REG - Chesnara PLC - Half-year Report
10/09/2024 07:00
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RNS Number : 5052D Chesnara PLC 10 September 2024
10 September 2024
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc (CSN.L)
("Chesnara" or "the Company")
STRONG CASH GENERATION AND 20 YEARS OF UNINTERRUPTED DIVIDEND GROWTH
Chesnara reports its 2024 interim results. Key highlights are:
· Continued strong group commercial cash
generation((1)) of £29m (six months to 30 June 2023: £22m);
· Robust solvency of 201% (31 December 2023: 205%),
materially above our 140 - 160% normal operating range;
· Economic value ("EcV") of £508m (31 December
2023: £525m) with EcV earnings of £20m pre FX and dividend (six months to 30
June 2023: £33m excluding the impact of acquisitions);
· Commercial value of new business((3)) of £5m
(six months to 30 June 2023: £6m);
· IFRS pre-tax profit of £13m (six months to 30
June 2023: £15m((4)));
· 3% increase to the 2024 interim dividend to 8.61p
per share (2023: 8.36p interim).
Commenting on the results, Steve Murray, Group CEO, said:
"The group has yet again delivered strong cash generation and generated
positive organic EcV earnings. This financial performance over the first half
of the year, combined with our robust solvency position, has allowed us to
extend our track record of uninterrupted dividend growth to 20 years,
unrivalled across listed UK and European insurers. Our people have also
continued to deliver on our major operational programmes, including the
introduction of Consumer Duty for UK closed books. We have continued to be
active in assessing potential acquisitions, our M&A pipeline remains
positive and we continue to have material firepower to deploy on
opportunities."
The results presentation will be held at 9:30am on 10 September 2024 -
participants can register here
(https://stream.brrmedia.co.uk/broadcast/66b391ca9680466ed96569e7/66bf1fa05c4d479e0499c7a3)
.
Further details on the financial results are as follows:
2024 HALF YEAR FINANCIAL AND STRATEGIC HIGHLIGHTS
CASH GENERATION AND DIVIDENDS - 20 YEARS OF UNINTERRUPTED DIVIDEND GROWTH
- Group commercial cash(1) generation of £29.2m in HY 2024 (HY
2023: £21.8m).
- 2024 interim dividend of 8.61p per share (2023 interim dividend
of 8.36p), which is a 3% increase compared to 2023.
- Our 20-year dividend growth track record is unrivalled across UK and
European Listed insurers with Chesnara's business model delivering sustainable
returns to shareholders, with c£489m of cumulative dividends paid over the 20
year period.
FINANCIAL RESILIENCE - FLEXIBILITY IN FINANCING FUTURE M&A
- Solvency II ratio of 201% as at 30 June 2024 (31 December 2023:
205%), materially above our normal operating range of between 140 -
160%.
- Pro forma cash balances at group holding companies increased
over the period (taking into account accrued divisional dividends) to £137.0m
(31 December 2023: £124.1m), providing substantial resources to both support
dividends and fund future acquisitions.
- Leverage ratio((2)) of 30% as at 30 June 2024 has remained
broadly consistent when compared to FY 2023 (31 December 2023: 29%).
DELIVERING LONG TERM VALUE
- Economic Value ("EcV") of £508.0m as at 30 June 2024 (31
December 2023: £524.7m), with positive organic EcV earnings of £20.2m offset
by the payment of dividends and the negative impact of foreign exchange rates
over the period.
- IFRS capital base of £458.1m as at 30 June 2024 (31 December
2023: £487.4m), has reduced over the period largely due to dividend payments.
The movement in the prior year was impacted by additional Contractual Service
Margin ("CSM") arising from acquisitions. Profit before tax was £13.4m for
the six month period to 30 June 2024 (£15.3m((4)) for the six month period to
30 June 2023).
- Commercial new business profit((3)) of £4.9m in HY 2024 (HY
2023: £6.3m).
- Our SS&C partnership for policy administration services will
enable a scalable platform for M&A in the UK and work on the migration to
the new platform has continued at pace over the first half of the year.
- We have expanded the reach of our Custodian offering in Sweden
from new partnerships which has driven value through new business sales.
DIVIDEND DETAILS
- The interim dividend of 8.61p per share is expected to be paid
on 1 November 2024. The ordinary shares will be quoted ex-dividend on the
London Stock Exchange as of 19 September 2024. The record date for
eligibility for payment will be 20 September 2024.
ANALYST PRESENTATION
- The results presentation will be held at 9.30am on 10 September
2024 at the offices of RBC Capital Markets, 100 Bishopsgate, London, EC2N 4AA,
which will be available to join online and subsequently be posted to the
corporate website at www.chesnara.co.uk.
- To join the webcast, please register using the following link
here
(https://stream.brrmedia.co.uk/broadcast/66b391ca9680466ed96569e7/66bf1fa05c4d479e0499c7a3)
.
Investor Enquiries
Sam Perowne
Head of Strategic Development & Investor Relations
Chesnara plc
E - sam.perowne@chesnara.co.uk
Media Enquiries
Roddy Watt
Director, Capital Markets
FWD
T - 020 7280 0651 / 07714 770 493
E - roddy.watt@fwdconsulting.co.uk
Notes to Editors
Chesnara (CSN.L) is a European life and pensions consolidator listed on the
London Stock Exchange. It administers c.1 million policies and operates as
Countrywide Assured in the UK, as The Waard Group and Scildon in the
Netherlands, and as Movestic in Sweden.
Following a three-pillar strategy, Chesnara's primary responsibility is the
efficient administration of its customers' life and savings policies, ensuring
good customer outcomes and providing a secure and compliant environment to
protect policyholder interests. It also adds value by writing focused,
profitable new business in the UK, 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 20 years in succession. Further details are available on the
Company's website (www.chesnara.co.uk).
Notes
Note 1 Group cash generation represents the surplus cash that the group
has generated in the period. Cash generation is largely a function of the
movement in the solvency position, used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring that other
constraints are managed.
Commercial cash generation is used as a measure of assessing how much dividend
potential has been generated, subject to ensuring other constraints are
managed. It excludes the impact of technical adjustments, modelling changes
and corporate acquisition activity; representing the group's view of the
commercial cash generated by the business.
The cash generation results excludes the day 1 impacts of acquisitions in the
period.
Note 2 The leverage ratio is a financial measure that demonstrates the
degree to which the company is funded by debt financing versus equity capital,
presented as a ratio. It is defined as 'debt' divided by 'net equity plus
debt plus CSM (net of tax and reinsurance)', as measured under IFRS.
Note 3 Commercial new business profit is a more commercially relevant
measure of new business profit than that recognised directly under the
Solvency II regime, allowing for a modest level of return, over and above
risk-free, and exclusion of the incremental risk margin Solvency II assigns to
new business. This provides a fair commercial reflection of the value added
by new business operations.
Note 4 IFRS HY 2023 comparators have been restated.
The Board approved this statement on 9 September 2024.
CAUTIONARY STATEMENT
This document may contain forward-looking statements with respect to certain
plans and current expectations relating to the future financial condition,
business performance and results of Chesnara plc. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond the control of Chesnara plc
including, amongst other things, UK domestic, Swedish domestic, Dutch domestic
and global economic and business conditions, market-related risks such as
fluctuations in interest rates, currency exchange rates, inflation, deflation,
the impact of competition, changes in customer preferences, delays in
implementing proposals, the timing, impact and other uncertainties of future
acquisitions or other combinations within relevant industries, the policies
and actions of regulatory authorities, the impact of tax or other legislation
and other regulations in the jurisdictions in which Chesnara plc and its
subsidiaries operate. As a result, Chesnara plc's actual future condition,
business performance and results may differ materially from the plans, goals
and expectations expressed or implied in these forward-looking statements.
HIGHLIGHTS
COMMERCIAL CASH GENERATION £29.2M SIX MONTHS ENDED 30 JUNE 2023 £21.8M
The opening half of 2024 has been another period of strong cash generation for
the group. Group cash generation of £19.6m (six months ended 30 June 2023:
£10.6m) allows for the short-term requirement to hold additional equity risk
capital (£9.3m) as defined by the Solvency II symmetric adjustment (SA).
Commercial cash generation looks through the SA impact and is deemed to better
reflect the underlying business performance. Commercial cash of £29.2m,
supported by strong divisional contributions demonstrates the group's
continued ability to deliver cash generation through a wide variety of market
conditions.
GROUP SOLVENCY 201% 31 DECEMBER 2023: 205%
The group's solvency has reduced slightly since the start of the year
remaining well above our normal operating range of 140-160%. The ratio does
not include any temporary impacts from either transitional benefits or a
positive closing SA position. The solvency position continues to provide
substantial headroom for future acquisitions, while all operating divisions
remain well in excess of risk appetite levels.
FUNDS UNDER MANAGEMENT £11.9BN 31 DECEMBER 2023: £11.5BN
FuM have increased by c4% since the start of the year, reflecting positive
investment returns on our existing business during the period.
ECONOMIC VALUE £508.0M 31 DECEMBER 2023 £524.7M
ECONOMIC VALUE EARNINGS £20.2M SIX MONTHS ENDED 30 JUNE 2023 £32.6M
excluding the impact of acquisitions
EcV earnings of £20.2m have been offset by the impact of dividend payments
(£23.5m) and foreign exchange consolidation impacts (£13.3m). Investment
returns have provided the most material contribution to the EcV earnings, with
new business also contributing positively.
COMMERCIAL NEW BUSINESS PROFIT £4.9M SIX MONTHS ENDED 30 JUNE 2023 £6.3M
Commercial new business profits continue to be a positive source of value
growth. Whilst the Swedish market remains competitive, we have seen margins
stabilise, with strong flows into our occupational pensions and custodian
offerings. In the Netherlands, new business volumes from our term assurance
offerings have remained supressed, while the UK division has continued to
contribute new business, primarily through its intermediated onshore bond
proposition, since the acquisition of CASLP in 2022.
IFRS PRE-TAX PROFIT £13.4M SIX MONTHS ENDED 30 JUNE 2023 £15.3M*
IFRS pre-tax profits are boosted by positive investment returns in the period
and the continued steady release of the contractual service margin (CSM).
*2023 IFRS comparatives have been restated from those previously reported -
see the IFRS Financial Statements section for further information.
IFRS CAPITAL BASE DECREASE £29.3M SIX MONTHS ENDED 30 JUNE 2023 £21.2M GAIN
The IFRS Capital Base has decreased in the period largely due to dividend
payments. The movement in the prior year was impacted by additional CSM
arising from acquisitions.
The adoption of IFRS 17 provides some more insight into the future profits
that are expected to emerge from the group's life insurance business.
However, the accounting standard does not include the group's significant
amount of policies that are classified as investment contracts, which also
represent a future profit stream for the business. As a result, whilst IFRS
17 does provide some level of alignment with the valuation regime of Solvency
II, it does not replace it and therefore the group continues to also focus on
Solvency II and its derivative KPIs of Economic Value and cash generation in
assessing the performance of the business.
INTERIM DIVIDEND INCREASED FOR THE 20(TH) CONSECUTIVE YEAR
Increase in the interim dividend for the year of 3% to 8.61p per share (2023:
8.36p interim), supported by continued commercial cash generation from our
divisions and strong, resilient capital position. Our 20 year dividend
growth track record is unrivalled across UK and European listed insurers with
Chesnara one of only seven companies across the main UK, French, German, Dutch
and Swedish exchanges to raise their dividend every year for 20 years, with
c£489m of cumulative dividends paid to our shareholders over the period.
ECONOMIC BACKDROP
The opening half of 2024 has been a period of economic growth, with positive
market movements supporting an increase in FuM and cash generation. It was
also another period of sterling appreciation (versus both the euro and Swedish
krona), in which our FX hedge continued to protect against the full force of
adverse foreign exchange impacts on the translation of our overseas divisional
results.
NEW GROUP CFO APPOINTED, BUSINESS INTEGRATIONS & CONSUMER DUTY PROGRESS
In April, Chesnara strengthened the group leadership team with Tom Howard
joining as Group CFO, bringing a wealth of experience having held a variety of
senior roles at Aviva. Tom's track record and capabilities further strengthen
the group's ability to deliver its ambitious plans for the future. He also
joined the plc board.
The Part VII transfer of the Canada Life protection portfolio (acquired in
2023) and the migration of the majority of the UK division's business to a new
outsourcing partner (SS&C), continue to move forward positively, with
expected completion dates in early 2025 and late 2025 respectively.
The UK also successfully complied with the Consumer Duty requirements for
closed books, meeting the 31 July 2024 regulatory deadline. While in the
Netherlands, Scildon's IT system improvement project has progressed and nears
completion, with cost efficiencies already materialising. And, in Sweden,
Movestic has strengthened its digital platform and connectivity with
distribution partners, to deliver a smoother transfer experience for
customers.
WE ARE COMMITTED TO BECOMING A SUSTAINABLE CHESNARA
We continue to work to transition the group into a sustainable business. We
are committed to delivering against our three key targets: to be a net zero
emitter; to invest in positive solutions; and to be an inclusive place for all
stakeholders. We reported on our progress against these in our Annual
Sustainability Report issued in March and have taken further steps since,
including starting the production of our climate transition plan under the
IIGCC's Net Zero Investment Framework and delivering the first part of our
group-wide sustainability training. In the UK, we have also signed up to the
UK Sustainable Investment & Finance Association (UKSIF) and the Finance
for Biodiversity Pledge and became a signatory of the PRI (Principles for
Responsible Investment). Work is also underway on our wider transition plans.
These financial highlights include the use of Alternative Performance Measures
(APMs) that are not required to be reported under International Financial
Reporting Standards.
1 - Group cash generation represents the surplus cash that the group has
generated in the period. Cash generation is largely a function of the
movement in the solvency position, used by the group as a measure of assessing
how much dividend potential has been generated, subject to ensuring other
constraints are managed.
2 - Commercial cash generation is used as a measure of assessing how much
dividend potential has been generated, subject to ensuring other constraints
are managed. It excludes the impact of technical adjustments, modelling
changes and corporate acquisition activity; representing the group's view of
the Commercial cash generated by the business.
3 - Funds Under Management (FuM) represents the sum of all financial assets on
the IFRS balance sheet.
4 - Economic Value (EcV) is a financial metric derived from Solvency II. It
provides a market consistent assessment of the value of existing insurance
businesses, plus adjusted net asset value of the non-insurance business within
the group.
5 - Economic Value earnings are a measure of the value generated in the
period, recognising the longer-term nature of the group's insurance and
investment contracts.
6 - Commercial new business represents the best estimate of cash flows
expected to emerge from new business written in the period. It is deemed to be
a more commercially relevant and market consistent measurement of the value
generated through the writing of new business, in comparison to the
restrictions imposed under the Solvency II regime.
CHAIR'S STATEMENT
The group has delivered a strong set of results and continues to benefit from
a strong and resilient capital position. This has supported an increase in the
interim dividend for the 20th consecutive year whilst maintaining significant
resources to transact future M&A opportunities
LUKE SAVAGE, CHAIR
20 YEARS OF DIVIDEND GROWTH
The first half of 2024 saw a continuation of Chesnara's strong record of
delivering cash generation with all of our operating divisions contributing to
commercial cash generation of £29.2m for the period, significantly higher
than in the same period in 2023 (£21.8m).
As a result, I am pleased to report that our shareholders will receive an
interim dividend of 8.61p per share, an increase of 3% on the prior year and
the 20th consecutive year that we have increased the dividend. This track
record puts us in a unique group of only 7 companies (according to RBC
research) across the main European listed exchanges of UK, France, Germany,
the Netherlands and Sweden to have increased their dividend for 20 years or
more.
We continue to ensure that we have a broad range of skills and capabilities on
our boards. In April, we announced Mark Hesketh's appointment as Chair of
our UK board, Countrywide Assured plc. And at the AGM, we formally appointed
Tom Howard (Group CFO) to the group board. It was also pleasing to see strong
shareholder support for all resolutions tabled at this year's Annual General
Meeting in May.
Financial stability remains at the heart of the Chesnara business and its
financial model and is fundamental to providing financial security to our
customers.
Our Solvency II ratio of 201% is significantly above our normal operating
range of 140% - 160%, continuing to provide us with considerable strategic
flexibility.
Our solvency position remains underpinned by a well-diversified business
model, a focus on responsible risk-based management and resilient and reliable
cash flows from our businesses.
A strong and resilient capital position is also a critical factor in the
investment case for both our equity and debt investors and it also provides us
with the solvency headroom required to take advantage of attractive M&A
opportunities as they arise.
OPERATIONAL DELIVERY
Across the group, our people continue to deliver strongly against our key
strategic priorities. Last year we announced the acquisition of a protection
portfolio in the UK from Canada Life. The planned transfer of this portfolio
in the UK is on track to complete in Q1 2025 (subject to approval by the High
Court of Justice of England and Wales) and the operational activities to
transfer existing Chesnara UK insurance portfolios to our new outsource
partner SS&C are progressing well.
In Sweden, the Movestic team's ongoing focus on digitisation and efficiency
has been a crucial factor in winning new partnership deals and supporting
healthy new business sales in a competitive market.
And, in the Netherlands the delivery of material IT projects in Scildon and
further bedding in of our new Waard operating model, post the acquisitions of
Robein Leven and an insurance portfolio from Conservatrix, are notable
highlights.
I'm also pleased to say that the process of fully embedding the IFRS 17
accounting regime has been successful and is a testament to the huge effort
and commitment made by many of our people across the group.
PURPOSE
At Chesnara, we help protect customers and their dependants by providing life,
health, and disability cover or savings and pensions solutions to meet future
financial needs. These are very often customers that have come to us through
acquisition, and we are committed to ensuring that they remain positively
supported by us.
We have always managed our business in a responsible way and have a strong
sense of acting in a fair manner, giving full regard to the relative interests
of all stakeholders.
Strong financial performance will always remain of key importance for many
reasons. These include our desire to offer competitive returns to shareholders
and fund our debt investor coupon payments but also because it creates
financial stability for customers. However, we continue to be very conscious
of the need for the business to serve a wider purpose with an increasing
balance of focus across the 3Ps: Profit, People and Planet.
Over recent years we have increased our focus on our sustainability agenda,
and I continue to be impressed with the level of engagement in this area from
all levels of the group.
The group-wide sustainability programme is progressing well against its
long-term objectives. We are working to embed sustainability into
decision-making at all levels of the group by placing Environmental, Social
and Governance (ESG) considerations at the heart of our internal governance
processes and by introducing mandatory sustainability training for all
colleagues as part of their learning journey.
We continue to develop our plans to deliver a just transition to net-zero, and
to develop our understanding of the actions we need to take to integrate
nature into our decision-making processes.
I am also pleased to report that Chesnara is now a signatory to the Principles
for Responsible Investment. This is another step forwards in our
sustainability journey and complements our existing memberships of the United
Nations Global Compact, UK Sustainable Investment and Finance Association and
the Institutional Investors Group on Climate Change, to name but a few.
We continue to build objectives that are a balance of items that create solid
foundations for longer term change together with shorter-term actions that
will begin to make a real-world positive impact.
Our financial results over the first half of 2024 demonstrate that the sources
of value from the components of the "Chesnara fan" (a diagrammatic
illustration of value growth sources) remain robust and will continue to be a
reliable source of value from our in-force book into the future.
In addition, the outlook for acquisitions remains positive and our strong,
resilient capital and cash positions mean that we are well-placed to benefit
from inorganic opportunities as they arise.
Luke Savage,
Chair
9 September 2024
CHIEF EXECUTIVE OFFICER'S REPORT
In H1, the group has again generated EcV earnings and delivered strong cash
generation. Our people have continued to deliver on our major operation
programmes and our M&A pipeline remains positive.
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
The first half of 2024 has been another period of good execution against our
renewed strategy, which continues to focus on:
1. Running in-force insurance and pensions books
efficiently and effectively;
2. Seeking out and delivering value enhancing M&A
opportunities; and
3. Writing focused, profitable new business where we
are satisfied an appropriate return can be made.
We have c1 million customers across Chesnara and our people take pride in the
responsibility that comes with delivering for them every single day.
We have an ambitious change agenda underway across the group.
There has been a strong cross-business effort to ensure we successfully met
the requirements of the new Consumer Duty regulations for closed books by the
deadline of 31 July this year. This follows the successful implementation of
the Consumer Duty regulations for open books last year. Chesnara remains fully
supportive of the Duty and has been reassured throughout the process that the
work completed several years ago to support long-standing customers has
provided strong foundations to deliver the good outcomes and value for money
that underpin the Duty. There has been a small provision sustained from last
year's full accounts where we acknowledged there were some changes that would
improve the outcomes for a small segment of customers. We have confidence in
the fully funded implementation plan that will roll out the further
recommendations approved by the board to support the Duty.
Work is continuing at pace to migrate the majority of our UK policies to our
new operating platform with SS&C. In his Chair's Statement, Luke
highlighted the positive progress we are making with regards to the planned
transfer and migration of the UK protection book we recently acquired from
Canada Life. We continue to believe that the partnership with SS&C will
be a key enabler for the UK business to continue to deliver quality and cost
effective servicing, with the capacity and flexibility to support continued
M&A developments in the UK where we see good opportunities.
In Scildon, a significant programme of work is now largely complete which was
focused on improving the efficiency and usability of our Individual Life
platform. In Waard, the work has continued to embed the new Target Operating
Model (TOM) for the enlarged business following the acquisitions of Robein
Leven and the insurance portfolio from Conservatrix. And for Sweden, we have
seen the benefits of the work that the Movestic team has executed to enhance
the quality of our offering for distribution partners with strong new business
flows over the period.
As Luke also mentions, our group-wide sustainability programme is progressing
well and we announced new initial interim targets for financed emissions. We
are committed to a 50% reduction by 2030 in our scope 1 and 2 financed
emissions investments that are within our control or influence, which
represents a material component of our assets under management. We are
committed to work with partners and customers for those assets where we have
less control or influence, for example those where policyholders self-select
their own investments. We also remain strongly committed to net zero by 2050
for all our financed emissions and so our targets will expand over time to
include all asset classes.
Work has also begun on our transition plans which will help us in identifying
the more detailed actions we will take to tackle all our financed emissions
and will also factor in how we manage a just transition which considers the
needs of all stakeholders, including nature and biodiversity.
We have also been more actively engaging with a number of the agencies that
provide sustainability related ratings to ensure we understand their
methodologies and approaches better.
On M&A, we've continued to see a positive pipeline of opportunities across
the UK and Europe. Our teams have evaluated multiple opportunities over the
first half of the year, and this has included the performance of due diligence
on a number of portfolios and legal negotiation in relation to some, albeit
not to conclusion. We continue to materially invest in the support of our
M&A activity, remaining very active in our pursuit of opportunities and
will maintain our discipline and patience when executing.
On new business, Movestic has had a strong first half across both its unit
linked and custodian propositions with overall new business levels higher than
the first half of 2023. It's been a tougher market in the Netherlands for
our main term life product with overall new business lower compared to the
same period in 2023. It has been pleasing to see the team maintain their
disciplined approach to pricing against this more challenging market
backdrop. In the UK, post the acquisition of Sanlam Life and Pensions UK, we
have continued to see positive flows into our intermediated onshore bond
proposition.
Tom Howard joined us from Aviva in April. Tom has held a variety of senior
roles within Aviva plc, including Director of Mergers & Acquisitions for
Aviva Group and CFO for Aviva's Life and General Insurance business in
Ireland. Tom brings with him an extensive European actuarial and financial
reporting background and we're already seeing the benefits of his experience
and skill across both our M&A activity and as part of the H1 reporting
process.
Looking at our financial results, we have again shown strong cash generation
in this period, with commercial cash generation of £29.2m providing coverage
of the interim dividend, T2 debt servicing, and the working capital costs over
H1.
We undertook no material management actions during the period with cash
generation driven by positive economics and operating performance. We note
the potential for EIOPA's Solvency II reforms to support further cash
generation e.g. if the risk margin is reformed in the way we have seen in the
UK. We will keep investors updated as these reforms become more certain.
COMMERCIAL CASH GENERATION OF £29.2M EXCEEDS THE INTERIM DIVIDEND AND OTHER
CENTRAL COSTS.
Divisional commercial cash generation by territory (Δ)
(Δ) excluding FX consolidation impacts
£m
UK 23.2
Sweden 2.0
Netherlands 5.2
Divisional total 30.4
The Chesnara parent company cash (including holding companies) and instant
access liquidity fund balance stood at £88m at 30th June 2024. After
allowing for our planned divisional dividend receipts of £49m the adjusted
balance of £137m is £13m higher than our opening balance (31 Dec 2023
£124m). This provides us with substantial resources to finance future
acquisitions, sustainably fund the group dividend and service our Tier 2
debt. The group recently renegotiated its Revolving Credit Facility with
£150m of capacity available. And shareholders also supported our AGM
resolution allowing us to issue RT1 instruments up to an amount equal to one
third of our issued ordinary share capital (c£120m). This provides us with
even greater potential firepower.
Looking forward, we continue to have a strong line of sight to future cash
generation over the medium and longer term from the unwind of risk margin and
SCR, investment returns above risk free rates, wider synergies and management
actions. And that's before further potential benefits from new business and
further acquisitions.
THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTICULARLY THROUGH
M&A
Before allowing for the prior-year dividend and FX impacts, the group
generated Economic Value earnings of £20.2m (vs £32.6m for the first half of
2023 and adjusting for the impact of acquisitions in the period) and we saw
components of the "Chesnara Fan" growth model deliver positively in the
period. The 'Chesnara fan' illustrates the additional areas of growth
potential the group may benefit from that aren't fully reflected in our
Economic Value metric.
We have previously highlighted that over the medium term, we expect all
components of the growth model to be positive, although there can be a level
of shorter-term volatility in each element.
Although there are limitations to tracking the growth metrics over short time
periods, it remains useful to assess how the results for the period mapped
against the value growth components of the 'Chesnara fan'.
A key element of the growth model is real-world investment returns. The
reported EcV of the group assumes risk free returns on shareholder and
policyholder assets. Given the direct link to external market performance
this source of value tends to be the most volatile of the growth sources.
During the period, real-world returns added c£32m to EcV.
Over time, we expect improvements to operational effectiveness to be a source
of value creation, be that through M&A synergies, scale benefits or other
positive management actions (such as our recently announced partnership with
SS&C). This period saw growth resulting from commercial new business
profits of £4.9m.
It's worth noting that further value growth expectations from M&A are
often not recognised in the day one gains.
We have also grown our Funds Under Management (FuM) in the period, through the
addition of new business and growth in underlying asset values.
Growth in FuM
Funds Under Management £bn
2020 8.5
2021 9.1
2022 10.6
2023 11.5
Jun 2024 11.9
ROBUST & RESILIENT SOLVENCY
Group solvency has remained robust at 201%, materially above the normal
operating range we have disclosed to investors of 140-160%. And our
divisions have generated a positive operating surplus over the period. It's
worth reminding investors that the solvency ratio does not adopt any of the
temporary benefits available from Solvency II transitional arrangements,
although we do apply the volatility adjustment in our UK and Dutch
divisions. The ratio does include the benefit of the capital efficiencies
relating to the Tier 2 debt raised in 2022.
We expect to utilise this additional capital surplus as we undertake
acquisitions, which should result in the ratio reverting back to within the
robust and stable 140%-160% normal range.
Our strong cash generation and solvency position has meant that we have yet
again grown the interim dividend, this year by 3%. This growth rate is now
back above short and long-term rates of inflation and as Luke highlighted is
the 20th consecutive year of interim dividend growth. This is a track record
that we are very proud of and one that is almost unrivalled amongst our UK and
European listed peers
Solvency ratio
Solvency ratio %* Solvency surplus £m
2020 156 204
2021 152 191
2022 197 298
2023 205 351
Jun 2024 201 330
*Preferred operating solvency range = 140% to 160%
OUTLOOK
It has been pleasing to see continued strong cash and economic earnings
generation. Whilst a volatile macro-economic backdrop will continue to be a
material factor in all our markets, we remain confident that the Chesnara
business model will continue to generate cash across a wide variety of market
conditions, as it has done over its history.
We also remain positive on the outlook for further M&A where we remain
active and continue to see a positive pipeline of opportunities.
Our people have continued to deliver across a number of material operational
programmes and for our customers in the period. I thank them again for their
efforts.
We celebrated our 20th anniversary in May and increasing our interim dividend
for the 20th consecutive year places us in a very small group of companies to
have this track record. I look forward to continuing to deliver for our
investors and continue to believe there is a lot to look forward to here at
Chesnara.
Steve Murray,
Chief Executive Officer
9 September 2024
MANAGEMENT REPORT
OVERVIEW OF STRATEGY
Our strategy focuses on delivering value to customers and shareholders through
our three strategic pillars, executed across our three territories.
STRATEGIC OBJECTIVES
1. 2. 3.
MAXIMISE THE VALUE FROM EXISTING BUSINESS ACQUIRE LIFE AND PENSIONS BUSINESSES ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
Managing our existing customers fairly and efficiently is core to delivering Acquiring and integrating companies into our business model is key to Writing profitable new business supports the growth of our group and helps
our overall strategic aims. continuing our growth journey. mitigate the natural run-off of our book.
KPIs KPIs KPIs
Cash generation Cash generation EcV growth
EcV earnings EcV growth Commercial new business profit
Customer outcomes Customer outcomes Customer outcomes
Solvency
OUR CULTURE AND VALUES -
RESPONSIBLE RISK BASED MANAGEMENT
RESPONSIBLE RISK BASED MANAGEMENT FOR THE BENEFIT OF ALL OUR STAKEHOLDERS GOOD TREATMENT OF CUSTOMERS MAINTAIN ADEQUATE FINANCIAL RESOURCES PROVIDE A COMPETITIVE RETURN TO OUR INVESTORS ROBUST REGULATORY COMPLIANCE A JUST TRANSITION TO A SUSTAINABLE GROUP
BUSINESS REVIEW | UK
The UK division consists of the operating company Countrywide Assured plc is
largely closed to new business and therefore largely grows through investment
returns, positive demographic experience, strong cost control and periodic
acquisitions. The UK division has continued to write onshore bond business
following the acquisition of CASLP.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
As a largely closed book, the division creates value through managing the
following key value drivers: costs; policy attrition; investment return; and
reinsurance strategy.
In general, surplus regulatory capital emerges as the book runs off. The
level of required capital is closely linked to the level of risk to which the
division is exposed. Management's risk-based decision-making process seeks
to continually manage and monitor the balance of making value enhancing
decisions whilst maintaining a risk profile in line with the board's risk
appetite.
At the heart of maintaining value is ensuring that the division is governed
well from a regulatory and customer perspective.
INITIATIVES AND PROGRESS IN 2024
- In the first half of the year, financial markets had a positive
impact on the value growth of the UK division, through rising yields and
growth of policyholder funds.
- Work has progressed on the transition to the long-term strategic
partnership with Fin Tech market leader, SS&C Technologies. SS&C
will service the front-to-back-office operations for the majority of the UK
division, providing a modern platform that will improve the efficiency of the
existing business and establishes a solid platform to scale the business via
future acquisitions.
- The programme of works included in this transformation and
transition project is significant and is expected to conclude in 2025.
- The division has continued to support the group's acquisition
strategy by assessing M&A opportunities and processes, including due
diligence activity, as appropriate.
- The UK business settled its year end 2023 proposed dividend of
£35.0m to Chesnara plc in early July, and is reporting a closing
post-dividend solvency ratio of 171%.
- The division generated new business which contributed £1.0m
(£1.0m on a commercial new business basis) to EcV in the first half of the
year primarily from the onshore bond that is open to new business via third
party investment platforms.
FUTURE PRIORITIES
- Delivery of the division's transition and transformation
programme, which focuses on the end state migration of front-to-back-office
operations to SS&C for the majority of the UK division.
- Execute the 'fully funded plan' in relation to further actions
on Consumer Duty.
- Identify potential capital management actions, focusing on those
that generate the appropriate balance of value and cash generation.
- Support Chesnara in identifying and delivering UK acquisitions.
- Continue to grow new business volumes to drive further value
growth.
KPIs
Economic Value - UK
£m 2020 2021 2022 2023 Jun 2024
EcV 187.4 181.9 209.3 181.0 205.1
Cumulative dividends 33.5 61.0 117.0 117.0
Total 187.4 215.4 270.3 298.0 322.1
Cash generation - UK
£m 2020 2021 2022 2023 Jun 2024
Cash generation 29.5 27.4 40.8 45.0 19.9
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Delivering good customer outcomes is one of our primary responsibilities. We
strive to do this by providing good customer service, competitive fund
performance and offering overall fair value for money. We seek to offer
additional support to customers who may need it and provide easy to understand
information about our products and the benefits provided. We are committed to
meeting our regulatory responsibilities, including remaining operationally
resilient and maintaining a strong solvency position.
INITIATIVES AND PROGRESS IN 2024
- An ongoing focus of the division is to ensure that it complies
with the requirements of the FCA's "Consumer Duty". The business unit met
the requirements in relation to its open business by the regulatory deadline
of 31 July 2023 and the closed book operations achieved compliance with the
requirements needed by the deadline of 31 July 2024.
- Another important multi-year focus is to ensure compliance with
the FCA's "Operational Resilience" regulations by 31 March 2025. This remains
on track and has included supporting the PRA in its industry-wide data
collection programme.
- The partnership with SS&C is expected to benefit customers
through an improved service experience.
FUTURE PRIORITIES
- Continued focus on the operational resilience programme to
ensure the regulatory deadline of March 2025 is achieved.
- Continued focus on delivering good customer outcomes and
maintaining strong service performance from all customer-facing suppliers and
providers.
KPIs
Policyholder fund performance
12 months ended 12 months ended
30 Jun 2024 30 Jun 2023
CA Pension Managed 12.7% 1.0%
CWA Balanced Managed Pension 12.7% 1.0%
S&P Managed Pension 12.2% 0.5%
Benchmark - ABI Mixed Inv 40%-85% shares 11.3% 3.6%
SLP Managed Pension 10.1% 1.0%
Benchmark - ABI Mixed Inv 20%-40% shares 9.0% 0.2%
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 2024
- The division has supported the wider group's sustainability
programme over the first half of the year and will continue to focus on local
initiatives, including supporting staff with volunteering opportunities.
Recently, it has also become a signatory of the PRI (Principles of Responsible
Investment).
- David Brand retired as a director and as Chair of CA in March
2024. Mark Hesketh, who was already a non-executive director of CA, was
appointed as Chair in April 2024.
- The division is focused on ensuring that its governance and
oversight routines adapt to reflect the changes taking place in the business,
from the partnership to SS&C to the planned Part VII of the Canada Life
portfolio.
- CA has maintained oversight of its investment managers, holding
regular meetings with fund managers and ensuring asset allocations are in line
with its strategic objectives, including review of sustainability metrics.
FUTURE PRIORITIES
- Ensure appropriate governance arrangements are in place as the
division transitions the majority of its front-to-back-office operations to
SS&C.
- Continue to horizon scan for future regulatory changes.
- Continue engaging with our asset managers on progress towards
net zero and investing in positive solutions.
- Support the wider group-wide sustainability programme to
becoming a more sustainable group, including focusing on our operation's
social purpose, and ensuring the group's and division's reporting needs are
met.
KPIs
SOLVENCY RATIO: 171%
£m Solvency Ratio
31 Dec 2023 surplus 49.9 149%
Surplus generation 53.8
30 Jun 2024 surplus (pre dividend) 103.8 207%
2024 dividend (35.0)
30 Jun 2024 surplus 68.8 171%
BUSINESS REVIEW | SWEDEN
Our Swedish division consists of Movestic, a life and pensions business which
is open to new business. It offers personalised unit-linked pension and
savings solutions through brokers, together with custodian products via a
number of private banks and is well regarded within both communities.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Movestic creates value predominantly by generating growth in unit-linked Funds
Under Management (FuM), whilst ensuring a high-quality customer proposition
and maintaining an efficient operating model. FuM growth is dependent upon
positive client cash flows and positive investment performance. Capital
surplus is a factor of both the value and capital requirements and hence
surplus can also be optimised by effective management of capital.
INITIATIVES AND PROGRESS IN 2024
- Financial market development has been positive in the first half
of the year, which is reflected in the favourable returns on policyholders'
investment assets.
- During 2024, transfer activity increased with an effect on both
inward and outward transfer flows, though the level of transfers out is not
expected to remain at this level in the long term. Movestic has intensified
its retention initiatives during the period.
- Strong inflows in both the unit-linked and the custodian areas
exceed the prior year and has resulted in overall positive net client cash
flow despite the strain from continued outflows in unit-linked pensions.
- Movestic's solvency ratio remains strong at 142% (pre-dividend:
148%).
FUTURE PRIORITIES
- Progress the development of the digital pension platform to
support customers in all distribution channels.
- Continue working to increase the use of automation, streamline
processes, and improve administrative efficiency and control.
- Continue to build solid and long-term sustainable value creation
for customers and owners through a diversified business model with continued
profitable growth of volumes and market shares in selected segments.
- Remain focused on customer loyalty and providing attractive
offerings to both retain customers and reach more volumes on the transfer
market.
- Provide a predictable and sustainable dividend to Chesnara.
- Seek out opportunities to bring in additional scale through
M&A.
KPIs (all comparatives have been presented using 2024 exchange rates)
Economic Value
£m 2020 2021 2022 2023 Jun 2024
Reported value 205.2 223.3 185.9 189.8 193.9
Cumulative dividends 4.9 7.7 18.9 18.9
Total 205.2 228.2 193.6 208.8 212.8
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, licenced brokers and private banks.
INITIATIVES AND PROGRESS IN 2024
- During 2024, the Swedish business has continued to expand its
custodian offering by establishing new partnerships.
- To help customers plan their retirement, Movestic has developed
a unique digital service where customers can plan, start withdrawing and
change how they receive their occupational pension. An updated version was
launched in 2024 which enables customers with several years until retirement,
to start planning for their withdrawal.
- A new digital service that helps customers explore whether a
salary sacrifice pension is right for them was launched on the company
website.
- Further automation and a new customer service system have
enabled smoother administration as well as improved customer service. During
the first half of 2024, the digital process for receiving customer enquiries
also went through an improvement process.
- Movestic has further strengthened its digital platform and
connectivity with distribution partners, to deliver a smoother transfer
experience for customers, via new technological capacity through APIs to
partners within the custodian offering.
FUTURE PRIORITIES
- Focus on high quality service and smooth administrative
processes to ensure that Movestic is a partner that is easy to do business
with.
- Further strengthen the relationship with brokers as well as
expanding partnerships beyond the traditional broker community, for instance
the private banking sector.
KPIs (all comparatives have been presented using 2024 exchange rates)
Broker assessment rating (out of 5)
2019 2020 2021 2022 2023
Rating 3.5 3.3 3.6 3.8 3.8
POLICYHOLDER AVERAGE INVESTMENT RETURN:
10.7%
GOVERNANCE
BACKGROUND INFORMATION
Movestic operates to exacting regulatory standards and adopts a robust
approach to risk management.
Maintaining strong governance is a critical platform to delivering the various
value-enhancing initiatives planned by the division.
INITIATIVES AND PROGRESS IN 2024
- The new EU regulatory framework, 'Digital Operational Resilience
Act' (DORA) will come into force in January 2025. DORA is designed to improve
cybersecurity within the finance sector. Movestic has worked on identifying
and mapping critical processes and IT systems as part of a group-wide project.
- Analysis of the Global Minimum Tax (GMT) regulatory framework
continues, as the directive was implemented in Swedish law in January 2024.
- Corporate Sustainability Reporting Directive (CSRD), the EU
adopted new directive on sustainability reporting, became Swedish law in May
2024. Movestic falls within the thresholds for SMEs, which are not covered by
CSRD, but Movestic will continue its sustainability work within the reporting
area both internally and as part of the Chesnara group.
- During H1 David Brand retired as Chairman of the board and was
replaced by Eamonn Flanagan, already a member of the board. Additionally, CEO,
Sara Lindberg joined the board in May and David Rimmington resigned from the
board.
FUTURE PRIORITIES
- Proceed with the implementation of sustainability regulations.
- Continue to develop plans, adapt and monitor the company's
carbon footprint in order to support and continuously work towards the
Chesnara group agenda of net zero financed and operational emissions by 2050.
KPIs (all comparatives have been presented using 2024 exchange rates)
SOLVENCY RATIO: 142%
£m Solvency Ratio
31 Dec 2023 surplus 52.1 147%
Surplus generation 7.6
30 Jun 2024 surplus (pre dividend) 59.7 148%
2024 dividend (7.5)
30 Jun 2024 surplus 52.2 142%
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
As an "open" business, Movestic not only adds value from sales but as it gains
scale, it will become increasingly cash generative which will fund further
growth or contribute towards the group's attractive dividend. Movestic
continues to adopt a profitable pricing strategy.
INITIATIVES AND PROGRESS IN 2024
- Sales volumes were strong in the first half of the year, rising
by 44%.
- The division delivered a commercial new business profit of
£2.1m.
- Movestic will continue to develop its pension and savings and
risk insurance offerings to increase competitiveness and build customer
loyalty.
FUTURE PRIORITIES
- Keep offering modern and individually adapted solutions within
pension and savings and health insurance combined with related digital
services.
- Continue to strengthen distribution capacity within all channels
and work to launch new partner collaborations within all lines of business.
KPIs (all comparatives have been presented using 2024 exchange rates)
Occupational pension market share %
% 2019 2020 2021 2022 2023
Market share 7.0 4.7 3.6 4.1 4.4
New business profit
£m 2020 2021 2022 2023 2024
New business profit 1.4 3.8 3.1 2.8 2.1
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses deliver growth through our acquisitive closed book
business Waard, which seeks to acquire and integrate portfolios; and our open
book business Scildon, which seeks to write profitable term, investments and
savings business.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Both Waard and Scildon have a common aim to make capital available to the
Chesnara group to fund further acquisitions or to contribute to the dividend
and debt 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. Waard periodically
grows through delivering acquisitions.
- 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 2024
- Scildon's IT system improvement project is near completion with
cost efficiencies materialising in line with the business case.
- Scildon has changed its asset mix to provide a better interest
rate hedge, replacing short-duration government bonds with investments in
money market funds and increasing its investment in mortgage funds. Waard also
made changes to its asset mix to improve longer term returns.
- Waard paid a dividend of £6.8m (€8m) to Chesnara in July
2024.
- Both Waard and Scildon continue to have strong solvency
positions, inclusive of the use of the volatility adjustment, with Scildon at
194% and Waard at 304%.
FUTURE PRIORITIES
- Effective management of the closed book run-off in Waard to
enable ongoing dividend payments to Chesnara.
- Complete the IT improvement project and ensure the planned
efficiencies are delivered.
- Continue to focus on maintaining an efficient and cost-effective
operating model.
- Identify potential capital management actions, focusing on those
that generate the appropriate balance of value and cash generation.
- Support Chesnara in identifying and delivering Dutch
acquisitions.
KPIs (all comparatives have been presented using 2024 exchange rates)
Economic Value - The Netherlands
£m 2020 2021 2022 2023 Jun 2024
EcV 212.5 183.5 220.7 246.5 246.0
Cumulative dividends 5.1 14.4 14.4
Total 212.5 183.5 225.8 260.9 260.4
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 2024
- Scildon's focus remains on providing flexible solutions and
offerings to its clients, including sustainable options. This has involved a
continued focus on digitisation for term life insurance and investment-linked
insurance customers.
- Scildon has also worked to make the pension scheme more
transparent for customers through a digital platform.
- Waard continued work on digitalising its customer portal to both
make it easier for customers to access documents but also to reduce the level
of printing required, in turn helping the group decarbonise. This is
expected to be launched in the second half of 2024.
FUTURE PRIORITIES
- Regular engagement with customers to improve service quality and
to enhance and develop existing processes, infrastructure, and customer
experiences.
- Continue to review and progress appropriate initiatives to meet
the needs of customers.
KPIs (all comparatives have been presented using 2024 exchange rates)
Scildon client satisfaction rating (range of -100 to +100)*
Dec 2023 Jun 2024
Rating 27 32
Net Promoter Score (NPS) - introduced in 2023 and therefore there are no
earlier comparatives available. Scale ranges from -100 to +100 and measures
customer loyalty by looking at their likelihood of recommending a given
business.
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 2024
- Both business units have been progressing their sustainability
activity, including Scildon's commitment to positive solutions through its
partnership with JustDiggit. Waard started the first stage of its investment
transition plan to reduce its scope 3 emissions over the period.
- Work has continued on the implementation of the Corporate
Sustainability Reporting Directive (CSRD), which is an EU adopted new
directive on sustainability reporting effective from 2024. It will be applied
from 2025 by Scildon, though Waard is working to determine its implementation
date, given the complex implementation rules of the legislation. The double
materiality assessments are ongoing and will be finalised in the short term.
- In January 2024, Chesnara Holdings BV was dissolved resulting in
the Scildon, Waard Leven and Waard Schade moving to be directly owned by
Chesnara plc. The company was later de-registered in April 2024.
FUTURE PRIORITIES
- Progress the implementation of the Corporate Sustainability
Reporting Directive (CSRD).
- Finalise the double materiality assessments and gap analyses.
- Prepare the roadmap for investments to become net zero in 2050.
KPIs (all comparatives have been presented using 2024 exchange rates)
SOLVENCY RATIO: SCILDON 194%; WAARD 304%
Scildon
£m Solvency Ratio
31 Dec 2023 surplus 59.5 184%
Surplus generation 6.7
30 Jun 2024 surplus 66.2 194%
Waard
£m Solvency Ratio
31 Dec 2023 surplus 68.9 353%
Surplus generation (3.9)
30 Jun 2024 surplus (pre dividend) 65.0 328%
2024 dividend (6.8)
30 Jun 2024 surplus 58.2 304%
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
Scildon brings a "New business" dimension to the Dutch division. Scildon sells
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 company maintain scale and hence contributes to unit cost management.
INITIATIVES AND PROGRESS IN 2024
- Scildon continues to generate solid new business profits, with a
commercial new business result of £1.8m for the first half of 2024. The
overall term market volumes remain suppressed with pressure on pricing.
Scildon have retained their disciplined approach to pricing, albeit at lower
volumes.
- Scildon policy count continued to increase, closing the period
with nearly 238,000 policies. The market share for the Scildon term product
over the first half of 2024 was 10.3% (2023: 10.8%).
- In April 2024, Scildon launched a Stop Smoking lifestyle
proposition on new business reflecting its focus on expanding offerings to
customers.
FUTURE PRIORITIES
- Reassess and simplify the product portfolio and implement
further cost improvement initiatives to help increase new business profits
which are lower than previous years due to pricing competition.
KPIs (all comparatives have been presented using 2024 exchange rates)
Scildon - term assurance market share %
% Jun 2022 Dec 2022 Jun 2023 Dec 2023 Jun 2024
Market share 11.6 10.6 12.2 10.8 10.3
Scildon - new business profit
£m 2020 2021 2022 2023 Jun 2024
New business profit 8.5 5.2 6.2 5.3 1.8
BUSINESS REVIEW | acquire life and pension businesses
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of own
contacts and advisors and industry associates, utilising both group and
divisional management expertise as appropriate.
- We primarily focus on acquisitions in our existing territories,
although we will consider other territories should the opportunity arise and
this is supportive of our strategic objectives.
- We assess deals by applying well established criteria which
consider the impact on cash generation and Economic Value under best estimate
and stressed scenarios.
- We work cooperatively with regulators.
- The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group's risk profile.
- Transaction risk is reduced through stringent risk-based due
diligence procedures and the senior management team's acquisition experience
and positive track record.
- We fund deals with a combination of own resources, debt or
equity depending on the size and cash flows of each opportunity and commercial
considerations.
HOW WE ASSESS DEALS
Cash generation
- Collectively our future acquisitions must be suitably cash
generative to continue to support Chesnara delivering attractive dividends.
Value enhancement
- Acquisitions are required to have a positive impact on the
Economic Value per share in the medium term under best estimate and certain
more adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance,
customer interests with deals always giving full regard to Consumer Duty
responsibilities.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite the
financial returns must be suitably compelling.
ACQUISITION OUTLOOK
- Chesnara has been active during the first half of 2024 in
assessing a number of potential acquisitions. This included due diligence
activity. We continue to see a healthy flow of future opportunities across
the UK & European insurance market.
- We remain disciplined in evaluating acquisition opportunities
and utilise both internal and external expertise in order to assess risks and
benefits of potential opportunities for shareholders.
- Our expectation is that sales of portfolios will continue across
the UK & European market and our strong expertise and knowledge, good
regulatory relationships and the flexibility of our operating model mean that
Chesnara is very well placed to manage the additional complexity associated
with these portfolio transfers and provide beneficial outcomes for all
stakeholders. These transactions may not be suitable for all potential
consolidators, in particular those who do not have existing regulatory
licenses.
- Key drivers for owners to divest portfolios continue to remain
relevant and create a strong pipeline. These include alternative uses of
capital (e.g. return to investors or supporting other business lines),
operational challenges (e.g. end of life systems), management distraction,
regulatory challenges and wider business and strategic needs.
- We continue to have immediately available acquisition firepower
of over £200m, noting we seek to hold cash reserves to cover costs for 12
months (dividend, coupon and working capital). We will continue to explore
how we can increase our funding capability further, including consideration of
partnerships as well as equity and debt to ensure we can compete for larger
deals.
- Our financing considerations, when looking at new deals, are:
that we operate in our normal operating solvency range of 140 - 160%; we
maintain our investment grade rating; we retain liquid resources to cover the
dividend, coupon and working capital for approximately one year; and we
continue to have the capacity to finance smaller transactions without further
fundraising.
CAPITAL MANAGEMENT | Solvency II
Subject to ensuring other constraints are managed, surplus capital is a useful
proxy measure for liquid resources available to fund items such as dividends,
acquisitions or business investment.
GROUP SOLVENCY
SOLVENCY POSITION
£m 30 Jun 2024 31 Dec 2023
Own funds 656 684
SCR 326 333
Surplus 330 351
Solvency ratio % 201% 205%
SOLVENCY SURPLUS
£m
Group solvency surplus at 31 Dec 2023 351.0
UK 18.8
Movestic 0.2
Waard (2.7)
Scildon 6.7
Chesnara / consol adj (0.2)
Change in T2/T3 restrictions (24.9)
Exchange rates (5.8)
Dividends (13.0)
Group solvency surplus at 30 Jun 2024 330.2
Surplus:
The group has £330m of surplus over and above the capital requirements under
Solvency II, compared to £351m at the end of 2023. The group solvency ratio
has decreased from 205% to 201%. The change in surplus is explained in terms
of Own Fund and SCR movements below.
Own Funds:
Own Funds have fallen by £14m (pre-dividend). A key driver of this is a
rise in the Tier 2/3 restriction due to an increase in the value of Tier 2
& Tier 3 assets and a small FX loss, offset by some economic gains due to
positive equity markets and rising yields.
SCR:
The SCR has decreased by £7m, owing mainly to a fall in underwriting risk
capital, due to the rise in yields, and an increase in the loss absorbing
capacity of deferred tax in the UK.
Solvency II background
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds" (OF)
and this is measured in accordance with the rules of the newly adopted
Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital Requirement
(SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an
absolute surplus: OF less SCR.
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and includes a value
for future profits expected to arise from in-force policies.
The Own Funds valuation: A restriction is applied to reduce the aggregate
value of Tier 2 and 3 assets down to 50% of the reported SCR.
Contract boundaries: Solvency II rules do not allow for the recognition of
future cash flows on certain policies despite a high probability of receipt.
Risk margin: The Solvency II rules require a 'risk margin' liability which
is deemed to be above the realistic cost, particularly in respect of the
overseas divisions. The overseas risk margin is based on the original
methodology whereas the UK benefits from HMT's Solvency II reforms.
Restricted with profit surpluses: Surpluses in the group's with-profit funds
are not recognised in Solvency II Own Funds despite their commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted for the items
above. As such our Own Funds and EcV have many common characteristics and
tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term guarantee package
when Solvency II was introduced, are available to temporarily increase Own
Funds. Chesnara does not take advantage of such measures, however we do
apply the volatility adjustment within our Dutch and UK divisions.
How do Own Funds change?
Own Funds (and Economic Value) are sensitive to economic conditions. In
general, positive equity markets and increasing yields lead to OF growth and
vice versa. Other factors that improve OF include writing profitable new
business, reducing the expense base and improvements to lapse rates.
WHAT IS CAPITAL REQUIREMENT?
The solvency capital requirement can be calculated using a "standard formula"
or "internal model". Chesnara adopts the "standard formula".
There are three levels of capital requirement:
Minimum dividend paying requirement/risk appetite requirement
The board sets a minimum solvency level above the SCR which means a more
prudent level is applied when making dividend decisions.
Solvency Capital Requirement
Amount of capital required to withstand a 1 in 200 event. The SCR acts as an
intervention point for supervisory action including cancellation or the
deferral of distributions to investors.
Minimum Capital Requirement
The MCR is between 45% and 25% of the SCR. At this point Chesnara would need
to submit a recovery plan which if not effective within three months may
result in authorisation being withdrawn.
How does the SCR change?
Given the largest component of Chesnara's SCR is market risk, changes in
investment mix or changes in the overall value of our assets has the greatest
impact on the SCR. For example, equity assets require more capital than low
risk bonds. Also, positive investment growth in general creates an increase
in SCR. Book run-off will tend to reduce SCR, but this will be partially
offset by an increase as a result of new business.
The HMT's reforms to Solvency II were laid before parliament on 8 December
2023 and came into force on 31 December 2023. The reforms updated the risk
margin calculation for CA. EIOPA has proposed provisional reforms to
Solvency II. These reforms need to be presented to member states and the
European Parliament for approval. We continue to monitor any further
proposed changes closely and future financial statements will report on the UK
specific application of Solvency II as it diverges from the EU's regime.
We are well capitalised at both a group and divisional level. We have
applied the volatility adjustment in Scildon, Waard Leven and CA, but have not
used any other elements of the long-term guarantee package within the group.
The Volatility Adjustment is an optional measure that can be used in solvency
calculations to reduce volatility arising from large movements in bond
spreads.
The numbers that follow present the divisional view of the solvency position
which may differ to the position of the individual insurance company(ies)
within the consolidated numbers. Note that year end 2023 figures have been
restated using 30 June 2024 exchange rates in order to aid comparison at a
divisional level.
UK
£m 30 Jun 2024 31 Dec 2023
Own funds (post dividend) 166 152
SCR 97 103
Buffer 19 21
Surplus 49 29
Solvency ratio % 171% 149%
Surplus: £49.4m above board's capital management policy.
Dividends: Solvency position is stated after £35.0m proposed dividend.
Own Funds: Increased by £13.3m, mostly driven by positive economic
experience as a result of rise in equities and fall in credit spreads.
SCR: Decreased by £5.5m, with the key drivers being a reduction in
underwriting risks, due to the rise in yields, and an increase in LACDT, due
to a rise in deferred tax liabilities.
SWEDEN
£m 30 Jun 2024 31 Dec 2023
Own funds (post dividend) 177 164
SCR 125 112
Buffer 25 22
Surplus 27 30
Solvency ratio % 142% 147%
Surplus: £27.4m above board's capital management policy.
Dividends: Solvency position is stated after £7.5m (100 MSEK) proposed
dividend.
Own Funds: Increased by £12.9m largely owing to positive economic
movements, offset by a small operating strain and assumption changes.
SCR: Increased by £12.7m due to positive equity growth and moderate rise in
currency risks.
NETHERLANDS - WAARD
£m 30 Jun 2024 31 Dec 2023
Own funds (post dividend) 87 96
SCR 29 27
Buffer 10 10
Surplus 48 59
Solvency ratio % 304% 353%
Surplus: £48.3m above board's capital management policy.
Dividends: Solvency position stated after £6.8m proposed dividend.
Own Funds: Decreased by £9.5m, largely owing to an economic strain caused
by an increase in government bond spreads and the rise in interest rates.
SCR: Increased by £1.2m, mainly due to an increase in spread risk, due to
some proactive re-risking via an increase in corporate bond holdings, offset
by a reduction in counterparty default risk.
NETHERLANDS - SCILDON
£m 30 Jun 2024 31 Dec 2023
Own funds (post dividend) 137 131
SCR 70 71
Buffer 53 53
Surplus 13 6
Solvency ratio % 194% 184%
Surplus: £13.5m above board's capital management policy.
Dividends: No foreseeable dividend was proposed for 2024.
Own Funds: Increased by £5.7m driven by positive operating variances and
new business profits.
SCR: Decreased by £1.0m, chiefly consisting of an increase in spread risk,
owing to a rise in money market holdings, offset by a decrease in life
underwriting risks, due to rising yields.
CAPITAL MANAGEMENT | Sensitivities
The group's solvency position remains strong and we proactively evaluate the
main factors that can affect our solvency. The group's EcV, and cash
generation, both of which are derived from the group's solvency calculations,
are also sensitive to these factors.
The table below provides some insight into the immediate impact of certain
sensitivities that the group is exposed to, covering solvency surplus and
Economic Value. As can be seen, EcV tends to take the 'full force' of
adverse conditions immediately (where the impacts are calculated on the cash
flows for the life of our portfolios) whereas solvency is often protected in
the short term and, to a certain extent, the longer term due to compensating
impacts on required capital.
Tier 2 debt has a material impact on the reported sensitivities because, as
capital requirements move, the amount of the Tier 2 debt able to be recognised
in the Own Funds also moves. For example, where FX movements reduce the SCR,
we also experience a corresponding reduction in base Own Funds and Own Funds
relating to Tier 2 capital. Importantly though, the Tier 2 debt itself has
created more than sufficient additional headroom to accommodate this.
Whilst cash generation has not been shown in the table below, the impact of
these sensitivities on the group's solvency surplus has a direct read across
to the immediate impact on cash generation. Each individual column in the
table illustrates the estimated impact range (£m) of the respective
sensitivities and whether that impact is positive or negative.
Solvency ratio Solvency surplus EcV
Impact % Impact range £m Impact range £m
20% sterling appreciation 22.0% (17.4) to (7.4) (59.8) to (49.8)
20% sterling depreciation (12.9)% 18.4 to 28.4 75.7 to 85.7
25% equity fall 10.4% (63.8) to (33.8) (94.5) to (74.5)
25% equity rise (7.0)% 21.5 to 51.5 64.0 to 84.0
10% equity fall 3.8% (21.6) to (11.6) (36.7) to (26.7)
10% equity rise (2.3)% 11.5 to 21.5 26.0 to 36.0
1% interest rate rise 2.6% (4.6) to 5.4 (10.6) to (0.6)
1% interest rate fall (4.9)% (18.1) to 1.9 (10.3) to 4.7
50bps credit spread rise (4.9)% (21.6) to (11.6) (16.8) to (11.8)
25bps swap rate fall (4.5)% (15.7) to (5.7) (13.5) to (3.5)
10% mass lapse 1.2% (26.7) to (16.7) (39.6) to (29.6)
1% inflation (10.0)% (33.5) to (23.5) (28.9) to (18.9)
5% mortality increase (3.4)% (14.0) to (9.0) (13.8) to (8.8)
INSIGHT*
20% sterling appreciation: A material sterling appreciation reduces the
value of surplus in our overseas divisions and any overseas investments in our
UK entities, however this is partially mitigated by the group currency hedge
so the overall impact on solvency is reduced.
Equity sensitivities: The equity rise sensitivities cause both Own Funds and
SCR to rise, as the value of the funds exposed to risk is higher. The
increase in SCR can be larger than Own Funds, resulting in an immediate
reduction in surplus, depending on the starting point of the symmetric
adjustment. The converse applies to an equity fall sensitivity, although the
impacts are not fully symmetrical due to management actions and tax. The
Tier 2 debt value also changes materially in these sensitivities. The change
in symmetric adjustment can have a significant impact (25% equity fall:
-£25.3m to the SCR, 25% equity rise: +£19.3m to SCR). The EcV impacts are
more intuitive as they are more directly linked to Own Funds impact. CA and
Movestic contribute the most due to their large amounts of unit-linked
business, much of which is invested in equities.
Interest rate sensitivities: An interest rate fall has a more adverse effect
on group EcV than an interest rate rise. Group solvency is less exposed to
rising interest rates as a rise in rates causes capital requirements to fall,
increasing solvency.
50bps credit spread rise: A credit spread rise has an adverse impact on
surplus and future cash generation, particularly in Waard and 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 impact is on
Scildon due to the size of the non-linked book.
10% mass lapse: In this sensitivity Own Funds fall as there are fewer
policies on the books, thus less potential for future profits. This is
largely offset by a fall in SCR, although the amount of eligible Tier 2
capital also falls. The division most affected is Movestic as it has the
largest concentration of unit-linked business.
1% inflation rise: This sensitivity measures a permanent increase in
inflation in every future year (above existing valuation assumptions). Such
a rise in inflation increases the amount of expected future expenses. This
is capitalised into the balance sheet and hits the solvency position
immediately.
5% mortality increase: This sensitivity has an adverse impact on surplus and
cash generation, particularly for Scildon due to their term products.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that the
sensitivities modelled are deemed to be broadly similar (with the exception
that the 10% equity movements are naturally more likely to arise) in terms of
likelihood. Whilst sensitivities provide a useful guide, in practice, how
our results react to changing conditions is complex and the exact level of
impact can vary due to the interactions of events and starting position.
FINANCIAL REVIEW
Our key performance indicators provide a good indication of how the business
has performed in delivering its three strategic objectives.
CASH GENERATION
GROUP CASH GENERATION £19.6M 30 JUNE 2023: £11.1M
DIVISIONAL CASH GENERATION£18.8M 30 JUNE 2023: £2.3M
What is it?
Cash generation is calculated as being the movement in Solvency II Own Funds
over the internally required capital, excluding the impact of Tier 2 debt.
The internally required capital is determined with reference to the group's
capital management policies, which have Solvency II rules at their heart.
Cash generation is used by the group as a measure of assessing how much
dividend potential has been generated, subject to ensuring other constraints
are managed.
Why is it important?
Cash generation is a key measure, because it is the net cash flows to Chesnara
from its life and pensions businesses which support Chesnara's dividend-paying
capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
from existing business'. However, our cash generation is always managed in the
context of our stated value of maintaining strong solvency positions within
the regulated entities of the group.
Risks
The ability of the underlying regulated subsidiaries within the group to
generate cash is affected by a number of our principal risks and
uncertainties. Whilst cash generation is a function of the regulatory
surplus, as opposed to the IFRS surplus, it is impacted by similar drivers,
and therefore factors such as yields on fixed interest securities and equity
and property performance contribute significantly to the level of cash
generation within the group.
£m Jun 2024
UK 19.9
Sweden (3.6)
Netherlands 2.5
Divisional cash generation 18.8
Other group activities 0.8
Group cash generation 19.6
- Cash generation of £19.6m exceeded the prior year (30 June
2023: £11.1m) and includes a material adverse impact from the symmetric
adjustment of £9.3m (six months to 30 June 2023: £10.6m).
- The divisional result of £18.8m was driven by another period of
strong cash generation from the UK (£19.9m), with a healthy contribution from
Scildon also supporting the result. In Sweden, value growth delivered through
equity returns was exceeded by associated rises in SCR (and symmetric
adjustment), while the Waard result included a reduction in Own Funds due to
economic losses (negative impact of rising interest rates).
- The central group contribution includes the benefit of a cash
gain from our FX hedge, which has risen in value to offset some (£4.7m) of
the adverse FX movements experienced elsewhere in the group, helping to reduce
capital requirements. The reduction in SCR offsets the adverse impact of
consolidation adjustments and central development expenditure (including
M&A).
IFRS
PRE-TAX PROFIT: £13.4M 30 JUNE 2023: PRE-TAX £15.3M
TOTAL COMPREHENSIVE INCOME: £(6.7)M 30 JUNE 2023: £0.5M
What is it?
Presentation of the results in accordance with International Financial
Reporting Standards (IFRS) aims to recognise the profit arising from the
longer-term insurance and investment contracts over the life of the policy.
Why is it important?
The IFRS results form the core of reporting and hence retain prominence as a
key financial performance metric. We believe that, for Chesnara, the IFRS
results in isolation do not recognise the wider financial performance of the
business, hence the use of supplementary Alternative Performance Measures to
enhance understanding of financial performance.
Risks
IFRS 17 was effective from 1 January 2023 and has been applied in the
financial statements in section C. IFRS 17 introduces a concept of insurance
revenue which aims to reflect the insurance contract services provided in each
period in the income statement by establishing an explicit measure of future
profit (the Contractual Service Margin (CSM)) and provides a framework as to
how the CSM is recognised in a given period. The 'investment result' is
presented separately from the 'insurance result' on the face of the income
statement. Market volatility impacting the surplus assets will result in
volatility in investment result and the IFRS pre-tax profit/(loss). Foreign
currency fluctuations will further affect total comprehensive income.
£m 30 Jun 2024
Net insurance service result (3.3)
Net investment result 40.3
Fee, commission and other operating income 54.9
Other operating expenses (72.9)
Financing costs (5.6)
Profit before income taxes 13.4
Tax (12.4)
Forex & other (7.7)
Total comprehensive income (6.7)
- Profit before tax in the period of £13.4m includes a net
insurance service loss of £ £3.3m and an investment result of £40.3m (six
months to 30 June 2023: £10.5m and £24.6m profit respectively).
- The negative insurance service result has been driven primarily
by adverse experience and assumption changes on lines of business, termed
'onerous contracts', for which the CSM has been extinguished meaning such
losses must be taken to the P&L rather than to the CSM.
- The positive investment result in the year, is reflective of
equity market gains combined with rising yields.
ECONOMIC VALUE (EcV)
£508.0M 31 DECEMBER 2023: £524.7M
What is it?
Economic value (EcV) was introduced following the introduction of Solvency II
at the start of 2016, with EcV being derived from Solvency II Own Funds. EcV
reflects a market-consistent assessment of the value of the existing insurance
business, plus the adjusted net asset value of the non-insurance businesses
within the group.
Why is it important?
EcV aims to reflect the market-related value of in-force business and net
assets of the non-insurance business and hence is an important reference point
by which to assess Chesnara's value. A life and pensions group may typically
be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
business over time.
The EcV development of the Chesnara group over time can be a strong indicator
of how we have delivered to our strategic objectives, in particular the value
created from acquiring life and pensions businesses and enhancing our value
through writing profitable new business. It ignores the potential of new
business to be written in the future (the franchise value of our Swedish and
Dutch businesses) and the value of the company's ability to acquire further
businesses.
Risks
The Economic Value of the group is affected by economic factors such as equity
and property markets, yields on fixed interest securities and bond spreads.
In addition, the EcV position of the group can be materially affected by
exchange rate fluctuations. For example, a 20.0% weakening of the Swedish
krona and euro against sterling would reduce the EcV of the group within a
range of £50m-£60m, based on the composition of the group's EcV at 30 June
2024.
£m
EcV 31 Dec 2023 524.7
EcV earnings 20.2
Forex (13.3)
Pre-dividend EcV 531.6
Dividends (23.5)
EcV 30 Jun 2024 508.0
- EcV growth for the opening half of the year was £20.2m (prior
to the dividend payment and FX consolidation losses).
- This value growth was delivered through a variety of sources
across the group. Positive new business results contributed to operating
profits in the UK and Netherlands while, at a total level, economic growth was
muted as investment market conditions had a mixed impact on our divisions.
Growth in the UK and Sweden (predominantly through rising equities and yields)
was offset by losses in the Netherlands, owing to the negative impact of
changes in interest rates.
ECV EARNINGS
£20.2M 30 JUNE 2023: £32.6M excluding acquisitions
What is it?
In recognition of the longer-term nature of the group's insurance and
investment contracts, supplementary information is presented that provides
information on the Economic Value of our business.
The principal underlying components of the Economic Value result are:
- The expected return from existing business (being the effect of
the unwind of the rates used to discount the value in-force);
- Value added by the writing of new business;
- Variations in actual experience from that assumed in the opening
valuation;
- The impact of restating assumptions underlying the determination
of expected cash flows; and
- The impact of acquisitions.
Why is it important?
A different perspective is provided in the performance of the group and on the
valuation of the business. Economic Value earnings are an important KPI as
they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
have delivered against all three of our core strategic objectives. This
includes new business profits generated from writing profitable new business,
Economic Value profit emergence from our existing businesses, and the Economic
Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of factors,
including those highlighted within our principal risks and uncertainties and
sensitivities analysis. In addition to the factors that affect the IFRS
pre-tax profit and cash generation of the group, the EcV earnings can be more
sensitive to other factors such as the expense base and persistency
assumptions. This is primarily due to the fact that assumption changes in
EcV affect our long-term view of the future cash flows arising from our books
of business.
£m Jun 2024
Total operating earnings 0.9
Economic earnings 31.9
Other (12.6)
Total EcV earnings 20.2
- Economic returns in the period underpin the positive EcV
earnings result. In the UK and Sweden, earnings were delivered through equity
market growth and positive impact of rising yields. This offset economic
losses in the Dutch divisions, with movements in interest rates having an
adverse impact on bond holdings.
- Operating profits were reported in the Dutch divisions, however
the result was impacted by adverse transfer activity in Sweden and a small
loss in the UK resulting in overall operating earnings of £0.9m.
- The "Other" category includes risk margin movement, negative tax
impacts, the cost of Tier 2 coupon payments and central costs which are
primarily one-off costs associated with M&A activity.
CASH GENERATION
There is no reporting framework defined by the regulators for cash generation
and there is therefore inconsistency across the sector. We define cash
generation as being the movement in Solvency II own funds over and above the
group's internally required capital, which is based on Solvency II rules.
GROUP CASH GENERATION
£19.6M 30 JUNE 2023: £11.1M excluding the impact of acquisitions
Cash generation was £19.6m for the period, with a divisional cash total of
£18.8m, the result benefitting from positive equity growth (net of the
temporary net impact of the symmetric adjustment). Cash is generated from
increases in the group's solvency surplus, which is represented by the excess
of Own Funds held over management's internal capital needs. These are based
on regulatory capital requirements, with the inclusion of additional
'management buffers'.
Implications of our cash definition:
Positives
- Creates a strong and transparent alignment to a regulated
framework.
- Positive cash results can be approximated to increased dividend
potential.
- Cash is a factor of both value and capital and hence management
are focused on capital efficiency in addition to value growth and indeed the
interplay between the two.
Challenges and limitations
- In certain circumstances the cash reported may not be
immediately distributable by a division to group or from group to
shareholders.
- Brings the technical complexities of the SII framework into the
cash results e.g. symmetric adjustment, with-profit fund restrictions, model
changes etc, and hence the headline results do not always reflect the
underlying commercial or operational performance.
Jun 2024 £m Jun 2023 £m
Movement in Movement in management's capital requirement Forex Cash Cash generated / (utilised)
Own Funds impact generated / (utilised)
UK 13.3 6.6 - 19.9 10.0
Sweden 13.0 (15.3) (1.2) (3.6) (6.4)
Netherlands - Waard Group (1.5) (1.7) (1.6) (4.7) (0.4)
Netherlands - Scildon 5.8 1.6 (0.2) 7.2 (0.9)
Divisional cash generation / (utilisation) 30.6 (8.8) (3.0) 18.8 2.3
Other group activities (7.3) 8.1 - 0.8 8.8
Group cash generation / (utilisation) 23.3 (0.7) (3.0) 19.6 11.1
GROUP
- Other group activities include consolidation adjustments as well
as central costs and central SCR movements.
- Central costs include Tier 2 debt coupon payments (c£5m) and
uncovered central expenditure, of which a large proportion of exceptional
non-recurring development activity.
UK
- The UK reported another strong period of cash generation,
contributing £19.9m in the first half of 2024. This was delivered through
both Own Funds growth and a reduction in capital requirements. Economic
conditions (mainly the positive impact of rising yields) supported both the
growth in Own Funds and the reduction in SCR (from lower with profit guarantee
costs, offsetting a rise in symmetric adjustment).
SWEDEN
- In Movestic, the increase in SCR was primarily driven by market
risk related capital requirements. This exceeded the growth in Own Funds from
economic returns on unit linked business. This equity market-driven growth in
Own Funds also resulted in a larger increase in the symmetric adjustment.
NETHERLANDS - WAARD
- Waard recorded cash utilisation of £4.7m for the period. Own
Funds fell due to economic losses (mainly the negative impact on bond holdings
of rising interest rates), offsetting operating profits. The SCR increased
mainly from a rise in market risk through a higher symmetric adjustment, the
purchase of government bonds with longer duration increasing interest rate SCR
and proactive re-risking through an increase in corporate bond holdings
increasing spread SCR. The divisional result also includes an FX loss on
consolidation owing to sterling appreciation versus the euro.
NETHERLANDS - SCILDON
- Scildon generated a cash return £7.2m for the period. Positive
market conditions were the primary driver of Own Funds growth and higher
interest rates also had a positive impact on capital requirements (owing to
fall in life risk), reducing the SCR.
CASH GENERATION - ENHANCED ANALYSIS
The format of the analysis draws out components of the cash generation results
relating to technical complexities, modelling issues or exceptional corporate
activity. The results excluding such items are deemed to better reflect the
inherent commercial outcome (Commercial cash generation).
COMMERCIAL CASH GENERATION
£29.2M 30 JUNE 2023: £21.8M excluding the impact of acquisitions
UK SWEDEN NETHERLANDS NETHERLANDS SCILDON DIVISIONAL GROUP ADJ TOTAL
WAARD TOTAL
Base cash generation 19.9 (3.6) (4.7) 7.2 18.8 0.8 19.6
Symmetric adjustment 3.0 4.4 0.3 0.7 8.4 0.9 9.3
WP restriction look through 0.2 0.2 - 0.2
Commercial cash generation 23.2 0.8 (4.5) 8.0 27.4 1.7 29.2
Commercial cash generation of £29.2m is primarily supported by contributions
of £23.2m from the UK business and £8.0m from Scildon. Movestic made a
small £0.8m gain in commercial cash while Waard experienced a £4.5m loss.
Movements in FX rates during 2024 led to a loss of £3.0m to cash, however,
the group FX hedge has more than offset these currency impacts, providing a
cash benefit of £10.9m YTD.
UK
The key drivers of the UK result are economic gains from positive equity
performance and rising yields - the latter has benefitted both Own Funds and
required capital.
SWEDEN
The Swedish result, after removing a loss caused by the increase in the
symmetric adjustment, is slightly positive. The economic result is positive,
principally due to equity market gains, offset by the depreciation of Swedish
krona against sterling. The economic gains are offset by a change to lapse
assumptions and new business strain.
WAARD
Waard's negative cash result is primarily driven by increased yields and
spreads on certain bond holdings, along with the depreciation of the euro
against sterling. The negative economic result is offset somewhat by an
increase in the Tier 3 tax asset.
SCILDON
Scildon's commercial cash generation reflects both positive economic and
operating impacts. The economic gains are a result of equity and yield
movements, offset somewhat by the depreciation of the euro against sterling.
GROUP
The central group result is driven by positive economic experience and a
beneficial FX hedge movement, offset by central expenses. Central expenses
include, Tier 2 debt coupon payments and a range of development activity, such
as M&A programmes as well as investment in the business to support the
future growth of the group.
EcV EARNINGS
£20.2M 30 JUNE 2023: £32.6M
A period of strong EcV earnings have been delivered through new business gains
and economic profits.
Analysis of the EcV result in the period by earnings source:
£m 30 Jun 30 Jun 31 Dec
2024 2023¹ 2023¹
Expected movement in period 9.8 7.7 14.9
New business 2.5 4.7 4.4
Operating experience variances (4.1) (5.7) 14.9
Operating assumption changes (7.3) (5.4) (25.9)
Total operating earnings 0.9 1.3 8.3
Total economic earnings 31.9 31.6 42.9
Other non-operating variances (4.8) 7.2 (13.8)
Central costs (including one-off costs) (6.6) (4.7) (14.1)
Risk margin movement 2.4 0.9 1.1
Tax (3.6) (3.7) 6.3
EcV earnings 20.2 32.6 30.7
Acquisitions - 28.4 28.4
EcV earnings inc. acquisitions 20.2 61.0 59.1
¹Prior year comparators have been restated following a reallocation of
components, with total EcV earnings remaining unchanged.
Analysis of the EcV result in the year by business segment:
£m 30 Jun 30 Jun 31 Dec
2024 2023 2023
UK 13.7 11.0 31.4
Sweden 12.1 15.0 6.8
Netherlands 1.7 12.1 19.5
Group and group adjustments (7.3) (5.5) (27.0)
Acquisitions - 28.4 28.4
EcV earnings 20.2 61.0 59.1
Total economic earnings: The economic result continues to be the largest
component of the total EcV earnings, with a profit of £31.9m in the period.
The result is in line with our reported sensitivities and is driven by the
following key market movements:
Rising equity indices:
- FTSE All Share index increased by 5.2% (6 months to 30 June
2023: increased by 0.5%);
- Swedish OMX all share index increased by 7.9% (6 months to 30
June 2023: increased by 8.4%);
- The Netherlands AEX all share index increased by 16.2% (6 months
to 30 June 2023: increased by 10.2%); and
Widening credit spreads:
- UK AA corporate bond yields decreased to 0.67% (31 December
2023: 0.71%)
- European AA credit spreads decreased to 0.52% (31 December 2023:
0.63%).
Increased yields:
- 10-year UK gilt yields have increased to 4.19% (31 December
2023: 3.64%).
The EcV results continue to illustrate how sensitive the results are to
economic factors. As outlined in the past, we continue to be of the view that
short term volatility has limited commercial impact on the business and of
more importance is the fact that steady state, over the longer term, we expect
EcV growth in the form of real-world investment returns.
Total operating earnings: Operating earnings of £0.9m were reported in the
period, driven from positive results in the two Dutch businesses. Their
earnings were largely offset in Sweden, where adverse transfer activity
resulted in an operating loss for Movestic, and in the UK, where expense
strengthening resulted in adverse assumption variances leading to a small
operating loss.
Other costs: It is worth noting that the EcV earnings result of £20.2m
includes a number of negative components that represent positive investment in
the future and items that are non-recurring in nature. Examples of key items
in the period include:
- Central costs, primarily one-off costs associated with the
M&A strategy. Whilst the cost of this development investment is
recognised, EcV does not recognise the potential returns we expect from it.
- Tier 2 debt servicing costs - EcV does not recognise the benefit
of the capital or the potential for future value adding transactions that it
provides.
Looking at the results by division:
UK: The UK's positive earning result of £13.7m was driven by favourable
market conditions, predominantly the long-term impact of rising yields and
equities. Operating losses were small, with favourable fee income being offset
by expense strengthening. The result also includes non-recurring transition
and transformational costs relating to new outsourcing arrangements and
business integrations. The UK also reported higher than expected new business
earnings in the first half of the year, contributing to the result.
Sweden: Movestic recorded earnings of £12.1m for the opening half of the
year with the division benefitting from external economic factors. Rising
equity markets in Sweden and Europe have underpinned economic returns of
£22.6m. This more than outweighed an operating loss, owing mainly to adverse
transfer activity. Pricing pressures suppressed fee income and lower fund
rebates also contributed to the result. Modest new business profits (on an EcV
basis) of £0.8m were recorded, reflective of the continued competitive market
conditions and margin pressures.
Netherlands: Overall, the Dutch businesses reported growth of £1.7m in the
period, with operating profits mitigating economic losses. Across both
entities, economic losses were primarily the consequence of rising interest
rates, reducing the value of bonds holdings. Scildon generated EcV growth of
£4.6m, driven by positive operating variances, offset by the economic
experience variances explained above. New business profits were muted, due to
market pricing pressures and a smaller term market. In Waard, the negative
impact of economic conditions on the bond portfolio, led to an overall loss of
£2.7m, offsetting positive operating earnings delivered in the opening half
of the year.
Group: This component contains a variety of group-related expenses and
includes: non-maintenance related costs (such as acquisition activity
costs); as well as some material economic-related items such as financing
costs, primarily in relation to the Tier 2 debt interest costs, and positive
investment returns for the period.
EcV
£508.0M (31 DEC 2023: £524.7M)
The Economic Value of Chesnara represents the present value of future profits
of the existing insurance business, plus the adjusted net asset value of the
non-insurance business within the group. EcV is an important reference point
by which to assess Chesnara's intrinsic value.
Value movement: 1 Jan 2024 to 30 Jun 2024:
£m
EcV 31 Dec 2023 524.7
EcV earnings 20.2
Forex (13.3)
Pre-dividend EcV 531.6
Dividends (23.5)
EcV 30 Jun 2024 508.0
EcV earnings: EcV profits of £20.2m have been driven primarily by positive
market conditions over the period.
Foreign exchange: The closing EcV of the group reflects a foreign exchange
loss in the period, which is a consequence of sterling appreciation against
both the Swedish krona and also the euro since the start of the year.
Dividends: Under EcV, dividends are recognised in the period in which they
are paid. Dividends of £23.5m were paid during the first half of the year,
representing the final dividend from 2023.
EcV by segment at 30 Jun 2024
£m
UK 205.1
Sweden 193.9
Netherlands 246.0
Other group activities (136.9)
EcV 30 Jun 2024 508.0
The above table shows that the EcV of the group is diversified across its
different markets.
EcV to Solvency II:
£m
EcV 30 Jun 2024 508.0
Risk margin (22.4)
Contract boundaries 1.8
Tier 2 debt 200.00
RFF & Tier 2/3 restrictions (25.7)
Deferred tax asset adjustment 7.7
Dividends (13.0)
SII Own Funds 30 Jun 2024 656.4
Our EcV is based on a Solvency II assessment of the value of the business but
adjusted for certain items where it is deemed that Solvency II does not
reflect the commercial value of the business. The above waterfall shows the
key difference between EcV and SII, with explanations for each item below.
Risk margin: Solvency II rules applying to our European businesses require a
significant 'risk margin' which is held on the Solvency II balance sheet as a
liability, and this is considered to be materially above a realistic cost. We
therefore reduce this margin for risk for EcV valuation purposes from being
based on a 6% (UK: 4%) cost of capital to a 3.25% cost of capital. On our UK
business, the Solvency II reform risk tapering is also reversed.
Contract boundaries: Solvency II rules do not allow for the recognition of
future cash flows on certain in-force contracts, despite the high probability
of receipt. We therefore make an adjustment to reflect the realistic value
of the cash flows under EcV.
Ring-fenced fund restrictions: Solvency II rules require a restriction to be
placed on the value of surpluses that exist within certain ring-fenced
funds. These restrictions are reversed for EcV valuation purposes as they
are deemed to be temporary in nature.
Dividends: The interim dividend for 2024 of £13.0m is recognised for SII
regulatory reporting purposes. It is not recognised within EcV until it is
actually paid.
Tier 2: The Tier 2 debt is treated as "quasi equity" for Solvency II
purposes. For EcV, consistent with IFRS, we continue to report this as debt.
Under SII this debt is recognised at fair value, while for EcV this remains at
book value.
Tier 3: Under Solvency II the eligibility of Tier 3 Own Funds is restricted in
accordance with regulatory rules. For EcV the Tier 3 Own Funds are recognised
at an impaired value.
.
IFRS BALANCE SHEET
The transition to IFRS 17 is now fully embedded in the reporting of the
group's IFRS results and balance sheet. As at 30 June 2024, total net equity
is £330m and the CSM, which represents unearned future insurance profits, is
£167m (net of reinsurance).
HOW THE CSM HAS MOVED IN THE PERIOD
£m
CSM: 31 Dec 2023 166.5
Interest accreted to CSM 2.0
Assumption & experience variances 7.7
New business CSM 3.0
Release of profit (9.0)
Foreign exchange rate impacts (3.0)
CSM: 30 Jun 24 167.2
The group CSM has slightly increased in the first half of 2024.
Positive experience and assumption changes across the group have added £7.7m
of CSM. New business in Scildon has also added £3.0m of CSM, reflecting the
future profits arising on profitable new business recognised in the period.
These additions broadly offset the £9.0m reduction, which reflects the
release to profit in the period as the insurance services are provided.
Other smaller movements include the impact of foreign exchange and the
"interest" on unwinding the discounting that is embedded within the opening
CSM valuation.
CSM values are shown net of reinsurance but gross of tax. When calculating the
IFRS capital base a net of reinsurance and net of tax figure is used. The
equivalent net of reinsurance and tax movement of CSM during the six months to
30 June 2024 is £0.4m
HOW DOES IFRS 17 COMPARE TO SOLVENCY II AND ECV?
EcV and IFRS share a number of common principles. However, for investment
contracts, expected future profits on existing policies are not recognised in
the IFRS balance sheet, with profits being reported as they arise. This
differs to the approach in EcV, where these future profits are fully
recognised on the balance sheet, subject to contract boundaries.
We believe that due to the hybrid nature of the business, EcV and Solvency II,
alongside cash generation, continue to give a more holistic view of the
financial dynamics of the group and are therefore the key metrics that
management use to manage the business.
LEVERAGE
Applying the Fitch gearing definition of debt divided by debt plus equity,
with the equity denominator adding back the net of tax CSM liability, the
gearing of the group as at 30 June 2024 was 30.4% (31 December 2023: 29.2%).
IFRS INCOME STATEMENT
IFRS PRE-TAX PROFIT
£13.4M 30 JUNE 2023 : £15.3M
IFRS TOTAL COMPREHENSIVE INCOME
£(6.7)M 30 JUNE 2023 : £(0.5)M
Analysis of IFRS result between net insurance service and net investment
results:
30 June 24 30 June 23 31 Dec 23
£m £m £m
Net insurance service result (3.3) 10.5 (5.1)
Net investment result 40.3 24.6 71.7
Fee, commission and other operating income 54.9 47.4 89.4
Other operating expenses (72.9) (65.7) (149.9)
Financing costs (5.6) (5.5) (11.0)
Profit arising on business combinations and portfolio acquisitions - 4.0 6.7
Profit before income taxes 13.4 15.3 1.8
Income tax (charge)/credit (12.4) (0.6) 16.9
Profit for the period after tax 1.0 14.7 18.7
Foreign exchange (loss)/gain (8.2) (15.2) (7.8)
Other comprehensive income 0.5 - (0.6)
Total comprehensive income (6.7) (0.5) 10.3
Movement in IFRS capital base
Opening IFRS capital base 487.4 469.2 469.2
Movement in CSM (net of reinsurance and tax) 0.4 44.1 42.4
Total comprehensive income (6.7) (0.5) 10.3
Other adjustments made directly to shareholders' equity 0.5 0.4 0.9
Dividend (23.5) (22.8) (35.4)
Closing IFRS capital base 458.1 490.4 487.4
IFRS REPORTING CATEGORY INSIGHT
Net insurance service result The net insurance service result of £3.3m loss can be broken down into the
following elements:
- gains from the release of risk adjustment and CSM of £11.2m (six months to
30 June 2023: £12.4m). These gains represent a healthy and consistent source
of future profits for the group.
- losses of £14.5m (six months to 30 June 2023: £1.9m loss) caused by
experience impacts and loss component effects where portfolios of contracts
with no CSM have suffered adverse impacts that would otherwise be offset in
the balance sheet if the CSM for those portfolios were positive. In this
reporting period, a variety of different factors have contributed to the
negative result, some of which will have offsetting amounts in the investment
result.
The net insurance service result comprises the revenue and expenses from
providing insurance services to policyholders and ceding insurance business to
reinsurers and is in respect of current and past service only. Assumption
changes, that relate to future service, are therefore excluded from the
insurance result (as they adjust the CSM), unless the CSM for a given
portfolio of contracts falls below zero; thereby in a 'loss component'
position. Economic impacts are also excluded from the insurance service
result.
Movement in CSM During the period to 30 June 2024, the gross of tax CSM has increased by
£0.7m to £167.2m. The key components of this increase are £3.0m of
additional CSM arising from new business within Scildon and positive
experience changes across all divisions which increased the CSM by £7.7m
These amounts are offset by £9.0m of CSM released to the income statement.
The remaining CSM will be earned over the coverage period of the policies to
which it relates, and the expected earnings pattern is such that after 10
years more than 40% will remain to be earned.
The movement in CSM is important to consider alongside the income statement.
New CSM represents future profits that are expected to be released to the
income statement over time and whilst a lot of the costs associated with
generating this new CSM are recognised in the year, the expected profit is
deferred over the life of the products.
Net investment result The investment result of £40.3m in the year to date reflects the positive
market conditions in the period, with equity market gains combined with rising
yields.
The UK investment result includes £8.1m in respect of policyholder tax
deductions on investment contracts which will have a corresponding contra
impact within the tax line. The effect of locked in discount rates has also
contributed £3.3m, partly offset by negative loss component impacts in the
insurance service result.
The net investment result contains the investment return earned on all assets
together with the financial impacts of movements in insurance and investment
contract liabilities.
Fee, commission and other operating income Fee, commission and other operating income shows an improvement on the 2023
comparative, but this is in part due to increased fee income in the form of
yield tax deducted from policyholders in Movestic (£20.0m for the six months
to 30 June 2024 and £11.7m for the six months to 30 June 2023) as a result of
improving economic factors, with a corresponding offset within other operating
expenses.
The most significant item in this line is the fee income that is charged to
policyholders in respect of the asset management services provided for
investment contracts. There is no income in respect of insurance contracts in
this line, as this is all now reported in the insurance result
Other operating expenses The expenses incurred in the first six months of 2024 are higher than the
corresponding six months in 2023, driven mainly by the increased policyholder
yield tax from the impact of stronger market on unit linked funds in Movestic.
This offsets the equivalent value within the fee, commission and other
operating income line above.
Other operating expenses consist of costs relating to the management of the
group's investment business, non-attributable costs relating to the group's
insurance business and other certain one-off costs such as project costs.
Other items of note are the amortisation of intangible assets in respect of
investment business and the payment of yield tax relating to policyholder
investment funds in Movestic, for which there is a corresponding income item
within the fee income line.
Financing costs This predominantly relates to the cost of servicing our Tier 2 corporate debt
notes which were issued in early 2022.
Profit arising on business combinations and portfolio acquisitions During 2023, Chesnara successfully completed the acquisition of the insurance
portfolio of Conservatrix, a specialist provider of life insurance products in
the Netherlands. This gave rise to a day 1 gain which can be found within
the 2023 income statement. There has been no equivalent gain for 2024.
Foreign exchange The IFRS result of the group reflects a foreign exchange loss in the period, a
consequence of sterling appreciation, particularly against the Swedish krona.
The resulting gain in respect of existing foreign exchange rate hedges can be
seen within the investment result.
Other comprehensive income This represents the impact of movements in the valuation of land and buildings
held in our Dutch division.
Income tax The income tax expense is mainly the result of a UK deferred tax charge driven
by utilisation of 'excess E' (brought forward losses) against the current year
Income tax consists of both current and deferred taxes. tax charge.
RISK MANAGEMENT
Managing risk is a key part of our business model. We achieve this by
understanding the current and emerging risks to the business, mitigating them
where appropriate and ensuring they are appropriately monitored and managed.
HOW WE MANAGE RISK
RISK MANAGEMENT SYSTEM
The risk management system supports the identification, assessment, and
reporting of risks to monitor and control the probability and/or impact of
adverse outcomes within the board's risk appetite or to maximise realisation
of opportunities.
Strategy: The risk management strategy contains the objectives and principles
of risk management, the risk appetite, risk preferences and risk tolerance
limits.
Policies: The risk management policies implement the risk management strategy
and provide a set of principles (and mandated activities) for control
mechanisms that take into account the materiality of risks.
Processes: The risk management processes ensure that risks are identified,
measured/ assessed, monitored and reported to support decision making.
Reporting: The risk management reports deliver information on the material
risks faced by the business and evidence that principal risks are actively
monitored and analysed and managed against risk appetite.
Chesnara adopts the "three lines of defence" model with a single set of risk
and governance principles applied consistently across the business.
In all divisions we maintain processes for identifying, evaluating and
managing the material risks faced by the group, which are regularly reviewed
by the divisional and group senior leadership teams and 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 of certain adverse events
occurring separately or in combination. The results, conclusions and any
recommended actions are included within divisional and group ORSA Reports to
the relevant boards. There is a strong correlation between these adverse
events and the risks identified in 'Principal risks and uncertainties'. The
outcome of this stress testing provides context against which the group and
divisions 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 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.
On the recommendation of the Audit & Risk Committee 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.
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. Senior Management are responsible for
the day-to-day implementation of the Risk and Control Board Policies. Subject
to the materiality of changes, the Chesnara board approves the review, updates
and attestation of these policies at least annually.
Risk Identification
The group maintains a register of risks which are specific to its activity and
scans the horizon to identify potential risk events (e.g. political; economic;
technological; environmental, legislative & social).
On an annual basis the board approves on the recommendation of the Audit &
Risk Committee 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 relevant
boards, 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.
The primary objective of the ORSA is to support the company's strategic
decision-making, by providing insights into the company's risks profile over
the business planning horizon. Effective ORSA reporting supports the board, in
its role of protecting the viability and reputation of the company, reviewing
and challenging management's strategic decisions and recommendations.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of and
attestation to the effectiveness of the Risk Management System. The assessment
considers the extent to which the Risk Management System is embedded.
The Chesnara board is responsible for monitoring the Risk Management System
and its effectiveness across the group. The outcome of the annual review is
reported to the group board which make decisions regarding its further
development.
CLIMATE CHANGE RISK WITHIN CHESNARA'S RISK FRAMEWORK
Climate change is not considered as a standalone principal risk. Instead,
the risks arising from climate change are integrated through existing
considerations and events within the framework. The following information has
been updated to reflect Chesnara's latest views on the potential implications
of climate change risk and wider developments and activity in relation to
Environmental, Social and Governance (ESG).
Chesnara has embedded climate change risk within the group's Risk Framework
and includes a detailed assessment as part of the group's regular ORSA
exercise, concluding that the group is not currently materially exposed to
climate change risk. However, Chesnara is not complacent about the wider risks
arising from climate change and the broader sustainability agenda, including
strategic, reputational and operational risks, some of which are material
risks for the group.
GEOPOLITICAL RISK
Geopolitical risk continues to create a greater level of uncertainty across
the group risk profile. To name some examples, the ongoing conflict between
Ukraine and Russia, unrest in the Middle East and growing tensions between
China and Taiwan all continue to be areas of emerging risk for Chesnara group,
in the sense that these are evolving situations which have potential
implications for Chesnara's Principal risks.
During the course of 2024, more than 40 countries, accounting for over 40
percent of the world are expected to hold national elections, making it the
largest year for global democracy. Against a backdrop of geopolitical
tensions and economic instability, significant political change is happening:
• elections in Europe have seen far-right
parties make serious gains, including the Netherlands and France
• the UK's Conservative Party were heavily
defeated after 14 years in power
• the US election could see the comeback of
former President Donald Trump, with Kamala Harris replacing Joe Biden as
Democratic Party candidate
MACROECONOMIC VOLATILITY
Geopolitical instability and conflict continue to be a significant risk to
global economic growth. Economic volatility and uncertainty remain high,
although interest rates in the UK and Europe have recently seen 25 bps cuts,
it is anticipated a cautious approach will be taken to any further cuts with
the key focus on keeping inflation low and stable.
principal risks and uncertainties
The following tables outline the principal risks and uncertainties of the
group. It has been drawn together following regular assessment, performed by
the Audit & Risk Committee, of the principal risks facing the group,
including those that would threaten its business model, future performance,
solvency or liquidity. The impacts are not quantified in the tables.
However, by virtue of the risks being defined as principal, the impacts are
potentially significant. Those risks with potential for a material financial
impact are covered within the sensitivities.
INVESTMENT AND LIQUIDITY RISK
DESCRIPTION Exposure to financial losses or value reduction arising from adverse movements
in currency, investment markets, counterparty defaults, or through inadequate
asset liability matching.
RISK APPETITE The group accepts this risk but has controls in place to prevent any increase
or decrease in the risk exposure beyond set levels. These controls will result
in early intervention if the amount of risk approaches those limits.
POTENTIAL IMPACT Market risk results from fluctuations in asset values, foreign exchange rates
and interest rates and has the potential to affect the group's ability to fund
its commitments to customers and other creditors, as well as pay a return to
shareholders.
CLIMATE CHANGE RISK With greater global emphasis being placed on environmental and social factors
when selecting investment strategies, the group has a particular emerging
exposure to 'transition risk' arising from changing preferences and influence
of, in particular, institutional investors. This has the potential to result
in adverse investment returns on any assets that perform poorly as a result of
'ESG transition'. Chesnara has established a 'Sustainability Programme' to
embed Chesnara's sustainability strategy.
GEOPOLITICAL RISK Ongoing global conflict, including more recently in the Middle East brings
continued volatility to financial markets. This creates additional risk of
poor mid-term performance on shareholder and policyholder assets.
REGULATORY CHANGE RISK
DESCRIPTION The risk of adverse changes in industry practice/regulation, or inconsistent
application of regulation across territories.
RISK APPETITE The group aims to minimise any exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Chesnara currently operates in three regulatory domains and is therefore
exposed to potential for inconsistent application of regulatory standards
across divisions, such as the imposition of higher capital buffers over and
above regulatory minimum requirements. Potential consequences of this risk for
Chesnara are the constraining of efficient and fluid use of capital within the
group or creating a non-level playing field with respect to future new
business/acquisitions.
Regulatory developments continue to drive a high level of change activity
across the group, with items such as Consumer Duty, Operational Resilience,
Climate Change/ESG and Digital Operational Resilience Act (DORA) being
particularly high profile. Such regulatory initiatives carry the risk of
expense overruns should it not be possible to adhere to them in a manner that
is proportionate to the nature and scale of Chesnara's businesses. The group
is therefore exposed to the risk of:
- incurring one-off costs of addressing regulatory change as well as any
permanent increases in the cost base in order to meet enhanced standards;
- erosion in value arising from pressure or enforcement to reduce future
policy charges;
- erosion in value arising from pressure or enforcement to financially
compensate for past practice; and
- regulatory fines or censure in the event that it is considered to have
breached standards or fails to deliver changes to the required regulatory
standards on a timely basis.
ACQUISITION RISK
DESCRIPTION The risk of failure to source acquisitions that meet Chesnara's criteria or
the execution of acquisitions with subsequent unexpected financial losses or
value reduction.
RISK APPETITE Chesnara has a patient approach to acquisition and generally expects
acquisitions to enhance EcV and expected cash generation in the medium term
(net of external financing), though each opportunity will be assessed on its
own merits.
POTENTIAL IMPACT The acquisition element of Chesnara's growth strategy is dependent on the
availability of attractive future acquisition opportunities. Hence, the
business is exposed to the risk of a reduction in the availability of suitable
acquisition opportunities within Chesnara's current target markets, for
example arising as a result of a change in competition in the consolidation
market or from regulatory change influencing the extent of life company
strategic restructuring.
Through the execution of acquisitions, Chesnara is also exposed to the risk of
erosion of value or financial losses arising from risks inherent within
businesses or funds acquired which are not adequately priced for or mitigated
as part of the transaction.
DEMOGRAPHIC EXPERIENCE RISK
DESCRIPTION Risk of adverse demographic experience compared with assumptions (such as
rates of mortality, morbidity, persistency etc.)
RISK APPETITE The group accepts this risk but restricts its exposure, to the extent
possible, through the use of reinsurance and other controls. Early warning
trigger monitoring is in place to track any increase or decrease in the risk
exposure beyond a set level, with action taken to address any impact as
necessary.
POTENTIAL IMPACT In the event that demographic experience (rates of mortality, morbidity,
persistency etc.) varies from the assumptions underlying product pricing and
subsequent reserving, more or less profit will accrue to the group.
The effect of recognising any changes in future demographic assumptions at a
point in time would be to crystallise any expected future gain or loss on the
balance sheet.
If mortality or morbidity experience is higher than that assumed in pricing
contracts (i.e. more death and sickness claims are made than expected), this
will typically result in less profit accruing to the group.
If persistency is significantly lower than that assumed in product pricing and
subsequent reserving, this will typically lead to reduced group profitability
in the medium to long-term, as a result of a reduction in future income
arising from charges on those products. The effects of this could be more
severe in the case of a one-off event resulting in multiple withdrawals over a
short period of time (a "mass lapse" event).
MACRO-ECONOMIC VOLATILITY Cost of living pressures could give rise to higher surrenders and lapses
should customers face personal finance pressures and not be able to afford
premiums or need to access savings. Currently there has been no evidence of
changes in behaviours. Chesnara continues to monitor closely and respond
appropriately.
Any prolonged stagnation of the property market could reduce protection
business sales compared to plan, particularly in the Netherlands.
EXPENSE RISK
DESCRIPTION Risk of expense overruns and unsustainable unit cost growth.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group is exposed to expenses being higher than expected as a result of
one-off increases in the underlying cost of performing key functions, or
through higher inflation of variable expenses.
A key underlying source of potential increases in regular expense is the
additional regulatory expectations on the sector.
For the closed funds, the group is exposed to the impact on profitability of
fixed and semi-fixed expenses, in conjunction with a diminishing policy
base.
For the companies open to new businesses, the group is exposed to the impact
of expense levels varying adversely from those assumed in product pricing.
Similar, for acquisitions, there is a risk that the assumed costs of running
the acquired business allowed for in pricing are not achieved in practice, or
any assumed cost synergies with existing businesses are not achieved.
MACRO-ECONOMIC VOLATILITY The cost of living and energy crisis has driven increases in material supplier
costs and wage inflation remains high, directly impacting the group's internal
costs. Consideration is being continually given to balance the desire to grow
the business and ensuring we have the capabilities and capacity to support
that growth whilst continuing to keep tight cost control and also seeking
opportunities to exploit efficiencies/ synergies.
OPERATIONAL RISK
DESCRIPTION Significant operational failure/business continuity event.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group and its subsidiaries are exposed to operational risks which arise
through daily activities and running of the business. Operational risks may,
for example, arise due to technical or human errors, failed internal
processes, insufficient personnel resources or fraud caused by internal or
external persons. As a result, the group may suffer financial losses, poor
customer outcomes, reputational damage, regulatory intervention or business
plan failure.
Part of the group's operating model is to outsource support activities to
specialist service providers. Consequently, a significant element of the
operational risk arises within its outsourced providers.
Operational resilience remains a key focus for the business and high on the
regulatory agenda following the regulatory changes published by the BoE, PRA
and FCA. Chesnara continues to progress activity under the UK operational
resilience project.
DORA entered into force January 2023 and will apply from January 2025. It aims
at strengthening the IT security of financial entities such as banks,
insurance companies and investment firms and making sure that the financial
sector in Europe is able to stay resilient in the event of a severe
operational disruption.
IT / DATA SECURITY & CYBER RISK
DESCRIPTION Risk of IT/ data security failures or impacts of malicious cyber-crime
(including ransomware) on continued operational stability.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Cyber risk is a growing risk affecting all companies, particularly those who
are custodians of customer data. The most pertinent risk exposure relates to
information security (i.e. protecting business sensitive and personal data)
and can arise from failure of internal processes and standards, but
increasingly companies are becoming exposed to potential malicious
cyber-attacks, organisation specific malware designed to exploit
vulnerabilities, phishing attacks etc. The extent of Chesnara's exposure to
such threats also includes third party service providers.
The potential impact of this risk includes financial losses, inability to
perform critical functions, disruption to policyholder services, loss of
sensitive data and corresponding reputational damage or fines.
GEOPOLITICAL RISK Geopolitical unrest heightens the risk of cyber-crime campaigns, particularly
originating from Russia and there continues to be an increased trend in state
sponsored cyber-attacks from Russia following Sweden officially joining NATO.
Although Chesnara is not considered to be a direct target of any such
campaigns, all business units have confirmed that they have increased
monitoring and detection/ protection controls in relation to the increased
threat.
NEW BUSINESS RISK
DESCRIPTION Adverse new business performance compared with projected value.
RISK APPETITE Chesnara does not wish to write new business that does not generate positive
new business value (on a commercial basis) over the business planning horizon.
POTENTIAL IMPACT If new business performance is significantly lower than the projected value,
this will typically lead to reduced value growth in the medium to long-term. A
sustained low level performance may lead to insufficient new business profits
to justify remaining open to new business.
MACRO-ECONOMIC VOLATILITY Increased expenses and price pressure remains a risk for the ongoing viability
of writing profitable new business across the group and the Swedish transfer
market remains active following regulatory changes which give greater transfer
freedom.
There is a risk that this persists longer than expected resulting in lower
sales than expected in the business plan.
Market share is currently being maintained in the Netherlands with activity to
look at some broader wealth products.
In Sweden action is being taken to diversify distribution partners whilst
expanding product offering across unit linked, custodian and life & health
markets.
And there is now a meaningful contribution from the UK, primarily through the
onshore bond wrapper acquired as part of the Sanlam Life and Pensions deal
which remains open to new business.
REPUTATIONAL RISK
DESCRIPTION Poor or inconsistent reputation with customers, regulators, investors, staff
or other key stakeholders/counterparties.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT The group is exposed to the risk that litigation, employee misconduct,
operational failures, the outcome of regulatory investigations, press
speculation and negative publicity, disclosure of confidential client
information (including the loss or theft of customer data), IT failures or
disruption, cyber security breaches and/or inadequate services, amongst
others, whether true or not, could impact its brand or reputation. The group's
brand and reputation could also be affected if products or services
recommended by it (or any of its intermediaries) do not perform as expected
(whether or not the expectations are realistic) or in line with the customers'
expectations for the product range.
Any damage to the group's brand or reputation could cause existing customers
or partners to withdraw their business from the group, and potential customers
or partners to elect not to do business with the group and could make it more
difficult for the group to attract and retain qualified employees.
CLIMATE CHANGE RISK Given the global focus on climate change as well as the significant momentum
in the finance industry, the group is exposed to strategic and reputational
risks arising from its action or inaction in response to climate change as
well the regulatory and reputational risks arising from its public disclosures
on the matter. Chesnara supports the UN Sustainable Development Goals (SDGs),
including Climate Action. We have set our long-term net zero targets,
interim targets for 2030 and short-term actions including baselining our
financial emissions and beginning work to create our transition plan to be a
net zero group.
Chesnara has mobilised a group-wide sustainability project programme in
relation to the broader sustainability agenda making commitments to:
- Become a net zero emitter
- Invest in positive solutions
- Provide inclusivity for all stakeholders
MODEL RISK
DESCRIPTION Adverse consequences from decisions based on incorrect or misused model
outputs, or fines or reputational impacts from disclosure of materially
incorrect or misleading information.
RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible,
but acknowledges that it may need to accept some risk as a result of carrying
out business.
POTENTIAL IMPACT Chesnara and each of its subsidiaries apply statistical, economic and
financial techniques and assumptions to process input data into quantitative
estimates. Inaccurate model results may lead to unexpected losses arising from
inaccurate data, assumptions, judgements, programming errors, technical
errors, and misinterpretation of outputs.
Potential risk impacts of inaccurate model results include:
- Poor decisions, for example regarding business strategy, operational
decisions, investment choices, dividend payments or acquisitions;
- Potentially overestimating the value of acquisitions resulting in over
payment;
- Misstatement of financial performance or solvency, resulting in misleading
key shareholders or fines; and
- Provision of inaccurate information to the board on business performance
resulting in poorly informed or delayed decisions.
GOING CONCERN
Going concern
After making appropriate enquiries, including consideration of the economic
uncertainty in the wake of a high-inflation environment on the group's
operations, financial position and prospects, the directors confirm that they
are satisfied that the company and the group have adequate resources to
continue in business for the foreseeable future. Accordingly, they continue
to adopt the going concern basis in the preparation of the financial
statements.
In performing this work, the board has considered the current solvency and
cash position of the group and company, coupled with the group's and company's
projected solvency and cash position as highlighted in the most recent
business plan and Own Risk and Solvency Assessment (ORSA) process. These
processes consider the financial projections of the group and its subsidiaries
on both a base case and a range of stressed scenarios, covering projected
solvency, liquidity, EcV and IFRS positions. In particular these projections
assess the cash generation of the life insurance divisions and how these flow
up into the Chesnara parent company balance sheet, with these cash flows being
used to fund debt repayments, shareholder dividends and the head office
function of the parent company. Further insight into the immediate and
longer-term impact of certain scenarios, covering solvency, cash generation
and Economic Value, can be found in the Chesnara Half Year Report for the six
months ended 30 June 2024, under the section headed 'Capital Management
Sensitivities'. The directors believe these scenarios will encompass any
potential future impact of the prevailing economic uncertainty on the group,
as Chesnara's most material ongoing exposure to both potential threats are any
associated future investment market impacts. Underpinning the projections
process outlined above are a number of assumptions. The key ones include:
- We do not assume that a future acquisition needs to take place
to make this assessment.
- We make long term investment return assumptions on equities and
fixed income securities.
- The base case scenario assumes exchange rates remain stable, and
the impact of adverse rate changes are assessed through scenario analysis.
- Levels of new business volumes and margins are assumed.
- The projections apply the most recent actuarial assumptions,
such as mortality and morbidity, lapses and expenses.
- and margins are assumed.
The group's strong capital position and business model, provides a good degree
of comfort that although the economic uncertainty in the wake of a
high-inflation environment has the potential to cause further significant
global economic disruption, the group and the company remain well capitalised
and has sufficient liquidity. As such we can continue to remain confident
that the group will continue to be in existence in the foreseeable future.
The information set out in the Capital Management section indicates a strong
Solvency II position as at 30 June 2024 as measured at both the individual
regulated life company levels and at the group level. As well as being
well-capitalised the group also has a healthy level of cash reserves to be
able to meet its debt obligations as they fall due and does not rely on the
renewal or extension of bank facilities to continue trading. This position
was further enhanced in early 2022, when the company announced the successful
pricing of its inaugural debt capital markets issuance of £200m Tier 2
Subordinated Notes, the net proceeds of which have been used for corporate
purposes, including investments and acquisitions.
The group's subsidiaries rely on cash flows from the maturity or sale of fixed
interest securities which match certain obligations to policyholders, which
brings with it the risk of bond default. In order to manage this risk, we
ensure that our bond portfolio is actively monitored and well diversified.
Other significant counterparty default risk relates to our principal
reinsurers. We monitor their financial position and are satisfied that any
associated credit default risk is low.
DIRECTORS' RESPONSIBILITIES STATEMENT
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in
accordance with United Kingdom adopted IAS 34 'Interim Financial Reporting';
- the management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and description of principal risks and uncertainties for the remaining
six months of the year); and
- the management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions and
changes therein).
By order of the board
Luke Savage Steve Murray
Chairman Chief
Executive Officer
9 September 2024 9 September 2024
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Unaudited Unaudited Restated
Six months ended 30 June
Six months ended 30 June 2023
2024 Year ended 31 December 2023
£m £m £m
Insurance revenue 136.1 118.5 228.0
Insurance service expense (138.2) (102.7) (224.7)
Net expenses from reinsurance contracts held (1.2) (5.3) (8.4)
Insurance service result (3.3) 10.5 (5.1)
Net investment return 811.8 603.0 1,023.5
Net finance (expenses)/income from insurance contracts issued (174.1) (147.0) (314.9)
Net finance income/(expenses) from reinsurance contracts held 2.5 (3.0) 6.7
Net change in investment contract liabilities (490.9) (361.7) (529.6)
Change in liabilities relating to policyholders' funds held by the group (109.0) (66.7) (114.0)
Net investment result 40.3 24.6 71.7
Fee, commission and other operating income 54.9 47.4 89.4
Total revenue net of investment result 91.9 82.5 156.0
Other operating expenses (72.9) (65.7) (149.9)
Total income less expenses 19.0 16.8 6.1
Financing costs (5.6) (5.5) (11.0)
Profit arising on business combinations and portfolio acquisitions - 4.0 6.7
Profit/(loss) before income taxes 13.4 15.3 1.8
Income tax (expense)/credit (12.4) (0.6) 16.9
Profit/(loss) for the period 1.0 14.7 18.7
Items that may be reclassified subsequently to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign (8.2) (15.2) (7.8)
operations
Revaluation of pension obligations after tax 0.5 - (0.7)
Revaluation of land and building - - 0.1
Other comprehensive (expense)/income for the period, net of tax (7.7) (15.2) (8.4)
Total comprehensive income/(expense) for the period (6.7) (0.5) 10.3
Basic earnings per share (based on profit or loss for the period) 0.66p 9.79p 12.41p
Diluted earnings per share (based on profit or loss for the period) 0.65p 9.70p 12.29p
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
Unaudited Unaudited
Restated
As at As at As at
30 June 30 June 31 December
2024 2023 2023
£m £m £m
Assets
Intangible assets 92.1 116.9 96.4
Property and equipment 7.6 7.5 8.4
Investment properties 96.2 98.7 88.1
Insurance contract assets 3.1 10.2 4.0
Reinsurance contract assets 179.8 179.3 185.7
Amounts deposited with reinsurers 33.5 32.1 32.5
Financial investments 11,885.7 11,008.8 11,456.1
Derivative financial instruments 0.1 3.2 0.3
Other assets 68.4 47.9 57.7
Deferred tax assets 41.1 51.3 54.6
Cash and cash equivalents 131.1 144.3 146.0
Total assets 12,538.7 11,700.2 12,129.8
Liabilities
Insurance contract liabilities 4,179.4 4,103.1 4,203.0
Reinsurance contract liabilities 14.4 16.2 17.1
Other provisions 21.5 16.9 23.2
Investment contracts at fair value through profit or loss 6,065.3 5,698.3 5,872.3
Liabilities relating to policyholders' funds held by the group 1,563.6 1,116.5 1,281.8
Lease contract liabilities 0.8 1.5 1.2
Borrowings 206.1 209.3 207.9
Derivative financial instruments (0.2) 0.1 4.4
Deferred tax liabilities 21.4 33.9 24.3
Deferred income 2.6 3.0 2.8
Other current liabilities 133.2 140.0 131.7
Bank overdrafts 0.4 0.2 0.2
Total liabilities 12,208.5 11,339.0 11,769.9
Net assets 330.2 361.2 359.9
Shareholders' equity
Share capital 7.5 7.5 7.5
Merger reserve 36.3 36.3 36.3
Share premium 142.5 142.4 142.5
Other reserves (1.2) (0.3) 6.5
Retained earnings 145.1 175.3 167.1
Total shareholders' equity 330.2 361.2 359.9
Approved by the Board of Directors and authorised for issue on 9 September
2024 and signed on its behalf by:
Luke Savage Steve Murray
Chairman Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Unaudited Restated
Six months ended Six months ended 30 June
30 June 2023
2024
£m £m
Profit/(Loss) for the period 1.0 14.7
Adjustments for:
Depreciation of property, plant and equipment 0.3 0.3
Depreciation on right-of-use assets 0.3 0.3
Amortisation of intangible assets 6.7 8.5
Share-based payment 0.5 0.3
Tax paid 12.4 0.6
Interest receivable (4.1) (1.1)
Dividends receivable (2.1) (0.6)
Interest expense 5.2 5.2
Fair value gains on financial assets (811.8) (603.0)
Profit on business combinations and portfolio acquisitions - (4.0)
(Increase) / decrease in intangible assets related to investment (4.8) (4.7)
contracts
Adjustment total (797.4) (598.2)
Interest received 5.9 3.8
Dividends received 4.0 1.2
Changes in operating assets and liabilities:
Decrease/(increase) in financial assets and investment properties 130.1 24.3
Decrease in net reinsurers contract assets 2.8 12.5
(Increase) / decrease in amounts deposited with reinsurers (1.0) 0.7
Decrease / (increase) in other assets 5.2 (12.0)
Increase in net insurance contract liabilities 42.4 24.8
Increase in investment contract liabilities 656.5 463.4
(Decrease) / increase in provisions (1.3) (3.8)
Increase in other current liabilities 7.6 14.3
Cash utilised from operations 55.8 (54.3)
Income tax paid (38.7) (1.3)
Net cash utilised from operating activities 17.1 (55.6)
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired - 30.3
Net proceeds/(purchases) of property and equipment (0.1) (1.2)
Net cash generated by investing activities (0.1) 29.1
Cash flows from financing activities
Net proceeds from issue of share premium - 0.1
Proceeds of borrowings - 0.2
Repayment of borrowings (1.8) (2.2)
Repayment of lease liabilities (0.3) (0.5)
Dividends paid (23.5) (22.8)
Interest paid (5.2) (5.1)
Net cash (utilised)/generated by / from financing activities (30.8) (30.3)
Net (decrease)/increase in cash and cash equivalents (13.8) (56.8)
Cash and cash equivalents at beginning of period 145.9 204.6
Effect of exchange rate changes on cash and cash equivalents (1.4) (3.7)
Cash and cash equivalents at end of the period 130.7 144.1
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
Unaudited - six months ended 30 June 2024
Share capital Share premium Merger reserve Other reserves Retained earnings Total
£m £m £m £m £m £m
Equity shareholders' funds at 1 January 2024 7.5 142.5 36.3 6.5 167.1 359.9
Profit for the period - - - - 1.0 1.0
Dividends paid - - - - (23.5) (23.5)
Foreign exchange translation differences - - - (8.2) - (8.2)
Other items of comprehensive income - - - 0.5 - 0.5
Share-based payment - - - - 0.5 0.5
Equity shareholders' funds at 30 June 2024 7.5 142.5 36.3 (1.2) 145.1 330.2
Unaudited - six months ended 30 June 2023 (restated)
Share capital Share premium Merger reserve Other reserves Retained earnings Total
£m £m £m £m £m £m
Equity shareholders' funds at 1 January 2023 7.5 142.3 36.3 14.9 183.1 384.1
Profit for the period - - - - 14.7 14.7
Dividends paid - - - - (22.8) (22.8)
Foreign exchange translation differences - - - (15.2) - (15.2)
Issue of share premium - 0.1 - - - 0.1
Share-based payment - - - - 0.3 0.3
Equity shareholders' funds at 30 June 2023 7.5 142.4 36.3 (0.3) 175.3 361.2
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of preparation
This condensed set of consolidated financial statements has been prepared in
accordance with International Accounting Standard 34 'Interim Financial
Reporting'. As required by the Disclosure and Transparency Rules of the
Financial Conduct Authority, this condensed set of consolidated financial
statements has been prepared applying the accounting policies and presentation
which were applied in the preparation of the group's published consolidated
financial statements for the year ended 31 December 2023.
Any judgements and estimates applied in the condensed set of consolidated
financial statements are consistent with those applied in the preparation of
the group's published consolidated financial statements for the year ended 31
December 2023.
The financial information shown in these interim financial statements is
unaudited and does not constitute statutory accounts within the meaning of
section 434 of the Companies Act 2006. The directors have elected to not
obtain a review opinion over these interim financial statements by the group's
auditor, Deloitte.
The comparative figures for the financial year ended 31 December 2023 are not
the company's statutory accounts for that financial year. Those accounts have
been reported on by the company's auditor and delivered to the Registrar of
Companies. The report of the auditor was (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report, and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006.
Going concern
After making appropriate enquiries, including detailed consideration of the
impact on the group's operations and financial position and prospects, the
directors confirm that they are satisfied that the company and the group have
adequate resources to continue in business for the foreseeable future, a
period of not less than 12 months from the date of this report. Accordingly,
they continue to adopt the going concern basis in the preparation of these
interim financial statements. Further detail on the key considerations made by
the directors in making this assessment has been included in the 'Going
Concern' section of this report.
Restatement
Following the production of the 2023 Interim Report, certain immaterial
adjustments were identified due to further updates to the IFRS 17
implementation programme. These adjustments have been applied consistently to
the prior year comparatives throughout these condensed financial statements
and the disclosure notes that are affected are headed up accordingly.
Standards and amendments issued but not yet effective
At the date of authorisation of these financial statements the following
standards and interpretations, which are applicable to the group, and which
have not been applied in these financial statements, were in issue but not yet
effective.
Title Effective date
IFRS 9 / IFRS 7 Amendments to the classification and measurement of financial 1 January 2026
instruments
IFRS 18 Presentation and disclosure financial statements 1 January 2027
The directors do not expect that the adoption of the standards and amendments
to standards listed above will have a material impact on the financial
statements of the group in future periods.
2 Significant judgements and estimates
The critical accounting judgements and key sources of estimation and
uncertainty remain largely unchanged from those described in Note A6 of the
2023 Annual Report and Accounts. The potential impact on the group has been
considered in the preparation of these interim financial statements, including
management's evaluation of critical accounting judgements and estimates.
Further information on discount rates applied in these financial statements is
provided below.
Discount rates
Cash flows are discounted using currency-specific, risk-free yield curves
adjusted for the characteristics of the cash flows and the liquidity of the
insurance contracts. The group applies a 'bottom-up' approach to determining
discount rates and follows the methodology used by the PRA and EIOPA to
determine risk-free yield curves and ultimate forward rates for regulatory
solvency calculations. To reflect the liquidity or otherwise of the insurance
contracts, the risk-free yield curves are adjusted by an illiquidity premium.
For certain Dutch 'savings mortgage' products, there is a direct connection to
the policyholder's mortgage loan and the premiums to repay the loan in that
the crediting rate is set such that the account value will be equal to the
balance on the loan at maturity. For this product, the cash flows are
discounted using the same curve used to value the corresponding mortgage
assets which itself is derived from mortgage rates available in the market.
When the present value of future cash flows is estimated using stochastic
modelling, the cash flows are discounted at scenario-specific rates
calibrated, on average, to be the risk-free rates as adjusted for illiquidity.
Inflation rates mainly relate to expense inflation. The assumptions in respect
of expense inflation reflect the group's best estimate view incorporating
market consistent data such as earnings indices and central bank inflation
targets.
The yield curves that were used to discount the estimates of future cash flows
that were modelled deterministically are shown in the following table:
Yield Curve Broad Product Category Currency 30 June 2024 31 December 2023
1 5 10 20 30 1 5 10 20 30
year years years years years year years Years years years
Risk-Free Rate Unit-linked/index-linked/with-profits - VFA EUR 3.43% 2.77% 2.73% 2.66% 2.70% 3.36% 2.32% 2.39% 2.41% 2.53%
Unit-linked/index-linked/with-profits - GMM (with high liquidity) GBP 4.89% 3.96% 3.86% 3.99% 3.92% 4.74% 3.36% 3.28% 3.43% 3.36%
Short-term protection SEK 2.98% 2.47% 2.49% 2.83% 2.99% 3.03% 2.26% 2.25% 2.76% 2.99%
Risk-Free Rate + VA Immediate annuities EUR 3.59% 2.93% 2.89% 2.82% 2.83% 3.56% 2.52% 2.59% 2.61% 2.70%
Term assurance & other non-linked GBP 5.12% 4.19% 4.09% 4.22% 4.15% 5.05% 3.67% 3.59% 3.74% 3.67%
Unit-linked/index-linked/with-profits - GMM (with medium liquidity)
Market Mortgage Rates Waard Savings Mortgage EUR 4.44% 3.77% 3.73% 3.67% 3.70% 4.77% 3.73% 3.80% 3.82% 3.94%
3 Earnings per share
Earnings per share are based on the following:
Unaudited
Six months ended Year ended
30 June 31 December
2024 restated 2023 2023
(Loss)/profit for the period attributable to shareholders (£m) (restated) 1.0 14.7 18.7
Weighted average number of ordinary shares 150,886,918 150,430,393 150,528,597
Basic earnings per share 0.66p 9.79p 12.41p
Diluted earnings per share 0.65p 9.70p 12.29p
The weighted average number of ordinary shares in respect of the six months
ended 30 June 2024 is based upon 150,849,587 shares in issue at the beginning
of the period and 150,954,119 at the end of the period. No shares were held
in treasury.
The weighted average number of ordinary shares in respect of the six months
ended 30 June 2023 is based upon 150,369,603 shares in issue at the beginning
of the period, and 150,570,190 shares in issue at the end of the period. No
shares were held in treasury.
The weighted average number of ordinary shares in respect of the year ended 31
December 2023 is based upon 150,369,603 shares in issue at the beginning of
the period and 150,849,587 shares in issue at the end of the period. No
shares were held in treasury.
There were 2,456,598 share options outstanding at 30 June 2024 (30 June 2023:
1,165,272). Accordingly, there is dilution of the average number of ordinary
shares in issue. There were 1,537,582 share options outstanding as at 31
December 2023.
4 Retained earnings
Six months ended
Unaudited 30 June
2024 restated 2023
£m £m
Retained earnings attributable to equity holders of the parent company
comprise:
Balance at 1 January 167.1 183.1
Profit/(loss) for the period 1.0 14.7
Share-based payment 0.5 0.3
Dividends:
Final approved and paid for 2022 - (22.8)
Final approved and paid for 2023 (23.5) -
Balance at 30 June 145.1 175.3
The interim dividend in respect of 2023, approved and paid in 2023 was paid at
the rate of 8.36p per share.
The final dividend in respect of 2023, approved and paid in 2024, was paid at
the rate of 15.61p per share so that the total dividend paid to the equity
shareholders of the company in respect of the year ended 31 December 2023 was
made at the rate of 23.97p per share.
An interim dividend of 8.61 per share in respect of the year ending 31
December 2024 is payable on 1 November 2024 to equity shareholders of the
company registered at the close of business on 20 September 2024, the dividend
record date, was approved by the Directors after the balance sheet date. The
resulting dividend of £13.0m has not been provided for in these financial
statements and there are no income tax consequences.
The following table summarises dividends per share in respect of the six-month
period ended 30 June 2024 and the year ended 31 December 2023:
Six months ended Year ended 31
30 June 2024 December 2023
Pence Pence
Interim - approved/paid 8.61 8.36
Final - proposed/paid - 15.61
Total 8.61 23.97
5 Operating segments
The group considers that it has no product or distribution-based business
segments. It reports segmental information on the same basis as reported
internally to the chief operating decision maker, which is the board of
directors of Chesnara plc.
The segments of the group as at 30 June 2024 comprise:
UK: This segment comprises the UK's life insurance and pensions business
within Countrywide Assured plc (CA), the group's principal UK operating
subsidiary. CA contains a mix of unit-linked, with-profits and non-linked
products and represents the UK acquisition vehicle, recently acquiring the
onshore individual protection business of Canada Life Limited in 2023 and
Sanlam Life and Pensions Limited in 2022.
Movestic: This segment comprises the group's Swedish life and pensions
business, Movestic Livförsäkring AB ('Movestic') and its subsidiary company
Movestic Fonder AB (investment fund management company). Movestic is open to
new business and primarily comprises unit-linked pension business and also
providing some life and health product offerings.
Waard Group: This segment represents the group's closed Dutch life insurance
business and comprises a number of acquisitions of closed insurance books of
business since the acquisition of the original Waard entities into the group
in 2015. The Waard group comprises a mixture of long-term savings and
protection business and also contains some non-life business.
Scildon: This segment represents the group's open Dutch life insurance
business. Scildon's policy base is predominantly made up of individual
protection and savings contracts. It is open to new business and sells
protection, individual savings and group pension contracts via a broker-led
distribution model.
Other group activities: The functions performed by the parent company,
Chesnara plc, are defined under the operating segment analysis as 'Other group
activities'. Also included therein are consolidation and elimination
adjustments.
The accounting policies of the segments are the same as those for the group as
a whole. Any transactions between the business segments are on normal
commercial terms in normal market conditions. The group evaluates
performance of operating segments on the basis of the profit before tax
attributable to shareholders of the reporting segments and the group as a
whole. There were no changes to the measurement basis for segment profit
during the period ended 30 June 2024.
(i) Segmental reporting for the six months ended 30 June 2024
Scildon
Movestic Waard Group (Netherlands)
(Sweden) (Netherlands) Total
Unaudited UK Other group activities
£m £m £m £m £m £m
Insurance revenue 36.8 5.1 14.5 79.7 - 136.1
Insurance service expense (33.5) (2.7) (17.5) (84.5) - (138.2)
Net expenses from reinsurance contracts held 0.9 (1.0) (0.1) (1.0) - (1.2)
Segmental insurance service result 4.2 1.4 (3.1) (5.8) - (3.3)
Net investment return 243.1 457.3 (2.4) 107.2 6.6 811.8
Net finance (expenses)/income from insurance contracts issued (63.5) (15.7) 3.7 (98.6) - (174.1)
Net finance income/(expenses) from reinsurance contracts held 2.0 - - 0.5 - 2.5
Net change in investment contract liabilities (161.1) (330.7) 0.9 - - (490.9)
Change in liabilities relating to policyholders' funds held by the group - (109.0) - - - (109.0)
Segmental net investment result 20.5 1.9 2.2 9.1 6.6 40.3
Fee, commission and other operating income 17.6 37.1 0.2 - - 54.9
Segmental revenue, net of investment result 42.3 40.4 (0.7) 3.3 6.6 91.9
Other operating expenses (17.4) (31.7) (3.7) (2.1) (11.1) (66.0)
Financing costs (0.2) (0.2) - - (5.2) (5.6)
Profit/(loss) before tax and consolidation adjustments 24.7 8.5 (4.4) 1.2 (9.7) 20.3
Consolidation adjustments:
Amortisation of intangible assets (1.5) (5.4) - - - (6.9)
Segmental income less expenses 23.2 3.1 (4.4) 1.2 (9.7) 13.4
Post completion gain on portfolio acquisition - - - - - -
(Loss)/profit before tax 23.2 3.1 (4.4) 1.2 (9.7) 13.4
Income tax credit / (charge) (12.9) - 0.8 (0.3) - (12.4)
(Loss)/profit after tax 10.3 3.1 (3.6) 0.9 (9.7) 1.0
(ii) Segmental assets and liabilities as at 30 June 2024
Unaudited Scildon Other Group
Movestic Waard Group (Netherlands) Activities Total
(Sweden) (Netherlands)
UK
£m £m £m £m £m £m
Segment assets 4,549.7 4,984.1 885.5 2,025.3 94.1 12,538.7
Segment liabilities (4,388.9) (4,887.9) (815.8) (1,912.5) (203.4) (12,208.5)
Segment net assets 160.8 96.2 69.7 112.8 (109.3) 330.2
(iii) Segmental reporting for the six months ended 30 June 2023 (restated)
Unaudited Restated Restated Scildon Other Group Activities
Movestic Waard Group
Total
UK (Sweden) (Netherlands) (Netherlands)
£m £m £m £m £m £m
Insurance revenue 35.1 5.8 21.2 56.4 - 118.5
Insurance service expense (31.6) (3.2) (11.8) (56.1) - (102.7)
Net expenses from reinsurance contracts held (2.5) (1.0) (1.0) (0.8) - (5.3)
Segmental insurance service result 1.0 1.6 8.4 (0.5) - 10.5
Net investment return 112.9 360.9 30.6 91.1 7.5 603.0
Net finance (expenses)/income from insurance contracts issued (21.7) (13.5) (30.0) (81.8) - (147.0)
Net finance income/(expenses) from reinsurance contracts held (1.5) (0.1) 0.1 (1.5) - (3.0)
Net change in investment contract liabilities (83.8) (279.3) 1.4 - - (361.7)
Change in liabilities relating to policyholders' funds held by the group - (66.7) - - - (66.7)
Segmental net investment result 5.9 1.3 2.1 7.8 7.5 24.6
Fee, commission and other operating income 18.8 28.4 0.2 - - 47.4
Segmental revenue, net of investment result 25.7 31.3 10.7 7.3 7.5 82.5
Other operating expenses (15.5) (22.7) (4.7) (2.3) (12.0) (57.2)
Financing costs - (0.3) - - (5.2) (5.5)
Profit/(loss) before tax and consolidation adjustments 10.2 8.3 6.0 5.0 (9.7) 19.8
Consolidation adjustments:
Amortisation of intangible assets (2.9) (5.6) - - - (8.5)
Segmental income less expenses 7.3 2.7 6.0 5.0 (9.7) 11.3
Post completion gain on portfolio acquisition - - 4.0 - - 4.0
Profit/(loss) before tax 7.3 2.7 10.0 5.0 (9.7) 15.3
Income tax credit / (charge) (0.7) - 1.6 (1.5) (0.1) (0.6)
Profit/(loss) after tax 6.6 2.7 11.6 3.5 (9.7) 14.7
(iv) Segmental assets and liabilities as at 30 June 2023
(restated)
Unaudited Restated Restated Other Group
Movestic Waard Group Scildon Activities Total
(Sweden) (Netherlands) (Netherlands)
UK
£m £m £m £m £m £m
Segment assets 4,577.2 4,106.8 956.1 1,921.3 138.8 11,700.2
Segment liabilities (4,434.6) (4,017.9) (873.4) (1,810.2) (202.9) (11,339.0)
Segment net assets 142.6 88.9 82.7 111.1 (64.1) 361.2
(v) Segmental reporting for the year ended 31 December 2023
Scildon Other Group Activities
Movestic Waard Group
Total
UK (Sweden) (Netherlands) (Netherlands)
£m £m £m £m £m £m
Insurance revenue 65.8 11.1 36.1 115.0 - 228.0
Insurance service expense (65.6) (7.4) (37.8) (113.9) - (224.7)
Net (expenses) / income from reinsurance contracts held (5.5) (0.6) 0.4 (2.7) - (8.4)
Segmental insurance service result (5.3) 3.1 (1.3) (1.6) - (5.1)
Net investment return 339.3 432.5 63.2 181.2 7.3 1,023.5
Net finance income from insurance contracts issued (86.4) (16.0) (49.3) (163.2) - (314.9)
Net finance (expenses)/income from reinsurance contracts held 9.3 0.7 0.1 (3.4) - 6.7
Net change in investment contract liabilities (226.4) (299.6) (3.6) - - (529.6)
Change in liabilities relating to policyholders' funds held by the group - (114.0) - - - (114.0)
Segmental net investment result 35.8 3.6 10.4 14.6 7.3 71.7
Fee, commission and other operating income 39.8 50.3 2.9 - (3.6) 89.4
Segmental revenue, net of investment result 70.3 57.0 12.0 13.0 3.7 156.0
Other operating expenses (39.9) (40.0) (3.5) (5.5) (23.1) (112.0)
Financing costs (0.2) (0.5) - - (10.3) (11.0)
Profit/(loss) before tax and consolidation adjustments 30.2 16.5 8.5 7.5 (29.7) 33.0
Consolidation adjustments:
Amortisation and impairment of intangible assets (26.7) (11.2) - - - (37.9)
Segmental income less expenses 3.5 5.3 8.5 7.5 (29.7) (4.9)
Post completion gain on portfolio acquisition - - 6.7 - - 6.7
Profit/(loss) before tax 3.5 5.3 15.2 7.5 (29.7) 1.8
Income tax credit / (charge) 20.5 - (1.6) (1.9) (0.1) 16.9
Profit/(loss) after tax 24.0 5.3 13.6 5.6 (29.8) 18.7
(vi) Segmental assets and liabilities as at 31 December 2023
Other Group Activities
Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
£m £m £m £m £m £m
Segment assets 4,527.2 4,519.4 946.8 2,009.1 127.3 12,129.8
Segment liabilities (4,376.6) (4,422.2) (867.0) (1,894.6) (209.5) (11,769.9)
Segment net assets 150.6 97.2 79.8 114.5 (82.2) 359.9
6 Insurance service result
Six months ended 30 June
Unaudited restated
2024 2023
Insurance revenue £m £m
Contracts not measured under the PAA:
Amounts relating to changes in the liability for remaining coverage:
Expected incurred claims and other directly attributable expenses 116.1 90.9
Change in risk adjustment for non-financial risk for the risk expired 2.8 8.3
CSM recognised for the services provided 10.6 12.1
Insurance acquisition cash flows recovery 1.9 1.7
Insurance revenue for contracts not measured under the PAA 131.4 113.0
Insurance revenue for contracts measured under the PAA 4.7 5.5
Total insurance revenue 136.1 118.5
Insurance service expenses
Incurred claims and other directly attributable expenses (97.4) (79.0)
Changes that relate to past service - changes in the FCF relating to the LIC 2.2 3.1
Losses on onerous contracts and reversals of those losses (41.1) (25.1)
Insurance acquisition cash flows amortisation (1.9) (1.7)
Total insurance service expenses (138.2) (102.7)
Net income/(expenses) from reinsurance contracts held
Reinsurance expenses (allocation of reinsurance premiums paid) - contracts not
measured under the PAA
Amounts relating to changes in the remaining coverage:
Expected amount recoverable for claims and other insurance service expenses (23.2) (23.4)
Change in risk adjustment for non-financial risk for the risk expired (1.1) (1.1)
CSM recognised for the services received (1.6) (2.0)
Reinsurance expenses (allocation of reinsurance premiums paid) - contracts not (25.9) (26.5)
measured under the PAA
Reinsurance expenses (allocation of reinsurance premiums paid) - contracts (1.4) (1.1)
measured under the PAA
Amounts recoverable for incurred claims and other incurred insurance service 26.9 23.1
expenses
Changes in amounts recoverable that relate to past service - adjustments to (0.8) (1.5)
incurred claims
Recoveries of loss on recognition of onerous underlying contracts 0.2 0.3
Recoveries of losses on onerous underlying contracts and reversals of such (0.2) 0.4
losses
Total net expenses from reinsurance contracts held (1.2) (5.3)
Total insurance service result (3.3) 10.5
7 Net investment result
In the tables that follow the investment return on surplus shareholder assets
is included in the insurance contracts column.
Investment contracts (without DPF's)
Insurance contracts Total
Unaudited
Investment result for the six months ended 30 June 2024
Net investment return £m £m £m
Interest revenue from financial assets not measured at FVTPL 4.5 - 4.5
Net gains on financial investments mandatorily measured at FVTPL 326.4 374.8 701.2
Net gains on financial investments designated as FVTPL (128.9) 225.1 96.2
Net gains from fair value adjustments to investment properties 9.9 - 9.9
Total net investment return 211.9 599.9 811.8
Finance income/(expenses) from insurance contracts issued
Change in fair value of underlying assets of contracts measured under the VFA (175.8) - (175.8)
Interest accreted (37.5) - (37.5)
Effect of changes in interest rates and other financial assumptions 34.4 - 34.4
Effect of changes in fulfilment cash flows at current rates when CSM is 4.8 - 4.8
unlocked at locked in rates
Total finance income from insurance contracts issued (174.1) - (174.1)
Finance income from reinsurance contracts issued
Interest accreted 6.8 - 6.8
Effect of changes in interest rates and other financial assumptions (2.8) - (2.8)
Effect of changes in fulfilment cash flows at current rates when CSM is (1.5) - (1.5)
unlocked at locked in rates
Total finance expenses from reinsurance contracts issued 2.5 - 2.5
Net insurance finance expenses (171.6) - (171.6)
Net change in investment contract liabilities - (490.9) (490.9)
Change in liabilities relating to policyholder funds held by the group - (109.0) (109.0)
Net investment result 40.3 - 40.3
Unaudited
Insurance contracts Investment contracts (without DPF's) Total
Investment result for the six months ended 30 June 2023 (restated)
Net investment return £m £m £m
Interest revenue from financial assets not measured at FVTPL 0.4 - 0.4
Net gains on financial investments mandatorily measured at FVTPL 151.7 361.7 513.4
Net gains on financial investments designated as FVTPL 22.5 66.7 89.2
Total net investment return 174.6 428.4 603.0
Finance income/(expenses) from insurance contracts issued
Change in fair value of underlying assets of contracts measured under the VFA (107.7) - (107.7)
Interest accreted (28.4) - (28.4)
Effect of changes in interest rates and other financial assumptions (12.5) - (12.5)
Effect of changes in fulfilment cash flows at current rates when CSM is 1.6 - 1.6
unlocked at locked in rates
Total finance income from insurance contracts issued (147.0) - (147.0)
Finance income from reinsurance contracts issued
Interest accreted 2.7 - 2.7
Effect of changes in interest rates and other financial assumptions (4.7) - (4.7)
Effect of changes in fulfilment cash flows at current rates when CSM is (1.0) - (1.0)
unlocked at locked in rates
Total finance expenses from reinsurance contracts issued (3.0) - (3.0)
Net insurance finance expenses (150.0) - (150.0)
Net change in investment contract liabilities - (361.7) (361.7)
Change in liabilities relating to policyholder funds held by the group - (66.7) (66.7)
Net investment result 24.6 - 24.6
8 Financial investments
The carrying amount of financial investments and other financial assets and
liabilities held by the group at the balance sheet date are as follows:
Amortised cost FVTPL - Designated FVTPL - Mandatory Total
30 June 2024 (unaudited)
£m £m £m £m
Financial investments
Equity securities - - 199.2 199.2
Holdings in collective investment schemes - - 8,645.4 8,645.4
Debt securities - government bonds - 472.3 - 472.3
Debt securities - other - 661.1 - 661.1
Policyholder funds held by the group - 1,563.6 - 1,563.6
Mortgage loan portfolio - 344.1 - 344.1
Total - 3,041.1 8,844.6 11,885.7
Derivatives and other financial assets
Derivative financial instruments - - 0.1 0.1
Other assets 68.4 - - 68.4
Cash and cash equivalents - 131.1 - 131.1
Total financial investments and financial assets 68.4 3,172.2 8,844.7 12,085.3
Financial liabilities
Investment contracts at fair value through profit or loss - 6,065.3 - 6,065.3
Liabilities relating to policyholder funds held by the group - 1,563.6 - 1,563.6
Derivative financial instruments 206.1 - - 206.1
Borrowings - - (0.2) (0.2)
Other current liabilities 133.2 - - 133.2
Total financial liabilities 339.3 7,628.9 (0.2) 7,968.0
Amortised cost FVTPL - Designated FVTPL - Mandatory Total
31 December 2023
£m £m £m £m
Financial investments
Equity securities - - 194.2 194.2
Holdings in collective investment schemes - - 8,376.2 8,376.2
Debt securities - government bonds - 716.5 - 716.5
Debt securities - other - 520.6 - 520.6
Policyholder funds held by the group - 1,281.8 - 1,281.8
Mortgage loan portfolio - 366.8 - 366.8
Total - 2,885.7 8,570.4 11,456.1
Derivatives and other financial assets
Derivative financial instruments - - 0.3 0.3
Other assets 57.7 - - 57.7
Cash and cash equivalents - 146.0 - 146.0
Total financial investments and financial assets 57.7 3,031.7 8,570.7 11,660.1
Financial liabilities
Investment contracts at fair value through profit or loss - 5,872.3 - 5,872.3
Liabilities relating to policyholder funds held by the group - 1,281.8 - 1,281.8
Derivative financial instruments - - 4.4 4.4
Borrowings 207.9 - - 207.9
Other current liabilities 131.7 - - 131.7
Total financial liabilities 339.6 7,154.1 4.4 7,498.1
9 Financial asset and liability fair value disclosures
Fair value is the amount for which an asset or liability could be exchanged
between willing parties in an arm's length transaction. The tables below show
the determination of fair value according to a three-level valuation
hierarchy. Fair values are generally determined at prices quoted in active
markets (Level 1). However, where such information is not available, the group
applies valuation techniques to measure such instruments. These valuation
techniques make use of market observable data for all significant inputs where
possible (Level 2), but in some cases it may be necessary to estimate other
than market-observable data within a valuation model for significant inputs
(Level 3).
Fair value measurement at 30 June 2024 (unaudited)
Level 1 Level 2 Level 3 Total
£m £m £m £m
Investment properties - - 96.2 96.2
Financial assets
Equities - Listed 199.2 - - 199.2
Holdings in collective investment schemes 5,181.5 - 165.4 5,346.9
Debt securities - government bonds 472.3 - - 472.3
Debt securities - other debt securities 3,959.6 - - 3,959.6
Policyholders' funds held by the group 1,515.3 - 48.3 1,563.6
Mortgage loan portfolio - 344.1 - 344.1
Derivative financial instruments - - - -
Total 11,327.9 344.1 309.9 11,981.9
Financial liabilities
Investment contracts at fair value through profit or loss - 5,954.9 - 5,954.9
Liabilities related to policyholders' funds held by the group 1,563.6 - - 1,563.6
Derivative financial instruments - (0.2) - (0.2)
Total 1,563.6 5,954.7 - 7,518.3
Fair value measurement at 31 December 2023
Level 1 Level 2 Level 3 Total
£m £m £m £m
Investment properties - - 88.1 88.1
Financial assets
Equities - Listed 194.2 - - 194.2
Holdings in collective investment schemes 8,233.7 - 142.5 8,376.2
Debt securities - government bonds 716.5 - - 716.5
Debt securities - other debt securities 520.6 - - 520.6
Policyholders' funds held by the group 1,239.4 - 42.4 1,281.8
Mortgage loan portfolio - 366.8 - 366.8
Derivative financial instruments - 0.3 - 0.3
Total 10,904.4 367.1 273.0 11,544.5
Financial liabilities
Investment contracts at fair value through profit or loss - 5,872.3 - 5,872.3
Liabilities related to policyholders' funds held by the group 1,281.8 - - 1,281.8
Derivative financial instruments - 4.4 - 4.4
Total 1,281.8 5,876.7 - 7,158.5
Investment properties
The investment properties are valued by external chartered surveyors using
industry standard techniques based on guidance from the Royal Institute of
Chartered Surveyors. The valuation methodology includes an assessment of
general market conditions and sector level transactions and takes account of
expectations of occupancy rates, rental income and growth. Properties undergo
individual scrutiny using cash flow analysis to factor in the timing of rental
reviews, capital expenditure, lease incentives, dilapidation and operating
expenses; these reviews utilise both observable and unobservable inputs.
Holdings in collective investment schemes
The fair value of holdings in collective investment schemes classified as
Level 2 are related to the UK segment and Scildon. These do not meet the
classification as Level 1, as their fair value is determined using valuation
techniques with observable market inputs. The holdings classified as Level 3
£165.4m (Dec 2023: £142.5m) also relate to Scildon, and represent
investments held in a mortgage fund. These are classified as Level 3 as the
fair value is derived from valuation techniques that include inputs that are
not based on observable market data.
Policyholder funds held by the group
There is also a small holding of assets classified as Level 3 £48.4m (Dec
2023: £42.4m) from our Movestic operation which are unlisted. The valuation
of the vast majority of these assets is based on unobservable prices from
trading on the over-the-counter market.
Debt securities
The debt securities classified as Level 2 at 2023 and 2024 are traded in
active markets with less depth or wider bid-ask spreads. This does not meet
the classification as Level 1 inputs. The fair values of debt securities not
traded in active markets are determined using broker quotes or valuation
techniques with observable market inputs. Financial instruments valued using
broker quotes are classified at Level 2, only where there is a sufficient
range of available quotes. These assets were valued using counterparty or
broker quotes and were periodically validated against third-party models.
Derivative financial instruments
The derivative financial instruments include a foreign currency hedge related
to the group. This was deemed to manage the exposure to foreign exchange
movements between sterling and both the euro and Swedish krona.
An uncapped collar which consists of two hedges:
• One hedge to protect against the downside (sterling
strengthening) (starting at strike A), and one to remove the upside
(weakening) (strike B); with the strikes of these coordinated to result in no
upfront premium.
• The 2nd hedge (strike B) creates an uncapped liquidity
requirement when it bites.
The capped collar comes with an additional leg which creates value and
liquidity when exchange rates move beyond a certain point (strike C).
Within derivative financial instruments is a financial reinsurance embedded
derivative related to our Movestic operation. The group has entered into a
reinsurance contract with a third party that has a section that is deemed to
transfer significant insurance risk and a section that is deemed not to
transfer significant insurance risk. The element of the contract that does not
transfer significant insurance risk has two components and has been accounted
for as a financial liability at amortised cost and an embedded derivative
asset at fair value.
The embedded derivative represents an option to repay the amounts due under
the contract early at a discount to the amortised cost, with its fair value
being determined by reference to market interest rate at the balance sheet
date. It is, accordingly, determined at Level 2 in the three-level fair value
determination hierarchy set out above.
Investment contract liabilities
The investment contract liabilities in Level 2 of the valuation hierarchy
represent the fair value of linked and non-linked liabilities valued using
established actuarial techniques utilising market observable data for all
significant inputs, such as investment yields.
Significant unobservable inputs in level 3 instrument valuations
The Level 3 instruments held in the group are in relation to investments held
in an Aegon managed Dutch Mortgage Fund that contains mortgage-backed assets
in the Netherlands. The fair value of the mortgage fund is determined by the
fund manager on a monthly basis using an in-house valuation model. The
valuation model relies on a number of unobservable inputs, the most
significant being the assumed conditional prepayment rate, the discount rate
and the impairment rate, all of which are applied to the anticipated modelled
cash flows to derive the fair value of the underlying asset.
The assumed Conditional Prepayment Rate (CPR) is used to calculate the
projected prepayment cash flow per individual loan and reflects the
anticipated early repayment of mortgage balances. The CPR is based on four
variables:
· Contract age - The CPR for newly originated mortgage loans
will initially be low, after which it increases for a couple of years to its
maximum expected value, and subsequently diminishes over time.
· Interest rate differential - The difference between the
contractual rates and current interest rates are positively correlated with
prepayments. When contractual rates are higher than interest rates of newly
originated mortgages, we observe more prepayments and the vice versa.
· Previous partial repayments - Borrowers who made a partial
prepayment in the past, are more likely to do so in the future.
· Burnout effect - Borrowers who have not made a prepayment in
the past, while their option to prepay was in the money, are less likely to
prepay in the future.
The projected prepayment cash flows per loan are then combined to derive an
average expected lifetime CPR, which is then applied to the outstanding
balance of the fund. The CPR used in the valuation of the fund as at 30 June
2024 was 3.2% (31 December 2023: 3.2%).
The expected projected cash flows for each mortgage within the loan portfolio
are discounted using rates that are derived using a matrix involving the
following three parameters:
· The remaining fixed rate term of the mortgage
· Indexed Loan to Value (LTV) of each mortgage
· Current (Aegon) mortgage rates
At 30 June 2024 this resulted in discounting the cash flows in each mortgage
using a range from 4.70% to 4.77% (31 December 2023: 4.67% to 4.68%).
An impairment percentage is applied to those loan cash flows which are in
arrears, to reflect the chance of the loan actually going into default. For
those loans which are 1, 2 or 3 months in arrears, an impairment percentage is
applied to reflect the chance of default. This percentage ranges from 0.60%
for 1 month in arrears to 13.70% for loans which are 3 months in arrears (31
December 2023: 0.60% for 1 month in arrears to 13.70% for loans which are 3
months in arrears). Loans which are in default receive a 100% reduction in
value.
The value of the fund has the potential to decrease or increase over time.
This can be as a consequence of a periodic reassessment of the conditional
prepayment rate and/or the discount rate used in the valuation model.
A 1 per cent increase in the CPR would reduce the value of the asset by £2.2m
(31 December 2023: £1.9m).
A 1 per cent decrease in the CPR would increase the value of the asset by
£2.3m (31 December 2023: £2.1m).
A 1 per cent increase in the discount rate would reduce the value of the asset
by £12.7m (31 December 2023: £11.4m).
A 1 per cent decrease in the discount rate would increase the value of the
asset by £14.7m (31 December 2023: £13.3m).
Reconciliation of Level 3 fair value measurements of financial instruments
Unaudited 31 December
30 June 2024 2023
£m £m
At start of period 273.0 273.8
Total gains and losses recognised in the income statement 38.3 (8.6)
Purchases 18.9 22.8
Settlements (15.2) (10.8)
Exchange rate adjustment (5.1) (4.2)
At the end of period 309.9 273.0
Carrying amount Fair value
31 December 31 December
Unaudited
30 June Unaudited
30 June
2024 2023 2024 2023
£m £m £m £m
Financial liabilities
Borrowings 206.1 207.9 168.3 155.4
Borrowings consist of the Tier 2 debt and an amount due in relation to
financial reinsurance. The fair value of the Tier 2 debt is calculated using
quoted prices in active markets and they are classified as Level 1 in the fair
value hierarchy. The amount due in relation to financial reinsurance is fair
valued with reference to market interest rates at the balance sheet date.
There were no transfers between Levels 1, 2 and 3 during the period. The group
holds no Level 3 liabilities as at the balance sheet date.
10 Insurance and Reinsurance contracts
(a) Composition of the balance sheet
(i) Composition of the balance sheet as at 30 June 2024
Unaudited Scildon
Movestic Waard Group
Total
UK (Sweden) (Netherlands) (Netherlands)
Insurance contracts £m £m £m £m £m
Insurance contract liabilities 1,368.3 176.7 740.7 1,893.7 4,179.4
Insurance contract assets (3.1) - - - (3.1)
Net insurance contract liabilities 1,365.2 176.7 740.7 1,893.7 4,176.3
Reinsurance contracts
Reinsurance contract assets 163.4 13.1 3.3 - 179.8
Reinsurance contract liabilities (2.1) - - (12.3) (14.4)
Net reinsurance contract liabilities 161.3 13.1 3.3 (12.3) 165.4
(ii) Composition of the balance sheet as at 31 December 2023
Scildon
Movestic Waard Group
Total
UK (Sweden) (Netherlands) (Netherlands)
Insurance contracts £m £m £m £m £m
Insurance contract liabilities 1,383.0 171.8 785.3 1,862.9 4,203.0
Insurance contract assets (4.0) - - - (4.0)
Net insurance contract liabilities 1,379.0 171.8 785.3 1,862.9 4,199.0
Reinsurance contracts
Reinsurance contract assets 166.8 14.5 4.4 - 185.7
Reinsurance contract liabilities (2.2) - - (14.9) (17.1)
Net reinsurance contract liabilities 164.6 14.5 4.4 (14.9) 168.6
(iii) Composition of the balance sheet as at 30 June 2023 (restated)
Unaudited Scildon
Movestic Waard Group
Total
UK (Sweden) (Netherlands) (Netherlands)
Insurance contracts £m £m £m £m £m
Insurance contract liabilities 1,390.1 158.1 780.3 1,774.6 4,103.1
Insurance contract assets (10.2) - - - (10.2)
Net insurance contract liabilities 1,379.9 158.1 780.3 1,774.6 4,092.9
Reinsurance contracts
Reinsurance contract assets 164.5 12.1 2.7 - 179.3
Reinsurance contract liabilities (2.0) - - (14.2) (16.2)
Net reinsurance contract liabilities 162.5 12.1 2.7 (14.2) 163.1
(b) Movements in insurance contract balances - Analysis by remaining
coverage and incurred claims
(i) Movements in insurance contract balances for the period 1 January
2024 to 30 June 2024
Liabilities for Remaining Coverage Liabilities for Incurred Claims
Unaudited Excluding Loss Component Loss component For contracts not under PAA Total
PV of future cash flows Risk adjustment
£m £m £m £m
£m £m
Insurance contract liabilities as at 1 January 2024 3,957.9 89.4 113.4 37.1 1.2 4,199.0
Changes in the statement of profit and loss
Insurance revenue
Contracts measured under the fair value approach (37.2) - - - - (37.2)
Contracts measured under the full retrospective approach (98.9) - - - - (98.9)
Insurance revenue total (136.1) - - - - (136.1)
Insurance service expenses - (25.3) 118.1 4.6 - 97.4
Incurred claims and other directly attributable expenses
Adjustments to liabilities for incurred claims - - - (2.1) (0.1) (2.2)
Losses and reversals of losses on onerous contracts - 41.1 - - - 41.1
Amortisation of insurance acquisition cash flows 1.9 - - - - 1.9
Insurance service expense total 1.9 15.8 118.1 2.5 (0.1) 138.2
Insurance service result (134.2) 15.8 118.1 2.5 (0.1) 2.1
Net finance expenses from insurance contracts 173.7 0.4 - - - 174.1
Effect of movements in exchange rates (60.7) (1.8) (1.1) (1.5) - (65.1)
Total amounts recognised in comprehensive income (21.2) 14.4 117.0 1.0 (0.1) 111.1
Investment components (167.6) - 167.8 - - 0.2
Cash flows
Premiums received 151.5 - - - - 151.5
Claims and other directly attributable expenses paid - - (279.0) (4.0) - (283.0)
Insurance acquisition cash flows (2.5) - - - - (2.5)
Total cash flows 149.0 - (279.0) (4.0) - (134.0)
Insurance contract liabilities as at 30 June 2024 3,918.1 103.8 119.2 34.1 1.1 4,176.3
(ii) Movements in insurance contract balances for the period 1 January
2023 to 30 June 2023 (restated)
Liabilities for Remaining Coverage Liabilities for Incurred Claims
Unaudited Excluding Loss Component Loss component For contracts not under PAA Total
PV of future cash flows Risk adjustment
£m £m £m £m
£m £m
Insurance contract liabilities as at 1 January 2023 3,582.2 83.6 116.0 38.2 1.6 3,821.6
Changes in the statement of profit and loss
Insurance revenue
Contracts measured under the fair value approach (30.0) - - - - (30.0)
Contracts measured under the full retrospective approach (88.5) - - - - (88.5)
Insurance revenue total (118.5) - - - - (118.5)
Insurance service expenses - (33.1) 106.2 5.9 0.1 79.1
Incurred claims and other directly attributable expenses
Adjustments to liabilities for incurred claims - - (0.1) (2.9) (0.2) (3.2)
Losses and reversals of losses on onerous contracts - 25.1 - - - 25.1
Amortisation of insurance acquisition cash flows 1.7 - - - - 1.7
Insurance service expense total 1.7 (8.0) 106.1 3.0 (0.1) 102.7
Insurance service result (116.8) (8.0) 106.1 3.0 (0.1) (15.8)
Net finance expenses from insurance contracts 146.9 0.2 - (0.1) - 147.0
Effect of movements in exchange rates (88.3) (2.4) (1.5) (3.3) (0.1) (95.6)
Total amounts recognised in comprehensive income (58.2) (10.2) 104.6 (0.4) (0.2) 35.6
Investment components (140.7) - 140.7 - - -
Cash flows
Premiums received 505.1 - - - - 505.1
Claims and other directly attributable expenses paid - - (261.7) (4.5) - (266.2)
Insurance acquisition cash flows (3.2) - - - - (3.2)
Total cash flows 501.9 - (261.7) (4.5) - 235.7
Insurance contract liabilities as at 30 June 2023 3,885.2 73.4 99.6 33.3 1.4 4,092.9
(c) Movements in insurance contract balances - Analysis by measurement
component - contracts not measured under the PAA
(i) Movements in insurance contract balances for the period 1 January
2024 to 30 June 2024
Unaudited Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Insurance contract liabilities as at 1 January 2024 3,908.0 52.5 170.7 27.5 4,158.7
Changes that relate to current service
CSM recognised for services provided - - (8.8) (1.8) (10.6)
Change in risk adjustment for non-financial risk for risk expired - (3.3) - - (3.3)
Experience adjustments (22.8) - - - (22.8)
Total changes in estimates that relate to current service (22.8) (3.3) (8.8) (1.8) (36.7)
Changes that relate to future service (4.3) 0.3 5.5 - 1.5
Contracts initially recognised in the period
Changes in estimates that adjust the CSM (7.5) 2.0 1.1 4.4 -
Changes in estimates that result in losses or reversals of losses on onerous 39.0 0.8 - - 39.8
underlying contracts
Total changes in estimates that relate to future service 27.2 3.1 6.6 4.4 41.3
Insurance service result 4.4 (0.2) (2.2) 2.6 4.6
Net finance expenses from insurance contracts 172.4 (0.7) 2.0 0.3 174.0
Effect of movements in exchange rates (58.9) (0.9) (3.5) (0.2) (63.5)
Total amounts recognised in comprehensive income 117.9 (1.8) (3.7) 2.7 115.1
Cash flows
Premiums received 146.8 - - - 146.8
Claims and other directly attributable expenses paid (279.0) - - - (279.0)
Insurance acquisition cash flows (2.3) - - - (2.3)
Total cash flows (134.5) - - - (134.5)
Insurance contract liabilities as at 30 June 2024 3,891.4 50.7 167.0 30.2 4,139.3
(ii) Movements in insurance contract balances for the period 1 January
2023 to 30 June 2023 (restated)
Unaudited Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Insurance contract liabilities as at 1 January 2023 3,587.3 46.0 105.7 40.7 3,779.7
Changes that relate to current service
CSM recognised for services provided - - (9.4) (2.7) (12.1)
Change in risk adjustment for non-financial risk for risk expired - (3.4) - - (3.4)
Experience adjustments (22.7) - - - (22.7)
Total changes in estimates that relate to current service (22.7) (3.4) (9.4) (2.7) (38.2)
Changes that relate to future service (69.6) 9.0 62.6 - 2.0
Contracts initially recognised in the period
Changes in estimates that adjust the CSM (14.3) 12.2 1.1 1.0 -
Changes in estimates that result in losses or reversals of losses on onerous 27.8 (5.2) 0.5 - 23.1
underlying contracts
Total changes in estimates that relate to future service (56.1) 16.0 64.2 1.0 25.1
Changes that relate to past service
Adjustments to liabilities for incurred claims (0.1) - - - (0.1)
Total changes in estimates that relate to past service (0.1) - - - (0.1)
Insurance service result 12.6 54.8 (1.7) (13.2)
(78.9)
Net finance expenses from insurance contracts 144.4 0.4 1.7 0.5 147.0
Effect of movements in exchange rates (85.7) (1.3) (4.3) (0.5) (91.8)
Total amounts recognised in comprehensive income (20.2) 11.7 52.2 (1.7) 42.0
Cash flows
Premiums received 499.6 - - - 499.6
Claims and other directly attributable expenses paid (261.7) - - - (261.7)
Insurance acquisition cash flows (3.2) - - - (3.2)
Total cash flows 234.7 - - - 234.7
Insurance contract liabilities as at 30 June 2023 3,801.8 57.7 157.9 39.0 4,056.4
(d) Movements in reinsurance contract balances - Analysis by remaining
coverage and incurred claims
(i) Movements in reinsurance contract balances for the period 1 January
2024 to 30 June 2024
Assets for Remaining Coverage Assets for Incurred Claims
Unaudited Loss-Recovery component For contracts not under PAA Total
Excluding Loss-Recovery Component
Future cash flows Risk adjustment
£m £m £m £m £m £m
Reinsurance contract assets as at 1 January 2024 124.0 6.2 23.3 14.9 0.2 168.6
Reinsurance expenses - allocation of reinsurance (27.3) - - - - (27.3)
Amounts recoverable from reinsurers: - - 25.8 1.2 - 27.0
Recoveries of incurred claims and other directly attributable expenses
Changes in the expected recoveries for past claims - - - (0.8) - (0.8)
Changes in the loss recovery component - (0.1) - - - (0.1)
Net (expenses)/income from reinsurance contracts held (27.3) (0.1) 25.8 0.4 - (1.2)
Net Finance expenses from reinsurance contracts 2.5 - - - - 2.5
Effect of movements in exchange rates 0.5 (0.1) (0.2) (0.6) - (0.4)
Total amounts recognised in comprehensive income (24.3) (0.2) 25.6 (0.2) - 0.9
Investment components (1.0) - 1.0 - - -
Cash flows 27.0 - - - - 27.0
Premiums paid net of ceding commission - - (30.0) (1.1) - (31.1)
Total cash flows 27.0 - (30.0) (1.1) - (4.1)
Reinsurance contract assets as at 30 June 2024 125.7 6.0 19.9 13.6 0.2 165.4
(ii) Movements in reinsurance contract balances for the period 1 January
2023 to 30 June 2023 (restated)
Assets for Remaining Coverage Assets for Incurred Claims
Unaudited Loss-Recovery component For contracts not under PAA Total
Excluding Loss-Recovery Component
Future cash flows Risk adjustment
£m £m £m £m £m £m
Reinsurance contract assets as at 1 January 2023 130.1 4.5 26.6 15.2 0.3 176.7
Reinsurance expenses - allocation of reinsurance (27.5) - - - - (27.5)
Amounts recoverable from reinsurers: - - 21.5 1.6 - 23.1
Recoveries of incurred claims and other directly attributable expenses
Changes in the expected recoveries for past claims - - - (1.4) (0.1) (1.5)
Changes in the loss recovery component - 0.6 - - - 0.6
Net (expenses)/income from reinsurance contracts held (27.5) 0.6 21.5 0.2 (0.1) (5.3)
Net Finance expenses from reinsurance contracts (2.9) - - (0.1) - (3.0)
Effect of movements in exchange rates 0.9 (0.2) (0.4) (1.3) - (1.0)
Total amounts recognised in comprehensive income (29.5) 0.4 21.1 (1.2) (0.1) (9.3)
Investment components (1.3) - 1.3 - - -
Cash flows
Premiums paid net of ceding commission 20.4 - - - - 20.4
Recoveries from reinsurance contracts held - - (23.3) (1.4) - (24.7)
Total cash flows 20.4 - (23.3) (1.4) - (4.3)
Reinsurance contract assets as at 30 June 2023 119.7 4.9 25.7 12.6 0.2 163.1
(e) Movements in reinsurance contract balances - Analysis by measurement
component - contracts not measured under the PAA
(i) Movements in reinsurance contract balances for the period 1 January
2024 to 30 June 2024
Unaudited Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Reinsurance contract assets as at 1 January 2024 106.9 15.2 26.4 5.6 154.1
Changes that relate to current service
CSM recognised for services received - - (1.4) (0.2) (1.6)
Change in risk adjustment for non-financial risk for risk expired - (1.1) - - (1.1)
Experience adjustments 2.4 - - - 2.4
Total changes that relate to current service 2.4 (1.1) (1.4) (0.2) (0.3)
Changes that relate to future service (2.6) 0.1 2.5 - -
Contracts initially recognised in the period
Changes in estimates that adjust the CSM 0.4 2.0 (1.0) (1.3) 0.1
CSM adjustment for income on initial recognition of onerous underlying - - 0.1 - 0.1
contracts
Changes in recoveries of losses on onerous underlying contracts that adjust - - - - -
the CSM
Total changes that relate to future service (2.2) 2.1 1.6 (1.3) 0.2
Net (expense)/income from reinsurance contracts held 0.2 1.0 0.2 (1.5) (0.1)
Net finance income from reinsurance contracts held 2.7 (0.4) 0.2 - 2.5
Effect of movements in exchange rates 0.9 (0.1) (0.5) - 0.3
Total amounts recognised in comprehensive income 3.8 0.5 (0.1) (1.5) 2.7
Cash flows
Premiums paid net of ceding commission 25.6 - - - 25.6
Recoveries from reinsurance contracts held (30.0) - - - (30.0)
Total cash flows (4.4) - - - (4.4)
Reinsurance contract assets as at 30 June 2024 106.3 15.7 26.3 4.1 152.4
(ii) Movements in reinsurance contract balances for the period 1 January
2023 to 30 June 2023 (restated)
Unaudited
Risk Adjustment CSM (new contracts and contracts measured under FRA) CSM (contracts measured under FVA) Total
Present value of future cash flows
£m £m £m £m £m
Reinsurance contract assets as at 1 January 2023 112.6 14.3 26.1 7.9 160.9
Changes that relate to current service
CSM recognised for services received - - (1.7) (0.3) (2.0)
Change in risk adjustment for non-financial risk for risk expired - (1.1) - - (1.1)
Experience adjustments (2.2) - - - (2.2)
Total changes that relate to current service (2.2) (1.1) (1.7) (0.3) (5.3)
Changes that relate to future service (1.7) 0.5 1.2 - -
Contracts initially recognised in the period
Changes in estimates that adjust the CSM 3.1 0.7 (2.2) (1.6) -
CSM adjustment for income on initial recognition of onerous underlying - - 0.3 - 0.3
contracts
Changes in recoveries of losses on onerous underlying contracts that adjust - - 0.7 - 0.7
the CSM
Total changes that relate to future service 1.4 1.2 - (1.6) 1.0
Net (expense)/income from reinsurance contracts held (0.8) 0.1 (1.7) (1.9) (4.3)
Net finance income from reinsurance contracts held (3.1) - 0.1 0.1 (2.9)
Effect of movements in exchange rates 1.5 (0.4) (0.8) - 0.3
Total amounts recognised in comprehensive income (2.4) (0.3) (2.4) (1.8) (6.9)
Cash flows
Premiums paid net of ceding commission 20.3 - - - 20.3
Recoveries from reinsurance contracts held (23.3) - - - (23.3)
Total cash flows (3.0) - - - (3.0)
Reinsurance contract assets as at 30 June 2023 107.2 14.0 23.7 6.1 151.0
11 Borrowings
31
Unaudited December
30 June 2023
2024
£m £m
Tier 2 Debt 200.7 200.6
Amount due in relation to financial reinsurance 3.6 5.3
Term finance 1.8 2.0
Total 206.1 207.9
The fair value of amounts due in relation to Tier 2 debt at 30 June 2024 was
£168.4m (31 December 2023: £148.4m).
The fair value of amounts due in relation to financial reinsurance at 30 June
2024 was £3.0m (31 December 2023: £5.1m).
Term finance comprises capital amounts outstanding on mortgage bonds taken out
over properties held in the unit-linked policyholder funds in the UK. The
mortgage over each such property is negotiated separately, varies in term from
5 to 20 years, and bears interest at fixed or floating rates that are agreed
at the time of inception of the mortgage. The fair value of the term finance
is not materially different to the carrying value shown above.
12 Approval of consolidated report for the six months ended 30 June
2024
This condensed set of consolidated financial statements has been approved by
the Board of Directors on 9 September 2024. A copy of this report will be
available to the public at the Company's registered office, 2nd Floor,
Building 4, West Strand Business Park, West Strand Road, Preston, PR1 8UY and
at www.chesnara.co.uk
FINANCIAL CALENDAR
10 September 2024
Results for the six months ended 30 June 2024 announced
19 September 2024
Interim ex-dividend date
20 September 2024
Interim dividend record date
11 October 2024
Last date for dividend reinvestment plan elections
01 November 2024
Interim dividend payment date
31 December 2024
End of financial year
KEY CONTACTS
Registered and head office
2(nd) Floor, Building 4
West Strand Business Park
West Strand Road
Preston
Lancashire
PR1 8UY
T: 01772 972050
www.chesnara.co.uk (http://www.chesnara.co.uk)
Advisors
Burness Paull LLP
Exchange Plaza
50 Lothian Road
Edinburgh
EH3 9WJ
Auditor
Deloitte LLP
Statutory Auditor
4 Brindley Place
Birmingham
B1 2HZ
Registrars
Link Group
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint Stockbrokers and
Corporate Advisors
Panmure Liberum
Ropemaker Place
Level 12,
25 Ropemaker Street
London
EC2Y 9LY
RBC Capital Markets
100 Bishopsgate
London
EC2N 4AA
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
Lloyds Bank plc
3(rd) Floor, Black Horse House
Medway Wharf Road
Tonbridge
Kent
TN9 1QS
Public Relations Consultants
FWD
15 St Helen's Place
London
EC3A 6DQ
ALTERNATIVE PERFORMANCE MEASURES
Throughout this report we use alternative performance measures (APMs) to
supplement the assessment and reporting of the performance of the group.
These measures are those that are not defined by statutory reporting
frameworks, such as IFRS or Solvency II.
The APMs aim to assess performance from the perspective of all stakeholders,
providing additional insight into the financial position and performance of
the group and should be considered in conjunction with the statutory reporting
measures such as IFRS and Solvency II.
The following table identifies the key APMs used in this report, how each is
defined and why we use them.
APM What is it? Why do we use it?
Group cash generation Cash generation is used by the group as a measure of assessing how much Cash generation is a key measure, because it is the net cash flows to Chesnara
dividend potential has been generated, subject to ensuring other constraints from its life and pensions businesses which support Chesnara's dividend-paying
are managed. capacity and acquisition strategy. Cash generation can be a strong indicator
of how we are performing against our stated objective of 'maximising value
Group cash generation is calculated as the movement in the group's surplus own from existing business'.
funds above the group's internally required capital, as determined by applying
the group's capital management policy, which has Solvency II rules at its
heart.
Divisional cash generation Cash generation is used by the group as a measure of assessing how much It is an important indicator of the underlying operating performance of the
dividend potential has been generated, subject to ensuring other constraints business before the impact of group level operations and consolidation
are managed. adjustments.
Divisional cash generation represents the movement in surplus own funds above
local capital management policies within the three operating divisions of
Chesnara. Divisional cash generation is used as a measure of how much
dividend potential a division has generated, subject to ensuring other
constraints are managed.
Commercial cash generation Cash generation is used by the group as a measure of assessing how much Commercial cash generation aims to provide stakeholders with enhanced insight
dividend potential has been generated, subject to ensuring other constraints into cash generation, drawing out components of the result relating to
are managed. technical complexities or exceptional items. The result is deemed to better
reflect the underlying commercial performance, show key drivers within that.
Commercial cash generation excludes the impact of technical adjustments,
modelling changes and corporate acquisition activity; representing the
underlying commercial cash generated by the business.
Economic Value (EcV) EcV is a financial metric that is derived from Solvency II Own Funds. It EcV aims to reflect the market-related value of in-force business and net
provides a market consistent assessment of the value of existing insurance assets of the non-insurance business and hence is an important reference point
businesses, plus adjusted net asset value of the non-insurance business within by which to assess Chesnara's value. A life and pensions group may typically
the group. be characterised as trading at a discount or premium to its Economic Value.
Analysis of EcV provides additional insight into the development of the
We define EcV as being the Own Funds adjusted for contract boundaries, risk business over time. The EcV development of the Chesnara group over time can be
margin and restricted with-profit surpluses. As such, EcV and Own Funds a strong indicator of how we have delivered to our strategic objectives.
have many common characteristics and tend to be impacted by the same factors.
Economic Value (EcV) earnings The principal underlying components of the Economic Value earnings are: By recognising the market-related value of in-force business (in-force value),
a different perspective is provided in the performance of the group and on the
- The expected return from existing business (being the effect of the unwind valuation of the business. Economic Value earnings are an important KPI as
of the rates used to discount the value in-force); they provide a longer-term measure of the value generated during a period.
The Economic Value earnings of the group can be a strong indicator of how we
- Value added by the writing of new business; have delivered against all three of our core strategic objectives.
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the determination of expected
cash flows; and
- The impact of acquisitions.
EcV operating earnings This is the element of EcV earnings (see above) that are generated from the EcV operating earnings are important as they provide an indication of the
company's ongoing core business operations, excluding any profit earned from underlying value generated by the business. It can help identify profitable
investment market conditions in the period and any economic assumption changes activities and also inefficient processes and potential management actions.
in the future.
EcV economic earnings This is the element of EcV earnings (see above) that are derived from EcV economic earnings are important in order to measure the additional value
investment market conditions in the period and any economic assumption changes generated from investment market factors.
in the future.
Commercial new business profit A more commercially relevant measure of new business profit than that This provides a fair commercial reflection of the value added by new business
recognised directly under the Solvency II regime, allowing for a modest level operations and is more comparable with how new business is reported by our
of return, over and above risk-free, and exclusion of the incremental risk peers, improving market consistency.
margin Solvency II assigns to new business.
Solvency Solvency is a fundamental financial measure which is of paramount importance Solvency gives policyholders comfort regarding the security of their
to investors and policyholders. It represents the relationship between the provider. This is also the case for investors together with giving them a
value of the business as measured on a Solvency II basis and the capital the sense of the level of potential surplus available to invest in the business or
business is required to hold - the Solvency Capital Requirement (SCR). distribute as dividends, subject to other considerations and approvals.
Solvency can be reported as an absolute surplus value or as a ratio.
Funds under management (FuM) FuM reflects the value of the financial assets that the business manages, as FuM are important as it provides an indication of the scale of the business,
reported in the IFRS Consolidated Balance Sheet. and the potential future returns that can be generated from the assets that
are being managed.
Acquisition value gain (incremental value) Acquisition value gains reflect the incremental Economic Value added by a The EcV gain from acquisition will be net of any associated increase in risk
transaction, exclusive of any additional risk margin associated with absorbing margin. The risk margin is a temporary Solvency II dynamic which will run off
the additional business. over time.
Leverage / gearing A financial measure that demonstrates the degree to which the company is It is an important measure as it indicates the overall level of indebtedness
funded by debt financing versus equity capital, presented as a ratio. It is of Chesnara, and it is also a key component of the bank covenant arrangements
defined as debt divided by debt plus equity, as measured under IFRS. held by Chesnara.
IFRS capital base This is the IFRS net equity for the group plus the consolidated CSM net of It is a better measure of the value of the business than net equity as it
reinsurance and tax. takes into account the store of deferred profits held in the balance sheet, as
represented by the CSM, including those as yet unrecognised profits from
writing new business and acquisitions.
Policies / policy count Policy count is the number of policies that the group manages on behalf of This is important to show the scale of the business, particularly to provide
customers. context to the rate at which the closed book business is maturing. In our
open businesses, the policy count shows the net impact of new business versus
policy attrition.
GLOSSARY
AGM Annual General Meeting.
ALM Asset Liability Management - management of risks that arise due to mismatches
between assets and liabilities.
APE Annual Premium Equivalent - an industry wide measure that is used for
measuring the annual equivalent of regular and single premium policies.
CA Countrywide Assured plc.
CALH Countrywide Assured Life Holdings Limited and its subsidiary companies.
CASLP CASLP Ltd (formerly Sanlam Life & Pensions UK)(.
BAU cash generation This represents divisional cash generation plus the impact of non-exceptional
group activity.
BLAGAB Basic life assurance and general annuity business
Cash generation This represents the operational cash that has been generated in the period.
The cash generating capacity of the group is largely a function of the
movement in the solvency position of the insurance subsidiaries within the
group and takes account of the buffers that management has set to hold over
and above the solvency requirements imposed by our regulators. Cash generation
is reported at a group level and also at an underlying divisional level
reflective of the collective performance of each of the divisions prior to any
group level activity.
Commercial cash generation Cash generation excluding the impact of technical adjustments, modelling
changes and exceptional corporate activity; the inherent commercial cash
generated by the business.
Core surplus emergence Absolute surplus movement of the divisions including Chesnara entity but
adjustments will be made for the impact of items such as FX, T2/T3
restrictions, acquisition impacts and shareholder dividends as deemed
appropriate. (Note: Any adjustments will be subject to Board approval (and
Remco approval if they impact remuneration) and will be transparently
reported.)
Divisional cash generation This represents the cash generated by the three operating divisions of
Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.
CSM Contractual Service Margin (CSM) represents the unearned profit that an entity
expects to earn on its insurance contracts as it provides services.
DNB De Nederlandsche Bank is the central bank of the Netherlands and is the
regulator of our Dutch subsidiaries.
DPF Discretionary Participation Feature - A contractual right under an insurance
contract to receive, as a supplement to guaranteed benefits, additional
benefits whose amount or timing is contractually at the discretion of the
issuer.
Dutch business Scildon and the Waard Group, consisting of Waard Leven N.V., Waard Schade N.V.
and Waard Verzekeringen B.V.
Economic profit A measure of pre-tax profit earned from investment market conditions in the
period and any economic assumption changes in the future (alternative
performance measure - APM).
EcV Economic Value is a financial metric that is derived from Solvency II Own
Funds. It provides a market consistent assessment of the value of existing
insurance businesses, plus adjusted net asset value of the non-insurance
business within the group.
FCA Financial Conduct Authority.
FI Finansinspektionen, being the Swedish Financial Supervisory Authority.
Form of proxy The form of proxy relating to the General Meeting being sent to shareholders
with this document.
FSMA The Financial Services and Markets Act 2000 of England and Wales, as amended.
GMM General measurement model - the default measurement model which applies to
insurance contracts with limited or no pass-through of investment risks to
policyholders.
Group Chesnara plc and its existing subsidiary undertakings.
Group cash generation This represents the absolute cash generation for the period at total group
level, comprising divisional cash generation as well as both exceptional and
non-exceptional group activity.
Group Own Funds In accordance with the UK's regulatory regime for insurers it is the sum of
the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the group in those capital
resources.
Group SCR In accordance with the UK's regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Group solvency Group solvency is a measure of how much the value of the company exceeds the
level of capital it is required to hold in accordance with Solvency II
regulations.
HCL HCL Insurance BPO Services Limited.
IFRS International Financial Reporting Standards.
IFA Independent Financial Advisor.
KPI Key performance indicator.
LACDT Loss Absorbing Capacity of Deferred Tax
Leverage (gearing) A financial measure that demonstrates the degree to which the company is
funded by debt financing versus equity capital, usually presented as a ratio,
defined as debt divided by debt plus equity, with the equity denominator
adding back the net of tax CSM liability, as measured under IFRS
London Stock Exchange London Stock Exchange plc.
LTIP Long-Term Incentive Plan - A reward system designed to incentivise executive
directors' long-term performance.
Movestic Movestic Livförsäkring AB.
Modernac Modernac SA, a previously associated company 49% owned by Movestic.
New business The present value of the expected future cash inflows arising from business
written in the reporting period.
Official List The Official List of the Financial Conduct Authority.
Operating profit A measure of the pre-tax profit earned from a company's ongoing core business
operations, excluding any profit earned from investment market conditions in
the period and any economic assumption changes in the future (alternative
performance metric - APM).
Ordinary shares Ordinary shares of 5 pence each in the capital of the company.
ORSA Own Risk and Solvency Assessment.
Own Funds Own Funds - in accordance with the UK's regulatory regime for insurers it is
the sum of the individual capital resources for each of the regulated related
undertakings less the book-value of investments by the company in those
capital resources.
PAA Premium allocation approach - a simplified measurement model which can be
applied to short term contracts.
PRA Prudential Regulation Authority.
QRT Quantitative Reporting Template.
RA Risk adjustment is the additional reserve held for non-financial risks.
RCF 3 year Revolving Credit Facility of £150m (currently unutilised) renewed in
July 2024.
Resolution The resolution set out in the notice of General Meeting set out in the FY23
accounts.
RMF Risk Management Framework.
Robein Leven Robein Leven N.V.
Scildon Scildon N.V.
Shareholder(s) Holder(s) of ordinary shares.
Solvency II A fundamental review of the capital adequacy regime for the European insurance
industry. Solvency II aims to establish a set of EU-wide capital requirements
and risk management standards and has replaced the Solvency I requirements.
Solvency (absolute) surplus A measure of how much the value of the company (Own Funds) exceeds the level
of capital it is required to hold
Standard Formula The set of prescribed rules used to calculate the regulatory SCR where an
internal model is not being used.
STIS Short-Term Incentive Scheme - A reward system designed to incentivise
executive directors' short-term performance.
SCR In accordance with the UK's regulatory regime for insurers it is the sum of
individual capital resource requirements for the insurer and each of its
regulated undertakings.
Swedish business Movestic and its subsidiaries and associated companies.
S&P Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
SS&C SS&C Technologies
TCF Treating Customers Fairly - a central PRA principle that aims to ensure an
efficient and effective market and thereby help policyholders achieve fair
outcomes.
Tier 2 Term debt capital (Tier 2 Subordinated Notes) issued in February 2022 with a
10.5 year maturity and 4.75% coupon rate.
Transfer ratio The proportion of new policies transferred into the business in relation to
those transferred out.
TSR Total Shareholder Return, measured with reference to both dividends and
capital growth.
UK or United Kingdom The United Kingdom of Great Britain and Northern Ireland.
UK business CA, S&P,CASLP and Canada Life.
VA The Volatility Adjustment is a measure to ensure the appropriate treatment of
insurance products with long-term guarantees under Solvency II. It represents
an adjustment to the rate used to discount liabilities to mitigate the effect
of short-term volatility bond returns.
VFA Variable fee approach - the measurement model that is applied to insurance
contracts with significant investment-related pass-through elements.
Waard The Waard Group.
NOTE ON TERMINOLOGY
As explained in the IFRS financial statements, the principal reporting
segments of the group are:
UK which comprises the original business of Countrywide Assured plc, the group's
original UK operating subsidiary: City of Westminster Assurance Company
Limited (which was acquired by the group in 2005) the long-term business of
which was transferred to Countrywide Assured plc during 2006; S&P which
was acquired on 20 December 2010. This business was transferred from Save
& Prosper Insurance Limited and Save & Prosper Pensions Limited to
Countrywide Assured plc during 2011; Protection Life Company Limited which was
acquired by the group in 2013, the long-term business of which was transferred
into Countrywide Assured plc in 2014, as well as the portfolio of policies
acquired from Canada Life on 16 May 2023 and reinsured into Countrywide
Assured plc. The business of CASLP Ltd (formerly Sanlam Life & Pensions
(UK) Limited) which was acquired on 28 April 2022 was transferred to
Countrywide Assured plc on 31 December 2023, using the Court approved scheme
under Part VII of the Financial Services and Markets Act 2000.
Movestic which was purchased on 23 July 2009 and comprises the group's Swedish
business, Movestic Livförsäkring AB and its subsidiary and associated
companies;
The Waard Group which was acquired on 19 May 2015 and comprises two insurance companies; Waard
Leven N.V. and Waard Schade N.V.; and a service company, Waard Verzekeringen;
Robein Leven NV acquired on 28 April 2022; and the insurance portfolio of
Conservatrix acquired on 1 January 2023
Scildon which was acquired on 5 April 2017; and
Other group activities which represents the functions performed by the parent company, Chesnara
plc. Also included in this segment are consolidation adjustments.
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