Chesnara Regulatory News (CSN)

Chesnara plc

Operationally and financially resilient

Chesnara's operations, solvency and dividends have all shown resilience to the impacts of Covid-19. Chesnara has continued to deliver positive cash generation, funding the dividend strategy as well as maintaining robust group solvency. Economic Value decreased largely as a result of equity falls in the period, although this was partially offset by foreign exchange gains.

· GROUP CASH GENERATION OF £12.9M (six months ended 30 June 2019: £13.4M) Note 1

DIVISIONAL CASH GENERATION OF £9.6M (six months ended 30 June 2019: £2.4M) Note 1 

The result for the period includes a positive impact from the symmetric adjustment of c£26m. Falling yields over the period have had a negative effect on cash generation.

· GROUP SOLVENCY RATIO OF 162% (31 December 2019: 155%) 

We are well capitalised at both group and subsidiary level under Solvency II, with group solvency increasing in the first six months of 2020.

· 3.00% INCREASE IN INTERIM DIVIDEND

The results support the continued growth of the interim dividend to 7.65p per share (2019 interim: 7.43p per share).

· ECONOMIC VALUE (ECV) OF £604.2M (31 December 2019: £670.0M) Note 2

Movement in the year is stated after dividend distributions of £20.8m and includes a foreign exchange gain of £29.1m.

· ECV EARNINGS NET OF TAX OF £(74.1)M (six months ended 30 June 2019: £47.1M)

The result includes £53.6m of economic losses resulting from investment market movements (six months ended 30 Jun 2019: investment market gain of £85.3m).

· COMMERCIAL NEW BUSINESS PROFIT OF £6.7M (six months ended 30 June 2019: £7.6M) Note 3

Scildon has reported a 37% improvement in commercial new business profit over the corresponding period in 2019, increasing market share in both term and individual life markets. Pricing pressures and changes to fee income and rebates continue to suppress Movestic's new business value, with more modest returns of £1.7m.

· IFRS PRE-TAX LOSS OF £(9.1)M (six months ended 30 June 2019: pre-tax profit £66.6M)

The result includes £25.0m of losses relating to economic market conditions, created by the Covid-19 pandemic, including an impairment of £11.6m to the Scildon AVIF intangible asset. By contrast, economic market conditions created a £43.2m gain during the first half of 2019.

· IFRS TOTAL COMPREHENSIVE INCOME OF £15.1M (six months ended 30 June 2019: £51.0M)

The 2020 result includes a foreign exchange gain of £21.9m (2019: loss of £3.5m).

· GOOD OPERATIONAL AND FINANCIAL RESILIENCE

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

Financial update

Chesnara remains well capitalised. Based on the closing market position on 30 June 2020, our solvency cover ratio is 162% (31 December 2019: 155%), after allowing for the payment of a proposed interim dividend of £11.5m (7.65 pence per share) which represents a 3% uplift on the 2019 interim dividend. This dividend will be paid on 13 November 2020 to shareholders on the register on 9 October 2020.

As expected, and in line with our reported sensitivities, market movements up to 30 June 2020 had an adverse impact on our Economic Value.

Operational update

Despite the challenging circumstances, our operations at both Head Office and our divisions, continue to function effectively. During the first half of 2020, our business continuity plans were implemented and continue to be adapted as the Covid-19 situation evolved. New working arrangements were put in place and the vast majority of our colleagues and outsource partners have been successfully working from home. We continue to assess this situation, with a view to a transition back to office-based working, when considered appropriate and safe to do so. Our risk management and control framework continues to be effective.

New business activity in the Netherlands for the first six months has held up well while Sweden has been impacted by the current environment. The impact is expected to be greater in the rest of the year in both territories, with a corresponding reduction consequently in the capital required to support new business.

John Deane, Chief Executive said:

"The impact of the global pandemic on investment market performance has had an inevitable effect on the results during the first half of 2020. Against the backdrop of equity market falls and further reductions in interest rates I am pleased to report that even after paying the 2019 final dividend, Chesnara's cash reserves and solvency surplus remain largely unchanged compared to the pre-pandemic position.

It is this robustness of solvency and cash that supported the payment of a record 2019 final dividend, and it enables us to increase the interim dividend by 3%.

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

I would like to express my thanks to our staff and business partners for all their commitment and flexibility in dealing with the current environment and their work in previous years which has enabled us to continue to provide our usual high standards of customer service throughout.

We have not furloughed any staff as a result of the pandemic and have not used any other state support packages.

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

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

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

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

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

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

Note 3 During 2019 we assessed our new business profitability measurement criteria. This review was initiated to ensure the figures reported, which were previously directly linked to the Solvency II measurement regime, are in fact a fair commercial reflection of value being added. As part of the assessment we also compared how our peers report new business profits to ensure market consistency. As a result of the assessment we have made two changes to how we quantify new business profits. Firstly, we now base the future cash flows on assuming a modest level of return over and above risk-free returns. No premium to risk-free was applied in the past. Secondly, we now exclude the incremental risk margin that Solvency II modelling assigns to the new business. We believe the revised profitability measurement better reflects the value of the best estimate cash flows we expect to emerge from new business written.

The Board approved this statement on 25 September 2020.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

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

Notes to Editors

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

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

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

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

HIGHLIGHTS 

IFRS PRE-TAX LOSS £(9.1)M SIX MONTHS ENDED 30 JUNE 2019 £66.6M

The result includes £25.0m of losses relating to economic market conditions, created by the Covid-19 pandemic, including an impairment of £11.6m to the Scildon AVIF intangible asset. By contrast, economic conditions created a £43.2m gain during the first half of 2019.

IFRS TOTAL COMPREHENSIVE INCOME £15.1M SIX MONTHS ENDED 30 JUNE 2019 £51.0M

The 2020 result includes a foreign exchange gain of £21.9m (2019: loss of £3.5m).

GROUP SOLVENCY 162% 31 DECEMBER 2019 155%

We are well capitalised at both group and subsidiary level under Solvency II, with group solvency improving in the first six months of 2020. We applied the volatility adjustment for the first time in 2019 in both of our Dutch subsidiaries.

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ECONOMIC VALUE £604.2M 31 DECEMBER 2019 £670.0M 

Movement in the year is stated after dividend distributions of £20.8m and includes a foreign exchange gain of £29.1m.

ECONOMIC VALUE EARNINGS £(74.1)M SIX MONTHS ENDED 30 JUNE 2019 £47.1M

The result includes £53.6m of economic losses resulting from investment market movements (six months ended 30 Jun 2019: investment market gain of £85.3m).

COMMERCIAL NEW BUSINESS PROFIT NOTE 1 £6.7M SIX MONTHS ENDED 30 JUNE 2019 £7.6M 

This new metric is deemed to better reflect the commercial impact of writing new business than the previous measure that was based more directly on Solvency II rules. Scildon has reported a 37% improvement over the corresponding period in 2019, increasing market share in both term and individual life markets. Pricing pressures and changes to fee income and rebates continue to suppress Movestic's new business value, with more modest returns of £1.7m.

GROUP CASH GENERATION £12.9M SIX MONTHS ENDED 30 JUNE 2019 £13.4M

DIVISIONAL CASH GENERATION £9.6M SIX MONTHS ENDED 30 JUNE 2019 £2.4M

The result for the period includes a positive impact from the symmetric adjustment NOTE 2 of c£26m. Falling yields over the period have had a negative effect on cash generation.

INTERIM DIVIDEND INCREASE

Interim dividend increased by 3% to 7.65p per share (2019: 7.43p interim and 13.87p final).

THE COVID-19 PANDEMIC HAS LED TO FALLING INTEREST RATES, REDUCED EQUITY PRICES AND STERLING DEPRECIATION IN 2020

The financial results for the first half of 2020 are reflective of the deterioration in investment markets witnessed since the turn of the year. Falling interest rates, widening bond spreads and falls in equity markets have driven economic losses. The impact of these factors has been felt, to varying degrees, across all financial metrics. A weakening of sterling against the euro and Swedish krona has led to foreign exchange translation gains.

EXPANSION IN THE NETHERLANDS CONTINUES

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

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

During the first six months of the year Covid-19 emerged as a global pandemic. Changes in working practices have been required in order to accommodate appropriate safety measures, such as staff working from home. The group has remained operationally resilient throughout this transition.

NOTES:

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

Note 1: In our 2019 Report & Accounts we assessed our new business profitability measurement criteria. This review was initiated to ensure the figures reported, which were previously directly linked to the Solvency II measurement regime, are in fact a fair commercial reflection of value being added. As part of the assessment we also compared how our peers report new business profits to ensure market consistency. As a result of the assessment we made two changes to how we quantify new business profits. Firstly, we now base the future cash flows on assuming a modest level of return over and above risk-free returns. No premium to risk-free was applied in the past. Secondly, we now exclude the incremental risk margin that Solvency II modelling assigns to the new business. We believe the revised profitability measurement better reflects the value of the best estimate cash flows we expect to emerge from new business written. The 2019 comparatives have been restated to the new basis.

We now adopt the more commercially relevant figures within our business and financial performance reviews of the report and accounts, including the Chairman's Statement, as well our internal reporting. Within the Solvency II and EcV analysis sections, where the guidelines must be applied, the impact of new business on movements during the year will remain on the technically imposed basis.

Note 2: 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.

MEASURING OUR PERFORMANCE

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

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

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

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

FINANCIAL STATEMENT KPIS:

· IFRS net assets

· IFRS profits

ADDITIONAL METRICS:

· Solvency

o Own Funds

o Solvency Capital Requirement (SCR)

o SCR plus management buffer

o Solvency position (absolute value)

o Solvency position ratio

· Cash generation

o Group cash generation

o Divisional cash generation

· Economic Value

o Balance sheet

o Earnings

· New business

o EcV

o Commercial

SOLVENCY

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

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

ECONOMIC VALUE

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

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

CASH GENERATION

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

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

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

OPERATIONAL AND OTHER PERFORMANCE MEASURES

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

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

The impact of the global pandemic on investment market performance has had an inevitable effect on the results during the first half of 2020. Against the backdrop of equity market falls and further reductions in interest rates I am pleased to report that even after paying the 2019 final dividend, Chesnara's cash reserves and solvency surplus remain largely unchanged compared to the pre-pandemic position.

It is this robustness of solvency and cash that supported the payment of a record 2019 final dividend, and it enables us to increase the interim dividend by 3%.

Our operations have proved to be resilient to the challenges Covid-19 has presented. Our IT infrastructure has supported a near seamless transition to remote working and this together with the commitment and flexibility of staff and business partners has ensured we have continued to provide our usual high standards of customer service throughout. However, we have seen some impact of Covid-19 on our new business operations, with reduced activity in the first half of the year.

We have not furloughed any staff as a result of the pandemic and have not used any other state rescue packages.

Finally, and perhaps most importantly, at the time of writing I am delighted to report that no members of staff have suffered any serious illness as a result of the pandemic.

I look forward to the company moving back to more normal operational and investment market conditions but, in the meantime, we will continue to work hard to ensure positive outcomes for customers and investors through these challenging times.

LUKE SAVAGE,

CHAIRMAN

The Covid-19 pandemic has brought significant challenges in terms of both investment market and operational performance. It has also created a natural level of concern regarding the health and well-being of our staff and their families. It is an unfortunate but timely reminder that we have a broad range of responsibilities across a wide range of stakeholders.

Before I go on to consider the performance of the business, I would like to provide an update on our staff. We have adopted Covid-19 appropriate working practices that have enabled us to continue to offer our usual high standards of customer service whilst minimising the personal risk to our employees and business partners. I am happy to report that at the time of writing whilst a handful of staff have contracted the virus none have suffered any serious illness. I would like to recognise my appreciation for the resilience, commitment and flexibility of our staff and those within our key business partners during these difficult times.

Within our 2019 Annual Report and Accounts we signposted that at the date of their issue the market turmoil resulting from the pandemic was estimated to have created a post year end reduction in Economic Value of c£90m but that solvency surplus and cash balances remained largely unchanged. Over more recent months equity markets have recovered somewhat such that whilst the Economic Value at 30 June 2020 remains lower than pre pandemic levels, it has in fact recovered from its lowest point. The Economic Value at 30 June 2020 was £604.2m which represents a pre-dividend decline of £45m, or 6.7%, compared to the year-end position.

The previously reported resilience of cash and solvency surplus has continued. Despite the uniquely challenging conditions the parent company continued to receive sizeable dividends from subsidiaries such that after paying the 2019 final dividend and repaying a further tranche of our modest level of bank debt, as at 30 June 2020, the Chesnara cash balance stands at £77.1m (31 December 2019: £75.5m). That said, some divisional dividends have not yet been paid in line with local guidelines amid the pandemic.

During the first half of 2020 group Solvency has remained robust, with a closing ratio of 162% (31 December 2019: 155%). Total solvency surplus, post the proposed interim dividend, has fallen modestly from £210.8m at the end of 2019 to £207.7m at 30 June 2020.

From an IFRS results perspective, the loss before tax of £9.1m (6 months to 30 June 2019: profit of £66.6m) is heavily influenced by the investment market conditions during the period which were less favourable than during the first half of 2019. The period on period movement is predominantly due to the strong Scildon results in 2019, which benefitted from valuation gains in its bond portfolio as a result of narrowing spreads.

At the heart of Chesnara's proposition as a reliable income stock, there is a need to generate sufficient cash to support the Chesnara dividend. Although the financial dynamics of the group means that cash generation is partly protected from the impact of volatile investment markets the fact remains that adverse conditions can suppress cash generation during specific accounting periods. Despite benefitting from the impact of the "symmetric adjustment" that is designed to reduce capital requirements in falling equity markets, the economic conditions during the first half of 2020 have not been favourable. In light of the uniquely challenging backdrop to the 2020 half year results, the total group cash generation of £12.9m is a relatively reassuring outcome. That is after taking account of a strain of c£4m arising from our decision to re-position the investment mix in Scildon, from BBB Corporate bonds to mortgage-backed assets as part of our capital optimisation strategy. This process has spanned a c12 month period, with the capital benefits from the sale of BBBs as reported in the 2019 results being partially reversed during the first half of 2020 through the reinvestment in a mortgage fund. It is reassuring to see that, while we do not set a pre-requisite that dividends should be covered by cash generation, they have been even in this challenging period.

Total new business profits of £6.7m are slightly lower than the six months to 30 June 2019 of £7.6m. The Scildon new business volumes held up relatively well to the general disruption from Covid-19 through most of the period although volumes have started to tail off quite sharply towards the end of the period and continued to do so in subsequent months.

Despite Sweden's slightly less restrictive approach to managing Covid-19, Movestic's new business volumes, which can be driven by customer confidence in investment markets, were less resilient with total volumes being 18% lower than during the first half of 2019.

On balance we expect to see further reductions in volumes during the remainder of the year with a corresponding impact on full year new business profits.

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

Cash generated is modest with a large negative driver being a further reductions in interest rates over the period. We are also reporting an expected cash generation strain of c£4m as a consequence of reinvesting c€150m of government bond investments into mortgages related investments within Scildon. This was the second step of a two-stage process to move away from BBB Corporate bonds that were deemed to offer insufficient returns compared to their capital consumption. The first step of moving from BBB corporate bonds to government bonds generated a £24.1m cash gain that was part of the 2019 cash result. Therefore, overall, we have created over £20m of cash whilst retaining broadly similar long-term investment return expectations however due to the two-stage approach this has suppressed the cash result during an already difficult six-month period in 2020. With the exception of Scildon, our open Dutch business, all business units reported positive cash generation for the six months to 30 June 2020. Scildon reported cash utilisation of £19.5m largely due to falls in interest rates, coupled with the aforementioned switch from corporate bonds to mortgage investments.

Predominantly as the result of adverse investment conditions all divisions have made Economic Value losses during the period. This has resulted in a reported EcV loss of £74.1m, although this was off-set by exchange rate gains of £29.1m, resulting in a pre-dividend movement in EcV of £45m.

COMPLETION OF OUR ACQUISITION OF ARGENTA INSURANCE IN THE NETHERLANDS

In the 2019 accounts we reported the acquisition of Argenta Insurance, at a 22% discount to Economic Value. Despite some of the Covid-19 logistical challenges it is pleasing to report this completed on 31 August 2020.

We remain committed to maintaining our discipline when assessing potential acquisitions and ensuring that any offer we make is in the interests of all of our stakeholders, despite the high level of competition in the acquisition space. Chesnara has strong support from shareholders and lending institutions to progress our acquisition strategy. We also believe that our operating model has the flexibility to accommodate a wide range of potential target books. We believe our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures that we are aware of most viable opportunities in the UK and Western Europe.

TOTAL NEW BUSINESS PROFITS OF £6.7m REPLACE 32% OF THE REDUCTION IN EcV CAUSED BY THE DIVIDEND PAYMENTS IN THE YEAR

Chesnara writes new business in both Sweden and the Netherlands. The ultimate aim is to create sufficient annual profits, either through returns on the existing business, or through writing new business, to replace a significant proportion of the Economic Value returned to shareholders in the shape of dividend payments. Movestic new business volumes have reduced by 18% compared to the first half of 2019 due to the Covid-19 pandemic having an impact on IFA and customer activity. New business profits of £1.7m are lower than the first half of 2019 and we expect profit levels to remain somewhat suppressed throughout the rest of 2020. We expect volumes and profitability to recover in line with any general recovery from the Covid-19 pandemic.

Scildon's new business volumes have held up well although they did begin to decline towards the end of the period as a result of Covid-19. We have however increased our market share whilst retaining target levels of profitability and this has resulted in a material new business profit of £5.0m (six months to 30 June 2019: £3.7m) in the period. We do expect a dip in profits during the remainder of 2020 and perhaps into the first half of 2021. As markets recover, we expect our improving market share position to drive total profits at least in line with pre-pandemic levels.

Solvency

The group continues to show a robust solvency ratio of 162% at 30 June 2020 (31 December 2019: 155%). The closing solvency position is stated after recognising the £11.5m cost of the proposed interim dividend, which will be paid in November 2020.

Regulation and governance

IFRS 17

Our programme continues to progress well and we have selected Willis Towers Watson to implement their tool to calculate the contractual service margin and store the associated data. Implementation has commenced and is due to complete during the second half of 2021. As part of our continual assessment of our plans, we have reassessed the associated budget and as a result have increased our provisions by a further £3m during the period, reflecting the complexity and scale of the programme.

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

Regulatory compliance

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

Governance framework

We continue to maintain a strong risk and governance culture across the group. Our recent focus had been on enhancing our operational resilience to improve understanding of any vulnerabilities and to strengthen and test our contingency options, providing greater assurance that all important business services can continue following any unexpected disruption. The effectiveness of our work in this area has been tested by the pandemic and I am extremely pleased with how robust our operations have proved to be.

Corporate purpose

Chesnara has always assessed its corporate purpose by considering the following eight aspects of our business and by looking at the business from the perspective of all stakeholders. Increased emphasis on reporting in our year end 2019 accounts in line with Section 172 of the Companies Act (S172) did not require any notable changes in our approach to decision making. It did however formalise the requirement to consider and report how we ensure we act in a way to find an optimal long-term balance for stakeholder outcomes.  

AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS

Business model

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

The products and services we provide

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

Sustainability

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

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

Shareholder proposition

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

Taxation

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

Staff

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

Suppliers and partners

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

Local community

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

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

OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE PURPOSE.

Outlook

Since the end of 2019, Covid-19 has emerged as a pandemic. This has had a significant impact on investment markets and society in general, and we have been closely assessing the impact on Chesnara and our stakeholders. Whilst the initial market impacts were extreme there has been a reasonable level of subsequent recovery. The scale of impact remains within the ranges we test as a matter of course within our established governance procedures. It is also useful to note that the Solvency II regime is designed specifically to ensure that we hold sufficient capital to withstand adverse conditions similar to those we are currently experiencing.

Whilst the solvency position during the first half of 2020 has held up well, the Economic Value of the group has dropped by approximately £65m, in line with our reported sensitivities. The reduction in Economic Value is unwelcome but likewise it is a natural feature of changes in investment markets and therefore is not deemed to materially impact the outlook of the group.

The Chesnara parent company had liquid balances at 30 June 2020 of over £77m. This balance has accumulated in part as a result of our disciplined historic dividend strategy whereby we have prioritised the ability to sustain the dividend during difficult times over the payment of special dividends. In addition to this, the divisional solvency positions suggest that despite the difficult results during the first half of the year we would still expect material levels of dividend income from our divisions during 2021.

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

Chesnara has a clear and consistent strategic direction and the ability to deliver against its objectives, which in turn fund our well-established dividend strategy. Covid-19 is having a negative impact on delivering our strategic objectives in the short term but importantly we have no reason to believe that the pandemic will have a permanent impact and nor is the temporary impact sufficiently extreme to compromise post pandemic recovery. In particular:

- under more neutral economic conditions we still expect value and cash to emerge from our existing books of business, both in the UK and our overseas divisions. Indeed, should economic conditions revert in time to pre pandemic levels which history tells us they tend to do, then we would expect the vast majority of any the recent Economic Value losses to be recovered;

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

- we remain committed to writing new business in both Sweden and the Netherlands with a view to replacing a meaningful proportion of the dividend strain through our new business operations. We expect a dip in new business profits during 2020 but this is due to external factors that are not deemed to compromise our longer-term expectations from new business operations.

Luke Savage

Chairman

25 September 2020

OVERVIEW OF STRATEGY

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

Managing our existing customers fairly and efficiently is core to delivering our overall strategic aims.

Acquiring and integrating companies into our business model is key to continuing our growth journey.

Writing profitable new business supports the growth of our group and helps mitigate the natural run-off of our book.

BUSINESS REVIEW | UK

The UK division is principally made up of the insurance company Countrywide Assured plc. The company manages c247,000 policies and is in run-off. Countrywide Assured follows an outsourcer based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced. A central governance team is responsible for managing all outsourced operations.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

INITIATIVES AND PROGRESS IN 2020

- The division's fund manager rationalisation programme has progressed well during the year to date. Phase 1 of the two-phase programme has been completed to plan, meaning there is one more fund manager left to migrate during the second half of the year.

- Countrywide Assured has benefited from positive persistency experience during the year to date, which has contributed to positive operating experience in the period.

- The reported value of the division over the first six months of the year has reduced, principally as a result of the Covid-19 driven fall in equity markets and gilt yields.

- Despite the impact of Covid-19 solvency remains robust, increasing 10% to 141% in the period.

FUTURE PRIORITIES

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

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

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

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

KPIs

Economic Value

Cash generation

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

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

INITIATIVES AND PROGRESS IN 2020

- A key focus for the division over the first half of the year has been ensuring that we continue to meet the needs of our customers under the temporary operating environment driven by the Covid-19 pandemic. This has largely resulted in a need for a large proportion of the organisation to work from home. Despite the necessary changes, all important business services have continued to operate effectively, having adapted our processes accordingly.

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

- The division's multi-year customer strategy implementation program was successfully completed and signed off during the year, with any revised processes having been successfully transferred into business as usual operations.

FUTURE PRIORITIES

- Key business as usual activities include:

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

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

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

- Monitor the impact of Covid-19 on operations and how it affects customers, responding accordingly.

KPIs

Policyholder fund performance

Our three main managed funds performed worse than the reported benchmark in the year to date due to being more heavily invested in equities which fell in the period as a result of market reaction to Covid-19.

GOVERNANCE

BACKGROUND INFORMATION

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

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

INITIATIVES AND PROGRESS IN 2020

- The division has continued to deliver on its business as usual governance responsibilities despite the Covid-19 situation. In this regard the main focus has been overseeing the transition of the organisation to a predominantly working from home arrangement, both in terms of our outsourcers and the oversight governance team itself. This has worked well and we continue to monitor the situation closely.

- Throughout the period the business has implemented enhanced monitoring of key measures, such as solvency, claims and customer service, ensuring performance levels are maintained despite the impact of the pandemic.

- IFRS 17 continues to progress and we have selected Willis Towers Watson as the group provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

- Monitor the Covid-19 situation closely and flex our operating procedures accordingly.

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

KPIs

SOLVENCY RATIO: 141%

Surplus generated in the period increases solvency ratio from 131% to 141%.

BUSINESS REVIEW | SWEDEN

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

INITIATIVES AND PROGRESS IN 2020

- Covid-19 resulted in significant volatility in financial markets during the period, which has had a direct consequence on the value of the division. Whilst Swedish equities saw a significant recovery during Q2, they remain 6% down over the year.

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

- Policyholder transfers continues to be a feature of the business due to the competitive Swedish market. Despite the adverse transfer ratio, the division continues to report positive net client cash flows. That said, the division has strengthened its transfer out assumptions in light of this dynamic, resulting in a strengthening of reserves by £14.3m.

- New industry-wide regulations have been introduced in order to make it easier for customers to transfer their pension funds. As part of this, further rules are expected during 2021 that limit the amount that can be charged when transferring policies. This has been reflected in the Q2 valuation and has reduced EcV by £3.2m.

FUTURE PRIORITIES

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

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

- Provide a predictable and sustainable dividend to Chesnara.

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

Economic Value

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

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

INITIATIVES AND PROGRESS IN 2020

- Policyholder average investment return of -7.4% in the year to date (H1 2019: 11.7%), driven largely by the equity market falls in the period as a result of Covid-19.

- Broker and customer servicing have been a key focus for the division during the operating environment under Covid-19. The division has adjusted its processes accordingly in order to ensure that such servicing continues to an acceptable level.

FUTURE PRIORITIES

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

- Launch new broker web proposition with improved functionality and digital administration self-services for brokers.

- Further work on the direct distribution channels.

- Broaden product and service offering for other customer segments.

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

Broker assessment rating (out of 5)

POLICYHOLDER AVERAGE INVESTMENT RETURN:

-7.4%

GOVERNANCE

BACKGROUND INFORMATION

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

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

INITIATIVES AND PROGRESS IN 2020

- Dealing with the impact of Covid-19 has been a key focus for management over the first six months of 2020.

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

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

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

- Aside from Covid-19 the division's digitalisation programme has progressed well in the period and is expected to be completed during the second half of the year.

- IFRS 17 continues to progress and we have selected Willis Towers Watson as the group provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

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

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

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

SOLVENCY RATIO: 184%

Solvency remains strong, with a ratio of 184% at 30 June 2020.

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

As an "open" business, Movestic not only adds value from sales but as it gains scale, it will become increasingly cash generative which will fund further growth or contribute towards the group's dividend strategy. Movestic has a clear sales focus and targets a market share of 6% -10% of the advised occupational pension market. This focus ensures we are able to adopt a profitable pricing strategy.

INITIATIVES AND PROGRESS IN 2020

- The division has reported new business profits of £1.7m over the period (2019 HY: £3.9m). The reduction compared with the same period in 2019 is largely as a result of reduced sales volumes, largely driven by Covid-19 dynamics, whereby brokers have focused more on existing customers rather than generating new customers for the business.

FUTURE PRIORITIES

- Continue the delivery of a new decumulation service for annuity planning.

- Launch digital life insurance for broker channel.

- Launch new risk products in a common broker hub.

- Launch of a new offering to the smaller brokers.

- Continue to write new business within the target range.

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

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

Occupational pension market share %

New business profit*

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

BUSINESS REVIEW | NETHERLANDS

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

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

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

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

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

INITIATIVES AND PROGRESS IN 2020

- Post period end, Waard has completed the acquisition of a portfolio of term life and savings products from Argenta Bank.

- Despite the market turmoil caused by the Covid-19 pandemic, both businesses continue to have strong solvency positions, inclusive of the use of the volatility adjustment. The solvency ratio of Scildon remains strong at 183% but is currently below the internal capital management policy of 185%. The period end positions also include foreseeable dividends of £12.7m which have not yet been paid, in line with local regulatory requirements. Waard continued to maintain significant solvency levels, the ratio rising to 557% in the period.

- Scildon has continued to optimise its risk-based return through de-risking its asset portfolio and investing into mortgage funds with £170m held as at 30 June 2020.

FUTURE PRIORITIES

- Continue to provide dividends to group.

- Integrate the Argenta acquisition into the Waard business.

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

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

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

Scildon Economic Value

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

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

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

INITIATIVES AND PROGRESS IN 2020

- We have actively engaged with customers through the Covid-19 pandemic and continue to support them in any way that we can through this difficult period.

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

- The annual performance research for consumers shows high scores.

FUTURE PRIORITIES

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

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

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

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

Scildon client satisfaction rating (out of 10)

GOVERNANCE

BACKGROUND INFORMATION

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

INITIATIVES AND PROGRESS IN 2020

- IFRS 17 continues to progress and we have selected Willis Towers Watson as the group provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

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

- Continuously enhance the governance and risk management framework.

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

SOLVENCY RATIO: SCILDON 183%; WAARD 557%

Solvency is robust in both businesses, with post-dividend solvency ratios of 183% and 557% for Scildon and Waard respectively.

Scildon

Waard

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

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

INITIATIVES AND PROGRESS IN 2020

- Market conditions are and will continue to be challenging but we have seen continued progress in new business profits, earning £5.0m in the period on our commercially realistic metric. This has been partly delivered through the realisation of the cost saving initiatives enacted in 2019. As the full impact of Covid-19 will be felt in the second half of 2020, we will face headwinds to maintain this progress, but we have a solid base to take advantage.

- Established a white labelling relationship with Dazure as another route to market enabling us to service a wider proportion of the market.

- In isolation, the term market share for Scildon term lifestyle product for June 2020 has risen to 16.9%, although the market size has decreased, partly as a result of Covid-19.

- Scildon policy count continues to increase.

FUTURE PRIORITIES

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

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

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

Scildon - term assurance market share %

Scildon - new business profit*

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

BUSINESS REVIEW | acquire life and pension businesses

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

HOW WE DELIVER OUR ACQUISITION STRATEGY

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

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

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

- We work cooperatively with regulators.

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

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

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

HOW WE ASSESS DEALS

Cash generation

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

Value enhancement

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

Customer outcomes

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

Risk appetite

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

RISKS

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

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

WHAT WE CAN DO ABOUT THIS

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

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

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

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

INITIATIVES AND PROGRESS IN 2020

During 2020 the group has continued pursuing its acquisition strategy. In particular:

1 Argenta transaction

The group announced on 22 November 2019 that it had entered into an agreement to acquire a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V. The transaction completed on 31 August 2020 and is expected to be both earnings and EcV accretive.

2. Other opportunities

Management has continued to pursue wider acquisition opportunities for the group. This involves a combination of making sure we are in regular touch with investment banks and advisers and making direct contact with potential sellers when deemed appropriate. This work continues to support our views that the acquisition market is buoyant and supports the group's ongoing acquisition strategy.

ACQUISITION OUTLOOK

- We have continued to witness acquisition activity in the year to date. We also believe that there has been a rise in seller's valuations and prices paid for potential targets in recent times.

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

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

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

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

CAPITAL MANAGEMENT | Solvency II

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

What is solvency and capital surplus?

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

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

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

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

WHAT ARE OWN FUNDS?

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

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

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

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

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

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

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

How do Own Funds change?

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

WHAT IS CAPITAL REQUIREMENT?

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

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

Note: The table above does not include the impact of ALAC DT.

There are three levels of capital requirement:

Minimum dividend paying requirement/risk appetite requirement

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

Solvency Capital Requirement

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

Minimum Capital Requirement

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

How does the SCR change?

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

CHESNARA GROUP SOLVENCY METRICS

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

CHESNARA GROUP

SOLVENCY POSITION

SOLVENCY SURPLUS

Surplus:  The group has £174.2m of surplus over and above the internal capital management policy, compared to £172.8m at the end of 2019. The group solvency ratio has increased from 155% to 162%. Solvency surplus has fallen by £3.1m as a result of own funds falling slightly more than the capital requirements, after the interim dividend is taken into account.

Dividends:  The closing solvency position is stated after deducting the £11.5m proposed interim dividend (31 December 2019: £20.8m).

Own Funds: Own Funds have fallen by £36.6m (pre-dividends). This is driven heavily by the fall in equity market values and yields due to the Covid-19 pandemic, partially offset by positive exchange rate variance.

SCR:  The SCR has fallen by £45.0m, mainly due to a material reduction in equity risk alongside smaller reductions in currency and lapse risk.

The graphs on this page present the divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within the consolidated numbers. Note that year end 2019 figures have been restated using 30 June 2020 exchange rates in order to aid comparison at a divisional level.

UK

Surplus: £19.1m above board's capital management policy.

Dividends: Dividend of £29.0m was paid to Chesnara in Q2 2020.

Own Funds: Fallen by £9.5m due to material fall in yield curve and reduction in equity values but offset by positive variance from operating assumption changes.

SCR: Fallen by £14.4m, driven by fall in equity risk capital. Currency risk and lapse risk have also contributed to SCR reduction.  

SWEDEN

Surplus: £73.1m above board's capital management policy.

Dividends: Dividend of £6.2m was paid to Chesnara in Q2 2020.

Own Funds: Fallen by £36.1m mainly due to material reduction in equity values, but also partially driven by operating losses due to changes in fund rebates and fund management fees.

SCR: Fallen by £45.0m, driven by material fall in equity risk capital and smaller reductions in lapse risk and currency risk.

NETHERLANDS - WAARD

Surplus: £31.2m above board's capital management policy.

Dividends: Solvency position stated after £5.2m proposed dividend (2019: £3.1m).

Own Funds: Fallen by £2.1m, mainly due to adverse bond and equity movements.

SCR: Fallen by £1.3m, due to small decrease in market risk and counterparty risk.

NETHERLANDS - SCILDON

Surplus: £2m below board's capital management policy.

Dividends: Solvency is stated after £7.5m dividend that was proposed at year end but has not yet been paid (2019: £4.9m).

Own Funds: Fallen by £10.8m due to fall in bond values caused by rising credit spreads and adverse lapse experience.

SCR: Increased by £5.6m, mainly due to increases in underwriting risks due to the fall in yields.

CAPITAL MANAGEMENT | Sensitivities

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

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

Key:

INSIGHT*

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

Equity sensitivities: The equity rise sensitivities cause both Own Funds and SCR to rise, as the value of the funds exposed to risk is higher. The increase in SCR is larger than Own Funds, resulting in an immediate impact on surplus. Conversely, in an equity fall, Own Funds and SCR both fall. The extent to which the SCR reduction offsets the Own Funds depends on the stress applied. The impacts are not symmetrical due to management actions and tax. The change in symmetric adjustment has a significant impact (25% equity fall: -£6m to the SCR, 25% equity rise: +£38m 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. Since the year end, the equity stresses have become more sensitive due to a change in the starting position of the symmetric adjustment (2019 y/e: -0.08% compared to 2020 HY: -6.72%).

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

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

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

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

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

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

*BASIS OF PREPARATION ON REPORTING:

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

FINANCIAL REVIEW

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

Summary of each KPI:

IFRS

PRE-TAX LOSS: £(9.1)M (30 JUNE 2019: PRE-TAX PROFIT £66.6M)

TOTAL COMPREHENSIVE INCOME: £15.1M (30 JUNE 2019: £51.0M)

What is it?

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

Why is it important?

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

Risks

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

*includes other comprehensive income

- Despite the Covid-19 impact on investment markets and subsequent economic losses, Movestic and Scildon generated reasonable profits for the first half of the year, stemming from operational activities.

- Consolidated operating earnings of £15.9m were hampered by economic losses of £25.0m, including an impairment of £11.6m to the Scildon AVIF intangible asset. Further detail can be found in the IFRS Financial Review.

- A strengthening of the short-term mortality and morbidity assumptions on the basis of the additional uncertainty that Covid-19 introduces in the CA and Movestic divisions, led to an increase in net reserves of circa £3m and £1m respectively.

- Total comprehensive income includes foreign exchange gains (£21.9m) due to sterling depreciation against the euro and Swedish krona.

CASH GENERATION

GROUP CASH GENERATION £12.9M (30 JUNE 2019: £13.4M)

DIVISIONAL CASH GENERATION £9.6M (30 JUNE 2019: £2.4M)

What is it?

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

Why is it important?

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

Risks

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

Divisional cash generation

- Cash generation in the Swedish division is the largest component of the divisional result, with cash being utilised in Scildon.

- The Swedish contribution was delivered through significant reduction in capital requirements, in excess of the reduction in Own Funds, owing to investment market conditions. More modest cash returns were supplied by CA and Waard, both restricted by the Covid-19 impact on investment performance.

- Scildon reported cash utilisation of £19.5m following a reduction in Own Funds and an increase in capital requirements. Falling bond values and the widening of spreads accounted for the majority of the economic losses, coupled with the additional SCR strain from reinvesting low risk cash into mortgages (£170m at 30 June 2020).

- The 2019 result includes the non-recurring benefit of a £7.9m capital transfer from restricted with-profit funds in the UK. No transfer has been made in 2020.

Group cash generation

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

ECONOMIC VALUE (EcV)

£604.2M (31 DECEMBER 2019: £670.0M)

What is it?

Economic value (EcV) was introduced following the introduction of Solvency II at the start of 2016, with EcV being derived from Solvency II Own Funds. Conceptually, EcV is broadly similar to EEV in that both reflect a market-consistent assessment of the value of existing insurance business, plus adjusted net asset value of the non-insurance business within the group.

Why is it important?

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

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

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets, yields on fixed interest securities and bond spreads. In addition, the EcV position of the group can be materially affected by exchange rate fluctuations. For example, a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group within a range of £90m-£140m, based on the composition of the group's EcV at 30 June 2020.

- Economic Value, pre-dividend, fell by 6.7% to £625.0m during the first half of 2020.

- The movement includes an EcV earnings loss of £74.1m, impacted by investment market conditions and subsequent substantial economic losses across the divisions.

- The reduction in EcV since the start of the year includes the impact of the payment of the final 2019 dividend.

- Foreign exchange gains arose from the translation of the Dutch and Swedish divisional results, representing the weakening of sterling against the euro and Swedish krona since the start of the year.

ECV EARNINGS

£(74.1)M (30 JUNE 2019: £47.1M)

What is it?

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

The principal underlying components of the Economic Value result are:

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

- Value added by the writing of new business;

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

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

- The impact of acquisitions.

Why is it important?

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

Risks

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

- An EcV loss of £74.1m was incurred in the opening six months of the year.

- Economic losses drive the result, arising primarily from reduced equity market returns and widening bond spreads.

- Material other operating items relate to one-off strengthening of assumptions in Movestic, following changes to the transfer process and changes to local transfer legislation.

- Underlying operating activities were also negative. Key components including the impact of the strengthening of assumptions in Movestic, operating experience in Scildon and group level expenses. The UK and Waard delivered positive operating earnings.

CASH GENERATION

GROUP CASH GENERATION

£12.9M (30 JUNE 2019: £13.4M)

DIVISIONAL CASH GENERATION

£9.6M (30 JUNE 2019: £2.4M)

The Swedish division has delivered a significant cash contribution despite difficult economic conditions, supporting a total cash generation of £12.9m for the first half of 2020. Cash is generated from increases in the group's solvency surplus, which is represented by the excess of own funds held over management's internal capital needs. These are based on regulatory capital requirements, with the inclusion of additional 'management buffers'.

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

Implications of our cash definition:

Positives

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

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

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

Challenges and limitations

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

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

GROUP

- Group cash generation of £12.9m is reflective of the challenging economic conditions witnessed in 2020, following the impact of the Covid-19 pandemic on investment markets.

- Own Funds have reduced significantly, with each division suffering economic losses, primarily through falling equity markets, reduced bond yields and widening spreads. Whilst the equity market falls also give rise to a reduction in capital requirements of similar magnitude, falling yields and widening spreads do not tend to show the same dynamic and have suppressed cash generation over the period.

- The headline cash result benefits from a foreign exchange gain, arising on the translation of the Dutch and Swedish divisional results, representing the weakening of sterling against the euro and Swedish krona since the start of the year.

UK

- The reduction in Own Funds and SCR stems primarily from economic losses. Whilst the equity market falls impact has a fairly neutral impact on cash generation, yields falling does generally result in some strain as this tends to decrease Own Funds and increase SCR.

- Offsetting the economic strain is the general benefits of the book running off over time, which reduces the SCR, coupled with some modest operating profits.

- The prior year comparison benefitted from a £7.9m release from the with-profits fund. No transfer has been made in 2020.

SWEDEN

- Movestic reported a significant cash contribution of £21.7m.

- Own Funds were heavily impacted by the equity falls in the period owing to the nature of the business. The division also suffered material non-recurring operating losses relating, primarily, to strengthening of assumptions following changes to transfer legislation. This was offset by significantly larger reductions in capital requirements owing in part to the symmetric adjustment.

- The result also benefits from an exchange gain on translation.

NETHERLANDS - WAARD

- Cash generation in Waard was modest but in line with expectations, with a reduction in Own Funds being offset by a similar decrease in capital requirements.

- A reduction in equity and bond values contribute to the decline in Own Funds, though the subsequent reductions in exposure to interest rate and spread risk drive a decrease in capital requirements of a greater magnitude, outweighing the fall in Own Funds.

- The result includes the benefit of a material exchange gain (£2.3m).

NETHERLANDS - SCILDON

- The division has reported adverse movements in both Own Funds and capital requirements, resulting in cash utilisation of £19.5m.

- The movement in Own Funds incorporates a significant loss resulting from further downward pressure on yields and widening of spreads, following the downturn in investment markets since 2019. This impact was softened however by the application of the volatility adjustment.

- Capital requirements increased following the growth in the mortgage portfolio (greater exposure to counterparty default) and increasing lapse risk.

EcV EARNINGS

£(74.1)M (30 JUNE 2019: £47.1M)

The EcV earnings of the group are reflective of a challenging start to the year and the impact of Covid-19 on investment market conditions, with falling interest rates, widening spreads and diminished equity returns.

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

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

Note 1 - Economic conditions: The EcV result is sensitive to investment market conditions, as reflected by the £53.6m of economic losses in the period. Key movements in investment market conditions during the year are as follows:

- The FTSE All share index decreased by 18.7% in the 6 months to 30 June 2020 (6 months to 30 June 2019: increased by 10.4%);

- The Swedish OMX all share index decreased by 5.0% (6 months to 30 June 2019: increased by 16.9%);

- The Netherlands AEX all share index decreased by 7.4% in the 6 months to June 2020 (6 months to 30 June 2019: increased by 15.7%); and

- 10-year UK gilt yields have decreased from 0.84% to 0.20%.

Note 2 - Material other operating items: This includes operating items that were individually material and have therefore been separately analysed to aid an understanding of the operating result. In Movestic a strengthening of assumed transfer rates (£13.5m) was undertaken, reflective of recent changes in the transfer out process and to align with changes to local legislation. There was a further one-off negative adjustment of (£3.0m) relating to transfer fee modelling, also a consequence of the changes to transfer legislation. The final 2019 result incorporated similar legislation driven adjustments for Movestic, however also included positive one-off revisions to future trail commission expectations, also stemming from legislative changes.

Note 3 - UK: The UK reported an EcV loss of £14.5m in the period as operational earnings were offset by larger economic losses. Economic losses stem mainly from the fall in equity markets, with UK equity markets falling c19% since the start of the year. Yields have also declined in the period, which has also contributed to the EcV reduction. Operating gains were assisted by positive mortality experience and fee income. Continued lower than expected rates of attrition across the books of business, resulted in future fee income higher than assumed at the start of the year.

Note 4 - Sweden: Movestic recorded a significant loss (£41.6m) in the first half of the year, with the division suffering heavy economic losses as well as some material adverse non-recurring operational items. Economic losses of £21.9m are driven largely by the equity falls following Covid-19, and reflects the division's exposure to equities via its policyholders. While operating experiences were marginally favourable, the strengthening of assumptions resulted in operating losses (as described in note 2). The main assumption changes include strengthening transfer out rate assumptions, updating assumptions regarding transfer-out charges driven by new rules, and reductions in assumed future performance fees and fund rebates. New business profits (on an EcV basis) were modest (£0.7m), reflective of the challenging market and ongoing margin pressures. Covid-19 has resulted in a general decline in sales volumes, including a reduction in single premium volumes where margins are higher. New business margins also bear the impact of reduced fund rebates and an increase in transfers out.

Note 5 - Netherlands: Economic conditions were a key factor in the results posted by the Dutch businesses, with the division reporting a loss of £12.7m for the period. Scildon incurred a loss of £10.8m, largely reflecting economic losses owing to falling yields and a widening of spreads. The impact of this was softened by the application of the volatility adjustment. Healthy new business performance in the period was offset by other operating losses, including adverse lapse experience. Waard also recorded a loss in the first half of the year, again stemming from investment market conditions, specifically falling bond values and equity returns. Operational activity was favourable, delivering modest earnings.

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

EcV

£604.2M (31 DECEMBER 2019: £670.0M)

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

Value movement: 1 Jan 2020 to 30 Jun 2020:

EcV earnings: A loss of £74.1m has been reported for the first half of the year. The impact of Covid-19 on investment markets being a key factor, with significant economic losses in the period. Further detail can be found on page 29.

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £20.8m were paid during the period, being the final dividend from 2019.

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

EcV by segment at 30 Jun 2020:

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

EcV to Solvency II:

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

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

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

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

Dividends: The proposed interim dividend of £11.5m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

IFRS

IFRS PRE-TAX LOSS

£(9.1)M (30 JUNE 2019: PRE-TAX PROFIT £66.6M)

IFRS TOTAL COMPREHENSIVE INCOME

£15.1M (30 JUNE 2019: £51.0M)

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

Executive summary

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

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

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

IFRS results

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

Note 1: The CA segment has been adversely impacted by the investment market impact of Covid-19. Equity markets are significantly down on the start of the year and this, coupled with reducing bond yields, has led to an overall negative economic return, especially in the S&P book, where product guarantees have surpassed a modest operating profit.

Note 2: Movestic continues to contribute positively to the overall group IFRS result, although posting reduced profit when compared to 2019. Despite lower investment returns due to adverse market factors, positive claims development and reduced operational expenses produced a favourable result year to date.

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

Note 4: Scildon has delivered a relatively strong IFRS result in the first six months. A positive insurance result was generated by favourable term policy experience. This was accompanied by a recovery in credit and country spreads in Q2, which contributed to partial recovery in the investment result year to date. Operational expense savings have also contributed to the result for the year.

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

Note 6: Consolidation adjustments relate to items such as the amortisation and impairment of intangible assets. The current year includes a write down of the Scildon AVIF intangible asset, following a reassessment performed at 30 June. Other components are broadly in line with last year.

Note 7: Sterling weakened against both the euro and Swedish krona in the period, resulting in a sizeable exchange gain year to date.

Note 8: The IFRS operating result demonstrates the stability of the underlying business, with solid operating results being seen across the Group divisions.

Note 9: Economic profit represents the components of the earnings that are directly driven by movements in economic variables. During 2020, all divisions suffered from adverse market conditions, as a consequence of the Covid-19 pandemic. 

RISK MANAGEMENT

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

HOW WE MANAGE RISK

RISK MANAGEMENT SYSTEM

The risk management system supports the identification, assessment, and reporting of risks along with coordinated and economical application of resources to monitor and control the probability and/or impact of adverse outcomes within the board's risk appetite or to maximise realisation of opportunities.

Strategy: The risk management strategy contains the objectives and principles of risk management, the risk appetite, risk preferences and risk tolerance limits.

Policies: The risk management policies implement the risk management strategy and provide a set of principles (and mandated activities) for control mechanisms that take into account the materiality of risks.

Processes: The risk management processes ensure that risks are identified, measured/ assessed, monitored and reported to support decision making.

Reporting: The risk management reports deliver information on the material risks faced by the business and evidence that principal risks are actively monitored and analysed and managed against risk appetite. 

Chesnara adopts the "three lines of defence" model adjusted as appropriate across the group taking into account size, nature and complexity, with a single set of risk and governance principles applied consistently across the business.

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

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

ROLE OF THE BOARD

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

Risk and Control Policies

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

Strategy and Risk Appetite

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

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

Risk Identification

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

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

Own Risk and Solvency Assessment (ORSA)

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

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

Risk Management System Effectiveness

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

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

principal risks and uncertainties

The following tables outline the principal risks and uncertainties of the group. It has been drawn together following regular assessment, performed by the Audit & Risk Committee, of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. The impacts are not quantified in the tables. However, by virtue of the risks being defined as principal, the impacts are potentially significant. The controls in place to mitigate or manage their impact are documented in the full year end report and are not duplicated here since they have not materially changed. Those risks with potential for a material financial impact are covered within the sensitivities.

Covid-19 has not created new principal risks for the business, however its impact is likely to affect some existing principal risks. Our assessment of the impact of Covid-19 against our principal risks is considered below where deemed applicable.

going concern

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

In performing this work, the board has considered the current cash position of the group and company, coupled with the group's and company's expected cash generation as highlighted in its most recent business plan. The business plan considers the financial projections of the group and its subsidiaries on both a base case and a range of stressed scenarios, covering projected IFRS, EcV and solvency positions. These projections also focus on the cash generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company. Further insight into the immediate and longer-term impact of certain sensitivities that the group is exposed to, covering solvency, cash generation and Economic Value, can be found under the section headed 'Capital Management Sensitivities'.

Due to the group's strong capital position and the group's business model, although the Covid-19 outbreak has caused significant global economic disruption, these scenarios have demonstrated that the group and the company remain well capitalised and have sufficient liquidity. As such we can continue to remain confident that, even if the negative financial market impact of Covid-19 is sustained, the group will continue to be in existence in the foreseeable future. The information set out on in the Capital Management section indicates a strong Solvency II position as at 30 June 2020 as measured at both the individual regulated life company levels and at the group level. As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due and does not rely on the renewal or extension of bank facilities to continue trading. The group's subsidiaries rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to manage this risk, we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that any associated credit default risk is low.

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

DIRECTORS' RESPONSIBILITIES STATEMENT

We confirm that to the best of our knowledge:

- the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

- the management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

- the management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Luke Savage John Deane

Chairman Chief Executive Officer

25 September 2020 25 September 2020

INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC

We have been engaged by the company to review the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and related notes 1 to 9. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK & Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Use of our report

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

Manchester

United Kingdom

25 September 2020

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME