor pricing. In Scildon we have experienced cash utilisation as a result of adopting revised standard mortality tables which suggest higher mortality than our specific portfolio experiences. Finally, the group figure relates to IFRS 17 expense reserves. This is mainly due to a policy to centralise the programme and hence there are corresponding releases in the UK and Scildon results of £3.0m and £3.4m respectively.

Management actions

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

a) The UK implemented a change in its asset mix backing its with profit policies, which benefitted the level of risk capital required to be held.

b) During the year we have delivered our pre-agreed flight path of reducing our capital management buffers in our Dutch businesses.

c) We have switched a significant proportion of Dutch assets from BBB corporate investments to mortgage based investments. This was implemented in two stages. Stage 1 involved the switch from BBB to cash which created £24.1m of cash generation and this was completed in 2019 and was hence recognised in the 2019 results. The second stage involved moving from cash to mortgage-based investments which resulted in cash utilisation of £5.9m in 2020. Therefore, despite the end to end process creating a large capital efficiency gain, the 2020 result includes a notable negative impact.

d) As part of the group's capital management programme we have reassessed the modelling of our currency risk capital requirement resulting in a large reduction.

EcV EARNINGS

£(37.6)M (2019: £104.0M)

EcV loss in the year is driven by some large operating losses reflecting difficult trading conditions in Sweden and a challenging low yield environment affecting Scildon, offset by modest economic profits over the course of the year.

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 change in economic earnings year on year. Key movements in investment market conditions during the year are as follows:

- FTSE All World index increased by 24% (year ended 31 December 2019: increased by 24%);

- Swedish OMX all share index increased by 13% (year ended 31 December 2019: increased by 30%);

- The Netherlands AEX all share index increased by 4% (year ended 31 December 2019: increased by 20%); and

- 10-year UK gilt yields have decreased from 0.84% to 0.24%.

Note 2 - Underlying operating earnings: The loss of £49.8m is largely made up of losses in Scildon and Movestic, coupled with some group expense strain being reported (see note 7). The competitive environment in Sweden has continued over the course of the year, with fund rebate pressure being the main driver of experience losses. Turning to Scildon, there has been positive lapse experience in the year, but in the current low yield economic environment this results in EcV losses due to guarantees within certain policies biting. In addition Scildon has also reported some mortality losses largely due to applying the most recently published mortality tables. The UK business and the Waard group have reported positive operating results.

Note 3 - Material other operating items: This includes operating items that are individually material and have therefore been analysed separately. This largely relates to Movestic, whereby assumption strengthening has been made in the year, amounting to £21.8m. This is largely down to: the general competitive environment and amount of churn in the market; changes to transfer regulations and associated charges; and a general move from customers to more traditional products with guarantees as a result of Covid-19 related market volatility concerns. Also included in this category is a £7.2m gain on the completion of Waard's acquisition of the Argenta portfolio during the year.

Note 4 - UK: The UK reported value growth of £11.8m in 2020, with economic earnings being the largest component of the result, despite the Covid-19 impact on investment markets early in the year. Economic gains were primarily the positive impact of modest equity market growth, noting that our policyholder funds are invested in a combination of UK and global equities, although this this was partially offset by the negative impact of falling yields. Operational earnings included gains arising from positive lapse experience (resulting in future fee income higher than assumed at the start of the year) and favourable mortality experience, offset by a strengthening of future expense assumptions.

Note 5 - Sweden: Movestic recorded a large loss (£22.9m) over the year. As described in note 3 the majority of this was as a result of assumption changes in relation to dynamics around policy transfers. New business profits of £1.0m were reported, representing a reduction compared to last year's reported profits of £4.3m. Volumes have been hit by Covid-19 and we believe these will return as Swedish society starts to open back up. Operating losses were also recorded in relation to fund management fees, which have come under pressure over the course of the year. Economic earnings of £9.2m were reported, substantially lower than 2019 (£55.3m), largely as a result of the significant equity market growth in 2019 not being repeated during 2020.

Note 6 - Netherlands: The Dutch businesses posted a loss of £8.5m for 2020. Waard delivered solid profits of £4.9m while Scildon incurred a loss of £13.4m. New business performance in Scildon of £2.7m (2019: £3.5m) was largely in line with the prior year. As referred to note 2, Scildon has reported operating losses amounting to £23.0m, largely as a result of incurring guarantee related costs as a result of better than expected policy retention, and also the impact of adjusting mortality assumptions to an updated mortality table. Economic gains were modest in Scildon (£5.3m).

Waard has reported positive EcV earnings of £5.3m. The majority of this arose from the Argenta portfolio acquisition, offset by small economic losses.

Note 7 - Group: This component includes various group-related costs, and includes: non-maintenance related costs (such as acquisition costs); the costs of the group's IFRS 17 programme (the budget of which was increased during the year); and some economic-related costs such as a foreign exchange loss on our euro debt, the negative impact of reduced interest rates and interest on our bank debt.

EcV

£636.8M (31 DEC 2019: £670.0M)

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 2020 to 31 Dec 2020:

EcV earnings: A loss of £37.6m has been reported in 2020. The impact of the Covid-19 pandemic felt in all divisions, with operating losses and more modest investment markets returns in the year.

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £32.3m were paid during the period, being the final dividend from 2019 and the 2020 interim dividend.

Foreign exchange: The EcV of the group benefitted from a foreign exchange gain in the period, a consequence of the sterling depreciation against the euro and Swedish krona.

EcV by segment at 31 Dec 2020:

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 £21.4m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

IFRS

IFRS PRE-TAX PROFIT

£24.6M (2019: £96.1M)

IFRS TOTAL COMPREHENSIVE INCOME

£43.3M (2019: £60.6M)

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

Executive summary

Stable core: At the heart of surplus, and hence cash generation, are the core 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.

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 has posted a strong result, albeit down on the prior year, which saw strong investment related returns late in 2019. In addition to positive economic returns, the current year result also benefited from positive operational impacts arising from mortality assumption changes, expense modelling impacts and favourable policyholder tax deductions.

Note 2: Movestic continues to contribute positively to the overall group IFRS result, with profits broadly in line with the prior year. Positive investment returns, strong claims development and reduced operational expenses produced a favourable result year to date.

Note 3:  The Waard Group result reflects weaker investment performance due to investment market volatility. It has also incurred slightly higher than expected acquisition related expenditure, which includes costs in relation to the purchase of a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V., which completed on 31 August 2020.

Note 4: Scildon has delivered a relatively strong IFRS result, despite the need for a strengthening of reserves of circa £10m in the year arising from the liability adequacy test biting. Positive investment value growth has arisen from favourable spread and interest rate movements, coupled with a positive insurance result due to favourable mortality experience.

Note 5: The Chesnara result largely represents holding company expenses. The current year loss is higher than last year largely due to 2020 including larger one-off items such as project related expenditure and a foreign exchange loss in respect of the Euro denominated loan that it holds.

Note 6: Consolidation adjustments relate to items such as the amortisation and impairment of intangible assets.

Note 7: During the year a write down of the Scildon AVIF intangible asset was performed amounting to £26.6m (£11.6m of this was recognised in the first half of the year). The impairment was as a result of a reduction in the assessed value of the future cash flows of policies that were in force at the point of acquisition. The AVIF held in respect of the Protection Life book within CA was also impaired by £1.0m, following a year end assessment. The impairments are driven by a combination of economic and operating factors, with the exact allocation between the two being impracticable to determine. As a result this has been reported outside of both operating and economic profits.

Note 8: Sterling weakened against both the euro and Swedish krona in the period, having a material impact on the 2020 result, creating a sizeable exchange gain at the end of the year.

Note 9: The operating proft, excluding AVIF impairment, includes the negative impact of the liability adequacy test biting in Scildon, amounting to £10.0m, which is driven by a combination of economic and operating assumption changes. In the absence of this operating profits have remained broadly in line year on year, demonstrating the stability of the core business.

Note 10: Economic profit, excluding AVIF impairment, represents the components of the earnings that are directly driven by movements in economic variables. Despite being lower than last year, economic profits have held up well in what has been a turbulent year for global investment markets, which have largely recovered from the steep falls seen at the start of the Covid-19 pandemic.

IFRS net assets remained relatively stable during the year, whilst cash generated from operating activities increased period on period, as positive investment returns outweighed corresponding movements in insurance and investment contract liabilities.

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: 156%

2. SHAREHOLDER RETURNS

2018-2020 TSR (14.07)%

2020 dividend yield 7.5%

Based on average 2020 share price and full year 2020 dividend of 21.94p.

3. CAPITAL STRUCTURE

Gearing ratio of 7.4%

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

4. LIQUIDITY AND POLICYHOLDER RETURNS

Policyholders' reasonable expectations maintained.

Asset liability matching framework operated effectively in the year.

Sufficient liquidity in the Chesnara holding company.

5. MAINTAIN THE GROUP AS A GOING CONCERN

Group remains a going concern

Further detail on capital structure

The group is funded by a combination of share capital, retained earnings and debt finance. The debt gearing (excluding financial reinsurance in Sweden) was 7.4% at 31 December 2020 (11.0% at 31 December 2019). The level of debt that the board is prepared to take on is driven by the group's "Debt and leverage policy" which incorporates the board's risk appetite in this area. Over time, the level of gearing within the group will change, and is a function of the funding requirements for future acquisitions and the repayment of existing debt.

Acquisitions are funded through a combination of debt, equity and internal cash resources. The ratios of these three funding methods vary on a deal-by-deal basis and are driven by a number of factors including, but not limited to the size of the acquisition; current cash resources of the group; the current gearing ratio and the board's risk tolerance limits for additional debt; the expected cash generation profile and funding requirements of the existing subsidiaries and potential acquisition; future financial commitments; and regulatory rules. In addition to the above, Movestic uses a financial reinsurance arrangement to fund its new business operation.

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

1. Maintain the group as a going concern

After making appropriate enquiries, including consideration of the impact of Covid-19 on the group's operations and financial position and prospects, the directors confirm that they are satisfied that the company and the group have adequate resources to continue in business for the foreseeable future. Accordingly, they continue to adopt the going concern basis in the preparation of the financial statements.

In performing this work, the board has considered the current solvency and cash position of the group and company, coupled with the group's and company's projected solvency and cash position as highlighted in its most recent business plan and Own Risk and Solvency Assessment (ORSA) process. These processes consider the financial projections of the group and its subsidiaries on both a base case and a range of stressed scenarios, covering projected solvency, liquidity, EcV and IFRS positions. In particular these projections assess the cash generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company. Further insight into the immediate and longer-term impact of certain scenarios, covering solvency, cash generation and Economic Value, can be found under the section headed 'Capital Management Sensitivities'. The directors believe these scenarios will encompass any potential future impact of Covid-19 on the group as Chesnara's most material ongoing exposure to Covid-19 is any associated future investment market impacts. Underpinning the projections process outlined above are a number of assumptions. The key ones include:

- We do not assume that a future acquisition needs to take place to make this assessment.

- We make long term investment return assumptions on equities and fixed income securities.

- The base case scenario assumes exchange rates remain stable, and the impact of adverse rate changes are assessed through scenario analysis.

- Levels of new business volumes and margins are assumed.

- The projections apply the most recent actuarial assumptions, such as mortality and morbidity, lapses and expenses.

Due to the group's strong capital position and the group's business model, although the Covid-19 outbreak caused significant global economic disruption, the group and the company remain well capitalised and has sufficient liquidity. No significant strengthening of mortality assumptions has been required as a result of Covid-19 at this stage. As such we can continue to remain confident that the group will continue to be in existence in the foreseeable future. The information set out under the Capital Management section indicates a strong Solvency II position as at 31 December 2020 as measured at both the individual regulated life company levels and at the group level. As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due and does not rely on the renewal or extension of bank facilities to continue trading. The group's subsidiaries rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to manage this risk, we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that any associated credit default risk is low.

Whilst there was some short-term operational disruption from dealing with the restricted operating environment in light of Covid-19, our assessment has shown that both our internal functions and those operated by our key outsourcers and suppliers adapted to these restrictions and do not cause any issues as to our going concern.

2. Assessment of viability

The board assesses that being financially viable includes continuing to pay an attractive and sustainable level of dividends to investors and meeting all other financial obligations, including debt repayments over the three-year business planning time horizon. The board's assessment of the viability of the group is performed in conjunction with its going concern assessment and considers both the time horizons required for going concern, and the slightly longer term timelines for assessing viability. The assessment for viability also considers the same key financial metrics as for assessing going concern, being solvency, cash, EcV and IFRS, both on base case and stressed scenarios.

As reported in the going concern section, the group has remained well capitalised throughout the Covid-19 pandemic, and any operational disruption in moving to a largely remote working model in the short term, was minimal. In light of this, should the Covid-19 situation be with us in society over the whole viability period, we do not believe that this factor would cause any concern as to our overall viability.

3. 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.

4. Assessment of prospects

Our longer-term prospects are primarily considered through the conclusions drawn from our annual business planning process, updated for key events that may occur in-between business plans.

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

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

Value from in-force book: The group has c930,000 policies in force at 31 December 2020. These are generally long-term policies, and the associated cash flows can, at an overall portfolio level, be reasonably well predicted on base case and stressed scenarios. The group is well capitalised at both a group and divisional level and we have high quality assets backing our insurance liabilities. From a Covid-19 perspective, whilst equity markets have somewhat recovered from the initial falls at the start of the pandemic, sustained depressed market values do adversely impact fee income streams and therefore if markets fall again then profitability prospects reduce. Similarly, further reductions in yields would adversely impact our prospects. Temporary market volatility is however a natural feature of investment markets and our financial model is well positioned to withstand difficult conditions without creating any permanent harm to the longer-term profitability prospects.

Acquisition Strategy:  We see no reason to expect that Covid-19 will have a long term impact on the availability of acquisition opportunities. Despite a competitive landscape, where deals have completed over the past year, the acquiring companies have still tended to report value gains. Indeed, we completed a small Dutch acquisition which has resulted in a €7.2m EcV gain. Waard are building a useful market position as a company who are able and willing to acquire books that are sub-scale for the vendors business model. Whilst we maintain our ambition to complete larger deals, the prospects from a steady flow of well priced smaller acquisitions should not be underestimated. The financial position of the group continues to support financing deals through the use of our own resources or by raising debt, however in the short-term equity funding would likely be less attractive.

Value from new business: Chesnara is in a fortunate position in that its prospects do not fundamentally rely on the ability to sustain new business volumes. New business levels have held up well in Scildon despite overall market size reductions during the year. An increase in market share stands us in a good position to take advantage should market volumes increase post Covid as we would expect them to do. Movestic's new business results have been more adversely impact by Covid-19 primarily due to an overall reduction in wider market activity. That said, we were still able to post a new business profit and our market share would mean a notable recovery in future profits when the wider market volume recovers.

Our business fundamentals such as assets under management, policy volumes, new business market shares and expenses have all proven resilient to the impact of the pandemic. This, together with the positive assessment of our core strategic objectives and a line of sight to positive management actions over the planning period, leaves use well positioned to deliver ongoing positive outcomes for all stakeholders.

RISK MANAGEMENT

Managing risk is a key part of our business model. We achieve this by understanding the current and emerging risks to the business, mitigating them where appropriate and ensuring they are appropriately monitored and managed.

HOW WE MANAGE RISK

RISK MANAGEMENT SYSTEM

The risk management system supports the identification, assessment, and reporting of risks 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.