Chesnara Regulatory News (CSN)

28 March 2024

LEI Number: 213800VFRMBRTSZ3SJ06

Chesnara plc (CSN.L)

("Chesnara" or "the Company")

CONTINUED STRONG CASH GENERATION WITH POSITIVE OUTLOOK FOR FURTHER M&A

Chesnara reports its 2023 full year results. Key highlights are:

· Completion of the acquisition of Conservatrix's insurance portfolio in the Netherlands

· Acquisition of an individual protection portfolio from Canada Life UK

· New UK strategic partnership with SS&C Technologies for policy administration

· Strong group commercial cash generation of £53.0m (FY 2022: £46.6m)

· Robust solvency of 205% (FY 2022: 197%), materially above our 140 - 160% normal operating range

· Economic value ("EcV") of £524.7m, 348p per share (FY 2022: £511.7m, 340p per share)

· Commercial value of new business of £10.1m (FY 2022: £9.5m)

· Proposed 3% increase to the full year dividend (total 2023 dividend of 23.97p per share)

· IFRS pre-tax profit of £1.8m (FY 2022: £62.1m loss)

Commenting on the results, Steve Murray, Group CEO, said:

"The two acquisitions we delivered in 2023 show we have continued momentum behind our acquisition strategy. We have seen significant delivery across the Group in the period including IFRS 17 and our new strategic partnership with SS&C for policy administration, which supports Chesnara's future growth ambitions in the UK. The wider business has continued to deliver for our customers and has also performed robustly despite continuing market volatility delivering economic value growth. Our solvency position remains strong and significantly above our normal operating range. On M&A, we begin 2024 with a positive pipeline and are optimistic about our ability to participate in future deals. And we remain confident in our ability to finance and execute transactions on attractive terms for both vendors and our shareholders and deliver positive outcomes for customers."

A full year results presentation is being held at 9:30am on 28 March 2024 - participants can register here.

Further details on the financial results are as follows:

CASH GENERATION AND DIVIDENDS - 19 YEARS OF DIVIDEND GROWTH

· Group commercial cash(1) generation of £53.0m in FY 2023 (FY 2022: £46.6m).

· Divisional commercial cash generation(1) of £72.8m in FY 2023 (FY 2022: £25.9m)

· The results during the year, combined with the group's balance sheet strength, support a further year of dividend growth for 2023.

· The Board has proposed a 2023 final dividend of 15.61p per share (2023 total dividend of 23.97p), which equates to £36.1m and a 3% increase compared to 2022 (£35.0m) and extends the period of uninterrupted dividend growth to 19 years.

FINANCIAL RESILIENCE - FLEXIBILITY IN FINANCING FUTURE M&A

· Solvency II ratio of 205% as at 31 December 2023 (31 December 2022: 197%), materially above our normal operating range of between 140 - 160%.

· Cash balances at group holding companies increased over the period to £124.1m (31 December 2022: £108.1m), providing substantial resources to fund future acquisitions.

· Leverage ratio(2) of 29.2% as at 31 December 2023 (restated 31 December 2022: 30.3%) following the introduction of IFRS 17 over the period and a change in leverage definition to include 'net of tax and reinsurance CSM'.

DELIVERING VALUE - GROWTH THROUGH ACQUISITIONS

· The acquisition of the Conservatrix insurance portfolio was completed and the Canada Life UK protection portfolio transaction executed during 2023, adding further scale to the Group's Dutch and UK businesses and generating a combined day one EcV gain of £28.4m. The Group looks after c1m policyholders.

· Commercial new business profit(3) increased to £10.1m in FY 2023 (FY 2022: £9.5m).

· Economic Value ("EcV") of £524.7m as at 31 December 2023 (31 December 2022: £511.7m) has grown over the year due to the Conservatrix and Canada Life acquisitions as well as positive equity markets, partly offset by the payment of dividends and the negative impact of foreign exchange rates.

· The new SS&C partnership for policy administration services will enable a scalable platform for M&A in the UK.

INTRODUCTION OF IFRS 17

· Introduction of IFRS 17 during the period, with IFRS pre-tax profits of £1.8m in FY 2023 (FY 2022 restated IFRS pre-tax losses: £(62.1)m), driven by positive investment returns over the period.

· Increase in CSM of £53.8m (£42.4m net of tax) over the year, largely due to the completion of the two acquisitions over the period.

· IFRS capital base(4), incorporating net equity and CSM (net of reinsurance and tax), increased to £487.4m as at 31 December 2023 (31 December 2022: £469.2m).

DIVIDEND DETAILS

· The recommended final dividend of 15.61p per share is expected to be paid on 28 May 2024. The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 11 April 2024. The record date for eligibility for payment will be 12 April 2024.

ANALYST PRESENTATION

· A presentation for analysts will be held at 9.30am on 28 March 2024 at the offices of RBC Capital Markets, 100 Bishopsgate, London, EC2N 4AA, which will be available to join online and subsequently be posted to the corporate website at www.chesnara.co.uk.

· To join the webcast, please register using the following link here.

Investor Enquiries

Sam Perowne

Head of Strategic Development & Investor Relations

Chesnara plc

E - sam.perowne@chesnara.co.uk

Media Enquiries

Roddy Watt

Director, Capital Markets

FWD

T - 020 7280 0651 / 07714 770 493 

E - roddy.watt@fwdconsulting.co.uk

Notes to Editors

Chesnara (CSN.L) is a European life and pensions consolidator listed on the London Stock Exchange. It administers approximately one million policies and operates as Countrywide Assured in the UK, as The Waard Group and Scildon in the Netherlands, and as Movestic in Sweden.

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

Consistent delivery of the Company strategy has enabled Chesnara to increase its dividend for 19 years in succession. Further details are available on the Company's website (www.chesnara.co.uk).

Notes

Note 1 Group cash generation represents the surplus cash that the group has generated in the period. Cash generation is largely a function of the movement in the solvency position and is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring that other constraints are managed.

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

Commercial cash generation is used as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed. It excludes the impact of technical adjustments, modelling changes and corporate acquisition activity; representing the group's view of the commercial cash generated by the business.

Note 2 The leverage ratio is a financial measure that demonstrates the degree to which the company is funded by debt financing versus equity capital, presented as a ratio. It is defined as 'debt' divided by 'net equity plus debt plus net of tax and reinsurance CSM', as measured under IFRS.

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

Note 4 IFRS capital base is the IFRS net equity for the group plus the consolidated CSM net of reinsurance and tax. It is a better measure of the value of the business than net equity as it takes into account the store of deferred profits held in the balance sheet, as represented by the CSM, including those as yet unrecognised profits from writing new business and acquisitions.

The Board approved this statement on 27 March 2024.

2023 HIGHLIGHTS

COMMERCIAL CASH GENERATION £53.0M 2022 £46.6M

GROUP CASH GENERATION £32.5M 2022 £82.7M

The group has again reported strong results across both cash metrics in 2023. Group cash generation includes a material adverse impact from the symmetric adjustment (SA) of £13.1m (2022: +£28.2m). The recovery we have seen across equity markets since 2022, whilst a positive overall for the group, means we are required to hold additional capital which has a short term impact on cash generation.

Commercial cash generation looks through the SA impact and is deemed to better reflect the underlying business performance. Total divisional commercial cash, excluding FX impacts, was £76.5m which provides over 210% coverage of the 2023 full year dividend. The strong group and divisional commercial cash result shows that Chesnara continues to deliver cash generation through a wide variety of market conditions.

GROUP SOLVENCY 205% 2022 197%

The group's solvency has increased in the year and is well above our normal operating range of 140-160%. The ratio does not include any temporary impacts from either transitional benefits or a positive closing SA position. The solvency position benefits from the capital efficiencies of the Tier 2 debt raised in 2022 and provides substantial headroom for future acquisitions.

FUNDS UNDER MANAGEMENT £11.5BN 2022 £10.6BN

FuM have increased by c8.5% since the start of the year. This is due to a combination of investment returns on the existing business and the value added through both new business written and the acquisitions completed in the year.

ECONOMIC VALUE £524.7M 2022 £511.7M

EcV has increased since the start of the year, as positive earnings (£59.1m) offset the impact of dividend payments (£35.4m) and foreign exchange consolidation impacts (£10.8m).

ECONOMIC VALUE EARNINGS £59.1M 2022 £84.7M LOSS

EcV earnings of £59.1m has been delivered (pre-dividend payments and FX impact). Acquisition gains and real world returns have provided the most material contributions, with Part VII synergies and new business further positive contributing factors.

COMMERCIAL NEW BUSINESS PROFIT £10.1M 2022 £9.5M

Commercial new business profits exceed the prior year return with the UK business also contributing new business alongside Movestic in Sweden and Scildon in the Netherlands. 

IFRS PRE-TAX PROFIT £1.8M 2022 £62.1M LOSS (restated as a result of IFRS 17 being applied retrospectively)

The IFRS results are being reported for the first time on an IFRS 17 basis in the Annual Report & Accounts, and the comparatives have been adjusted to apply this retrospectively. Profit before tax of £1.8m includes a net insurance service loss of £5.1m and an investment result of £71.7m (2022: £13.3m profit and £39.0m loss respectively).

IFRS TOTAL COMPREHENSIVE INCOME £10.3M 2022 £26.1M LOSS (restated as a result of IFRS 17 being applied retrospectively)

Total comprehensive income includes a foreign exchange loss of £7.8m (2022: £6.9m gain).

The adoption of IFRS 17 provides some more insight into the future profits that are expected to emerge from the group's life insurance business. However, the accounting standard does not include the group's significant amount of policies that are classified as investment contracts, which also represent a future profit stream for the business. As a result, whilst IFRS 17 does provide some level of alignment with the valuation regime of Solvency II, it does not replace it and therefore the group continues to primarily focus on Solvency II and its derivative KPIs of Economic Value and cash generation in assessing the performance of the business.

FULL YEAR DIVIDEND INCREASED FOR THE 19th CONSECUTIVE YEAR

Increase in the full year dividend for the year of 3% to 23.97p per share (8.36p interim and 15.61p proposed final), supported by material divisional cash contributions in the year and a strong group solvency. Both of the acquisitions that were executed in the year are expected to positively support future cash generation and we continue to have clear line of sight to sources of mid to long term cash generation.

VOLATILE INVESTMENT MARKET CONDITIONS HAVE CONTINUED

Overall, it has been a period of economic growth although volatility has remained across most asset classes. As a result there have been comparatively modest investment returns and mixed economic results in our operating divisions with the varied economic factors having impacted each of the businesses and our key financial metrics in different ways. We have seen some equity market growth which has had a positive impact on the UK's and Sweden's EcV growth but has dampened cash generation in these territories, and we have seen the impact of falling yields putting some downward pressure on the EcV of our Dutch businesses, but less so on cash generation. Sterling appreciation against both EUR and SEK has caused adverse foreign exchange impacts on the translation of our overseas divisional results, although this has had some mitigation from our foreign exchange hedge. As we look forward there continues to remain some uncertainty around economics with inflation and interest rates persisting at a higher level than forecast by central banks.

THE GROUP CONTINUES TO EXPAND THROUGH M&A

2023 was another busy period for Chesnara with two acquisitions in the year, delivering a combined day one EcV gain of £28.4m. Following the announcement late in 2022, we completed the acquisition of the insurance portfolio of Conservatrix in the Netherlands, with an EcV gain of £21.7m and increase in Waard's policies under administration of c70,000. In May, expansion in the UK continued for the second year running, with the acquisition of a protection portfolio from Canada Life. The acquisition has initially been executed through entering into a 100% reinsurance agreement with Canada Life, and these policies will subsequently transfer to the division through a Part VII transfer process. The transaction has delivered an immediate EcV gain of £6.7m and additional policies of c47,000 to the UK division. 

Our 2024 acquisition pipeline looks positive and we remain optimistic about the outlook for future deals. We have the operational bandwidth, material solvency headroom, liquid resources and other financing levers to support our ambitions.

NEW OUTSOURCING PARTNERSHIP, BUSINESS INTEGRATIONS, NEW PEOPLE AND IFRS 17 DELIVERY

In the UK, we have entered into a new long-term strategic partnership for the outsourcing of operations for the majority of the division, providing surety over the future operating costs of the business over a minimum 10 year period. The Part VII transfer of the policies of CASLP to Countrywide Assured was also successfully completed at the end of 2023. In the Netherlands, the Conservatrix insurance portfolio was successfully integrated into the Waard Group. At a group and divisional level, IFRS 17 has been implemented for this first reporting year, with reporting processes now bedding down into our business as usual operations following several years of planning and implementation. From a people perspective we have seen some key changes over the course of the year, with three new divisional CEOs joining the group, coupled with the announcement of the change in our group CFO planned for the first half of 2024.

WE ARE COMMITTED TO BECOMING A SUSTAINABLE CHESNARA

The group's sustainability programme has progressed well over the course of the year. We are committed to delivering against our three key targets: to be a net zero emitter; to invest in positive solutions; and to be an inclusive place for all stakeholders. We have successfully baselined our financed and operational emissions and also set our initial interim targets for financed emissions. More detail can be found in our Annual Sustainability Report (www.chesnara.co.uk/sustainability).

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

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

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

3 - Commercial cash generation is used as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed. It excludes the impact of technical adjustments, modelling changes and corporate acquisition activity; representing the group's view of the Commercial cash generated by the business.

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

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

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

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

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

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

MEASURING OUR PERFORMANCE

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

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

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

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

The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and, as such, all major financial APMs are derived from a defined rules-based regime. The list below shows the core financial metrics that sit alongside the IFRS results, together with their associated KPIs and interested parties.

FINANCIAL STATEMENT KPIs:

· IFRS net assets (£359.9m)

· IFRS profits

ADDITIONAL METRICS:

· Solvency

o  Own Funds (£683.7m)

o  Solvency Capital Requirement (SCR)

o  SCR plus management buffer

o  Solvency position (absolute value)

o  Solvency position ratio

· Cash generation

o  Group cash generation

o  Divisional cash generation

· Economic Value

o  Balance sheet

o  Earnings

· New business

o  EcV

o  Commercial

SOLVENCY

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

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

ECONOMIC VALUE

EcV is derived from Solvency II ('SII') Own Funds. It recognises the impact of certain items that are not recognised in SII Own Funds, and also takes a more commercial view of the risk margin than under Solvency II.

An element of the EcV earnings each period is the Economic Value of new business. By factoring in real world investment returns and removing the impact of risk margins, the group determines the value of new business on a commercial basis. 

CASH GENERATION

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

Group cash generation is calculated as the movement in the group's surplus Own Funds above the group's internally required capital, as determined by applying the group's Capital Management Policy, which has Solvency II rules at its heart.

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

Commercial cash generation excludes the impact of technical adjustments, modelling changes and corporate acquisition activity; representing the group's view of cash generated by the business.

OPERATIONAL AND OTHER PERFORMANCE MEASURES

In addition to the financial performance measures, the Report & Accounts includes measures that consider and assess the performance of all our key stakeholder groups. The table below summarises the performance measures adopted throughout the Report & Accounts.

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

The group has delivered strong cash generation and Economic Value growth during the period whilst continuing to have a strong solvency position. This has supported an increase in the full year dividend for a 19th consecutive year and provides headroom for future M&A.

LUKE SAVAGE, CHAIR

STRONG CASH GENERATION AND SOLVENCY

Chesnara has continued its strong track record of delivering cash generation across a variety of market conditions in 2023. Total commercial cash generation of £53.0m supports us continuing to extend our dividend growth track record. We are recommending that our shareholders will receive a final dividend of 15.61p per share, an increase of 3% in the full year dividend for the 19th consecutive year.

Having a strong and stable solvency position provides financial security for customers and is also critical to the investment case for both our equity and debt investors. And having material solvency headroom also supports our ability to execute further M&A. 

I am pleased to report a continued strong Solvency II ratio of 205%. This remains significantly above our normal operating range of 140-160%, providing us with considerable strategic flexibility. Our solvency position remains underpinned by a well-diversified business model, a focus on responsible, risk-based management and resilient and reliable cash flows from our businesses. And our businesses have delivered EcV growth even after the impact of FX and dividends.

Steve talks about these financial dynamics further in his report.

PEOPLE AND OPERATIONAL DELIVERY

Across the group, our people continue to deliver, which includes the execution of another two deals in the period. Firstly, we completed the acquisition of the Conservatrix insurance portfolio in the Netherlands on 1 January. Later in May, we announced the acquisition of Canada Life's protection portfolio in the UK, which has been initially executed through a reinsurance arrangement. The deals have created significant value for investors with £28.4m of day 1 EcV gains and we expect them to be an important source of value in the long-term. Our teams in the Netherlands and UK have worked extremely hard to integrate the newly acquired businesses and portfolios, including Sanlam Life and Pensions (CASLP) which we purchased in the previous year. We have completed the Part VII transfer of the CASLP policies into our main UK insurance company Countrywide Assured, which has also had a positive impact on cash generation and EcV, and the insurance portfolio of Conservatrix is now fully integrated into the Waard Group. 

Another major development during the period has been the announcement of a new outsource partner in the UK, SS&C. This positive development creates a sound commercial and operational foundation for long term customer support and business development.

In Movestic we have continued to work on improving our customer service, launching a new unique digital service in the year that allows customers to customise how they utilise their occupational pension scheme. We have also continued to build our custodian business through new partnerships in the year. 

And in the Netherlands Scildon has continued with its IT upgrade programme, improving its customer and broker front end capabilities.

The transition to the new insurance contract accounting regime, IFRS 17, has gone live in 2023 and our full year accounts have fully complied with the statutory requirements of the new standard. This is the cumulation of several hard years of planning and execution from teams across the group.

And finally, we have also been working hard to transition a number of leadership roles. During the year, September saw Pauline Derkman became CEO of Scildon and Jackie Ronson become our UK CEO and in December Sara Lindberg became our CEO of Movestic. We wish them the very best in their roles. On behalf of the board, I also wanted to thank Gert-Jan Fritzsche, Linnéa Echorville and Ken Hogg for everything they have done for Scildon, Movestic and CA respectively over the six, six and seven years they were CEOs of their respective businesses.

We also announced that David Rimmington will not be seeking re-election at our Annual General Meeting in May 2024 and that he will be stepping down from the board and leaving his role as Group Finance Director at that meeting. He will be replaced by Tom Howard who will become Group Chief Financial Officer, subject to regulatory approval and should start with us no later than 1 May 2024. On behalf of the board, I want to thank David for everything he has achieved at Chesnara over the last ten years and he leaves with our best wishes. At the same time, we are delighted to be welcoming Tom to Chesnara plc. He has extensive financial services experience particularly in life insurance and asset management as well as expertise in M&A; these skills align strongly with the group's strategic ambition.

It has been a period of significant operational delivery and I would like to take this opportunity to thank staff for their continued commitment and efforts. We remain mindful that significant periods of operational delivery, although rewarding, can be stressful and so we remain committed to investing in staff welfare programmes to support our people.

PURPOSE

At Chesnara, we help protect customers and their dependants through the provision of life, health, and disability cover or by providing savings and pensions products to meet future financial needs. These are very often customers that have come to us through acquisition, and we are committed to ensuring that they remain positively supported by us.

We have always managed our business in a responsible way and have a strong sense of acting in a fair manner, giving full regard to the relative interests of all stakeholders.

Delivering cash generation, EcV growth and solvency, will always remain of key importance for many reasons. These include our desire to offer competitive returns to shareholders and fund our debt investor coupon payments but also because it creates financial stability for customers. We continue to be very conscious of the need for the business to serve a wider purpose with an increasing balance of focus across the 3Ps: Profit, People and Planet.

Governance is a core foundation to our business model and we have a well-established governance framework. We continue to increase our focus on environmental and social matters and are committed to becoming a sustainable Chesnara. Alongside this document, we have published our 2023 Annual Sustainability Report which details our wider ambitions and progress against our targets and commitments. I encourage you to read the report and please provide any feedback or thoughts to me or a member of the Chesnara team. 

The path to sustainability will be long and complicated but we are investing in sustainability-focused resource and infrastructure to support the group on this journey. A very visible and encouraging development was the success of our first group-wide Sustainability Summit held in June. I was hugely encouraged by the level of engagement from all levels across the group and by the clear alignment of ambitions leading to the identification of key workstreams and objectives. The objectives are a mix of items that create solid foundations for longer term change together with some shorter term actions that will begin to make a real world positive impact. I am confident that we will deliver against those objectives, and I look forward to updating you on our progress.

OUTLOOK

Overall, it has been a good year of delivery and strong cash generation. The start of 2024 has continued to show volatile market conditions with inflation and interest rates persisting at higher levels than we have seen in recent years. That said, we have seen more positive signs from equity markets and stronger signals from central banks that we will return to normality in terms of macro-economic conditions. 

Our business model has delivered positively in these volatile environments, and we continue to expect the UK and European M&A markets to be active. Our strong and stable solvency, alongside the parent company cash balance, leave us well positioned to participate in these markets. 

And as we reach our 20th year as a listed company, the board and I look forward to continuing to deliver for our shareholders in the future.

Luke Savage,

Chair

27 March 2024

The group has generated material EcV earnings and delivered strong cash generation. Our people have delivered two acquisitions, secured a new UK strategic partnership and made the successful transition to IFRS 17. And we are continuing to see plenty of M&A opportunities.

STEVE MURRAY, CEO

INTRODUCTION & RESULTS

The key strategic areas of focus for 2023 have remined the same across Chesnara namely:

1. Running in-force insurance and pensions books efficiently and effectively;

2. Seeking out and delivering value enhancing M&A opportunities; and

3. Writing focused, profitable new business where we are satisfied an appropriate return can be made.

The momentum behind our acquisition strategy has continued with a further two deals recognised in the year (five now in the last two years). These two acquisitions have added £28m of immediate additional value to the group against consideration paid of £9m and total group capital deployed of £35m. Conservatrix and Robein Leven are now both fully integrated into Waard and the UK completed the Part VII of CASLP policies into CA in December, which has created synergies that have had a positive impact on cash generation and EcV. We also saw an improved contribution from new business for the period at £10m, including nearly £2m from the UK.

We have c1 million customers in Chesnara and we take the responsibility of delivering for them every day very seriously. Our UK team have been working hard to implement the new UK Consumer Duty regulation which will help continue to ensure we focus on good outcomes and value for money for customers.

A major highlight in the year is the signing of a new outsource arrangement in the UK, which we announced in May. Sixty-eight Chesnara colleagues transferred to SS&C in August and we have a major programme of activity underway to migrate our UK policies to our new operating platform including both CASLP and those policies being acquired from Canada Life UK. SS&C will be a key partner for us, enabling the UK business to continue to deliver high quality and cost effective servicing with the capacity and flexibility to support continued M&A developments in the UK where we see good opportunities.

In Scildon, work has continued to improve the efficiency and usability of our Individual Life platform which has seen positive feedback from brokers. And for Sweden, further automation and use of AI alongside the build of digital tools such as the pension calculator have also been material developments.

As Luke mentions, there has been an increased focus on defining and delivering the group sustainability vision in line with the commitments we set out in our Annual Sustainability Report (ASR), including our new initial interim targets for financed emissions. We are committed to a 50% reduction by 2030 in our scope 1 and 2 financed emissions investments that are within our control or influence, which represents a material component of our assets under management. We will also be working with partners and customers for those assets where we have less control or influence, for example those where policyholders self-select their own investments. We remain strongly committed to net zero by 2050 for all our financed emissions and so our targets will expand over time to include all asset classes.

The production of our transition plans will be a key step in identifying the more detailed actions we will take to tackle all our financed emissions and will also factor in how we manage a just transition which considers the needs of all stakeholders, including nature and biodiversity. I am pleased to report that we are taking tangible steps on our journey, including implementing new platforms and tools to enable us to baseline our financed and operational emissions. I share Luke's confidence that we will be able to successfully deliver against our sustainability objectives and look forward to providing updates on our future progress.

After five years of intensive work, there has also been a significant focus on ensuring we could report on the new IFRS 17 basis. I am delighted to report that our 2023 financial statements are compliant.

Process wise, we are in good shape regarding transitioning from the project to recurring business as usual operations and the financial impact of the transition to the new reporting framework is positive and in line with the guidance we gave investors alongside our full year 2022 results.

Before the proposed FY dividend and FX impacts, the group Economic Value grew materially by 12% (up £59.1m). We saw all components of the "Chesnara Fan" growth model deliver positively over the year. We invested further in central resources to support major projects such as IFRS 17 and M&A activity as well as continuing to pay the coupon on our £200m Tier 2 debt instrument. 

The derivative we put in place towards the end of 2022 to reduce the exposure of our capital surplus to extreme FX movements has been renewed and slightly broadened in 2023. Whilst this mitigates against extreme movements we do remain exposed to the risks and opportunities relating to FX movements within the cap and floor of the derivative. A primary driver of the hedge was to reduce the capital we need to hold against currency risk and to limit more extreme EcV exposure, rather than to fully hedge FX exposures across all metrics. During 2023 sterling has strengthened slightly against the euro and Swedish krona resulting in a negative FX impact on EcV of £10.8m.

The group continued to generate cash with total commercial cash generation of £53.0m. We see this as a strong result given the underlying economic conditions in the year. Our cash generation has benefitted from delivering a mass lapse reinsurance arrangement in the UK towards the end of the year, and has also been positively impacted by the UK's Solvency II reform, which resulted in a reduction in the level of risk margin we are required to hold in our UK business.

In terms of cash resources, we have again seen a significant flow of dividends in the period from our divisions with £71m having been remitted to Chesnara during the year. This contributed to a £16m increase in the parent company surplus cash balance (including holding companies) and a closing amount of £124m (which is post payment of the full year 2022 and interim 2023 dividends). Our group solvency ratio has also improved further during the period closing at 205% (31 December 2022:197%). As Luke highlighted, this is materially above our normal operating range of 140-160% and provides us with substantial headroom to support further strategic activity.

Our inaugural IFRS 17 numbers show a £51.5m increase in net equity as at 31 December 2022. As at 31 December 2023 total net equity is £359.9m with a contractual service margin (CSM) of £166.5m. This results in a leverage ratio of 29.2% (including the CSM net of tax) which is a significant reduction compared to the ratio of 37.6% reported at 31 December 2022 under the previous IFRS reporting regime. Whilst the CSM gives a useful indication of future profits on our insurance business it should be noted that in fact only 42% of our total portfolio is classified as insurance. As such, the CSM by no means represents the full future profit of the group as it excludes investment contracts. 

Whilst the move to IFRS 17 has been a very material programme of work for the group, you will note that my wider review continues to focus on metrics linked to Solvency II. We continue to believe that the Solvency II metrics better support a commercial assessment of the business and remain the metrics upon which we manage the group.

CASH GENERATION, GROUP LIQUIDITY AND STRONG SOLVENCY

At the heart of the Chesnara financial model and investment case is resilient cash generation and stable solvency, across a wide variety of market conditions.

STRONG CASH GENERATION

The total group commercial cash generation (excluding the impact of acquisitions) during the year was £53.0m (2022: £46.6m). This more than covers the proposed full year 2023 dividend of £36.1m.

Looking at how our businesses have generated cash, the divisional commercial cash generation for the year, excluding FX translation impacts, was £76.5m (2022: £28.3m). This represents c212% coverage of the total 2023 dividend and shows we continue to have significant future dividend paying capacity. The cash generation results include some positive impacts from management actions taken during the year, including the impact of mass lapse reinsurance in the UK and the benefits from the UK Solvency II reforms.

Commercial cash generation by territory:

DIVISIONAL COMMERCIAL CASH GENERATION REPRESENTS c212% COVERAGE OF THE 2023 SHAREHOLDER DIVIDEND?

? excluding FX consolidation impacts

The Chesnara parent company cash (including holding companies) and instant access liquidity fund balance at the year end has increased to £124m (31 December 2022: £108m). Cash reserves have benefitted from the £71m of divisional dividend receipts during the year. This provides substantial resources for future acquisitions and further supports the sustainable funding of the group dividend and payment of our Tier 2 debt coupon. The group continues to retain a Revolving Credit Facility with a further £100m of capacity and an additional £50m accordion.

Looking forward, we continue to have a strong line of sight to future cash generation over the medium and longer term from the unwind of risk margin and SCR, investment returns above risk free rates, wider synergies and management actions. And that's before further potential benefits from new business and further acquisitions.

STRONG SOLVENCY

During the year we have seen a further increase in the group solvency ratio to 205% (2022: 197%).

The closing headline solvency ratio of 205% is significantly above our normal operating range of between 140% and 160%. Unlike many of our peers, the solvency ratio does not adopt any of the temporary benefits available from Solvency II transitional arrangements, although we do apply the volatility adjustment in our UK and Dutch divisions. The ratio does include the benefit of the capital efficiencies relating to the Tier 2 debt raised in 2022. 

We expect to utilise this additional capital surplus as we undertake acquisitions, which should result in the ratio reverting back to within the robust and stable 140% to 160% historical range.

Symmetric adjustment: the Solvency II capital requirement calculation includes an adjusting factor that reduces or increases the level of the equity capital required depending on historical market conditions. Following periods of market growth, the factor tends to increase the level of capital required and conversely, in falling markets the capital requirement becomes less onerous.

THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTICULARLY THROUGH M&A

The 'Chesnara fan' illustrates the additional areas of growth potential the group may benefit from that aren't fully reflected in our Economic Value metric.

We have previously highlighted that over the medium term, we expect all components of the growth model to be positive, although there can be a level of shorter-term volatility in each element. Over the year all components have made positive contributions, although synergy related gains are offset by the impact of central costs (development costs and Tier 2 interest).

Although there are limitations to tracking the growth metrics over short time periods, it remains useful to assess how the results for the period mapped against the value growth components of the 'Chesnara fan'.

A key element of the growth model is real world investment returns. The reported EcV of the group assumes risk free returns on shareholder and policyholder assets. Given the direct link to external market performance this source of value tends to be the most volatile of the growth sources. During the year, real-world returns added c£43m to EcV. This gain partially offsets the significant economic value reduction from lower real world investment returns we saw in 2022, whilst demonstrating the value potential from even modestly beneficial economic conditions.

Over time, we expect improvements to operational effectiveness to be a source of value creation, be that through M&A synergies, scale benefits or other positive management actions (such as our recently announced partnership with SS&C). During the year, the deals completed have generated positive synergies. I am also pleased to report £10.1m of value growth resulting from commercial new business profits which have slightly increased versus 2022.

Acquisitions in the period have also added £28.4m of EcV. We see continued momentum behind the M&A strategy which is now materially contributing to the growth of the group. Its worth noting that further value growth expectations from this M&A are not recognised in the day one gains.

FOCUSSED WRITING OF NEW BUSINESS

Writing new business is the third area of focus in the Chesnara strategy. Not only is new business value-adding in its own right, importantly it adds scale which in turn enhances operational effectiveness and improves the sustainability of the financial model. During the year, we have seen positive commercial new business profits of £10.1m (2022: £9.5m). This has included a contribution of almost £2m from the UK.

We have grown our Funds Under Management (FuM) in 2023, largely through the completion of the acquisition of the insurance portfolio of Conservatrix and we have also reported a growth in underlying asset values.

Growth in FuM

GROWTH OF 61% SINCE 2018

FOLLOWING THE RECENT ACQUISITIONS, WE NOW LOOK AFTER c1 MILLION POLICIES FOR CUSTOMERS WHO HAVE £11.5BN OF THEIR ASSETS WITH US

CONTINUED DELIVERY OF ACQUISITIVE GROWTH

The primary purpose of Chesnara when it was formed back in 2004 was to acquire other closed book businesses and acquisition activity has been a core component of our historical EcV growth. As well as the immediate benefit from incoming EcV, acquisitions also improve the future growth outlook by enhancing the potential from the other value elements of the 'Chesnara fan'. 

Successful acquisitions have been key to Chesnara's development historically and will remain so in the future. During 2023 we delivered two acquisitions. The acquisition of the insurance portfolio of Conservatrix, a specialist provider of life insurance products in the Netherlands, was completed on 1 January 2023 having been originally announced in July 2022. The insurance portfolio has increased Waard's number of policies under administration by over 50%, transforming Waard into a second material closed book consolidation business alongside Chesnara's existing UK platform. The Conservatrix transaction increased the group's EcV by £21.7m and provides further EcV accretion potential, including from future real world investment returns and the run-off of the risk margin. We have already seen significant recycling of some of the capital deployed to support the acquisition.

On 16 May 2023 Chesnara announced the acquisition of the onshore individual protection line of business of Canada Life UK, which was closed to new business in November 2022. As a result of the acquisition, the life insurance and critical illness policies for approximately 47,000 customers will transfer to Chesnara's UK subsidiary, Countrywide Assured plc (CA plc). In the interim period, Canada Life UK will reinsure the portfolio to CA plc, effective from 31 December 2022. The initial commission as part of the reinsurance agreement was £9.0m, funded from internal group resources, and the transaction has increased the group's Economic Value by £6.7m.

Positive progress continues on the work to complete the transition of CASLP into our target operating platform and the approval of the Part VII transfer of CASLP into CA in December was a further important milestone here and also had a positive impact on EcV.

CONFIDENCE IN OUR ABILITY TO EXECUTE FUTURE M&A

We remain optimistic about the prospect of future acquisitions and believe that we can deliver further value accretive deals. Even relatively small transactions can have a material positive cumulative impact, as the group delivers synergies from integrating businesses and portfolios into its existing operations.

2023 has continued to see an active M&A market across European insurance for deals of £1bn and below with large international insurance groups continuing to focus their strategies and management teams actively managing business portfolios to release capital and simplify operations. Even with the ongoing market volatility and macro-economic environment, we expect the positive levels of insurance M&A to continue. An active market provides opportunities for Chesnara as a consolidator and the five deals that we have announced over the past two years is indicative of the momentum that we have in this key strategic objective, providing confidence on our ability to execute future M&A.

We continue to have material financial resources to deploy, with cash balances of £124m at a group level. Our revolving credit facility is not currently utilised and creates an additional level of working capital capacity of £150m. For more transformational deals, we retain the ability to raise equity and are mindful of the potential benefits from other funding arrangements such as joint ventures or vendor part-ownership.

Our assessment of the market potential, our track record of delivery and the actions we have taken to enhance our ability to execute M&A means we are confident that acquisitions will continue to contribute to Chesnara's success in the future.

PEOPLE CHANGES

There have been a number of changes in key personnel of the group over the course of the year, as summarised below.

- In February 2023, we announced that after six years as our Scildon CEO, Gert-Jan Fritzsche would be leaving the business. Having conducted a full market search, we were delighted to announce in July that Pauline Derkman agreed to take up the position of Scildon CEO on 1 September. She has a huge amount of Dutch market experience including M&A from her time at Aegon, ASR and PWC.

- In August 2023 we also announced that after six years as Movestic CEO, Linnéa Ecorcheville would be leaving the business. Sara Lindberg, who is a key member of our Movestic management team, was initially appointed as interim CEO whilst a formal market search was performed. Sara was part of this process and it was clear that Sara was the strongest candidate to fulfil this position not least given her strong performance in the interim role and she was consequently appointed as CEO on a permanent basis.

- In September 2023 we announced that after seven years Ken Hogg, UK CEO would be leaving the business. We were delighted to announce that Jackie Ronson would be taking up the role of UK CEO and started with Chesnara on 14 September. She brings with her over 25 years of experience across financial services and beyond, working in a range of businesses from start-ups to FTSE 100 organisations. 

- Regulatory approval was received for all three new appointments and a full transition of responsibilities completed. I want to thank Gert-Jan, Ken and Linnéa for all their efforts at Chesnara and wish them the very best for the future.

- And in December we announced that David Rimmington, Group Finance Director would not be seeking re-election at the 2024 AGM and that he would step down as a director at that time. David has seen through the year end 2023 financial reporting process, including the inaugural annual reporting of the group's results under IFRS 17. I would like to thank him for his service to the business over the last 10 years, particularly the support and guidance he has given me over the last two years. We wish him well as he considers the next steps in his career.

- Having delivered the year end reporting process and associated releases, David will support the orderly transition of his role to Tom Howard, who will be joining us from Aviva in April. Tom has held a variety of senior roles within Aviva plc, including Director of Mergers & Acquisitions for Aviva Group and CFO for Aviva's Life and General Insurance business in Ireland. Tom brings with him European actuarial and financial reporting capabilities and a strong track record of leadership in finance, M&A, capital management and business transformation. I am looking forward to working closely with Tom as we push forward delivering the group's renewed strategy.

I am confident that these changes will put us in a strong position to deliver our ambitious plans for the future. 

A SUSTAINABLE CHESNARA

We are committed to becoming a sustainable group and our principles are: "Do no harm. Do good. Act now for later.". As a steward and a safe harbour for our c1 million policyholders and £11.5bn of policyholder and shareholder assets, we have a real responsibility to help drive the change needed to deliver decarbonisation, protect nature and ensure a sustainable society and economy. The path to sustainability will be long and complicated but we are working to put sustainability at the heart of everything we do and during the year we have taken action to embed sustainability into decision-making across the group.

Our work is overseen by the Board and our Group Sustainability Committee which is chaired by our Senior Independent Director, Jane Dale. The committee consists of executive management from across the group with executive sponsorship from myself and is focused on delivery of real world actions.

Our commitments are detailed within our Annual Sustainability Report and simply put, we will make decisions based on all of our stakeholders, including the planet and its natural resources. Based on this, we're committed to:

1. Supporting a sustainable future, including our net zero transition plans

2. Making a positive impact, including our plans to invest in positive solutions

3. Creating a fairer world, ensuring our group is an inclusive environment for all employees, customers and stakeholders

As I highlighted earlier, these commitments are shaping what we do and how we do it and we have set our initial interim 2030 targets for financed emissions.

In addition, we will be reporting on our sustainability position and activities in line with the appropriate reporting frameworks. We have reported under TCFD (Task Force on Climate-Related Financial Disclosures) for several years, are reporting under the CFD regulations (Climate-related Financial Disclosure) for the first time this year as required by an amendment to the Companies Act, and we have commenced our work on CSRD (the EU Corporate Sustainability Reporting Directive) reporting.

OUTLOOK

It has been pleasing to see economic earnings gains in the year as well as continued strong cash generation. Whilst a volatile macro-economic backdrop will continue to be a material factor in all our markets, we remain confident that the Chesnara business model will continue to generate cash across a wide variety of market conditions, as it has done over its history.

We also remain positive on the outlook for further M&A and are starting 2024 with a positive pipeline of opportunities. The two deals delivered in 2023 providing further evidence of the renewed momentum we have behind our M&A activity.

Finally, the operational delivery we have seen during the year would not have been possible without the fantastic efforts of our teams across the group. 

In 2024, Chesnara will be celebrating the 20th anniversary of its listing. It's a privilege to be leading the business in its 20th year and looking ahead, I continue to believe there is a lot to look forward to here at Chesnara.

Steve Murray,

Chief Executive Officer

27 March 2024

OUR STRATEGY

Our strategy focuses on delivering value to customers and shareholders, mindful of the interests of other stakeholders, through our three strategic pillars, executed across our three territories.

BUSINESS REVIEW | UK

The UK division consists of the operating company Countrywide Assured plc which now includes the insurance business of CASLP following the Part VII transfer on 31 December 2023. The business also reflects the impact of the Canada Life deal that was entered into in May 2023. 

The division manages c291,000 policies covering linked pension business, life insurance, endowments, annuities and some with-profit business. The division is largely closed to new business, but generates future value through a small amount of new business, investment returns on linked policies, increments to existing policies and periodic acquisitions.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

INITIATIVES AND PROGRESS IN 2023

- In May 2023 the division entered into a new long-term strategic partnership with Fin Tech market leader, SS&C Technologies. SS&C will service the front to back office operations for the majority of the UK division. This represents a landmark agreement for the division, and provides a modern platform that delivers surety of future operating costs over the longer term, will improve the efficiency of the existing business and establishes a solid platform to scale the business via future acquisitions.

- This has initiated a programme of work to migrate the business operations of CASLP to the SS&C target operating model. The first key milestone of transferring CASLP staff to SS&C was met during the year.

- The planned Part VII insurance business transfer of CASLP into CA plc completed on 31 December 2023 and has resulted in the realisation of some immediate capital synergies. This also supports the delivery of future operational efficiencies.

- In May 2023 the division agreed to acquire Canada Life's individual protection business of 47,000 policies. This was initially executed via a reinsurance agreement, with the policies expected to transfer to CA through a Part VII insurance business transfer process following court approval.

- CA has continued to optimise the risk/reward balance of its investment portfolio, having executed a change in the assets backing the non-linked, non-volatility adjustment portfolio during the year.

- In Q4 CA entered into a mass lapse reinsurance arrangement. This provides cover against the risk of a large outflow of policies and as a result reduces the amount of capital that is required to be held in a mass lapse scenario.

- As a result of the Solvency II risk margin reforms that came into force on 31 December 2023 the risk margin has reduced by £13.2m.

- The UK business paid total dividends of £56.0m to Chesnara plc in the year and is reporting a year end 2023 dividend of £35.0m to be paid later in 2024, with a closing post dividend solvency ratio of 149%.

FUTURE PRIORITIES

- Continued migration of the majority of the existing and the acquired books of business to SS&C as strategic outsource partner.

- Complete the final stages of the integration plans of CASLP into CA, including deauthorising and the subsequent dissolution of CASLP Limited.

- Complete the work necessary to prepare for the transfer the policies of Canada Life into CA plc.

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

- Identify potential capital management actions, focusing on those that generate the appropriate balance of value and cash generation.

- Support Chesnara in identifying and delivering UK acquisitions.

KPIs

Economic Value - UK

The closing EcV at 31 December 2023 includes a £6.7m gain arising on the Canada Life deal.

Cash generation - UK

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Delivering good customer outcomes is one of our primary responsibilities. We strive to do this by providing good customer service, competitive fund performance and offering overall fair value for money. We seek to offer additional support to customers who may need it and provide easy to understand information about our products and the benefits provided. We are committed to meeting our regulatory responsibilities, including remaining operationally resilient and maintaining a strong solvency position.

INITIATIVES AND PROGRESS IN 2023

- An ongoing focus of the division is to ensure that it complies with the requirements of the FCA's "Consumer Duty". The business unit met the requirements in relation to its open business by the regulatory deadline of 31 July 2023 and the closed book operations are on track to comply with the requirements by the later deadline of 31 July 2024.

- Another important multi-year focus is to ensure compliance with the FCA's "Operational Resilience" regulations by 31 March 2025. This remains on track and has included supporting the PRA in its industry-wide data collection programme.

- The policies of CASLP were transferred to CA plc on 31 December 2023 following court approval on 21 December 2023. As part of this process an independent expert for the transfer confirmed that all policyholders could expect to receive the same benefits in their existing policies with the same level of security under the transfer.

FUTURE PRIORITIES

- Continued focus on the operational resilience programme to ensure the regulatory deadline of March 2025 is achieved.

- Execute the board agreed plans and progress any actions needed to meet the requirements of the Consumer Duty regulation by July 2024.

- Continued focus on delivering good customer outcomes and maintaining strong service performance from all customer facing suppliers and providers.

KPIs

Policyholder fund performance - UK

Throughout the year our main managed funds performed ahead of industry benchmarks.

GOVERNANCE

BACKGROUND INFORMATION

Maintaining effective governance and a constructive relationship with regulators underpins the successful delivery of the division's strategic plans.

Having robust governance processes provides management with a platform to deliver the other aspects of the business strategy. As a result, a significant proportion of management's time and attention continues to be focused on ensuring that both the existing governance processes, coupled with future developments, are delivered.

INITIATIVES AND PROGRESS IN 2023

- In September Jackie Ronson joined Chesnara, succeeding Ken Hogg as UK CEO. As well as overseeing the day to day operations of the division, Jackie will apply her experience in M&A and leading large scale transformation to deliver the UK's business strategy.

- During the course of the year the division successfully delivered the integration of the policies and governance frameworks of CASLP with CA. This was in preparation for the Part VII transfer of CASLP into CA at the end of the year, and puts the CA board in good stead for overseeing the enlarged business through a combined oversight structure going froward.

- Following entering into the new strategic partnership with SS&C during the year, coupled with the new arrangement with Canada Life, the division has focused on ensuring that its governance and oversight routines have been adapted to reflect these new arrangements.

- CA has implemented IFRS 17 reporting into its overall financial reporting framework, as required to support Chesnara's year end 2023 IFRS 17 reporting.

- The division has supported the wider group's sustainability programme over the course of the year and will continue to focus on local initiatives for 2024.

FUTURE PRIORITIES

- Continue embedding the new IFRS 17 financial reporting processes into business as usual routines.

- Ensure appropriate governance arrangements are in place as the division transitions the majority of its front to back operations to SS&C.

- Continue to horizon scan for future regulatory changes

- Continue engaging with our asset managers on progress towards net zero and investing in positive solutions.

- Support the wider group-wide sustainability programme to becoming a more sustainable group, including focusing on our operations, social purpose, and ensuring the group's and division's reporting needs are met.

KPIs

Divisional solvency remains strong and stable with surplus generated in the year increasing the pre-dividend solvency ratio from 135 % to 183%.

SOLVENCY RATIO: 149%

BUSINESS REVIEW | SWEDEN

Our Swedish division consists of Movestic, a life and pensions business which is open to new business. It offers personalised unit-linked pension and savings solutions through brokers, together with custodian products via a number of private banks and is well-regarded within both communities.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

INITIATIVES AND PROGRESS IN 2023

- 2023 continued to see geopolitical uncertainty in many parts of the world, which drove rising interest and inflation rates, although the trend turned later in the year. The financial markets have been volatile, but overall positive, due to an upswing in US and wider tech markets; this development was reflected in the favourable returns on policyholders' investment assets.

- Movestic continued to improve its offerings within both the unit-linked and custody account segments through a number of activities for example, continuing to monitor developments and ensuring products remain relevant. In addition, Movestic has continued its retention initiatives during the year, albeit high transfer activity is expected to remain a market feature due to simplified processes and new regulations that have come into force.

- Over the year, Movestic has continued to develop its digital offering such as: through extending its digital processing; establishing new partnerships; and through continuing efforts to streamline processes and increase the use of automation. New customer demands and a greater digitalisation on the market overall have also caused the division to intensify its efforts to create services that are easier and more efficient for customers and partners to use. The work with automation and digitalisation is also expected to add future synergies as we will be able to scale up the business.

- Movestic's solvency ratio remains robust despite the development of the symmetric adjustment following positive investment markets which requires additional capital to be held. The closing FUM balance of £4.4bn represents a full year increase of 18.5% when compared to 2022, driven by overall favourable market conditions.

FUTURE PRIORITIES

- The Swedish life insurance industry is going through a major transformation. Recent regulatory and technology developments (e.g. AI) will create opportunities, but also lead to higher customer demand for accessibility, information, and personalised products and services. Movestic will keep working to increase the use of automation; streamline its processes and improve its administrative efficiency and control.

- Continue to build solid and long-term sustainable value creation for customers and owners through a diversified business model with continued profitable growth of volumes and market shares in selected segments.

- Remain focused on customer loyalty and providing attractive offerings to both retain customers and reach more volumes on the transfer market.

- Provide a predictable and sustainable dividend to Chesnara.

- Seek out opportunities to bring in additional scale through M&A, working collaboratively with the group.

KPIs (all comparatives have been presented using 2023 exchange rates)

Economic Value

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Movestic provides personalised long-term savings, insurance policies and occupational pensions for individuals and business owners. We believe that recurring independent financial advice increases the likelihood of a solid and well-planned financial status, hence we are offering our products and services through advisors and licenced brokers.

INITIATIVES AND PROGRESS IN 2023

- Movestic have developed a new sustainability rating for funds on its platform, with the aim of providing an aggregated valuation of different sustainability ratings that are available on the investment market (more information is available on the Movestic website).

- Work to automate processes and make them more efficient has taken place over the year. In addition, a new customer service case management system was implemented over 2023. Both activities will help to ensure smoother administration and improved customer service.

- Movestic continued to expand the custodian offering by establishing new partnerships.

- To help customers plan their retirement, Movestic has developed a unique digital service where customers can: plan; start withdrawing; and change how they receive their occupational pension. In 2023, seven out of every ten of the company's customers used this service to start withdrawing their pension.

- A new digital medical underwriting tool and an improved digital investment tool have been launched, making it easier for customers to choose and exchange the funds in their portfolios.

- The long-term trend with more satisfied customers is continuing as the company's Customer Satisfaction Index rose for the third consecutive year.

FUTURE PRIORITIES

- Continued development of new digital self-service solutions and tools to support the brokers' value enhancing customer proposition, and to facilitate smooth administrative processes making Movestic a partner that is easy to do business with.

- Further strengthen the relationship with brokers and partners through increased presence, both physical and digital.

- Continue to capitalise on the new rules that came into effect in July 2022 that enhances the business's ability to transfer policies onto its own platform where it is in the interest of customers to do so.

KPIs (all comparatives have been presented using 2023 exchange rates)

Broker assessment rating (out of 5)

POLICYHOLDER AVERAGE INVESTMENT RETURN:

11.8%

GOVERNANCE

BACKGROUND INFORMATION

Movestic operates to exacting regulatory standards and adopts a robust approach to risk management.

Maintaining strong governance is a critical platform to delivering the various value-enhancing initiatives planned by the division.

INITIATIVES AND PROGRESS IN 2023

- IFRS 17 and IFRS 9 - the division has delivered its first full year-end for 2023 under the new group accounting standards.

- Sustainability has remained a key focus area with work progressing in a number of areas. A key example is work over the year to develop a solution to digitally provide customers with individual sustainability annual statements which is in accordance with new regulation that came into force on 1 January 2023. Additionally, work has progressed in respect of the Corporate Sustainability Reporting Directive (CSRD) which is an EU adopted new directive on sustainability reporting. Movestic initiated an impact assessment in December 2023, and we are working to understand the likely effective date, given the complexities of the legislation.

- Analysis of the Global Minimum Tax (GMT) regulatory framework is also underway, to determine how the new law affects the company's tax situation.

- Work has commenced to implement the new regulatory framework, Digital Operational Resilience Act (DORA), which is effective from January 2025. DORA is designed to improve the ability to withstand cyber threats and the risks associated with information security.

FUTURE PRIORITIES

- Ensure new reporting processes are embedded into BAU operations to support IFRS 17 requirements.

- Continue implementation of sustainability regulations.

KPIs (all comparatives have been presented using 2023 exchange rates)

SOLVENCY RATIO: 147%

Solvency remains strong post a foreseeable dividend of £7.8m

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

As an "open" business, Movestic not only adds value from sales but as it gains scale, it will become increasingly cash generative which will fund further growth or contribute towards the group's attractive dividend. Movestic continues to adopt a profitable pricing strategy.

INITIATIVES AND PROGRESS IN 2023

- Sales volumes for the unit-linked business have developed positively over the year, representing a 15% rise on the prior year. The custodian sales volumes slowed down during the year due to the less favourable financial market conditions, particularly a lack of local IPOs.

- The division delivered a commercial new business profit of £2.8m, which is slightly below last year, in part due to salary increases below the inflation rate, which led to lower increment contributions.

- Movestic will continue to develop its pension and savings offering to increase competitiveness and build customer loyalty.

- For the second year in a row, Movestic have been awarded 'Unit-linked Insurance Company of the Year' for 2023 by Söderberg & Partners

FUTURE PRIORITIES

- Launch new risk product offerings in the broker channel, including a new technical solution for administration.

- Continue to strengthen distribution capacity within all channels and work to launch new partner collaboration within all lines of business.

KPIs (all comparatives have been presented using 2023 exchange rates)

Occupational pension market share %

New business profit

BUSINESS REVIEW | NETHERLANDS

Our Dutch businesses deliver growth through our acquisitive closed book business Waard, which increased in size as a result of the Conservatrix acquisition at the start of the year, and our open book business Scildon, which seeks to write profitable term, investments and savings business.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

INITIATIVES AND PROGRESS IN 2023

- On 1 January 2023, Waard executed the acquisition of an insurance portfolio from Conservatrix, a specialist provider of life insurance products in the Netherlands that was declared bankrupt on 8 December 2020. The integration of both the portfolio and staff, were successfully completed in 2023

- Scildon's IT system improvement project has progressed well over the year, and cost efficiencies have materialised in line with the business case. The project is expected to conclude in 2024.

- Over the year, Waard combined all holdings (excluding unit linked) to one custodian. This will both save costs and enable to us to better track our financed emissions and progress towards our net zero target.

- Both Waard and Scildon continue to have strong solvency positions at the end of 2023, inclusive of the use of the volatility adjustment, with Scildon at 184% and Waard at 353%.

FUTURE PRIORITIES

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

- Complete the IT improvement project and ensure the planned efficiencies are delivered.

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

- Identify potential capital management actions, focusing on those that generate the appropriate balance of value and cash generation.

- Support Chesnara in identifying and delivering Dutch acquisitions.

KPIs (all comparatives have been presented using 2023 exchange rates)

Economic Value - The Netherlands

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Great importance is placed on providing customers with high quality service and positive outcomes.

Whilst the ultimate priority is the end customer, in Scildon we also see the brokers who distribute our products as being customers, and hence developing processes to best support their needs is a key focus.

INITIATIVES AND PROGRESS IN 2023

- Scildon has continued to make improvements to its customer offering through new products and digitalisation options where possible. These improvements will also reduce the level of physical mail, making all communications with IFA's and customers digital.

- Scildon retained high customer satisfaction and Net Promotor Score (NPS) in 2023.

- Through the acquisition of Conservatrix, Waard has safeguarded policyholder interests and provided certainty to staff. Processes were put in place to support the contact issues policyholders faced at the start of the year with many policyholders restarting their premiums in the second half of the year.

- Waard has also progressed work on digitalising its customer portal to both make it easier for customers to access documents but also to reduce the level of printing required, in turn helping the group decarbonise. This is expected to be launched in 2024.

FUTURE PRIORITIES

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

- Launch the new digital portal in Waard.

KPIs (all comparatives have been presented using 2023 exchange rates)

Scildon client satisfaction rating (out of 10)*

*Source MWM2 market research agency, Netherlands

GOVERNANCE

BACKGROUND INFORMATION

Waard and Scildon operate in a regulated environment and comply with rules and regulations both from a prudential and from a financial conduct point of view.

INITIATIVES AND PROGRESS IN 2023

- Work is progressing to embed IFRS 17 and IFRS 9 processes into normal finance activity, with significant strides being made during the year, with this set of results being the first audited set of numbers under the new accounting standard.

- Both business units have been progressing their sustainability activity with a significant programme of work expected over 2024.

- Work has started on consideration of the Corporate Sustainability Reporting Directive (CSRD) which is an EU adopted new directive on sustainability reporting and we are working to understand the likely effective date, given the complexities of the legislation.

FUTURE PRIORITIES

- Continue to work to fully embed IFRS 17.

- Progress the implementation of the Corporate Sustainability Reporting Directive (CSRD).

KPIs (all comparatives have been presented using 2023 exchange rates)

SOLVENCY RATIO: SCILDON 184%; WAARD 353%

Solvency is robust in both businesses, with post-dividend solvency ratios (inclusive of the volatility adjustment) of 184% and 353% for Scildon and Waard respectively.

Scildon

Waard

Note: The 2022 closing solvency ratio for Waard includes additional capital held in respect of the purchase of Conservatrix, with the acquisition and business integration completing in 2023.

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

Scildon brings a "New business" dimension to the Dutch division. Scildon sell protection, individual savings, and group pensions contracts via a broker-led distribution model. The aim is to deliver meaningful value growth from a realistic market share. New business also helps the business maintain scale and hence contributes to unit cost management.

INITIATIVES AND PROGRESS IN 2023

- Scildon continues to generate solid new business profits, with a commercial new business result of £5.4m for 2023 (pre-tax). The market remains tough with pressure on pricing, but we have a solid base to drive further growth.

- Underpinning this, Scildon APE and policy count continue to increase, closing the year with more than 236,000 policies. The market share for the Scildon term product over 2023 was 10.5% (2022: 10.6%).

- Scildon were awarded a 5-star rating for the second year in a row for its lifestyle product, by independent trade body, Moneyview.

FUTURE PRIORITIES

- Continue to deliver product innovation and cost management actions.

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

- Scildon continues to look to offer sustainable solutions for their unit linked proposition.

KPIs (all comparatives have been presented using 2023 exchange rates)

Scildon - term assurance market share %

Scildon - new business profit

BUSINESS REVIEW | acquire life and pension businesses

During 2023 we completed the acquisition of the insurance portfolio of Conservatrix in the Netherlands and entered into a deal in the UK with Canada Life to transfer its onshore protection business to the group.

HOW WE DELIVER OUR ACQUISITION STRATEGY

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

- We primarily focus on acquisitions in our existing territories, although we will consider other territories should the opportunity arise and this is supportive of our strategic objectives.

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

- We work cooperatively with regulators.

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

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

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

HOW WE ASSESS DEALS

Cash generation

- Collectively our future acquisitions must be suitably cash generative to continue to support Chesnara delivering attractive dividends.

Value enhancement

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

Customer outcomes

- Acquisitions must ensure we protect, or ideally enhance, customer interests with deals always giving full regard to Consumer Duty responsibilities.

Risk appetite

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

TRANSACTIONS IN 2023

CONSERVATRIX

The acquisition of the insurance portfolio of Conservatrix, a specialist provider of life insurance products in the Netherlands, was completed on 1 January 2023 having been originally announced in July 2022. The insurance portfolio has increased Waard's number of policies under administration by over 50%, transforming Waard into a second material closed book consolidation business alongside Chesnara's existing UK platform.

The Conservatrix transaction increased the group's EcV by £21.7m on day 1 and provides further EcV accretion potential from future real world investment returns and the run-off of the risk margin. The Conservatrix portfolio was integrated into the Waard business over the course of the year, including allowing customers the option to restart their premiums on their policies.

CANADA LIFE UK

Chesnara announced the acquisition of the onshore individual protection line of business of Canada Life UK in May 2023. As a result of the acquisition, the life insurance and critical illness policies for approximately 47,000 policies will transfer to Chesnara's UK subsidiary, Countrywide Assured plc ("CA plc").

Canada Life UK will reinsure the portfolio to CA plc, effective from 31 December 2022. The consideration as part of the reinsurance agreement was £9 million, funded from internal group resources, and the transaction resulted in an immediate day 1 EcV gain of £6.7m.

Customers' policies are expected to formally transfer to CA plc after completion of a court-approved Part VII transfer. This is following the successful completion in 2023 of the Part VII transfer of the CASLP entity to CA plc.

ACQUISITION OUTLOOK

- We continue to see a healthy flow of acquisition opportunities across the European insurance market.

- Key drivers for owners to divest portfolios continue to remain relevant and create a strong pipeline. These include better uses of capital (e.g. return to investors or supporting other business lines), operational challenges (e.g. end of life systems), management distraction, regulatory challenges and wider business and strategic needs.

- Our expectation is that sales of portfolios will continue and our strong expertise and knowledge, good regulatory relationships and the flexibility of our operating model means that Chesnara is very well placed to manage the additional complexity associated with these portfolio transfers and provide beneficial outcomes for all stakeholders. These transactions may not be suitable for all potential consolidators, in particular those who do not have existing regulatory licenses.

- We continue to have immediately available acquisition firepower of over £200m, noting we seek to hold cash reserves to cover costs for 12 months (dividend, coupon and working capital). We will continue to explore how we can increase our funding capability further, including consideration of partnerships as well as equity and debt to ensure we can compete for larger deals.

- Our financing considerations, when looking at new deals, are: that we operate in our normal operating solvency range of 140 - 160%; we maintain our investment grade rating through managing our leverage ratio; we retain liquid resources to cover the dividend, coupon and working capital for approximately one year; and we continue to have the capacity to finance smaller transactions without extra fundraising.

CAPITAL MANAGEMENT | Solvency II

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

GROUP SOLVENCY

SOLVENCY POSITION

SOLVENCY SURPLUS MOVEMENT*

*PRE INTRAGROUP DIVIDENDS

Surplus:

The group has £351m of surplus over and above the capital requirements under Solvency II, compared to £298m at the end of 2022. The group solvency ratio has increased from 197% to 205%.

Own Funds:

Own Funds have risen by £115m (pre-dividends). The most material drivers are the acquisition of the insurance portfolio of Conservatrix in Waard and the reinsurance of policies from Canada Life in CA, which contributed £32m of Own Funds on completion, coupled with the reduction in Tier 2 restrictions.

SCR:

The SCR has increased by £26m, owing mainly to a rise in equity risk (due to the rise in equity markets and symmetric adjustment) and increases in market and life underwriting SCR from the 2023 acquisitions.

Solvency II background

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

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

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

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

WHAT ARE OWN FUNDS?

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

The Own Funds valuation: A restriction is applied to reduce the aggregate value of Tier 2 and eligible Tier 3 assets down to 50% of the reported SCR.

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

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

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

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

Transitional measures, introduced as part of the long-term guarantee package when Solvency II was introduced, are available to temporarily increase Own Funds. Chesnara does not take advantage of such measures, however we do apply the volatility adjustment within our Dutch and UK divisions.

How do Own Funds change?

Own Funds (and Economic Value) are sensitive to economic conditions. In general, positive equity markets and increasing yields lead to OF growth and vice versa. Other factors that improve OF include writing profitable new business, reducing the expense base and improvements to lapse rates.

WHAT IS CAPITAL REQUIREMENT?

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

There are three levels of capital requirement:

Minimum dividend paying requirement/risk appetite requirement

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

Solvency Capital Requirement

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

Minimum Capital Requirement

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

How does the SCR change?

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

The HMT's reforms to Solvency II were laid before parliament on 8 December, and came into force on 31 December 2023. The reforms updated the risk margin calculation for CA. We continue to monitor any further proposed changes closely and future financial statements will report on the UK specific application of Solvency II as it diverges from the EU's regime. We see no specific reason to expect the PRA to use their enhanced freedoms to take a route that systemically makes it harder to do business in the UK.

EIOPA has proposed provisional reforms to Solvency II. These reforms need to be presented to member states and the European Parliament for approval.

We are well capitalised at both a group and subsidiary level. We have applied the volatility adjustment in Scildon, Waard Leven and CA, but have not used any other elements of the long-term guarantee package within the group. The Volatility Adjustment is an optional measure that can be used in solvency calculations to reduce volatility arising from large movements in bond spreads.

The numbers that follow present the divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within the consolidated numbers. Note that year end 2022 figures have been restated using 31 December 2023 exchange rates in order to aid comparison at a divisional level.

UK

Surplus:  £29.4m above board's capital management policy.

Dividends: Solvency position is stated after £35.0m proposed dividend (2022: £56.0m).

Own Funds:  Increased by £51.5m (pre dividend), including the Canada Life day 1 gain, positive economic experience, Part VII synergies and a decrease in the risk margin due to the SII reforms.

SCR:  Increased by £2.3m primarily due a fall in lapse risk due to the mass lapse reinsurance, offset by increases as a result of the Canada Life deal, Part VII synergies and a rise in equity risk capital.

SWEDEN

Surplus:  £30.9m above board's capital management policy.

Dividends:  Solvency position is stated after £7.8m (100 MSEK) proposed dividend (2022: £11.7m - 150 MSEK).

Own Funds:  Increased by £10.1m (pre-dividend) largely owing to positive economic movements, being offset by operating strain, primarily arising from adverse lapse experience.

SCR:  Increased by £12.7m due to positive equity growth and moderate rise in currency and lapse risks.

NETHERLANDS - WAARD

Surplus:  £60.7m above board's capital management policy.

Dividends: Solvency position stated after £6.9m proposed dividend (2022: £4.3m).

Own Funds:  Increased by £28.3m (pre-dividend) largely due to the Conservatrix deal, coupled with some positive operating items.

SCR:  Increased by £14.7m, mainly due to the Conservatrix deal, which has mostly impacted longevity, lapse and concentration risk.

NETHERLANDS - SCILDON

Surplus:  £6.2m above board's capital management policy.

Dividends: No foreseeable dividend is proposed (2022: £nil).

Own Funds: Increased by £4.3m due to positive operating variances and new business profits.

SCR: Increased by £4.1m, chiefly made up of an increase in mortality and catastrophe risks, offset by an increase in LACDT.

CAPITAL MANAGEMENT | Sensitivities

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

The table below provides below provides some insight into the immediate impact of certain sensitivities that the group is exposed to, covering solvency surplus and Economic Value. As can be seen, EcV tends to take the 'full force' of adverse conditions immediately (where the impacts are calculated on the cash flows for the life of our portfolios) whereas solvency is often protected in the short term and, to a certain extent, the longer term due to compensating impacts on required capital. 

Tier 2 debt has a material impact on the reported sensitivities because, as capital requirements move, the amount of the Tier 2 debt able to be recognised in the Own Funds also moves. For example, where FX movements reduce the SCR, we also experience a corresponding reduction in base Own Funds and Own Funds relating to Tier 2 capital. The total surplus is now more exposed to downside risks than before the tier 2 debt but, importantly, the Tier 2 debt itself has created more than sufficient additional headroom to accommodate this.

Whilst cash generation has not been shown in the diagrams below, the impact of these sensitivities on the group's solvency surplus has a direct read across to the immediate impact on cash generation.

INSIGHT*

20% sterling appreciation:  A material sterling appreciation reduces the value of surplus in our overseas divisions and any overseas investments in our UK entities, however this is partially mitigated by the group currency hedge so the overall impact on solvency is reduced.

Equity sensitivities: The equity rise sensitivities cause both Own Funds and SCR to rise, as the value of the funds exposed to risk is higher. The increase in SCR can be larger than Own Funds, resulting in an immediate reduction in surplus, depending on the starting point of the symmetric adjustment. The converse applies to an equity fall sensitivity, although the impacts are not fully symmetrical due to management actions and tax. The Tier 2 debt value also changes materially in these sensitivities. The change in symmetric adjustment can have a significant impact (25% equity fall: -£20.1m to the SCR, 25% equity rise: +£30.2m to SCR). 

The EcV impacts are more intuitive as they are more directly linked to Own Funds impact. CA and Movestic contribute the most due to their large amounts of unit-linked business, much of which is invested in equities.

Interest rate sensitivities:  An interest rate fall has a more adverse effect on group economic value than an interest rate rise. Group solvency is less exposed to rising interest rates as a rise in rates causes capital requirements to fall, increasing solvency.

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

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

10% mass lapse: In this sensitivity Own Funds fall as there are fewer policies on the books, thus less potential for future profits. This is largely offset by a fall in SCR, although the amount of eligible Tier 2 capital also falls. The division most affected is Movestic as it has the largest concentration of unit-linked business.

1% inflation rise: This sensitivity measures a permanent increase in inflation in every future year (above existing valuation assumptions). Such a rise in inflation increases the amount of expected future expenses. This is capitalised into the balance sheet and hits the solvency position immediately.

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

*BASIS OF PREPARATION ON REPORTING:

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

FINANCIAL REVIEW

Our key performance indicators provide a good indication of how the business has performed in delivering its three strategic objectives. 

Summary of each KPI:

CASH GENERATION

GROUP CASH GENERATION excluding the impact of acquisitions £32.5M 2022: £82.7M

DIVISIONAL CASH GENERATION excluding the impact of acquisitions £50.1M 2022: £61.9M

What is it?

Cash generation is calculated as being the movement in Solvency II Own Funds over the internally required capital, excluding the impact of tier 2 debt. The internally required capital is determined with reference to the group's capital management policies, which have Solvency II rules at their heart. Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Why is it important?

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

Risks

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

- Group cash generation was £32.5m for the year (2022: £82.7m) and contains a material adverse impact from the symmetric adjustment of £13.1m (2022: +£28.2m), which is a key component of the year on year movement.

- The divisional result, despite the negative impact of the symmetric adjustment, was again strong, with £50.1m reported for the year. The UK division again underpinned divisional cash with £45.0m generated, while there was also very positive contributions from Waard. Economic factors supported the value growth in the UK, while cash generation in the Netherlands was driven by the operating profits, offsetting the loss in Sweden owing to the market driven rise capital requirements.

- The central group result includes the adverse impact of some non-recurring development items (including M&A), central overheads and Tier 2 coupon payments. The FX hedge had a positive cash impact of £2.5m, offsetting some of the adverse FX movements experienced on consolidation of divisional results.

IFRS

PRE-TAX PROFIT: £1.8M 2022: PRE-TAX LOSS £62.1M

TOTAL COMPREHENSIVE INCOME: £10.3M 2022: £26.1M LOSS 

What is it?

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

Why is it important?

The IFRS results form the core of reporting and hence retain prominence as a key financial performance metric. We believe that, for Chesnara, the IFRS results in isolation do not recognise the wider financial performance of the business, hence the use of supplementary Alternative Performance Measures to enhance understanding of financial performance.

Risks

IFRS 17 is effective from 1 January 2023 and has been applied in the financial statements in Section C. As a result, several accounting policies and significant judgements and estimates have changed. IFRS 17 introduces a new concept of insurance revenue which aims to reflect the insurance contract services provided in each period in the income statement by establishing an explicit measure of future profit (the Contractual Service Margin (CSM)) and provides a framework as to how the CSM is recognised in a given period. The 'investment result' is presented separately from the 'insurance result' on the face of the income statement. Market volatility impacting the surplus assets will result in volatility in investment result and the IFRS pre-tax profit/(loss). Foreign currency fluctuations will further affect total comprehensive income.

- Profit before tax for the year of £1.8m includes a net insurance service loss of £5.1m and an investment result of £71.7m (2022: £13.3m profit and £39.0m loss respectively).

- The negative insurance service result has been driven primarily by adverse experience and assumption changes on lines of business, termed 'onerous contracts', for which the CSM has been extinguished meaning such losses must be taken to the P&L rather than to the CSM. In 2022 this effect was much more benign.

- The positive investment result in the year, is reflective of investment market recoveries with improved equity returns and falling yields being the main contributors. The comparative period in 2022 was adversely impacted by falling equity markets and rising yields.

ECONOMIC VALUE (EcV)

£524.7M 31 DECEMBER 2022: £511.7M

What is it?

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

Why is it important?

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

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

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets, yields on fixed interest securities and bond spreads. In addition, the EcV position of the group can be materially affected by exchange rate fluctuations. For example, a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group within a range of £59m-£69m, based on the composition of the group's EcV at 31 December 2023.

- Economic Value increased 12% in 2023 prior to the impact of dividend payments and FX losses (arising on consolidation).

- Growth has been delivered through a range of areas, with strong new business profits, economic returns and significant gains through the acquisitions delivered in the year. While economic profits form a material part of the result, economic conditions have meant it was still a relatively modest period for economic growth. The result also includes pleasing operating profits in the Dutch divisions, as well as the adverse impact of some exceptional non-recurring central costs. These factors combined, give further reassurance of the robustness of the group and provides confidence of future growth under more beneficial economic conditions.

ECV EARNINGS

£59.1M (including the impact of acquisitions) 2022: £84.7M LOSS

What is it?

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

The principal underlying components of the Economic Value result are:

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

- Value added by the writing of new business;

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

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

- The impact of acquisitions.

Why is it important?

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

Risks

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

- Economic earnings were the largest component of the result, with strong contributions from the UK and Swedish divisions, predominantly through the positive impact of equity market growth on expected future fee income in our unit linked policyholder funds. The Dutch divisions reported smaller economic losses, with different economic factors being less beneficial and offsetting one another to a certain extent.

- The operating loss of £7.7m has been impacted by a number of one-off items, including investing in our M&A activity and future growth of the group. It is pleasing to reporting strong operating profits from the Dutch division, reflecting a marked improvement on prior years.

- Acquisitions in the year added £28.4m of growth, with £21.7m on the Conservatrix portfolio in the Netherlands and a further £6.7m on the protection portfolio of Canada Life in the UK.

- The "Other" category includes risk margin movement, tax impacts and the cost of Tier 2 coupon payments.

CASH GENERATION

There is no reporting framework defined by the regulators for cash generation and there is therefore inconsistency across the sector. We define cash generation as being the movement in Solvency II own funds over and above the group's internally required capital, which is based on Solvency II rules.

GROUP CASH GENERATION excluding the impact of acquisitions

£32.5M 2022: £82.7M

DIVISIONAL CASH GENERATION

£50.1M 2022: £61.9M

 Cash generation in 2023 was impacted, at a divisional level, by adverse movement in the symmetric adjustment (£13.1m - 2022: +£28.2m) following equity market growth, while the group result also contains the impact of exceptional and non-recurring central costs. Cash is generated from increases in the group's solvency surplus, which is represented by the excess of own funds held over management's internal capital needs. These are based on regulatory capital requirements, with the inclusion of additional 'management buffers'.

Implications of our cash definition:

Positives

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

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

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

Challenges and limitations

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

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

- At a group level the result includes complex consolidation adjustments relating to buffers, which can compromise how well the figure truly reflects performance.

GROUP

- Other group activities include consolidation adjustments as well as central costs and central SCR movements.

- Central costs include Tier 2 debt coupon payments (c£10m) and uncovered central costs of (c£14m), of which a large proportion relates to exceptional non-recurring development expenditure, such as IFRS 17, M&A activity and strengthening of the group governance resource.

UK

- The UK division has continued to be the largest contributor to cash generation, with £45.0m reported in the year, delivered mainly through Own Funds growth. This has included the positive impact of investment market performance; the benefit of a reduction in the risk margin as a result of the first phase of UK Solvency II reforms and some synergies as a result of the Part VII transfer of CASLP into CA on 31 December 2023. The cash result also benefitted from a reduction in capital requirements during the year, which included the positive impact of a new mass lapse reinsurance arrangements and the general run off of the business, offsetting factors such as the need to hold more capital as a result of equity market growth, including the symmetric adjustment.

SWEDEN

- Movestic has reported cash utilisation of £7.0m for 2023, as Own Funds growth was exceeded by a larger increase in capital requirements. On the Own Funds side, growth was delivered primarily through the positive impact of equity market movements, although this was offset by some negative operating items, including the impact of ongoing challenges in outward policy transfers. The equity market-driven growth in Own Funds has resulted in an increase in market-risk related capital requirements, including the impact of the symmetric adjustment, which increased significantly since the start of the year. The divisional result also includes a foreign exchange loss on consolidation, owing to a slight weakening of the krona versus sterling over the year.

NETHERLANDS - WAARD

- Waard recorded pleasing cash generation of £15.3m in 2023, delivered largely through value growth. Strong operating profits benefited from a reduction in future expenses, benefitting from the economies of scale arising from the addition of the Conservatrix portfolio. The result also contains a reduction in capital requirements, supported by interest rate movements and the reduction in future expenses. Additionally, the divisional result bears the impact of sterling appreciation versus the euro during 2023, leading to a small foreign exchange loss on consolidation.

NETHERLANDS - SCILDON

- Scildon has posted £3.1m of cash utilisation for the year. Own Funds growth of £4.3m was driven by positive operating profits, offsetting economic losses. Operating profits include the positive impacts of new business profits and cost efficiencies, while the negative effect of falling interest rates was the main component of the economic loss on Own Funds. The negative cash result was underpinned by an increase in capital requirements, outweighing the value growth. Rises in life risk and equity risk capital, driven by equity growth and the consequential rise in the symmetric adjustment, offsetting the positive impact of lower interest rates.

CASH GENERATION - ENHANCED ANALYSIS

The format of the analysis draws out components of the cash generation results relating to technical complexities, modelling issues or exceptional corporate activity. The results excluding such items are deemed to better reflect the inherent commercial outcome (commercial cash generation). 

COMMERCIAL CASH GENERATION excluding the impact of acquisitions

£53.0M 2022: £46.6M

Commercial cash generation of £53.0m was primarily supported by contributions of £48.5m from the UK business and £24.0m from the Netherlands. All overseas divisions have also generated cash, even though returns have been dampened by the depreciation of the euro and Swedish krona currencies against sterling. The FX hedge that was implemented in 2022 and renewed again in 2023, has offset some of these currency impacts, providing a total cash benefit of £2.5m over the year.

UK

The UK result primarily comes from investment market gains, influenced by equity gains and falling yields, alongside the beneficial impact of the implementation of the mass lapse reinsurance, the SII risk margin reforms and some synergies arising from the Part VII transfer of CASLP into CA on 31 December 2023. This offset some expense strengthening, which largely represents positive investment in the future and supports the growth of the division.

The commercial cash outcome continues to illustrate that the UK remains at the heart of the cash generation model.

SWEDEN

The Swedish result, after removing a loss caused by the increase in the symmetric adjustment, was relatively neutral. The economic result is positive, principally due to equity market gains, offset by the depreciation of Swedish krona against sterling. The economic gains are offset by adverse lapse experience, fee and rebate income pressure and a new business strain.

WAARD

Waard's positive cash result is supported by the positive post-acquisition impact of integrating Conservatrix into the business, coupled with the impact of positive expense assumption changes, slightly offset by an expense operating variance. The result also benefits from economic impacts, albeit to a lesser extent, predominantly owing to falling yields. The capital that plc injected to support Conservatrix liabilities has been recycled back into surplus.

SCILDON

Scildon's commercial cash generation reflects a combination of positive economic impacts, largely owing to falling yields, alongside some negative factors including adverse changes in lapse and mortality assumptions. The commercial cash result, unlike base cash generation, benefits from a positive increase in the amount of risk capital that is shielded by tax.

GROUP

The central group result is driven by uncovered group level expenditure, resulting in a reduction in Own Funds. The central expenses include, Tier 2 debt coupon payments and a range of development activity, such as M&A programmes, IFRS 17, as well as investment in the business to support the future growth of the group. These factors outweigh investment returns, owing to falling yields, and an overall £2.5m cash generation benefit from the FX hedge.

EcV EARNINGS including the impact of acquisitions

£59.1M 2022: £84.7M LOSS

The EcV earnings of the group reflect the benefits of delivering our acquisition strategy, coupled with positive economic earnings arising in volatile markets.

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

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

Total economic earnings: The economic result continues to be the largest component of the total EcV earnings, with a profit of £42.9m in the year. The result is in line with our reported sensitivities and is driven by the following key market movements:

Rising equity indices:

- FTSE All Share index increased by 3.7% (year ended 31 December 2022: decreased by 3.2%)

- Swedish OMX all share index increased by 15.6% (year ended 31 December 2022: decreased by 24.6%)

- The Netherlands AEX all share index increased by 13.4% (year ended 31 December 2022: decreased by 15.0%)

Credit spreads - mixed news:

- UK AA corporate bond yields decreased to 0.71% (31 December 2022 1.04%)

- European AA credit spreads increased to 0.63% (31 December 2022: 0.29%)

Decreasing yields:

- 10-year UK gilt yields have decreased to 3.64% (31 December 2022: 3.82%

- 10 year euro swap yield have decreased to 2.49% (31 December 2022: 3.20%)

The EcV results continue to illustrate how sensitive the results are to economic factors. While investment market growth has been positive compared to the prior year, it was still relatively muted versus previous periods of growth. As outlined in the past, we continue to be of the view that short term volatility has limited commercial impact on the business and of more importance is the fact that, over the longer term, we expect EcV growth in the form of real world investment returns. Total economic earnings: The economic result continues to be the largest component of the total EcV earnings, with a profit of £42.9m in the period. The result is in line with our reported sensitivities and is driven by the following key market movements:

Total operating earnings: The operating loss for the year reflects a significant reduction compared with last year, continuing the encouraging trend of improvement. A number of the negative components that are non-recurring in nature represent positive investment in the future and support the growth of the group. Examples of key items in 2023 include:

- Recurring central development overheads including those associated with the M&A strategy. Whilst the cost of this development investment is recognised, EcV does not recognise the potential returns we expect from it.

- Non-recurring development expenditure such as IFRS 17.

- Tier 2 debt servicing costs - EcV does not recognise the benefit of the capital or the potential for future value adding transactions that it provides.

Acquisitions:  M&A activity continued to be a source of growth and resulted in £28.4m of immediate EcV earnings in 2023. The incremental value was delivered by the Conservatrix insurance portfolio acquisition (1 January 2023) and also a UK protection portfolio reinsurance arrangement with Canada Life (16 May 2023), under the Waard Group and CA plc respectively.

Looking at the results by division:

UK:  The UK division reported EcV earnings of £31.4m (excluding acquisitions), with economic growth and the synergies from the Part VII of CASLP into CA offsetting an operating loss. The operating result was largely driven by non-recurring activity, as outlined above, relating to the expansion of the division and investment in the business to facilitate future growth. This outweighed positive results on fee income (due to lower policy attrition) and other decrements. The economic gains of £23.1m arose primarily as a result of the impact of equity market growth in unit linked funds, which increases our projected future fee income. While the economic profit was relatively subdued, it remains a significant improvement on the prior year.

Sweden:  Movestic posted earnings of £6.8m for 2023. The division benefitted from the impact that equity market growth had on its unit linked funds, underpinning total economic earnings of £18.6m. This more than outweighed an operating loss, due primarily to adverse transfer activity. Lower fee and commission income, owing to pricing pressures, and suppressed fund rebate income also contributed. Modest new business profits (on an EcV basis) were £0.9m (2022: £1.8m), reflective of the continued competitive market conditions and margin pressures.

Netherlands:  The Dutch division has reported growth of £19.5m in the year, with positive operating profits exceeding smaller economic losses in both businesses. The operating result in Scildon of £8.7m represents a significant upturn versus the losses reported in the prior year and includes EcV new business profits £1.7m. Economic losses of £3.3m were primarily the consequence of falling interest rates and flattening yield curves. Waard has reported EcV growth of £16.0m, also driven by operating profits. This included the benefit of some changes in expense assumptions, some positive news in relation to policy lapses and the impact of reigniting premiums on paused policies within the Conservatrix portfolio. Despite positive bond returns exceeding expectations, the economic loss (£1.3m) stemmed from a number of factors, primarily the negative impact of the fall in interest rates and declining yields on the business's future liabilities, with subdued equity performance also contributing.

Group:  This component contains a variety of group-related expenses and includes: non-maintenance related costs (such as acquisition activity); the costs of the group's IFRS 17 programme; and Tier 2 debt interest costs, offset by positive investment returns in the period.

EcV

£524.7M 2022: £511.7M

The Economic Value of Chesnara represents the present value of future profits of the existing insurance business, plus the adjusted net asset value of the non-insurance business within the group. EcV is an important reference point by which to assess Chesnara's intrinsic value.

Value movement: 1 Jan 2023 to 31 Dec 2023:

EcV earnings:  EcV profits excluding acquisition impacts of £30.7m have been delivered in 2023, supported by economic profits, with significant growth also delivered through acquisitions.

Acquisitions:  The group has delivered two deals during 2023; the Conservatrix portfolio acquisition and the reinsurance arrangement with Canada Life. This has resulted in day 1 EcV gains of £21.7m and £6.7m respectively.

Foreign exchange:  The closing EcV of the group reflects a foreign exchange loss in the period, which is a consequence of sterling appreciation against both the Swedish krona and also the euro.

Dividends:  Under EcV, dividends are recognised in the period in which they are paid. Dividends of £35.4m were paid during the year, representing the final dividend from 2022 and interim dividend for 2023.

EcV by segment at 31 Dec 2023

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 applying to our European businesses require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% (UK: 4%) cost of capital to a 3.25% cost of capital. On our UK business, the Solvecny II reform risk tapering is also reversed.

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

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

Dividends:  The proposed final dividend of £23.5m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

Tier 2:  The tier 2 debt is treated as "quasi equity" for Solvency II purposes. For EcV, consistent with IFRS, we continue to report this as debt. Under SII this debt is recognised at fair value, while for EcV this remains at book value.

Tier 3: Under Solvency II the eligibility of Tier 3 Own Funds is restricted in accordance with regulatory rules. For EcV the Tier 3 Own Funds are recognised at a deemed realistic value.

IFRS

The group IFRS results are reported under IFRS 17 for the first time in the annual financial statements. The following information provide an introduction to IFRS 17 and how it impacts Chesnara, together with the IFRS results for the year ended 31 December 2023 and comparative figures for 2022, which have been restated under IFRS 17.

INTRODUCTION TO IFRS 17

What is IFRS 17?

IFRS 17 is the new accounting standard for recognising, measuring and disclosing insurance contracts. This is effective for the first time in these financial statements and replaces the previous standard, IFRS 4. IFRS 17 has been implemented as if it had always been in place and so previous results have been restated.

IFRS 17 has been introduced with the aim of allowing greater comparability of results between insurance companies and the wider market. 

How does IFRS 17 impact Chesnara?

IFRS 17 'insurance contracts' represents an accounting change that does not impact the fundamentals of the business. Specifically, the implementation of IFRS 17 does not impact the growth ambition, value or cash generation of the group. There are no changes to the solvency ratio, cash generation or economic value of the group. There are also no changes to the dividend expectations or strategy and capability for future M&A.

IFRS 17 only applies to those policies of the group that are classified as 'insurance contracts', which equates to 42% of the group's total policyholder liabilities at the end of December 2023. The remaining contracts are classified as investment business, which are valued under IFRS 9 'Financial Instruments', which is also effective for the group for this period. Under IFRS 9, there is no impact to the results from how these liabilities have been previously valued under IAS 39. A key difference between the measurement of contracts under IFRS 9 and IFRS 17 is that investment contracts equate to unit value under IFRS 9 and their value therefore does not take into account future profit, whereas insurance contracts include the contractual service margin (CSM) and the risk adjustment that reflects the uncertainty around the amount and timing of the cash flows.

How are profits earned under IFRS 17?

A fundamental concept introduced by IFRS 17 is the contractual service margin (CSM). This represents the unearned profit that an entity expects to earn on its insurance contracts as it provides insurance services.

The CSM embodies two principles:

1. An insurer must spread expected profits for profitable business written over time.

This spread profit forms the CSM which can only be recognised in the income statement as and when insurance services are provided. The CSM consequently represents the expected amount of profits that have not yet been earned from the insurance business of the group.

2. An insurer must recognise the expected losses for loss-making business immediately.

An insurer cannot establish a "negative CSM" and defer loss recognition into the future.

IFRS BALANCE SHEET

As at 31 December 2022 there is a £51m increase in IFRS net equity under IFRS 17 compared with the previously stated IFRS 4 position. Total net equity as at 31 December 2023 is £360m and we have a CSM, which represents unrecognised future insurance profits, of £167m (net of reinsurance). The adoption of IFRS 17 has affected our gearing ratio, and in line with Fitch, we have added back the net of tax CSM to the equity denominator in the calculation. On this basis the gearing ratio as at 31 December 2023 is 29.2% which is significantly lower than the most recent ratio reported prior to IFRS 17 (31 December 2022: 37.6%). 

Some analysis has been provided below on the IFRS balance sheet of the group on an IFRS 17 basis:

HOW IFRS 17 IMPACTS NET EQUITY AT DECEMBER 2022

Under IFRS 17, the restated shareholder net equity at 31 December 2022 has increased by £51m compared with as previously reported.

The combined impact of remeasuring the future cash flows for insurance and reinsurance contracts under IFRS 17 and revaluing corresponding assets under IFRS 9 at that date has added £226m of growth. Offset against this is the recognition of liabilities for the Risk Adjustment (£31m) and the CSM (£113m), representing a store of future profits that will be released to the income statement as the associated future insurance services are provided.

A consequence of applying IFRS 17 is that the group has also derecognised intangible assets and their associated tax balances in respect of insurance contracts (£31m). These assets previously represented the immediate recognition of future profits on insurance business, but under IFRS 17 profits are now deferred and reflected in the CSM.

HOW THE CSM HAS MOVED IN THE PERIOD

The group has added £54m of CSM (future profits) in 2023. 

The increase is largely driven by the two deals in the period, with the Conservatrix portfolio acquisition adding £46m and the Canada Life arrangement adding £11m.

The movement in the period also includes:

A £20m reduction which reflects the release to profit in the period as the insurance services are provided and £9m of new business CSM, reflecting the future profits arising on profitable new business written in the period.

Other smaller movements including the impact of foreign exchange, changes in assumptions and the "interest" on unwinding the discounting that is embedded within the opening CSM valuation.

CSM values are shown net of reinsurance but gross of tax. When calculating the IFRS capital base a net of reinsurance and net of tax figure is used. The equivalent net of reinsurance and tax movement of CSM during 2023 is £42m.

HOW DOES IFRS 17 COMPARE TO SOLVENCY II AND ECV?

A lot of the principles and underlying technical decisions are consistent across EcV and IFRS, as they are based on common foundations; however, there is one fundamental difference in how investment contracts are valued. For investment contracts, expected future profits on existing policies are not recognised in the IFRS balance sheet, with profits being reported as they arise; this is in contrast to EcV, where they are fully recognised on the balance sheet, subject to contract boundaries.

As such, at Chesnara, we believe that due to the hybrid nature of the business, EcV and Solvency II, alongside cash generation, continue to give a more holistic view of the financial dynamics of the group and are therefore the key metrics that management use to manage the business.

HOW DOES IFRS 17 IMPACT LEVERAGE

The positive impact of IFRS 17 on net equity has been beneficial to the group's gearing ratio. Rating agencies will be revisiting their definitions of gearing for insurance groups as a result of IFRS 17, and in line with guidance from Fitch, we have added back the net of tax CSM to the equity denominator in the calculation. On this basis, the gearing of the group as at 31 December 2023 was 29.2%.

IFRS INCOME STATEMENT

IFRS PRE-TAX PROFIT

£1.8M 2022: £62.1M LOSS

IFRS TOTAL COMPREHENSIVE INCOME

£10.3M 2022: £26.1M LOSS

Analysis of IFRS result between insurance service and investment results: