TIDMCSN
RNS Number : 1323N
Chesnara PLC
21 September 2023
21 September 2023
LEI Number: 213800VFRMBRTSZ3SJ06
Chesnara plc
("Chesnara", the "Company" or the "Group")
CONTINUED ACQUISITION MOMENTUM DRIVES ECONOMIC VALUE GROWTH AND
POSITIVE CASH GENERATION
Chesnara reports its 2023 half year results. Key highlights for
the period are:
-- Completion of the acquisition of Conservatrix's insurance portfolio in the Netherlands
-- Acquisition of an individual protection portfolio from Canada Life UK
-- New UK strategic partnership with SS&C Technologies
-- Positive Group commercial cash generation of GBP21.8m
-- Robust solvency of 205%, materially above our 140-160% normal operating range
-- Increased Economic value ("EcV") of GBP523.2m (347p per share)
-- Improved commercial new business growth of GBP6.3m delivered
-- IFRS profit before tax of GBP16.0m, and increase of CSM of GBP54.2m in the period
-- 3% increase to the interim dividend to 8.36p per share; the
19(th) year of consecutive increases
Commenting on the results, Steve Murray, Group CEO, said:
"The two acquisitions we delivered in the first half of 2023
show we have continued momentum behind our acquisition strategy.
The first half of the year has been one of strong delivery
including IFRS 17 and our new strategic partnership with SS&C
which supports Chesnara's future growth ambitions in the UK. The
wider business has also performed robustly despite continuing
market uncertainty. We retain a strong and resilient solvency
position significantly above our normal operating range and
substantial cash balances at the holding company level to fund
future acquisitions. We remain optimistic about our ability to
participate in future M&A and continue to be highly confident
in our ability to finance and execute such transactions on
attractive terms for both vendors and our shareholders."
A half year results presentation is being held at 9:30am on 21
September 2023 - participants can register here .
Further details on the financial results are as follows :
2023 HALF YEAR FINANCIAL AND STRATEGIC HIGHLIGHTS
CASH GENERATION AND DIVIDS - 19 YEARS OF DIVID GROWTH
-- Divisional commercial cash(1) generation excluding FX
translation impacts of GBP20.0m in HY 2023 (HY 2022: GBP18.4m)
.
-- Group commercial cash(1) generation of GBP21.8m in HY 2023 (HY 2022: GBP(3.0)m).
-- The Board has declared a 2023 interim dividend of 8.36p per
share (HY 2022 interim dividend of 8.12p), which is a 3% increase
compared to HY 2022 and extends the period of uninterrupted interim
dividend growth to 19 years.
FINANCIAL RESILIENCE - FLEXIBILITY IN FINANCING FUTURE
M&A
-- Solvency II ratio of 205% as at 30 June 2023 (31 December
2022: 197%), materially above our normal operating range of between
140-160%.
-- Cash balances at Group holding companies increased over the
period to GBP127.5m (31 December 2022: GBP108.1m), providing
substantial resources to fund future acquisitions.
-- Leverage ratio(2) of 29.5% as at 30 June 2023 (31 December
2022: 37.6%, restated 31 December 2022: 30.3%) following the
introduction of IFRS 17 over the period and a change in leverage
definition to include 'net of tax CSM'.
DELIVERING VALUE - GROWTH THROUGH ACQUISITIONS
-- The acquisition of the Conservatrix insurance portfolio was
completed and the Canada Life UK protection portfolio transaction
executed during the first half of 2023, adding further scale to the
Group's Dutch and UK businesses respectively.
-- Commercial new business profit(3) of GBP6.3m in HY 2023 (HY 2022: GBP4.6m).
-- Economic Value ("EcV") of GBP523.2m (31 December 2022:
GBP511.7m) has increased over the year to date due to the
Conservatrix and Canada Life acquisitions as well as positive
equity markets in Sweden and the Netherlands, partly offset by the
payment of the 2022 Final Dividend and the negative impact of
foreign exchange rates.
INTRODUCTION OF IFRS 17
-- Introduction of IFRS 17 during the period, with starting
shareholder equity as at 31 December 2022 of GBP384.6m, compared to
GBP333.1m under IFRS 4.
-- IFRS pre-tax profits were GBP16.0m in HY 2023 (HY 2022
restated IFRS pre-tax losses: GBP54.2m), driven by insurance
profits and positive investment returns over the period.
-- Increase in CSM of GBP54.2m over the first six months of the
year, largely due to the completion of the two acquisitions over
the period.
DIVID DETAILS
-- The interim dividend of 8.36p per share is expected to be
paid on 10 November 2023. The ordinary shares will be quoted
ex-dividend on the London Stock Exchange as of 28 September 2023.
The record date for eligibility for payment will be 29 September
2023.
ANALYST PRESENTATION
-- A presentation for analysts will be held at 9.30am on 21
September 2023 at the offices of RBC Capital Markets, 100
Bishopsgate, London, EC2N 4AA, which will be available to join
online. A replay will subsequently be posted to the corporate
website at www.chesnara.co.uk.
-- To join the webcast, please register using the following link here .
Investor Enquiries
Sam Perowne
Head of Strategic Development & Investor Relations
Chesnara plc
E - sam.perowne@chesnara.co.uk
Media Enquiries
Roddy Watt
Director, Capital Markets
FWD
T - 020 7280 0651 / 07714 770 493
E - roddy.watt@fwdconsulting.co.uk
Notes to Editors
Chesnara (CSN.L) is a European life and pensions consolidator
listed on the London Stock Exchange. It administers over one
million policies and operates as Countrywide Assured and CASLP in
the UK, as The Waard Group and Scildon in the Netherlands, and as
Movestic in Sweden.
Following a three-pillar strategy, Chesnara's primary
responsibility is the efficient administration of its customers'
life and savings policies, ensuring good customer outcomes and
providing a secure and compliant environment to protect
policyholder interests. It also adds value by writing profitable
new business in Sweden and the Netherlands and by undertaking
value-adding acquisitions of either companies or portfolios.
Consistent delivery of the Company strategy has enabled Chesnara
to increase its dividend for 19 years in succession.
Further details are available on the Company's website (
www.chesnara.co.uk ).
Notes
Note 1 Group cash generation represents the surplus cash that
the group has generated in the period. Cash generation is largely a
function of the movement in the solvency position, used by the
group as a measure of assessing how much dividend potential has
been generated, subject to ensuring that other constraints are
managed.
Divisional cash generation represents the cash generated by the
three operating divisions of Chesnara (UK, Sweden and the
Netherlands), exclusive of group level activity.
Commercial cash generation is used as a measure of assessing how
much dividend potential has been generated, subject to ensuring
other constraints are managed. It excludes the impact of technical
adjustments, modelling changes and corporate acquisition activity;
representing the group's view of the commercial cash generated by
the business.
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 net of tax
CSM', as measured under IFRS.
Note 3 Commercial new business profit is a more commercially
relevant measure of new business profit than that recognised
directly under the Solvency II regime, allowing for a modest level
of return, over and above risk-free, and exclusion of the
incremental risk margin Solvency II assigns to new business. This
provides a fair commercial reflection of the value added by new
business operations.
The Board approved this statement on 20 September 2023.
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
GROUP CASH GENERATION (exc. the impact of acquisitions) GBP11.1
M SIX MONTHSED 30 JUNE 2022 GBP21.9 M
COMMERCIAL CASH GENERATION (exc. the impact of acquisitions)
GBP21.8 M SIX MONTHSED 30 JUNE 2022 GBP(3.0) M
Both of the group's cash metrics were positive over the period.
Group cash generation includes a material adverse impact from the
symmetric adjustment (SA) of GBP10.6m (six months to 30 June 2022:
+GBP30.8m). The recovery we have seen across equity markets in H1
whilst a positive overall for the group means we hold additional
capital which has a short term impact on cash generation.
Commercial cash looks through the SA impact and is deemed to
better reflect the underlying business performance. Total
divisional commercial cash, excluding FX impacts is GBP20.0m which,
on an annualised basis, provides 115% coverage of the 2022
dividend. No specific capital enhancing management actions have
been executed during the period, as is often the case during the
first half of the year.
GROUP SOLVENCY 205% 31 DECEMBER 2022: 197%
The group's solvency has increased in the period and shows
material headroom over and above our normal operating range of
140-160%. The ratio does not include any temporary impacts from
either transitional benefits or a materially positive closing SA
position. The headline ratio benefits from the capital efficiencies
of the Tier 2 debt raised in 2022.
FUNDS UNDER MANAGEMENT GBP11.0 BN 31 DECEMBER 2022: GBP10.6
BN
FuM have increased by c4% since the year end. This is largely
due to the acquisitions in the period. Excluding the acquisition
impacts, FUM remain broadly unchanged.
ECONOMIC VALUE GBP523.2 M 31 DECEMBER 2022 GBP511.7 M
Strong earnings in the period have more than offset the impact
of the latest dividend payment (GBP22.8m) and FX consolidation
impact (GBP26.8m)* resulting in a GBP11.5m growth in Economic
Value.
* Of the FX consolidation impact, cGBP6.7m was offset by
movement in the fair value of derivatives held to hedge FX
movements.
ECONOMIC VALUE EARNINGS GBP61.0 M SIX MONTHSED 30 JUNE 2022
GBP(75.7) M
A strong EcV earnings period with all elements of the EcV growth
model ('the Chesnara fan') making individually significant positive
contributions. Acquisition gains and real world returns have had
the most material impact but it is equally pleasing to see a modest
positive operating result following a period of negative operating
variances.
COMMERCIAL NEW BUSINESS PROFIT GBP6.3 M SIX MONTHSED 30 JUNE
2022 GBP4.6 M
Commercial new business profits increased for the period which
is a positive result given the local market challenges in both
Sweden and the Netherlands. At current profit levels we deem the
new business strategy to be materially beneficial to the wider
group outlook.
IFRS PRE-TAX PROFIT (UNAUDITED) GBP16.0 M SIX MONTHSED 30 JUNE
2022 GBP54.2 M LOSS
The result is a material improvement on H1 22 and includes an
acquisition gain of GBP4m and investment profits of GBP25.0m.
Acquisitions in the period have added GBP55.7m of CSM* which by
design is not recognised in the profit in the period and will
instead contribute to insurance profits in future periods. The
prior year loss was largely due to adverse economic market impacts
but is much reduced versus the corresponding loss reported under
IFRS 4.
* Contractual Service Margin (CSM) represents the unearned
profit that an entity expects to earn on its insurance contracts as
it provides services.
IFRS TOTAL COMPREHENSIVE INCOME GBP0.2 M SIX MONTHSED 30 JUNE
2022 GBP29.8 M LOSS
Total comprehensive income includes a foreign exchange loss of
GBP15.3m (six months to 30 June 2022: GBP1.9m gain).
INTERIM DIVID INCREASED FOR THE 19TH CONSECUTIVE YEAR
Increase in the interim dividend for the year of 3% to 8.36p per
share (2022: 8.12p interim), supported by divisional cash
contributions in the period and a strong group solvency. The
previously announced acquisition in the Netherlands of the
insurance portfolio of Conservatrix completed on 1 January 2023 and
we also announced the acquisition of an individual protection
portfolio in the UK from Canada Life on 16 May 2023, with a
corresponding reinsurance agreement executed. Both of these
acquisitions are expected to positively support future cash
generation and we continue to have clear line of sight to sources
of mid to long term cash generation.
ECONOMIC BACKDROP
Overall it has been a period of economic growth. Significant
volatility has remained across most asset classes and inflation has
continued to run ahead of central bank targets with materially
increased interest rates. There have therefore been comparatively
modest investment returns and mixed economic results in our
operating divisions. Different economic factors have impacted each
of the businesses to varying extents across our main financial
metrics. Key items include the impact of rising yields and equity
indices supporting growth in the UK and Sweden respectively, while
in both the Netherlands and Sweden, currency movements,
specifically sterling appreciation, caused adverse foreign exchange
impacts to the divisional results on consolidation.
THE GROUP CONTINUES TO EXPAND THROUGH M&A
The opening half of 2023 has been another busy period for
Chesnara with two acquisitions recognised in the period, delivering
a combined day one EcV gain of GBP28.4m. Following the announcement
late in 2022, we completed the acquisition of the insurance
portfolio of Conservatrix in the Netherlands, with an EcV gain of
GBP21.7m and increase in Waard's policies under administration of
c50% to 170,000.
In May, expansion in the UK continued for the second year
running, with the acquisition of a protection portfolio from Canada
Life. The acquisition has initially been executed through entering
into a 100% reinsurance agreement with Canada Life, and these
policies will subsequently transfer to the division through a Part
VII transfer process. The transaction has delivered an EcV gain of
GBP6.7m and additional policies of c47,000 to the UK division. We
remain optimistic about the outlook for future deals and have
material solvency headroom and liquid resources to support our
ambitions.
NEW OUTSOURCING ARRANGEMENTS, BUSINESS INTEGRATIONS & IFRS
17 DELIVERY
In the UK, we have entered into a new long-term strategic
partnership for the outsourcing of operations for the majority of
the division, providing surety over the future operating costs of
the business over a 10 year period. The Part VII transfer of the
policies of CASLP to Countrywide Assured plc has progressed well,
remaining on track to be delivered by the end of 2023.
In the Netherlands, following completion of the acquisition in
January, the Conservatrix policy portfolio was successfully
integrated into the Waard Group. At a group and divisional level,
IFRS 17 has been implemented for this first reporting period, with
reporting processes now transitioning to business as usual
operations following several years of planning and
implementation.
These financial highlights include the use of Alternative
Performance Measures (APMs) that are not required to be reported
under International Financial Reporting Standards.
1 - Group cash generation represents the surplus cash that the
group has generated in the period. Cash generation is largely a
function of the movement in the solvency position, used by the
group as a measure of assessing how much dividend potential has
been generated, subject to ensuring other constraints are
managed.
2 - Divisional cash generation represents the cash generated by
the three operating divisions of Chesnara (UK, Sweden and the
Netherlands), exclusive of group level activity.
3 - Commercial cash generation is used as a measure of assessing
how much dividend potential has been generated, subject to ensuring
other constraints are managed. It excludes the impact of technical
adjustments, modelling changes and corporate acquisition activity;
representing the group's view of the Commercial cash generated by
the business.
4 - Funds Under Management (FuM) represents the sum of all
financial assets on the IFRS balance sheet.
5 - Economic Value (EcV) is a financial metric derived from
Solvency II. It provides a market consistent assessment of the
value of existing insurance businesses, plus adjusted net asset
value of the non-insurance business within the group.
6 - Economic Value earnings are a measure of the value generated
in the period, recognising the longer-term nature of the group's
insurance and investment contracts.
7 - Commercial new business represents the best estimate of cash
flows expected to emerge from new business written in the period.
It is deemed to be a more commercially relevant and market
consistent measurement of the value generated through the writing
of new business, in comparison to the restrictions imposed under
the Solvency II regime.
8 - Economic profit is a measure of pre-tax profit earned from
investment market conditions in the period and any economic
assumption changes in the future.
9 - Operating profit is a measure of the pre-tax profit earned
from a company's ongoing core business operations, excluding any
profit earned from investment market conditions in the period and
any economic assumption changes in the future.
CHAIR'S STATEMENT
The group has delivered positive cash generation and Economic
Value growth during the period whilst continuing to have a strong
solvency position. This has supported an increase in the interim
dividend for a 19th consecutive year.
LUKE SAVAGE, CHAIR
CASH EMERGENCE, DIVID GROWTH AND FINANCIAL STABILITY
As I have highlighted to investors before, Chesnara has a strong
track record of delivering cash generation across a variety of
market conditions. The first half of 2023 has been no exception,
with total divisional commercial cash generation of GBP20.0m
(before FX impacts), leaving us well positioned to continue to
extend our dividend growth. Our shareholders will receive 8.36p per
share interim dividend, an increase of 3% for the 19th consecutive
year.
Financial stability is at the heart of the Chesnara business and
its financial model. First and foremost, it is fundamental to
providing financial security to our customers. Strong and stable
solvency is also critical to the investment case for both our
equity and debt investors and provides us the solvency headroom to
execute M&A.
I am pleased to report a continued strong and stable Solvency II
ratio of 205%. This is significantly above our normal operating
range, providing us with considerable strategic flexibility. Our
solvency position remains underpinned by a well-diversified
business model, a focus on responsible risk-based management and
resilient and reliable cash flows from our businesses.
Steve will talk about these financial dynamics further in his
report that follows.
PEOPLE AND DELIVERY
Across the group, our people continue to deliver. We have
another two deals to report in the period. Firstly, we completed
the previously announced acquisition of the Conservatrix insurance
portfolio in the Netherlands. Later in May, we announced the
acquisition of Canada Life's protection portfolio in the UK
(initially executed through a reinsurance arrangement). It is clear
from the results that the deals have created significant value for
investors (GBP28.4m of Economic Value gains). What is sometimes
less obvious is the operational impact of such deals. Staff in the
Netherlands and UK have worked extremely hard to integrate the
newly acquired businesses and portfolios, including Sanlam Life and
Pensions (CASLP). We have made good progress implementing the
operational and governance framework required, and the insurance
portfolio of Conservatrix is now fully integrated into the Waard
Group. We remain mindful that such challenging work, although
rewarding, can be stressful and so we continue to invest in staff
welfare programmes to support our people.
Another major development during the period has been the
announcement of a new long term outsource partner in the UK,
SS&C. This positive development creates a sound commercial and
operational foundation for long term customer support and business
development.
Last but not least, the transition to the new insurance contract
accounting regime, IFRS 17, has gone live in 2023 and our half year
accounts have applied both IFRS 17 and IFRS 9. Resource across the
group has worked tirelessly on this programme for many years and
whilst there is still more to do for the full year financial
statements, we remain on track and the change has been delivered at
a cost that is well within generally recognised industry
benchmarks.
In short, it has been a period of significant operational
delivery and I would like to take this opportunity to thank staff
for their continued commitment and efforts.
PURPOSE
At Chesnara, we help protect customers and their dependants
through the provision of life, health, and disability cover or by
providing savings and pensions 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.
Profitability, which in our case manifests itself in cash
generation. EcV growth and solvency, will always remain of key
importance for many reasons. These include our desire to offer
competitive returns to shareholders and fund our debt investor
coupon payments but also because it creates financial stability for
customers. 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 3P's; Profit, People and Planet.
We have always been fully respectful of Environmental, Social
and Governance ('ESG') matters. In particular, we have positioned
governance as being a core foundation to the business model and
have a well-established governance framework.
Over recent years we have increased our focus on environmental
and social matters and we have accelerated and deepened this focus
during the year. Our inaugural Annual Sustainability Report (ASR)
issued in March 2023 laid out our wider ambitions in this regard.
We need to move from positive intent to real action and I am
pleased to report that this has begun in earnest during the year.
The path to sustainability can be long and complicated but we have
begun to invest in developing sustainability focused resource and
infrastructure and a well-resourced and well supported group wide
programme is in place. A very visible and encouraging development
was the success of our first group-wide Sustainability Summit held
in June. I was hugely encouraged by the level of engagement from
all levels across the group and by the clear alignment of
ambitions. Building on our published commitments, the programme has
identified very specific workstreams which in turn have defined
initial and long term objectives. I am confident that we will
deliver against those objectives and will report progress in my
year end statement. The objectives are a mix of items that create
solid foundations for longer term change together with some shorter
term actions that will begin to make a real world positive
impact.
Our sources of future growth remain strong. In fact, in the
first half of 2023 all components of the "Chesnara fan" (a
diagrammatic illustration of value growth sources) were materially
positive. The resultant EcV earnings of GBP61.0m represents a
significant level of recovery of the economic value reduction
primarily from falling equity markets we saw in 2022. We retain our
view that, despite short-term market volatility, equities continue
to offer a source of long-term value enhancement.
In addition, the outlook for acquisitions is positive. We
continue to expect the market to be active and our strong and
stable solvency, alongside the increased parent company cash
balance, leave us well positioned to participate in that
market.
Luke Savage,
Chair
20 September 2023
CHIEF EXECUTIVE OFFICER'S REPORT
The group has continued to generate cash and we have also seen
material EcV earnings generated for the period. Our people have
delivered another two acquisitions as well as extensive work on
acquisition integrations, securing a new UK strategic partnership
and the transition to IFRS 17.
STEVE MURRAY, CEO
INTRODUCTION & RESULTS
The first half of 2023 has been another busy and productive
period for Chesnara across all aspects of strategic focus areas
namely:
1. Running in-force insurance and pensions books efficiently and effectively;
2. Seeking out and delivering value enhancing M&A opportunities: and
3. Writing focused, profitable new business where we are
satisfied an appropriate return can be made.
The increased momentum behind the acquisition strategy, one of
our three strategic pillars, has continued with a further two deals
recognised in the period (5 now in the last 2 years). The two
recent acquisitions have added GBP28.4m of additional value to the
group against consideration paid of GBP9m and total group capital
deployed of GBP35m. And on both deals we have made significant
progress with the integration of these businesses into our
operation and governance framework. We also saw an increased
contribution from new business for the period primarily driven by
increased sales in Scildon.
We have over 1 million customers in Chesnara and we take the
responsibility of delivering for them every day very seriously.
A major highlight in the period is the signing of a new
outsource arrangement in the UK, which we announced in May. 68
Chesnara colleagues have now transferred to SS&C and we have
begun the process to migrate our UK policies to our new operating
platform. I am confident that SS&C will become a key partner,
enabling the UK business to continue to deliver high quality and
cost effective servicing with the capacity and flexibility to
support continued M&A developments in the UK.
There has been an increased focus on defining and delivering the
group sustainability vision in line with the commitments we set out
in our inaugural Annual Sustainability Report (ASR).
After five years of planning, there has also been a significant
focus on ensuring we could report on the new IFRS 17 basis. Process
wise, we are in good shape and the financial impact of the
transition to the new reporting framework is positive and in line
with the guidance we gave investors alongside our full year 2022
results. We have worked closely with our auditors over the course
of our implementation programme in order to ensure the audit of our
opening balance sheet and restated 2022 financial statements will
be fully audited in time for the release of our year end 2023
Annual Report and Accounts.
Pre dividend and FX impacts, the group Economic Value grew
materially by GBP61.0m or 12%. All aspects of our business model
and the "Chesnara Fan", including new business, M&A, and
driving value from the in force business were materially
positive:
EcV Earnings GBPm
========================== =====
New business 4.7
Operating 3.9
Economic & non-operating 24.0
Acquisitions 28.4
Total 61.0
The derivative we put in place towards the end of 2022 to reduce
the exposure to extreme FX movements also supported cash and
capital generation in 2022. We do however remain exposed to the
risks and opportunities relating to FX movements within the cap and
floor of the derivative. During the first half of 2023 sterling has
strengthened marginally against the euro and more markedly against
the Swedish krona resulting in a negative FX impact on EcV of
GBP26.8m.
The group continued to generate cash with total commercial cash
generation of GBP21.8m. We see this as a good result given the
underlying economic conditions in the first half and the fact that
no material capital management actions have been completed in the
first half of the year. We will continue to assess management
actions and determine the most appropriate time to activate
them.
In terms of cash resources, as expected we have seen a
significant flow of dividends in the period from our divisions with
GBP57m having been remitted to Chesnara at the half year (a further
GBP10m has been received in September and cGBP5m is also due later
in 2023). This contributed to a GBP19m increase in the parent
company (including holding companies) surplus cash balance and a
closing amount of GBP128m (which included the payment of the FY
dividend). Our group solvency ratio has also improved further
during the period closing at 205% (31 December 2022:197%). As Luke
highlighted, this is materially above our normal operating range of
140-160% and provides us with substantial headroom to support
further strategic activity.
Our inaugural IFRS 17 numbers show a GBP51.5m increase in net
equity as at 31 December 2022. As at 30 June 2023 total net equity
is GBP362.4m with a contractual service margin (CSM) of GBP157.2m.
This results in a leverage ratio of 29.5% (including the CSM) which
is a significant reduction compared to the ratio of 37.6% reported
at 31 December 2022 under the previous IFRS reporting regime.
Whilst the CSM gives a useful indication of future profits on our
insurance business it should be noted that in fact only 42% of our
total portfolio is classified as insurance. As such the CSM by no
means represents the full future profit of the group as it excludes
investment contracts.
Whilst the move to IFRS 17 has been a very material programme of
work for the group, you will note that my wider review continues to
focus on metrics linked to Solvency II. We continue to believe that
the Solvency II metrics better support a commercial assessment of
the business and remain the metrics upon which we manage the
group.
CONTINUED CASH GENERATION AND STRONG SOLVENCY
At the heart of the Chesnara financial model and investment case
is resilient cash generation and stable solvency, across a wide
variety of market conditions.
RESILIENT CASH GENERATION
The total group commercial cash generation (excluding the impact
of acquisitions) during the period to 30 June 2023 was GBP21.8m (6
months to 30 June 2022: GBP(3.0)m). As a reminder, we define cash
generation as the movement in the group's surplus Own Funds above
the group's internally required capital. Commercial cash generation
then excludes the impact of the symmetric adjustment*. The surplus
can be impacted by equity markets and currency movements in the
near term and also by consolidation adjustments. The divisional
results pre-consolidation therefore give a good reflection of the
dividend potential rather than looking at the consolidated group
figures in isolation.
The divisional commercial cash generation for the period
excluding FX translation impacts was GBP20.0m (six months to 30
June 2022: GBP18.4m), with all territories contributing positively
over the period. On an annualised basis the total of GBP40.0m
represents 115% coverage of the total 2022 dividend payment and
shows significant future dividend paying capacity. There remains
the potential to take management actions during the remainder of
the year. This means we continues to be very confident in our
ability to cover dividend and debt coupon payments for the full
year and further forward.
(*) Symmetric adjustment: the Solvency II capital requirement
calculation includes an adjusting factor that reduces or increases
the level of the equity capital required depending on historical
market conditions. Following periods of market growth, the factor
tends to increase the level of capital required and conversely, in
falling markets the capital requirement becomes less onerous.
Commercial cash generation by territory:
Divisional cash generation
GBPm
============================ ======
UK 12.6
Sweden 4.7
Netherlands 2.8
Divisional Total 20.0
Other group 8.8
FX (7.0)
Group Total 21.8
DIVISIONAL COMMERCIAL CASH GENERATION REPRESENTS 115% COVERAGE
OF THE 2022 SHAREHOLDER DIVID(DELTA>)
(DELTA>) on an annualised basis excluding FX consolidation
impacts
The Chesnara parent company cash (including holding companies)
and instant access liquidity fund balance at 30 June 2023 has
increased to GBP128m (31 December 2022: GBP108m). Cash reserves
have benefitted from the GBP57.0m of divisional dividend receipts
in the first half of the year, with an additional GBP10m having
been received in September (a further cGBP5m is also due later in
the year). This provides future acquisition funding capacity and
further supports the sustainable funding of the group dividend and
payment of our Tier 2 debt coupon.
Looking forward, we continue to have a strong line of sight to
future cash generation over the medium and longer term from the
unwind of risk margin and SCR, investment returns above risk free
rates, wider synergies and management actions. And that's before
further potential benefits from new business and further
acquisitions.
STRONG SOLVENCY
During the period we have seen a further increase in the group
solvency ratio to 205%.
Solvency ratio
Solvency ratio %* Solvency surplus GBPm
========== ================== ======================
2019 155 211
2020 156 204
2021 152 191
2022 197 298
Jun 2023 205 345
*Normal operating solvency range = 140% to 160%
The closing headline solvency ratio of 205% is significantly
above our normal operating range of between 140% and 160%. Unlike
many of our peers, the solvency ratio does not adopt any of the
temporary benefits available from Solvency II transitional
arrangements, although we do apply the volatility adjustment in our
UK and Dutch divisions. The ratio does however include the benefit
of the capital efficiencies relating to the Tier 2 debt raised in
2022.
Solvency ratio movement
Solvency ratio %
============================ =================
SII % 31 Dec 2022 197
Operating 2
Economic (Exc.
SA) 8
Symmetric adjustment (4)
FX (2)
Dividend payments (4)
Acquisition - Conservatrix (9)
Acquisition - Canada
Life 1
Change in T2 asset
recognition 16
SII % 30 Jun 2023 205
We expect to utilise this additional capital surplus as we
undertake acquisitions, which should result in the ratio reverting
back to within the robust and stable 140% to 160% historical
range.
THE LONG TERM OUTLOOK FOR GROWTH REMAINS POSITIVE, PARTCULARLY
THROUGH M&A
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. In
this six month period, all components have made positive
contributions.
Although there are limitations to tracking the growth metrics
over short times 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 first half of the
year equity and fixed income asset market movements created
GBP20.6m of value growth. This gain partially offsets the economic
value reduction from lower real world investment returns we saw in
2022, whilst demonstrating the value potential from even modestly
beneficial economic conditions.
Over time, we expect improvements to operational effectiveness
to be a source of value creation, be that through M&A
synergies, operating variances, scale or other positive management
actions. During the first half of the year, I am pleased to report
GBP8.6m of EcV growth resulting from operational items (including
new business profits).
The other value growth components have all been a source of
growth during the period. The Economic Value of the group has
increased by cGBP0.9m directly as a result of risk margin
reductions. This increase does not include the expected risk margin
reduction as a result of UK government changes coming soon.
Acquisitions in the period have also added GBP28.4m of EcV with
further value growth expectations not recognised in the day one
gains. This shows that the increased momentum behind the M&A
strategy is now materially contributing to the growth of the
group.
FOCUSSED WRITING OF NEW BUSINESS
Writing new business is the third area of focus in the Chesnara
strategy. Not only is new business value adding in its own right,
importantly it adds scale which in turn enhances operational
effectiveness and improves the sustainability of the financial
model. During the 6 months to 30 June 2023, we have seen improved
commercial new business profits of GBP6.3m (6 months to 30 June
2022: GBP4.6m).
We have grown our Funds Under Management (FuM) in 2023, largely
through the completion of the acquisition of the insurance
portfolio of Conservatrix and we have also reported a modest growth
in underlying asset values.
Growth in FuM
Funds Under Management GBPbn
======================== ======
2018 7.1
2019 7.7
2020 8.5
2021 9.1
2022 10.6
Jun 2023 11.0
FOLLOWING THE RECENT ACQUISITIONS, WE NOW LOOK AFTER OVER 1
MILLION POLICYHOLDERS & CUSTOMERS WHO HAVE GBP11BN OF THEIR
ASSETS WITH US
CONTINUED DELIVERY OF ACQUISITIVE GROWTH
The primary purpose of Chesnara when it was formed back in 2004
was to acquire other closed book businesses and acquisition
activity has been a core component of our historical EcV growth. As
well as the immediate benefit from any price discount to EcV,
acquisitions also improve the future growth outlook by enhancing
the potential from the other value elements of the Chesnara
'fan'.
Successful acquisitions have been key to Chesnara's development
historically and will remain so in the future. During the first
half of 2023 we delivered two acquisitions. The acquisition of the
insurance portfolio of Conservatrix, a specialist provider of life
insurance products in the Netherlands, was completed on 1 January
2023 having been originally announced in July 2022. The insurance
portfolio has increased Waard's number of policies under
administration by over 50%, transforming Waard into a second
material closed book consolidation business alongside Chesnara's
existing UK platform. The Conservatrix transaction increased the
group's EcV by GBP21.7m as at 30 June 2023 and provides further EcV
accretion potential, including from future real world investment
returns and the run-off of the risk margin. The acquisition is
expected to deliver cGBP4m per annum of incremental steady-state
cash generation.
On 16 May 2023 Chesnara announced the acquisition of the onshore
individual protection line of business of Canada Life UK, which was
closed to new business in November 2022. As a result of the
acquisition, the life insurance and critical illness policies for
approximately 47,000 customers will transfer to Chesnara's UK
subsidiary, Countrywide Assured plc (CA plc). Customers' policies
are expected to transfer to CA plc in 2024, subject to the
completion of a court-approved Part VII transfer. In the interim
period, Canada Life UK will reinsure the portfolio to CA plc,
effective from 31 December 2022. The initial commission as part of
the reinsurance agreement is GBP9.0m, funded from internal group
resources, and the transaction has increased the group's Economic
Value by GBP6.7m as at 30 June 2023. The transaction is expected to
deliver additional cash generation over the next five years of
approximately GBP16m.
Positive progress continues on the work to complete the
transition of CASLP into our target operating platform and to
transfer policies via Part VII into our CA legal entity.
CONFIDENCE IN OUR ABILITY TO EXECUTE FUTURE M&A
We remain optimistic about the prospect of future acquisitions
and believe that we can deliver further value accretive deals. Even
relatively small transactions can have a material positive
cumulative impact, as the group delivers synergies from integrating
businesses and portfolios into its existing operations.
2023 has continued to see an active M&A market across
European insurance for deals of GBP1bn and below with large
international insurance groups continuing to focus their strategies
and management teams actively managing business portfolios to
release capital and simplify operations. Even with the ongoing
market volatility and macro-economic environment, we expect the
positive levels of insurance M&A to continue. An active market
provides opportunities for Chesnara as a consolidator and the five
deals that we have announced over the past two years provides
confidence to sellers and their advisors about our ability to
execute future M&A.
We continue to have material financial resources to deploy, with
cash balances of GBP128m at a group level. Our revolving credit
facility creates an additional level of working capital
flexibility. For more transformational deals, we retain the ability
to raise equity and are mindful of the potential benefits from
other funding arrangements such as joint ventures or vendor
part-ownership.
Our assessment of the market potential, our track record of
delivery and the actions we have taken to enhance our ability to
execute M&A means we are confident that acquisitions will
continue to contribute to Chesnara's success in the future.
PEOPLE CHANGES
In February this year, we announced that our Scildon CEO,
Gert-Jan Fritzsche would be leaving the business as we enter the
next phase of Scildon's strategic development. Having conducted a
full market search, we were delighted to announce in July that
Pauline Derkman has agreed to take up the position of Scildon CEO
on 1 September. She has a huge amount of Dutch market experience
including M&A from her time at Aegon, ASR and PWC. I am looking
forward to working with her and the wider Scildon team going
forward.
Last month, we also announced that after 8 years with Movestic
(6 as Movestic CEO), Linnea Ecorcheville will be leaving the
business. We thank Linnea for all she has done for Movestic over
the last 8 years and wish her all the best for the future. Sara
Lindberg, who is a key member of our Movestic management team, has
been made Interim CEO and we have now started a formal market
search for a successor.
And we announced on 12th September that after 7 years Ken Hogg,
UK CEO will be leaving to focus on his non-executive career. On
behalf of the board, I wanted to thank him for everything he has
done during his time at Chesnara and wish him every success in the
future. We were also delighted to announce that Jackie Ronson will
be taking up the role of UK CEO, subject to regulatory approval,
and started with Chesnara on 14th September. She brings with her
over 25 years of experience across financial services and beyond
working in a range of businesses from start-ups to FTSE 100
organisations. Ken and Jackie are already working actively on the
effective hand over of responsibilities.
A SUSTAINABLE CHESNARA
We are committed to becoming a sustainable group and our
principles are: "Do no harm. Do good. Act now for later.". As a
steward and a safe harbour for our c1 million policyholders and
cGBP11bn of policyholder and shareholder assets, we have a real
responsibility to help drive the change needed to deliver
decarbonisation and a sustainable society and economy.
We published our commitments within our inaugural Annual
Sustainability Report (ASR) in March and simply put, we will make
decisions based on all of our stakeholders, including the planet
and its natural resources. Positive outcomes for any particular
stakeholder at the cost of inappropriate outcomes for other
stakeholders is not acceptable. Based on this, we're committed
to:
1. Supporting a sustainable future, including our net zero transition plans
2. Making a positive impact, including our plans to invest in positive solutions
3. Creating a fairer world, ensuring our group is an inclusive
environment for all employees, customers and stakeholders
These commitments are shaping what we do and how we do it. In
addition, there will be changes to sustainability based reporting
requirements at a divsional and group level. The path to
sustainability will be long and complicated but we are working to
put sustainability at the heart of everything we do. We are making
progress against our 2023 plans and this work is combining what
short term actions we can take whilst also considering the longer
term strategy, processes and changes we need to make in order to be
truly sustainable. Our Group Sustainability Committee chaired by
our Senior Independent Director, Jane Dale, and consisting of
senior management from across the group, including myself, is
overseeing our work that is being led by Dave Rimmington.
OUTLOOK
It has been pleasing to see economic gains in the first half of
the year as well as positive cash generation. Whilst a volatile
macro-economic backdrop will continue to be a material factor in
all our markets, we remain confident that the Chesnara business
model will continue to generate cash across a wide variety of
market conditions, as it has done over its history.
We also remain positive on the outlook for further M&A with
the two deals delivered in the period providing further evidence of
the renewed momentum we have behind our M&A activity.
Finally, the operational delivery we have seen in the first part
of the year would not have been possible without the fantastic
efforts of our teams across the group.
Looking forward to the rest of 2023 and beyond, I continue to
believe there is a lot to look forward to here at Chesnara.
Steve Murray,
Chief Executive Officer
20 September 2023
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 ACQUIRE LIFE AND PENSIONS ENHANCE VALUE THROUGH
EXISTING BUSINESS BUSINESSES PROFITABLE NEW BUSINESS
Managing our existing Acquiring and integrating Writing profitable new
customers fairly and companies into our business business supports the
efficiently is core model is key to continuing growth of our group and
to delivering our overall our growth journey. helps mitigate the natural
strategic aims. run-off of our book.
===================================== ====================================
KPIs KPIs KPIs
Cash generation Cash generation EcV growth
EcV earnings EcV growth Customer outcomes
Customer outcomes Customer outcomes
Risk appetite
===================================== ====================================
OUR CULTURE AND VALUES -
RESPONSIBLE RISK BASED MANAGEMENT
RESPONSIBLE FAIR TREATMENT MAINTAIN PROVIDE A ROBUST A JUST
RISK BASED OF CUSTOMERS ADEQUATE COMPETITIVE REGULATORY TRANSITION
MANAGEMENT FINANCIAL RETURN TO COMPLIANCE TO A
FOR THE RESOURCES OUR INVESTORS SUSTAINABLE
BENEFIT GROUP
OF ALL OUR
STAKEHOLDERS
BUSINESS REVIEW | UK
The UK division consists of Countrywide Assured plc (including
the recent Canada Life deal) and CASLP Limited, formerly Sanlam
Life and Pensions, acquired in April 2022. The combined businesses
manage c308,000 policies covering linked pension business, life
insurance, endowments, annuities and some with-profit business. The
division is largely closed to new business, but grows through above
risk free returns, increments to existing policies and periodic
acquisitions.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
As a largely closed book, the division creates value through
managing the following key value drivers: 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 2023
- The division entered into a new long-term strategic
partnership with Fin Tech market leader, SS&C Technologies.
SS&C will service the front to back office operations for the
majority of the UK division. This represents a landmark agreement
for the division and provides surety over the future operating
costs of the business over a 10 year period.
- The initial focus of the arrangement with SS&C is to
migrate the business of CASLP to its end state operating model.
This transition and transformation programme has progressed well to
date, with an initial key milestone of transferring the majority of
CASLP staff to SS&C having recently been met.
- The planned Part VII transfer of the policies of CASLP to CA
plc is progressing well, remaining on track to be delivered by the
end of 2023. This is expected to create further operational and
capital efficiencies.
- In May 2023 the division entered into an agreement with Canada
Life Limited to acquire its individual protection business of
47,000 policies. The acquisition has initially been executed
through entering into a 100% reinsurance agreement with Canada
Life, and these policies will subsequently transfer to the division
through a Part VII transfer process.
- Further work has been performed to refine the investment
portfolio of CA plc, with a re-balancing of the portfolio backing
the non-linked, non-volatility adjustment portfolio having been
delivered in the period.
- CA plc has settled its year end 2022 foreseeable dividend of
GBP46m, with the CASLP dividend settled in September, resulting in
a combined total GBP56m being paid up to Chesnara plc.
- Solvency has strengthened in both UK businesses with combined
EcV earnings of GBP11m in a period of muted economic growth, as
rising inflation dampened the impact of investment market returns.
The EcV result includes an element of new business profit in CASLP
of GBP0.5m (GBP0.7m on a commercial new business basis), as the
CASLP onshore bond remains open to new business via third party
links.
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.
- Deliver the remaining aspects of the programme to transfer the
policies of CASLP and Canada Life into CA plc.
- Continue to focus on maintaining an efficient and cost-effective operating model.
- Identify potential capital management actions, focusing on
those that generate the appropriate balance of value and cash
generation.
- Support Chesnara in identifying and delivering UK acquisitions.
KPIs
Economic Value - UK
GBPm 2019 2020 2021 2022 Jun 2023
====================== ====== ====== ====== ====== =========
EcV 204.6 187.4 181.9 209.3 181.0
Cumulative dividends 29.0 62.5 90.0 136.0
====================== ====== ====== ====== ====== =========
Total 204.6 216.4 244.4 299.3 317.0
====================== ====== ====== ====== ====== =========
The closing EcV for June 2023 includes a GBP6.7m gain delivered
through the Canada Life deal.
Cash generation - UK
GBPm 2019 2020 2021 2022 Jun 2023
----------------- ----- ----- ----- ----- ---------
Cash generation 33.6 29.5 27.4 40.8 10.0
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Delivering good customer outcomes is one of our primary
responsibilities. We seek to do this by having effective customer
service operations together with competitive fund performance
whilst giving full regard to all regulatory matters including a
strong solvency position. This supports our aim to ensure
policyholders receive good returns, appropriate communication, and
service in line with customer expectations.
INITIATIVES AND PROGRESS IN 2023
- An ongoing focus of the division is to ensure that it complies
with the requirements of the FCA's "Consumer Duty". CASLP, as an
operation that continues to write a small amount of new business,
met the requirements by the regulatory deadline of 31 July 2023. CA
plc's closed book operation is on track to comply with the
requirements by the later deadline of 31 July 2024.
- The process for transferring the policies of CASLP to CA plc
is progressing well. The independent expert for the transfer has
confirmed that he does not expect any reduction in the benefits
that existing policyholders expect to receive from their products,
or any deterioration in the security of those benefits. Court
approval has been received for the scheme to progress to the next
stage, culminating in a November Sanction Hearing.
- From an operational resilience perspective the division has
continued to successfully deliver its programme. This has included
supporting the PRA in its industry wide data collection programme
and the minor feedback received has already been incorporated into
the ongoing 2023 plans.
FUTURE PRIORITIES
- Continued focus on the operational resilience programme to
ensure the regulatory deadline of March 2025 is achieved.
- Execute the board agreed plans and progress any actions needed
to meet the requirements of the Consumer Duty for the division.
KPIs
Policyholder fund performance - CA plc
12 months ended 12 months ended
30 Jun 2023 30 Jun 2022
CA Pension Managed 1.0% (2.8)%
CWA Balanced Managed Pension 1.0% (2.8)%
S&P Managed Pension 0.5% (3.3)%
Benchmark - ABI Mixed Inv 40%-85% shares 3.6% (6.8)%
Markets remained volatile throughout the year and our main
managed funds under-performed the reported ABI sector index
benchmark due to the portfolio allocation and investing style over
the period. This was due in part to the slightly higher UK equity
component held within the portfolio relative to the index, but also
impacted by lower Fixed Income performance due to unprecedented
volatile conditions. For periods greater than one year, performance
remains strong, outperforming the sector benchmark and ranked in
top or second quartile.
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 2023
- Following the acquisition of CASLP during 2022, the division
has focused on ensuring that the business is appropriately governed
in line with the division's risk framework. Following entering into
the new strategic partnership with SS&C during the period, the
division is at the next phase of its governance oversight journey
for CASLP, with SS&C having taken on the CASLP operation in
Bristol from 1 August this year.
- As a result of the new arrangement with Canada Life, the
division has focused on ensuring that there is appropriate
oversight over the reinsurance arrangement prior to the planned
transfer of the policies to CA through a Part VII process.
- Both CASLP and CA have now implemented IFRS 17 reporting into
their overall financial reporting framework, as required to support
the inaugural IFRS 17 reporting for the Chesnara group for this
half year.
- In the second half of 2023, a group wide impact assessment and
gap analysis of sustainability reporting requirements will
conclude, which will inform the UK divisions implementation plan
and next steps. It is expected that the FY 2024 reporting will see
a number of key changes following the implementation of the new
sustainability standards IFRS S1 and S2. Work will also progress on
the transition plans, although this will largely fall into
2024.
FUTURE PRIORITIES
- Transition the new financial reporting processes in place to
support IFRS 17 reporting into BAU.
- Ensure appropriate governance arrangements are in place as the
division transitions the majority of its front to back operations
to SS&C.
- Continue to progress towards net zero as part of the
group-wide programme to become a sustainable group. And undertake
further work on ensuring sustainability reporting obligations are
met.
KPIs
Solvency is strong in both businesses with surplus generated in
the period increasing the solvency ratio from 134% to 146% and from
139% to 154% in CA and CASLP respectively.
SOLVENCY RATIO CA: 146%
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2022 surplus 21.9 134%
Surplus generation 10.0
30 Jun 2023 surplus 31.9 146%
======================== ===== =========
SOLVENCY RATIO SLP: 154%
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2022 surplus 13.8 139%
Surplus generation 4.5
30 Jun 2022 surplus 18.3 154%
======================== ===== =========
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 &
partners and is well-rated within the broker community.
S derberg & Partners have, in their recent annual report,
named Movestic as insurance company of the year for unit-linked
insurance, ahead of competition from 12 other insurance providers
in the Swedish market.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Movestic creates value predominantly by generating growth in
unit-linked Funds Under Management (FuM), whilst assuring a
high-quality customer proposition and maintaining an efficient
operating model. FuM growth is dependent upon positive client cash
flows and positive investment performance. Capital surplus is a
factor of both the value and capital requirements and hence surplus
can also be optimised by effective management of capital.
INITIATIVES AND PROGRESS IN 2023
- In the first half-year of 2023, the financial markets have
been volatile but overall positive due to an upswing in US and
wider tech markets. This development was reflected in the
favourable returns on the policyholders' investment assets.
- The division has continued to strengthen its offering and
distribution within its custodian business.
- Further regulation was introduced in July 2022 to further open
up parts of the market to be accessible for transfer into newer
unit linked products. This change, along with further improvements
in our proposition and broker plan offerings has led to a material
improvement to inflows. This, combined with the removal of
competitors' aggressive pricing activities and the impact of
Movestic's retention initiatives, has led to a much improved
position on outflows overall albeit still slightly ahead of our
long term assumptions.
- Movestic's solvency ratio remained robust after the dividend
payment of GBP11.0m during the second quarter and despite the
development of the symmetric adjustment following positive
investment markets, which requires us to hold some additional
capital.
- The financial result is positive for H1 2023 with fees on
increased FuM the main driver for revenue. AUM has a closing
balance of GBP4.0bn which is a YTD increase of +15%.
FUTURE PRIORITIES
- 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.
- Focus on building digital leadership in the industry through
the development of digitalised and tailored customer propositions
and experience. Movestic will also continue the journey to digital
and automated processes to further improve efficiency and
control.
- 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 2023 exchange
rates)
Economic Value
GBPm 2019 2020 2021 2022 Jun 2023
====================== ====== ====== ====== ====== =========
Reported value 225.3 200.0 217.7 181.2 185.0
Cumulative dividends 5.6 10.2 13.1 24.0
---------------------- ------ ------ ------ ------ ---------
Total 225.3 205.6 227.9 194.3 209.0
---------------------- ------ ------ ------ ------ ---------
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Movestic provides personalised long-term savings, insurance
policies and occupational pensions for individuals and business
owners. We believe that recurring independent financial advice
increases the likelihood of a solid and well-planned financial
status, hence we are offering our products and services through
advisors and licenced brokers.
INITIATIVES AND PROGRESS IN 2023
- A third-party survey completed during H1 2023 demonstrated the
importance of an occupational pension as the most important benefit
when choosing a new employer, hence an important tool for employers
to stay attractive.
- A new sustainability rating has been developed and implemented
aiming at providing an aggregated valuation of all the different
sustainability ratings that are available on the investment
market.
- Automation and a new customer service system have both been
implemented during the period, ensuring smoother administration and
better customer service.
- A new digital medical underwriting tool and an improved
digital investment tool have been launched, making it easier for
customers to choose and exchange the funds in their portfolios.
FUTURE PRIORITIES
- Continued development of new digital self-service solutions
and tools to support the brokers' value enhancing customer
proposition, and to facilitate smooth administrative processes
making Movestic a partner that is easy to do business with.
- Further strengthen the relationship with brokers and partners
through increased presence, both physical and digital.
- Continue to capitalise on the new rules that came into effect
in July 2022 that enhances the business's ability to transfer
policies onto its own platform where it is in the interest of
customers to do so.
KPIs ( all comparatives have been presented using 2023 exchange
rates)
Broker assessment rating (out of 5)
2018 2019 2020 2021 2022
======== ===== ===== ===== ===== =====
Rating 3.8 3.5 3.3 3.6 3.8
POLICYHOLDER AVERAGE INVESTMENT RETURN:
10.8%
GOVERNANCE
BACKGROUND INFORMATION
Movestic operates to exacting regulatory standards and adopts a
robust approach to risk management.
Maintaining strong governance is a critical platform to
delivering the various value-enhancing initiatives planned by the
division.
INITIATIVES AND PROGRESS IN 2023
- IFRS 17 entered into force 1 January 2023 and Movestic has
delivered their first set of financial reports under the new
standard. Further IFRS 17 enhancements are required in the
remainder of the year.
- Sustainability has remained a focus area. Among other things,
efforts have been made to develop a solution to, in a digital way,
provide customers with individual sustainability annual reports in
accordance with the delegated rules (RTS) to the Disclosure
Regulation, which entered into force on 1 January 2023.
- Further efforts have been made to deepen employees' knowledge
regarding sustainability. A training programme has been developed
and started. Movestic has also been playing a strong role in the
group's wider sustainability programme.
FUTURE PRIORITIES
- Ensure new reporting processes are embedded into BAU
operations to support IFRS 17 requirements.
- Continue implementation of sustainability regulations.
KPIs ( all comparatives have been presented using 2023 exchange
rates)
SOLVENCY RATIO: 155%
Solvency remains strong post payment of dividends to Chesnara of
GBP11.0m
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2022 surplus 60.5 162%
Surplus generation 1.1
30 Jun 2023 surplus 61.6 155%
======================== ===== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
As an 'open' business, Movestic not only adds value from sales
but as it gains scale, it will become increasingly cash generative
which will fund further growth or contribute towards the group's
attractive dividend. Movestic has a clear sales focus and targets a
market share of 6% -10% of the advised occupational pension market.
This focus ensures we are able to adopt a profitable pricing
strategy.
INITIATIVES AND PROGRESS IN 2023
- Sales volumes have developed positively in 2023 and were 19%
above the same period in 2022 for the unit-linked segment. The
custodian sales volumes are below the previous year (-14%) due to
the less favourable financial market conditions, particularly a
lack of local IPOs.
- The division delivered new business profit of GBP2.0m which
was 31% above the same period in 2022. The main driver for the
increase was the success in attracting new transfer in volumes.
- Movestic will continue to develop its pension offering to
increase competitiveness and build customer loyalty. A special
focus has been put on new volumes that became available on the
Swedish transfer market from the second half of 2022, which for the
first half-year of 2023 has resulted in transfer in volumes 109%
above previous year.
FUTURE PRIORITIES
- Launch new risk product offerings in the broker channel,
including a new technical solution for administration.
- Strengthen distribution capacity within the direct business
area, as a complement to the broker channel and partner distributed
custodian business.
- Continued work to launch new partner collaborations within all lines of business.
KPIs ( all comparatives have been presented using 2023 exchange
rates)
Occupational pension market share %
% 2018 2019 2020 2021 2022
============== ===== ===== ===== ===== =====
Market share 6.6 7.0 4.7 3.6 4.1
New business profit
GBPm 2019 2020 2021 2022 Jun 2023
===================== ===== ===== ===== ===== =========
New business profit 6.4 1.5 4.0 3.2 2.0
BUSINESS REVIEW | NETHERLANDS
Our Dutch businesses aim to deliver growth and earnings through
the closed book business, Waard, which seeks to acquire and
integrate portfolios and the open book business, Scildon, which
seeks to write profitable term, investments and savings
business.
MAXIMISE VALUE FROM EXISTING BUSINESS
CAPITAL AND VALUE MANAGEMENT
BACKGROUND INFORMATION
Both Waard and Scildon have a common aim to make capital
available to the Chesnara group to fund further acquisitions or to
contribute to the dividend funding. Whilst their aims are common,
the dynamics by which the businesses add value differ:
- Waard is in run-off and has the benefit that the capital
requirements reduce in-line with the attrition of the book.
- As an "open business", Scildon's capital position does not
benefit from book run-off. It therefore adds value and creates
surplus capital through writing new business and by efficient
operational management and capital optimisation.
INITIATIVES AND PROGRESS IN 2023
- Waard completed the acquisition of the insurance portfolio of
Conservatrix on 1 January 2023, with the integration now largely
complete, adding c70,000 policies and cGBP0.4bn of assets under
management. This acquisition further strengthens Waard's position
as an acquirer of business and portfolios in the Netherlands.
- Scildon continued to make progress on its IT system
improvement project and the expected completion date (early 2024)
and anticipated savings remain on track.
- Including the use of the volatility adjustment, both
businesses have strong solvency positions, noting the Waard
solvency ratio has reduced from FY 2022, albeit from a very high
ratio, following the acquisition of the insurance portfolio of
Conservatrix, as expected.
- Despite a period of mixed investment returns and volatility
seen across different asset classes, the division has delivered
Economic Value growth through operating profits and a gain on
completion of the Conservatrix deal.
FUTURE PRIORITIES
- Continue to support Chesnara in identifying and delivering Dutch acquisitions.
- Effective management of the closed book run-off in Waard to
enable ongoing divided payments to Chesnara.
- Work towards finalisation of the IT projects and ultimate
recognition of their capital efficiencies.
KPIs ( all comparatives have been presented using 2023 exchange
rates)
Economic Value - The Netherlands
GBPm 2019 2020 2021 2022 Jun 2023
====================== ====== ====== ====== ====== =========
EcV 222.2 209.0 217.3 216.2 248.7
Cumulative dividends 5.0 5.0 10.1 10.1
====================== ====== ====== ====== ====== =========
Total 222.2 214.0 222.3 226.3 258.8
====================== ====== ====== ====== ====== =========
Note: The 2022 closing value includes the additional EcV in
Waard relating to the capital injection from Chesnara plc in
respect of the Conservatrix acquisition. There is a corresponding
value outflow of GBP21.5m at the parent company. The acquisition
was completed on 1 January 2023 and is reflected in the current
period EcV.
CUSTOMER OUTCOMES
BACKGROUND INFORMATION
Great importance is placed on providing customers with high
quality service and positive outcomes.
Whilst the ultimate priority is the end customer, in Scildon we
also see the brokers who distribute our products as being customers
and hence developing processes to best support their needs is a key
focus.
INITIATIVES AND PROGRESS IN 2023
- Scildon's focus remains on providing flexible solutions and
offerings to its clients, including sustainable options. This has
involved things such as: digitalising some customer service
processes; reviewing sales channels for its term insurance product
for tenants to maximise accessibility to customers; and continual
review of its investing solutions to try and rationalise its
investment portfolio in order to offer sustainable and profitable
investment products to customers.
- Waard has been focused on working with Conservatrix
policyholders to enable them, where appropriate, to restart
premiums or transfer out funds, following a long period pre
acquisition where policyholder assets remained 'locked'.
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 2023 exchange
rates)
Scildon client satisfaction rating (out of 10)*
2018 2019 2020 2021 2022
======== ===== ===== ===== ===== =====
Rating 7.7 7.8 8.1 8.1 8.3
*Source MWM(2) market research agency, Netherlands
GOVERNANCE
BACKGROUND INFORMATION
Waard and Scildon operate in a regulated environment and comply
with rules and regulations both from a prudential and from a
financial conduct point of view.
INITIATIVES AND PROGRESS IN 2023
- The multi year IFRS 17 and IFRS 9 project has largely come to
a close with this report representing the first external reporting
output under the new framework.
- Further implementation on the EU sustainability regulation
(the SFDR and the EU Taxonomy) was carried out during the first
half of the year.
- Preparations to implement the Corporate Sustainability
Reporting Directive (CSRD) are also underway for both Scildon and
Waard and are expected to come into force in respect of FY
2025.
- Pauline Derkman commenced as the new CEO of Scildon on 1
September 2023 bringing a wealth of experience to the role.
FUTURE PRIORITIES
- Continued implementation of sustainability regulations.
- Embedding of IFRS 17 into BAU functions.
KPIs ( all comparatives have been presented using 2023 exchange
rates)
SOLVENCY RATIO: SCILDON 187%; WAARD 273%
Solvency is robust in both businesses, with post-dividend
solvency ratios (inclusive of the volatility adjustment) of 187%
and 273% for Scildon and Waard respectively. Note, the Waard
opening solvency ratio includes the benefit of the GBP21.5m capital
injection from group in respect of the acquisition of the insurance
portfolio of Conservatrix, completed 1 January 2023.
Scildon
GBPm Solvency
Ratio
===================== ===== =========
31 Dec 2022 surplus 60.1 188%
Surplus generation 2.4
30 Jun 2023 surplus 62.5 187%
======================== ===== =========
Waard
GBPm Solvency
Ratio
===================== ====== =========
31 Dec 2022 surplus 64.0 591%
Surplus generation (5.2)
30 Jun 2023 surplus 58.8 273%
======================== ====== =========
ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
BACKGROUND INFORMATION
Scildon brings a "New business" dimension to the Dutch division.
Scildon sell protection, individual savings and group pensions
contracts via a broker-led distribution model. The aim is to
deliver meaningful value growth from realistic market share. Having
realistic aspirations regarding volumes means we are able to adopt
a profitable pricing strategy. New business also helps the business
maintain scale and hence contributes to unit cost management.
INITIATIVES AND PROGRESS IN 2023
- Scildon has continued to generate commercial new business
profits with GBP3.7m earned to date (30 June 2022: GBP3.2m).
- The market share for Scildon's term lifestyle product for June
is 12.1% (11.4% average for the first half of 2023). This has
increased from 11.6% in June 2022.
- The Dutch housing market remains subdued with a corresponding
impact on the overall term market. Conversely as interest rates
have risen, annuities have become increasingly popular.
Note, the market share methodology approach has changed when
compared to FY 2022, and has resulted in a change in calculation.
At FY 2022, under the old methodology, the full year market share
was 18.2%, which is 12.9% under the new approach.
FUTURE PRIORITIES
- Continue to deliver product innovation and cost management actions.
KPIs ( all comparatives have been presented using 2023 exchange
rates)
Scildon - term assurance market share %
% Jun 2022 Dec 2022 Jun 2023
============== ========= ========= =========
Market share 11.6 10.6 12.6
Scildon market share calculation basis has changed and has
resulted in a lower position than the previous methodology, the
2022 comparators on the new basis have been included for
context.
Scildon - new business profit
GBPm 2019 2020 2021 2022 Jun 2023
===================== ===== ===== ===== ===== =========
New business profit 7.7 8.7 5.3 6.3 3.7
BUSINESS REVIEW | acquire life and pension businesses
During the first half of 2023 we completed the acquisition of
the insurance portfolio of Conservatrix in the Netherlands and
entered into a deal in the UK with Canada Life to transfer its
onshore protection business to the group.
HOW WE DELIVER OUR ACQUISITION STRATEGY
- Identify potential deals through an effective network of own
contacts and advisers and industry associates, utilising both group
and divisional management expertise as appropriate.
- We primarily focus on acquisitions in our existing
territories, although we will consider other territories should the
opportunity arise and this is supportive of our strategic
objectives.
- We assess deals by applying well established criteria which
consider the impact on cash generation and Economic Value under
best estimate and stressed scenarios.
- We work cooperatively with regulators.
- The financial benefits are viewed in the context of the impact
the deal will have on the enlarged group's risk profile.
- Transaction risk is reduced through stringent risk-based due
diligence procedures and the senior management team's acquisition
experience and positive track record.
- We fund deals with a combination of own resources, debt or
equity depending on the size and cash flows of each opportunity and
commercial considerations.
HOW WE ASSESS DEALS
Cash generation
- Collectively our future acquisitions must be suitably cash
generative to continue to support Chesnara delivering attractive
dividends.
Value enhancement
- Acquisitions are required to have a positive impact on the
Economic Value per share in the medium term under best estimate and
certain more adverse scenarios.
Customer outcomes
- Acquisitions must ensure we protect, or ideally enhance,
customer interests with deals always giving full regard to Consumer
Duty responsibilities.
Risk appetite
- Acquisitions should normally align with the group's documented
risk appetite. If a deal is deemed to sit outside our risk appetite
the financial returns must be suitably compelling.
INITIATIVES AND PROGRESS IN 2023
The acquisition of the insurance portfolio of Conservatrix, a
specialist provider of life insurance products in the Netherlands,
was completed on 1 January 2023 having been originally announced in
July 2022. The insurance portfolio has increased Waard's number of
policies under administration by over 50%, transforming Waard into
a second material closed book consolidation business alongside
Chesnara's existing UK platform.
This is the seventh transaction undertaken in the Dutch market.
Conservatrix's savings, annuity and funeral plan products are well
aligned with Chesnara's existing life and pension liability mix in
the Netherlands, adding approximately 70,000 additional policies
and GBP0.4bn of assets to the group.
A capital contribution of GBP25m was provided by the group,
along with an additional GBP10m from Waard's own resources to
support the solvency position of the Conservatrix business. Post
acquisition, we expect that Waard will become a material
contributor to the group's dividends, with expected total annual
steady state cash generation of GBP8 million. The Conservatrix
transaction increased the group's EcV by GBP21.7m as at 30 June
2023 and provides further EcV accretion potential from future real
world investment returns and the run-off of the risk margin.
In addition, on 16 May 2023 Chesnara announced the acquisition
of the onshore individual protection line of business of Canada
Life UK, which was closed to new business in November 2022. As a
result of the acquisition, the life insurance and critical illness
policies for approximately 47,000 customers will transfer to
Chesnara's UK subsidiary, Countrywide Assured plc (CA plc).
Customers' policies are expected to transfer to CA plc in 2024,
subject to the completion of a court-approved Part VII transfer. In
the interim period, Canada Life UK will reinsure the portfolio to
CA plc, effective from 31 December 2022. The consideration as part
of the reinsurance agreement is GBP9 million, funded from internal
group resources, and the transaction has increased the group's EcV
by GBP6.7m as at 30 June 2023. The transaction is expected to
deliver additional cash generation over the next five years of
approximately GBP16m. The impact on the group's Solvency II ratio
as a result of the transaction was 1%.
ACQUISITION OUTLOOK
- We continue to see a healthy flow of acquisition opportunities
across European insurance including the UK and the Netherlands.
- We recognise that the consolidation markets in these countries
are mature but the key drivers for owners to divest portfolios
continue to remain relevant and create a strong pipeline. These
include better uses of capital (e.g. return to investors or
supporting other business lines), operational challenges (e.g. end
of life systems), management distraction, regulatory challenges,
business change (e.g. IFRS 17) and wider business and strategic
needs.
- Our expectation is that sales of portfolios will continue and
our strong expertise and knowledge in the markets, good regulatory
relationships and the flexibility of our operating model means that
Chesnara is very well placed to manage the additional complexity
associated with these portfolio transfers and provide beneficial
outcomes for all stakeholders. These transactions may not be
suitable for all potential consolidators, in particular those who
do not have existing licences in these territories.
- Chesnara will continue its robust acquisition assessment model
which takes into account; (a) the strategic fit; (b) the cash
generation capability; (c) the medium term impact on EcV per share;
and (d) the risks within the target. We will also continue to
assess the long-term commercial value of acquisitions as part of
our objective to maximise the value from in-force business.
- The GBP200m Tier 2 subordinated debt issue in February 2022
together with the existing GBP100m Revolving Credit Facility
arrangement (with an additional GBP50m accordion option) provides
funding capability on commercially attractive terms. We continue to
have immediately available acquisition firepower of over GBP100m,
supported by a strong group solvency position. We will continue to
explore how we can increase our funding capability further,
including consideration of partnerships to ensure we can compete
for larger deals.
- Our strong network of contacts including the corporate finance
adviser community, who understand the Chesnara acquisition model,
supported by our engagement activity with potential targets,
ensures that we are aware of viable opportunities in the UK and
Western Europe. With this in mind, we are confident that we are
well positioned to continue our successful acquisition track record
in the future.
CAPITAL MANAGEMENT | Solvency II
Subject to ensuring other constraints are managed, surplus
capital is a useful proxy measure for liquid resources available to
fund items such as dividends, acquisitions or business
investment.
GROUP SOLVENCY
SOLVENCY POSITION
GBPm 30 Jun 2023 31 Dec 2022
================== ============ ============
Own funds 673 605
SCR 328 307
Surplus 345 298
Solvency ratio % 205% 197%
SOLVENCY SURPLUS
GBPm
======================================= =======
Group solvency surplus at 31 Dec 2022 298.4
CA 5.9
CASLP 4.5
Movestic 1.2
Waard 2.4
Scildon 2.5
Chesnara / consol adj 5.7
Change in T2/T3 restrictions 39.9
Acquisition 8.8
Exchange rates (11.9)
Dividends (12.6)
======================================= =======
Group solvency surplus at 30 Jun 2023 344.8
======================================= =======
Surplus:
The group has GBP345m of surplus over and above the capital
requirements under Solvency II, compared to GBP298m at the end of
2022. The group solvency ratio has increased from 197% to 205%.
Own Funds:
Own Funds have risen by GBP80.2m (pre-dividends). The most
material drivers are the acquisition of the insurance portfolio of
Conservatrix in Waard and the reinsurance of policies from Canada
Life in CA, which contribute GBP33.7m to Own Funds and the
reduction in Tier 2 restrictions.
SCR:
The SCR has increased by GBP21.3m, owing mainly to a rise in
equity risk (due to the rise in equity markets and symmetric
adjustment) and increases in market and life underwriting SCR from
the 2023 acquisitions.
Solvency II background
- Solvency is a measure of how much the value of the company
exceeds the level of capital it is required to hold.
- The value of the company is referred to as its "Own Funds"
(OF) and this is measured in accordance with the rules of the newly
adopted Solvency II regime.
- The capital requirement is again defined by Solvency II rules
and the primary requirement is referred to as the Solvency Capital
Requirement (SCR).
- Solvency is expressed as either a ratio: OF/SCR % or as an
absolute surplus: OF less SCR.
WHAT ARE OWN FUNDS?
A valuation which reflects the net assets of the company and
includes a value for future profits expected to arise from in-force
policies.
T he Own Funds valuation : The Own Funds valuation, before
considering the benefit of Tier 2 and Tier 3 capital (which is
restricted to 50% of the value of the reported SCR), is deemed to
represent a commercially meaningful figure with the exception
of:
Contract boundaries : Solvency II rules do not allow for the
recognition of future cash flows on certain policies despite a high
probability of receipt.
Risk margin : The Solvency II rules require a 'risk margin'
liability which is deemed to be above the realistic cost.
Restricted with profit surpluses : Surpluses in the group's
with-profit funds are not recognised in Solvency II Own Funds
despite their commercial value.
We define Economic Value (EcV) as being the Own Funds adjusted
for the items above. As such our Own Funds and EcV have many common
characteristics and tend to be impacted by the same factors.
Transitional measures, introduced as part of the long-term
guarantee package when Solvency II was introduced, are available to
temporarily increase Own Funds. Chesnara does not take advantage of
such measures, however we do apply the volatility adjustment within
our Dutch 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.
A review of the UK's application of Solvency II is currently
underway, led by HM Treasury. In April 2022 the PRA published a
statement indicating its agreement with the view that the risk
margin and matching adjustment can be reformed so as to reduce
overall capital levels for life insurers. In November 2022 the UK
government announced plans to legislate the reforms to Solvency II.
On 29 June 2023 the PRA started consultation CP12/23 setting out
the proposed reforms. We continue to monitor this closely and
future financial statements will report on the UK specific
application of Solvency II as it diverges from the EU's regime. We
see no specific reason to expect the PRA to use their enhanced
freedoms take a route that systemically makes it harder to do
business in the UK.
We are well capitalised at both a group and subsidiary level. We
have applied the volatility adjustment in Scildon, Waard Leven, CA
and CASLP, but have not used any other elements of the long-term
guarantee package within the group. The Volatility Adjustment is an
optional measure that can be used in solvency calculations to
reduce volatility arising from large movements in bond spreads.
The numbers that follow present the divisional view of the
solvency position which may differ to the position of the
individual insurance company(ies) within the consolidated numbers.
Note that year end 2022 figures have been restated using 30 June
2023 exchange rates in order to aid comparison at a divisional
level.
UK - CA
GBPm 30 Jun 2023 31 Dec 2022
=========================== ============ ============
Own funds (post dividend) 102 87
SCR 70 65
Buffer 14 13
Surplus 18 9
Solvency ratio % 146% 134%
Surplus: GBP18.0m above board's capital management policy.
Dividends: During Q2 2023 a GBP46.0m dividend in was paid up to
Chesnara. (2022: GBP27.5m).
Own Funds: Increased by GBP15.2m due to Canada Life reinsurance,
and positive economic experience.
SCR: Increased by GBP5.2m primarily due to Canada Life
reinsurance, increase in symmetric adjustment and an increase in
bond holdings.
UK - CASLP
GBPm 30 Jun 2023 31 Dec 2022
=========================== ============ ============
Own funds (post dividend) 52 49
SCR 34 36
Buffer 7 7
Surplus 12 6
Solvency ratio % 154% 139%
Surplus: GBP11.5m above board's capital management policy.
Dividends: Solvency position stated after GBP10.0m proposed
dividend, due to be paid in the second half of the year.
Own Funds: Own Funds increased by GBP3.0m, largely due to an
increase in interest rates, offset by adverse lapse experience and
a strengthening of expense assumptions.
SCR: Fallen by GBP1.5m, due to reductions in underwriting risks
following the rise in interest rates.
SWEDEN
GBPm 30 Jun 2023 31 Dec 2022
=========================== ============ ============
Own funds (post dividend) 173 158
SCR 111 97
Buffer 22 19
Surplus 39 41
Solvency ratio % 155% 162%
Surplus: GBP39.4m above board's capital management policy.
Dividends: During Q2 2023 a GBP11.0m dividend was paid up to Chesnara (2022: GBP3.0m).
Own Funds: Inc reased by GBP15.2m largely owing to positive
economic movements, being slightly offset by adverse lapse
experience and depreciation of SEK against GBP.
SCR: Increased by GBP14.1m due to positive equity growth and
moderate rise in currency and lapse and risks.
NETHERLANDS - WAARD
GBPm 30 Jun 2023 31 Dec 2022
=========================== ============ ============
Own funds (post dividend) 85 77
SCR 31 13
Buffer 11 5
Surplus 43 59
Solvency ratio % 273% 591%
Surplus: GBP42.8m above board's capital management policy.
Dividends: Solvency position stated after GBP5.1m proposed
dividend (2022: GBP6.4m), due to be paid in the second half of the
year.
Own Funds: In creased by GBP7.6m largely due to the Conservatrix
deal.
SCR: Increased by GBP17.9m, mainly due to the Conservatrix
transaction, which has mostly impacted longevity, lapse and
concentration risk.
NETHERLANDS - SCILDON
GBPm 30 Jun 2023 31 Dec 2022
=========================== ============ ============
Own funds (post dividend) 135 128
SCR 72 68
Buffer 54 51
Surplus 8 9
Solvency ratio % 187% 188%
Surplus: GBP8.4m above board's capital management policy.
Dividends: No foreseeable dividend is proposed (2022: GBP5.3m).
Own Funds: Increased by GBP6.5m due to positive operating variances and new business profits.
SCR: Increased by GBP4.1m, largely due to positive equity market
growth and rise in symmetric adjustment, as well as an increase in
spread risk due to a rise in bond values.
CAPITAL MANAGEMENT | Sensitivities
The group's solvency position can be affected by a number of
factors over time. As a consequence, the group's EcV and cash
generation, both of which are derived from the group's solvency
calculations, are also sensitive to these factors.
The table below provides some insight into the immediate impact
of certain sensitivities that the group is exposed to, covering
solvency surplus and Economic Value. As can be seen, EcV tends to
take the 'full force' of adverse conditions 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.
As we highlighted in our FY 2022 report, the Tier 2 debt raise
in February 2022, has had 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,
creating a new dynamic. For example, where FX movements reduce the
SCR, we now also experience a corresponding reduction in base Own
Funds and Own Funds relating to Tier 2 capital. The total surplus
is now more exposed to downside risks but, importantly, the Tier 2
itself has created more than sufficient additional headroom to
accommodate this.
Whilst cash generation has not been shown in the diagrams below,
the impact of these sensitivities on the group's solvency surplus
has a direct read across to the immediate impact on cash
generation.
Solvency ratio Solvency surplus EcV
Impact % Impact range GBPm Impact range GBPm
============================ ========================== ============================= =============================
20% sterling 14.6% (27.0) to (17.0) (64.7) to (54.7)
appreciation
20% sterling (12.2)% 26.4 to 36.4 73.5 to 83.5
depreciation
25% equity fall 6.9% (59.0) to (29.0) (85.7) to (65.7)
25% equity rise (16.2)% 1.1 to 31.1 68.1 to 88.1
10% equity fall 2.6% (21.4) to (11.4) (33.6) to (23.6)
10% equity rise (5.4)% 4.2 to 14.2 25.4 to 35.4
1% interest rate 6.8% 2.2 to 12.2 (16.6) to (6.6)
rise
1% interest rate (7.3)% (19.9) to 0.1 4.0 to 19.0
fall
50bps credit (2.1)% (15.6) to (5.6) (20.9) to (15.9)
spread rise
25bps swap rate (5.5)% (19.8) to (9.8) (13.5) to (3.5)
fall
10% mass lapse (0.7)% (29.9) to (19.9) (45.3) to (35.3)
1% inflation (6.9)% (26.5) to (16.5) (26.2) to (16.2)
10% mortality (4.9)% (21.3) to (16.3) (22.6) to (17.6)
increase
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: -GBP17.3m to the SCR, 25% equity rise: +GBP26.7m to SCR). The
EcV impacts are more intuitive as they are more directly linked to
Own Funds impact. CA and Movestic contribute the most due to their
large amounts of unit-linked business, much of which is invested in
equities.
Interest rate sensitivities: An interest rate rise currently has
a more adverse effect on group economic value than an
interest rate fall. This is a consistent with the change in
exposure following continued rise in interest rates over 2023.
However, group solvency is still less exposed to rising interest
rates as a rise in rates causes capital requirements to fall,
increasing solvency.
50bps credit spread rise: A credit spread rise has an adverse
impact on surplus and future cash generation, particularly in
Scildon due to corporate and non-local government bond holdings
that form part of the asset portfolios backing non-linked insurance
liabilities. The impact on the other divisions is less severe.
25bps swap rate fall: This sensitivity measures the impact of a
fall in the swap discount curve with no change in the value of
assets. The result is that liability values increase in isolation.
The most material impacts are on CA and Scildon due to the size of
the non-linked book.
10% mass lapse: In this sensitivity Own Funds fall as there are
fewer policies on the books, thus less potential for future
profits. This is largely offset by a fall in SCR, although the
amount of eligible Tier 2 capital also falls. The division most
affected is Movestic as it has the largest concentration of
unit-linked business.
1% inflation rise: This sensitivity measures a permanent
increase in inflation in every future year. Such a rise in
inflation increases the amount of expected future expenses. This is
capitalised into the balance sheet and hits the solvency position
immediately.
10% mortality increase: This sensitivity has an adverse impact
on surplus and cash generation, particularly for Scildon due to
their term products.
*BASIS OF PREPARATION ON REPORTING:
Although it is not a precise exercise, the general aim is that
the sensitivities modelled are deemed to be broadly similar (with
the exception that the 10% equity movements are naturally more
likely to arise) in terms of likelihood. Whilst sensitivities
provide a useful guide, in practice, how our results react to
changing conditions is complex and the exact level of impact can
vary due to the interactions of events and starting position.
FINANCIAL REVIEW
Our key performance indicators provide a good indication of how
the business has performed in delivering its three strategic
objectives.
Summary of each KPI:
CASH GENERATION
GROUP CASH GENERATION excluding the impact of acquisitions
GBP11.1 M 30 JUNE 2022: GBP21.9 M
DIVISIONAL CASH GENERATION excluding the impact of acquisitions
GBP2.3 M 30 JUNE 2022: GBP60.1 M
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.
GBPm Jun 2023
============================ =========
UK 10.0
Sweden (6.4)
Netherlands - Waard (0.4)
Netherlands - Scildon (0.9)
============================ =========
Divisional cash generation 2.3
Other group activities 8.8
Group cash generation 11.1
============================ =========
- Cash generation of GBP11.1m (30 June 2022: GBP21.9m) includes
a material adverse impact from the symmetric adjustment of GBP10.6m
(30 June 2022: +GBP30.8m), which is a key factor in the year on
year movement.
- The divisional result of GBP2.3m was supported by solid
returns from the UK division. The result has been impacted by
market driven economic factors that have caused capital
requirements to rise. This was particularly the case in Sweden
where the value gains delivered through equity growth were more
than offset by associated rises in SCR including the impact of the
symmetric adjustment.
- The central group contribution includes the benefit of a cash
gain from our FX hedge, which has risen in value to offset some
(GBP10.6m) 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, central
development expenditure (including M&A) and central recurring
overheads.
IFRS
PRE-TAX PROFIT: GBP16.0 M 30 JUNE 2022: PRE-TAX LOSS GBP54.2
M
TOTAL COMPREHENSIVE INCOME: GBP0.2 M 30 JUNE 2022: GBP29.8 M
LOSS
What is it?
Presentation of the results in accordance with International
Financial Reporting Standards (IFRS) aims to recognise the profit
arising from the longer-term insurance and investment contracts
over the life of the policy.
Why is it important?
The IFRS results form the core of reporting and hence retain
prominence as a key financial performance metric. We believe that,
for Chesnara, the IFRS results in isolation do not recognise the
wider financial performance of the business, hence the use of
supplementary Alternative Performance Measures to enhance
understanding of financial performance.
Risks
IFRS 17 is effective from 1 January 2023 and has been applied in
the financial statements in Section C. As a result, several
accounting policies and significant judgements and estimates have
changed. IFRS 17 introduces a new concept of insurance revenue
which aims to remove volatility from 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.
GBPm 30 Jun 2023
======================================================= ============
Net insurance service result 9.5
Net investment result 25.0
Fee, commission and other operating income 48.5
Other operating expenses (65.5)
Financing costs (5.5)
Profit arising on business combinations and portfolio
acquisitions 4.0
------------------------------------------------------- ------------
Profit before income taxes 16.0
Tax (0.4)
Forex & other (15.4)
Total comprehensive income 0.2
- Profit before tax in the period of GBP16.0m includes a net
insurance service profit of GBP9.5m and an investment result of
GBP25.0m (six months to 30 June 2022: GBP3.2m profit and GBP46.2m
loss respectively).
- The positive insurance result comprises a gain from gross
business of GBP15.7m and a loss from reinsurance of (GBP6.2m).
Investment returns reflect market recoveries from the lows
experienced in 2022, with rising bond yields, improved equity
returns and narrowing credit spreads being the main
contributors.
ECONOMIC VALUE (EcV)
GBP523.2 M 31 DECEMBER 2022: GBP511.7 M
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
GBP55m-GBP65m , based on the composition of the group's EcV at 30
June 2023.
GBPm
================== =======
EcV 31 Dec 2022 511.7
EcV earnings 32.6
Acquisitions 28.4
Forex (26.8)
------------------ -------
Pre-dividend EcV 546.0
Dividends (22.8)
================== =======
EcV 30 Jun 2023 523.2
================== =======
- The opening half of 2023 has shown good value growth, with an
increase in Economic Value of c12% (excluding the impact of FX
losses that arise on consolidation and the dividend payment).
- This result is particularly pleasing as the growth has been
delivered across all areas of Chesnara's 'Fan' core components,
including strong new business results, both operating and economic
profits, as well as substantial incremental gains through
acquisitions. Furthermore, while we have seen some improvement in
financial markets since 2022, it has still been a relatively modest
period in terms of economic growth. The result therefore gives
further reassurance of the robustness of the group and provides
confidence of future growth under more beneficial economic
conditions.
ECV EARNINGS
GBP61.0 M ( including the impact of acquisitions ) 30 JUNE 2022:
GBP75.7 M LOSS
What is it?
In recognition of the longer-term nature of the group's
insurance and investment contracts, supplementary information is
presented that provides information on the Economic Value of our
business.
The principal underlying components of the Economic Value result
are:
- The expected return from existing business (being the effect
of the unwind of the rates used to discount the value
in-force);
- Value added by the writing of new business;
- Variations in actual experience from that assumed in the opening valuation;
- The impact of restating assumptions underlying the
determination of expected cash flows; and
- The impact of acquisitions.
Why is it important?
A different perspective is provided in the performance of the
group and on the valuation of the business. Economic Value earnings
are an important KPI as they provide a longer-term measure of the
value generated during a period. The Economic Value earnings of the
group can be a strong indicator of how we have delivered against
all three of our core strategic objectives. This includes new
business profits generated from writing profitable new business,
Economic Value profit emergence from our existing businesses, and
the Economic Value impact of acquisitions.
Risks
The EcV earnings of the group can be affected by a number of
factors, including those highlighted within our principal risks and
uncertainties and sensitivities analysis. In addition to the
factors that affect the IFRS pre-tax profit and cash generation of
the group, the EcV earnings can be more sensitive to other factors
such as the expense base and persistency assumptions. This is
primarily due to the fact that assumption changes in EcV affect our
long-term view of the future cash flows arising from our books of
business.
GBPm Jun 2023
========================== =========
Total operating earnings 8.6
Economic earnings 31.6
Other (7.6)
========================== =========
Acquisitions 28.4
========================== =========
Total EcV earnings 61.0
========================== =========
- In an encouraging improvement on the prior year, operating
activities have delivered earnings of GBP8.6m, which includes
improved new business profits from Scildon and Movestic.
- The majority of the economic earnings arose in Movestic, where
equity market growth, particularly in Swedish and European indices,
has driven investment returns and growth in unit linked
policyholder funds. Economic earnings across the other divisions
were more modest, with different economic factors offsetting one
another to a certain extent.
- Acquisitions in the period added GBP28.4m of earnings, with
GBP21.7m on the Conservatrix portfolio (completed 1 Jan 2023) and a
further GBP6.7m on the protection portfolio of Canada Life
(reinsurance arrangement executed on 16 May 2023) under the Dutch
and UK divisions respectively.
- The "Other" category includes risk margin movement, negative
tax impacts and the cost of Tier 2 coupon payments.
CASH GENERATION
There is no reporting framework defined by the regulators for
cash generation and there is therefore inconsistency across the
sector. We define cash generation as being the movement in Solvency
II own funds over and above the group's internally required
capital, which is based on Solvency II rules.
GROUP CASH GENERATION excluding the impact of acquisitions
GBP11.1 M 30 JUNE 2022: GBP21.9 M
DIVISIONAL CASH GENERATION
GBP2.3 M 30 JUNE 2022: GBP11.55 M
Cash generation of GBP11.1m for the period was impacted at a
divisional level by adverse movement in the symmetric adjustment
following positive equity market growth. Cash is generated from
increases in the group's solvency surplus, which is represented by
the excess of own funds held over management's internal capital
needs. These are based on regulatory capital requirements, with the
inclusion of additional 'management buffers'.
Implications of our cash definition:
Positives
- Creates a strong and transparent alignment to a regulated framework.
- Positive cash results can be approximated to increased dividend potential.
- Cash is a factor of both value and capital and hence
management are focused on capital efficiency in addition to value
growth and indeed the interplay between the two.
Challenges and limitations
- In certain circumstances the cash reported may not be
immediately distributable by a division to group or from group to
shareholders.
- Brings the technical complexities of the SII framework into
the cash results e.g. symmetric adjustment, with-profit fund
restrictions, model changes etc, and hence the headline results do
not always reflect the underlying commercial or operational
performance.
- At a group level the result includes complex consolidation
adjustments relating to buffers, which can compromise how well the
figure truly reflects performance.
Jun 2023 GBPm Jun 2022
GBPm
Movement Movement Forex Cash Cash generated
in in management's impact generated / (utilised)
Own Funds capital requirement / (utilised)
UK 12.3 (2.3) - 10.0 31.3
Sweden 16.1 (17.9) (4.6) (6.4) 14.2
Netherlands - Waard Group 4.1 (2.4) (2.1) (0.4) 2.2
Netherlands - Scildon 6.6 (7.2) (0.3) (0.9) 12.4
============================= ========== ==================== ======= ============= ==============
Divisional cash generation
/ (utilisation) 39.1 (29.8) (7.0) 2.3 60.1
Other group activities (5.4) 13.5 0.7 8.8 (38.2)
Group cash generation
/ (utilisation) 33.7 (16.3) (6.3) 11.1 21.9
============================= ========== ==================== ======= ============= ==============
GROUP
- Other group activities includes consolidation adjustments as
well as central costs and central SCR movements.
- Central costs of approximately GBP5m include a large
proportion of exceptional non-recurring expenditure and Tier 2
interest costs.
UK
- The UK division has continued to be the largest contributor to
cash generation, with GBP10.0m reported in the period, delivered
through Own Funds growth. The positive impact of rising yields and
to a lesser extent, equity growth, provided economic returns that
underpins the growth. Favourable results on fee income and future
expenses also support the result. A smaller increase in capital
requirements during the period was primarily due to the impacts of
equity market growth (and symmetric adjustment) and also following
changes to the asset mix of the division.
SWEDEN
- Movestic has reported cash utilisation of GBP6.4m for the
opening half of 2023, as Own Funds growth was exceeded by a larger
increase in capital requirements. On the Own Funds side, growth was
delivered primarily through economic returns, with the division
being particularly sensitive to equity market movements,
specifically the rise in Swedish and European equity indices.
Conversely, this equity market-driven growth in Own Funds has
resulted in an increase in market-risk related capital
requirements, including the impact of the symmetric adjustment,
which increased significantly since the start of the year. The
divisional result also includes a material foreign exchange loss on
consolidation, owing the weakening of the krona versus sterling
during the period.
NETHERLANDS - WAARD
- Waard recorded cash utilisation of GBP0.4m for the period.
While value growth was delivered through solid operating profits,
outweighing smaller economic losses, there was an increase in
capital requirements and a foreign exchange loss, driving the cash
utilisation. The increase in capital requirements includes an
increase in market risks following rising interest and spread risk.
The divisional result also bears the impact of sterling
appreciation versus the euro during 2023, leading to foreign
exchange loss on consolidation.
NETHERLANDS - SCILDON
- In Scildon a small cash utilisation of GBP0.9m was posted for
the year to date. Own Funds growth of GBP6.6m was driven by
positive operating profits of GBP13.1m, offsetting economic losses
(being predominantly the negative impact of rising yields). This
value growth was offset by a slightly larger increase in capital
requirements. Key drivers were predominantly rises in market based
risks, with equity growth driving an increase in symmetric
adjustment and rising corporate bond values leading to an increase
in spread risk.
CASH GENERATION - ENHANCED ANALYSIS
The format of the analysis draws out components of the cash
generation results relating to technical complexities, modelling
issues or exceptional corporate activity (e.g. acquisitions). The
results excluding such items are deemed to better reflect the
inherent commercial outcome (Commercial cash generation).
COMMERCIAL CASH GENERATION excluding the impact of
acquisitions
GBP21.8 M 30 JUNE 2022: GBP(3.0)M
UK SWEDEN NETHERLANDS NETHERLANDS DIVISIONAL GROUP TOTAL
WAARD SCILDON TOTAL ADJ
====================== ==== ====== =========== =========== ========== ===== =====
Base cash generation 10.0 (6.4) (0.4) (0.9) 2.3 8.8 11.1
====================== ==== ====== =========== =========== ========== ===== =====
Symmetric adjustment 2.5 6.5 0.5 1.1 10.6 - 10.6
WP restriction look
through 0.1 - - - 0.1 - 0.1
Commercial cash
generation 12.6 0.1 0.1 0.2 13.0 8.8 21.8
====================== ==== ====== =========== =========== ========== ===== =====
Commercial cash
generation excluding
FX impacts 12.6 4.7 2.2 0.5 20.0 1.4 21.4
====================== ==== ====== =========== =========== ========== ===== =====
The UK businesses drove the majority of the group's commercial
cash generation, with a total UK result of GBP12.6m, of which a
rise in yields is a key proponent of growth. The overseas divisions
have generated smaller gains which have been dampened by the
depreciation of the euro and Swedish krona currencies against
sterling. The FX hedge that was implemented in 2022 has offset some
of these currency impacts, providing a total cash benefit of
GBP10.6m over the year to date.
UK
The UK result primarily comes from economic gains, particularly
the rise in yields which has led to a reduction in capital
requirements. This is backed up by a small operating profit arising
from a reduction in expense assumptions and release of capital
requirements as the book runs off.
The commercial cash outcome illustrates that the UK remains at
the heart of the cash generation model.
SWEDEN
The Swedish result, after removing a loss caused by the increase
in the symmetric adjustment, is fairly neutral. The economic result
is positive, principally due to gains on overseas equities offset
by the depreciation of Swedish krona against sterling. The economic
gains are offset by an operating loss driven by adverse lapse
experience and a new business strain.
WAARD
Waard's commercial cash result is made up of a small economic
loss, primarily driven by the depreciation of the euro versus
sterling, and a small operating gain arising from positive
mortality experience and the unwind of the discount rate.
SCILDON
Scildon's commercial cash result consists of a small operating
cash gain offsetting an economic loss, due to a fall in bond values
relative to liabilities and the depreciation of euro against
sterling.
GROUP
The central group cash generation includes a GBP10.6m cash gain
from the FX hedge, which has risen in value to offset some of the
FX losses experienced elsewhere in the group and slightly increased
its beneficial impact on capital requirements. The group has also
benefited from interest rate changes that have driven a reduction
in group SCR. These positive effects are offset by central
expenses, including overheads, coupon payments on the Tier 2 debt
and centrally incurred business development investments e.g.
M&A activity, IFRS 17.
EcV EARNINGS including the impact of acquisitions
GBP61.0 M 30 JUNE 2022: GBP75.7 M LOSS
A period of strong EcV earnings have been delivered through a
number of sources, with solid new business gains, operating and
economic profits, alongside significant growth through
acquisitions.
Analysis of the EcV result in the period by earnings source:
GBPm 30 Jun 30 Jun 31 Dec
2023 2022 2022
=============================== ======== ========= ==========
Expected movement in period 7.7 (0.8) (1.3)
New business 4.7 3.6 8.0
Operating experience variances 1.6 (22.5) (19.0)
Operating assumption changes (5.4) (1.0) (14.5)
Total operating earnings 8.6 (20.7) (26.8)
=============================== ======== ========= ==========
Total economic earnings 31.6 (91.1) (109.1)
Other non-operating variances (4.8) 0.8 (2.6)
Risk margin movement 0.9 14.6 20.4
Tax (3.7) 6.8 12.0
=============================== ======== ========= ==========
Acquisitions 28.4 13.9 21.4
=============================== ======== ========= ==========
EcV earnings 61.0 (75.7) (84.7)
=============================== ======== ========= ==========
Analysis of the EcV result in the year by business segment:
GBPm 30 Jun 30 Jun 31 Dec
2023 2022 2022
============================ ======== =========== =========
UK 11.0 (20.8) (24.6)
Sweden 15.0 (46.8) (37.1)
Netherlands 12.1 (15.0) (29.4)
Group and group adjustments (5.5) (7.0) (15.0)
============================ ======== =========== =========
Acquisitions 28.4 13.9 21.4
============================ ======== =========== =========
EcV earnings 61.0 (75.7) (84.7)
============================ ======== =========== =========
Total economic earnings: The economic result continues to be the
largest component of the total EcV earnings, with a profit of
GBP31.6m 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 0.5% (6 months to 30 June 2022: decreased by 2.4%);
- Swedish OMX all share index increased by 8.4% (6 months to 30 June 2022: decreased by 20.7%);
- The Netherlands AEX all share index increased by 10.2% (6
months to 30 June 2022: decreased by 10.8%); and
Widening credit spreads:
- UK AA corporate bond yields increased to 1.06% (31 December 2022 1.04%)
- European AA credit spreads increased to 0.48% (31 December 2021: 0.29%).
Increased yields:
- 10-year UK gilt yields have increased to 4.43%. (31 December 2022: 3.78%).
The EcV results continue to illustrate how sensitive the results
are to economic factors. While investment market growth has been
positive compared to the prior year, it was still relatively muted
versus previous periods of growth. As outlined in the past, we
continue to be of the view that short term volatility has limited
commercial impact on the business and of more importance is the
fact that steady state, over the longer term, we expect EcV growth
in the form of real world investment returns
Total operating earnings: Earnings for the period reflect a
significant uplift on the losses reported in recent years and
continues the encouraging trend of improvement. It is also worth
noting that the result 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 2023 include:
- Recurring central development overheads including those
associated with the M&A strategy. Whilst the cost of this
development investment is recognised, EcV does not recognise the
potential returns we expect from it.
- Non-recurring development expenditure such as IFRS 17.
- Transition and transformational costs relating to the UK's new
outsourcing arrangements and business integrations
post-acquisition.
- Tier 2 debt servicing costs - EcV does not recognise the
benefit of the capital or the potential for future value adding
transactions that it provides.
Acquisitions: M&A activity continued to be a source of
growth and supplied GBP28.4m of EcV earnings in the period. The
incremental value was delivered by the Conservatrix insurance
portfolio acquisition (1 January 2023) and also a UK protection
portfolio reinsurance arrangement with Canada Life (16 May 2023),
under the Waard Group and CA plc respectively.
Looking at the results by division:
UK: The UK division reported a modest operating profit, with
positive results on fee income (due to lower policy attrition) and
a reduction in future expenses (under the new outsourcing
arrangements), which offset some expense pressure in the period
owing to non-recurring transition and migration activity. An
economic gain of GBP8.3m drives the divisional result. This was
primarily the positive impact of rising yields plus, to a lesser
extent, an improvement in equity indices. While the economic profit
was relatively subdued, it remains a significant improvement on the
prior year.
Sweden: Movestic posted earnings of GBP15.0m for the opening
half of 2023, with the division benefitting from external economic
factors. Investment markets, in particular rising equity markets in
Sweden and Europe, have underpinned economic returns of GBP19.8m.
This more than outweighed a smaller operating loss, due to adverse
transfer activity, lower fee and commission income (owing to
pricing pressures) and suppressed fund rebate income. Modest new
business profits (on an EcV basis) were GBP1.5m (30 June 2022:
GBP0.7m), reflective of the continued competitive market conditions
and margin pressures, though an improvement on 2022.
Netherlands: The Dutch division has reported growth of GBP12.1m
in the period, with operating profits mitigating economic losses in
both businesses. The operating result in Scildon, delivering growth
of GBP13.1m, represents a significant upturn versus the losses
sustained in prior periods and includes new business profits
GBP2.7m. Economic losses of GBP3.3m were primarily the consequence
of rising yields, partly offset by the volatility adjustment
impact. Waard has reported EcV growth of GBP3.7m, supported by
operating profits of GBP5.1m, which included favourable mortality
experience and the positive impact of surrenders on expenses.
Despite positive bond returns exceeding expectations, the economic
loss (GBP0.6m) stemmed from a number of factors including subdued
equity growth and changes in the market value of our mortgage
portfolio. The negative impact of a fall in interest rates also
offset the benefit of rising yields on the business's future
liabilities.
Group: This component contains a variety of group-related
expenses and includes: non-maintenance related costs (such as
acquisition activity costs); the costs of the group's IFRS 17
programme; 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
GBP523.2 M (31 DEC 2022: GBP511.7 M )
The Economic Value of Chesnara represents the present value of
future profits of the existing insurance business, plus the
adjusted net asset value of the non-insurance business within the
group. EcV is an important reference point by which to assess
Chesnara's intrinsic value.
Value movement: 1 Jan 2023 to 30 Jun 2023:
GBPm
================== =======
EcV 31 Dec 2022 511.7
EcV earnings 32.6
Acquisitions 28.4
Forex (26.7)
------------------ -------
Pre-dividend EcV 546.0
Dividends (22.8)
================== =======
EcV 30 Jun 2023 523.2
================== =======
EcV earnings: EcV profits of GBP61.0m have been delivered in the
opening half of the year, supported by both economic and operating
profits, with significant growth also delivered through
acquisitions.
Acquisitions: The group has delivered two deals during the first
half of 2023; the Conservatrix portfolio acquisition and the
reinsurance arrangement with Canada Life. This has resulted in day
1 EcV gains of GBP21.7m and GBP6.7m respectively.
Foreign exchange: The closing EcV of the group reflects a
foreign exchange loss in the period, which is a consequence of
sterling appreciation against both the Swedish krona and also the
euro.
Dividends: Under EcV, dividends are recognised in the period in
which they are paid. Dividends of GBP22.8m were paid during the
first half of the year, representing the final dividend from
2022.
EcV by segment at 30 Jun 2023
GBPm
======================== =======
UK 181.0
Sweden 185.0
Netherlands 248.7
Other group activities (91.5)
------------------------ -------
EcV 30 Jun 2022 523.2
------------------------ -------
The above table shows that the EcV of the group is diversified
across its different markets.
EcV to Solvency II:
GBPm
=============================== =======
EcV 30 Jun 2023 523.2
Risk margin (38.4)
Contract boundaries (2.6)
Own Funds restrictions (0.1)
Tier 2 debt 200.00
Tier 2/3 restrictions (6.8)
Deferred tax asset adjustment 10.0
=============================== =======
Dividends (12.6)
=============================== =======
SII Own Funds 30 Jun 2023 672.7
=============================== =======
Our reported EcV is based on a Solvency II assessment of the
value of the business but adjusted for certain items where it is
deemed that Solvency II does not reflect the commercial value of
the business. The above table shows the key difference between EcV
and SII, with explanations for each item below.
Risk margin: Solvency II rules require a significant 'risk
margin' which is held on the Solvency II balance sheet as a
liability, and this is considered to be materially above a
realistic cost. We therefore reduce this margin for risk for EcV
valuation purposes from being based on a 6% cost of capital to a
3.25% cost of capital.
Contract boundaries: Solvency II rules do not allow for the
recognition of future cash flows on certain in-force contracts,
despite the high probability of receipt. We therefore make an
adjustment to reflect the realistic value of the cash flows under
EcV.
Ring-fenced fund restrictions: Solvency II rules require a
restriction to be placed on the value of surpluses that exist
within certain ring-fenced funds. These restrictions are reversed
for EcV valuation purposes as they are deemed to be temporary in
nature.
Dividends: The proposed interim dividend of GBP12.6m 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 2 and 3 Own
Funds is restricted in accordance with regulatory rules.
IFRS
The group IFRS results are reported under IFRS 17 for the first
time. The following section provides an introduction to IFRS 17 and
how it impacts Chesnara, together with the unaudited IFRS results
for the 6 months to 30 June 2023 and comparative periods, which
have been restated under IFRS 17.
INTRODUCTION TO IFRS 17
What is IFRS 17?
IFRS 17 is the new accounting standard for valuing and
disclosing insurance contracts. This is effective for the first
time in these half year financial statements and replaces the
previous standard, IFRS 4. IFRS 17 has been implemented as if it
had always been in place and so previous results have been
restated.
IFRS 17 has been introduced with the aim of allowing greater
comparability of results between insurance companies and the wider
market.
How does IFRS 17 impact Chesnara?
IFRS 17 'insurance contracts' represents an accounting policy
change that does not impact the fundamentals of the business.
Specifically, the implementation of IFRS 17 does not impact the
growth ambition, value or cash generation of the group. There are
no changes to the solvency ratio, cash generation or economic value
of the group. There are no changes to the dividend expectations or
strategy and capability for future M&A.
IFRS 17 only applies to those policies of the group that are
classified as 'insurance contracts', which equates to 42% of the
group's total policyholder liabilities at the end of June 2023. The
remaining contracts are classified as investment business, which
are valued under IFRS 9 'Financial Instruments', and is also
effective for the group for this period. Under IFRS 9, there is no
impact to the results from how these liabilities have been
previously valued under IAS 39. A key difference between the
measurement of contracts under IFRS 9 and IFRS 17 is that
investment contracts equate to unit value under IFRS 9 and their
value therefore does not take into account future profit, whereas
insurance contracts contain prudence in the form of the risk
adjustment (RA) and contractual service margin (CSM).
The group's net equity position has increased at 31 December
2022 under IFRS 17 compared to that reported under IFRS4, thereby
lowering the gearing ratio to 30.3% compared to 37.6% under IFRS 4.
The gearing ratio at HY 23 is 29.5%.
How are profits earned under IFRS 17?
A fundamental concept introduced by IFRS 17 is the contractual
service margin (CSM). This represents the unearned profit that an
entity expects to earn on its insurance contracts as it provides
insurance services.
The CSM embodies two principles:
1. An insurer must spread expected profits for profitable business written over time.
This spread profit forms the CSM which can only be recognised in
the income statement as and when insurance services are provided.
The CSM consequently represents the expected amount of profits that
have not yet been earned from the insurance business of the
group.
2. An insurer must recognise the expected losses for loss-making business immediately.
An insurer cannot establish a "negative CSM" and defer loss
recognition into the future.
IFRS BALANCE SHEET
As at 31 December 2022 the transition to IFRS 17 has created a
GBP52m increase in IFRS net equity compared with the previously
stated IFRS 4 position. Total net equity as at 30 June 2023 is
GBP362m and we have a CSM, which represents unrecognised future
insurance profits, of GBP157m. The adoption of IFRS 17 has affected
our gearing ratio, and whilst Fitch have not stated how they will
calculate leverage under IFRS 17 they have indicated that the
calculation will include adding back the CSM to the equity
denominator in its calculation. On this basis the gearing ratio as
at 30 June 2023 is 29.5% which is significantly lower than the most
recent ratio reported prior to IFRS 17 (31 December 2022:
37.6%).
Some analysis has been provided below on the IFRS balance sheet
of the group on an IFRS 17 basis:
HOW IFRS 17 IMPACTS NET EQUITY AT DECEMBER 2022
GBPm
=============================================== ========
IFRS 4: shareholder equity 31 Dec 2022 333.0
Remeasurement of liabilities 285.4
Creation of CSM (102.8)
Creation of risk adjustment (32.0)
Other asset changes inc deferred tax and AVIF (99.0)
----------------------------------------------- --------
IFRS 17: shareholder equity 31 Dec 2022 384.6
----------------------------------------------- --------
Under IFRS 17, the restated shareholder net equity at 31
December 2022 has increased by GBP52m compared with as previously
reported.
The re-measurement of insurance contract liabilities at that
date has added GBP150m of that growth. This uplift includes GBP103m
of CSM (i.e. future profits) that will be released to the income
statement as the associated future insurance services are
provided.
A consequence of applying IFRS 17 is that the group has also
re-measured certain intangible assets (and their associated tax
balances) that were previously recognised on previous acquisitions
that included insurance contracts. These assets at the time
essentially represented future profits, but under IFRS 17 these are
now reflected in the CSM.
HOW THE CSM HAS MOVED IN THE PERIOD
GBPm
=================================== ======
CSM: 1 Jan 2023 102.9
Interest accreted to CSM 1.8
Assumption & experience variances 4.0
New business CSM 5.8
Release of profit (9.8)
Acquisition CSM 55.7
Foreign exchange rate impacts (3.4)
CSM: 30 Jun 23 157.0
----------------------------------- ------
The group has added GBP54m of CSM (future profits) in the 6
months to 30 June 2023.
The increase is largely driven by the two deals in the period,
with the Conservatrix portfolio acquisition adding GBP45m and the
Canada Life arrangement adding GBP10m.
The movement in the period also includes:
- a GBP10m reduction which reflects the release to profit in the
period as the insurance services are provided
- GBP6m of new business CSM, reflecting the future profits
arising on profitable new business written in the period.
Other smaller movements including the impact of foreign
exchange, changes in assumptions and the "interest" on unwinding
the discounting that is embedded within the opening CSM
valuation.
HOW DOES IFRS 17 COMPARE TO SOLVENCY II AND ECV?
GBPm
================================= ========
EcV 523.2
Investment business value (105.1)
Different treatment of expenses 55.2
Technical & other 18.6
Tax (12.3)
--------------------------------- --------
IFRS 17 net equity + nCSM 479.6
--------------------------------- --------
A lot of the principles and underlying technical decisions are
consistent across EcV and IFRS, as they are based on common
foundations; however, there is one fundamental difference in how
investment contracts are valued. For investment contracts, expected
future profits on existing policies are not recognised in the IFRS
balance sheet, with profits being reported as they arise; this is
in contrast to EcV, where they are fully recognised on the balance
sheet, subject to contract
boundaries.
As such, at Chesnara, we believe that due to the hybrid nature
of a portfolio, EcV and Solvency II, alongside cash generation,
continue to give a more holistic view of the financial dynamics of
the group and are therefore the key metrics that management use to
manage the business.
HOW DOES IFRS 17 IMPACT LEVERAGE
The positive impact of IFRS 17 on net equity has been beneficial
to the group's gearing ratio. Rating agencies will be revisiting
their definitions of gearing for insurance groups as a result of
IFRS 17, although these have yet to be formalised. Fitch has
indicated that a gearing ratio that takes debt divided by debt plus
equity, with
the equity denominator adding back the net of tax CSM liability,
could be an acceptable definition. On this basis, the gearing of
the group as at 30 June 2023 was 29.5%.
IFRS INCOME STATEMENT
IFRS PRE-TAX PROFIT
GBP16.0 M 30 JUNE 2022 : GBP54.2 M LOSS
IFRS TOTAL COMPREHENSIVE INCOME
GBP0.2 M 30 JUNE 2022 : GBP29.8 M LOSS
Analysis of IFRS result between insurance service and investment
results:
Unaudited* Unaudited*
Six months ended Year ended
30 Jun 23 30 Jun 31 Dec
22 22
GBPm GBPm GBPm
================================================ ============== ========= ===========
Net insurance service result 9.5 3.2 12.1
Net investment result 25.0 (46.2) (58.8)
================================================ ============== ========= ===========
Fee, commission and other operating income 48.5 32.2 73.3
Other operating expenses (65.5) (48.6) (93.4)
Financing costs (5.5) (4.6) (10.5)
Profit arising on business combinations and
portfolio acquisitions 4.0 9.9 15.4
================================================ ============== ========= ===========
Profit before income taxes 16.0 (54.2) (61.9)
================================================ ============== ========= ===========
Income tax (charge)/credit (0.4) 22.4 28.6
================================================ ============== ========= ===========
Profit for the period after tax 15.6 (31.7) (33.3)
Foreign exchange (loss)/gain (15.3) 1.9 7.0
Other comprehensive income (0.1) - 0.7
================================================ ============== ========= ===========
Total comprehensive income 0.2 (29.8) (25.6)
================================================ ============== ========= ===========
Movement in CSM 54.2 6.0 (6.1)
================================================ ============== ========= ===========
*We have decided not to include a review opinion in these half
year financial statements. Our decision assessed the process impact
risk in comparison to the relatively limited scope of the half year
review, with the focus instead being on completion of audit
procedures over the restated balance sheets under IFRS 17 and IFRS
9 for the years ended 31 December 2021 and 31 December 2022.
IFRS REPORTING CATEGORY INSIGHT
======================================== ==================================================
Net insurance service result The net insurance service result of
GBP9.5m is up GBP6.3m compared to the
same period in 2022, driven by a combination
of higher CSM amortisation of GBP9.7m
(HY 2022 GBP8.1m) plus improved experience
and loss component effects of GBP2.4m
loss (HY 2022 GBP7.2m loss). The latter
has largely been as a result of an improved
performance from Waard.
At the close of the period the CSM of
the group amounted to GBP157m, having
increased by GBP54m since the start
of the year. This remaining CSM will
be earned over the cover period of the
policies to which this relates.
==================================================
The net insurance service result
comprises the revenue and expenses
from providing insurance services
to policyholders and ceding insurance
business to reinsurer's and is
in respect of current service
only. Assumption changes are
therefore excluded from the insurance
result, 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 2023, the
CSM has increased by GBP54.2m. The key
components of this increase are GBP55.7m
of new CSM through the group's two acquisitions
in the period and GBP6m of additional
CSM arising from new business, offset
by GBP10m released to the income statement.
==================================================
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 positive investment result in the
year to date, is reflective of investment
market recoveries, with rising bond
yields, improved equity returns and
narrowing credit spreads being the main
contributors. The comparative period
in 2022 was adversely impacted by falling
equity markets, following the Russian
invasion of Ukraine.
==================================================
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 The year-to-date figures are an improvement
income on the 2022 six-month comparative, reflecting
the fact that the current year to date
number includes a full six months of
fee income generated by CASLP within
the UK, whereas the June 2022 number
only included two months of income,
post the CASLP acquisition in late April
2022. Movestic also contributed to the
improvement on the comparative figure,
as higher assets under management values
as a result of market improvements generated
higher fund rebate income.
==================================================
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
ion this line, as this is all
now reported in the insurance
result
======================================== ==================================================
Other operating expenses The expenses incurred in the first six
months of 2023 are higher than the corresponding
six months in 2022. This is due to a
number of factors. In Movestic, the
expense in respect of the yield tax
on policyholder funds has increased
significantly, in line with the underlying
gains on the policyholder funds, due
to improving economic factors.
In the UK, costs have increased when
comparing to the half year and full
year comparatives, due to the acquisition
of CASLP, which has a full six months
of expenses in 2023, compared to two
months in 2022. Similarly, expenses
have increased in Waard, following the
acquisition of the Conservatrix book
in January 2023. The parent company
has also seen an increase in expenses,
due to project related expenditure and
strengthening of the central governance
oversight team..
==================================================
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.
Further details can be found in Note
12 of the financial statements.
======================================== ==================================================
Profit arising on business combinations On 1 January 2023, Chesnara successfully
and portfolio acquisitions 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 of GBP4.0m.
======================================== ==================================================
Income tax In 2022, the large pre-tax losses generated
Income tax consists of both current deferred tax credits, particularly in
and deferred taxes. the UK, in respect of investment and
trading losses. The tax charge in the
current year to date is similarly impacted
by deferred tax movements on investment
movements and non-taxable profits in
Movestic, which instead are subject
to a yield tax charge.
======================================== ==================================================
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
and to a lesser extent against the euro.
======================================== ==================================================
Other comprehensive income This represents the impact of movements
in the valuation of an investment property
held in our Dutch division.
======================================== ==================================================
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 Audit
& Risk Committees. Our risk assessment processes have regard to
the significance of risks, the likelihood of their occurrence and
take account of the controls in place to manage them. The processes
are designed to manage the risk profile within the board's approved
risk appetite.
Group and divisional risk management processes are enhanced by
stress and scenario testing, which evaluates the impact on the
group of certain adverse events occurring separately or in
combination. The results, conclusions and any recommended actions
are included within divisional and group ORSA Reports to the
relevant boards. There is a strong correlation between these
adverse events and the risks identified in 'Principal risks and
uncertainties'. The outcome of this stress testing provides context
against which the group can assess whether any changes to its risk
appetite or to its management processes are required.
ROLE OF THE BOARD
The Chesnara board is responsible for the adequacy of the design
and implementation of the group's risk management and internal
control system and its consistent application across divisions. All
significant decisions for the development of the group's risk
management system are the group board's responsibility.
Strategy and Risk Appetite
Chesnara group and its divisions have a defined risk strategy
and supporting risk appetite framework to embed an effective risk
management framework, culture and processes at its heart and to
create a holistic, transparent and focused approach to risk
identification, assessment, management, monitoring and
reporting.
The Chesnara board approves a set of risk preferences which
articulate, in simple terms, the desire to increase, maintain, or
reduce the level of risk taking for each main category of risk. The
risk position of the business is monitored against these
preferences using risk tolerance limits, where appropriate, and
they are taken into account by the management teams across the
group when taking strategic or operational decisions that affect
the risk profile .
Risk and Control Policies
Chesnara has a set of Risk and Control Policies that set out the
key policies, processes and controls to be applied. The Chesnara
board approves the review, updates and attestation of these
policies at least annually.
Risk Identification
The group maintains a register of risks which are specific to
its activity and scans the horizon to identify potential risk
events (e.g. political; economic; technological; environmental,
legislative & social).
On an annual basis the board approves the materiality criteria
to be applied in the risk scoring and in the determination of what
is considered to be a principal risk. At least quarterly the
principal and emerging risks are reported to the board, assessing
their proximity, probability and potential impact.
Own Risk and Solvency Assessment (ORSA)
On an annual basis, or more frequently if required, the group
produces a group ORSA Report which aggregates the divisional ORSA
findings and supplements these with an assessment specific to group
activities. The group and divisional ORSA policies outline the key
processes and contents of these reports.
The Chesnara board is responsible for approving the ORSA,
including steering in advance how the assessment is performed and
challenging the results.
Risk Management System Effectiveness
The group and its divisions undertake a formal annual review of
and attestation to the effectiveness of the risk management system.
The assessment considers the extent to which the risk management
system is embedded.
The Chesnara board is responsible for monitoring the Risk
Management System and its effectiveness across the group. The
outcome of the annual review is reported to the group board which
make decisions regarding its further development.
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 information in the following section 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
materially exposed to climate change risk.
UKRAINE CONFLICT
The ongoing invasion of Ukraine by Russia continues to be an
area of emerging risk for Chesnara group in the sense that it is an
evolving situation and has potential implications for Chesnara's
Principal risks.
MACROECONOMIC VOLATILITY
Geopolitical instability and conflict remains a significant risk
to global economic growth. Economic volatility and uncertainty
remains high as Central Banks tackle persistently high inflation,
particularly in the UK. Most economies have seen yield curve
increases not seen since the 1980s and prospects of this
stabilising are very dependent on inflation.
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 With greater global emphasis being placed on environmental
RISK 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.
==================================================================
UKRAINE CONFLICT The conflict in Ukraine / Russia brings additional economic
uncertainty and volatility to financial markets, including
the potential for higher inflationary pressures in the
short term (given impacts on the supply chain). The group
has no direct exposure in terms of investments in Russian
funds or companies via customer unit linked funds, and
we are working with customers that are exposed to help
them.
==================================================================
MACRO-ECONOMIC There remains significant economic volatility globally
VOLATILITY and particularly in the UK with more persistent inflation,
and so there is a heightened risk of poor mid-term performance
on shareholder and policyholder assets.
Chesnara continues to operate within its stated Risk Appetite
but is currently undertaking a review of its interest rate
matching approach given the recent yield curve paradigm
shift.
==================================================================
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 IFRS17 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 Cost of living pressures could give rise to higher surrenders
VOLATILITY and lapses should customers face personal finance pressures
and not be able to afford premiums or need to access savings.
Any downturn in the property market could reduce protection
business sales particularly in the Netherlands. Currently
there has been no evidence of changes in behaviours other
than a slow down sales in Netherlands. Chesnara continues
to monitor closely and respond appropriately
=================================================================
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 High inflation and the energy crisis has driven increases
VOLATILITY in supplier costs, particularly in the UK with its outsourcing
model. Wage inflation is generally lower than headline
inflation but is currently much higher than the long term
valuation assumptions, with consideration needed regarding
the balancing of employee remuneration versus turnover
/retention / motivation risks / tight labour markets. The
risk is currently higher in the UK than in Sweden and Netherlands
since the UK inflation has been more persistent.
===================================================================
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.
===============================================================
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.
======================================================================
UKRAINE CONFLICT The ongoing invasion of Ukraine by Russia heightens the
risk of cyber crime campaigns originating from Russia,
with some suppliers reporting an increase in information
security threats which some are saying is state sponsored.
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 Some of Chesnara's new business is linked to the property
VOLATILITY market such as the mortgage term protection product in
the Netherlands. Where there has been a slow down in the
property market, we have seen a corresponding slow down
in sales of such products, as expected. There is a risk
that this persists longer than expected resulting in lower
sales than expected in the business plan.
============================================================
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 Given the global focus on climate change as well as the
RISK 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
and during 2023, we will produce our transition plan and
the all-important shorter term 2025 and 2030 targets.
==================================================================
UKRAINE CONFLICT In relation to the Ukraine / Russia conflict, no material
exposure has been identified in terms of the group's key
counterparty connections. There are limited indirect connections
through third parties who have a presence in Russia and
Chesnara has confirmed that there are no obvious links
with Russia through its shareholders or stockbrokers.
==================================================================
GOING CONCERN
Going concern
After making appropriate enquiries, including consideration of
the ongoing high inflation environment and the impacts of the
ongoing invasion of Ukraine on the group's operations and financial
position and prospects, the directors confirm that they are
satisfied that the company and the group have adequate resources to
continue in business for the foreseeable future. Accordingly, they
continue to adopt the going concern basis in the preparation of the
financial statements.
In performing this work, the board has considered the current
solvency and cash position of the group and company, coupled with
the group's and company's projected solvency and cash position as
highlighted in its most recent business plan and Own Risk and
Solvency Assessment (ORSA) process. These processes consider the
financial projections of the group and its subsidiaries on both a
base case and a range of stressed scenarios, covering projected
solvency, liquidity, EcV and IFRS positions. In particular these
projections assess the cash generation of the life insurance
divisions and how these flow up into the Chesnara parent company
balance sheet, with these cash flows being used to fund debt
repayments, shareholder dividends and the head office function of
the parent company. Further insight into the immediate and
longer-term impact of certain scenarios, covering solvency, cash
generation and Economic Value, can be found in the Chesnara Half
Year Report for the six months ended 30 June 2023, under the
section headed 'Capital Management Sensitivities'. The directors
believe these scenarios will encompass any potential future impact
of high inflation and the Ukraine crisis on the group, as
Chesnara's most material ongoing exposure to these 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..
The group's strong capital position and business model, provides
a degree of comfort that although the high inflation environment
and ongoing Ukraine crisis have 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 at 30 June 2023, 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 GBP200m Tier 2 Subordinated Notes,
the net proceeds of which are being utilised 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
20 September 2023 20 September 2023
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Unaudited Unaudited Year ended 31
Six months ended December
30 June
2023 2022 restated 2022 restated
GBP000 GBP000 GBP000
=========================================== ====== =========== ============= ========================
Insurance revenue 118,048 106,673 224,031
Insurance service expense (102,388) (99,288) (205,872)
Net income expenses from reinsurance contracts held (6,144) (4,179) (6,036)
=================================================== =========== ============= ========================
Insurance service result 9,516 3,206 12,123
=================================================== =========== ============= ========================
Net investment return 603,012 (1,588,102) (1,556,870)
Net finance (expenses) / income from insurance
contracts issued (151,895) 483,275 547,694
Net finance expenses from reinsurance contracts
held (2,527) (9,208) (13,491)
Net change in investment contract liabilities (356,895) 725,977 570,974
Change in liabilities relating to policyholders'
funds held by the group (66,705) 341,856 392,884
=================================================== =========== ============= ========================
Net investment result 24,990 (46,202) (58,809)
=================================================== =========== ============= ========================
Fee, commission and other operating income 48,485 32,201 73,363
Total revenue net of investment result 82,991 (10,795) 26,677
Other operating expenses (65,501) (48,642) (93,405)
--------------------------------------------------- ----------- ------------- ------------------------
Total income less expenses 17,490 (59,437) (66,728)
Financing costs (5,508) (4,583) (10,549)
Profit arising on business combinations and
portfolio acquisitions 3,969 9,866 15,361
=================================================== =========== ============= ========================
Profit / (loss) before income taxes 15,951 (54,154) (61,916)
Income tax(expense) / credit (420) 22,443 28,627
=================================================== =========== ============= ========================
Profit / (loss) for the period 15,531 (31,711) (33,289)
Items that may be reclassified subsequently
to profit and loss:
Foreign exchange translation differences arising
on the revaluation of foreign operations (15,315) 1,876 6,982
Revaluation of land and building (54) 25 674
=================================================== =========== ============= ========================
Other comprehensive (loss) / income for the period,
net of tax (15,369) 1,901 7,656
=================================================== =========== ============= ========================
Total comprehensive income / (loss) for the period 162 (29,810) (25,633)
=================================================== =========== ============= ========================
Basic earnings per share (based on profit or loss
for the period) 10.32p (21.12)p (22.16)p
=================================================== =========== ============= ========================
Diluted earnings per share (based on profit or loss
for the period) 10.25p (20.87)p (21.90)p
=================================================== =========== ============= ========================
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
Unaudited Unaudited as at 31 Unaudited
as at 30 December as at 31 December
June 2022 2021
2023
restated restated
GBP000 GBP000 GBP000
========================================== ===== ========== ================= =================
Assets
Intangible assets 114,820 124,186 77,665
Property and equipment 7,539 7,893 7,830
Investment properties 98,749 94,481 1,071
Insurance contract assets 10,190 - -
Reinsurance contract assets 179,341 193,952 242,343
Amounts deposited with reinsurers 32,113 32,803 38,295
Financial investments 11,008,759 10,566,147 9,176,010
Derivative financial instruments 3,160 141 264
Other assets 48,897 46,041 47,316
Deferred tax assets 49,908 10,179 922
Cash and cash equivalents 144,284 175,293 70,086
================================================= ==== ========== ================= =================
Total assets 11,697,760 11,251,116 9,661,802
================================================= ==== ========== ================= =================
Liabilities
Insurance contract liabilities 4,104,519 3,821,101 4,032,070
Reinsurance contract liabilities 12,807 13,536 28,812
Other provisions 16,947 8,651 1,712
Investment contracts at fair value through income 5,695,738 5,660,778 3,981,976
Liabilities relating to policyholders' funds held
by the group 1,116,495 986,768 990,700
Lease contract liabilities 1,474 1,233 2,018
Borrowings 209,344 211,976 47,185
Derivative financial instruments 127 3,850 -
Deferred tax liabilities 33,941 31,770 10,567
Deferred income 3,022 3,470 4,473
Other current liabilities 140,788 123,373 118,633
Bank overdrafts 206 19 256
================================================= ==== ========== ================= =================
Total liabilities 11,335,408 10,866,525 9,218,402
================================================= ==== ========== ================= =================
Net assets 362,352 384,591 443,400
================================================= ==== ========== ================= =================
Shareholders' equity
Share capital 7,503 7,502 7,496
Merger reserve 36,272 36,272 36,272
Share premium 142,387 142,332 142,085
Other reserves (451) 14,918 7,262
Retained earnings 176,641 183,567 250,285
================================================= ==== ========== ================= =================
Total shareholders' equity 362,352 384,591 443,400
================================================= ==== ========== ================= =================
Approved by the Board of Directors and authorised for issue on
20 September 2023 and signed on its behalf by:
Luke Savage Steve Murray
Chairman Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Unaudited Unaudited
Six months ended 30 June Six months
ended 30 June
2023 2022
GBP000 GBP000
--------------------------------------------------------------- -------------------------------- --------------
Profit / (loss) for the period 15,531 (31,711)
Adjustments for:
Depreciation of property, plant and equipment 724 701
Amortisation of intangible assets 5,654 3,384
Interest on lease liabilities 27 17
Share based payment 342 504
Tax paid / (recovery) 1,944 (36,419)
Interest receivable (8,323) (5,696)
Dividends receivable (7,825) (1,461)
Interest expense 4,750 9,163
Fair value (gains)/losses on financial assets (586,864) 1,580,945
Profit on business combinations and portfolio acquisitions (3,969) (9,866)
Loss on sale of fixed assets 149 -
Increase in intangible assets related to investment contracts (4,187) (314)
Interest received 8,914 6,216
Dividends received 7,481 1,292
Changes in operating assets and liabilities:
Decrease/(increase) in financial assets 510,950 (102,886)
Decrease in reinsurers contract assets 1,075 309
Decrease in amounts deposited with reinsurers 690 4,148
(Increase)/decrease in other assets (17,639) 16,827
Decrease in insurance contract liabilities (62,754) (550,840)
Decrease in investment contract liabilities (35,115) (836,471)
Increase in reinsurance contract liabilities 9,867 1,332
Increase/(decrease) in provisions 144,125 (92,928)
(Decrease)/Increase in other current liabilities (4,295) 1,289
--------------------------------------------------------------- -------------------------------- --------------
Cash utilised from operations (18,748) (42,465)
Income tax paid (213) (9,390)
--------------------------------------------------------------- -------------------------------- --------------
Net cash generated from operating activities (18,961) (51,855)
--------------------------------------------------------------- -------------------------------- --------------
Cash flows from investing activities
Business combinations 31,415 49,251
Development of software (1,130) -
Disposal of investment properties 1,987 2,758
Purchases of property and equipment (1,513) (1,005)
Net cash generated by investing activities 30,759 51,004
--------------------------------------------------------------- -------------------------------- --------------
Cash flows from financing activities
Proceeds from issue of share premium 56 -
Proceeds from Tier 2 debt - 200,000
Repayment of borrowings - (31,273)
Repayment of principal under lease liabilities (186) (385)
Dividends paid (22,799) (22,103)
Interest paid (4,750) (9,178)
--------------------------------------------------------------- -------------------------------- --------------
Net cash (utilised)/generated by from financing activities (27,679) 137,061
--------------------------------------------------------------- -------------------------------- --------------
Net (decrease)/increase in cash and cash equivalents (15,881) 136,210
Cash and cash equivalents at beginning of period 175,274 69,830
Effect of exchange rate changes on cash and cash equivalents (15,315) 718
=============================================================== ================================ ==============
Cash and cash equivalents at end of the period 144,078 206,758
--------------------------------------------------------------- -------------------------------- --------------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
Unaudited - six months
ended 30 June 2023
Share capital Share premium Merger reserve Other reserves Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------- ------------- ------------- -------------- -------------- ----------------- --------
Equity shareholders'
funds at 1 January
2023 restated 7,502 142,332 36,272 14,918 183,567 384,591
Profit for the period - - - - 15,531 15,531
Dividends paid - - - - (22,799) (22,799)
Foreign exchange
translation
differences - - - (15,315) - (15,315)
Revaluation of land
and building - - - (54) - (54)
Issue of share capital 1 - - - - 1
Issue of share premium - 55 - - - 55
Share based payment - - - - 342 342
---------------------- ------------- ------------- -------------- -------------- ----------------- --------
Equity shareholders'
funds at 30 June 2023 7,503 142,387 36,272 (451) 176,641 362,352
---------------------- ------------- ------------- -------------- -------------- ----------------- --------
Unaudited - six months
ended 30 June 2022
Share capital Share premium Merger reserve Other reserves Retained earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------- ------------- ------------- -------------- -------------- ----------------- --------
Equity shareholders'
funds at 1 January
2022 (as previously
stated) 7,496 142,085 36,272 7,262 265,052 458,167
Transition adjustments
(note 3) - - - - (14,767) (14,767)
Equity shareholders'
funds at 1 January
2022 (restated) 7,496 142,085 36,272 7,262 250,285 443,400
Loss for the period - - - - (31,711) (31,711)
Dividends paid - - - - (22,103) (22,103)
Foreign exchange
translation
differences - - - 1,876 - 1,876
Revaluation of land
and building - - - 25 - 25
Issue of share capital - - - - - -
Issue of share premium - - - - - -
Share based payment - - - - 504 504
---------------------- ------------- ------------- -------------- -------------- ----------------- --------
Equity shareholders'
funds at 30 June 2022 7,496 142,085 36,272 9,163 196,975 391,991
---------------------- ------------- ------------- -------------- -------------- ----------------- --------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of preparation
The annual financial statements of Chesnara plc are prepared in
accordance with United Kingdom adopted International Financial
Reporting Standards. This condensed set of consolidated financial
statements has been prepared in accordance with International
Accounting Standard 34 'Interim Financial Reporting'.
This is the first set of the group's financial statements in
which 'IFRS 17 Insurance contracts' (IFRS 17) and 'IFRS 9 Financial
instruments' (IFRS 9) have been applied. The changes to significant
accounting policies arising from the adoption of IFRS 17 and IFRS 9
are set out in Note 2.
The results from the full year 2022 and half year 2022 have been
restated to reflect the retrospective application of IFRS 17 and
IFRS 9 from 1 January 2022. The comparative figures for the
financial year ended 31 December 2022 are not the group's statutory
accounts for that financial year but are derived from those
accounts. 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.
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 the half
year 2023 financial statements by the group's auditor, Deloitte. In
the opinion of the directors it is more optimal for both Deloitte
and Chesnara group management to focus resources on completing the
audit procedures over the restated balance sheets under IFRS17 and
IFRS9 for both the year ended 31 December 2021 and 31 December
2022.
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 half year 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 Half Year
Report for the six months ended 30 June 2023.
Judgements and estimates
The critical accounting judgements and key sources of estimation
and uncertainty and their potential impact on the group have been
updated and evaluated by management in the preparation of these
half year condensed financial statements. Note 2 provides details
of the critical accounting judgements and estimates that now exist
for the group following the application of IFRS 17 and IFRS 9 in
these condensed financial statements.
2 Changes in significant accounting policies and significant
judgements, estimates and assumptions
The group has initially applied IFRS17 and IFRS9, including any
consequential amendment to other standards, from 1 January 2023.
The introduction of these standards mean there are significant
changes to the accounting for insurance and reinsurance contracts
and financial instruments, although the impact for the group in
respect of IFRS9 is less significant. As a result of these
standards becoming effective for the group from 1 January 2023, the
group has restated certain comparative amounts and restated the
opening shareholder equity position as at 1 January 2022. The
nature and effects of the key changes in the group's accounting
policies resulting from its adoption of IFRS17 and IFRS9 are set
out below.
(a) IFRS 17 - Insurance contracts
(i) Components of insurance and reinsurance contracts
'IFRS17 Insurance Contracts' is effective for annual reporting
periods beginning on or after 1 January 2023 and brings about
significant changes in the recognition, measurement and
presentation of insurance and reinsurance contracts for the
group.
IFRS17 requires insurance liabilities to be broken down into
separate component parts, consisting of the 'Liability for
Remaining Coverage' (LRC) and the 'Liability for Incurred Claims'
(LIC).
The LRC comprises the present value of future cash flows (pvFCF)
and also introduces a risk adjustment (RA) for non-financial risk,
measuring uncertainty in the amount and timing of the cash flows.
The pvFCF and RA are collectively described as 'fulfilment
cash-flows' and the movements in the fulfilment cash-flows either
impact the profit and loss or the Contractual Service Margin (CSM);
the final component of the LRC. The CSM represents the future
unearned profits of the insurance contracts and as such will be a
key measure in the future reporting of insurance contracts. In the
case that a group of contracts is onerous (ie, CSM < zero), a
loss component is established instead of a CSM, with losses on
onerous contracts recognised in profit or loss immediately.
The LIC represents outstanding claims for insured events that
have already occurred. Any subsequent changes in the incurred value
of outstanding claims are recognised in profit or loss.
For reinsurance contracts held, the reinsurance contract assets
will consist of the 'Asset for Remaining Coverage' (ARC) and the
'Asset for Incurred Claims' (AIC). The components of the ARC are
similar to the LRC, with the following distinct differences:
- The risk adjustment for non-financial risk represents the
amount of risk being transferred by the cedant to the
reinsurer;
- The CSM represents the net cost or net gain on purchasing
reinsurance and can be positive or negative; and
- To the extent that onerous contracts are reinsured, a loss
recovery component shall be established at the date the underlying
onerous losses are recognised to cater for the expected recoveries
of the underlying losses from the reinsurance contracts held.
(ii) Presentation in the profit and loss and balance sheet
IFRS17 has a significant impact on the presentation of the
income statement with a separate insurance service result and
investment result.
Under IFRS 17, for contracts not measured under the 'Premium
Allocation Approach' (PAA), the group recognises insurance revenue
as it satisfies its performance obligations - i.e. as it provides
services under groups of insurance contracts. The insurance revenue
relating to services provided for each year represents the total of
the changes in the LRC that relate to services for which the group
expects to receive consideration. This mainly comprises the release
of expected claims, the risk adjustment expired and the CSM
amortised in the period.
For contracts measured under the PAA, the insurance revenue for
each period is the amount of expected premium receipts for
providing services in the period.
'Insurance service expenses' in each reporting period represents
the cost of providing those services, broadly comprising incurred
claims and benefits and expenses that are directly attributable to
providing the service in the period.
'Net income (expenses) from reinsurance contracts' generally
comprises reinsurance expenses and the recovery of incurred claims.
Reinsurance expenses are recognised similarly to insurance revenue,
with the amount of reinsurance expenses representing an allocation
of the premiums paid to reinsurers that depicts the received
insurance contract services in the period.
Together, the insurance revenue, insurance service expenses and
net income (expenses) from reinsurance contracts make up the
insurance service result, presented on the face of the income
statement. 'Non-distinct investment components' of insurance
contracts represent amounts that the group must pay out in all
circumstances and are not included within insurance revenue or
elsewhere within the profit or loss account, being recognised
instead directly in the balance sheet.
The 'investment result' comprises the 'net investment return',
changes in investment contract liabilities and policyholder funds
held by the group and insurance finance income or expense (IFIE)
for both insurance and reinsurance contracts. The IFIE broadly
includes the effect of changes in the time value of money and the
effect of financial risk and changes in financial risk.
Portfolios of insurance contracts that are assets and those that
are liabilities, and portfolios of reinsurance contracts that are
assets and those that are liabilities, are presented separately in
the statement of financial position. Any assets or liabilities
recognised for cash flows arising before the recognition of the
related group of contracts (including any assets for insurance
acquisition cash flows) are included in the carrying amount of the
related portfolios of contracts.
(iii) Fulfilment cash flows
The fulfilment cash flows are the current estimates of the
future cash flows within the contract boundary of a group of
contracts that the group expects to collect from premiums and pay
out for claims, benefits and expenses, adjusted to reflect the
timing and the uncertainty of those amounts.
Fulfilment cash flows comprise:
-- estimates of future cash flows;
-- an adjustment to reflect the time value of money and the
financial risks related to future cash flows, to the extent that
the financial risks are not included in the estimates of future
cash flows; and
-- a risk adjustment for non-financial risk.
In estimating future cash flows, the group incorporates, in an
unbiased way, all reasonable and supportable information that is
available without undue cost or effort at the reporting date. This
information includes both internal and external historical data
about claims and other experience, updated to reflect current
expectations of future events. The estimates of future cash flows
reflect the group's view of current conditions at the reporting
date, as long as the estimates of any relevant market variables are
consistent with observable market prices.
The estimates of future cash flows are adjusted using the
current discount rates to reflect the time value of money and the
financial risks related to those cash flows, to the extent not
included in the estimates of cash flows. The discount rates reflect
the characteristics of the cash flows arising from the groups of
insurance contracts, including timing, currency and liquidity of
cash flows. The determination of the discount rate that reflects
the characteristics of the cash flows and liquidity characteristics
of the insurance contracts requires significant judgement and
estimation .
Significant judgements, estimates and assumptions - Discounting,
Investment Return & Inflation
Cashflows 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 where there is a
direct connection to the policyholder's mortgage and the premiums
and crediting rate are set such that the account value will be
equal to the balance on the loan then the cashflows are discounted
using a curve 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 rate are set at a market consistent level.
Risk adjustments for non-financial risk are determined to
reflect the compensation that the individual issuing entity would
require for bearing non-financial risk, separately for the non-life
and other contracts, and are allocated to groups of contracts based
on an analysis of the risk profiles of the groups.
Significant judgements, estimates and assumptions - Risk
adjustment
The group calculates the risk adjustment using a 'cost of
capital' (CoC) methodology similar to the PRA and EIOPA Solvency II
Risk Margin approach, whilst incorporating risk drivers consistent
with the contract boundaries applicable under IFRS 17. Each entity
determines a risk adjustment by applying a CoCl rate to the amount
of capital required for each future reporting date and discounting
the result using risk-free rates adjusted for illiquidity.
The required capital is determined using stresses and
diversification factors aligned to the relevant Solvency II
methodologies and allocated to groups of contracts in a way that is
consistent with the risk profiles of the groups. The CoC rate
reflects that used in the group's own EcV reporting, currently
3.25%pa (2022: 3.25%).
To determine the risk adjustments for non-financial risk for
reinsurance contracts, the group applies these techniques both
gross and net of reinsurance and derives the amount of risk being
transferred to the reinsurer as the difference between the two
results.
Over a one year time horizon and on a net of reinsurance basis,
this risk adjustment corresponds to a confidence level of 82%. This
is equivalent to estimating that the probability that any changes
in best estimate liabilities from non-financial risk over the next
year will be less than 82%."
(iv) Transition
IFRS17 is required to be applied retrospectively unless it is
impracticable to do so due to the lack of available and supportable
historical information. For a fully retrospective approach (FRA)
the CSM at the date of transition is calculated by rolling forward
the CSM determined at inception of the contract as if the
accounting policies under IFRS17 had always applied. Where the FRA
is impracticable, a choice between a 'modified retrospective
approach' (MRA) and a 'fair value approach' (FVA) is permitted.
The group has been able to apply the FRA to its Dutch business
divisions with the inception date for the contracts acquired being
the date of historical acquisition into the group. The FVA has been
applied for CA plc in the UK where the length of time elapsed since
acquisition into the group has meant that the retrospective
application of IFRS17 is not possible or practicable. Note 3
provides details of the quantitative impact of applying IFRS 17 in
these financial statements as at 1 January 2022.
Significant judgements, estimates and assumptions - Fair value
methodology
As the fully retrospective approach was impracticable for CA,
the group have elected to apply a fair value approach as permitted
by IFRS17.C5 to calculate the CSM at the transition date.
The CSM is defined as the difference between the fair value of a
group of insurance contracts (i.e. the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date)
and the fulfilment cash flows measured at that date. The CSM using
a fair value approach can therefore be expressed as being equal to
the price required to transfer the business less the fulfilment
cash flows under IFRS17.
The price required to transfer the business includes, but is not
necessarily limited to:
(i) a market participant's assessment of risk adjusted realistic liabilities; plus
(ii) a market participant's compensation for holding capital to support those risks; plus
(iii) any margin for non-performance risk required by the market participant.
The group has assumed that:
(i) the market participants risk adjusted liabilities is equal
to: CA's IFRS 17 pvFCF plus CA's IFRS 17 RA;
(ii) the market participants compensation for holding capital is
based on a CoC approach using the projected SII required capital
plus a solvency buffer; and
(iii) the market participants assessment of non-performance risk is zero.
The above assumptions result in the CSM being equal to the
market participant's compensation for holding capital.
(v) Insurance contract definition, classification and measurement models
Contracts under which the group accepts significant insurance
risk from a policyholder by agreeing to compensate the policyholder
if a specified uncertain future event adversely affects the
policyholder are classified as insurance contracts. Contracts held
by the group under which it transfers significant insurance risk
related to underlying insurance contracts are classified as
reinsurance contracts. Insurance and reinsurance contracts also
expose the group to financial risk.
Contracts that have a legal form of insurance, but do not
transfer significant insurance risk and expose the group to
financial risk are classified as investment contracts and follow
accounting for financial instruments as per IFRS9.
Under IFRS 17, insurance contracts are classified as direct
participating contracts or contracts without direct participation
features. Direct participating contracts are contracts for which,
at inception:
- the contractual terms specify that the policyholder
participates in a share of a clearly identified pool of underlying
items;
- the group expects to pay to the policyholder an amount equal
to a substantial share of the fair value returns on the underlying
items; and;
- the group expects a substantial proportion of any change in
the amounts to be paid to the policyholder to vary with the change
in fair value of the underlying items.
All other insurance contracts and all reinsurance contracts are
classified as contracts without direct participation features.
The classification of insurance contracts is important as it
determines which measurement model the contracts fall under and
therefore impacts subsequent measurement.
IFRS17 contains three measurement models:
a) General Measurement Model (GMM) - this is the default
measurement model and applies to contracts that do not contain
direct participating features. Reinsurance contracts must be
measured under the GMM.
b) Variable Fee Approach (VFA) - this is the measurement model
used for contracts that are classified as contracts with direct
participating features. Such contracts are viewed as creating an
obligation to pay policyholders an amount that is equal to the fair
value of underlying items, less a variable fee for service. The
variable fee comprises the groups share of the fair value of
underlying items in the form of investment management service fees.
This measurement approach is a modification of GMM whereby the
financial and economic impacts affecting the entity are taken to
the CSM rather than profit or loss, as is the case under GMM.
c) Premium Allocation Approach (PAA) - for short-duration
contracts, IFRS17 permits a simplified approach which can be
applied to contracts that have a duration of 12 months or less or
for which such simplification would produce a measurement of the
LRC that would not differ materially from the one that would be
produced applying GMM. Disclosure requirements are modified for
contracts measured under the PAA.
The implication for subsequent measurement for contracts under
GMM and VFA are outlined further in section (xi).
Significant judgements, estimates and assumptions - Measurement
model classification
Short-term, stand-alone protection business and associated
reinsurance is measured as PAA. Otherwise non-participating
business and reinsurance is measured as GMM whilst most
participating business has been deemed to qualify to be treated as
VFA. However, there are some participating products/policies which,
due to the relatively high levels of guarantees or protection
benefits over and above any underlying item, that have been classed
as GMM business.
(vi) Aggregation of insurance and reinsurance contracts
Insurance contracts are aggregated into groups for measurement
purposes. Groups of insurance contracts are determined by
identifying portfolios of insurance contracts, each comprising
contracts that are subject to similar risks and are managed
together. Each portfolio is divided into annual cohorts (i.e. by
year of issue) and each annual cohort into a maximum of three
groups based on the profitability of contracts:
- any contracts that are onerous on initial recognition;
- any contracts that, on initial recognition, have no
significant possibility of becoming onerous subsequently; and
- any remaining contracts in the annual cohort.
Contracts within a portfolio that would fall into different
groups only because law or regulation specifically constrains the
group's practical ability to set a different price or level of
benefits for policyholders with different characteristics are
included in the same group.
Groups of reinsurance contracts are established such that each
group comprises a single contract.
(vii) Recognition
An insurance contract issued by the group is recognised from the
earliest of:
- the beginning of its coverage period (i.e. the period during
which the group provides services in respect of any premiums within
the boundary of the contract);
- when the first payment from the policyholder becomes due or,
if there is no contractual due date, when it is received from the
policyholder; and
- when facts and circumstances indicate that the contract is onerous.
An insurance contract acquired in a transfer of contracts or a
business combination is recognised on the date of acquisition.
When the contract is recognised, it is added to an existing
group of contracts or, if the contract does not qualify for
inclusion in an existing group, it forms a new group to which
future contracts are added. Groups of contracts are established on
initial recognition and their composition is not revised once all
contracts have been added to the group.
A group of reinsurance contracts is recognised on the following
dates.
- Reinsurance contracts initiated by the group that provide
proportionate coverage: The date on which any underlying insurance
contract is initially recognized, if later than the beginning of
the coverage period of the reinsurance contract.
- Other reinsurance contracts initiated by the group: The
beginning of the coverage period of the group of reinsurance
contracts. However, if the group recognises an onerous group of
underlying insurance contracts on an earlier date and the related
reinsurance contract was entered into before that earlier date,
then the group of reinsurance contracts is recognised on that
earlier date.
- Reinsurance contracts acquired: The date of acquisition.
(viii) Derecognition
The group derecognises a contract when it is extinguished - i.e.
when the specified obligations in the contract expire or are
discharged or cancelled. The group also derecognises a contract if
its terms are modified in a way that would have changed the
accounting for the contract significantly had the new terms always
existed, in which case a new contract based on the modified terms
is recognised. If a contract modification does not result in
derecognition, then the group treats the changes in cash flows
caused by the modification as changes in estimates of fulfilment
cash flows.
(ix) Insurance acquisition cash flows
Insurance acquisition cash flows are cash flows arising from the
costs of selling, underwriting and starting a group of insurance
contracts (issued or expected to be issued) that are directly
attributable to the portfolio of insurance contracts to which the
group belongs. Such cash flows are allocated to groups of insurance
contracts using a systematic and rational method and considering,
in an unbiased way, all reasonable and supportable information that
is available without undue cost or effort.
Insurance acquisition cash flows arising before the recognition
of the related group of contracts are recognised as an asset.
Assets for insurance acquisition cash flows arise when they are
paid or when a liability is required to be recognised under a
standard other than IFRS 17. Such an asset is recognised for each
group of contracts to which the insurance acquisition cash flows
are allocated. The asset is derecognised, fully or partially, when
the insurance acquisition cash flows are included in the
measurement of the group of contracts.
(x) Initial measurement
On initial recognition, the group measures a group of insurance
contracts as the total of (a) the fulfilment cash flows, which
comprise estimates of future cash flows, adjusted to reflect the
time value of money and the associated financial risks, and a risk
adjustment for non-financial risk; and (b) the CSM. The fulfilment
cash flows of a group of insurance contracts do not reflect the
group's non-performance risk.
The risk adjustment for non-financial risk for a group of
insurance contracts, determined separately from the other
estimates, is the compensation required for bearing uncertainty
about the amount and timing of the cash flows that arises from
non-financial risk.
The CSM of a group of insurance contracts represents the
unearned profit that the group will recognise as it provides
services under those contracts. On initial recognition of a group
of insurance contracts, if the total of (a) the fulfilment cash
flows, (b) any cash flows arising at that date and (c) any amount
arising from the derecognition of any assets or liabilities
previously recognised for cash flows related to the group
(including assets for insurance acquisition cash flows under (ix))
is a net inflow, then the group is not onerous. In this case, the
CSM is measured as the equal and opposite amount of the net inflow,
which results in no income or expenses arising on initial
recognition.
For groups of contracts acquired in a transfer of contracts or a
business combination, the consideration received for the contracts
is included in the fulfilment cash flows as a proxy for the
premiums received at the date of acquisition. In a business
combination, the consideration received is the fair value of the
contracts at that date. If the total is a net outflow, then the
group is onerous. In this case, the net outflow is recognised
as a loss in profit or loss, or as an adjustment to goodwill or
a gain on a bargain purchase if the contracts are acquired in a
business combination. A loss component is created to depict the
amount of the net cash outflow, which determines the amounts that
are subsequently presented in profit or loss as reversals of losses
on onerous contracts and are excluded from insurance revenue.
(xi) Subsequent measurement
The carrying amount of a group of insurance contracts at each
reporting date is the sum of the LRC and the LIC. The LRC comprises
(a) the fulfilment cash flows that relate to services that will be
provided under the contracts in future periods and (b) any
remaining CSM at that date. The LIC includes the fulfilment cash
flows for incurred claims and expenses that have not yet been paid,
including claims that have been incurred but not yet reported.
The fulfilment cash flows (FCF) of groups of insurance contracts
are updated by the group for current assumptions at the end of
every reporting period, using the current estimates of the amount,
timing and uncertainty of future cash flows and of discount rates.
The way in which the changes in estimates of the FCF are treated
depends on which estimate is being updated:
a) changes that relate to current or past service are recognised
in profit or loss; and
b) changes that relate to future service are recognised by
adjusting the CSM or the loss component within the
LRC as per the policy below.
For insurance contracts under the GMM, the following adjustments
relate to future service and thus adjust the CSM:
a) experience adjustments - arising from premiums received in
the period that relate to future service and related cash flows
such as insurance acquisition cash flows and premium-based
taxes;
b) changes in estimates of the present value of future cash
flows in the LRC, except those described in the following
paragraph;
c) differences between any investment component expected to
become payable in the period and the actual investment component
that becomes payable in the period, determined by comparing (i) the
actual investment component that becomes payable in a period with
(ii) the payment in the period that was expected at the start of
the period plus any insurance finance income or expenses related to
that expected payment before it becomes payable; and
d) changes in the risk adjustment for non-financial risk that relate to future service.
Adjustments (a), (b) and (d) above are measured using discount
rates determined on initial recognition (the locked-in discount
rates).
For insurance contracts under the GMM, the following adjustments
do not adjust the CSM:
a) changes in the FCF for the effect of the time value of money
and the effect of financial risk and changes thereof;
b) changes in the FCF relating to the LIC;
c) experience adjustments - arising from premiums received in
the period that do not relate to future service and related cash
flows, such as insurance acquisition cash flows and premium-based
taxes; and
d) experience adjustments relating to insurance service expenses
(excluding insurance acquisition cash flows).
For insurance contracts under the VFA, the following adjustments
relate to future service and thus adjust the CSM:
a) changes in the amount of the group's share of the fair value
of the underlying items; and
b) changes in the FCF that do not vary based on the returns of underlying items:
i. changes in the effect of the time value of money and
financial risks including the effect of financial guarantees;
ii. experience adjustments arising from premiums received in the
period that relate to future service and related cash flows, such
as insurance acquisition cash flows and premium-based taxes;
iii. changes in estimates of the present value of future cash
flows in the LRC, except those described in the following
paragraph;
iv. differences between any investment component expected to
become payable in the period and the actual investment component
that becomes payable in the period, determined by comparing (i) the
actual investment component that becomes payable in a period with
(ii) the payment in the period that was expected at the start of
the period plus any insurance finance income or expenses related to
that expected payment before it becomes payable; and
v. changes in the risk adjustment for non-financial risk that relate to future service.
Adjustments (ii)-(v) are measured using the current discount
rates.
For insurance contracts under the VFA, the following adjustments
do not adjust the CSM:
a) changes in the obligation to pay the policyholder the amount
equal to the fair value of the underlying items;
b) changes in the FCF that do not vary based on the returns of underlying items:
i. changes in the FCF relating to the LIC;
ii. experience adjustments arising from premiums received in the
period that do not relate to future service and related cash flows,
such as insurance acquisition cash flows and premium-based taxes;
and
iii. experience adjustments relating to insurance service
expenses (excluding insurance acquisition cash flows).
Significant judgements, estimates and assumptions - CSM coverage
units
The CSM at the end of the reporting period is allocated to
profit and loss based on the relevant underlying coverage units
where the number of coverage units in a group is determined by
considering, for each contract, the quantity of the benefits
provided under a contract and its expected coverage period. The
quantity of benefits provided is based on the maximum benefit
payment which may become due in a period.
For contracts that provide an investment return or investment
related service the account balance is generally considered the
main driver for determining the amount of service provided in a
period. For products that provide an insurance service the sum
assured, in excess of any account balance, is considered the main
driver for determining the amount of insurance service provided in
a period.
(xii) Loss components
The group establishes a loss component of the liability for
remaining coverage for onerous groups of insurance contracts. The
loss component determines the amounts of fulfilment cash flows that
are subsequently presented in profit
or loss as reversals of losses on onerous contracts and are
excluded from insurance revenue when they occur. When the
fulfilment cash flows are incurred, they are allocated between the
loss component and the liability for remaining coverage excluding
the loss component on a systematic basis.
(xiii) Contract boundaries
The measurement of a group of contracts includes all of the
future cash flows within the boundary of each contract in the
group. For insurance contracts, cash flows are within the contract
boundary if they arise from substantive rights and obligations that
exist during the reporting period in which the group can compel the
policyholder to pay premiums or has a substantive obligation to
provide services (including insurance coverage and any investment
services).
A substantive obligation to provide insurance contract services
ends when either:
a) the group has the practical ability to reassess the risks of
the particular policyholder and as a result can set a price or
level of benefits that fully reflects those risks, or
b) the group has the practical ability to reassess the risks of
the portfolio of insurance contracts that contain the contract and
as a result can set a price or level of benefits that fully
reflects the risk of that portfolio unless the pricing of the
premiums up to the date when the risks are reassessed takes into
account the risks that relate to periods after the assessment.
For reinsurance contracts cash flows are within the contract
boundary if they arise from substantive rights and obligations that
exist during the reporting period in which the group is compelled
to pay amounts to the reinsurer or has a substantive right to
receive services from the reinsurer.
(xiv) Separation of distinct investment components
At inception, the group separates distinct investment components
from an insurance or reinsurance contract and accounts for them as
if they were stand-alone financial instruments. Distinct investment
components are investment components that are not highly
inter-related with the insurance components and for which contracts
with equivalent terms are sold, or could be sold, separately in the
same market or the same jurisdiction.
(xv) Non-distinct investment components
Insurance revenue and insurance service expenses exclude any
'non-distinct investment components'. The group identifies the
investment component of a contract by determining the amount that
it would be required to repay to the policyholder in all scenarios
with commercial substance. These include circumstances in which an
insured event occurs or the contract matures or is terminated
without an insured event occurring. Investment components are
excluded from insurance revenue and insurance service expenses.
(xvi) Application of accounting policies impacting presentation
The group does not disaggregate amounts recognised in the
statement of profit or loss and OCI as permitted by IFRS17.88.
Income and expenses from reinsurance contracts are presented
separately from income and expenses from insurance contracts.
Income and expenses from reinsurance contracts, other than
insurance finance income or expenses, are presented on a net basis
as 'net expenses from reinsurance contracts' in the insurance
service result.
The group does not disaggregate changes in the risk adjustment
for non-financial risk between the insurance service result and
insurance finance income or expenses. All changes in the risk
adjustment for non-financial risk are included in the insurance
service result.
(xvii) Acquisition accounting
IFRS17 provides specific guidance on accounting for transfers of
insurance contracts under a business combination and as such the
requirements of IFRS3 'Business Combinations' are modified as a
result on IFRS17 becoming effective. There is no longer any
'Acquired Value of In-Force Business' (AVIF) calculated in respect
of insurance contracts on acquisition and no immediate profit
recognised on insurance contracts acquired as was the case when
IFRS4 was extant.
Instead a CSM is established, recognising the future profit that
will be earned from the insurance contracts acquired as the
insurance and investment related service is provided. As a result,
IFRS17 will generally result in delayed profit recognition compared
to IFRS4. A delay in profit recognition will also generally be true
for existing business as changes in fulfilment cash flows
considered to be in respect of future service will adjust the CSM,
with revenue recognised only for the current service provided. This
is in contrast to IFRS4 where all changes in the insurance contract
value were booked immediately to profit and loss.
(xviii) Additional information on key assumptions
Demographic assumptions
Best estimate assumptions about mortality/longevity, morbidity
and policyholder behaviour, such as surrenders, used in estimating
future cash flows are developed for homogeneous product types and
groups of policyholders at a local entity level. Demographic
assumptions are generally based on a combination of national data,
standard industry tables, the local entity's recent experience and
also future expectations. Experience is monitored through regular
studies, the results of which are reflected both in the pricing of
new products and in the measurement of existing contracts.
Expense assumptions
Best-estimate assumptions regarding expenses used in the
estimation of future cash flows are set at a level that reflects
the groups expectations as to future expenditure based on each
entity's cost base and annual budgeting process along with longer
term expectations as to how the business will run off. Transition
costs and major project expenses are reviewed on a case by case
basis as to whether they should be treated as non-attributable.
Expenses pertaining to investment costs on assets backing
liabilities where no investment service is provided to
policyholders, generally term assurance and annuities, are also
excluded.
Non-performance of reinsurance
Where appropriate reinsurance cashflows are adjusted for the
possibility of loss due to reinsurer default using an approach
equivalent to the PRA & EIOPA methodology for the Solvency II
Credit Default Adjustment.
(b) IFRS 9 - Financial Instruments
'IFRS 9 Financial Instruments' was effective from 1 January 2018
and replaces 'IAS 39 Financial Instruments: Recognition and
Measurement'. The group elected to defer the application of IFRS9
in the consolidated financial statements, applying the temporary
exemption available under 'Amendments to IFRS 4 Insurance
Contracts: Applying IFRS 9 Financial Instruments with IFRS 4' up
until the previously published group consolidated financial
statements as at 31 December 2022.
(i) Financial assets
IFRS9.4.1 requires financial assets to be classified into the
following measurement categories based on an assessment of the
business model of the group and the contractual cash flow
characteristics of the assets:
a) Amortised cost (AC) where the financial asset is in a 'hold
to collect' business model and where contractual cash flows arising
are solely payments of principal and interest (SPPI).
b) Fair value through OCI (FVTOCI) where the financial asset is
in a 'hold to collect and sell' business model and where
contractual cash flows arising are solely payments of principal and
interest (SPPI).
c) Fair value through Profit or Loss (FVTPL) where the financial
asset does not fit into either of the above classifications or
where the entity elects to measure financial assets at FVTPL.
(ii) Financial liabilities
Almost all accounting requirements for financial liabilities
remain unchanged from IAS 39. IFRS 9 has however introduced new
requirements for accounting and presentation of changes in the fair
value of an entity's own credit risk where the entity has
designated to value at fair value (IFRS 9.5.7.7-8): changes in fair
value attributable to the change in the entity's own credit risk
are presented in OCI unless this presentation would create or
enlarge an accounting mismatch in the P&L, as is the case for
the Chesnara plc group.
The two financial liability classification categories are:
a) Fair value through profit or loss (FVTPL); and
b) Amortised cost (AC).
(iii) Classification of financial assets
The majority of the group's financial assets and liabilities
will be classified as FVTPL, either mandatorily as prescribed by
IFRS9, or by designating as such, as permitted under IFRS9.4.1.5 to
avoid an accounting mismatch that would otherwise have occurred
with the valuation of the corresponding liabilities.
The majority of the group's financial instruments were already
held at FVTPL under IAS39 and will continue to be valued at FVTPL
under IFRS9 to reflect the way the business is managed and in line
with a fair value approach to SII and EcV reporting. The 'Solely
Payments of Principal and Interest' (SPPI) test is used to
distinguish between those mandatorily classified as FVTPL and those
designated at FVTPL.
The mortgage portfolio held by Waard, comprising both direct
mortgages and savings mortgages, was previously valued at AC under
IAS39. Both types of mortgage assets pass the SPPI test as the
contractual terms require only fixed payments on fixed dates or
variable payments where the amount of the variable payment for a
period is determined by applying a floating market rate of interest
for that period. They are therefore not required to be classified
at FVTPL but they have been designated as FVTPL as this will
significantly reduce the accounting mismatch with the corresponding
liability, valued under IFRS17 using current market sourced
discount rates, that would arise otherwise. This application of the
'fair value option' aligns with the group's business model which is
to manage the business on a fair value basis.
Short-term receivables will be classified as AC and no assets
will be categorised as FVTOCI.
Significant judgements, estimates and assumptions - Valuation of
'savings mortgages' assets
For certain mortgage assets related to Dutch 'savings mortgage'
products, where there is (i) a direct connection to the
policyholder's mortgage and (ii) the premiums and crediting rate
are set such that the account value will be equal to the balance on
the loan; then the asset cashflows are discounted using a curve
derived from mortgage rates available in the marke t.
(iv) Classification of financial liabilities
Financial liabilities are generally classified and measured at
AC (IFRS 9.4.2.1), however they can be classified and measured at
FVTPL if held for trading or designated as at FVTPL where doing so
results in more relevant information (IFRS 9.4.2.2), because
either:
a) It eliminates, or significantly reduces, a measurement of recognition inconsistency; or
b) A group of financial instruments is managed and its
performance evaluated on a fair value basis in accordance with a
documented risk management or investment strategy, and information
about the group is provided internally on that basis to the
entity's key management personnel.
The investment contracts help by the group meet the criteria
above for classification at FVTPL as this will significantly reduce
the accounting mismatch that would arise otherwise. This is also in
line with the group's business model is to manage the business on a
fair value basis.
The borrowings liabilities do not match the exceptions listed
above and it is appropriate that they are classified as AC under
IFRS9, as was also the case under IAS39. This includes the Tier 2
debt within the parent company of the group.
(v) Impairment and Expected Credit Losses
IFRS 9 includes an expected loss impairment model (IFRS
9.5.5.1-8) for assets classified as AC or FVTOCI that requires
entities to recognise a loss allowance for Expected Credit Losses
(ECLs) in line with a three-stage model:
a) Stage 1 impairment: if the credit risk on a financial
instrument has not increased significantly since initial
recognition, a loss allowance equal to a 12-month ECL is
recognised.
b) Stage 2 impairment: if the credit risk has increased
significantly since initial recognition, a loss allowance equal to
lifetime ECLs must be recognised. If the credit risk subsequently
improves, it is possible for a financial instrument to revert to a
stage 1 impairment and for the loss allowance to be reduced.
c) Stage 3 impairment: if an impairment event has occurred, a
financial asset is written off and derecognised when the entity has
no reasonable expectation of recovering it.
There is also a simplified approach to impairment that is
available as a policy choice for contract assets and lease
receivables. The standard stipulates the following [IFRS
9:5.5.15]:
1) For trade receivables or IFRS 15 contract assets with no
significant financing component, the simplified approach is
required.
2) For trade receivables or IFRS 15 contract assets with a
significant financing component, the simplified approach is
optional.
3) For IFRS 16 lease receivables, the simplified approach is optional.
The simplified approach requires recognition of a loss allowance
for an amount equal to lifetime ECLs without the need to consider
credit quality of the financial asset for staging purposes. A
provision matrix can be used to apply relevant loss rates to
outstanding balances at the reporting date as follows:
a) Determine appropriate groupings of assets.
b) Determine the historical loss rates over an appropriate period.
c) Incorporate forward looking macro-economic factors into loss rates.
d) Calculate the expected credit losses.
The assets held by the group at AC are short-term receivables
that include those arising from insurance contracts, those arising
from investment contracts, accrued interest income and receivables
from fund management companies. The simplified approach to
impairment has been applied for all these short-term
receivables.
Using the provision matrix method the group has concluded that
the provision for ECLs would be materially correct at GBPnil due to
the short-term nature of the financial instruments held and minimal
level of historical credit losses. The potential for future
defaults has also been taken into account in this assessment. The
intercompany balances included in individual company accounts will
also have a materially correct ECL provision of GBPnil due to
minimal historical credit losses and low potential for future
defaults.
(vi) Transition
The group has elected to apply IFRS 9 from 1 January 2022 in
these consolidated financial statements. Note 4 provides details of
the impact as a result of adopting IFRS 9 in these financial
statements as at 1 January 2022.
All other accounting policies remain unchanged from those stated
in the 2022 year-end consolidated financial statements .
3 Impact of IFRS 17 and IFRS 9 at transition date
The following table shows, by balance sheet line item, how the
adoption of IFRS17 and IFRS9 has impacted the balance sheet that
was reported in the consolidated financial statements of the group
as at 31 December 2021.
Unaudited
31 December 2021 Items Items IFRS 17 and As at 1 January
- as reported derecognised reclassified IFRS 9 2022
remeasurement
GBP000 GBP000 GBP000 GBP000 GBP000
------------------ ----------------- ----------------- ----------------- ----------------- -----------------
Intangible assets 122,161 (44,496) - - 77,665
Property and
equipment 7,830 - - - 7,830
Investment
properties 1,071 - - - 1,071
Reinsurance
contract assets 247,750 - 23,297 (57,516) 213,531
Amounts deposited
with reinsurers 38,295 - - - 38,295
Financial
investments 9,127,116 - - 48,895 9,176,011
Derivative
financial
instruments 264 - - - 264
Other assets 72,431 - (25,118) - 47,313
Deferred tax
assets - 498 2,239 (1,816) 921
Cash and cash
equivalents 70,087 - - - 70,087
------------------ ----------------- ----------------- ----------------- ----------------- -----------------
Total assets /
transition
effects on assets 9,687,005 (43,998) 418 (10,437) 9,632,988
Insurance contract
liabilities 3,818,412 - 106,437 107,221 4,032,070
Other provisions 992 - 720 - 1,712
Investment
contracts at fair
value through
income 4,120,572 - 20 (138,616) 3,981,976
Liabilities
relating to
policyholder
funds held by
group 990,700 - - - 990,700
Lease contract
liabilities 2,019 - - - 2,019
Borrowings 47,185 - - - 47,185
Derivative
financial
instruments - - - - -
Deferred tax
liabilities 15,699 (9,561) 2,239 2,191 10,568
Deferred income 2,809 (504) 2,168 - 4,473
Other current
liabilities 230,194 (399) (111,166) - 118,629
Bank overdrafts 256 - - - 256
Total liabilities
/ transition
effects on
liabilities 9,228,838 (10,464) 418 (29,204) 9,189,588
Net assets /
transition
effects on
shareholders'
equity 458,167 (33,534) - 18,767 443,400
------------------ ----------------- ----------------- ----------------- ----------------- -----------------
The group has adopted IFRS17 retrospectively, applying the fully
retrospective approach across the group with the exception of CA,
for which the fair value at transition approach was applied.
Accordingly, for the entities applying the full retrospective
approach, the group has identified, recognised and measured each
group of insurance contracts as if IFRS17 had always applied since
the date of their acquisition into the group; derecognised any
existing balances that would not exist if IFRS17 had always
applied; and recognised any resulting difference in net equity. For
insurance contracts within the group that are eligible for PAA, the
group has concluded that only current and prospective information
was required to reflect the circumstances at the transition
date.
For CA, the group has determined that the necessary historical
information is not available in order to apply the fully
retrospective for any of the contract groups. It was therefore
impracticable to apply the fully retrospective approach and the
fair value approach has been applied.
The group has elected to apply IFRS9 within these condensed
financial statements from 1 January 2022 in line with IFRS17 in
order to avoid any potential accounting mismatch that may otherwise
arise, as the measurement of assets under IFRS9 cannot be
considered without reference to the liabilities under IFRS17.
The overall impact to the net equity position of the group at
1(st) January 2022 as a result of applying IFRS17 and IFRS9 is a
reduction in net equity of GBP14.767m.
There are various offsetting impacts which result in this
overall reduction of net equity, the key ones being:
Items derecognised:
Derecognition of Acquired Value of in-force business (AVIF) and
Deferred Acquisition Costs (DAC) in respect of insurance
contracts:
Under IFRS17 there is no insurance AVIF recognised on
acquisitions and which is then subsequently amortised. Similarly,
DAC is no longer recognised for new contracts written, instead an
asset for insurance acquisition cash flows is recognised in the
balance sheet for the relevant group of contracts and is
derecognised on initial calculation of the opening CSM for the
contract group. AVIF of GBP34.1m and DAC of GBP10.4m have been
derecognised from the consolidated group balance sheet at the date
of transition, with a corresponding adjustment to net equity.
Together with the deferred tax and other smaller impacts, this
results in a reduction of net equity of GBP33.5m at the transition
date .
IFRS17 and IFRS9 remeasurement:
- Recognition of the CSM as an explicit liability representing
future unearned profits. At 1 January 2022 a CSM of GBP109.1m net
of reinsurance was established resulting in a decrease to net
equity.
- Recognition of an explicit liability for Risk Adjustment for
non-financial risk. At 1 January 2022 a RA of GBP39.7m net of
reinsurance was established resulting in a decrease to net
equity.
- In addition to the above factors, the move from a variety of
local methodologies with different areas of implicit margin to a
valuation of 'best estimate' future cash flows discounted using
market interest rates. Net of reinsurance this results in an
increase to net equity of GBP167.6m at 1 January 2022.
Items reclassified:
The group has also reclassified all rights and obligations
arising from portfolios of insurance and reinsurance contracts such
as (i) outstanding claims in respect of insurance contracts and the
reinsurers share of outstanding claims (ii) receivables and
payables related to insurance and reinsurance contracts. These
reclassifications have not impacted the net equity of the group at
the transition date.
4 Earnings per share
Earnings per share are based on the following:
Unaudited Unaudited
Six months ended Year ended
30 June 31 December
2023 2022 2022
=================================================================== =========== =========== ============
Profit/(loss) for the period attributable to shareholders (GBP000) 15,531 (31,711) (33,289)
Weighted average number of ordinary shares 150,430,393 150,153,465 150,239,599
Basic earnings per share 10.32p (21.12)p (22.16)p
Diluted earnings per share 10.25p (20.87)p (21.90)p
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 at the end of
the period. No shares were held in treasury.
The six months ended 30 June 2022 is based upon 150,145,602
shares in issue at the beginning of the period, and 150,157,451
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 2022 is based upon 150,145,602 shares in
issue at the beginning of the period and 150,369,603 shares in
issue at the end of the period. No shares were held in
treasury.
There were 1,165,272 share options outstanding at 30 June 2023
(30 June 2022: 1,815,601). Accordingly, there is dilution of the
average number of ordinary shares in issue. There were 1,501,566
share options outstanding as at 31 December 2022.
5 Retained earnings
Unaudited
Six months ended
30 June
2023 2022
GBP000 GBP000
============================================================= ============================= ==================
Retained earnings attributable to equity holders of the
parent company comprise:
Balance at 1 January (as reported) 265,052
Transition adjustment (note 3) (14,767)
Balance at 1 January (restated) 183,567 250,285
Profit / (loss) for the period 15,531 (31,711)
Share based payment 342 504
Dividends:
Final approved and paid for 2021 - (22,103)
Final approved and paid for 2022 (22,799) -
================================================================ ============================= ==================
Balance at period end 176,641 196,975
================================================================ ============================= ==================
The interim dividend in respect of 2022, approved and paid in
2022 was paid at the rate of 8.12p per share.
The final dividend in respect of 2022, approved and paid in
2023, was paid at the rate of 15.16p per share so that the total
dividend paid to the equity shareholders of the company in respect
of the year ended 31 December 2022 was made at the rate of 23.28p
per share.
An interim dividend of 8.36 p per share in respect of the year
ending 31 December 2023 payable on 10 November 2023 to equity
shareholders of the company registered at the close of business on
29 September 2023, the dividend record date, was approved by the
Directors after the balance sheet date. The resulting dividend of
GBP12.6m 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 2023 and the year ended 31
December 2022:
Unaudited Six months ended Year ended 31
30 June 2023 December 2022
Pence Pence
============================================= ================== =============
Interim - approved/paid 8.36 8.12
Final - proposed/paid - 15.16
================================================ ================== =============
Total 8.36 23.28
================================================ ================== =============
6 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 2023 comprise:
UK: This segment represents the group's UK life insurance and
pensions run-off portfolio and comprises the business of
Countrywide Assured plc (CA) and Sanlam Life & Pensions UK
(CASLP).
CA consists of its original business and that of City of
Westminster Assurance Company Limited which was acquired in 2005
and the long-term business transferred to CA during 2006. It also
contains Save & Prosper Insurance Limited which was acquired on
20 December 2010 and its then subsidiary Save & Prosper
Pensions Limited. The Save & Prosper business was transferred
to CA during 2011. It also contains the business of Protection
Life, which was purchased on 28 November 2013 and the business of
which was transferred to CA effective from 1 January 2015, as well
as the portfolio of policies acquired from Canada Life on 16 May
2023.
Sanlam Life and Pensions UK (CASLP) was acquired on 28 April
2022 and subsequently changed its legal name to CASLP.
CA & CASLP are responsible for conducting unit-linked and
non-linked business. Additionally CA has a with-profits portfolio,
which carries significant additional market risk, as described in
note 6 'Management of financial risk' of the 2022 Annual Report and
Accounts.
Movestic: This segment comprises the group's Swedish life and pensions business, Movestic Livförsäkring AB (Movestic) and its subsidiary company Movestic Kapitalforvaltning AB (investment fund management company) which are open to new business and which are responsible for conducting both unit-linked and pensions and savings business and providing some life and health product offerings.
Waard Group: This segment represents the group's closed Dutch
life business which was acquired on 19 May 2015 and comprised the
three insurance companies Waard Leven N.V., Hollands Welvaren Leven
N.V. and Waard Schade N.V., and a servicing company, Waard
Verzekering.
During 2017, the book of policies held within Hollands Welvaren
Leven N.V. was successfully integrated into Waard Leven and
consequently Hollands Welvaren Leven N.V. was deregistered on 19
December 2018. The Waard Group's policy base is predominantly made
up of term life policies, although also includes unit-linked
policies and some non-life policies, covering risks such as
occupational disability and unemployment.
On 1 October 2019, the Waard Group acquired a small portfolio of
policies from Monuta insurance, which consists of term and savings
policies.
On 21 November 2019, the Waard Group completed a deal to acquire
a portfolio of term life insurance policies and saving mortgages
insurance policies. The completion took place on the 31 August
2020, at which stage Waard Group obtained control.
On 31 December 2020, Waard entered into an agreement to acquire
a portfolio of term life insurance policies, Unit Linked policies
and funeral insurance policies from Dutch insurance provider Brand
New Day Levensverzekeringen N.V. (BND). The portfolio was
successfully migrated on 10 April 2021.
On 25 November 2021, Waard entered into an agreement with
Monument Re Group to acquire Robein Leven, a specialist provider of
traditional and linked savings products, mortgages and annuities in
the Netherlands. The acquisition was successfully completed on 28
April 2022, thereby extending the existing group.
On 1 January 2023, Waard Leven N.V, completed the acquisition of
the insurance portfolio of Nederlandsche Algemeene Maatschappij van
Levensverzekering "Conservatrix" N.V. ("Conservatrix"), a
specialist provider of life insurance products in the Netherlands
that was declared bankrupt on 8 December 2020. A capital
contribution of GBP35m has been provided by Chesnara to support the
solvency position of the Conservatrix business, consisting of a
GBP21m contribution from Chesnara and GBP14m of existing Waard
resources.
The Waard Group's policy base is predominantly made up of term
life policies, although also includes unit-linked policies and some
non-life policies, covering risks such as occupational disability
and unemployment. This segment is closed to new business.
Scildon: This segment represents the group's open Dutch life
insurance business, which was acquired on 5 April 2017. 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 ultimate
holding company within the group, 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
and on the total assets and liabilities of the reporting segments
and the group. There were no changes to the measurement basis for
segment profit during the six months ended 30 June 2023.
(i) Segmental reporting for the six months ended 30 June 2023
Unaudited Movestic Waard Group Scildon Other Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands)
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
Insurance revenue 35,088 5,459 21,222 56,279 - 118,048
Insurance service expense (31,575) (2,895) (11,815) (56,103) - (102,388)
Net expenses from
reinsurance contracts
held (2,544) (991) (1,009) (1,600) - (6,144)
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
Insurance service result 969 1,573 8,398 (1,424) - 9,516
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
Net investment return 112,876 360,943 30,630 91,091 7,472 603,012
Net finance
income/(expenses) from
insurance contracts
issued (21,742) (18,411) (29,975) (81,767) - (151,895)
Net finance
income/(expenses) from
reinsurance contracts
held (1,461) (144) 50 (972) - (2,527)
Net change in investment
contract liabilities (83,782) (274,551) 1,438 - - (356,895)
Change in liabilities
relating to
policyholders' funds held
by the group - (66,705) - - - (66,705)
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
Net investment result 5,891 1,132 2,143 8,352 7,472 24,990
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
Fee, commission and other
operating income 18,878 29,411 193 - 3 48,485
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
Total revenue net of
investment result 25,738 32,116 10,734 6,928 7,475 82,991
Other operating expenses (18,419) (28,072) (4,691) (2,300) (12,019) (65,501)
Financing costs (46) (289) (6) - (5,167) (5,508)
Profit arising on business
combinations and
portfolio acquisitions - - 3,969 - - 3,969
Profit / (loss) before tax 7,273 3,755 10,006 4,628 (9,711) 15,951
-------------------------- -------- ---------- ------------- ------------- ---------------------- ---------
(ii) Segmental assets and liabilities as at 30 June 2023
Other Group
Unaudited Movestic Waard Group Scildon Activities Total
(UK) (Sweden) (Netherlands) (Netherlands)
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
==================== =========== =========== ============= ============= =========== ============
Segment assets 4,577,236 4,105,753 956,095 1,919,903 138,773 11,697,760
Segment liabilities (4,434,047) (4,020,113) (873,416) (1,804,885) (202,947) (11,335,408)
==================== =========== =========== ============= ============= =========== ============
Segment net assets 143,189 85,640 82,679 115,018 (64,174) 362,352
==================== =========== =========== ============= ============= =========== ============
(iii) Segmental reporting for the six months ended 30 June
2022
Unaudited Movestic Waard Group Scildon Other Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands)
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Insurance revenue 32,158 6,016 7,540 60,959 - 106,673
Insurance service
expense (31,953) (2,578) (7,570) (57,187) - (99,288)
Net expenses from
reinsurance contracts
held (733) (1,974) (668) (804) - (4,179)
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Insurance service
result (528) 1,464 (698) 2,968 - 3,206
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Net investment return (343,661) (895,636) (85,591) (265,356) 2,142 (1,588,102)
Net finance income from
insurance contracts
issued 134,726 24,570 79,171 244,808 - 483,275
Net finance (expenses)
/ income from
reinsurance contracts
held (17,465) (802) (192) 9,251 - (9,208)
Net change in
investment contract
liabilities 199,940 526,037 - - - 725,977
Change in liabilities
relating to
policyholders' funds
held by the group - 341,856 - - - 341,856
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Net investment result (26,460) (3,975) (6,612) (11,297) 2,142 (46,202)
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Fee, commission and
other operating income 8,204 23,922 75 - - 32,201
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Total revenue net of
investment result (18,784) 21,411 (7,235) (8,329) 2,142 (10,795)
Other operating
expenses (12,086) (21,602) (1,844) (2,353) (10,757) (48,642)
Financing costs (13) (470) (1) - (4,099) (4,583)
Profit arising on
business combinations
and portfolio
acquisitions 9,565 - 301 - - 9,866
Loss before tax (21,318) (661) (8,779) (10,682) (12,714) (54,154)
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
(iv) Segmental reporting for the year ended 31 December 2022
Unaudited Movestic Waard Group Scildon Other Group Activities Total
(UK) (Sweden) (Netherlands) (Netherlands)
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Insurance revenue 65,117 11,895 16,907 130,112 - 224,031
Insurance service
expense (58,194) (4,079) (17,751) (125,848) - (205,872)
Net (expenses) / income
from reinsurance
contracts held (1,729) (2,899) (1,563) 155 - (6,036)
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Insurance service
result 5,194 4,917 (2,407) 4,419 - 12,123
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Net investment return (280,802) (876,844) (93,313) (302,326) (3,585) (1,556,870)
Net finance income from
insurance contracts
issued 161,633 19,052 90,960 276,049 - 547,694
Net finance (expenses)
/ income from
reinsurance contracts
held (24,083) (501) (275) 11,368 - (13,491)
Net change in
investment contract
liabilities 109,718 461,256 - - - 570,974
Change in liabilities
relating to
policyholders' funds
held by the group - 392,884 - - - 392,884
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Net investment result (33,534) (4,153) (2,628) (14,909) (3,585) (58,809)
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Fee, commission and
other operating income 29,120 44,110 133 - - 73,363
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
Total revenue net of
investment result 780 44,874 (4,902) (10,490) (3,585) 26,677
Other operating
expenses (28,909) (41,568) (3,142) (5,555) (14,231) (93,405)
Financing costs (228) (823) (1) - (9,497) (10,549)
Profit arising on
business combinations
and portfolio
acquisitions 9,565 - 5,796 - - 15,361
(Loss) / profit before
tax (18,792) 2,483 (2,249) (16,045) (27,313) (61,916)
----------------------- --------- ---------- ------------- ------------- ---------------------- -----------
(v) Segmental assets and liabilities as at 31 December 2022
(vi)
Unaudited Other Group
Movestic Waard Group Scildon Activities Total
(UK) (Sweden) (Netherlands) (Netherlands)
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
==================== =========== =========== ============= ============= ===================== ============
Segment assets 4,748,869 3,945,968 542,640 1,900,968 112,671 11,251,116
Segment liabilities (4,566,294) (3,843,690) (469,434) (1,785,422) (201,685) (10,866,525)
==================== =========== =========== ============= ============= ===================== ============
Segment net assets 182,575 102,278 73,206 115,546 (89,014) 384,591
==================== =========== =========== ============= ============= ===================== ============
7 Insurance service result
Unaudited
Six months ended Unaudited Six months ended
30 June 30 June
2023 2022
Insurance revenue GBP000 GBP000
=============================================================== ================== ==========================
Contracts not measured under the PAA:
Amounts relating to changes in the liability for remaining
coverage:
Expected incurred claims and other directly attributable
expenses 90,610 81,969
Change in risk adjustment for non-financial risk for the risk
expired 8,287 6,463
CSM recognised for the services provided 11,964 10,605
Insurance acquisition cash flows recovery 1,728 1,620
--------------------------------------------------------------- ------------------ --------------------------
Insurance revenue for contracts not measured under the PAA 112,589 100,657
Insurance revenue for contracts measured under the PAA 5,459 6,016
--------------------------------------------------------------- ------------------ --------------------------
Total insurance revenue 118,048 106,673
--------------------------------------------------------------- ------------------ --------------------------
Insurance service expenses
--------------------------------------------------------------- ------------------ --------------------------
Incurred claims and other directly attributable expenses (78,701) (76,874)
Changes that relate to past service - changes in the FCF
relating to the LIC 3,145 2,922
Losses on onerous contracts and reversals of those losses (25,104) (23,716)
Insurance acquisition cash flows amortisation (1,728) (1,620)
Insurance acquisition cash flows impairment - -
--------------------------------------------------------------- ------------------ --------------------------
Total insurance service expenses (102,388) (99,288)
--------------------------------------------------------------- ------------------ --------------------------
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 incurred claims and other directly attributable
expenses recovery (23,353) (23,007)
Change in risk adjustment for non-financial risk for the risk
expired (1,098) (1,042)
CSM recognised for the services received (2,282) (2,473)
--------------------------------------------------------------- ------------------ --------------------------
Reinsurance expenses (allocation of reinsurance premiums paid)
- contracts not measured under
the PAA (26,733) (26,522)
Reinsurance expenses (allocation of reinsurance premiums paid)
- contracts measured under
the PAA (1,112) (1,974)
Amounts recoverable for incurred claims and other incurred
insurance service expenses 23,076 22,996
Changes in amounts recoverable that relate to past service -
adjustments to incurred claims (1,513) 458
Recoveries of loss on recognition of onerous underlying
contracts 292 1,050
Recoveries of losses on onerous underlying contracts and
reversals of such losses (154) (187)
Effect of changes in the risk of reinsurers' non-performance - -
--------------------------------------------------------------- ------------------ --------------------------
Total net expenses from reinsurance contracts held (6,144) (4,179)
Total insurance service result 9,516 3,206
8 Net investment result
In the tables that follow the investment return on surplus
shareholder assets is included in the insurance contracts
column.
Investment result for the six months
ended 30 June 2023 (unaudited) Insurance contracts Investment contracts (without DPF's) Total
Net Investment return GBP000 GBP000 GBP000
-------------------------------------- --------------------- ------------------------------------- ---------
Interest revenue from financial assets
not measured at FVTPL - - -
Net income from FVTPL investments 179,412 423,600 603,012
Net credit impairment losses - - -
Total net investment return 179,412 423,600 603,012
-------------------------------------- --------------------- ------------------------------------- ---------
Finance income / (expenses) from
insurance contracts issued
-------------------------------------- --------------------- ------------------------------------- ---------
Change in fair value of underlying
assets of contracts measured under
VFA (126,274) - (126,274)
Interest accreted (28,311) - (28,311)
Effect of changes in interest rates
and other financial assumptions 1,130 - 1,130
Effect of changes in FCF at current
rates when CSM is unlocked at locked
in rates 1,560 - 1,560
-------------------------------------- --------------------- ------------------------------------- ---------
Total finance expenses from insurance
contracts issued (151,895) - (151,895)
-------------------------------------- --------------------- ------------------------------------- ---------
Finance income from reinsurance
contracts issued
-------------------------------------- --------------------- ------------------------------------- ---------
Interest accreted 2,721 - 2,721
Effect of changes in interest rates
and other financial assumptions (4,716) - (4,716)
Effect of changes in FCF at current
rates when CSM is unlocked at locked
in rates (532) - (532)
-------------------------------------- --------------------- ------------------------------------- ---------
Total finance expenses from
reinsurance contracts issued (2,527) - (2,527)
-------------------------------------- --------------------- ------------------------------------- ---------
Net change in investment contract
liabilities - (356,895) (356,895)
Change in liabilities relating to
policyholder funds held by the group - (66,705) (66,705)
-------------------------------------- --------------------- ------------------------------------- ---------
Net investment result 24,990 - 24,990
-------------------------------------- --------------------- ------------------------------------- ---------
Investment result for the six months Investment contracts (without
ended 30 June 2022 (unaudited) Insurance contracts DPF's) Total
Net Investment return GBP000 GBP000 GBP000
------------------------------------- --------------------- ------------------------------------ -----------
Interest revenue from financial
assets not measured at FVTPL - - -
Net income from FVTPL investments (520,269) (1,067,833) (1,588,102)
Net credit impairment losses - - -
Total net investment return (520,269) (1,067,833) (1,588,102)
------------------------------------- --------------------- ------------------------------------ -----------
Finance income / (expenses) from
insurance contracts issued
------------------------------------- --------------------- ------------------------------------ -----------
Change in fair value of underlying
assets of contracts measured under
VFA 249,854 - 249,854
Interest accreted 16,113 - 16,113
Effect of changes in interest rates
and other financial assumptions 220,813 - 220,813
Effect of changes in FCF at current
rates when CSM is unlocked at locked
in rates (3,505) - (3,505)
------------------------------------- --------------------- ------------------------------------ -----------
Total finance income from insurance
contracts issued 483,275 - 483,275
------------------------------------- --------------------- ------------------------------------ -----------
Finance income from reinsurance
contracts issued
------------------------------------- --------------------- ------------------------------------ -----------
Interest accreted (1,579) - (1,579)
Effect of changes in interest rates
and other financial assumptions (7,622) - (7,622)
Effect of changes in FCF at current
rates when CSM is unlocked at locked
in rates (7) - (7)
------------------------------------- --------------------- ------------------------------------ -----------
Total finance expenses from
reinsurance contracts issued (9,208) - (9,208)
------------------------------------- --------------------- ------------------------------------ -----------
Net change in investment contract
liabilities - 725,977 725,977
Change in liabilities relating to
policyholder funds held by the group - 341,856 341,856
------------------------------------- --------------------- ------------------------------------ -----------
Net investment result (46,202) - (46,202)
------------------------------------- --------------------- ------------------------------------ -----------
9 Financial assets and liabilities
The carrying amount of financial assets and liabilities held by
the group split by classification category are
shown in the tables below.
Financial assets and liabilities as at 30 FVTPL - FVTPL -
June 2023 (unaudited) Amortised cost Designated Mandatory Total
GBP000 GBP000 GBP000 GBP000
=========================================== ================= ================= ========== ==========
Equity securities - - 203,439 203,439
Holdings in collective investment schemes - - 8,139,658 8,139,658
Debt securities - 1,191,239 - 1,191,239
Policyholder funds held by the group - 1,116,495 - 1,116,495
Mortgage loan portfolio - 357,928 - 357,928
---------------------------------------------- ----------------- ----------------- ---------- ----------
Total financial investments - 2,665,662 8,343,097 11,008,759
============================================== ================= ================= ========== ==========
Derivative financial instruments - - 3,160 3,160
Other assets 48,897 - - 48,897
Cash and cash equivalents - 144,284 - 144,284
============================================== ================= ================= ========== ==========
Total financial assets 48,897 2,809,946 8,346,257 11,205,100
============================================== ================= ================= ========== ==========
Financial liabilities
------------------------------------------- ----------------- ----------------- ---------- ----------
Investment contract liabilities - 5,629,313 - 5,629,313
Liabilities relating to policyholder funds
held by the group - 1,116,495 - 1,116,495
Borrowings 209,344 - - 209,344
Derivative financial instruments - - 127 127
Other current liabilities 140,788 - - 140,788
============================================== ================= ================= ========== ==========
Total financial liabilities 350,132 6,745,808 127 7,096,067
============================================== ================= ================= ========== ==========
Financial assets and liabilities as at 31 FVTPL - FVTPL -
December 2022 (unaudited) Amortised cost Designated Mandatory Total
GBP000 GBP000 GBP000 GBP000
=========================================== ================= ================= ========== ==========
Equity securities - - 223,472 223,472
Holdings in collective investment schemes - - 8,157,208 8,157,208
Debt securities - 932,711 - 932,711
Policyholder funds held by the group - 986,768 - 986,768
Mortgage loan portfolio - 265,988 - 265,988
---------------------------------------------- ----------------- ----------------- ---------- ----------
Total financial investments - 2,185,467 8,380,680 10,566,147
============================================== ================= ================= ========== ==========
Derivative financial instruments - - 141 141
Other assets 46,041 - - 46,041
Cash and cash equivalents - 175,293 - 175,293
============================================== ================= ================= ========== ==========
Total financial assets 46,041 2,360,760 8,380,821 10,787,622
============================================== ================= ================= ========== ==========
Financial liabilities
------------------------------------------- ----------------- ----------------- ---------- ----------
Investment contract liabilities - 5,660,778 - 5,660,778
Liabilities relating to policyholder funds
held by the group - 986,768 - 986,768
Borrowings 211,976 - - 211,976
Derivative financial instruments - - 3,850 3,850
Other current liabilities 123,373 - - 123,373
============================================== ================= ================= ========== ==========
Total financial liabilities 335,349 6,647,546 3,850 6,986,745
============================================== ================= ================= ========== ==========
10 Financial asset and liability fair value disclosures
The table below shows the determination of the fair value of
financial assets and financial liabilities 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).
The group held the following financial instruments at fair value
at 30 June 2023.
Fair value measurement at 30 June 2023 (unaudited)
Level 1 Level 2 Level 3 Total
GBP000 GBP000 GBP000 GBP000
================================================================ ========== ========= ======= ==========
Investment properties 1,176 - 97,573 98,749
Financial assets
Equities - Listed 203,439 - - 203,439
Holdings in collective investment schemes 8,014,796 - 124,862 8,139,658
Debt securities - Government Bonds 666,417 24,384 - 690,801
Debt securities - Other debt securities 446,116 54,322 - 500,438
Policyholders' funds held by the group 1,090,430 - 26,065 1,116,495
Mortgage loan portfolio - 357,928 - 357,928
Derivative financial instruments - 3,160 - 3,160
================================================================ ========== ========= ======= ==========
Total 10,422,374 439,794 248,500 11,110,668
================================================================ ========== ========= ======= ==========
Financial liabilities
================================================================ ========== ========= ======= ==========
Investment contracts at fair value through income - 5,695,738 - 5,695,738
Liabilities related to policyholders' funds held by the group 1,116,495 - - 1,116,495
Derivative financial instruments - 127 - 127
================================================================ ========== ========= ======= ==========
Total 1,116,495 5,695,865 - 6,812,360
================================================================ ========== ========= ======= ==========
Fair value measurement at 31 December 2022 (unaudited)
Level 1 Level 2 Level 3 Total
GBP000 GBP000 GBP000 GBP000
================================================================ ========== ========= ======= ==========
Investment properties 1,215 - 93,266 94,481
Financial assets
Equities - Listed 223,472 - - 223,472
Holdings in collective investment schemes 7,977,562 46,505 133,141 8,157,208
Debt securities - Government Bonds 420,681 24,200 - 444,881
Debt securities - Other debt securities 432,870 54,960 - 487,830
Policyholders' funds held by the group 951,667 - 35,101 986,768
Mortgage loan portfolio - 265,988 - 265,988
Derivative financial instruments - 141 - 141
================================================================ ========== ========= ======= ==========
Total 10,007,467 391,794 261,508 10,660,769
================================================================ ========== ========= ======= ==========
Financial liabilities
================================================================ ========== ========= ======= ==========
Investment contracts at fair value through income - 5,660,778 - 5,660,778
Liabilities related to policyholders' funds held by the group 986,768 - - 986,768
Derivative financial instruments - 3,850 - 3,850
================================================================ ========== ========= ======= ==========
Total 986,768 5,664,628 - 6,651,396
================================================================ ========== ========= ======= ==========
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.
Policyholder funds held by the group
There is a small holding of assets classified as level 3
amounting to GBP26.0m (December 2022: GBP35.1m) 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.
Holdings in collective investment schemes
The fair value of holdings in collective investment schemes
classified as Level 3 also relate to our Scildon operation, 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.
There is also a small holding of assets classified as level 3
GBP26.0m (December 2022: GBP35.1m) 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 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
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 non-linked and guaranteed
income and growth bonds 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 4 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 conditional prepayment
rate used in the valuation of the fund as at 30 June 2023 was 4.9%
(31 December 2022: 4.9%).
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 2023 this resulted in discounting the cash flows in
each mortgage using a range from 4.29% to 4.92% (31 December 2022:
4.29% to 4.92% )
An impairment percentage is applied to those loan cashflows
which are in arrears, to reflect the chance of the loan actually
going into default. For those loans which are one, two or three
months in arrears, an impairment percentage is applied to reflect
the chance of default. This percentage ranges from 0.60% for one
month in arrears to 13.70% for loans which are 3 months in arrears
(31 December 2022: 0.60% for one 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 conditional prepayment rate would
reduce the value of the asset by GBP1.7m (31 December 2022:
GBP1.7m).
A 1 per cent decrease in the conditional prepayment rate would
increase the value of the asset by GBP2.0m (31 December 2022:
GBP2.1m).
A 1 per cent increase in the discount rate would reduce the
value of the asset by GBP9.0m (31 December 2022: GBP9.6m).
A 1 per cent decrease in the discount rate would increase the
value of the asset by GBP10.4m (31 December 2022: GBP11.1m).
Sensitivity of level 3 instruments measured at fair value on the
statement of financial position to changes in key assumptions
There is a risk that the value of the fund decreases or
increases over time. This can be as a consequence of a periodic
reassessment of the constant prepayment rate and the discount rate
used in the valuation model.
Reconciliation of Level 3 fair value measurements of financial
instruments
30 31 December
June 2022
Unaudited 2023
GBP'000 GBP'000
At start of period 261,508 190,229
Additions - acquisition of a subsidiary - 102,974
Transfers into level 3 - -
Total gains and losses recognised in the income statement (10,388) (42,224)
Purchases 4,471 14,691
Settlements (48) (11,452)
Exchange rate adjustment (7,043) 7,290
---------------------------------------------------------- ------------------------ -----------------
At the end of period 248,500 261,508
---------------------------------------------------------- ------------------------ -----------------
Except as detailed in the following table, the directors
consider that the carrying value amounts of financial assets and
financial liabilities recorded at amortised cost in the financial
statements are approximately equal to their fair values:
Unaudited Carrying amount Fair value
30 June 31 December 30 June 31 December
2023 2022 2023 2022
GBP000 GBP000 GBP000 GBP000
----------------------- ------- --------------- ---------- -----------
Financial liabilities:
Borrowings 209,344 211,976 152,433 157,000
Borrowings consist of tier 2 debt, property mortgage loans and
an amount due in relation to financial reinsurance.
The tier 2 debt is fair valued based on the price available in
the market at the balance sheet date.
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.
11 Insurance and Reinsurance contracts
11 (a) Composition of the balance sheet
(i) Composition of the balance sheet as at 30 June 2023 (unaudited)
Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Insurance contract liabilities 1,390,100 161,614 780,343 1,772,462 4,104,519
Assets for insurance acquisition cash flows - - - - -
Total 1,390,100 161,614 780,343 1,772,462 4,104,519
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Insurance contract assets 10,190 - - - 10,190
Assets for insurance acquisition cash flows - - - - -
------------- ---------
Total 10,190 - - - 10,190
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Reinsurance contracts
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Reinsurance contract assets 164,502 12,108 2,731 - 179,341
Reinsurance contract liabilities 2,000 - - 10,807 12,807
(ii) Composition of the balance sheet as at 31 December 2022 (unaudited)
Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Insurance contract liabilities 1,447,584 160,570 463,714 1,749,233 3,821,101
Assets for insurance acquisition cash flows - - - - -
Total 1,447,584 160,570 463,714 1,749,233 3,821,101
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Insurance contract assets - - - - -
Assets for insurance acquisition cash flows - - - - -
------------- ---------
Total - - - - -
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Reinsurance contracts
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Reinsurance contract assets 174,678 15,806 3,468 - 193,952
Reinsurance contract liabilities 2,149 - - 11,387 13,536
(iii) Composition of the balance sheet as at 1 January 2022
(unaudited)
Movestic Waard Group Scildon Total
(UK) (Sweden) (Netherlands) (Netherlands)
Insurance contracts GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Insurance contract liabilities 1,536,138 189,369 386,315 1,920,248 4,032,070
Assets for insurance acquisition cash flows - - - - -
Total 1,536,138 189,369 386,315 1,920,248 4,032,070
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Insurance contract assets - - - - -
Assets for insurance acquisition cash flows - - - - -
Total - - - - -
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Reinsurance contracts
-------------------------------------------- --------- ---------- ------------- ------------- ---------
Reinsurance contract assets 217,678 19,081 5,584 - 242,343
Reinsurance contract liabilities - - - 28,812 28,812
11 (b) Movements in insurance contract balances - Analysis by
remaining coverage and incurred claims
(i) Movements in insurance contract balances for the period 1
January 2023 to 30 June 2023 (unaudited)
Liabilities for Remaining Coverage Liabilities for Incurred Claims
Excluding
Loss For contracts not PV of future Risk adjustment
Component Loss component under PAA cash flows Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- ---------------- ----------------- ---------------- ---------------- ---------
Insurance contract
liabilities as at 1
January 2023 3,579,890 85,321 116,130 38,170 1,590 3,821,101
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Changes in the statement of
profit and loss
Insurance revenue
Contracts measured under
the fair value approach (29,976) - - - - (29,976)
Contracts measured under
the fully retrospective
approach (88,072) - - - - (88,072)
Insurance revenue total (118,048) - - - - (118,048)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Insurance service expenses
Incurred claims and other
directly attributable
expenses - (33,121) 105,903 5,860 59 78,701
Adjustments to liabilities
for incurred claims - - (121) (2,864) (160) (3,145)
Losses and reversals of
losses on onerous
contracts - 25,104 - - - 25,104
Amortisation of insurance
acquisition cash flows 1,728 - - - - 1,728
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Insurance service expense
total 1,728 (8,017) 105,782 2,996 (101) 102,388
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Insurance service result (116,320) (8,017) 105,782 2,996 (101) (15,660)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Net finance expenses from
insurance contracts 151,783 196 - (123) 39 151,895
Effect of movements in
exchange rates (88,367) (2,514) (1,413) (3,349) (141) (95,784)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Total amounts recognised in
comprehensive income (52,904) (10,335) 104,369 (476) (203) 40,451
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Investment components (140,734) - 140,734 - - -
Cash flows
Premiums received 499,567 - - - - 499,567
Claims and other directly
attributable expenses paid - - (258,909) (4,769) - (263,678)
Insurance acquisition cash
flows (3,112) - - - - (3,112)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Total cash flows 496,455 - (258,909) (4,769) - 232,777
Insurance contract
liabilities as at 30 June
2023 3,882,707 74,986 102,324 32,925 1,387 4,094,329
(ii) Movements in insurance contract balances for the period 1
January 2022 to 31 December 2022 (unaudited)
Liabilities for Remaining Coverage Liabilities for Incurred Claims
Excluding
Loss For contracts not PV of future Risk adjustment
Component Loss component under PAA cash flows Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Insurance contract
liabilities as at 1
January 2022 3,803,839 67,332 112,000 46,707 2,192 4,032,070
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Changes in the statement of
profit and loss
Insurance revenue
Contracts measured under
the fair value approach (59,145) - - - - (59,145)
Contracts measured under
the fully retrospective
approach (164,886) - - - - (164,886)
Insurance revenue total (224,031) - - - - (224,031)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Insurance service expenses
Incurred claims and other
directly attributable
expenses - (19,413) 184,895 10,993 103 176,578
Adjustments to liabilities
for incurred claims - - - (6,645) (373) (7,018)
Losses and reversals of
losses on onerous
contracts - 32,805 - - - 32,805
Amortisation of insurance
acquisition cash flows 3,507 - - - - 3,507
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Insurance service expense
total 3,507 13,392 184,895 4,348 (270) 205,872
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Insurance service result (220,524) 13,392 184,895 4,348 (270) (18,159)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Net finance expenses from
insurance contracts (545,963) 265 23 (1,735) (284) (547,694)
Effect of movements in
exchange rates 109,806 4,332 2,683 (1,033) (48) 115,740
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Total amounts recognised in
comprehensive income (656,681) 17,989 187,601 1,580 (602) (450,113)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Investment components (292,261) - 292,261 - - -
Cash flows
Premiums received 731,644 - - - - 731,644
Claims and other directly
attributable expenses paid - - (475,732) (10,117) - (485,849)
Insurance acquisition cash
flows (6,651) - - - - (6,651)
--------------------------- ---------------- ----------------- ------------------ ------------ ----------- ---------
Total cash flows 724,993 - (475,732) (10,117) - 239,144
Insurance contract
liabilities as at 31
December 2022 3,579,890 85,321 116,130 38,170 1,590 3,821,101
11 (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 2023 to 30 June 2023 (unaudited)
CSM (new contracts
Present value of and contracts CSM (contracts
future cash flows Risk Adjustment measured under FRA) measured under FVA) Total
GBP000 GBP000 GBP000 GBP000 GBP000
Insurance contract
liabilities as at 1
January 2023 3,594,193 44,907 103,662 36,275 3,779,037
Changes that relate
to current service
CSM recognised for
services provided - - (9,390) (2,574) (11,964)
Change in risk
adjustment for
non-financial risk
for risk expired - (3,353) - - (3,353)
Experience
adjustments (22,759) - - - (22,759)
Total changes that
relate to current
service (22,759) (3,353) (9,390) (2,574) (38,076)
Changes that relate
to future service
Contracts initially
recognised in the
period (69,710) 8,913 62,652 - 1,855
Changes in estimates
that adjust the CSM (13,264) 12,063 1,133 68 -
Changes in estimates
that result in
losses or reversals
of losses on
onerous underlying
contracts 27,901 (5,123) 468 - 23,246
Total changes that
relate to future
service (55,073) 15,853 64,253 68 25,101
Changes that relate
to past service
Adjustments to
liabilities for
incurred claims (121) - - - (121)
Total changes that
relate to past
service (121) - - - (121)
Insurance service
result (77,953) 12,500 54,863 (2,506) (13,096)
Net finance expenses
from insurance
contracts 149,639 391 1,574 374 151,978
Effect of movements
in exchange rates (86,557) (1,281) (4,252) - (92,090)
Total amounts
recognised in
comprehensive
income (14,871) (11,610) 52,185 (2,132) 46,792
Cash flows
Premiums received 494,091 - - - 494,091
Claims and other
directly
attributable
expenses paid (258,909) - - - (258,909)
Insurance
acquisition cash
flows (3,111) - - - (3,111)
Total cash flows 232,071 - - - 232,071
Insurance contract
liabilities as at
30 June 2023 3,811,393 56,517 155,847 34,143 4,057,900
(ii) Movements in insurance contract balances for the period 1
January 2022 to 31 December 2022 (unaudited)
CSM (new contracts
Present value of and contracts CSM (contracts
future cash flows Risk Adjustment measured under FRA) measured under FVA) Total
GBP000 GBP000 GBP000 GBP000 GBP000
Insurance contract
liabilities as at 1
January 2022 3,781,561 53,393 110,966 35,395 3,981,315
Changes that relate
to current service
CSM recognised for
services provided - - (13,760) (5,380) (19,140)
Change in risk
adjustment for
non-financial risk
for risk expired - (6,729) - - (6,729)
Experience
adjustments (17,278) - - - (17,278)
Total changes that
relate to current
service (17,278) (6,729) (13,760) (5,380) (43,147)
Changes that relate
to future service
Contracts initially
recognised in the
year (21,133) 9,106 19,155 - 7,128
Changes in estimates
that adjust the CSM 6,611 6,077 (18,625) 5,937 -
Changes in estimates
that result in
losses or reversals
of losses on
onerous underlying
contracts 30,620 (4,944) - - 25,676
Total changes that
relate to future
service 16,098 10,239 530 5,937 32,804
Changes that relate
to past service
Adjustments to
liabilities for
incurred claims - - - - -
Total changes that
relate to past
service - - - - -
Insurance service
result (1,180) 3,510 (13,230) 557 (10,343)
Net finance expenses
from insurance
contracts (532,545) (13,765) 313 323 (545,674)
Effect of movements
in exchange rates 109,481 1,769 5,613 - 116,863
Total amounts
recognised in
comprehensive
income (424,244) (8,486) (7,304) 880 (439,154)
Cash flows
Premiums received 719,259 - - - 719,259
Claims and other
directly
attributable
expenses paid (475,732) - - - (475,732)
Insurance
acquisition cash
flows (6,651) - - - (6,651)
Total cash flows 236,876 - - - 236,876
Insurance contract
liabilities as at
31 December 2022 3,594,193 44,907 103,662 36,275 3,779,037
11 (d) Movements in reinsurance contract balances - Analysis by
remaining coverage and incurred claims
(i) Movements in reinsurance contract balances for the period 1
January 2023 to 30 June 2023 (unaudited)
Assets for Remaining Coverage Assets for Incurred Claims
Excluding
Loss-Recovery Loss-Recovery For contracts Future cash Risk adjustment
Component component not under PAA flows Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Reinsurance
contract assets
as at 1 January
2023 134,397 4,001 26,498 15,108 412 180,416
Reinsurance
expenses -
allocation of
reinsurance
premiums paid (27,844) - - - - (27,844)
Amounts
recoverable
from
reinsurers:
Recoveries of
incurred claims
and other
insurance
service
expenses - - 21,441 1,609 24 23,074
Changes in the
expected
recoveries for
past claims - - - (1,442) (71) (1,513)
Changes in the
loss recovery
component - 139 - - - 139
Effect of - - - - -
changes in
non-performance
risk of
reinsurers -
Net i(expenses)
/ income from
reinsurance
contracts held (27,844) 139 21,441 167 (47) (6,144)
Net Finance
expenses from
reinsurance
contracts (2,387) 4 - (152) 8 (2,527)
Effect of
movements in
exchange rates 781 (132) (349) (1,287) (35) (1,022)
Total amounts
recognised in
comprehensive
income (29,450) 11 21,092 (1,272) (74) (9,693)
Investment
components (1,253) - 1,253 - - -
Cash flows
Premiums paid
net of ceding
commission 20,550 - - - - 20,550
Recoveries from
reinsurance
contracts held - - (23,299) (1,440) - (24,739)
Total cash flows 20,550 - (23,299) (1,440) - (4,189)
Reinsurance
contract assets
as at 30 June
2023 124,244 4,012 25,544 12,396 338 166,534
11 (d) Movements in reinsurance contract balances - Analysis by
remaining coverage and incurred claims
(ii) Movements in reinsurance contract balances for the period 1
January 2022 to 31 December 2022 (unaudited)
Assets for Remaining Coverage Assets for Incurred Claims
Excluding
Loss-Recovery Loss-Recovery For contracts Future cash Risk adjustment
Component component not under PAA flows Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Reinsurance
contract assets
as at 1 January
2022 166,636 2,493 25,140 18,635 627 213,531
Reinsurance
expenses -
allocation of
reinsurance
premiums paid (53,787) - - - - (53,787)
Amounts
recoverable
from
reinsurers:
Recoveries of
incurred claims
and other
insurance
service
expenses - - 47,045 2,714 48 49,807
Changes in the
expected
recoveries for
past claims - - - (3,207) (171) (3,378)
Changes in the
loss recovery
component - 1,320 - - - 1,320
Effect of
changes in
non-performance
risk of
reinsurers - - - 2 - 2
Net (expenses) /
income from
reinsurance
contracts held (53,787) 1,320 47,045 (491) (123) (6,036)
Net Finance
expenses from
reinsurance
contracts (12,984) (6) - (423) (78) (13,491)
Effect of
movements in
exchange rates (1,347) 194 525 (414) (14) (1,056)
Total amounts
recognised in
comprehensive
income (68,118) 1,508 47,570 (1,328) (215) (20,583)
Investment
components (3,951) - 3,951 - - -
Cash flows
Premiums paid
net of ceding
commission 39,830 - - - - 39,830
Recoveries from
reinsurance
contracts held - - (50,163) (2,199) - (52,362)
Total cash flows 39,830 - (50,163) (2,199) - (12,532)
Reinsurance
contract assets
as at 31
December 2022 134,397 4,001 26,498 15,108 412 180,416
11 (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 2023 to 30 June 2023 (unaudited)
CSM (new contracts
Present value of and contracts CSM (contracts
future cash flows Risk Adjustment measured under FRA) measured under FVA) Total
GBP000 GBP000 GBP000 GBP000 GBP000
Reinsurance contract
assets as at 1
January 2023 113,366 14,302 29,081 7,864 164,613
Changes that relate
to current service
CSM recognised for
services received - - (1,974) (307) (2,281)
Change in risk
adjustment for
non-financial risk
for risk expired - (1,098) - - (1,098)
Experience
adjustments (2,109) - - - (2,109)
Total changes that
relate to current
service (2,109) (1,098) (1,974) (307) (5,488)
Changes that relate
to future service
Contracts initially
recognised in the
period (1,666) 483 1,183 - -
Changes in estimates
that adjust the CSM 1,987 694 (1,018) (1,557) 106
CSM adjustment for
income on initial
recognition of
onerous underlying
contracts - - 292 - 292
Changes in
recoveries of
losses on onerous
underlying
contracts that
adjust the CSM - - (63) - (63)
Total changes that
relate to future
service 321 1,177 394 (1,557) 335
Changes that relate
to past service
Adjustments to
assets for incurred
claims - - - - -
Total changes that
relate to past
service - - - - -
Effect of changes in
non-performance risk
of reinsurers - - - - -
Net (expense) /
income from
reinsurance
contracts held (1,788) 79 (1,580) (1,864) (5,153)
Net finance income
from reinsurance
contracts held (2,639) 61 141 54 (2,383)
Effect of movements
in exchange rates 1,529 (366) (897) - 266
Total amounts
recognised in
comprehensive
income (2,898) (226) (2,336) (1,810) (7,270)
Cash flows
Premiums paid net of
ceding commission 20,381 - - - 20,381
Recoveries from
reinsurance
contracts held (23,299) - - - (23,299)
Total cash flows (2,918) - - - (2,918)
Reinsurance contract
assets as at 30
June 2023 107,550 14,076 26,745 6,054 154,425
(ii) Movements in reinsurance contract balances for the period 1
January 2022 to 31 December 2022 (unaudited)
CSM (new contracts
Present value of and contracts CSM (contracts
future cash flows Risk Adjustment measured under FRA) measured under FVA) Total
GBP000 GBP000 GBP000 GBP000 GBP000
Reinsurance contract
assets as at 1
January 2022 141,961 15,224 29,840 7,423 194,448
Changes that relate
to current service
CSM recognised for
services received - - (4,039) (1,039) (5,078)
Change in risk
adjustment for
non-financial risk
for risk expired - (2,100) - - (2,100)
Experience
adjustments 2,412 - - - 2,412
Total changes that
relate to current
service 2,412 (2,100) (4,039) (1,039) (4,766)
Changes that relate
to future service
Contracts initially
recognised in the
year (5,381) 1,659 3,722 - -
Changes in estimates
that adjust the CSM 625 1,769 (3,804) 1,410 -
CSM adjustment for
income on initial
recognition of
onerous underlying
contracts - - 1,333 - 1,333
Changes in
recoveries of
losses on onerous
underlying
contracts that
adjust the CSM - - 296 - 296
Total changes that
relate to future
service (4,756) 3,428 1,547 1,410 1,629
Changes that relate
to past service
Adjustments to
assets for incurred
claims - - - - -
Total changes that
relate to past
service - - - - -
Effect of changes in
non-performance risk
of reinsurers - - - - -
Net (expense) /
income from
reinsurance
contracts held (2,344) 1,328 (2,492) 371 (3,137)
Net finance income
from reinsurance
contracts held (10,396) (2,847) 182 70 (12,991)
Effect of movements
in exchange rates (2,780) 597 1,551 - (632)
Total amounts
recognised in
comprehensive
income (15,520) (922) (759) 441 (16,760)
Cash flows
Premiums paid net of
ceding commission 37,089 - - - 37,089
Recoveries from
reinsurance
contracts held (50,164) - - - (50,164)
Total cash flows (13,075) - - - (13,075)
Reinsurance contract
assets) as at 31
December 2022 113,366 14,302 29,081 7,864 164,613
12 Borrowings
Unaudited 30 June 31 December
2023 2022
GBP000 GBP000
===========
Tier 2 Debt 200,471 200,356
Amount due in relation to financial reinsurance 6,667 9,607
Other 2,206 2,013
===========
Total 209,344 211,976
===========
The fair value of amounts due in relation to Tier 2 debt at 30
June 2023 was GBP144.0m (31 December 2022: GBP148.0m).
The fair value of amounts due in relation to financial
reinsurance at 30 June 2023 was GBP6.2m (31 December 2022:
GBP9.0m).
Other borrowings comprises capital amounts outstanding on
mortgage bonds taken out over properties held in the Unit-linked
policyholder funds of the UK division. The mortgage over each
property is negotiated separately, varies in term and bears
interest at fixed or floating rates that are agreed at the time of
inception of the mortgage. The fair value is not materially
different to the carrying values shown above.
13 Business combination
Conservatrix
On 22 July 2022, Chesnara announced the acquisition of the
insurance portfolio of Nederlandsche Algemeene Maatschappij van
Levensverzekering "Conservatrix" N.V. ("Conservatrix"), a
specialist provider of life insurance products in the Netherlands
that was declared bankrupt on 8 December 2020. The acquisition was
completed on 1 January 2023, following Court and Regulatory
approvals.
The acquisition was effected through the transfer of the
insurance portfolio (together with other assets and liabilities set
out in the table below) into Waard Leven N.V., Chesnara's Dutch
closed-book subsidiary. In order to support the solvency position
of the Conservatrix insurance portfolio, a Capital Contribution of
GBP35m has been provided by Chesnara, consisting of a GBP21m
contribution from Chesnara and GBP14m of existing Waard resources.
The cash consideration for the acquisition was EUR1.
The acquisition is classed as a Business Combination under IFRS3
and the fair value of the assets and liabilities recognised at 1
January 2023 are as follows:
Unaudited Fair value
GBP'000
Assets
Financial investments 366,698
Other assets 1,308
Deferred tax asset 33,387
Cash 31,415
Total assets 432,808
Liabilities
Insurance contracts 346,173
Other provision 12,591
Investment contracts 70,075
Total liabilities 428,839
Fair value of net assets 3,969
Net assets acquired 3,969
Total consideration paid -
Profit arising on business combination 3,969
A profit of GBP4.0m has been recognised on acquisition. This
profit on acquisition has been recorded as a "Profit arising on
business combinations and portfolio acquisitions" on the face of
the statement of comprehensive income. A day one gain has arisen on
business combination, as by applying the pricing model that we
generally adopt, we offered a purchase price which was at a
discount to our own assessment of the value of the net assets to be
acquired.
The CSM on acquisition has been calculated as the difference
between the fair value of the insurance liabilities and the
fulfilment cash flows. This has resulted in a CSM of GBP45.4m being
recognised as at 1 January 2023. This amount forms part of the CSM
value for 'Contracts initially recognised in the year' in note
11(c)(i).
The group determined that a significant number of the contracts
acquired did not have any significant insurance risk at the
acquisition date and have therefore been classed as investment
contracts, to be accounted for under IFRS9.
The assets and liabilities acquired are included within the
respective line items on the face of the cash flow statement.
The results of Conservatrix have been included in the
consolidated financial statements of the group with effect from 1
January 2023, within Waard Group.
14 Portfolio transfer
Canada Life
On 16 May 2023, Chesnara announced it had reached an agreement
to acquire the onshore individual protection business of Canada
Life Ltd, representing approximately 47,000 life insurance and
critical illness policies. The transaction is initially in the form
of a reinsurance agreement with the liabilities 100% ceded by
Canada Life Ltd and accepted by CA plc, with the effective date
being 1 January 2023. From this date all risks and rewards relating
to the policies were transferred to CA plc along with the economic
benefit of those risks and rewards.
The initial commission paid by CA plc to Canada Life Ltd for
this reinsurance inwards transaction was GBP9.0m and was funded
from internal group resources. The CSM on initial recognition has
been calculated as GBP10.3m as at 1 January 2023.
Customers' policies are expected to transfer to CA plc in 2024,
subject to the completion of a court-approved Part VII
transfer.
15 Post balance sheet event
The Directors are not aware of any significant post balance
sheet events that require disclosure in the condensed interim
financial statements.
16 Approval of consolidated report for the six months ended 30 June 2023
This condensed consolidated report was approved by the Board of
Directors on 20 September 2023. A copy of the 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 CALAR
21 September 2023
Results for the six months ended 30 June 2023 announced
28 September 2023
Interim ex-dividend date
29 September 2023
Interim dividend record date
20 October 2023
Last date for dividend reinvestment plan elections
10 November 2023
Interim dividend payment date
31 December 2023
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
Advisors
Addleshaw Goddard LLP
One St Peter's Square
Manchester
M2 3DE
Burness Paull LLP
Exchange Plaza
50 Lothian Road
Edinburgh
EH3 9WJ
Auditor
Deloitte LLP
Statutory Auditor
3 Rivergate
Temple Quay
Bristol
BS1 6GD
Registrars
Link Group
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint Stockbrokers and
Corporate Advisors
Panmure Gordon
40 Gracechurch Street
London
EC3V 0BT
RBC Capital Markets
100 Bishopsgate
London
EC2N 4AA
Bankers
National Westminster Bank plc
135 Bishopsgate
London
EC2M 3UR
The Royal Bank of Scotland
8(th) Floor, 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 Cash generation is used by the group Cash generation is a key
generation as a measure of assessing how much measure, because it is the
dividend potential has been generated, net cash flows to Chesnara
subject to ensuring other constraints from its life and pensions
are managed. businesses which support
Group cash generation is calculated Chesnara's dividend-paying
as the movement in the group's surplus capacity and acquisition
own funds above the group's internally strategy. Cash generation
required capital, as determined can be a strong indicator
by applying the group's capital of how we are performing
management policy, which has Solvency against our stated objective
II rules at its heart. of 'maximising value from
existing business'.
Divisional Cash generation is used by the group It is an important indicator
cash generation as a measure of assessing how much of the underlying operating
dividend potential has been generated, performance of the business
subject to ensuring other constraints before the impact of group
are managed. level operations and consolidation
Divisional cash generation represents adjustments.
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 is used by the group Commercial cash generation
cash generation as a measure of assessing how much aims to provide stakeholders
dividend potential has been generated, with enhanced insight into
subject to ensuring other constraints cash generation, drawing
are managed. out components of the result
Commercial cash generation excludes relating to technical complexities
the impact of technical adjustments, or exceptional items. The
modelling changes and corporate result is deemed to better
acquisition activity; representing reflect the underlying commercial
the underlying commercial cash generated performance, show key drivers
by the business. within that.
Economic EcV is a financial metric that is EcV aims to reflect the market-related
Value (EcV) derived from Solvency II Own Funds. value of in-force business
It provides a market consistent and net assets of the non-insurance
assessment of the value of existing business and hence is an
insurance businesses, plus adjusted important reference point
net asset value of the non-insurance by which to assess Chesnara's
business within the group. value. A life and pensions
We define EcV as being the Own Funds group may typically be characterised
adjusted for contract boundaries, as trading at a discount
risk margin and restricted with-profit or premium to its Economic
surpluses. As such, EcV and Own Value. Analysis of EcV provides
Funds have many common characteristics additional insight into the
and tend to be impacted by the same development of the business
factors. 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.
Economic The principal underlying components By recognising the market-related
Value (EcV) of the Economic Value earnings are: value of in-force business
earnings * The expected return from existing business (being the (in-force value), a different
effect of the unwind of the rates used to discount perspective is provided in
the value in-force); the performance of the group
and on the valuation of the
business. Economic Value
* Value added by the writing of new business; earnings are an important
KPI as they provide a longer-term
measure of the value generated
* Variations in actual experience from that assumed in during a period. The Economic
the opening valuation; Value earnings of the group
can be a strong indicator
of how we have delivered
* The impact of restating assumptions underlying the against all three of our
determination of expected cash flows; and core strategic objectives.
- The impact of acquisitions.
EcV operating This is the element of EcV earnings EcV operating earnings are
earnings (see above) that are generated from important as they provide
the company's ongoing core business an indication of the underlying
operations, excluding any profit value generated by the business.
earned from investment market conditions It can help identify profitable
in the period and any economic assumption activities and also inefficient
changes in the future. processes and potential management
actions.
EcV economic This is the element of EcV earnings EcV economic earnings are
earnings (see above) that are derived from important in order to measure
investment market conditions in the additional value generated
the period and any economic assumption from investment market factors.
changes in the future.
Commercial A more commercially relevant measure This provides a fair commercial
new business of new business profit than that reflection of the value added
profit recognised directly under the Solvency by new business operations
II regime, allowing for a modest and is more comparable with
level of return, over and above how new business is reported
risk-free, and exclusion of the by our peers, improving market
incremental risk margin Solvency consistency.
II assigns to new business.
Funds under FuM reflects the value of the financial FuM are important as it provides
management assets that the business manages, an indication of the scale
(FuM) as reported in the IFRS Consolidated of the business, and the
Balance Sheet. potential future returns
that can be generated from
the assets that are being
managed.
Acquisition Acquisition value gains reflect The EcV gain from acquisition
value gain the incremental Economic Value added will be net of any associated
(incremental by a transaction, exclusive of any increase in risk margin.
value) additional risk margin associated The risk margin is a temporary
with absorbing the additional business. Solvency II dynamic which
will run off over time.
Leverage A financial measure that demonstrates It is an important measure
/ gearing the degree to which the company as it indicates the overall
is funded by debt financing versus level of indebtedness of
equity capital, presented as a ratio. Chesnara, and it is also
It is defined as debt divided by a key component of the bank
debt plus equity, with the equity covenant arrangements held
denominator adding back the net by Chesnara.
of tax CSM liabilility, as measured
under IFRS.
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 Sanlam Life & Pensions UK Limited
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.
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 that is
broadly
similar in concept to European Embedded Value. 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, as measured under IFRS
London Stock Exchange London Stock Exchange plc.
LTI Long-Term Incentive Scheme - 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 pence7 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 GBP100m (currently unutilised) put in place in July
2021
Resolution The resolution set out in the notice of General Meeting set out in this document.
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.
Standard Formula The set of prescribed rules used to calculate the regulatory SCR where an internal model
is
not being used.
STI 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.
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 and CASLP
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:
CA 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 on 31 December; and 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;
CASLP - 'SLP' Sanlam Life & Pensions (UK) Limited which was acquired 28 April 2022 and includes subsidiaries
CASFS Limited and CASLPTS Limited;
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; and 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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